Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities as High-Quality Liquid Assets, 21223-21233 [2016-07716]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 81, Number 69 (Monday, April 11, 2016)]
[Rules and Regulations]
[Pages 21223-21233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07716]



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Federal Register / Vol. 81, No. 69 / Monday, April 11, 2016 / Rules 
and Regulations

[[Page 21223]]



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: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is adopting a final rule that amends the Board's liquidity coverage 
ratio rule and modified liquidity coverage ratio rule (together, LCR 
rule) to include certain U.S. municipal securities as high-quality 
liquid assets (HQLA). This final rule includes as level 2B liquid 
assets under the LCR rule general obligation securities of a public 
sector entity (i.e., securities backed by the full faith and credit of 
a U.S. state or municipality) that meet similar criteria as corporate 
debt securities that are included as level 2B liquid assets, subject to 
limitations that are intended to address the structure of the U.S. 
municipal securities market. The final rule applies to all Board-
regulated institutions that are subject to the LCR rule: 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; state member banks with $10 billion or more in total 
consolidated assets that are consolidated subsidiaries of bank holding 
companies described in the first instance; nonbank financial companies 
designated by the Financial Stability Oversight Council for Board 
supervision to which the Board has applied the LCR rule by separate 
rule or order; and bank holding companies and certain savings and loan 
holding companies, in each case with $50 billion or more in total 
consolidated assets, but that do not meet the thresholds described in 
the first through third instances, which are subject to the Board's 
modified liquidity coverage ratio rule.

DATES: Effective Date: July 1, 2016.

FOR FURTHER INFORMATION CONTACT: Gwendolyn Collins, Assistant Director, 
(202) 912-4311, Peter Clifford, Manager, (202) 785-6057, 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; Benjamin W. 
McDonough, Special Counsel, (202) 452-2036, Dafina Stewart, Counsel, 
(202) 452-3876, or Adam Cohen, Counsel, (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 and Overview
    A. Background and Summary of the Proposed Rule
    B. Overview of the Final Rule and Significant Changes From the 
Proposed Rule
II. Inclusion of U.S. Municipal Securities as HQLA
    A. Criteria for Inclusion of U.S. Municipal Securities 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. Quantitative Limitations on a Company's Inclusion of U.S. 
General Obligation Municipal Securities in its HQLA Amount
    1. Limitation on the Inclusion of U.S. General Obligation 
Municipal Securities With the Same CUSIP Number in the HQLA Amount
    2. Limitation on the Inclusion of the U.S. General Obligation 
Municipal Securities of a Single Issuer in the HQLA Amount
    3. Limitation on the Amount of U.S. General Obligation Municipal 
Securities That Can Be Included in the HQLA Amount
    C. HQLA Calculation
III. Plain Language
IV. Regulatory Flexibility Act
V. Paperwork Reduction Act
VI. Riegle Community Development and Regulatory Improvement Act of 
1994

I. Background and Overview

A. Background and Summary of the Proposed Rule

    On May 28, 2015, the Board of Governors of the Federal Reserve 
System (Board) invited comment on a proposed rule (proposed rule) to 
allow Board-regulated institutions subject to the liquidity coverage 
ratio rule and modified liquidity coverage ratio rule (together, LCR 
rule) \1\ to include certain U.S. general obligation municipal 
securities as high-quality liquid assets (HQLA).\2\ The LCR rule, 
adopted by the Board, the Office of the Comptroller of the Currency 
(OCC), and the Federal Deposit Insurance Corporation (FDIC) 
(collectively, the agencies) in 2014,\3\ 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 rule requires a company to maintain an 
amount of HQLA (the numerator of the ratio) \4\ that is no less than 
its total net cash outflow amount over a forward-looking 30 calendar-
day period of significant stress (the denominator of the ratio).\5\ 
Community banking organizations are not subject to the LCR rule.\6\
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    \1\ 12 CFR part 249.
    \2\ 80 FR 30383 (May 28, 2015).
    \3\ 79 FR 61440 (October 10, 2014).
    \4\ A company's HQLA amount for purposes of the LCR rule is 
calculated according to 12 CFR 249.21.
    \5\ A company's total net cash outflow amount for purposes of 
the LCR rule is calculated according to 12 CFR 249.30 or 249.63.
    \6\ The LCR rule applies to (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); (3) nonbank 
financial companies designated by the Financial Stability Oversight 
Council (Council) for Board supervision to which the Board has 
applied the LCR rule by separate rule or order; and (4) bank holding 
companies and certain savings and loan holding companies that, in 
each case, have $50 billion or more in consolidated assets but that 
do not meet the thresholds described in (1) through (3), which are 
subject to the modified liquidity coverage ratio rule (collectively, 
covered companies). At this time, General Electric Capital 
Corporation is the only nonbank financial company designated by the 
Council for Board supervision to which the Board has applied the LCR 
rule. 80 FR 4411 (July 24, 2015).

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[[Page 21224]]

    Under the LCR rule, asset classes that count as HQLA are those that 
have historically served as sources of liquidity in the United States, 
including during periods of significant stress. In identifying the 
asset classes that qualify as HQLA under the LCR rule, the agencies 
considered several factors, including an asset class's risk profile and 
characteristics of the market for the asset class (e.g., the existence 
of active sale or repurchase markets at all times, significant 
diversity in market participants, and high trading volume). In 
addition, the agencies developed certain other criteria, such as 
operational requirements, that assets must meet for inclusion as 
eligible HQLA.\7\
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    \7\ The LCR rule defines eligible HQLA as those high-quality 
liquid assets that meet the requirements set forth in 12 CFR 249.22.
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    The LCR rule divides HQLA into three categories of assets: Level 1, 
level 2A, and level 2B liquid assets. Specifically, level 1 liquid 
assets, which are the highest quality and most 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 securities 
issued by or unconditionally guaranteed as to timely payment of 
principal and interest by a sovereign entity, certain international 
organizations, or certain multilateral development banks. Level 1 
liquid assets may be included in a covered company's HQLA amount 
without limitation and without haircut.
    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. All 
level 2 liquid assets, including all level 2B liquid assets, must be 
liquid and readily marketable as defined in the LCR rule to be included 
as HQLA.\8\ 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. Under the LCR rule, level 2A liquid assets are 
subject to a 15 percent haircut, and the aggregate amount of level 2A 
and level 2B liquid assets is limited to no more than 40 percent of a 
covered company's HQLA amount, as calculated under 12 CFR 249.21. 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 a covered company's HQLA 
amount. Under the LCR rule, level 2B liquid assets include certain 
corporate debt securities and certain common equity shares of publicly 
traded companies.
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    \8\ The liquid and readily marketable standard is defined in 12 
CFR 249.3 and is discussed in section II.B.2 of the Supplementary 
Information section to the LCR rule published October 10, 2014. 79 
FR 61440, 61451-52 (October 10, 2014).
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    Other classes of assets, such as debt securities issued or 
guaranteed by a public sector entity (municipal securities), are not 
treated as HQLA under the LCR rule. The LCR rule defines a public 
sector entity to include any state, local authority, or other 
governmental subdivision below the U.S. sovereign entity level.\9\ The 
Supplementary Information section to the LCR rule published October 10, 
2014, stated that ``[w]ith respect to municipal securities, the 
agencies have observed that the liquidity characteristics of municipal 
securities range significantly, and overall many municipal securities 
are not `liquid and readily-marketable' in U.S. markets as defined in 
Sec.  __.3 of the final rule.'' \10\ Accordingly, the agencies did not 
include U.S. municipal securities as HQLA in the LCR rule. However, the 
Board continued to study the question of whether at least some U.S. 
municipal securities should be included as HQLA under some 
circumstances, and subsequently issued the proposed rule.
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    \9\ 12 CFR 249.3.
    \10\ 79 FR 61440, 61463.
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    The proposed rule would have included as level 2B liquid assets 
under the LCR rule certain U.S. general obligation municipal securities 
that meet similar criteria as corporate debt securities that are 
included as level 2B liquid assets. The proposed rule also would have 
contained several criteria and limitations designed to ensure that U.S. 
general obligation municipal securities included as HQLA would be 
sufficiently liquid in times of stress. The proposed rule would have 
applied to all Board-regulated institutions that are subject to the LCR 
rule: (1) Bank holding companies, savings and loan holding companies 
without significant commercial or insurance operations, 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; \11\ (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); (3) nonbank financial 
companies designated by the Council for Board supervision to which the 
Board has applied the LCR rule by separate rule or order; and (4) bank 
holding companies and certain savings and loan holding companies, in 
each case with $50 billion or more in total consolidated assets, but 
that do not meet the thresholds described in (1) through (3), which are 
subject to the Board's modified liquidity coverage ratio rule 
(together, Board-regulated covered companies).
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    \11\ On-balance sheet foreign exposure equals total cross-border 
claims less claims with a head office or guarantor located in 
another country plus redistributed guaranteed amounts to the country 
of the head office or guarantor plus local country claims on local 
residents plus revaluation gains on foreign exchange and derivative 
transaction products, calculated in accordance with the Federal 
Financial Institutions Examination Council (FFIEC) 009 Country 
Exposure Report. 12 CFR 249.1(b)(1)(ii).
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    The proposed rule and the final rule permit U.S. general obligation 
municipal securities that meet certain criteria to be counted as HQLA 
for purposes of the LCR rule, subject to certain limits.\12\ Neither 
the proposed rule nor the final rule limit in any way, however, the 
amount or types of municipal securities that a Board-regulated covered 
company may hold for purposes other than complying with the LCR rule.
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    \12\ A Board-regulated covered company that holds these 
securities in its consolidated subsidiaries, including those 
consolidated securities that are not regulated by the Board, may 
count the securities as HQLA for purposes of the LCR rule in 
accordance with 12 CFR 249.22(b)(3) and (4).
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B. Overview of the Final Rule and Significant Changes From the Proposed 
Rule

    The final rule amends the LCR rule to include certain U.S. 
municipal securities as HQLA. The final rule includes U.S. general 
obligation municipal securities as level 2B liquid assets if they meet 
certain criteria, some of which have been adjusted from the criteria in 
the proposed rule based on comments received. To qualify as HQLA under 
the final rule, the securities must be general obligations of public 
sector entities, which includes bonds or similar obligations that are 
backed by the full faith and credit of the public sector entities. U.S. 
municipal securities must also be ``investment grade'' under 12 CFR 
part 1 as of the calculation

[[Page 21225]]

date,\13\ and must 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. Under the final rule, 
U.S. municipal securities generally do not qualify as level 2B liquid 
assets if they are obligations of a financial sector entity or a 
consolidated subsidiary of a financial sector entity. This approach is 
consistent with the requirements imposed on corporate debt securities 
and publicly traded common equity shares that are included as level 2B 
liquid assets. Unlike the proposed rule and the LCR rule's treatment of 
other level 2B liquid assets, however, U.S. municipal securities that 
are insured by a bond insurer may count as level 2B liquid assets, so 
long as the underlying U.S. municipal security would otherwise qualify 
as HQLA without the insurance.
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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, Public Law 
111-203, 124 Stat. 1376, 1887 (2010) section 939A, codified at 15 
U.S.C. 78o-7, the final rule does not rely on credit ratings as a 
standard of credit-worthiness. Rather, the final rule relies on an 
assessment by the Board-regulated covered company of the capacity of 
the issuer of the U.S. municipal security to meet its financial 
commitments.
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    The proposed rule would have limited the amount of U.S. general 
obligation municipal securities a Board-regulated covered company could 
include in its HQLA amount based on the total amount of outstanding 
securities with the same CUSIP number and the average daily trading 
volume of U.S. general obligation municipal securities issued by a 
particular U.S. municipal issuer. The proposed rule would also have 
limited the percentage of the institution's total HQLA amount that 
could be comprised of U.S. municipal securities. Commenters opposed 
these limitations, arguing that U.S. municipal securities have similar 
risks and liquidity characteristics as other assets included in the 
HQLA amount that are not subject to these limitations. Instead of these 
limitations, commenters argued that the credit and liquidity 
characteristics of a U.S municipal security, such as credit quality, 
source of repayment, CUSIP size, and issuer size, should be considered 
in determining whether the security may be included in a company's HQLA 
amount. After considering comments on the proposed rule, the Board is 
retaining two and eliminating one of these proposed limitations in the 
final rule.

II. Inclusion of U.S. Municipal Securities as HQLA

    The Board received 13 comments on the proposed rule from state and 
local government officials, trade organizations, public interest 
groups, and other interested parties. In addition, Board staff held 
meetings with members of the public, summaries of which are available 
on the Board's public Web site.\14\ Although most commenters generally 
supported allowing Board-regulated covered companies to include certain 
liquid U.S. municipal securities as HQLA, they objected to the criteria 
and limitations on U.S. municipal securities in the proposed rule, 
stating that they would be overly restrictive. One commenter asserted 
that the cumulative impact of the restrictions imposed on U.S. 
municipal securities includable as HQLA would essentially negate the 
ability of a Board-regulated covered company to include U.S. municipal 
securities as HQLA. Another commenter suggested that the definition of 
HQLA is too narrow and concentrated on certain instruments, such as 
cash and U.S. Treasury securities, which could lead to market 
distortions such as constrictions in HQLA supply during times of 
financial stress as banks seek the same sources of HQLA. Although the 
criteria and limitations in the final rule will exclude certain U.S. 
municipal securities, these criteria and limitations are designed to 
include in the HQLA amount only those securities that have liquidity 
characteristics comparable to other level 2B liquid assets. In 
addition, the final rule expands the assets that Board-regulated 
covered companies may include as HQLA, which mitigates potential market 
distortions caused by the correlated market behavior discussed by the 
commenter.
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    \14\ See https://www.federalreserve.gov/newsevents/reform_systemic.htm.
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    One commenter opposed the inclusion of any U.S. municipal 
securities as HQLA because that commenter believed that U.S. municipal 
securities would be illiquid during periods of significant stress, 
which would weaken the effectiveness of the LCR Rule. Under the final 
rule, the criteria that must be met by, and limitations applied to, the 
U.S. municipal securities that are included in a Board-regulated 
covered company's HQLA amount ensures that those securities have a high 
potential to generate liquidity through monetization (sale or secured 
borrowing) during a period of significant stress. Thus, the 
effectiveness of the LCR rule will not be compromised by their 
inclusion as HQLA.
    Many commenters also expressed a desire for the OCC and the FDIC to 
issue rules similar to the Board's proposed rule, in order to promote 
consistency in the regulation of banking organizations and to allow 
institutions not regulated by the Board to include U.S. municipal 
securities as HQLA. The final rule would apply only to Board-regulated 
covered companies.

A. Criteria for Inclusion of U.S. Municipal Securities as Level 2B 
Liquid Assets

    Under the proposed rule, U.S. municipal securities would have been 
included as level 2B liquid assets. Commenters argued that U.S. 
municipal securities instead should be included as level 2A liquid 
assets because they have exhibited limited price volatility, 
particularly during the 2007-2009 financial crisis, high trading 
volumes, and deep and stable secured funding markets. Commenters also 
contended that many U.S. municipal securities are more liquid and more 
secure than foreign sovereign securities that may be counted as level 
2A liquid assets under the LCR rule and other assets that are level 2B 
liquid assets, such as corporate bonds. Some commenters highlighted the 
difference between the treatment of certain U.S. municipal securities 
under the proposed rule and the treatment under the liquidity coverage 
ratio standard established by the Basel Committee on Banking 
Supervision (Basel III Liquidity Framework),\15\ which includes 
municipal securities as level 2A liquid assets. A commenter expressed 
concern that the rule would create an international inconsistency that 
would disadvantage U.S. state and local government issuers due to the 
different treatment of municipal securities in the United States as 
compared to other jurisdictions.
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    \15\ 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.
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    Certain U.S. municipal securities may be more liquid than some 
securities that can be included as level 2A liquid assets under the LCR 
rule. However U.S. municipal securities as a class of assets are less 
liquid than the asset classes included as level 2A liquid assets under 
the LCR rule. For example, the daily trading volume of securities 
issued or guaranteed by U.S. GSEs far exceeds that of U.S. municipal 
securities. The LCR rule differs from the Basel III Liquidity Framework 
in the treatment of municipal securities because of

[[Page 21226]]

differences in the regulation and structure of the U.S. municipal 
securities compared to municipal securities markets in foreign 
jurisdictions.
    The proposed rule would have required U.S. municipal securities to 
be ``liquid and readily marketable,'' as that term is defined in the 
LCR rule \16\ for other level 2B liquid assets. To be liquid and 
readily marketable, a security must be traded in an active secondary 
market with more than two committed market makers, a large number of 
non-market maker participants on both the buying and selling sides of 
transactions, timely and observable market prices, and a high trading 
volume. Commenters asserted that most U.S. municipal securities would 
not meet the conditions specified in the LCR rule to be considered 
liquid and readily marketable, and therefore would not qualify as level 
2B liquid assets under the proposed rule.
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    \16\ See supra note 9.
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    Consistent with the LCR rule's treatment of corporate securities, 
the final rule maintains that a U.S. municipal security may only be 
included as a level 2B liquid asset if it meets the liquid and readily 
marketable standard in the LCR rule. The final rule retains this 
requirement because it will aid in improving a Board-regulated covered 
company's resilience to liquidity risk by ensuring that U.S. municipal 
securities included as level 2B liquid assets are traded in deep, 
active markets, so a company can monetize them easily, even during 
periods of significant stress. This criterion applies equally to 
corporate debt securities, and is successfully being implemented by 
firms for purposes of the LCR. There is no special difficulty in 
applying this same criterion in the same manner to U.S. municipal 
securities.
    Permitting certain U.S. municipal securities to be included as 
level 2B liquid assets recognizes that these securities, while not as 
liquid as a category as other types of HQLA, can serve as highly liquid 
assets within certain limits and if certain conditions are met.
1. U.S. General Obligation Municipal Securities
    Under the proposed rule, a U.S. municipal security would have 
qualified as a level 2B liquid asset only if it was a general 
obligation of the issuing entity, which includes bonds or similar 
obligations that are backed by the full faith and credit of the issuing 
public sector entity. A revenue bond, which is an obligation that a 
public sector entity has committed to repay with proceeds from a 
specified revenue source, such as a project or utility system, rather 
than from general tax funds, would not have qualified as a level 2B 
liquid asset.
    Commenters argued that revenue bonds have similar liquidity and 
volatility characteristics to general obligation bonds and therefore 
should not be treated differently under the final rule. Some commenters 
stated that the inclusion of revenue bonds would expand the universe of 
HQLA-eligible municipal bonds without impairing the objectives of the 
LCR rule. In addition, commenters contended that many revenue bonds are 
not dependent on a single project as a source of repayment, but are 
secured by multiple sources of repayment, such as revenues of multiple 
public entities, pools of assets backed by the full faith and credit of 
other public entities, or by other sources of tax revenues. One 
commenter argued that the value of corporate bonds, which are level 2B 
liquid assets, are tied to uncertain corporate revenues, which is 
similar to revenue bonds being tied to revenues of a specific project 
or projects.
    An asset's credit quality is an important factor in its liquidity 
because market participants tend to be more willing to purchase higher 
credit quality assets, especially during stressed market conditions. 
During a period of significant stress, the credit quality of revenue 
bonds tends to deteriorate more significantly than general obligation 
bonds, and thus, the liquidity of revenue bonds is not as reliable as 
that of general obligation bonds during a period of market stress.\17\ 
Revenue derived from one or more sources may fall dramatically as 
domestic consumption declines during a stress, and as the risk of 
default of any associated revenue bond increases, revenue bonds may 
experience significant price declines and become less liquid. On the 
other hand, general obligation bonds are less likely to experience 
significant price declines during a period of significant stress 
because they are backed by the general taxing authority of the issuing 
municipality and, therefore, are less likely to default in times of 
stress. In fact, historically, there have been a significantly higher 
number of defaults on revenue bonds than general obligation bonds.
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    \17\ The Board has also recognized that general obligation bonds 
have a higher credit quality than revenue bonds in its risk-based 
capital rules, which assign a 50 percent risk weight to revenue 
bonds and a 20 percent risk weight to general obligations of U.S. 
public sector entities. See 12 CFR 217.32(e)(1).
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    Another commenter argued that revenue bonds should be included as 
HQLA because revenue bonds receive preferential treatment under chapter 
9 of the U.S. Bankruptcy Code. Several commenters requested that the 
inclusion of U.S. municipal securities as HQLA be based on the issuer's 
total amount of outstanding debt and the issuer's credit rating, rather 
than support from the general taxing authority of the municipality. One 
commenter argued that the term ``general obligation'' is not 
universally understood and does not necessarily imply a greater level 
of security than the term ``revenue obligation.''
    A revenue bond's treatment in bankruptcy, though a relevant 
consideration to its liquidity profile, does not necessarily indicate 
that the bond has sufficient liquidity for inclusion in a Board-
regulated covered company's HQLA amount. During a period of significant 
stress, probability of default is considered along with the magnitude 
of the expected loss upon a default. As discussed above, without 
general taxing authority support, the market would likely be more 
concerned about the probability of default for a revenue bond as 
compared to a general obligation bond. Similarly, the total amount of 
outstanding debt supporting a municipal project is not necessarily a 
reliable indicator of the liquidity of a U.S. revenue bond supporting 
that project. For example, liquidity could disappear if the specified 
revenue source of a revenue bond were found to be insufficient to meet 
its obligation, regardless of the total amount of the revenue bond 
outstanding. The final rule clarifies that the term ``general 
obligation'' means a bond or similar obligation that is backed by the 
full faith and credit of a public sector entity.
    The Board will continue to monitor the liquidity characteristics of 
revenue bonds and consider whether certain revenue bonds should be 
included as HQLA.
2. Investment Grade U.S. General Obligation Municipal Securities
    Consistent with the requirements applied to corporate debt 
securities that are included as level 2B liquid assets, the proposed 
rule would have required that U.S. municipal securities be ``investment 
grade'' under 12 CFR part 1 as of the calculation date.\18\ Commenters 
requested that all U.S. municipal securities that meet the investment 
grade standard qualify as

[[Page 21227]]

HQLA regardless of other limitations set forth in the proposed rule, 
arguing that not including these high-credit-quality securities would 
increase borrowing costs for state and local governments to finance 
public infrastructure projects. Commenters also asked for clarity on 
the definition of ``investment grade,'' stating that without clearer 
guidance a Board-regulated covered company could interpret ``investment 
grade'' to include U.S. municipal securities that have low credit 
quality, inclusion of which in a Board-regulated covered company's HQLA 
amount would not improve the liquidity risk profile of the firm. One 
commenter suggested that a municipal security should be included in 
HQLA on the basis of the issuer's credit rating.
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    \18\ See supra footnote 13.
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    The investment grade criterion helps to ensure that only U.S. 
municipal securities with high credit quality are included in a Board-
regulated covered company's HQLA amount. 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.\19\ While higher credit quality is associated with greater 
liquidity, in the absence of other distinguishing factors, a security's 
credit quality alone does not guarantee its liquidity. Therefore, the 
final rule will permit Board-regulated covered companies to include 
investment grade U.S. municipal securities as HQLA only if they meet 
the additional criteria for inclusion as level 2B liquid assets and 
subject to the limitations discussed below.
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    \19\ In 2012, the Board issued guidance on the investment grade 
standard. See Supervision and Regulation Letter 12-15 (November 15, 
2012), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1215.htm.
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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 rule, the proposed 
rule would have required 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. Under the proposed rule, a Board-regulated covered company 
would have been 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. 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 
securities or equivalent securities of the issuer increased by no more 
than 20 percentage points during a 30 calendar-day period of 
significant stress.
    Commenters argued that this standard would severely limit the 
number of U.S. municipal securities that would qualify for inclusion as 
HQLA based on the historical performance of U.S. municipal securities 
in times of stress. The final rule maintains the requirement that U.S. 
municipal securities must have a proven record as a reliable source of 
liquidity to qualify as level 2B liquid assets. The percentage decline 
in value (20 percent) and percentage increase in haircut (20 percent) 
used to determine compliance with this criterion are the same as those 
applicable to corporate debt securities included as level 2B liquid 
assets under the LCR rule.\20\ This criterion is meant to exclude 
volatile U.S. municipal securities, which may not hold their value 
during a period of significant stress. Inclusion of volatile U.S. 
municipal securities may result in an overestimation of the HQLA amount 
available to a Board-regulated covered company during a period of 
significant stress. U.S. municipal securities that meet this criterion 
have demonstrated an ability to maintain relatively stable prices, and 
are more likely to be able to be rapidly monetized by a Board-regulated 
covered company during a period of significant stress.
---------------------------------------------------------------------------

    \20\ Under the LCR rule, 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.
---------------------------------------------------------------------------

    Commenters expressed concern that it would be difficult to 
demonstrate compliance with this requirement without specific examples 
of a stress scenario and quantitative, measurable standards for such an 
assessment. As discussed in the Supplementary Information section to 
the LCR rule published October 10, 2014, a Board-regulated covered 
company 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.\21\ Board-regulated covered companies should also consider 
other periods of systemic and idiosyncratic stress to determine if the 
asset under consideration has proven to be a reliable source of 
liquidity.
---------------------------------------------------------------------------

    \21\ 79 FR 61440, 61459 (October 10, 2014).
---------------------------------------------------------------------------

4. Not an Obligation of a Financial Sector Entity or Its Consolidated 
Subsidiaries
    The proposed rule would have excluded U.S. general obligation 
municipal securities that are obligations of a financial sector entity 
or a consolidated subsidiary of a financial sector entity, as defined 
under the LCR Rule.\22\ This requirement would have excluded U.S. 
general obligation municipal securities that received a guarantee from 
a financial sector entity, including a U.S. municipal security that was 
insured by a bond insurer that was a financial sector entity. This 
criterion was intended to exclude U.S. general obligation municipal 
securities that are valued, in part, based on guarantees provided by 
financial sector entities, because these guarantees could exhibit 
similar risks and correlation with Board-regulated covered companies 
(wrong-way risk) during a period of significant stress. Inclusion may 
result in an overestimation of the HQLA amount that would be available 
to the Board-regulated covered company during such period of 
significant stress.
---------------------------------------------------------------------------

    \22\ The LCR rule 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 rule. 12 CFR 249.3.
---------------------------------------------------------------------------

    Commenters argued that an insured U.S. municipal security should 
not be considered an obligation of a financial sector entity because 
the primary obligation of the security is that of the issuer, not the 
insurer. Commenters also expressed concern that insured U.S. general 
obligation municipal securities would receive punitive treatment on the 
basis of the insurance regardless of the liquidity of the underlying 
U.S. general obligation municipal security, which may otherwise qualify 
as HQLA. Commenters further argued that insured U.S. general obligation 
municipal securities do not represent the type of highly correlated 
wrong-way risk that is present when a financial institution holds the 
debt of another financial

[[Page 21228]]

institution and, since the 2007-2009 financial crisis, bond insurers 
have modified their risk profiles to limit such wrong-way risk.
    Commenters stated that insurance not only provides an additional 
layer of credit protection, but also provides additional benefits 
because insurers promote increased transparency, engage in due 
diligence and credit monitoring, and actively participate in bond 
restructurings following a default, all of which increase the price 
stability and liquidity of insured bonds. One commenter suggested 
modifying the proposed rule to allow bonds insured by U.S. regulated 
financial guarantors who only insure U.S. municipal securities, because 
these insurers have less exposure to the broader financial markets.
    In response to comments, the final rule adopts a different approach 
to U.S. general obligation municipal securities that are insured than 
in the proposed rule. Under the final rule, a Board-regulated covered 
company may include as a level 2B liquid asset a U.S. general 
obligation municipal security that has a guarantee from a financial 
institution as long as the company demonstrates that the underlying 
U.S. general obligation municipal security meets all of the other 
criteria to be included as level 2B liquid assets without taking into 
consideration the insurance. This revision is based on further research 
showing that the market for insured U.S. municipal securities are 
primarily derived from underlying U.S. municipal securities' liquidity 
characteristics and not the presence of the insurance, which limits the 
presence of wrong-way risk. In this way, the requirements in the final 
rule will help to ensure that an insured U.S. general obligation 
municipal security would remain liquid regardless of the financial 
health of the insurer.

B. Quantitative Limitations on a Company's Inclusion of U.S. General 
Obligation Municipal Securities in Its HQLA Amount

    The proposed rule would have limited the amount of U.S. general 
obligation municipal securities with the same CUSIP number that a 
Board-regulated covered company could include in its HQLA amount. It 
would also have limited the amount of a particular U.S. municipal 
security that a Board-regulated covered company could include in its 
HQLA amount based on the average daily trading volume of U.S. general 
obligation municipal securities issued by the U.S. municipality. In 
addition, the proposed rule would have limited the overall amount of 
municipal securities that a Board-regulated covered company could 
include in its HQLA amount to 5 percent of the institution's total HQLA 
amount. Commenters opposed these limitations, arguing that U.S. 
municipal securities have similar risks and liquidity characteristics 
as other assets included in the HQLA amount that are not subject to 
these limitations. The final rule will retain two and eliminate one of 
the proposed limitations.
1. Limitation on the Inclusion of U.S. General Obligation Municipal 
Securities With the Same CUSIP Number in the HQLA Amount
    As stated above, the proposed rule would have permitted a Board-
regulated covered company to include 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 25 
percent of the total amount of outstanding securities with the same 
CUSIP number.
    Commenters opposed this limitation, arguing that it would exclude a 
large portion of the outstanding U.S. general obligation municipal 
securities from eligible HQLA, and that the limitation was unnecessary 
to ensure the liquidity of a Board-regulated covered company's HQLA, in 
light of the proposed rule's other requirements. Commenters emphasized 
that, due to the structure of the U.S. municipal security market, this 
limitation would reduce a Board-regulated covered company's ability to 
invest in U.S. municipal securities and would incentivize them to hold 
smaller, less liquid blocks of U.S. municipal securities. A commenter 
stated that applying a limitation at the CUSIP number level would be 
more limiting than one at the issuer level because single securities 
issuances with the same CUSIP level are typically smaller in size than 
an issuer's outstanding debt.
    Several commenters noted that U.S. municipal securities generally 
are not traded or evaluated according to their CUSIP number, as bond 
issuances are often structured to include many CUSIP numbers 
identifying issuances with varying maturities and coupon payment 
schedules, but which are treated similarly in the U.S. municipal 
securities markets. For example, a very large issuer of U.S. municipal 
securities may have several hundred individual issuances outstanding, 
each with different CUSIP numbers. A commenter noted that the number of 
CUSIPs does not affect the liquidity of a particular security or 
negatively impact the price stability of U.S. municipal securities. Due 
to this structure, some commenters suggested that the 25 percent cap 
could more readily be applied to outstanding U.S. municipal securities 
of a single issuing entity, rather than to outstanding securities with 
the same CUSIP number. One commenter expressed concern that a 25 
percent cap on securities with the same CUSIP number would cause Board-
regulated covered companies to hold smaller positions in individual 
issuances of U.S. municipal securities rather than large blocks of 
securities that are more liquid and more frequently traded by 
institutional investors. Another commenter requested that the Board 
clarify whether 25 percent of the total amount of outstanding 
securities with the same CUSIP number could be included as level 2B 
liquid assets if a company owned more than 25 percent of the 
outstanding securities.
    In response to concerns expressed by certain commenters, the final 
rule eliminates the 25 percent limitation on the total amount of 
outstanding securities with the same CUSIP number that could be 
included as level 2B liquid assets. As indicated in the proposed rule, 
a Board-regulated covered company that holds a high percentage of an 
issuance of outstanding municipal securities with the same CUSIP number 
faces a concentration risk and, therefore, may be unable to readily 
monetize such positions during a financial stress. This concentration 
risk is exacerbated in the U.S. municipal securities markets where 
municipal securities issuances are often structured to include many 
CUSIP numbers identifying issuances with varying maturities and coupon 
payments. However, as commenters indicated, the proposed 25 percent 
limitation would have prevented Board-regulated covered companies from 
including certain municipal securities from issuances, particularly 
small issuances as level 2B liquid assets, even though some portion of 
them are highly liquid. To avoid excluding these highly liquid 
securities, the 25 percent limitation is not a requirement under the 
final rule. To the extent these securities are not liquid and, more 
generally, to address the elevated liquidity risk presented by the 
structure of the U.S. municipal securities market, the final rule would 
retain the other limitations on the inclusion of U.S. general 
obligation municipal securities in a Board-regulated covered company's 
HQLA amount, as discussed below.

[[Page 21229]]

2. Limitation on the Inclusion of the U.S. General Obligation Municipal 
Securities of a Single Issuer in the HQLA Amount
    The proposed rule would have limited the amount of securities 
issued by a single public sector entity that a company may include as 
eligible HQLA to two times the average daily trading volume, as 
measured over the previous four quarters, of all U.S. general 
obligation municipal securities issued by that public sector entity. As 
discussed in the Supplementary Information section to the proposed 
rule, this limitation was designed to ensure U.S. general obligation 
municipal securities are only included as eligible HQLA to the extent 
that the market has capacity to absorb an increased supply of such 
securities.
    Many commenters expressed concern regarding this requirement, 
cautioning that this limitation would put too much emphasis on trading 
volumes as a measure of liquidity and too little emphasis on the 
historical price risk of U.S. municipal securities. Some commenters 
asserted that trading volume, in isolation, is not a reliable indicator 
of U.S. municipal securities' future liquidity in times of stress. 
Commenters asserted that trading volumes in the U.S. municipal 
securities market are often low during times of financial strength, as 
many investors purchase such securities as ``buy-and-hold'' 
investments, and therefore past trading volumes during non-stressed 
periods do not necessarily correlate with a U.S. municipal security's 
liquidity during periods of significant stress. One commenter asserted 
that U.S. municipal securities have similar liquidity characteristics 
as other level 2B liquid assets that are not subject to similar 
limitations.
    As discussed in the Supplementary Information section to the 
proposed rule, the Board analyzed data on the historical trading volume 
of U.S. municipal securities in order to determine the general level of 
increased sales of U.S. municipal securities that could be absorbed by 
the market during periods of significant stress. The Board did not 
include the volume of U.S. municipal securities that are purchased and 
held for long periods in this analysis because doing so would have 
assumed that theoretical capacity and demand would exist in periods of 
significant stress, and would have increased liquidity risk by 
permitting firms to include an amount of U.S. municipal securities in 
their HQLA amount that may not be readily monetized in periods of 
stress. Based on the Board's analysis, two times the average daily 
trading volume of all U.S. general obligation municipal securities 
issued by a public sector entity could likely be absorbed by the market 
within a 30 calendar-day period of significant stress without 
materially disrupting the functioning of the market. This requirement 
complements the other criteria and limitations in the final rule and 
ensures that U.S. general obligation securities that are included as 
eligible HQLA remain relatively liquid and have buyers and sellers 
during periods of significant stress.
    Commenters also expressed concern that this limitation would pose 
operational difficulties for Board-regulated covered companies because 
a system to monitor daily trading volumes of individual municipal 
issuers' securities does not currently exist. Although it does not 
appear that an automated system to monitor daily trading volume is 
available, data on the trading of an individual municipal issuers' 
securities is publicly available, so Board-regulated covered companies 
should be able to access data on the daily trading volumes of 
individual municipal issuers and monitor such trading volumes with 
limited operational difficulties.
    For these reasons, the final rule retains the limitation on the 
inclusion of U.S. general obligation municipal securities of a single 
issuer as eligible HQLA. In addition, the Board is clarifying in the 
final rule that a Board-regulated covered company that owns more than 
two times the average daily trading volume of all U.S. general 
obligation municipal securities issued by a public sector entity may 
include up to two times the average daily trading volume of such 
securities as eligible HQLA.
3. Limitation on the Amount of U.S. General Obligation Municipal 
Securities That Can Be Included in the HQLA Amount
    The proposed rule would have limited the amount of U.S. general 
obligation municipal securities that may be included in a Board-
regulated covered company's HQLA amount to no more than 5 percent of 
the HQLA amount. Commenters disagreed with this limitation, contending 
that U.S. municipal securities are safer and more liquid than some 
other types of HQLA assets that have no such concentration limitation. 
A commenter argued that limiting the amount of U.S. municipal 
securities to 5 percent of the HQLA amount would discourage banks from 
investing in U.S. municipal securities, would increase funding costs 
for state and local entities, and would unnecessarily constrict the 
supply of HQLA. Another commenter suggested that the preexisting 
limitations in the LCR rule regarding the percentage of HQLA assets 
that can be level 2 liquid assets would ensure sufficient 
diversification in HQLA assets.
    The final rule maintains the 5 percent limitation on the amount of 
U.S. municipal securities that can be included in a Board-regulated 
covered company's HQLA amount, but, as noted, does not include the 
proposed 25 percent limitation on the total amount of outstanding 
securities with the same CUSIP number. As discussed above, while the 25 
percent limitation effectively could have barred a Board-regulated 
covered company from including certain municipal securities, and 
particularly small issuances, in its HQLA amount, the 5 percent 
limitation should not prevent a Board-regulated covered company from 
including any particular issuance of municipal securities in its HQLA 
amount. Rather, the 5 percent limitation will act as a backstop to 
address the overall liquidity risk presented by the structure of the 
U.S. municipal securities market, including the large diversity of 
issuers and sizes of issuances, by ensuring that a Board-regulated 
covered company's HQLA amount is not overly concentrated in and reliant 
on U.S. municipal securities. The 5 percent limitation is in addition 
to the 40 percent limitation on the aggregate amount of level 2A and 
level 2B liquid assets and the 15 percent limitation on level 2B liquid 
assets that can be included in a Board-regulated covered company's HQLA 
amount. It also complements the two times trading volume limitation on 
U.S. general obligation municipal securities described above, which 
pertains to individual issuers. Consistent with the LCR rule's 
limitations on level 2A and level 2B liquid assets, this 5 percent 
limitation applies both on an unadjusted basis and after adjusting the 
composition of the HQLA amount upon the unwinding of certain secured 
funding transactions, secured lending transactions, asset exchanges and 
collateralized derivatives transactions.\23\
---------------------------------------------------------------------------

    \23\ See 12 CFR 249.21(g).
---------------------------------------------------------------------------

    The final rule would not, however, limit the amount of U.S. 
municipal securities a firm may hold for purposes other than complying 
with the LCR rule.

C. HQLA Calculation

    Section 249.21 of the LCR rule provides instructions for 
calculating a Board-regulated covered company's

[[Page 21230]]

HQLA amount, which includes the calculation of the required haircuts 
and caps for level 2 liquid assets. The final rule implements the 5 
percent limitation for U.S. general obligation municipal securities by 
adding the limitation to the calculation in Sec.  249.21 of the LCR 
rule. Specifically, the final rule amends the calculations of the 
unadjusted excess HQLA amount and the adjusted excess HQLA amount in 
the LCR rule \24\ and adds four new calculations: the public sector 
entity security liquid asset amount, the public sector entity security 
cap excess amount, the adjusted public sector entity security liquid 
asset amount, and the adjusted public sector entity security cap excess 
amount.
---------------------------------------------------------------------------

    \24\ See 12 CFR 249.21(c) and (f).
---------------------------------------------------------------------------

    Under the final rule, the unadjusted excess HQLA amount equals 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 the final rule. Under this section, the 
public sector entity security cap excess amount is 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 total of (i) the 
level 1 liquid asset amount, plus (ii) the level 2A liquid asset 
amount, plus (iii) the level 2B liquid asset amount, minus (iv) the 
public sector entity security liquid asset amount; or (2) zero.
    Under the final rule, the adjusted excess HQLA amount equals 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 the final 
rule. The adjusted public sector entity security cap excess amount is 
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 total of (i) 
the adjusted level 1 liquid asset amount, plus (ii) the adjusted level 
2A liquid asset amount, plus (iii) the adjusted level 2B liquid asset 
amount, minus (iv) the adjusted public sector entity security liquid 
asset amount; or (2) zero.
    The Supplementary Information section to the LCR rule included an 
example calculation of the HQLA amount.\25\ The following is an example 
calculation of the HQLA amount under the final rule, which is similar 
to the calculation in the LCR rule, but includes the public sector 
entity security liquid asset amount, the public sector entity security 
cap excess amount, the adjusted public sector entity security liquid 
asset, and the adjusted public sector entity security cap excess 
amount. Note that the given liquid asset amounts and adjusted liquid 
asset amounts already reflect the level 2A and 2B haircuts.
---------------------------------------------------------------------------

    \25\ See 79 FR 61440, 61474-75.
---------------------------------------------------------------------------

    (a) Calculate the liquid asset amounts (12 CFR 249.21(b))
    The following values are given:

Fair value of all level 1 liquid assets that are eligible HQLA: 17
Covered company's reserve balance requirement: 2
Level 1 liquid asset amount (12 CFR 249.21(b)(1)): 15
Level 2A liquid asset amount: 25
Level 2B liquid asset amount: 140
    Of Which, Public sector entity security liquid asset amount: 15

    (b) Calculate unadjusted excess HQLA amount (12 CFR 249.21(c))
    Step 1: Calculate the level 2 cap excess amount (12 CFR 249.21(d)):

Level 2 cap excess amount = Max (level 2A liquid asset amount + level 
2B liquid asset amount-0.6667*level 1 liquid asset amount, 0)
= Max (25 + 140-0.6667*15, 0)
= Max (165-10.00, 0)
= Max (155.00, 0)
= 155.00
    Step 2: Calculate the level 2B cap excess amount (12 CFR 
249.21(e)).

Level 2B cap excess amount = Max (level 2B liquid asset amount-level 2 
cap excess amount -0.1765*(level 1 liquid asset amount + level 2A 
liquid asset amount), 0)
= Max (140-155.00-0.1765*(15 + 25), 0)
= Max (-15-7.06, 0)
= Max (-22.06, 0)
= 0
    Step 3: Calculate the public sector entity security cap excess 
amount (Sec.  249.21(f) of the final rule).

Public sector entity security cap excess amount = Max (public sector 
entity security liquid asset amount-level 2 cap excess amount-level 2B 
cap excess amount-0.0526*(level 1 liquid asset amount + level 2A liquid 
asset amount + level 2B liquid asset amount-public sector entity 
security liquid asset amount), 0)
= Max (15-155.00-0-0.0526*(15 + 25 + 140-20), 0)
= Max (-140-8.42, 0)
= Max (-148.42, 0)
= 0

    Step 4: Calculate the unadjusted excess HQLA amount (12 CFR 
249.21(c)).

Unadjusted excess HQLA amount = Level 2 cap excess amount + level 2B 
cap excess amount + public sector entity security cap excess amount
= 155.00 + 0 + 0
= 155
    (c) Calculate the adjusted liquid asset amounts, based upon the 
unwind of certain transactions involving the exchange of eligible HQLA 
or cash (12 CFR 249.21(g)).
    The following values are given:

Adjusted level 1 liquid asset amount: 110
Adjusted level 2A liquid asset amount: 50
Adjusted level 2B liquid asset amount: 20
    Of Which, Adjusted public sector entity security liquid asset 
amount: 20
    (d) Calculate adjusted excess HQLA amount (12 CFR 249.21(h)).
    Step 1: Calculate the adjusted level 2 cap excess amount (12 CFR 
249.21(i)).

Adjusted level 2 cap excess amount = Max (adjusted level 2A liquid 
asset amount + adjusted level 2B liquid asset amount-0.6667*adjusted 
level 1 liquid asset amount, 0)
= Max (50 + 20-0.6667*110, 0)
= Max (70-73.34, 0)
= Max (-3.34, 0)
= 0

    Step 2: Calculate the adjusted level 2B cap excess amount (12 CFR 
249.21(j)).

Adjusted level 2B cap excess amount = Max (adjusted level 2B liquid 
asset amount-adjusted level 2 cap excess amount-0.1765*(adjusted level 
1 liquid asset amount + adjusted level 2A liquid asset amount, 0)
= Max (20-0-0.1765*(110 + 50), 0)
= Max (20-28.24, 0)
= Max (-8.24, 0)
= 0

    Step 3: Calculate the adjusted public sector entity security cap 
excess amount (Sec.  249.21(k) of the final rule).

Adjusted public sector entity security cap excess amount = Max(adjusted

[[Page 21231]]

public sector entity security liquid asset amount-adjusted level 2 cap 
excess amount-adjusted level 2B cap excess amount-0.0526*(adjusted 
level 1 liquid asset amount + adjusted level 2A liquid asset amount + 
adjusted level 2B liquid asset amount-adjusted public sector entity 
security liquid asset amount, 0)
= Max (20-0-0-0.0526*(110 + 50 + 20-20), 0)
= Max (20-8.42, 0)
= Max (11.58, 0)
= 11.58

    Step 4: Calculate the adjusted excess HQLA amount (12 CFR 
249.21(h)).

Adjusted excess HQLA amount = Adjusted level 2 cap excess amount + 
adjusted level 2B cap excess amount + adjusted public sector entity 
security cap excess amount
= 0 + 0 + 11.58
= 11.58
    (e) Determine the HQLA amount (12 CFR 249.21(a)).

HQLA Amount = Level 1 liquid asset amount + level 2A liquid asset 
amount + level 2B liquid asset amount-Max (unadjusted excess HQLA 
amount, adjusted excess HQLA amount)
= 15 + 25 + 140-Max (155, 11.58)
= 180-155
= 25

III. Plain Language

    Section 722 of the Gramm-Leach Bliley Act \26\ requires the Board 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board sought to present the proposed rule in a 
simple and straightforward manner and did not receive any comments on 
the use of plain language.
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    \26\ Public Law 106-102, 113 Stat. 1338, 1471, 12 U.S.C. 4809.
---------------------------------------------------------------------------

IV. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (the ``RFA''), 
generally requires that an agency prepare and make available for public 
comment an initial Regulatory Flexibility Act analysis in connection 
with a notice of proposed rulemaking.\27\ The Board solicited public 
comment on this rule in a notice of proposed rulemaking and has since 
considered the potential impact of this final rule on small entities in 
accordance with section 604 of the RFA. The Board received no public 
comments related to the initial Regulatory Flexibility Act analysis in 
the proposed rule from the Chief Council for Advocacy of the Small 
Business Administration or from the general public. Based on the 
Board's 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.
---------------------------------------------------------------------------

    \27\ See 5 U.S.C. 603(a).
---------------------------------------------------------------------------

    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, 
2015, there were approximately 606 small state member banks, 3,268 
small bank holding companies, and 166 small savings and loan holding 
companies.
    As discussed above, the final rule would amend the LCR rule to 
include certain high-quality U.S. general obligation municipal 
securities as HQLA for the purposes of the LCR rule. The final rule 
does not apply to ``small entities'' and applies only to Board-
regulated institutions subject to the LCR rule: (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 rule; (3) nonbank financial companies 
designated by the Council for Board supervision to which the Board has 
applied the LCR rule by separate rule or order; and (4) bank holding 
companies and certain savings and loan holding companies with $50 
billion or more in total consolidated assets, but that do not meet the 
thresholds in (1) through (3), which are subject to the modified LCR 
rule. Companies that are subject to the final rule therefore 
substantially exceed the $550 million asset threshold at which a 
banking entity is considered a ``small entity'' under SBA regulations.
    No small top-tier bank holding company, top-tier savings and loan 
holding company, or state member bank would be subject to the rule, so 
there would be no additional projected compliance requirements imposed 
on small bank holding companies, small savings and loan holding 
companies, or small state member banks.
    The Board believes that the final rule will not have a significant 
impact on small banking organizations supervised by the Board and 
therefore believes that there are no significant alternatives to the 
rule that would reduce the economic impact on small banking 
organizations supervised by the Board.

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 the final rule 
under the authority delegated to the Board by the OMB and determined 
that it would not introduce any new collection of information pursuant 
to the PRA.

VI. Riegle Community Development and Regulatory Improvement Act of 1994

    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (RCDRIA) requires a 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, 
to consider any administrative burdens that such regulations would 
place on depository institutions, and the benefits of such regulations, 
consistent with the principles of safety and soundness and the public 
interest.\28\ In addition, 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 which begins on or after the date on which the regulations are 
published in final form.\29\ Section 302 of the RCDRIA does not apply 
to this final rule because the final rule does not prescribe additional 
reporting, disclosures, or other new requirements on insured depository 
institutions. As discussed in detail above in the SUPPLEMENTARY 
INFORMATION section, the final rule instead expands the types of assets 
for which Board-regulated covered companies may include as HQLA under 
the LCR rule. Nevertheless, the final rule becomes effective on July 1, 
2016, the first day of a calendar quarter.
---------------------------------------------------------------------------

    \28\ See Section 302 of the Riegle Community Development and 
Regulatory Improvement Act of 1994, 12 U.S.C. 4802.
    \29\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 249

    Administrative practice and procedure; Banks, banking; Federal 
Reserve System; Holding companies;

[[Page 21232]]

Liquidity; Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons stated in the SUPPLEMENTARY INFORMATION, the Board 
amends 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.


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2. Amend Sec.  249.3 by adding a definition for ``General obligation'' 
in alphabetical order to read as follows:


Sec.  249.3  Definitions.

* * * * *
    General obligation means a bond or similar obligation that is 
backed by the full faith and credit of a public sector entity.
* * * * *

0
3. Amend Sec.  249.20 by redesignating paragraph (c)(2) as paragraph 
(c)(3) and adding 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, 
except that a security will not be disqualified as a level 2B liquid 
asset solely because it is guaranteed by a financial sector entity or a 
consolidated subsidiary of a financial sector entity if the security 
would, if not guaranteed, meet the criteria in paragraphs (c)(2)(i) and 
(ii) of this section.
* * * * *

0
4. 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 ``; plus'';
0
c. Adding paragraph (c)(3);
0
d. Redesignating paragraphs (f) through (i) as paragraphs (g) through 
(j), respectively, and adding paragraph (f);
0
e. Adding paragraph (g)(4) to newly redesignated paragraph (g);
0
f. Removing the period at the of newly redesignated paragraph (h)(2) 
and adding in its place ``; plus''; and
0
g. Adding paragraph (h)(3) to newly redesignated paragraph (h) and 
paragraph (k).
    The additions and revisions 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 total of:
    (i) The level 1 liquid asset amount; plus
    (ii) The level 2A liquid asset amount; plus
    (iii) The level 2B liquid asset amount; minus
    (iv) The public sector entity security liquid asset amount; and
    (2) 0.
    (g) * * *
    (4) Adjusted public sector entity security liquid asset amount. A 
Board-regulated institution'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 Board-regulated institution upon 
the unwind of any secured funding transaction (other than a 
collateralized deposit), secured lending transaction, asset exchange, 
or collateralized derivatives transaction that matures within 30 
calendar days of the calculation date where the Board-regulated 
institution 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 total of:
    (i) The adjusted level 1 liquid asset amount; plus
    (ii) The adjusted level 2A liquid asset amount; plus
    (iii) The adjusted level 2B liquid asset amount; minus
    (iv) The adjusted public sector entity security liquid asset 
amount; and
    (2) 0.

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5. Amend Sec.  249.22 by redesignating paragraph (c) as paragraph (d) 
and adding 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 to the extent that the fair 
value of the aggregate amount of securities of a single public sector 
entity issuer included as eligible HQLA 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.
* * * * *


[[Page 21233]]


    By order of the Board of Governors of the Federal Reserve 
System, March 31, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-07716 Filed 4-8-16; 8:45 am]
 BILLING CODE 6210-01-P