Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities as High-Quality Liquid Assets, 30383-30389 [2015-12850]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 80, Number 102 (Thursday, May 28, 2015)]
[Proposed Rules]
[Pages 30383-30389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12850]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 80, No. 102 / Thursday, May 28, 2015 / 
Proposed Rules

[[Page 30383]]



FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Docket No. R-1514; Regulation WW]
RIN 7100 AE-32


Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities 
as High-Quality Liquid Assets

AGENCY: Board of Governors of the Federal Reserve System.

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

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
invites public comment on a proposed rule (proposed rule) that would 
amend the Board's liquidity coverage ratio requirement (LCR) to include 
certain U.S. municipal securities as high-quality liquid assets (HQLA). 
This proposed rule includes as level 2B liquid assets under the LCR 
general obligation securities of a public sector entity that meet the 
same criteria as corporate debt securities that are included as level 
2B liquid assets, subject to limits that are intended to address the 
unique structure of the U.S. municipal securities market. This proposed 
rule would apply to all Board-regulated institutions that are subject 
to the LCR, which include: (1) Bank holding companies, certain savings 
and loan holding companies, and state member banks that, in each case, 
have $250 billion or more in total consolidated assets or $10 billion 
or more in on-balance sheet foreign exposure; (2) state member banks 
with $10 billion or more in total consolidated assets that are 
consolidated subsidiaries of bank holding companies described in (1); 
and (3) nonbank financial companies designated by the Financial 
Stability Oversight Council for Board supervision to which the Board 
has applied the LCR by rule or order. This proposed rule would also 
permit bank holding companies and certain savings and loan holding 
companies, in each case with $50 billion or more in total consolidated 
assets that are subject to the Board's modified liquidity coverage 
ratio to rely on the proposed expanded definition of HQLA.

DATES: Comments on this notice of proposed rulemaking must be received 
by July 24, 2015.

ADDRESSES: When submitting comments, please consider submitting your 
comments by email or fax because paper mail in the Washington, DC area 
and at the Board may be subject to delay. You may submit comments, 
identified by Docket No. R-1514, by any of the following methods:
     Agency Web site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Robert de V. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper form in 
Room 3515, 1801 K Street NW. (between 18th and 19th Street NW.), 
Washington, DC 20006 between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Constance Horsley, Assistant Director, 
(202) 452-5239, Adam S. Trost, Senior Supervisory Financial Analyst, 
(202) 452-3814, or J. Kevin Littler, Senior Supervisory Financial 
Analyst, (202) 475-6677, Risk Policy, Division of Banking Supervision 
and Regulation; Dafina Stewart, Counsel, (202) 452-3876, or Adam J. 
Cohen, Senior Attorney, (202) 912-4658, Legal Division, Board of 
Governors of the Federal Reserve System, 20th and C Streets, 
Washington, DC 20551. For the hearing impaired only, Telecommunication 
Device for the Deaf (TDD), (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
II. Proposed Criteria for Inclusion of U.S. Municipal Securities as 
Eligible HQLA
    A. Criteria for Inclusion as Level 2B Liquid Assets
    1. U.S. General Obligation Municipal Securities
    2. Investment Grade U.S. General Obligation Municipal Securities
    3. Proven Record as a Reliable Source of Liquidity
    4. Not an Obligation of a Financial Sector Entity or Its 
Consolidated Subsidiaries
    B. Limitations on a Company's Inclusion of U.S. General 
Obligation Municipal Securities as Eligible HQLA
    1. Limitation on the Inclusion of U.S. General Obligation 
Municipal Securities With the Same CUSIP Number as Eligible HQLA
    2. Limitation on the Inclusion of the U.S. General Obligation 
Municipal Securities of a Single Issuer as Eligible HQLA
    3. Limitation on the Amount of U.S. General Obligation Municipal 
Securities That Can Be Included in the HQLA Amount
III. Plain Language
IV. Regulatory Flexibility Act
V. Paperwork Reduction Act

I. Background

    On September 3, 2014, the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, and the Federal 
Deposit Insurance Corporation (collectively, the agencies) adopted a 
final rule that implemented a quantitative liquidity requirement \1\ 
(LCR) consistent with the liquidity coverage ratio standard established 
by the Basel Committee on Banking Supervision (Basel III Liquidity 
Framework).\2\ The LCR is designed to promote the short-term resilience 
of the liquidity risk profile of large and internationally active 
banking organizations, and to further improve the measurement and 
management of liquidity risk, thereby improving the banking sector's 
ability to absorb shocks arising during periods of significant stress. 
The LCR requires a company subject to the rule to maintain an

[[Page 30384]]

amount of high-quality liquid assets (HQLA) (the numerator of the 
ratio) \3\ that is no less than 100 percent of its total net cash 
outflows over a prospective 30 calendar-day period of significant 
stress (the denominator of the ratio). Community banking organizations 
are not subject to the LCR.\4\
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    \1\ 79 FR 61440 (October 10, 2014).
    \2\ Basel Committee on Banking Supervision, ``Basel III: The 
Liquidity Coverage Ratio and liquidity risk monitoring tools'' 
(January 2013), available at https://www.bis.org/publ/bcbs238.htm.
    \3\ A company's HQLA amount is calculated according to section 
249.21 of the LCR.
    \4\ The LCR applies to large and internationally active banking 
organizations, generally: (1) Bank holding companies, certain 
savings and loan holding companies, and depository institutions 
that, in each case, have $250 billion or more in total assets or $10 
billion or more in on-balance sheet foreign exposure; (2) depository 
institutions with $10 billion or more in total consolidated assets 
that are consolidated subsidiaries of bank holding companies and 
savings and loan holding companies described in (1); and (3) nonbank 
financial companies designated by the Financial Stability Oversight 
Council for Board supervision to which the Board has applied the LCR 
by rule or order. In addition, the Board adopted a modified minimum 
liquidity coverage ratio requirement for bank holding companies and 
certain savings and loan holding companies that, in each case, have 
$50 billion or more in total consolidated assets but that do not 
meet the threshold for large and internationally active firms 
(together with the entities described in (1), (2), (3) above, 
covered companies).
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    Under the LCR, only a limited number of asset classes that have 
historically been used as a source of liquidity in the United States 
during periods of significant stress and have a demonstrable record of 
liquidity are included as HQLA. In identifying the types of assets that 
qualify as HQLA under the Basel III Liquidity Framework the Basel 
Committee on Banking Supervision considered several factors, including 
the asset's risk profile and characteristics of the market for the 
asset (e.g., active sale or repurchase markets at all times, 
significant diversity in market participants, and high trading volume). 
The agencies considered similar factors in developing the LCR. In 
addition, the agencies developed certain other criteria, such as 
operational requirements, that assets must meet for inclusion as 
eligible HQLA.
    The LCR divides HQLA into three categories of assets: Level 1, 
level 2A, and level 2B liquid assets. Specifically, level 1 liquid 
assets are limited to balances held at a Federal Reserve Bank and 
foreign central bank withdrawable reserves, all securities issued or 
unconditionally guaranteed as to timely payment of principal and 
interest by the U.S. Government, and certain highly liquid, high credit 
quality sovereign, international organization and multilateral 
development bank debt securities. Level 1 liquid assets, which are the 
highest quality and most liquid assets, may be included in a covered 
company's HQLA amount without limit and without haircuts. Level 2A and 
2B liquid assets have characteristics that are associated with being 
relatively stable and significant sources of liquidity, but not to the 
same degree as level 1 liquid assets. Level 2A liquid assets include 
certain obligations issued or guaranteed by a U.S. government-sponsored 
enterprise (GSE) and certain obligations issued or guaranteed by a 
sovereign entity or a multilateral development bank that are not 
eligible to be treated as level 1 liquid assets. The LCR subjects level 
2A liquid assets to a 15 percent haircut and limits the aggregate of 
level 2A and level 2B liquid assets to no more than 40 percent of the 
total HQLA amount. Level 2B liquid assets, which are liquid assets that 
generally exhibit more volatility than level 2A liquid assets, are 
subject to a 50 percent haircut and may not exceed 15 percent of the 
total HQLA amount. Under the LCR, level 2B liquid assets include 
certain corporate debt securities and certain common equity shares of 
publicly traded companies. Level 2 liquid assets, including all level 
2B liquid assets, must be liquid and readily marketable as defined in 
the LCR to be included as HQLA.\5\ Other classes of assets, such as 
debt securities issued or guaranteed by a U.S. public sector entity 
(U.S. municipal securities), are not treated as HQLA. The LCR final 
rule defines a public sector entity to include any state, local 
authority, or other governmental subdivision below the U.S. sovereign 
entity level.\6\
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    \5\ The liquid and readily marketable standard is defined in 
section 249.3 of the LCR final rule and is discussed in section 
II.B.2 of the Supplementary Information section. 79 FR 61440, 61451 
(October 10, 2014).
    \6\ 12 CFR 249.3.
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    The agencies received a substantial number of comments in 
connection with the LCR rulemaking \7\ from U.S. and foreign firms, 
public officials (including state and local governments and members of 
the U.S. Congress), public interest groups, private individuals, and 
other interested parties requesting that U.S. municipal securities be 
treated as HQLA. Commenters asserted that U.S. municipal securities 
exhibit liquidity characteristics consistent with those considered by 
the agencies in identifying assets as HQLA and presented data to 
demonstrate the liquidity of U.S. municipal securities. In particular, 
some commenters indicated that certain U.S. municipal securities trade 
more often and in greater volumes than some corporate debt securities 
that qualify as HQLA under the LCR. In addition, commenters argued that 
the exclusion of U.S. municipal securities from HQLA could lead to 
higher funding costs for U.S. municipalities, which could affect local 
economies and infrastructure.
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    \7\ 78 FR 71818 (November 29, 2013).
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    In the SUPPLEMENTARY INFORMATION section to the LCR final rule, the 
agencies expressed concern that covered companies would be limited in 
their ability to rapidly monetize U.S. municipal securities during a 
period of significant stress. For example, the funding of many U.S. 
municipal securities in the repurchase market is limited, which lessens 
the opportunity for companies to convert the securities to cash quickly 
during a period of significant stress. Accordingly, the LCR final rule 
did not include U.S. municipal securities as HQLA.
    However, the Board indicated a willingness to continue to study the 
question of whether at least some U.S. municipal securities should be 
permitted under some circumstances to be included as HQLA. The Board 
now proposes to allow Board-regulated institutions to include as level 
2B liquid assets under the LCR U.S. general obligation municipal 
securities that exhibit characteristics that are comparable to other 
asset classes included as level 2B liquid assets. The proposal contains 
a variety of criteria and limitations designed to ensure that U.S. 
general obligation municipal securities included as HQLA are liquid and 
appropriately valued for purposes of the LCR.
    This proposed rule would apply to all Board-regulated institutions 
that are subject to the LCR, which include: (1) Bank holding companies, 
certain savings and loan holding companies, and state member banks 
that, in each case, have $250 billion or more in total consolidated 
assets or $10 billion or more in on-balance sheet foreign exposure; (2) 
state member banks with $10 billion or more in total consolidated 
assets that are consolidated subsidiaries of bank holding companies 
subject to the LCR described in (1); and (3) nonbank financial 
companies designated by the Financial Stability Oversight Council for 
Board supervision to which the Board has applied the LCR by rule or 
order. This proposed rule would also allow bank holding companies and 
certain savings and loan holding companies, in each case with $50 
billion or more in total consolidated assets, that are subject to the 
Board's modified minimum liquidity coverage ratio to take advantage of 
the proposed expanded definition of HQLA.

[[Page 30385]]

II. Proposed Criteria for Inclusion of U.S. Municipal Securities as 
Eligible HQLA

    As described in more detail below, this proposed rule would include 
limited amounts of U.S. general obligation municipal securities as 
level 2B liquid assets under the LCR if the securities meet certain 
criteria. The Board invites comment on all aspects of the proposal 
including whether these criteria and limitations are appropriate, 
reasonable, and achieve their intended purposes.
    The Board proposes to include U.S. general obligation municipal 
securities as level 2B liquid assets, rather than as level 2A liquid 
assets. Municipal securities are less liquid than assets that are 
included as level 2A liquid assets. For example, the daily trading 
volume of securities issued or guaranteed by U.S. GSEs far exceeds that 
of U.S. municipal securities.
    As a threshold matter, to qualify as HQLA under the proposal, U.S. 
general obligation municipal securities must be liquid and readily 
marketable and meet other criteria consistent with the criteria for 
corporate debt securities that are included as level 2B liquid assets. 
These criteria help to ensure comparable treatment between U.S. general 
obligation municipal securities and corporate debt securities included 
as HQLA.\8\ In addition, to help ensure sufficient liquidity of the 
U.S. general obligation municipal securities that are included in the 
total HQLA amount, this proposed rule would impose certain limits on 
the amount of U.S. general obligation municipal securities that a 
Board-regulated institution may include as eligible HQLA.\9\ This 
proposed rule would not limit the amount of U.S. municipal securities a 
Board-regulated institution could hold for other purposes.
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    \8\ See 12 CFR 249.20(c)(1).
    \9\ The LCR final rule defines eligible HQLA as those high-
quality liquid assets that meet the requirements set forth in 
section 249.22.
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A. Criteria for Inclusion as Level 2B Liquid Assets

1. U.S. General Obligation Municipal Securities
    Under this proposed rule, U.S. municipal securities would qualify 
as HQLA only if they are general obligations of the issuing entity. 
General obligations of U.S. public sector entities, which include bonds 
or similar obligations that are backed by the full faith and credit of 
the public sector entities, are assigned a 20 percent risk weight under 
the Board's risk-based capital rules.\10\ This provision, which is 
consistent with the Basel III Liquidity Framework, is designed to limit 
the liquidity and credit risk associated with U.S. municipal securities 
included in the HQLA amount.
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    \10\ See 12 CFR part 217.
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    Revenue obligations, which include bonds or similar obligations 
that are obligations of U.S. public sector entities, but which the 
public sector entities have committed to repay with revenues from a 
specific project rather than from general tax funds, are assigned a 50 
percent risk weight under the Board's risk-based capital rules.\11\ 
Revenue obligations are assigned a higher risk weight than general 
obligations because repayment of revenue obligations is dependent on 
revenue from an underlying project without an obligation from a public 
sector entity to repay these obligations from other revenue 
sources.\12\ The Board has proposed to exclude revenue obligations 
because, during a period of significant stress, revenue derived from a 
particular project, such as a stadium, may fall dramatically as 
domestic consumption declines and the associated revenue bond may 
experience significant price declines and become less liquid.
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    \11\ Id.
    \12\ 78 FR 62018, 62086 (October 11, 2013).
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2. Investment Grade U.S. General Obligation Municipal Securities
    Consistent with the requirements for corporate debt securities 
included as level 2B liquid assets, this proposed rule would require 
that U.S. general obligation municipal securities be ``investment 
grade'' under 12 CFR part 1 as of the calculation date.\13\ This 
criterion requires an issuer of a U.S. general obligation municipal 
security to have adequate capacity to meet its financial commitments 
under the security for the projected life of the security, which is met 
by showing a low risk of default and an expectation of the timely 
repayment of principal and interest.
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    \13\ 12 CFR 1.2(d). In accordance with section 939A of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, this 
regulation does not rely on credit ratings as a standard of credit-
worthiness. Rather, the regulation relies on an assessment by the 
bank of the capacity of the issuer to meet its financial 
commitments.
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3. Proven Record as a Reliable Source of Liquidity
    Consistent with the requirements for corporate debt securities 
included as level 2B liquid assets under the LCR, this proposed rule 
would require that U.S. general obligation municipal securities 
included as level 2B liquid assets be issued by an entity whose 
obligations have a proven record as a reliable source of liquidity in 
repurchase or sales markets during a period of significant stress. A 
Board-regulated institution would be required to demonstrate this 
record of liquidity reliability and lower volatility during periods of 
significant stress by showing that the market price of the U.S. general 
obligation municipal securities or equivalent securities of the issuer 
declined by no more than 20 percent during a 30 calendar-day period of 
significant stress, or that the market haircut demanded by 
counterparties to secured lending and secured funding transactions that 
were collateralized by such debt securities or equivalent securities of 
the issuer increased by no more than 20 percentage points during a 30 
calendar-day period of significant stress. This percentage decline in 
value and percentage increase in haircut is the same as those 
applicable to corporate debt securities included as level 2B liquid 
assets under the LCR.\14\ This limitation is meant to exclude volatile 
U.S. municipal securities because their volatility indicates these 
assets may not hold their value during a period of significant stress, 
thereby over-estimating the amount of HQLA actually available to the 
banking entity.
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    \14\ Under the LCR, equity securities included as level 2B 
liquid assets have a similar criteria. However, the covered company 
would be required to demonstrate that the market price of the 
security or equivalent securities of the issuer declined by no more 
than 40 percent during a 30 calendar-day period of significant 
stress, or that the market haircut demanded by counterparties to 
securities borrowing and lending transactions that are 
collateralized by the publicly traded common equity shares or 
equivalent securities of the issuer increased by no more than 40 
percentage points, during a 30 calendar-day period of significant 
stress.
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    As discussed in the Supplementary Information section to the LCR 
final rule, a Board-regulated institution may demonstrate a historical 
record that meets this criterion through reference to historical market 
prices and available funding haircuts of the U.S. general obligation 
municipal security during periods of significant stress, such as the 
2007-2009 financial crisis.\15\ Board-regulated institutions should 
also look to other periods of systemic and idiosyncratic stress to see 
if the asset under consideration has proven to be a reliable source of 
liquidity. As noted above, HQLA include only those assets that have 
demonstrated an ability to maintain relatively stable prices such that 
they can be rapidly sold by a Board-regulated institution to meet its

[[Page 30386]]

obligations during a period of significant stress.
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    \15\ 79 FR 61440, 61459 (October 10, 2014).
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4. Not an Obligation of a Financial Sector Entity or Its Consolidated 
Subsidiaries
    Under this proposed rule, U.S. general obligation municipal 
securities would qualify as HQLA only if they are not obligations of a 
financial sector entity and not obligations of a consolidated 
subsidiary of a financial sector entity. For purposes of this 
provision, the Board considers a security that is issued or guaranteed 
by a financial sector entity to be an obligation of the financial 
sector entity. The LCR defines a financial sector entity to include a 
regulated financial company, investment company, non-regulated fund, 
pension fund, investment adviser, or a company that the Board has 
determined should be treated the same as the foregoing for the purposes 
of the LCR. Thus, if a bond insurer insures the general obligation 
municipal securities of a U.S. public sector entity (such insurance is 
commonly referred to as a ``wrap''), the securities would not be 
eligible for inclusion in HQLA. The Board has proposed to include this 
criterion in order to exclude U.S. general obligation municipal 
securities that are valued, in part, based on guarantees provided by 
financial sector entities, because these financial sector entity 
guarantees could exhibit similar risks and correlation with Board-
regulated institutions (wrong-way risk) during a liquidity stress 
period, thus overestimating the amount of HQLA that would be available 
to the banking entity during a liquidity stress period. This criterion 
is consistent with the Basel III Liquidity Framework and with the 
requirements imposed on corporate debt securities and publicly traded 
common equity shares that are included as level 2B liquid assets under 
the LCR.
    1. How should the Board supplement or amend the proposed criteria 
for including U.S. general obligation municipal securities as HQLA?
    2. Is it appropriate to exclude U.S. general obligation municipal 
securities that are guaranteed (or ``wrapped'') by bond insurers or 
other financial sector entities from HQLA because of wrong-way risk? 
Why or why not? How else could the Board address concerns regarding the 
wrong-way risk associated with such securities?

B. Limitations on a Company's Inclusion of U.S. General Obligation 
Municipal Securities as Eligible HQLA

    This proposed rule would limit the amount of U.S. general 
obligation municipal securities a Board-regulated institution could 
include as eligible HQLA based on the total amount outstanding of U.S. 
general obligation municipal securities with the same CUSIP number, on 
the average daily trading volume of general obligation municipal 
securities issued by a particular U.S. municipal issuer, and on a 
percentage of the institution's total HQLA amount. These limitations 
are intended to address the unique structure of the U.S. municipal 
securities market and designed to help ensure sufficient liquidity of 
the U.S. general obligation municipal securities included in the HQLA 
amount under the LCR.
1. Limitation on the Inclusion of U.S. General Obligation Municipal 
Securities With the Same CUSIP Number as Eligible HQLA
    Individual issuances of U.S. municipal securities (those with the 
same CUSIP number) by a single public sector entity are frequently far 
smaller and more numerous than issuances of debt securities by a single 
corporate issuer and exhibit a diverse array of maturity dates and 
interest rates. This is in part due to legal and other restrictions on 
the size of individual issuances by public sector entities and because 
U.S. municipal securities are frequently marketed to retail or smaller 
institutional investors. For example, a very large issuer of U.S. 
municipal securities (such as a state or large city) may have several 
hundred individual issuances outstanding. In contrast, a single 
corporate issuer may have a comparable dollar amount of securities 
outstanding but with only 20 to 30 individual issuances outstanding. 
Investors in U.S. municipal securities sometimes purchase a large 
percentage, including more than 50 percent of the outstanding amount, 
of the individual issuance.
    The Board is concerned that a Board-regulated institution would not 
be able to monetize a concentration in the holding of a particular 
issuance of U.S. general obligation municipal securities during a 
period of significant stress without a material impact on the 
securities' price. This proposed rule therefore would permit a Board-
regulated institution to count U.S. general obligation municipal 
securities as eligible HQLA only to the extent the fair value of the 
institutions' securities with the same CUSIP number do not exceed a 
maximum of 25 percent of the total amount of outstanding securities 
with the same CUSIP number. Under the proposal, this threshold for 
inclusion as eligible HQLA would be calculated prior to application of 
the 50 percent haircut applicable to level 2B liquid assets that is set 
forth in Sec.  249.21(a)(3) of the LCR final rule. This requirement is 
designed to ensure that a Board-regulated institution does not include 
in its HQLA amount a concentration of an individual issuance of U.S. 
general obligation municipal securities.
2. Limitation on the Inclusion of the U.S. General Obligation Municipal 
Securities of a Single Issuer as Eligible HQLA
    The Board is proposing a limit on the amount of securities issued 
by a single U.S. public sector entity that a Board-regulated 
institution may include as eligible HQLA, based on the trading volume 
that the secondary market for the entity's general obligation municipal 
securities could be expected to withstand before prices materially 
decline. For each U.S. public sector entity, this proposed rule would 
limit the aggregate fair value of the general obligation securities 
that a Board-regulated institution could include as eligible HQLA to 
two times the average daily trading volume, as measured over the 
previous four quarters, of all general obligation municipal securities 
issued by that public sector entity.
    The LCR was designed to include as eligible HQLA assets that remain 
relatively liquid and have multiple buyers and sellers during periods 
of significant stress, as a covered company may be expected to sell 
HQLA to meet its cash outflows during such periods. To remain 
consistent with the design of the LCR, the proposal seeks to include 
U.S. general obligation municipal securities as eligible HQLA to the 
extent that they would exhibit liquidity without dramatic loss in value 
during periods of significant stress. The U.S. municipal securities 
market includes a large diversity of issuers, size of issuances, and 
volumes of secondary market trading. The Board analyzed data on the 
historical trading volume of municipal securities in order to determine 
the general level of increased sales of municipal securities that could 
be absorbed by the market during periods of significant stress before 
prices would materially decline. The proposal would limit the aggregate 
fair value of the U.S. general obligation municipal securities of a 
public sector entity that may be included as eligible HQLA to two times 
the average daily trading volume of all U.S. general obligation 
municipal securities issued by that public sector entity because, based 
on the Board's analysis, a holding of two times the average daily 
trading volume could likely be absorbed by the market within a 30 
calendar-day period

[[Page 30387]]

of significant stress without materially disrupting the functioning of 
the market.
    Rather than proposing an average daily trading volume limitation on 
a per-security basis, the Board is proposing a limitation based on the 
average daily trading volume of all U.S. general obligation municipal 
securities issued by the public sector entity. Due to the smaller size 
of many U.S. municipal securities issuances, applying this limit on a 
per-security basis may unnecessarily restrict a covered company's 
ability to invest in a particular security that meets the Board-
regulated institution's investment criteria and liquidity needs. 
However, as discussed above, the Board has proposed a separate 
limitation on the amount of an individual issuance that may be included 
as eligible HQLA to address the concern that a high concentration of an 
individual U.S. general obligation municipal security could be included 
as eligible HQLA.
3. Limitation on the Amount of U.S. General Obligation Municipal 
Securities That Can Be Included in the HQLA Amount
    The Board is proposing to limit the amount of U.S. general 
obligation municipal securities that are included in a Board-regulated 
institution's HQLA amount to no more than five percent of its total 
HQLA amount. This limit is in addition to the 40 percent limit on the 
aggregate amount of level 2A and level 2B liquid assets and the 15 
percent limit on level 2B liquid assets that can be included in the 
HQLA amount. It also complements the other two limits on U.S. general 
obligation municipal securities described above, which relate solely to 
a particular issuance and individual issuers. Although the Board has 
concluded that certain U.S. general obligation municipal securities are 
sufficiently liquid to be included as eligible HQLA, the Board proposes 
to limit the aggregate amount of all U.S. general obligation municipal 
securities that may be included in the HQLA amount to ensure 
appropriate diversification of asset classes within a Board-regulated 
institution's HQLA amount. Consistent with the LCR's limits on level 2A 
and level 2B liquid assets, this proposed five percent limit applies 
both on an unadjusted basis and after adjusting the composition of the 
HQLA amount upon the unwind of certain secured funding transactions, 
secured lending transactions, asset exchanges and collateralized 
derivatives transactions.\16\
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    \16\ See 12 CFR 249.21(g).
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    The proposed five percent limit would be applied to the calculation 
of the HQLA amount by amending the definitions of the unadjusted excess 
HQLA amount and the adjusted excess HQLA amount.\17\ Under this 
proposed rule, the unadjusted excess HQLA amount would equal the sum of 
the level 2 cap excess amount, the level 2B cap excess amount and the 
public sector entity security cap excess amount. The method of 
calculating the public sector entity security cap excess amount is set 
forth in Sec.  249.21(f) of this proposed rule. Under this provision, 
the public sector entity security cap excess amount would be calculated 
as the greater of: (1) The public sector entity security liquid asset 
amount minus the level 2 cap excess amount minus level 2B cap excess 
amount minus 0.0526 (or 5/95, which is the ratio of the maximum 
allowable public sector entity security liquid assets to the level 1 
liquid assets and other level 2 liquid assets) times the sum of (i) the 
level 1 liquid asset amount, (ii) the level 2A liquid asset amount, and 
(iii) the level 2B liquid asset amount minus the public sector entity 
security liquid asset amount; or (2) zero.
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    \17\ See 12 CFR 249.21(c) and (f).
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    Under this proposed rule, the adjusted excess HQLA amount would 
equal the sum of the adjusted level 2 cap excess amount, the adjusted 
level 2B cap excess amount, and the adjusted public sector entity cap 
excess amount. The method of calculating the adjusted public sector 
entity security cap excess amount is set forth in Sec.  249.21(k) of 
this proposed rule. Under this provision, the adjusted public sector 
entity security cap excess amount would be calculated as the greater 
of: (1) The adjusted public sector entity security liquid asset amount 
minus the adjusted level 2 cap excess amount minus the adjusted level 
2B cap excess amount minus 0.0526 (or 5/95, which is the ratio of the 
maximum allowable adjusted public sector entity security liquid assets 
to the adjusted level 1 liquid assets and other adjusted level 2 liquid 
assets) times the sum of (i) the adjusted level 1 liquid asset amount, 
(ii) the adjusted level 2A liquid asset amount, and (iii) the adjusted 
level 2B liquid asset amount minus the adjusted public sector entity 
security liquid asset amount; or (2) zero.
    3. What additional or alternative limitations should the Board 
consider relating to the inclusion of individual and aggregate 
issuances of U.S. public sector entities as eligible HQLA and in a 
Board-regulated institution's HQLA amount? How else could the Board 
address concerns regarding concentrations and minimizing market price 
movements associated with sales of HQLA?

III. Plain Language

    Section 722 of the Gramm-Leach Bliley Act (Pub L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Board to use plain 
language in all proposed and final rules published after January 1, 
2000. The Board invites your comments on how to make this proposal 
easier to understand. For example:
     Has the Board organized the material to suit your needs? 
If not, how could this material be better organized?
     Are the requirements in the proposed rule clearly stated?
     If not, how could the proposed rule be more clearly 
stated?
     Does the proposed rule contain language or jargon that is 
not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the proposed rule easier to 
understand? If so, what changes to the format would make the proposed 
rule easier to understand?
     What else could the Board do to make the regulation easier 
to understand?

IV. Regulatory Flexibility Act

    The Regulatory Flexibility Act \18\ (RFA), requires an agency to 
either provide an initial regulatory flexibility analysis with a 
proposed rule for which a general notice of proposed rulemaking is 
required or to certify that the proposed rule will not have a 
significant economic impact on a substantial number of small entities 
(defined for purposes of the RFA to include banks with assets less than 
or equal to $550 million). In accordance with section 3(a) of the RFA, 
the Board is publishing an initial regulatory flexibility analysis with 
respect to this proposed rule. Based on its analysis and for the 
reasons stated below, the Board believes that this proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. Nevertheless, the Board is publishing an initial regulatory 
flexibility analysis. A final regulatory flexibility analysis will be 
conducted after commenters received during the public comment period 
have been considered.
---------------------------------------------------------------------------

    \18\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    As discussed above, this proposed rule would amend the liquidity 
coverage ratio rule to include certain high-quality general obligation 
U.S. municipal securities as high-quality

[[Page 30388]]

liquid assets for the purposes of the LCR.
    Under regulations issued by the Small Business Administration, a 
``small entity'' includes a depository institution, bank holding 
company, or savings and loan holding company with total assets of $550 
million or less (a small banking organization). As of December 31, 
2014, there were approximately 664 small state member banks, 3,832 
small bank holding companies, and 275 small savings and loan holding 
companies.
    This proposed rule does not apply to ``small entities'' and would 
apply only to Board-regulated institutions subject to the LCR, which 
include: (1) Bank holding companies, certain savings and loan holding 
companies, and state member banks that, in each case, have $250 billion 
or more in total consolidated assets or $10 billion or more in on-
balance sheet foreign exposure; (2) state member banks with $10 billion 
or more in total consolidated assets that are consolidated subsidiaries 
of bank holding companies subject to the LCR; and (3) nonbank financial 
companies designated by the Financial Stability Oversight Council for 
Board supervision to which the Board has applied the LCR by rule or 
order. This proposed rule also would apply to bank holding companies 
and certain savings and loan holding companies with $50 billion or more 
in total consolidated assets, which are subject to the modified minimum 
liquidity coverage ratio. Companies that are subject to this proposed 
rule therefore substantially exceed the $550 million asset threshold at 
which a banking entity is considered a ``small entity'' under SBA 
regulations.
    As noted above, because this proposed rule is not likely to apply 
to any company with assets of $550 million or less, if adopted in final 
form, it is not expected to apply to any small entity for purposes of 
the RFA. The Board is aware of no other Federal rules that duplicate, 
overlap, or conflict with this proposed rule. In light of the 
foregoing, the Board does not believe that this proposed rule, if 
adopted in final form, would have a significant economic impact on a 
substantial number of small entities supervised and therefore believes 
that there are no significant alternatives to this proposed rule that 
would reduce the economic impact on small banking organizations 
supervised by the Board.
    The Board welcomes comment on all aspects of its analysis. A final 
regulatory flexibility analysis will be conducted after consideration 
of comments received during the public comment period.

V. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or 
sponsor, and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The Board reviewed this proposed rule 
and determined that it would not introduce any new collection of 
information pursuant to the PRA.

List of Subjects in 12 CFR Part 249

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

Authority and Issuance

    For the reasons stated in the Supplementary Information section, 
the Board proposes to amend part 249 of chapter II of title 12 of the 
Code of Federal Regulations as follows:

PART 249--LIQUIDITY RISK MEASUREMENT STANDARDS (REGULATION WW)

0
1. The authority citation for part 249 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1467a(g)(1), 
1818, 1828, 1831p-1, 1831o-1, 1844(b), 5365, 5366, 5368.

0
2. Amend Sec.  249.20, by redesignating paragraph (c)(2) as paragraph 
(c)(3) and adding new paragraph (c)(2) to read as follows:


Sec.  249.20  High-quality liquid asset criteria.

* * * * *
    (c) * * *
    (2) A general obligation security issued by, or guaranteed as to 
the timely payment of principal and interest by, a public sector entity 
where the security is:
    (i) Investment grade under 12 CFR part 1 as of the calculation 
date;
    (ii) Issued or guaranteed by a public sector entity whose 
obligations have a proven record as a reliable source of liquidity in 
repurchase or sales markets during stressed market conditions, as 
demonstrated by:
    (A) The market price of the security or equivalent securities of 
the issuer declining by no more than 20 percent during a 30 calendar-
day period of significant stress; or
    (B) The market haircut demanded by counterparties to secured 
lending and secured funding transactions that are collateralized by the 
security or equivalent securities of the issuer increasing by no more 
than 20 percentage points during a 30 calendar-day period of 
significant stress; and
    (iii) Not an obligation of a financial sector entity and not an 
obligation of a consolidated subsidiary of a financial sector entity.
* * * * *
0
3. Amend Sec.  249.21, by:
0
a. Adding paragraph (b)(4);
0
b. Removing the period at the end of paragraph (c)(2) and adding in its 
place a semicolon and the word ``plus'';
0
c. Adding paragraph (c)(3);
0
d. Redesignating paragraphs (f) through (i) and as paragraphs (g) 
through (j) respectively and adding new paragraph (f);
0
e. Adding paragraph (g)(4);
0
f. Removing the period at the end of paragraph (h)(2) and adding in its 
place a semicolon and the word ``plus'';
0
g. Adding paragraphs (h)(3); and (k);
    The additions read as follows:


Sec.  249.21  High-quality liquid asset amount.

* * * * *
    (b) * * *
    (4) Public sector entity security liquid asset amount. The public 
sector entity security liquid asset amount equals 50 percent of the 
fair value of all general obligation securities issued by, or 
guaranteed as to the timely payment of principal and interest by, a 
public sector entity that are eligible HQLA.
    (c) * * *
    (3) The public sector entity security cap excess amount.
* * * * *
    (f) Calculation of the public sector entity security cap excess 
amount. As of the calculation date, the public security entity security 
cap excess amount equals the greater of:
    (1) The public sector entity security liquid asset amount minus the 
level 2 cap excess amount minus level 2B cap excess amount minus 0.0526 
times the sum of:
    (i) The level 1 liquid asset amount;
    (ii) The level 2A liquid asset amount; and
    (iii) The level 2B liquid asset amount minus the public sector 
entity security liquid asset amount; or
    (2) 0.
    (g) * * *
    (4) Adjusted public sector entity security liquid asset amount. A 
[BANK]'s adjusted public sector entity security liquid asset amount 
equals 50 percent of the fair value of all general obligation 
securities issued by, or guaranteed as to the timely payment of 
principal and interest by, a public sector entity that would be 
eligible HQLA and would be held by the [BANK] upon the unwind of any 
secured funding

[[Page 30389]]

transaction (other than a collateralized deposit), secured lending 
transaction, asset exchange, or collateralized derivatives transaction 
that matures within 30 calendar days of the calculation date where the 
[BANK] will provide an asset that is eligible HQLA and the counterparty 
will provide an asset that will be eligible HQLA.
    (h) * * *
    (3) The adjusted public sector entity security cap excess amount.
* * * * *
    (k) Calculation of the adjusted public sector entity security cap 
excess amount. As of the calculation date, the adjusted public sector 
entity security cap excess amount equals the greater of:
    (1) The adjusted public sector entity security liquid asset amount 
minus the adjusted level 2 cap excess amount minus the adjusted level 
2B cap excess amount minus 0.0526 times the sum of:
    (i) The adjusted level 1 liquid asset amount;
    (ii) The adjusted level 2A liquid asset amount: and
    (iii) The adjusted level 2B liquid asset amount minus the adjusted 
public sector entity security liquid asset amount; or
    (2) 0.
0
4. Amend Sec.  249.22, by redesignating paragraph (c) as paragraph (d) 
and adding new paragraph (c) to read as follows:


Sec.  249.22  Requirements for eligible high-quality liquid assets.

* * * * *
    (c) Securities of public sector entities as eligible HQLA. A Board-
regulated institution may include as eligible HQLA a general obligation 
security issued by, or guaranteed as to the timely payment of principal 
and interest by, a public sector entity if each of the following is 
satisfied:
    (1) The fair value of a single issuance of securities that are 
included as eligible HQLA by the Board-regulated institution is no 
greater than 25 percent of the total amount of outstanding securities 
with the same CUSIP number at the calculation date; and
    (2) The fair value of the aggregate amount of securities of a 
single public sector entity issuer that are included as eligible HQLA 
by the Board-regulated institution is no greater than two times the 
average daily trading volume during the previous four quarters of all 
general obligation securities issued by that public sector entity.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, May 18, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-12850 Filed 5-27-15; 8:45 am]
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