Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements, 35123-35183 [2016-11505]

Download as PDF Vol. 81 Wednesday, No. 105 June 1, 2016 Part II Department of the Treasury Office of the Comptroller of the Currency 12 CFR Part 50 Federal Reserve System 12 CFR Part 249 Federal Deposit Insurance Corporation sradovich on DSK3TPTVN1PROD with PROPOSALS2 12 CFR Part 329 Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements; Proposed Rule VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\01JNP2.SGM 01JNP2 35124 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 50 [Docket ID OCC–2014–0029] RIN 1557–AD97 FEDERAL RESERVE SYSTEM 12 CFR Part 249 [Regulation WW; Docket No. R–1537] RIN 7100–AE 51 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 329 RIN 3064–AE 44 Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements Office of the Comptroller of the Currency, Department of the Treasury; Board of Governors of the Federal Reserve System; and Federal Deposit Insurance Corporation. ACTION: Notice of proposed rulemaking with request for public comment. AGENCY: The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) are inviting comment on a proposed rule that would implement a stable funding requirement, the net stable funding ratio (NSFR), for large and internationally active banking organizations. The proposed NSFR requirement is designed to reduce the likelihood that disruptions to a banking organization’s regular sources of funding will compromise its liquidity position, as well as to promote improvements in the measurement and management of liquidity risk. The proposed rule would also amend certain definitions in the liquidity coverage ratio rule that are also applicable to the NSFR. The proposed NSFR requirement would apply beginning on January 1, 2018, to bank holding companies, certain savings and loan holding companies, and depository institutions that, in each case, have $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure, and to their consolidated subsidiaries that are depository institutions with $10 billion or more in total consolidated assets. In addition, the Board is proposing a modified NSFR requirement for bank sradovich on DSK3TPTVN1PROD with PROPOSALS2 SUMMARY: VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 holding companies and certain savings and loan holding companies that, in each case, have $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure. Neither the proposed NSFR requirement nor the proposed modified NSFR requirement would apply to banking organizations with consolidated assets of less than $50 billion and total on-balance sheet foreign exposure of less than $10 billion. A bank holding company or savings and loan holding company subject to the proposed NSFR requirement or modified NSFR requirement would be required to publicly disclose the company’s NSFR and the components of its NSFR each calendar quarter. DATES: Comments on this notice of proposed rulemaking must be received by August 5, 2016. ADDRESSES: Comments should be directed to: OCC: Because paper mail in the Washington, DC area is subject to delay, commenters are encouraged to submit comments by the Federal eRulemaking Portal or email, if possible. Please use the title ‘‘Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements’’ to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods: • Federal eRulemaking Portal— ‘‘regulations.gov’’: Go to https:// www.regulations.gov. Enter ‘‘Docket ID OCC–2014–0029’’ in the Search Box and click ‘‘Search’’. Results can be filtered using the filtering tools on the left side of the screen. Click on ‘‘Comment Now’’ to submit public comments. Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting public comments. • Email: regs.comments@ occ.treas.gov. • Mail: Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency, 400 7th Street SW., Suite 3E–218, Mail Stop 9W–11, Washington, DC 20219. • Hand Delivery/Courier: 400 7th Street SW., Suite 3E–218, Mail Stop 9W–11, Washington, DC 20219. • Fax: (571) 465–4326. Instructions: You must include ‘‘OCC’’ as the agency name and ‘‘Docket ID OCC–2014–0029’’ in your comment. In general, the OCC will enter all comments received into the docket and publish them on the Regulations.gov Web site without change, including any business or personal information that you provide, such as name and address PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this rulemaking action by any of the following methods: • Viewing Comments Electronically: Go to https://www.regulations.gov. Enter ‘‘Docket ID OCC–2014–0029’’ in the Search box and click ‘‘Search’’. Comments can be filtered by Agency using the filtering tools on the left side of the screen. Click on the ‘‘Help’’ tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for viewing public comments, viewing other supporting and related materials, and viewing the docket after the close of the comment period. • Viewing Comments Personally: You may personally inspect and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649–6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649– 5597. Upon arrival, visitors will be required to present valid governmentissued photo identification and to submit to security screening in order to inspect and photocopy comments. • Docket: You may also view or request available background documents and project summaries using the methods described above. Board: You may submit comments, identified by Docket No. R–1537; RIN 7100 AE–51, 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 deV. Frierson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules 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 9:00 a.m. and 5:00 p.m. on weekdays. FDIC: You may submit comments by any of the following methods: • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. • Agency Web site: https:// www.FDIC.gov/regulations/laws/ federal/propose.html. • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. • Hand Delivered/Courier: The guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7:00 a.m. and 5:00 p.m. • Email: comments@FDIC.gov. Instructions: Comments submitted must include ‘‘FDIC’’ and ‘‘RIN: 3064– AE44.’’ Comments received will be posted without change to https:// www.FDIC.gov/regulations/laws/ federal/propose.html, including any personal information provided. FOR FURTHER INFORMATION CONTACT: OCC: Christopher McBride, Group Leader, (202) 649–6402, James Weinberger, Technical Expert, (202) 649–5213, or Ang Middleton, Bank Examiner (Risk Specialist), (202) 649– 7138, Treasury & Market Risk Policy; Thomas Fursa, Bank Examiner (Capital Markets Lead Expert), (917) 344–4421; Patrick T. Tierney, Assistant Director, Carl Kaminski, Special Counsel, or Henry Barkhausen, Senior Attorney, Legislative and Regulatory Activities Division, (202) 649–5490; or Tena Alexander, Acting Assistant Director, or David Stankiewicz, Counsel, Securities and Corporate Practices Division, (202) 649–5510; for persons who are deaf or hard of hearing, TTY, (202) 649–5597; Office of the Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219. Board: Gwendolyn Collins, Assistant Director, (202) 912–4311, Peter Clifford, Manager, (202) 785–6057, Adam S. Trost, Senior Supervisory Financial Analyst, (202) 452–3814, J. Kevin Littler, Senior Supervisory Financial Analyst, (202) 475–6677, or Peter VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 Goodrich, Risk Management Specialist, (202) 872–4997, Risk Policy, Division of Banking Supervision and Regulation; Benjamin W. McDonough, Special Counsel, (202) 452–2036, Dafina Stewart, Counsel, (202) 452–3876, Adam Cohen, Counsel, (202) 912–4658, or Brian Chernoff, Senior Attorney, (202) 452–2952, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263– 4869. FDIC: Bobby R. Bean, Associate Director, (202) 898–6705, Eric W. Schatten, Capital Markets Policy Analyst, (202) 898–7063, Andrew D. Carayiannis, Capital Markets Policy Analyst, (202) 898–6692, Nana OforiAnsah, Capital Markets Policy Analyst, (202) 898–3572, Capital Markets Branch, Division of Risk Management Supervision, (202) 898–6888; Gregory S. Feder, Counsel, (202) 898–8724, Andrew B. Williams, II, Counsel, (202) 898–3591, or Suzanne J. Dawley, Senior Attorney, (202) 898–6509, Supervision and Corporate Operations Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (800) 925– 4618. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction A. Summary of the Proposed Rule B. Background C. Overview of the Proposed Rule 1. NSFR Calculation, Shortfall Remediation, and Disclosure Requirements 2. Scope of Application of the Proposed Rule D. Definitions 1. Revisions to Existing Definitions 2. New Definitions E. Effective Dates II. Minimum Net Stable Funding Ratio A. Rules of Construction 1. Balance-Sheet Metric 2. Netting of Certain Transactions 3. Treatment of Securities Received in an Asset Exchange by a Securities Lender B. Determining Maturity C. Available Stable Funding 1. Calculation of ASF Amount 2. ASF Factor Framework 3. ASF Factors D. Required Stable Funding 1. Calculation of the RSF Amount 2. RSF Factor Framework 3. RSF Factors E. Derivative Transactions 1. NSFR Derivatives Asset or Liability Amount 2. Variation Margin Provided and Received and Initial Margin Received PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 35125 3. Customer Cleared Derivative Transactions 4. Assets Contributed to a CCP’s Mutualized Loss Sharing Arrangement and Initial Margin 5. Derivatives Portfolio Potential Valuation Changes 6. Derivatives RSF Amount 7. Derivatives RSF Amount Numerical Example F. NSFR Consolidation Limitations G. Interdependent Assets and Liabilities III. Net Stable Funding Ratio Shortfall IV. Modified Net Stable Funding Ratio Applicable to Certain Covered Depository Institution Holding Companies A. Overview and Applicability B. Available Stable Funding C. Required Stable Funding V. Disclosure Requirements A. Proposed NSFR Disclosure Requirements B. Quantitative Disclosure Requirements C. Qualitative Disclosure Requirements D. Frequency and Timing of Disclosure VI. Impact Assessment VII. Solicitation of Comments on Use of Plain Language VIII. Regulatory Flexibility Act IX. Riegle Community Development and Regulatory Improvement Act of 1994 X. Paperwork Reduction Act XI. OCC Unfunded Mandates Reform Act of 1995 Determination I. Introduction A. Summary of the Proposed Rule The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are inviting comment on a proposed rule (proposed rule) that would implement a net stable funding ratio (NSFR) requirement. The proposed NSFR requirement is designed to reduce the likelihood that disruptions to a banking organization’s regular sources of funding will compromise its liquidity position, as well as to promote improvements in the measurement and management of liquidity risk. By requiring banking organizations to maintain a stable funding profile, the proposed rule would reduce liquidity risk in the financial sector and provide for a safer and more resilient financial system. Maturity and liquidity transformation are important components of the financial intermediation performed by banking organizations, which contributes to efficient resource allocation and credit creation in the United States. These activities entail a certain inherent level of funding instability, however. Consequently, the risks of these activities must be wellmanaged by banking organizations in order to help ensure their ongoing E:\FR\FM\01JNP2.SGM 01JNP2 35126 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 ability to provide financial intermediation. The proposed rule would establish a quantitative metric, the NSFR, to measure the stability of a covered company’s funding profile.1 Under the requirement, a covered company would calculate a weighted measure of the stability of its equity and liabilities over a one-year time horizon (its available stable funding amount or ASF amount). The proposed rule would require a covered company’s ASF amount to be greater than or equal to a minimum level of stable funding (its required stable funding amount or RSF amount) calculated based on the liquidity characteristics of its assets, derivative exposures, and commitments over the same one-year time horizon. A covered company’s NSFR would measure the ratio of its ASF amount to its RSF amount. Sections II.C and II.D of this SUPPLEMENTARY INFORMATION section describe in more detail the calculation of a covered company’s ASF and RSF amounts, respectively. The proposed rule would require a covered company to maintain a minimum NSFR of 1.0. Given their size, complexity, scope of activities, and interconnectedness, covered companies with an NSFR of less than 1.0 face an increased likelihood of liquidity stress in the event of demands for repayment of their short- and medium-term liabilities, which may also contribute to financial instability in the broader economy. The NSFR would help to identify a covered company that has a heightened liquidity risk profile and poses greater risk to U.S. financial stability. It would allow the agencies, before a liquidity crisis, to require the covered company to take steps to improve its liquidity and resilience, as discussed in section I.C.1 of this Supplementary Information section. As part of this proposal, the Board is also inviting comment on a modified NSFR requirement for bank holding companies and savings and loan holding companies without significant insurance or commercial operations that, in each case, have $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure (each, a modified NSFR holding company). This modified NSFR 1 As discussed in section I.C.2 of this section, covered companies are bank holding companies, certain savings and loan holding companies, and depository institutions, in each case with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure, as well as any consolidated subsidiary depository institution with total consolidated assets of $10 billion or more. SUPPLEMENTARY INFORMATION VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 requirement is described in section IV of this SUPPLEMENTARY INFORMATION section. The proposed rule also includes public disclosure requirements for depository institution holding companies that would be subject to the proposed NSFR requirement or modified NSFR requirement. B. Background The 2007–2009 financial crisis exposed the vulnerability of large and internationally active banking organizations to liquidity shocks. For example, before the crisis, many banking organizations lacked robust liquidity risk management metrics and relied excessively on short-term wholesale funding to support less liquid assets.2 In addition, firms did not sufficiently plan for longer-term liquidity risks, and the control functions of banking organizations failed to challenge such decisions or sufficiently plan for possible disruptions to the organization’s regular sources of funding. Instead, the control functions reacted only after funding shortfalls arose. During the crisis, many banking organizations experienced severe contractions in the supply of funding. As access to funding became limited and asset prices fell, many banking organizations faced the possibility of default and failure. The threat this presented to the financial system caused governments and central banks around the world to provide significant levels of support to these institutions to maintain global financial stability. This experience demonstrated a need to address these shortcomings at banking organizations and to implement a more rigorous approach to identifying, measuring, monitoring, and limiting reliance by banking organizations on less stable sources of funding.3 Since the 2007–2009 financial crisis, the agencies have developed quantitative and qualitative standards focused on strengthening banking organizations’ overall risk management, liquidity positions, and liquidity risk management. By improving banking organizations’ ability to absorb shocks arising from financial and economic stress, these measures, in turn, promote a more resilient banking sector and financial system. This work has taken into account ongoing supervisory reviews and analysis in the United 2 See Senior Supervisors Group, Risk Management Lessons from the Global Banking Crisis of 2008, (October 21, 2009), available at https://www.newyorkfed.org/medialibrary/media/ newsevents/news/banking/2009/SSG_report.pdf. 3 See id. PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 States, as well as international discussions regarding appropriate liquidity standards.4 The agencies have implemented or proposed several measures to improve the liquidity positions and liquidity risk management of supervised banking organizations. First, the agencies adopted the liquidity coverage ratio (LCR) rule in September 2014,5 which requires certain banking organizations to hold a minimum amount of highquality liquid assets (HQLA) that can be readily converted into cash to meet net cash outflows over a 30-calendar-day period. Second, pursuant to section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 6 (DoddFrank Act) and in consultation with the OCC and the FDIC, the Board adopted general risk management, liquidity risk management, and stress testing requirements for bank holding companies with total consolidated assets of $50 billion or more in Regulation YY.7 Third, the Board adopted a risk-based capital surcharge for global systemically important banking organizations (GSIBs) in the United States that is calculated based on a bank holding company’s risk profile, including its reliance on short-term wholesale funding (GSIB surcharge rule).8 Fourth, the Board recently proposed a long-term debt requirement and a total loss-absorbing capacity (TLAC) requirement that would apply to U.S. GSIBs and the U.S. operations of certain foreign GSIBs, and would require these firms and operations to have sufficient amounts of equity and eligible long-term debt to improve their ability to absorb significant losses and withstand financial stress, which would also improve the funding profile of these firms.9 4 See, e.g., Principles for Sound Liquidity Risk Management and Supervision (September 2008), available at https://www.bis.org/publ/bcbs144.htm; Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013), available at https://www.bis.org/publ/bcbs238.pdf; Basel III: the net stable funding ratio (October 2014), available at https://www.bis.org/bcbs/publ/d295.pdf. 5 ‘‘Liquidity Coverage Ratio: Liquidity Risk Measurement Standards,’’ 79 FR 61440 (October 10, 2014), codified at 12 CFR part 50 (OCC), 12 CFR part 249 (Board), and 12 CFR part 329 (FDIC). 6 Public Law 111–203, 124 Stat. 1376, 1423–1432 (2010) § 165, codified at 12 U.S.C. 5365. 7 See ‘‘Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations,’’ 79 FR 17240 (March 27, 2014), codified at 12 CFR part 252. 8 ‘‘Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies,’’ 80 FR 49082 (August 14, 2015). 9 ‘‘Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 The agencies have also focused specifically on the importance of banking organizations maintaining a stable funding profile. The agencies have issued supervisory guidance to address the risks arising from excessive reliance on unstable funding, such as short-term wholesale funding, both before and after the 2007–2009 financial crisis, and have incorporated such guidance in their supervisory ratings. For example, in 1990, the Board issued guidance that cautioned against excessive reliance on the use of shortterm debt,10 and in 2010, the agencies issued interagency guidance emphasizing the importance of diversifying funding sources and tenors.11 In addition, there are statutory restrictions under the Federal Deposit Insurance Act (FDI Act) on the ability of an insured depository institution that is less than well capitalized to accept or renew brokered deposits, which can be a less stable form of funding than other retail deposits.12 The proposed rule would complement existing law and regulations and the proposed TLAC and long-term debt requirements, as well as existing supervisory guidance.13 For example, it would build on the LCR rule’s goal of improving resilience to short-term economic and financial stress by focusing on the stability of a covered company’s structural funding profile over a longer, one-year time horizon. It would also address liquidity risks that are not readily mitigated by the agencies’ capital requirements. In a Systemically Important Foreign Banking Organizations; Regulatory Capital Deduction for Investments in Certain Unsecured Debt of Systemically Important U.S. Bank Holding Companies,’’ 80 FR 74926 (November 20, 2015). 10 See Supervision and Regulation Letter 90–20 (June 22, 1990), available at https:// www.federalreserve.gov/boarddocs/srletters/1990/ sr9020.htm, superseded by OCC, Board, FDIC, Office of Thrift Supervision, and National Credit Union Administration, ‘‘Interagency Policy Statement on Funding and Liquidity Risk Management,’’ 75 FR 13656 (March 22, 2010) (Interagency 2010 Policy Statement on Funding and Liquidity Risk Management); and Supervision and Regulation Letter 96–38 (December 27, 1996), available at https://www.federalreserve.gov/ boarddocs/srletters/1996/sr9638.htm. 11 See Interagency 2010 Policy Statement on Funding and Liquidity Risk Management. 12 See 12 U.S.C. 1831f(a). 13 See, e.g., Interagency 2010 Policy Statement on Funding and Liquidity Risk Management; Supervision and Regulation Letter 12–17 (December 12, 2012), available at https:// www.federalreserve.gov/bankinforeg/srletters/ sr1217.htm; Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks (March 1, 2016), available a: https:// www.occ.gov/news-issuances/bulletins/2016/ bulletin-2016-7.html (OCC), https:// www.federalreserve.gov/bankinforeg/srletters/ sr1603a1.pdf (Board), and https://www.fdic.gov/ news/news/financial/2016/fil16012.pdf (FDIC). VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 financial crisis, financial institutions without stable funding sources may be forced by creditors to monetize assets at the same time, driving down asset prices. The proposed rule would mitigate such risks by directly increasing the funding resilience of individual covered companies, thereby indirectly increasing the overall resilience of the U.S. financial system. The proposed NSFR requirement would also provide a standardized means for measuring the stability of a covered company’s funding structure, promote greater comparability of funding structures across covered companies and foreign firms subject to similar requirements, and improve transparency and increase market discipline through the proposed rule’s public disclosure requirements. The proposed rule would be consistent with the net stable funding ratio standard published by the Basel Committee on Banking Supervision (BCBS) 14 in October 2014 (Basel III NSFR) 15 and the net stable funding ratio disclosure standards published by the BCBS in June 2015.16 The Basel III NSFR is a longer-term structural funding metric that complements the BCBS’s short-term liquidity risk metric, the BCBS liquidity coverage ratio standard (Basel III LCR).17 In developing the Basel III NSFR, the agencies and their international counterparts in the BCBS considered a number of possible structural funding metrics. For example, the BCBS considered the traditional ‘‘cash capital’’ measure, which compares a firm’s amount of long-term and stable sources of funding to the amount of its illiquid assets. The BCBS found that this cash capital measure failed to account for material funding risks, such as those related to offbalance sheet commitments and certain on-balance sheet short-term funding and lending mismatches. The Basel III NSFR incorporates consideration of these and 14 The BCBS is a committee of banking supervisory authorities that was established by the central bank governors of the G10 countries in 1975. It currently consists of senior representatives of bank supervisory authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. Documents issued by the BCBS are available through the Bank for International Settlements Web site at https:// www.bis.org. 15 See supra note 4. 16 ‘‘Net Stable Funding Ratio disclosure standards’’ (June 2015), available at https:// www.bis.org/bcbs/publ/d324.pdf (Basel III NSFR Disclosure Standards). 17 See supra note 4. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 35127 other funding risks, as would the proposed rule’s NSFR requirement. C. Overview of the Proposed Rule 1. NSFR Calculation, Shortfall Remediation, and Disclosure Requirements The proposed rule would require a covered company to maintain an amount of ASF, or available stable funding, that is no less than the amount of its RSF, or required stable funding, on an ongoing basis. A covered company’s NSFR would be expressed as a ratio of its ASF amount (the numerator of the ratio) to its RSF amount (the denominator of the ratio). A covered company’s ASF amount would be a weighted measure of the stability of the company’s funding over a one-year time horizon. A covered company would calculate its ASF amount by applying standardized weightings (ASF factors) to its equity and liabilities based on their expected stability. Similarly, a covered company would calculate its RSF amount by applying standardized weightings (RSF factors) to its assets, derivative exposures, and commitments based on their liquidity characteristics.18 These characteristics would include credit quality, tenor, encumbrances, counterparty type, and characteristics of the market in which an asset trades, as applicable. As noted above, the proposed rule would require a covered company to maintain, on a consolidated basis, an NSFR equal to or greater than 1.0. The proposed rule would require a covered company to take several steps if its NSFR fell below 1.0, as discussed in more detail in section III of this SUPPLEMENTARY INFORMATION section. In particular, a covered company would be required to notify its appropriate Federal banking agency of the shortfall no later than 10 business days (or such other period as the appropriate Federal banking agency may require by written notice) following the date that any event has occurred that would cause or has caused the covered company’s NSFR to fall below the minimum requirement. In addition, a covered company would be required to submit to its appropriate Federal banking agency a plan to remediate its NSFR shortfall. These procedures would enable supervisors to monitor and respond appropriately to the particular circumstances that give rise to any deficiency in a covered company’s funding profile. Given the range of possible reasons, both 18 ASF factors are described in section II.C, RSF factors are described in section II.D, and the derivatives RSF amount is described in section II.E of this Supplementary Information section. E:\FR\FM\01JNP2.SGM 01JNP2 35128 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules idiosyncratic and systemic, for a covered company having an NSFR below 1.0, the proposed rule would establish a framework that would allow for flexible supervisory responses. The agencies expect circumstances where a covered company has an NSFR shortfall to arise only rarely. Nothing in the proposed rule would limit the authority of the agencies under any other provision of law or regulation to take supervisory or enforcement actions, including actions to address unsafe or unsound practices or conditions, deficient liquidity levels, or violations of law. The proposed rule would require a covered company that is a depository institution holding company to publicly disclose, each calendar quarter, its NSFR and NSFR components in a standardized tabular format and to discuss certain qualitative features of its NSFR calculation. These disclosures, which are described in further detail in section V of this Supplementary Information section, would enable market participants to assess and compare the liquidity profiles of covered companies and non-U.S. banking organizations. The proposed NSFR requirement would take effect on January 1, 2018. sradovich on DSK3TPTVN1PROD with PROPOSALS2 2. Scope of Application of the Proposed Rule The proposed NSFR requirement would apply to the same large and internationally active banking organizations that are subject to the LCR rule: (1) Bank holding companies, savings and loan holding companies without significant commercial or insurance operations, and depository institutions that, in each case, have $250 billion or more in total consolidated assets or $10 billion or more in onbalance sheet foreign exposure,19 and (2) depository institutions with $10 billion or more in total consolidated assets that are consolidated subsidiaries of such bank holding companies and savings and loan holding companies. The proposed rule would apply to banking organizations that tend to have larger and more complex liquidity risk profiles than smaller and less internationally active banking organizations. While banking organizations of any size can face 19 Total consolidated assets for the purposes of the proposed rule would be as reported on a banking organization’s most recent year-end Consolidated Reports of Condition and Income or Consolidated Financial Statements for Bank Holding Companies, Federal Reserve Form FR Y–9C. Foreign exposure data would be calculated in accordance with the Federal Financial Institutions Examination Council 009 Country Exposure Report. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 threats to their safety and soundness based on an unstable funding profile, covered companies’ scale, scope, and complexity require heightened measures to manage their liquidity risk. In addition, covered companies with total consolidated assets of $250 billion or more can pose greater risks to U.S. financial stability than smaller banking organizations because of their size, the scale and breadth of their activities, and their interconnectedness with the financial sector. Consequently, threats to the availability of funding to larger firms pose greater risks to the financial system and economy. Likewise, the foreign exposure threshold identifies firms with a significant international presence, which may also present risks to financial stability for similar reasons. By promoting stable funding profiles for large, interconnected institutions, the proposed rule would strengthen the safety and soundness of covered companies and promote a more resilient U.S. financial system and global financial system. The proposed rule would also apply the NSFR requirement to depository institutions that are the consolidated subsidiaries of covered companies and that have $10 billion or more in total consolidated assets.20 These large depository institution subsidiaries can play a significant role in covered companies’ funding structures and operations, and present a larger exposure to the FDIC’s Deposit Insurance Fund than smaller insured institutions because of the greater volume of their deposit-taking and lending activities. To reduce the potential impacts of a liquidity event on the safety and soundness of such large depository institution subsidiaries, the proposed rule would require that such 20 Pursuant to the International Banking Act (IBA), 12 U.S.C. 3101 et seq., and OCC regulation, 12 CFR 28.13(a)(1), a Federal branch or agency regulated and supervised by the OCC has the same rights and responsibilities as a national bank operating at the same location. Thus, as a general matter, Federal branches and agencies are subject to the same laws as national banks. The IBA and the OCC regulation state, however, that this general standard does not apply when the IBA or other applicable law provides other specific standards for Federal branches or agencies or when the OCC determines that the general standard should not apply. This proposal would not apply to Federal branches and agencies of foreign banks operating in the United States. At this time, these entities have assets that are substantially below the proposed $250 billion asset threshold for applying the proposed liquidity standard to large and internationally active banking organizations. As part of its supervisory program for Federal branches and agencies of foreign banks, the OCC reviews liquidity risks and takes appropriate action to limit such risks in those entities. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 entities independently have sufficient stable funding. Consistent with the LCR rule, the proposed rule would not apply to depository institution holding companies with large insurance operations or savings and loan holding companies with large commercial operations because their business models and liquidity risks differ significantly from those of other covered companies.21 The proposed rule would also not apply to nonbank financial companies designated by the Financial Stability Oversight Council (Council) for Board supervision (nonbank financial companies).22 However, the Board may apply an NSFR requirement and disclosure requirements to these companies in the future by separate rule or order. The Board would assess the business model, capital structure, and risk profile of a nonbank financial company to determine whether, and if so how, the proposed NSFR requirement should apply to a nonbank financial company or to a category of nonbank financial companies, as appropriate. The Board would provide nonbank financial companies, either collectively or individually, with notice and opportunity to comment prior to applying an NSFR requirement. The proposed rule would also not apply to the U.S. operations of foreign banking organizations or intermediate holding companies required to be formed under the Board’s Regulation YY that do not otherwise meet the requirements to be a covered company (for example, as a U.S. bank holding company with more than $250 billion in total consolidated assets). The Board anticipates implementing an NSFR requirement through a future, separate rulemaking for the U.S. operations of foreign banking organizations with $50 billion or more in combined U.S. assets. The proposed rule would not apply to a ‘‘bridge financial company’’ or a subsidiary of a ‘‘bridge financial 21 The proposed rule would not apply to: (i) A grandfathered unitary savings and loan holding company (as described in section 10(c)(9)(A) of the Home Owners’ Loan Act, 12 U.S.C. 1467a(c)(9)(A)) that derives 50 percent or more of its total consolidated assets or 50 percent of its total revenues on an enterprise-wide basis from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)); (ii) a top-tier bank holding company or savings and loan holding company that is an insurance underwriting company; or (iii) a top-tier bank holding company or savings and loan holding company that has 25 percent or more of its total consolidated assets in subsidiaries that are insurance underwriting companies. For purposes of (iii), the company must calculate its total consolidated assets in accordance with GAAP or estimate its total consolidated assets, subject to review and adjustment by the Board. 22 See 12 U.S.C. 5323. E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules company,’’ a ‘‘new depository institution,’’ or a ‘‘bridge depository institution,’’ as those terms are used in the FDI Act in the resolution context.23 Requiring these entities to maintain a minimum NSFR may constrain the FDIC’s ability to resolve a depository institution or its affiliates in an orderly manner. The Board is also proposing to implement a modified version of the NSFR requirement for bank holding companies and savings and loan holding companies without significant insurance or commercial operations that, in each case, have $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure. Modified NSFR holding companies are large financial companies that have sizable operations in banking, brokerage, or other financial activities, as discussed in section IV of this SUPPLEMENTARY INFORMATION section. Although they generally are smaller in size, less complex in structure, and less reliant on riskier forms of funding than covered companies, these modified NSFR holding companies are nevertheless important providers of credit in the U.S. economy. The Board is therefore proposing a form of the NSFR requirement that is tailored to the less risky liquidity profile of these companies. The agencies would each reserve the authority to apply the proposed rule to additional companies if the application of the NSFR requirement would be appropriate in light of a company’s asset size, complexity, risk profile, scope of operations, affiliation with covered companies, or risk to the financial system. A covered company would remain subject to the proposed NSFR requirement until its appropriate Federal banking agency determines in writing that application of the rule to the company is not appropriate in light of these same factors. The agencies would also reserve the authority to require a covered company to maintain an ASF amount greater than otherwise required under the proposed rule, or to take any other measure to improve the covered company’s funding profile, if the appropriate Federal banking agency determines that the covered company’s NSFR requirement under the proposed rule is not commensurate with its liquidity risks. A company that becomes subject to the proposed rule pursuant to § ll.1(b)(1) after the effective date would be required to comply with the proposed NSFR requirement beginning 23 See 12 U.S.C. 1813(i) and 12 U.S.C. 5381(a)(3). VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 35129 1. Revisions to Existing Definitions The proposed rule would amend the existing definition of ‘‘calculation date’’ in § ll.3 of the LCR rule to define ‘‘calculation date’’ for purposes of the NSFR requirement as any date on which a covered company calculates its NSFR under § ll.100. The existing definition of ‘‘collateralized deposit’’ in § ll.3 of the LCR rule includes those fiduciary deposits that a covered company is required by federal law, as applicable to national banks and Federal savings associations, to collateralize using its own assets. The LCR rule excludes collateralized deposits from the set of secured funding transactions that a covered company is required to unwind in its calculation of adjusted liquid asset amounts under § ll.21 of the LCR rule. To provide consistent treatment for covered companies subject to state laws that require collateralization of deposits, the proposed rule would amend the definition of ‘‘collateralized deposit’’ to include those deposits collateralized as required under state law, as applicable to state member and nonmember banks and state savings associations. In addition, the proposed rule would amend the definition of ‘‘collateralized deposit’’ to include those fiduciary deposits held at a covered company for which a depository institution affiliate of the covered company is a fiduciary and that the covered company has collateralized pursuant to 12 CFR 9.10(c) (for national banks) or 12 CFR 150.310 (for Federal savings associations). Although a covered company may not be required under applicable law to collateralize fiduciary deposits held at an affiliated depository institution, if the covered company decides to collateralize those deposits, then they should also be excluded from the unwind of applicable secured funding transactions. The existing definition of ‘‘committed’’ in § ll.3 of the LCR rule provides the criteria under which a credit facility or liquidity facility would be considered committed for purposes of the LCR rule, and thus receive an outflow rate as specified in § ll.32(e). The definition provides that a credit facility or liquidity facility is committed if (1) the covered company may not refuse to extend credit or funding under the facility or (2) the covered company may refuse to extend credit under the facility (to the extent permitted under applicable law) only upon the satisfaction or occurrence of one or more specified conditions not including change in financial condition of the borrower, customary notice, or administrative conditions. To more clearly capture the intended meaning of ‘‘committed,’’ the proposed rule would amend the definition to state that a credit or liquidity facility is committed if it is not unconditionally cancelable under the terms of the facility. The proposed rule would define ‘‘unconditionally cancelable,’’ consistent with the agencies’ risk-based capital rules, to mean that a covered company may refuse to extend credit under the facility at any time, including without cause (to the extent permitted under applicable law).25 For example, a credit or liquidity facility that only permits a covered company to refuse to extend credit upon the occurrence of a specified event (such as a material adverse change) would not be considered unconditionally cancelable, and therefore the facility would be considered committed under the proposed definition. Conversely, a credit or liquidity facility that the covered company may cancel without 24 12 CFR part 50 (OCC), 12 CFR part 249 (Board), and 12 CFR part 329 (FDIC). 25 See 12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), and 12 CFR 324.2 (FDIC). on April 1 of the following year. For example, if a bank holding company becomes subject to the proposed rule on December 31, 2020, because it reports on its year-end Consolidated Financial Statements for Holding Companies (FR Y–9C) that it has total consolidated assets of $251 billion, that bank holding company would be required to begin complying with the proposed NSFR requirement on April 1, 2021. Question 1: Would the proposed onequarter transition period provide sufficient time for a covered company to make any needed adjustments to its systems to come into compliance with the proposed rule’s requirements? What alternative transition period, if any, would be more appropriate and why? What would be the benefits of providing covered companies with a longer or shorter transition period? D. Definitions The proposed rule would share definitions with the LCR rule and would be adopted and codified in the same part of the Code of Federal Regulations as the LCR rule for each of the agencies.24 In connection with the proposed rule, the agencies are proposing to revise certain of the existing definitions in § ll.3 of the LCR rule and to add certain new definitions. This part of the SUPPLEMENTARY INFORMATION section discusses these definitions. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 35130 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules cause would not be considered committed because the covered company may refuse to extend credit under the facility at any time. For example, home equity lines of credit and credit cards lines that are cancelable without cause (to the extent permitted under applicable law), as is generally the case, would not be considered committed under the proposed amendment to the definition. The proposed rule would revise the definition of ‘‘covered nonbank company’’ to clarify that if the Board requires a company designated by the Council for Board supervision to comply with the LCR rule or the proposed rule, it will do so through a rulemaking that is separate from the LCR rule and this proposed rule or by issuing an order. The existing definition of ‘‘operational deposit’’ provides the parameters under which funding of a covered company would be considered an operational deposit for purposes of the LCR rule, meaning that the funding amount is necessary for the provision of operational services, as defined in § ll.3 of the LCR rule. While the LCR rule defines the term ‘‘operational deposit’’ to refer only to funding of a company, the proposed rule would use the term to refer to both funding and lending. Accordingly, the proposed rule would amend the definition of ‘‘operational deposit’’ to include both deposits received by the covered company in connection with operational services provided by the covered company and deposits placed by the covered company in connection with operational services received by the covered company. The proposed rule would also amend the definition of ‘‘operational deposit’’ to clarify that only deposits, as defined in § ll.3 of the LCR rule, can qualify as operational deposits. Other forms of funding from, or provided to, wholesale customers or counterparties (e.g., longer-term unsecured funding) would not qualify as operational deposits. Because operational deposits are limited to accounts that facilitate short-term transactional cash flows associated with operational services, operational deposits also should only have shortterm maturities, falling within the proposed rule’s less-than-6-month maturity category and generally within the LCR rule’s 30 calendar-day period. Notwithstanding the proposed revisions to this definition, the treatment of operational deposits under §§ ll.32 and ll.33 of the LCR rule would remain the same. Finally, the proposed rule would revise the definitions of ‘‘secured VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 funding transaction’’ and ‘‘secured lending transaction’’ to clarify that the obligations referenced in those definitions must be secured by a lien on securities or loans (rather than secured by a lien on other assets), that such transactions are only those with wholesale customers or counterparties, and that securities issued or owned by a covered company do not constitute secured funding or lending transactions of the covered company. The treatment of secured transactions in the LCR rule, which adjusts inflow and outflow rates based on the relative liquidity of the collateral, would be appropriate only for transactions where the collateral is securities or loans because these forms of collateral are generally more liquid than others. For example, inflows in a stressed environment associated with lending secured by collateral types that are not generally traded in liquid markets, such as property, plant, and equipment, are typically based on the nature of the counterparty rather than the collateral, thus making the liquidity risk associated with such arrangements more akin to that of unsecured lending. Said another way, lending secured by property, plant, and equipment should not receive a 100 percent inflow rate; rather, the inflow should depend on the characteristics of the borrower, which more accurately reflects the likelihood a covered company will roll over such a loan during a period of significant stress. By the same reasoning, the definition of ‘‘unsecured wholesale funding’’ would be revised to include transactions that are not secured by securities or loans, but that may be secured by other forms of collateral (such as property, plant, and equipment), which are generally less liquid. By limiting the definitions of ‘‘secured funding transaction’’ and ‘‘secured lending transaction’’ to those transactions with wholesale customers or counterparties, the proposed rule would clarify that funding and lending transactions with a retail customer or counterparty, even if collateralized, are subject to the retail treatment under the LCR rule and the proposed rule. For the same reasons as discussed above, the inflows and outflows associated with funding provided by a retail customer or counterparty, even if collateralized, are more dependent on the retail nature of the counterparty and not any collateral that secures the funding. Lastly, by excluding securities from these definitions, the proposed rule would clarify that securities issued by a covered company or owned by a covered company are treated based on PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 the provisions applicable to securities in the LCR rule and the proposed rule. For example, securities issued through conduit structures that are consolidated on a covered company’s balance sheet would not be considered secured funding transactions but rather, would be considered securities issued by the covered company. Question 2: What modifications, if any, should be made to the proposed revised definitions of ‘‘calculation date,’’ ‘‘collateralized deposits,’’ ‘‘committed,’’ ‘‘covered nonbank company,’’ ‘‘operational deposit,’’ ‘‘secured funding transaction,’’ ‘‘secured lending transaction,’’ and ‘‘unsecured wholesale funding’’ and why? What, if any, are the unintended consequences to the operation of the LCR rule and the proposed rule that may result from the proposed revisions to these definitions? Question 3: Given that the terms ‘‘unsecured wholesale funding’’ and, as discussed below, ‘‘unsecured wholesale lending’’ would include funding and lending that is secured by certain less liquid forms of collateral, would it be clearer to use different terminology for these terms and ‘‘secured funding transaction’’ and ‘‘secured lending transaction?’’ Question 4: For the definitions of ‘‘secured funding transaction’’ and ‘‘secured lending transaction,’’ what, if any, assets beyond securities and loans should be included as qualifying collateral because they are sufficiently liquid to be relevant in assigning inflow and outflow rates to such transactions under the LCR rule? What, if any, securities or loans should be excluded from the qualifying collateral because they are not sufficiently liquid and why? Question 5: Is the term ‘‘unsecured wholesale lending’’ appropriately defined by reference to a liability or obligation of a wholesale customer or counterparty? If not, in what ways should the definition be modified and why? What specific assets, if any, should be, but are not currently, included or excluded from the definition of ‘‘unsecured wholesale lending’’ for purposes of the NSFR? Likewise, what specific liabilities, if any, should be, but are not currently, included or excluded from the definition of ‘‘unsecured wholesale funding’’ for purposes of the NSFR? For example, what assets or liabilities within these terms, if any, such as a receivable based on an insurance claim or a payable for services rendered by a wholesale service provider, should be assigned different RSF and ASF E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 factors 26 than other assets or liabilities within these terms? Question 6: Given that the definitions in the LCR rule would apply to the proposed rule and the Board’s GSIB surcharge rule, are there other definitions or terms, in addition to those noted above, that the agencies should amend and why? For example, should the definition of ‘‘liquid and readilymarketable’’ be amended, including any of its criteria, to provide more clarity or to ease operational burden, given its implication on the determination of HQLA and HQLA treatment under the proposed NSFR requirement, and if so, why? Commenters are invited to provide suggested language to amend any definitions. 2. New Definitions The proposed rule would add several new defined terms. The proposed rule would define ‘‘carrying value’’ to mean the value on a covered company’s balance sheet of an asset, NSFR regulatory capital element, or NSFR liability, as determined in accordance with U.S. generally accepted accounting principles (GAAP). The proposed rule includes this definition because RSF and ASF factors generally would be applied to the carrying value of a covered company’s assets, NSFR regulatory capital elements, and NSFR liabilities. By relying on values based on GAAP, the proposed rule would ensure consistency in the application of the NSFR requirement across covered companies and limit operational burdens to comply with the proposed rule because covered companies already prepare financial reports in accordance with GAAP. This definition would be consistent with the definition used in the agencies’ regulatory capital rules.27 The proposed rule would define ‘‘encumbered’’ using the criteria for an unencumbered asset in § ll.22(b) of the LCR rule. The proposed definition does not include any substantive changes to the concept of encumbrance included in the LCR rule. The proposed rule would also use the defined term in place of the criteria enumerated in § ll.22(b) of the LCR rule. The addition of this definition is necessary to apply the concept of encumbrance in § ll.106(c) and (d) of the proposed rule, as discussed below. The proposed rule would define two new related terms, ‘‘NSFR regulatory capital element’’ and ‘‘NSFR liability.’’ The proposed rule would define ‘‘NSFR 26 See section II.D and II.C of this SUPPLEMENTARY section for discussion of assignment of RSF and ASF factors, respectively. 27 See 12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), and 12 CFR 324.2 (FDIC). INFORMATION VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 regulatory capital element’’ to mean any capital element included in a covered company’s common equity tier 1 capital, additional tier 1 capital, and tier 2 capital, as those terms are defined in the agencies’ risk-based capital rules, prior to the application of capital adjustments or deductions set forth in the agencies’ risk-based capital rules.28 This definition would exclude any debt or equity instrument that does not meet the criteria for additional tier 1 or tier 2 capital instruments in § ll.22 of the agencies’ risk-based capital rules or that is being phased out of tier 1 or tier 2 capital pursuant to subpart G of the agencies’ risk-based capital rules.29 The term ‘‘NSFR regulatory capital element’’ would include both equity and liabilities under GAAP that meet the requirements of the definition. This definition of ‘‘NSFR regulatory capital element’’ would generally align with the definition of regulatory capital in the agencies’ risk-based capital rules, but would not include capital deductions and adjustments.30 Because the proposed rule would require assets that are capital deductions (such as goodwill) to be fully supported by stable funding, as discussed in section II.D.3.a.viii of this SUPPLEMENTARY INFORMATION section below, deducting the value of these assets from a covered company’s NSFR regulatory capital elements would understate a company’s NSFR. The proposed rule would define ‘‘NSFR liability’’ to mean any liability or equity reported on a covered company’s balance sheet that is not an NSFR regulatory capital element. The term ‘‘NSFR liability’’ primarily refers to balance sheet liabilities but may include equity because some equity may not qualify as an NSFR regulatory capital element. The definitions of ‘‘NSFR liability’’ and ‘‘NSFR regulatory capital element,’’ taken together, should capture the entirety of the liability and equity side of a covered company’s balance sheet. The proposed rule would define ‘‘QMNA netting set’’ to refer to a group of derivative transactions with a single 28 See 12 CFR part 3 (OCC), 12 CFR part 217 (Board), and 12 CFR part 324 (FDIC). 29 Tier 2 capital instruments that have a remaining maturity of less than one year are not included in regulatory capital. See 12 CFR 3.20(d)(1)(iv) (OCC), 12 CFR 217.20(d)(1)(iv) (Board), and 12 CFR 324.20(d)(1)(iv) (FDIC); see also 12 CFR 3.300 (OCC), 12 CFR 217.300 (Board), and 12 CFR 324.300 (FDIC). 30 The proposed definition of ‘‘NSFR regulatory capital element’’ would include allowances for loan and lease losses (ALLL) to the same extent as under the risk-based capital rules. See 12 CFR 3.20(d)(3) (OCC), 12 CFR 217.20(d)(3) (Board), and 12 CFR 324.20(d)(3) (FDIC). PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 35131 counterparty that is subject to a qualifying master netting agreement,31 and is netted under the qualifying master netting agreement.32 QMNA netting sets would include, in addition to non-cleared derivative transactions, a group of cleared derivative transactions (that is, a group of derivative transactions that have been entered into with, or accepted by, a central counterparty (CCP)) if the applicable governing rules for the group of cleared derivative transactions meet the definition of a qualifying master netting agreement. The proposed rule would use the term ‘‘QMNA netting set’’ in the calculation of a covered company’s stable funding requirement attributable to its derivative transactions, as discussed in section II.E of this SUPPLEMENTARY INFORMATION section. The proposed rule would define ‘‘unsecured wholesale lending’’ as a liability or general obligation of a wholesale customer or counterparty to the covered company that is not a secured lending transaction. Although the term ‘‘unsecured wholesale funding’’ is defined in the LCR rule, ‘‘unsecured wholesale lending’’ is not. The proposed rule’s NSFR requirement would require a covered company to hold stable funding against unsecured wholesale lending, so a definition of this term is included in the proposed rule. Question 7: In what ways, if any, should the agencies modify the newly proposed definitions of ‘‘carrying value,’’ ‘‘encumbered,’’ ‘‘NSFR liability,’’ ‘‘NSFR regulatory capital element,’’ ‘‘QMNA netting set,’’ and ‘‘unsecured wholesale lending’’ and why? Question 8: What other terms, if any, should the agencies define and why? Question 9: In the definition of ‘‘NSFR regulatory capital element,’’ what adjustments to, or deductions from, regulatory capital, if any, should the agencies include in NSFR regulatory capital elements and why? For example, should the NSFR regulatory capital elements include adjustments or deductions for changes in the fair value of a liability due to a change in a 31 Each QMNA netting set must meet each of the conditions specified in the definition of ‘‘qualifying master netting agreement’’ under § ll.3 of the LCR rule and the operational requirements under § ll.4(a) of the LCR rule. 32 A qualifying master netting agreement may identify a single QMNA netting set (for which the agreement creates a single net payment obligation and for which collection and posting of margin applies on an aggregate net basis) or it may establish multiple QMNA netting sets, each of which would be separate from and exclusive of any other QMNA netting set or derivative transaction covered by the qualifying master netting agreement. E:\FR\FM\01JNP2.SGM 01JNP2 35132 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules covered company’s own credit risk? If so, why? sradovich on DSK3TPTVN1PROD with PROPOSALS2 E. Effective Dates As noted, the proposed NSFR requirement would be effective as of January 1, 2018. This effective date should provide covered companies with sufficient time to adjust to the requirements of the proposal, including to make any changes to ensure their assets, derivative exposures, and commitments are stably funded and to adjust information systems to calculate and monitor their NSFR. The NSFR is a balance-sheet metric, and its calculations would generally be based on the carrying value, as determined under GAAP, of a covered company’s assets, liabilities, and equity. As a result, covered companies should be able to leverage current financial reporting systems to comply with the NSFR requirement. The revisions to definitions currently used in the LCR rule and that would be used in the proposed rule, as discussed in section I.D.1 of this SUPPLEMENTARY INFORMATION section, would become effective for purposes of the LCR rule at the beginning of the calendar quarter after finalization of the proposed rule, instead of on January 1, 2018. Because these revisions would enhance the clarity of certain definitions used in the LCR rule, the agencies are proposing that they become effective sooner than the proposed NSFR effective date. Question 10: Would the proposed effective date provide sufficient time for covered companies to make any needed adjustments to their systems for compliance with the proposed rule’s requirements and to ensure that their assets, derivative exposures, and commitments are stably funded? What alternative effective date, if any, would be more appropriate for the proposed NSFR requirement and why? What would be the benefits of providing covered companies with a longer or shorter period of time to comply with the proposed rule? Question 11: What alternative effective date, if any, would be more appropriate for the proposed revisions to the existing definitions used in the LCR rule, and why? II. Minimum Net Stable Funding Ratio As noted above, a covered company would calculate its NSFR by dividing its ASF amount by its RSF amount. The proposed rule would require a covered company to maintain an NSFR equal to or greater than 1.0 on an ongoing basis. As a result, while the proposed rule would require a covered company that is a depository institution holding VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 company to calculate its NSFR on a quarterly basis in order to comply with the proposed rule’s public disclosure requirements (as discussed in section V of this SUPPLEMENTARY INFORMATION section), a covered company would need to monitor its funding profile on an ongoing basis to ensure compliance with the NSFR requirement. If a covered company’s funding profile materially changes intra-quarter, the agencies expect the company to be able to calculate its NSFR to determine whether it remains compliant with the NSFR requirement, consistent with the notification requirements under § ll.110(a) and discussed in section III of this SUPPLEMENTARY INFORMATION section. The following discussion describes the calculation of a covered company’s ASF amount and RSF amount. A. Rules of Construction The proposed rule would include rules of construction in § ll.102 relating to how items recorded on a covered company’s balance sheet would be reflected in the covered company’s ASF and RSF amounts. 1. Balance-Sheet Metric As noted above, a covered company would generally determine its ASF and RSF amounts based on the carrying values of its assets, NSFR regulatory capital elements, and NSFR liabilities as determined under GAAP. Under GAAP, certain transactions and exposures are not recorded on the covered company’s balance sheet. The proposed rule would include a rule of construction in § ll.102(a) specifying that, unless otherwise provided, a transaction or exposure that is not recorded on the balance sheet of a covered company would not be assigned an ASF or RSF factor and, conversely, a transaction or exposure that is recorded on the balance sheet of the covered company would be assigned an ASF or RSF factor. While the proposed rule would generally rely on balance sheet carrying values, it would differ in some cases, such as with respect to determination of a covered company’s stable funding requirements relating to derivative transactions, as described in section II.E of this SUPPLEMENTARY INFORMATION section, and the undrawn amount of commitments, as described in section II.D.3 of this SUPPLEMENTARY INFORMATION section. 2. Netting of Certain Transactions The proposed rule would include a rule of construction in § ll.102(b) that describes the treatment of receivables and payables that are associated with PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 secured funding transactions, secured lending transactions, and asset exchanges with the same counterparty that the covered company has netted against each other. For purposes of determining the carrying value of these transactions, GAAP permits a covered company, when the relevant accounting criteria are met, to offset the gross value of receivables due from a counterparty under secured lending transactions by the amount of payments due to the same counterparty under secured funding transactions (GAAP offset treatment). The proposed rule would require a covered company to satisfy both these accounting criteria and the criteria applied in § ll.102(b) before it could treat the applicable receivables and payables on a net basis for the purposes of the NSFR requirement. Section § ll.102(b) would apply the netting criteria specified in the agencies’ supplementary leverage ratio rule (SLR rule).33 These criteria require, first, that the offsetting transactions have the same explicit final settlement date under their governing agreements. Second, the criteria require that the right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of receivership, insolvency, liquidation, or similar proceeding. Third, the criteria require that under the governing agreements, the counterparties intended to settle net, settle simultaneously, or settle according to a process that is the functional equivalent of net settlement (that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date), where the transactions are settled through the same settlement system, the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of the transactions will occur by the end of the business day, and the settlement of the underlying securities does not interfere with the net cash settlement. If a covered company entered into secured funding and secured lending transactions with the same counterparty and applied the GAAP offset treatment when recording the carrying value of these transactions, but the transactions did not meet the criteria in § ll.102(b), the covered company would be required to assign the appropriate RSF and ASF factors to the gross value of the receivables and payables associated with these 33 12 CFR 3.10(c)(4)(ii)(E)(1) through (3) (OCC), 12 CFR 217.10(c)(4)(ii)(E)(1) through (3) (Board), and 12 CFR 324.10(c)(4)(ii)(E)(1) through (3) (FDIC). E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules transactions, rather than to the net value. Thus, the gross value of these receivables or payables would be treated as if they were included on the balance sheet of the covered company. If the criteria in § ll.102(b) are not met, the cash flows associated with the maturities of these secured lending and secured funding transactions may not align and, therefore, the proposed rule would treat these transactions on an individual basis when assigning them RSF and ASF factors. The proposed rule’s incorporation of these netting criteria would also maintain consistency with covered companies’ treatment of offset receivables and payables under the SLR rule. sradovich on DSK3TPTVN1PROD with PROPOSALS2 3. Treatment of Securities Received in an Asset Exchange by a Securities Lender The proposed rule would include a rule of construction in § ll.102(c) specifying that when a covered company, acting as a securities lender, receives a security in an asset exchange and has not rehypothecated the security received, the covered company is not required to assign an RSF factor to the security it has received and is not permitted to assign an ASF factor to any liability to return the security. The requirements of § ll.102(c), which would be consistent with the treatment of security-for-security transactions under the SLR rule,34 are intended to neutralize differences across different accounting frameworks and maintain consistency across covered companies. Because the proposed rule would not require stable funding for the securities received, it would not treat the covered company’s obligation to return these securities as stable funding and would not assign an ASF factor to this obligation. If, however, the covered company, acting as the securities lender, sells or rehypothecates the securities received, the proposed rule would require the covered company to assign the appropriate RSF factor or factors under § ll.106 to the proceeds of the sale or, in the case of a pledge or rehypothecation, to the securities themselves if they remain on the covered company’s balance sheet.35 34 12 CFR 3.10(c)(4)(ii)(A) (OCC), 12 CFR 217.10(c)(4)(ii)(A) (Board), and 12 CFR 324.10(c)(4)(ii)(A) (FDIC). 35 See sections II.D.3.c and II.D.3.d of this Supplementary Information section. If the collateral securities received by the securities lender have been rehypothecated but remain on the covered company’s balance sheet, the collateral securities would be assigned an RSF factor under § ll.106(c) to reflect the encumbrance. If the collateral securities have been rehypothecated but do not remain on the covered company’s balance sheet, the covered company may be required to VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 Similarly, the covered company would assign a corresponding ASF factor to the NSFR liability associated with the asset exchange, for example, an obligation to return the security received. B. Determining Maturity Under the proposed rule, the ASF and RSF factors assigned to a covered company’s NSFR liabilities and assets would depend in part on the maturity of each NSFR liability or asset. The proposed rule would incorporate the maturity assumptions in § ll.31(a)(1) and (2) of the LCR rule to determine the maturities of a covered company’s NSFR liabilities and assets. These LCR rule provisions generally require a covered company to identify the most conservative maturity date when calculating inflow and outflow amounts—that is, the earliest possible date for an outflow from a covered company and the latest possible date for an inflow to a covered company. These provisions also generally require covered companies to take the most conservative approach when determining maturity with respect to any notice periods and with respect to any options, either explicit or embedded, that may modify maturity dates. Because the proposed rule would incorporate the LCR rule’s maturity assumptions, it would similarly require a covered company to identify the maturity date of its NSFR liabilities and assets in the most conservative manner. Specifically, the proposed rule would require a covered company to apply the earliest possible maturity date to an NSFR liability (which would be assigned an ASF factor) and the latest possible maturity date to an asset (which would be assigned an RSF factor). The proposed rule would also require a covered company to take the most conservative approach when determining maturity with respect to any notice periods and with respect to any options, either explicit or embedded, that may modify maturity dates. For example, a covered company would be required to assume that an option to reduce the maturity of an NSFR liability and an option to extend the maturity of an asset will be exercised. The proposed rule would treat an NSFR liability that has an ‘‘open’’ maturity (i.e., the NSFR liability has no maturity date and may be closed out on demand) as maturing on the day after the calculation date. For example, an apply an additional encumbrance to the asset it has provided in the asset exchange, pursuant to § ll.106(d). PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 35133 ‘‘open’’ repurchase transaction or a demand deposit placed at a covered company would be treated as maturing on the day after the calculation date. To ensure consistent use of terms in the proposed rule and LCR rule and to avoid ambiguity between perpetual instruments and transactions (i.e., the instrument or transaction has no contractual maturity date and may not be closed out on demand) and open instruments and transactions, the proposed rule would amend the LCR rule to use the term ‘‘open’’ instead of using the phrase ‘‘has no maturity date.’’ This proposed change would have no substantive impact on the LCR rule. The proposed rule would treat a perpetual NSFR liability (such as perpetual securities issued by a covered company) as maturing one year or more after the calculation date. The proposed rule would treat each principal amount due under a transaction, such as separate principal payments due under an amortizing loan, as a separate transaction for which the covered company would be required to identify the date when the payment is contractually due and apply the appropriate ASF or RSF factor based on that maturity date. This proposed treatment would ensure that a covered company’s ASF and RSF amounts reflect the actual timing of a company’s cash flows and obligations, rather than treating all principal payments for a transaction as though each were due on the same date (e.g., the last contractual principal payment date of the transaction). For example, if a loan from a counterparty to a covered company requires two contractual principal payments, the first due less than six months from the calculation date and the second due one year or more from the calculation date, only the principal amount that is due one year or more from the calculation date would be assigned a 100 percent ASF factor, which is the factor assigned to liabilities that have a maturity of one year or more from the calculation date. The liability arising from the principal payment due within six months represents a less stable source of funding and would therefore be assigned a lower ASF factor (for example, a zero percent ASF factor if the loan is from a financial sector entity, as discussed in section II.C.3.e of this SUPPLEMENTARY INFORMATION section). For deferred tax liabilities that have no maturity date, the maturity date under the proposed rule would be the first calendar day after the date on which the deferred tax liability could be realized. E:\FR\FM\01JNP2.SGM 01JNP2 35134 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules The proposed rule would not apply the LCR rule’s maturity assumptions to a covered company’s NSFR regulatory capital elements. Unlike NSFR liabilities, which have varying maturities, NSFR regulatory capital elements are longer-term by definition, and as such, the proposed rule would assign a 100 percent ASF factor to all NSFR regulatory capital elements. C. Available Stable Funding Under the proposed rule, a covered company’s ASF amount would measure the stability of its equity and liabilities. An ASF amount that equals or exceeds a covered company’s RSF amount would be indicative of a stable funding profile over the NSFR’s one-year time horizon. sradovich on DSK3TPTVN1PROD with PROPOSALS2 1. Calculation of ASF Amount Under § ll.103 of the proposed rule, a covered company’s ASF amount would equal the sum of the carrying values of the covered company’s NSFR regulatory capital elements and NSFR liabilities, each multiplied by the ASF factor assigned in § ll.104 or § ll.107(c). As described below, these ASF factors would be assigned based on the stability of each category of NSFR liability or NSFR regulatory capital element over the NSFR’s one-year time horizon. As discussed in section II.E of this SUPPLEMENTARY INFORMATION section, certain NSFR liabilities relating to derivative transactions are not considered stable funding for purposes of a covered company’s NSFR calculation and are assigned a zero percent ASF factor under § ll.107(c). In addition, pursuant to § ll.108 of the proposed rule, a covered company may include in its ASF amount the available stable funding of a consolidated subsidiary only to the extent that the funding of the subsidiary supports the RSF amount associated with the subsidiary’s own assets or is readily available to support RSF amounts associated with the assets of the covered company outside the consolidated subsidiary. This restriction is discussed in more detail in section II.F of this SUPPLEMENTARY INFORMATION section. 2. ASF Factor Framework The proposed rule would use a set of standardized weightings, or ASF factors, to measure the relative stability of a covered company’s NSFR liabilities and NSFR regulatory capital elements over a one-year time horizon. ASF factors would be scaled from zero to 100 percent, with a zero percent weighting representing the lowest stability and a VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 100 percent weighting representing the highest stability. The proposed rule would consider funding to be less stable if there is a greater likelihood that a covered company will need to replace or repay it during the NSFR’s one-year time horizon—for example, if the funding matures and the counterparty declines to roll it over. The proposed rule would categorize NSFR liabilities and NSFR regulatory capital elements and assign an ASF factor based on three characteristics relating to the stability of the funding: (1) Funding tenor, (2) funding type, and (3) counterparty type. Funding tenor. For purposes of assigning ASF factors, the proposed rule would generally treat funding that has a longer effective maturity (or tenor) as more stable than shorter-term funding. All else being equal, funding that by its terms has a longer remaining tenor should be less susceptible to rollover risk, meaning there is a lower risk that a firm would need to replace maturing funds with less stable funding or potentially monetize less liquid positions at a loss to meet obligations, which could cause a firm’s liquidity position to deteriorate. Longer-term funding, therefore, should provide greater stability across all market conditions, but especially during periods of stress. The proposed rule would group the maturities of NSFR liabilities and NSFR regulatory capital elements into one of three categories: Less than six months, six months or more but less than one year, and one year or more. The proposed rule would generally treat funding with a remaining maturity of one year or more as the most stable, because a covered company would not need to roll it over during the NSFR’s one-year time horizon. Funding with a remaining maturity of less than six months or an open maturity would generally be treated as the least stable, because a covered company would need to roll it over in the short term. The proposed rule would generally treat funding that matures in six months or more but less than one year as partially stable, because a covered company would not need to roll it over in the shorter term, but would still need to roll it over before the end of the NSFR’s oneyear time horizon. As described further below and in section II.C.3 of this SUPPLEMENTARY INFORMATION section, funding tenor matters more for the stability of some categories of funding than for others. For example, with respect to stable retail deposits,36 contractual maturity 36 Section ll.3 of the LCR rule defines a ‘‘stable retail deposit’’ as a retail deposit that is entirely covered by deposit insurance and either (1) is held PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 generally has less effect on the stability of the funding relative to wholesale deposits. Funding type. The proposed rule would recognize that certain types of funding are inherently more stable than others, independent of the remaining tenor. For example, as described in section II.C.3.b of this SUPPLEMENTARY INFORMATION section, the proposed rule would assign a higher ASF factor to stable retail deposits relative to other retail deposits, due in large part to the presence of full deposit insurance coverage and other stabilizing features that reduce the likelihood of a counterparty discontinuing the funding across a broad range of market conditions. Similarly, the proposed rule would assign a higher ASF factor to operational deposits than to certain other forms of short-term, wholesale deposits, based on the provision of services linked to an operational deposit, as discussed in section II.C.3.d of this SUPPLEMENTARY INFORMATION section. Likewise, the proposed rule would assign different ASF factors to different categories of retail brokered deposits, based on features that tend to make these forms of deposit more or less stable, as described in sections II.C.3.c, II.C.3.d, and II.C.3.e of this SUPPLEMENTARY INFORMATION section below. Counterparty type. The proposed rule’s assignment of ASF factors would also take into account the type of counterparty providing funding, using the same counterparty type classifications as the LCR rule: (1) Retail customers or counterparties, (2) wholesale customers or counterparties that are not financial sector entities, and (3) financial sector entities.37 As by the depositor in a transactional account or (2) the depositor that holds the account has another established relationship with the covered company such as another deposit account, a loan, bill payment services, or any similar service or product provided to the depositor that the covered company demonstrates, to the satisfaction of the appropriate Federal banking agency, would make the withdrawal of the deposit highly unlikely during a liquidity stress event. ‘‘Deposit insurance’’ is defined in § ll.3 as deposit insurance provided by the FDIC under the FDI Act (12 U.S.C. 1811 et seq.). 37 Under § ll.3 of the LCR rule, the term ‘‘retail customer or counterparty’’ includes individuals, certain small businesses, and certain living or testamentary trusts. The term ‘‘wholesale customer or counterparty’’ refers to any customer or counterparty that is not a retail customer or counterparty. The term ‘‘financial sector entity’’ refers to a regulated financial company, identified company, investment advisor, investment company, pension fund, or non-regulated fund, as such terms are defined in § ll.3. The proposed rule would incorporate these definitions. For purposes of determining ASF and RSF factors assigned to assets, commitments, and liabilities where counterparty is relevant, the proposed rule would treat an E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules described below and in section II.C.3 of this SUPPLEMENTARY INFORMATION section, within the NSFR’s one-year time horizon, and all other things being equal, the proposed rule would treat most types of deposit funding provided by retail customers or counterparties as more stable than similar types of funding provided by wholesale customers or counterparties. It would also treat most types of funding that matures within six months and that is provided by financial sector entities as less stable than funding of a similar tenor provided by non-financial wholesale customers or counterparties. Different types of counterparties may respond to events and market conditions in different ways. For example, differences in business models and liability structures tend to make short-term funding provided by financial sector entities less stable than similar funding provided by nonfinancial wholesale customers or counterparties. Financial sector entities typically have less stable liability structures than non-financial wholesale customers or counterparties, due to their financial intermediation activities. They tend to be more sensitive to market fluctuations and more susceptible to sudden cash outflows that could cause them to rapidly withdraw funding from a covered company. In contrast, wholesale customers and counterparties that are not financial sector entities typically maintain balances with covered companies to support their nonfinancial activities, such as production and physical investment, which tend to be impacted by financial market fluctuations to a lesser degree than activities of financial sector entities. In addition, non-financial wholesale customers or counterparties generally rely less on funding that is short-term or that can be withdrawn on demand. Therefore, these non-financial wholesale customers or counterparties may be less likely than financial sector entities to rapidly withdraw funding from a covered company. The proposed rule would accordingly treat most shortterm funding provided by financial sector entities as less stable than similar funding provided by non-financial wholesale customers or counterparties. The proposed rule’s assignment of ASF factors would also account for differences in funding provided by retail and wholesale customers or counterparties. For example, retail customers and counterparties typically place deposits at a bank to safeguard their money and access the payments unconsolidated affiliate of a covered company as a financial sector entity. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 system, which makes them less likely to withdraw these deposits purely as a result of market stress, especially when covered by deposit insurance. Wholesale customers or counterparties, while often motivated by similar considerations, may also be motivated to a greater degree by the return and risk of an investment. In addition, as compared to retail customers or counterparties, wholesale customers or counterparties tend to be more sophisticated and responsive to changing market conditions, and often employ personnel who specialize in the financial management of the company. Therefore, the proposed rule would treat most types of deposit funding provided by retail customers or counterparties as more stable than similar funding provided by wholesale customers or counterparties. While comprehensive data on the funding of covered companies by counterparty type is limited, the agencies’ analysis of available data was consistent with the expectation of funding stability differences across counterparty types.38 The agencies reviewed information collected on the Consolidated Reports of Condition and Income (Call Report), Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002), and the Securities and Exchange Commission (SEC) Financial and Operational Combined Uniform Single Report (FOCUS Report) over the period beginning December 31, 2007, and ending December 31, 2008, in combination with more recent FR 2052a report data and supervisory information collected in connection with the LCR rule. In addition, the agencies reviewed supervisory information collected from depository institutions that the FDIC placed into receivership in 2008 and 2009. Although the NSFR requirement is designed to measure the stability of a covered company’s funding profile across all market conditions and would not be specifically based on a market stress environment, the agencies focused on a period of stress for purposes of evaluating the relative effects of counterparty type on funding stability. Because a covered company may under normal conditions adjust funding across counterparty types for any number of reasons, focusing on 38 Prior to the 2007–2009 financial crisis, covered companies did not consistently report or disclose detailed liquidity information. On November 17, 2015, the Board adopted the revised FR 2052a Complex Institutions Liquidity Monitoring Report (FR 2052a report) to collect quantitative information on selected assets, liabilities, funding activities, and contingent liabilities from certain large banking organizations. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 35135 periods of stress allowed the agencies to better measure differences in stability by counterparty type. During these periods of stress, a covered company will generally be trying to roll over its funding, so differences in funding behavior may reasonably be more attributed to its counterparties than business decisions of the covered company. The agencies’ analysis of available public and supervisory information found that, during 2008, funding from financial sector entities exhibited less stability than funding provided by nonfinancial wholesale counterparties, which in turn exhibited less stability than retail deposits. For example, Call Report data on insured deposits, deposit data from the FFIEC 002, and brokerdealer liability data reported on the SEC FOCUS Report showed higher withdrawals in wholesale funding than retail deposits over this period. The agencies’ analysis of supervisory data from a sample of large depository institutions that the FDIC placed into receivership in 2008 and 2009 also indicated that, during the periods leading up to receivership, funding provided by wholesale counterparties can be significantly less stable, showing higher average total withdrawals, than funding provided by retail customers and counterparties. Question 12: The agencies invite comment regarding the foregoing framework. Are funding tenor, funding type, and counterparty type appropriate indicators of funding stability for purposes of the proposed rule? Why or why not? What other funding characteristics should the proposed rule take into account for purposes of assigning ASF factors? Please provide data and analysis to support your conclusions. 3. ASF Factors a. 100 Percent ASF Factor NSFR Regulatory Capital Elements and Long-Term NSFR Liabilities Section ll.104(a) of the proposed rule would assign a 100 percent ASF factor to NSFR regulatory capital elements, as defined in § ll.3 and described in section I.D of this SUPPLEMENTARY INFORMATION section, and to NSFR liabilities that mature one year or more from the calculation date, other than funding provided by retail customers or counterparties. Because NSFR regulatory capital elements and these long-term liabilities do not mature during the NSFR’s one-year time horizon, they are not susceptible to rollover risk during this time frame and represent the most stable form of E:\FR\FM\01JNP2.SGM 01JNP2 35136 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules funding under the proposed rule. This category would include securities issued by a covered company that have a remaining maturity of one year or more. Therefore, the proposed rule would assign the highest possible ASF factor of 100 percent to NSFR regulatory capital elements and most long-term NSFR liabilities. As described in sections II.C.3.b through II.C.3.e of this SUPPLEMENTARY INFORMATION section, the proposed rule would assign different ASF factors to retail deposits and other forms of NSFR liabilities provided by retail customers or counterparties. Question 13: Which, if any, NSFR regulatory capital elements should be assigned an ASF factor of other than 100 percent, and why? Question 14: Should long-term debt securities issued by a covered company where the company is the primary market maker of such securities be assigned an ASF factor other than 100 percent (such as between 95 and 99 percent) to address the risk of a covered company buying back these debt securities? Please provide supporting data for such alternative factors. sradovich on DSK3TPTVN1PROD with PROPOSALS2 b. 95 Percent ASF Factor Stable Retail Deposits Section ll.104(b) of the proposed rule would assign a 95 percent ASF factor to stable retail deposits held at a covered company.39 The proposed rule would assign a 95 percent ASF factor to stable retail deposits to reflect the fact that such deposits are a highly stable source of funding for covered companies. Specifically, the combination of full deposit insurance coverage, the depositor’s relationship with the covered company, and the costs of moving transactional or multiple accounts to another institution substantially reduce the likelihood that retail depositors will withdraw these deposits in significant amounts over a one-year time horizon.40 Because stable retail deposits are nearly as stable over the NSFR’s one-year time horizon as NSFR regulatory capital elements and long-term NSFR liabilities under § ll.104(a) of the proposed rule (described above in section II.C.3.a), the proposed rule would assign to stable deposits an ASF factor that is only slightly lower than that assigned to NSFR regulatory capital elements and long-term NSFR liabilities. As discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION section, 39 The proposed rule would incorporate the LCR rule’s definition of ‘‘stable retail deposit.’’ See supra note 36. 40 See supra section II.C.2 of this SUPPLEMENTARY INFORMATION section. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 insured retail deposits would be treated as more stable than similar funding from wholesale customers or counterparties, and would therefore be assigned a higher ASF factor. Consistent with the LCR rule, the maturity and collateralization of stable retail deposits would not affect their treatment under the proposed rule, because the stability of retail deposits is more closely linked to the combination of deposit insurance, the other stabilizing features included in the definition of ‘‘stable retail deposit,’’ and the retail nature of the depositor, rather than maturity or any underlying collateral. Maturity is less relevant, for example, because a covered company may repay a retail term deposit for business and reputational reasons in the event of an early withdrawal request by the depositor despite the absence of a contractual requirement to provide such a repayment within the NSFR’s one-year time horizon. c. 90 Percent ASF Factor Other Retail Deposits Section ll.104(c) of the proposed rule would assign a 90 percent ASF factor to retail deposits that are neither stable retail deposits nor retail brokered deposits, which includes retail deposits that are not fully insured by the FDIC or are insured under non-FDIC deposit insurance regimes. The proposed rule would assign a lower ASF factor to deposits that are not entirely covered by deposit insurance relative to that assigned to stable retail deposits because of the elevated risk of depositors withdrawing funds if they become concerned about the condition of the bank, in part, because the depositor will have no guarantee that uninsured funds will promptly be made available through established and timely intervention and resolution protocols. Supervisory experience has demonstrated that retail depositors whose deposits exceed the FDIC’s insurance limit have tended to withdraw not only the uninsured portion of the deposit, but the entire deposit under these circumstances. In addition, deposits that are neither transactional deposits nor deposits of a customer that has another relationship with a covered company tend to be less stable than deposits that have such characteristics because the depositor is less reliant on the bank. Therefore, the proposed rule would assign an ASF factor of 90 percent to these deposits, slightly lower than the ASF factor it would assign to stable retail deposits. Retail customers and counterparties tend to provide deposits that are more PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 stable than funding provided by other types of counterparties, as discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION section above, and, thus, retail deposits would be assigned a higher ASF factor than all but the most stable forms of long-term funding from wholesale customers. For the same reasons as discussed above in relation to stable retail deposits, the maturity and collateralization of these other retail deposits would not affect the ASF factor they would be assigned under the proposed rule. Retail funding that is not in the form of a deposit, such as payables owed to small business service providers, would not be treated as stable funding and would be assigned a zero percent ASF factor, as described in section II.C.3.e of this SUPPLEMENTARY INFORMATION section below. Fully Insured Affiliate, Reciprocal, and Certain Longer-Term Retail Brokered Deposits Section ll.104(c) of the proposed rule would assign a relatively high 90 percent ASF factor to three categories of brokered deposits 41 provided by retail customers or counterparties that include certain stabilizing features that tend to make them more stable forms of funding than other brokered deposits, as discussed in sections II.C.3.d and II.C.3.e of this SUPPLEMENTARY INFORMATION section below.42 Retail brokered deposits that would be assigned a 90 percent ASF factor include (1) a reciprocal brokered deposit where the entire amount is covered by deposit insurance; 43 (2) a brokered sweep deposit that is deposited in accordance with a contract between the retail customer or counterparty and the 41 Under § ll.3 of the LCR rule, a brokered deposit is a deposit held at the covered company that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker, as that term is defined in section 29(g) of the FDI Act (12 U.S.C. 1831f(g)). 42 The agencies note that the ASF factors assigned to retail brokered deposits are based solely on the stable funding characteristics of these deposits over a one-year time horizon. The assignment of ASF factors is not intended to reflect the impact of these deposits on a covered company, such as their effect on a company’s probability of failure or loss given default, franchise value, or asset growth rate or lending practices. In addition, the assignment of ASF factors does not affect the determination of deposits as brokered, which is addressed under other regulations and guidance. 43 A ‘‘reciprocal brokered deposit’’ is defined in § ll.3 of the LCR rule as a brokered deposit that the covered company receives through a deposit placement network on a reciprocal basis, such that: (1) For any deposit received, the covered company (as agent for the depositors) places the same amount with other depository institutions through the network and (2) each member of the network sets the interest rate to be paid on the entire amount of funds it places with other network members. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 covered company, a controlled subsidiary of the covered company, or a company that is a controlled subsidiary of the same top-tier company of which the covered company is a controlled subsidiary, where the entire amount of the deposit is covered by deposit insurance; 44 and (3) a brokered deposit that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and has a remaining maturity of one year or more. By assigning a 90 percent ASF factor, the proposed rule would treat these brokered deposits as more stable than most other categories of brokered deposits, less stable than stable retail deposits, and comparably stable to retail deposits other than stable retail deposits. First, § ll.104(c)(2) of the proposed rule would assign a 90 percent ASF factor to a reciprocal brokered deposit provided by a retail customer or counterparty, where the entire amount of the deposit is covered by deposit insurance. The reciprocal nature of the brokered deposit means that a deposit placement network contractually provides a covered company with the same amount of deposits that it places with other depository institutions. As a result, and because the deposit is fully insured, the retail customers or counterparties providing the deposit tend to be less likely to withdraw it than other types of brokered deposits. Second, § ll.104(c)(3) of the proposed rule would assign a 90 percent ASF factor to a brokered sweep deposit that is deposited in accordance with a contract between the retail customer or counterparty that provides the deposit and the covered company or an affiliate of the covered company, where the entire amount of the deposit is covered by deposit insurance. A typical brokered sweep deposit arrangement places deposits, usually those in excess of deposit insurance caps, at different banking organizations, with each banking organization receiving the maximum amount that is covered by deposit insurance, according to a priority ‘‘waterfall.’’ Within the waterfall structure, affiliates of the deposit broker tend to be the first to receive deposits and the last from which 44 Under § ll.3 of the LCR rule, a ‘‘brokered sweep deposit’’ is a deposit held at a covered company by a customer or counterparty through a contractual feature that automatically transfers to the covered company from another regulated financial company at the close of each business day amounts identified under the agreement governing the account from which the amount is being transferred. Typically, these transactions involve securities firms or investment companies that transfer (‘‘sweep’’) idle customer funds into deposit accounts at one or more banks. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 deposits are withdrawn. With this affiliate relationship, a covered company is more likely to receive and maintain a steady stream of brokered sweep deposits. Based on the reliability of this stream of brokered sweep deposits and the enhanced stability associated with full deposit insurance coverage, the proposed rule would treat this type of brokered deposit, in the aggregate, as more stable than brokered sweep deposits received from unaffiliated institutions. Third, § ll.104(c)(4) of the proposed rule would assign a 90 percent ASF factor to a brokered deposit provided by a retail customer or counterparty that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and has a remaining maturity of one year or more. The contractual term of this category of brokered deposit and the exclusion of accounts used by a customer for transactional purposes make this category of brokered deposit more stable than other types of brokered deposits that would be assigned a lower ASF factor. Like other types of retail deposits with a remaining maturity of one year or more, however, these deposits would not be assigned a 100 percent ASF factor, because a covered company may be more likely to repay retail brokered deposits, in the event of an early withdrawal request by the depositor, for reputational or franchise reasons even without a contractual requirement to make such repayment. In addition, the brokered nature of these deposits makes them no more stable than stable retail deposits, which are assigned a 95 percent ASF factor, or retail deposits other than stable retail deposits and brokered deposits, which are assigned a 90 percent ASF factor, even if the deposit is fully covered by deposit insurance. The proposed rule would assign lower ASF factors to brokered deposits that do not include these stabilizing factors, as discussed in sections II.C.3.d and II.C.3.e of this SUPPLEMENTARY INFORMATION section below. Question 15: To what extent should the proposed rule consider the contractual term of a retail deposit (in addition to considering it for some forms of brokered deposits) for purposes of assigning an ASF factor? What alternative ASF factors, if any, would be more appropriate, and under what circumstances? Question 16: The agencies invite commenter views on the proposed 90, 50, and zero percent ASF factors assigned to retail brokered deposits. What, if any, alternative ASF factors PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 35137 should be assigned to these deposits and why? d. 50 Percent ASF Factor Section ll.104(d) of the proposed rule would assign a 50 percent ASF factor to certain unsecured wholesale funding, and secured funding transactions, depending on the tenor of the transaction and the covered company’s counterparty; operational deposits that are placed at the covered company; and certain brokered deposits. Unsecured Wholesale Funding Provided by, and Secured Funding Transactions With, a Counterparty That Is Not a Financial Sector Entity or Central Bank and With Remaining Maturity of Less Than One Year Sections ll.104(d)(1) and (2) of the proposed rule would assign a 50 percent ASF factor to a secured funding transaction or unsecured wholesale funding (including a wholesale deposit) that, in each case, matures less than one year from the calculation date and is provided by a wholesale customer or counterparty that is not a central bank or a financial sector entity (or a consolidated subsidiary thereof). The proposed 50 percent ASF factor for this category would be lower than the 100 percent ASF factor assigned to funding from similar counterparties that matures more than a year from the calculation date because the need to roll over the funding during the NSFR’s oneyear time horizon makes this category of funding less stable. The 50 percent ASF factor would also be lower than the factor assigned to the categories of retail deposits described above, which include features such as deposit insurance and retail counterparty relationships that make those categories of funding more stable, regardless of remaining contractual maturity. The proposed rule would generally assign an ASF factor to secured funding transactions and unsecured wholesale funding on the basis of counterparty type and maturity, without regard to whether and what type of collateral secures the transaction. This treatment would differ from the LCR rule, which more closely considers the liquidity characteristics of the underlying collateral. This different treatment stems from the fact that the LCR rule considers the immediate liquidity of the underlying collateral and behavior of the counterparty during a 30-calendar day period of significant stress, whereas the proposed rule focuses on the stability of funding over a one-year time horizon, which is less influenced by the underlying collateral. E:\FR\FM\01JNP2.SGM 01JNP2 35138 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules Unsecured Wholesale Funding Provided by, and Secured Funding Transactions With, a Financial Sector Entity or Central Bank With Remaining Maturity of Six Months or More, But Less Than One Year Sections ll.104(d)(3) and (4) of the proposed rule would assign a 50 percent ASF factor to a secured funding transaction or unsecured wholesale funding that matures six months or more but less than one year from the calculation date and is provided by a financial sector entity or a consolidated subsidiary thereof, or a central bank.45 As discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION section, to account for the less stable nature of funding from these financial counterparties, the proposed rule would treat this funding more conservatively than funding from other types of wholesale customers or counterparties. If the funding from these counterparties has a maturity of less than six months, the proposed rule would assign a zero percent ASF factor, as described below, which would reflect the higher rollover risk of the funding resulting from the short remaining maturity and the financial nature of the counterparty. The proposed rule would treat funding from central banks consistently with funding from financial sector entities (i.e., as a less stable form of funding) to discourage potential overreliance on funding from central banks, consistent with the proposed rule’s focus on stable funding raised from market sources. In the United States, the Federal Reserve does not currently offer funding arrangements of this term. sradovich on DSK3TPTVN1PROD with PROPOSALS2 Securities Issued by a Covered Company With Remaining Maturity of Six Months or More, But Less Than One Year Section ll.104(d)(5) of the proposed rule would assign a 50 percent ASF factor to securities issued by a covered company that mature in six months or more, but less than one year, from the calculation date. As discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION section, in general, the proposed rule would consider funding that has a longer maturity to be more stable. These securities would represent less stable funding than securities issued by a covered company that are perpetual or mature one year or more from the calculation date (which would 45 As noted supra note 37 for purposes of determining ASF and RSF factors assigned to assets, commitments, and liabilities where counterparty is relevant, the proposed rule would treat an unconsolidated affiliate of a covered company as a financial sector entity. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 be assigned an ASF factor of 100 percent, as discussed above), but more stable funding than securities that mature within six months from the calculation date (which would be assigned a zero percent ASF factor, as discussed below). Unlike other NSFR liabilities for which the proposed rule considers the counterparty type when assigning an ASF factor, the proposed rule would not consider the identities of the holders of the securities issued by a covered company. Because securities may actively trade on secondary markets and may be purchased by a variety of investors including financial sector entities, the identities of current security holders would not be an accurate or consistent factor that affects the stability of this type of funding. In addition, a covered company may not know or be able to track the identities of the holders of its securities that are traded. The proposed rule would therefore treat securities issued by a covered company equivalently to funding provided by a financial sector entity, rather than assuming greater stability based on a different type of counterparty. Therefore, similar to funding provided by a financial sector entity, securities issued by a covered company that mature in six months or more, but less than one year, from the calculation date would be assigned a 50 percent ASF factor. Operational Deposits Operational deposits are unsecured wholesale funding in the form of deposits or collateralized deposits that are necessary for the provision of operational services, such as clearing, custody, or cash management services.46 In the LCR rule, such funds are assumed to have a lower outflow rate than other types of unsecured wholesale funding during a period of stress based on legal or operational limitations that make significant withdrawals from these accounts within 30 calendar days less likely. For example, an entity that relies on the cash management services of a covered company would find it more difficult to terminate its deposit agreement because it might be subject to early termination fees and might also incur start-up costs to establish a similar 46 The agencies note that the methodology that a covered company uses to determine whether and to what extent a deposit is operational for the purposes of the proposed rule must be consistent with the methodology used for the purposes of the LCR rule. See § ll.3 of the LCR rule for the full list of services that qualify as operational services and § ll.4(b) of the LCR rule for additional requirements for operational deposits. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 operational account with another financial institution. As noted, a key operating assumption of the NSFR is a one-year time horizon. Under this longer time horizon, it is more reasonable to assume that a counterparty could successfully restructure its operational deposits and place them with another financial institution. Therefore, as compared with the treatment in the LCR rule, the treatment of operational deposits in the proposed rule is closer to that of nonoperational deposits, but reflects that there may still be some difficulty and cost associated with switching operational service providers. Accordingly, § ll.104(d)(6) of the proposed rule would also treat operational deposits, including those from financial sector entities, as more stable than other forms of short-term wholesale funding and assign them a 50 percent ASF factor. Other Retail Brokered Deposits Section ll.104(d)(7) of the proposed rule would assign a 50 percent ASF factor to most categories of brokered deposits provided by retail customers or counterparties that do not include the additional stabilizing features required under § ll.104(c) and summarized in section II.C.3.c of this SUPPLEMENTARY INFORMATION section. Brokered deposits tend to be less stable and exhibit greater volatility than stable retail deposits, even in cases where the deposits are fully or partially insured, as customers can more easily move brokered deposits among institutions. In addition, intermediation by a deposit broker may result in a higher likelihood of withdrawal compared to a non-brokered retail deposit where a direct relationship exists between the depositor and the covered company. Statutory restrictions on certain brokered deposits can also make this form of funding less stable than other deposit types. Specifically, a covered company that becomes less than ‘‘well capitalized’’ 47 is subject to restrictions on accepting, renewing, or rolling over funds obtained directly or indirectly through a deposit broker.48 Thus, as a general matter, the proposed rule would assign a 50 percent ASF factor to most categories of brokered deposits. Retail brokered deposits that would be assigned a 50 percent ASF factor include (1) a brokered deposit that is not a reciprocal brokered deposit or brokered sweep deposit and that is held in a transactional account; (2) a 47 As defined in section 38 of the FDI Act, 12 U.S.C. 1831o. 48 See 12 U.S.C. 1831f. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules brokered deposit that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and matures in six months or more, but less than one year, from the calculation date; (3) a reciprocal brokered deposit or brokered affiliate sweep deposit where less than the entire amount of the deposit is covered by deposit insurance; and (4) a brokered non-affiliate sweep deposit, regardless of deposit insurance coverage. Retail brokered deposits to which the proposed rule would assign a 50 percent ASF factor do not have the same combination of stabilizing attributes, such as a combination of being fully covered by deposit insurance, being an affiliated brokered sweep deposit, or having a longer-term maturity, as brokered deposits assigned a 90 percent ASF factor, as discussed in section II.C.3.c of this SUPPLEMENTARY INFORMATION section. However, these types of brokered deposits are more stable than brokered deposits that mature in less than six months from the calculation date and are not reciprocal brokered deposits or brokered sweep deposits or held in a transactional account, which are assigned a zero percent ASF factor, as discussed in section II.C.3.e of this SUPPLEMENTARY INFORMATION section. sradovich on DSK3TPTVN1PROD with PROPOSALS2 All Other NSFR Liabilities With Remaining Maturity of Six Months or More, But Less Than One Year Section ll.104(d)(8) of the proposed rule would assign a 50 percent ASF factor to all other NSFR liabilities that have a remaining maturity of six months or more, but less than one year. As discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION section, a covered company would not need to roll over a liability of this maturity in the shorter-term, but would still need to roll it over before the end of the NSFR’s oneyear time horizon. e. Zero Percent ASF Factor Section ll.104(e) of the proposed rule would assign a zero percent ASF factor to NSFR liabilities that demonstrate the least stable funding characteristics, including trade date payables, certain short-term retail brokered deposits, non-deposit retail funding, certain short-term funding from financial sector entities, and any other NSFR liability that matures in less than six months and is not described above. Trade Date Payables Section ll.104(e)(1) of the proposed rule would assign a zero percent ASF factor to trade date payables that result VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 from purchases by a covered company of financial instruments, foreign currencies, and commodities that are required to settle within the lesser of the market standard settlement period for the particular transactions and five business days from the date of the sale. Trade date payables are established when a covered company buys financial instruments, foreign currencies, and commodities, but the transactions have not yet settled. These payables, which are liabilities, should result in an outflow from a covered company at the settlement date, which varies depending on the specific market, but generally occurs within five business days, so the proposed rule does not treat the liability as stable funding. The failure of a trade date payable to settle within the required settlement period for the transaction would not affect the ASF factor assigned to the transaction under the proposed rule because a trade date payable that has failed to settle also does not represent stable funding. Consistent with the definition of ‘‘derivative transaction’’ in § ll.3, the proposed rule would treat a payable with a contractual settlement period that is longer than the lesser of the market standard for the particular instrument or five business days as a derivative transaction under § ll.107, rather than as a trade date payable. Certain Brokered Deposits Section ll.104(e)(2) of the proposed rule would assign a zero percent ASF factor to a brokered deposit provided by a retail customer or counterparty that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and matures less than six months from the calculation date. In addition to the reasons discussed in section II.C.3.d above, this type of brokered deposit tends to be less stable than other types of brokered deposits because of the absence of incrementally stabilizing features such as being a transactional account or reciprocal or brokered sweep arrangement. As a result, retail customers or counterparties that provide this type of brokered deposit face low costs associated with withdrawing the funding. For example, a retail customer or counterparty providing this type of brokered deposit may seek to deposit funds with the banking organization that offers the highest interest rates, which may not be the covered company. Non-Deposit Retail Funding Section ll.104(e)(3) of the proposed rule would assign a zero percent ASF factor to retail funding that is not in the form of a deposit. Given that non- PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 35139 deposit retail liabilities are not regular sources of funding or commonly utilized funding arrangements, the proposed rule would not treat any portion of them as stable funding. As noted above, a security issued by the covered company that is held by a retail customer or counterparty would not take into account counterparty type and therefore would not fall within this category. Short-Term Funding From a Financial Sector Entity or Central Bank Section ll.104(e)(5) of the proposed rule would apply a zero percent ASF factor to funding (other than operational deposits) for which the counterparty is a financial sector entity or a consolidated subsidiary thereof and the transaction matures less than six months from the calculation date.49 Financial sector entities and their consolidated subsidiaries are generally the most likely to withdraw funding from a covered company, regardless of whether the funding is secured or unsecured or the nature of any collateral securing the funding, as described in section II.C.2 of this SUPPLEMENTARY INFORMATION section. Short-term funding from central banks is also assigned a zero percent ASF factor to discourage overreliance on funding from central banks, consistent with the proposed rule’s focus on stable funding from market sources, as noted in section II.C.3.d of this Supplementary Information section above. For example, overnight funding from the Federal Reserve’s discount window would be assigned a zero percent ASF factor. Securities Issued by a Covered Company With Remaining Maturity of Less Than Six Months Section ll.104(e)(4) of the proposed rule would assign a zero percent ASF factor to securities that are issued by a covered company and that have a remaining maturity of less than six months. As discussed above, the proposed rule generally treats as less stable those instruments that have shorter tenors and have to be paid within the NSFR’s one-year time horizon. Because these liabilities may be actively traded, also as discussed above, the counterparty holding the securities may not be reflective of the stability of the covered company’s funding under the securities. As a result, the proposed rule would treat these NSFR liabilities 49 As noted supra note 37 for purposes of determining ASF and RSF factors assigned to assets, commitments, and liabilities where counterparty is relevant, the proposed rule would treat an unconsolidated affiliate of a covered company as a financial sector entity. E:\FR\FM\01JNP2.SGM 01JNP2 35140 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules equivalently to funding with a similar maturity provided by a financial sector entity, rather than assuming greater stability based on a particular type of counterparty. sradovich on DSK3TPTVN1PROD with PROPOSALS2 All Other NSFR Liabilities With Remaining Maturity of Less Than Six Months or an Open Maturity Section ll.104(e)(6) of the proposed rule would assign a zero percent ASF factor to all other NSFR liabilities, including those that mature less than six months from the calculation date and those that have an open maturity. NSFR liabilities that do not fall into one of the categories described above would not represent a regular or reliable source of funding and, therefore, the proposed rule would not treat any portion as stable funding. Question 17: What, if any, liabilities are not, but should be, specifically addressed in the proposed rule and what ASF factors should be assigned to those liabilities? Question 18: What, if any, additional ASF factors should be included and to which NSFR liabilities or NSFR regulatory capital elements should they be assigned? Would adding such ASF factors provide for a better calibrated ASF amount and, if so, why? Question 19: What, if any, liabilities owed to retail customers or counterparties not in the form of a deposit should be assigned an ASF factor greater than zero percent, and why? D. Required Stable Funding Under the proposed rule, a covered company would be required to maintain an ASF amount that equals or exceeds its RSF amount. As described below, a covered company’s RSF amount would be based on the liquidity characteristics of its assets, derivative exposures, and commitments. In general, the less liquid an asset over the NSFR’s one-year time horizon, the greater extent to which the proposed rule would require it to be supported by stable funding. By requiring a covered company to maintain more stable funding to support less liquid assets, the proposed rule would reduce the risk that the covered company may not be able to readily monetize the assets at a reasonable cost or could be required to monetize the assets at fire sale prices or in a manner that contributes to disorderly market conditions. 1. Calculation of the RSF Amount The proposed rule would require a covered company to calculate its RSF amount as set forth in § ll.105. A covered company’s RSF amount would VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 equal the sum of two components: (i) The carrying values of a covered company’s assets (other than assets included in the calculation of the covered company’s derivatives RSF amount) and the undrawn amounts of its commitments, each multiplied by an RSF factor assigned under § ll.106 and described in section II.D.3 of this SUPPLEMENTARY INFORMATION section; and (ii) the covered company’s derivatives RSF amount, as calculated under § ll.107 and described in section II.E of this SUPPLEMENTARY INFORMATION section. 2. RSF Factor Framework The proposed rule would use a set of standardized weightings, or RSF factors, to determine the amount of stable funding a covered company must maintain. Specifically, a covered company would calculate its RSF amount by multiplying the carrying values of its assets, the undrawn amounts of its commitments, and its measures of derivative exposures (as discussed in section II.E of this SUPPLEMENTARY INFORMATION section) by the assigned RSF factors. This approach would promote consistency of the proposed NSFR measure across covered companies. RSF factors would be scaled from zero percent to 100 percent based on the liquidity characteristics of an asset, derivative exposure, or commitment. A zero percent RSF factor means that the proposed rule would not require the asset, derivative exposure, or commitment to be supported by available stable funding, and a 100 percent RSF factor means that the proposed rule would require the asset, derivative exposure, or commitment to be fully supported by available stable funding. Accordingly, the proposed rule would generally assign a lower RSF factor to more liquid assets, exposures, and commitments and a higher RSF factor to less liquid assets, exposures, and commitments. The proposed rule would categorize assets, derivatives exposures, and commitments and assign an RSF factor based on the following characteristics relating to their liquidity over the NSFR’s one-year time horizon: (1) Credit quality, (2) tenor, (3) type of counterparty, (4) market characteristics, and (5) encumbrance. Credit quality. Credit quality is a factor in an asset’s liquidity because market participants tend to be more willing to purchase higher credit quality assets across a range of market and economic conditions, but especially in a stressed environment (sometimes called ‘‘flight to quality’’). The demand for PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 higher credit quality assets, therefore, is more likely to persist and such assets are more likely to have resilient values, allowing a covered company to monetize them more readily. Assets of lower credit quality, in contrast, are more likely to become delinquent, and that increased credit risk makes these assets less likely to hold their value, particularly in times of market stress. As a result, the proposed rule would generally require assets of lower credit quality to be supported by more stable funding, to reduce the risk that a covered company may have to monetize the lower credit quality asset at a discount. Tenor. In general, the proposed rule would require a covered company to maintain more stable funding to support assets that have a longer tenor because of the greater time remaining before the covered company will realize inflows associated with the asset. In addition, assets with a longer tenor may liquidate at a discount because of the increased market and credit risks associated with cash flows occurring further in the future. Assets with a shorter tenor, in contrast, would require a smaller amount of stable funding under the proposed rule because a covered company would have access to the inflows under these assets sooner. Thus, the proposed rule would generally require less stable funding for shorterterm assets compared to longer-term assets. The proposed rule would divide maturities into three categories for purposes of a covered company’s RSF amount calculation: less than six months, six months or more but less than one year, and one year or more. Counterparty type. A covered company may face pressure to roll over some portion of its assets in order to maintain its franchise value with customers and because a failure to roll over such assets could be perceived by market participants as an indicator of financial distress at the covered company. Typically, these risks are driven by the type of counterparty to the asset. For example, covered companies often consider their lending relationships with a wholesale, nonfinancial borrower to be important to maintain current business and generate additional business in the future. As a result, a covered company may have concerns about damaging future business prospects if it declines to roll over lending to such a customer for reasons other than a change in the financial condition of the borrower. More broadly, because market participants generally expect a covered company to roll over lending to wholesale, non-financial counterparties E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 based on relationships, a covered company’s failure to do so could be perceived as a sign of liquidity stress at the company, which could itself cause such a liquidity stress. These concerns are less likely to be a factor with respect to financial counterparties because financial counterparties typically have a wider range of alternate funding sources already in place and face lower transaction costs associated with arranging alternate funding and less expectation of stable lending relationships with any single provider of credit. Therefore, market participants are less likely to assume the covered company is under financial distress if the covered company declines to roll over funding to a financial sector counterparty. In light of these business and reputational considerations, the proposed rule would require a covered company to more stably fund lending to non-financial counterparties than lending to financial counterparties, all else being equal.50 Market characteristics. Assets that are traded in transparent, standardized markets with large numbers of participants and dedicated intermediaries tend to exhibit a higher degree of reliable liquidity. The proposed rule would, therefore, require less stable funding to support such assets than those traded in markets characterized by information asymmetry and relatively few participants. Depending on the asset class and the market, relevant measures of liquidity may include bid-ask spreads, market size, average trading volume, and price volatility.51 While no single metric is likely to provide for a complete assessment of market liquidity, multiple indicators taken together provide relevant information about the extent to which a liquid market exists for a particular asset class. For example, market data reviewed by the agencies show that securities that meet the criteria to qualify as HQLA typically trade with tighter bid-ask spreads than non-HQLA securities and in markets 50 As noted supra note 37 for purposes of determining ASF and RSF factors assigned to assets, commitments, and liabilities where counterparty is relevant, an unconsolidated affiliate of a covered company would be treated as a financial sector entity. 51 In general, tighter bid-ask spreads, larger market sizes, higher trading volumes, and more consistent pricing tend to indicate greater market liquidity. The agencies reviewed market data discussed in this section II.D of this SUPPLEMENTARY INFORMATION section from the following sources: Bloomberg Finance L.P., Financial Industry Regulatory Authority (FINRA) Trade Reporting and Compliance Engine (TRACE), and Securities Industry and Financial Market Association statistics (https://www.sifma.org/research/statistics.aspx). VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 with significantly higher average daily trading volumes, both of which tend to indicate greater liquidity in the markets for HQLA securities. Encumbrance. As described in section II.D.3 of this SUPPLEMENTARY INFORMATION section, whether and the degree to which an asset is encumbered will dictate the amount of stable funding the proposed rule would require a covered company to maintain to support the particular asset, as encumbered assets cannot be monetized during the period over which they are encumbered. For example, securities that a covered company has encumbered for a period of greater than one year in order to provide collateral for its longer-term borrowings are not available for the covered company to monetize in the shorter term. In general, the longer an asset is encumbered, the more stable funding the proposed rule would require. Question 20: The agencies invite comment regarding the foregoing framework. Are the characteristics described above appropriate indicators of the liquidity of a covered company’s assets, derivative exposures, and commitments for purposes of the proposed rule? Why or why not? What other characteristics should the proposed rule take into account for purposes of assigning RSF factors? Please provide data and analysis to support your conclusions. 3. RSF Factors Section ll.106 of the proposed rule would assign RSF factors to a covered company’s assets and commitments, other than certain assets relating to derivative transactions that are assigned an RSF factor under § ll.107. Section ll.106 would also set forth specific treatment for nonperforming assets, encumbered assets, assets held in certain segregated accounts, and certain assets relating to secured lending transactions and asset exchanges. a. Treatment of Unencumbered Assets i. Zero Percent RSF Factor As noted above, a covered company’s RSF amount reflects the liquidity characteristics of its assets, derivative exposures, and commitments. Section ll.106(a)(1) of the proposed rule would assign a zero percent RSF factor to certain assets that can be directly used to meet financial obligations, such as cash, or that are expected, based on contractual terms, to be converted to assets that can be directly used to meet financial obligations over the immediate term. By assigning a zero percent RSF factor to these assets, the proposed rule PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 35141 would not require a covered company to support them with stable funding. Currency and Coin Section ll.106(a)(1)(i) of the proposed rule would assign a zero percent RSF factor to currency and coin because they can be directly used to meet financial obligations. Currency and coin include U.S. and foreign currency and coin owned and held in all offices of a covered company; currency and coin in transit to a Federal Reserve Bank or to any other depository institution for which the covered company’s subsidiaries have not yet received credit; and currency and coin in transit from a Federal Reserve Bank or from any other depository institution for which the accounts of the subsidiaries of the covered company have already been charged.52 Cash Items in the Process of Collection Section ll.106(a)(1)(ii) of the proposed rule would assign a zero percent RSF factor to cash items in the process of collection. These items would include: (1) Checks or drafts in process of collection that are drawn on another depository institution (or a Federal Reserve Bank) and that are payable immediately upon presentation in the country where the covered company’s office that is clearing or collecting the check or draft is located, including checks or drafts drawn on other institutions that have already been forwarded for collection but for which the covered company has not yet been given credit (known as cash letters), and checks or drafts on hand that will be presented for payment or forwarded for collection on the following business day; (2) government checks drawn on the Treasury of the United States or any other government agency that are payable immediately upon presentation and that are in process of collection; and (3) such other items in process of collection that are payable immediately upon presentation and that are customarily cleared or collected as cash items by depository institutions in the country where the covered company’s office which is clearing or collecting the item is located.53 Despite not being in a form that can be directly used to meet financial obligations at the calculation date, cash items in the process of collection will be in such a form in the immediate term. The proposed rule 52 This description of currency and coin is consistent with the treatment of currency and coin in Federal Reserve form FR Y–9C. 53 This description of cash items in the process of collection is consistent with the treatment of cash items in process of collection in Federal Reserve Form FR Y–9C. E:\FR\FM\01JNP2.SGM 01JNP2 35142 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules would therefore not require these assets to be supported by stable funding. sradovich on DSK3TPTVN1PROD with PROPOSALS2 Reserve Bank Balances and Other Claims on a Reserve Bank That Mature in Less Than Six Months Section ll.106(a)(1)(iii) of the proposed rule would assign a zero percent RSF factor to a Reserve Bank balance or other claim on a Reserve Bank that matures in less than six months from the calculation date. The term ‘‘Reserve Bank balances’’ is defined in § ll.3 of the LCR rule and includes required reserve balances and excess reserves, but not other balances that a covered company maintains on behalf of another institution, such as balances it maintains on behalf of a respondent for which it acts as a passthrough correspondent 54 or on behalf of an excess balance account participant.55 The proposed rule would assign a zero percent RSF factor to Reserve Bank balances because these assets can be directly used to meet financial obligations through the Federal Reserve’s payment system. The proposed rule would also assign a zero percent RSF factor to a claim on a Reserve Bank that does not meet the definition of a Reserve Bank balance if the claim matures in less than six months. In these cases, while the asset cannot be directly used to meet financial obligations of a covered company, a covered company faces little risk of a counterparty default or harm to its franchise value if it does not roll over the lending and it may therefore realize cash flows associated with the asset in the near term. Claims on a Foreign Central Bank That Matures in Less Than Six Months Section ll.106(a)(1)(iv) of the proposed rule would assign a zero percent RSF factor to claims on a foreign central bank that mature in less than six months. Similar to claims on a Reserve Bank, claims on a foreign central bank in this category may generally either be directly used to meet financial obligations or will be available for such use in the near term, and a covered company faces little risk of a counterparty default or harm to its franchise value if it does not roll over the lending. The proposed rule would therefore not require that they be supported by stable funding. Trade Date Receivables Similar to cash items in the process of collection, a covered company can reasonably expect that certain 54 See 55 See 12 CFR 204.5(a)(1)(ii). 12 CFR 204.10(d). VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 contractual ‘‘trade date’’ receivables will settle in the near term. These trade date receivables are limited to those due to the covered company that result from the sales of financial instruments, foreign currencies, or commodities that (1) are required to settle within the lesser of the market standard settlement period for the relevant type of transaction, without extension of the standard settlement period, and five business days from the date of the sale; and (2) have not failed to settle within the required settlement period.56 Section ll.106(a)(1)(v) of the proposed rule would assign a zero percent RSF to these receivables because they are generally reliable, with standardized, widely used settlement procedures and standardized settlement periods that are no longer than five business days. Thus, a covered company will realize inflows from these receivables in the very near term. Question 21: Given the one-year time horizon of the NSFR, the proposed rule would not require a covered company to support its current reserve balance requirement with stable funding. Because balances that meet reserve balance requirements are not immediately available to be used to directly meet financial obligations, what, if any, RSF factor (such as 100 percent) should be assigned to a covered company’s reserve balance requirement and why? Question 22: Should the proposed rule treat as a trade date receivable (instead of a derivative transaction) any transaction involving the sale of financial instruments, foreign currencies, or commodities, that has a market standard settlement period of greater than five business days from the date of the sale, and if so, why? 56 Consistent with the definition of ‘‘derivative transaction’’ under § ll.3 of the LCR rule, the proposed rule would treat a trade date receivable that has a contractual settlement or delivery lag beyond this period as a derivative transaction under § ll.107. (The definition of ‘‘derivative transaction’’ under § ll.3 of the LCR rule includes ‘‘unsettled securities, commodities, and foreign currency exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or five business days.’’) The proposed rule would not treat as a derivative transaction a trade date receivable that has a contractual settlement or delivery lag within the lesser of the market standard settlement period and five business days, but which fails to settle within this period; instead, the proposed rule would assign a 100 percent RSF factor to the trade date receivable under § ll.106(a)(8) as an asset not otherwise assigned an RSF factor under § ll.106(a)(1) through (7) or § ll.107. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 ii. 5 Percent RSF Factor Unencumbered Level 1 Liquid Assets Section ll.106(a)(2)(i) of the proposed rule would assign a 5 percent RSF factor to level 1 liquid assets that would not be assigned a zero percent RSF factor. The proposed rule would incorporate the definition of ‘‘level 1 liquid assets’’ set forth in § ll.20(a) of the LCR rule, which does not take into consideration the requirements under § ll.22. The following level 1 liquid assets would be assigned a 5 percent RSF factor: (1) Securities issued or unconditionally guaranteed as to the timely payment of principal and interest by the U.S. Department of the Treasury; (2) liquid and readily-marketable securities, as defined in § ll.3 of the LCR rule, issued or unconditionally guaranteed as to the timely payment of principal and interest by any other U.S. government agency (provided that its obligations are fully and explicitly guaranteed by the full faith and credit of the U.S. government); (3) certain liquid and readily-marketable securities that are claims on, or claims guaranteed by, a sovereign entity, a central bank, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and European Community, or a multilateral development bank; and (4) certain liquid and readily-marketable debt securities issued by sovereign entities. Section ll106(a)(2)(i) of the proposed rule would assign a relatively low RSF factor of 5 percent to these level 1 liquid assets based on their high credit quality and favorable market liquidity characteristics, which reflect their ability to serve as reliable sources of liquidity. For example, U.S. Treasury securities (a form of level 1 liquid assets) have among the highest credit quality of assets because they are backed by the full faith and credit of the U.S. government. In addition, the market for U.S. Treasury securities has a high average daily trading volume, large market size, and low bid-ask spreads relative to the markets in which other asset classes trade. Assignment of a 5 percent RSF factor would recognize that there are modest transaction costs related to selling U.S. Treasury securities and other level 1 liquid assets but that, other than assets that a covered company can use directly to meet financial obligations (or will be able to use within a matter of days), level 1 liquid assets generally represent the most readily monetizable asset types for a covered company. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 Credit and Liquidity Facilities Section ll.106(a)(2)(ii) of the proposed rule would assign a 5 percent RSF factor to the undrawn amount of committed credit and liquidity facilities that a covered company provides to its customers and counterparties. The proposed rule would require a covered company to support these facilities with stable funding, even though they are generally not included on its balance sheet, because of their widespread use and associated material liquidity risk based on the possibility of drawdowns across a range of economic environments. Research conducted by Board staff found increases in drawdowns of as much as 10 percent of committed amounts over a 12-month period from 2006–2011.57 Given the proposed rule’s application across all counterparties and economic environments, assignment of a 5 percent RSF factor would be appropriate based on the observed drawdowns during this period. The terms ‘‘credit facility’’ and ‘‘liquidity facility’’ are defined in § ll.3 of the LCR rule and, as described in section I.D of this Supplementary Information section, the proposed rule would modify the definition of ‘‘committed’’ that is currently in the LCR rule to describe credit and liquidity facilities that cannot be unconditionally canceled by a covered company. Under § ll.106(a)(2) of the proposed rule, the undrawn amount is the amount that could be drawn upon within one year of the calculation date, whereas under § ll.32(e) of the LCR rule, the undrawn amount is the amount that could be drawn upon within 30 calendar days. When determining the undrawn amount over the proposed rule’s one-year time horizon, a covered company would not include amounts that are contingent on the occurrence of a contractual milestone or other event that cannot be reasonably expected to be reached or occur within one year. For example, if a construction company can draw a certain amount from a credit facility only upon meeting a construction milestone that cannot reasonably be expected to be reached within one year, such as entering the final stage of a multi-year project that has just begun, then the undrawn amount would not include the amount 57 See Jose M. Berrospide, Ralf R. Meisenzahl, and Briana D. Sullivan, ‘‘Credit Line Use and Availability in the Financial Crisis: The Importance of Hedging,’’ Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series 2012–27 (2012). VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 that would become available only upon entering the final stage of the project. Similarly, a letter of credit that meets the definition of credit or liquidity facility may entitle a seller to obtain funds from a covered company if a buyer fails to pay the seller. If, under the terms of the letter of credit, the seller is not legally entitled to obtain funds from the covered company as of the calculation date because the buyer has not failed to perform under the agreement with the seller, and the covered company does not reasonably expect nonperformance within the NSFR’s one-year time horizon, then the funds potentially available under the letter of credit are not undrawn amounts. If the seller is legally entitled to obtain the funds available under the letter of credit as of the calculation date (because the buyer has defaulted) or if the buyer should reasonably be expected to default within the NSFR’s one-year time horizon, then the funds available under the letter of credit are undrawn amounts. Unlike the LCR rule, which permits covered companies to net certain level 1 and level 2A liquid assets that secure a committed credit or liquidity facility against the undrawn amount of the facility, the proposed rule would not allow netting of such assets because any draw upon a credit or liquidity facility would become an asset on a covered company’s balance sheet regardless of the underlying collateral and would require stable funding. Question 23: The agencies invite comment on the proposed assignment of a 5 percent RSF factor to the undrawn amount of committed credit and liquidity facilities. What, if any, additional factors should be considered in determining the treatment of unfunded commitments under the proposed rule? Question 24: What, if any, modifications to the definitions of ‘‘credit facility’’ and ‘‘liquidity facility’’ or the description of the ‘‘undrawn amount’’ for purposes of the proposed rule should the agencies consider? Question 25: If required to be posted as collateral upon a draw on a committed credit or liquidity facility, should certain level 1 and level 2A liquid assets be netted against the undrawn amount of the facility, and if so, why? Provide detailed explanations and supporting data. PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 35143 iii. 10 Percent RSF Factor Secured Lending Transactions With a Financial Sector Entity or a Subsidiary Thereof That Mature Within Six Months and Are Secured by Rehyphothecatable Level 1 Liquid Assets Section ll.106(a)(3) of the proposed rule would assign a 10 percent RSF factor to a secured lending transaction 58 with a financial sector entity or a consolidated subsidiary thereof that matures within six months of the calculation date and is secured by level 1 liquid assets that are rehypothecatable for the duration of the secured lending transaction. The proposed rule would require a covered company to support short-term lending between financial institutions, where the transaction is secured by rehypothecatable level 1 liquid assets, with a lower amount of available stable funding, relative to most other asset classes, because of a covered company’s ability to monetize the level 1 liquid asset collateral for the duration of the transaction. Because of the financial nature of the counterparty, a transaction of this type also presents relatively lower reputational risk to a covered company if it chooses not to roll over the transaction when it matures, as discussed in section II.D.2 of this Supplementary Information section. As provided in § ll.106(d) of the proposed rule and discussed in section II.D.3.d of this SUPPLEMENTARY INFORMATION section, the RSF factor applicable to a transaction in this category may increase if the covered company rehypothecates the level 1 liquid asset collateral securing the transaction for a period with more than six months remaining from the calculation date. iv. 15 Percent RSF Factor Unencumbered Level 2A Liquid Assets Section ll.106(a)(4)(i) of the proposed rule would assign a 15 percent RSF factor to level 2A liquid assets, as set forth in § ll.20(b) of the LCR rule, but would not take into consideration the requirements in § ll.22 or the level 2 cap in § ll.21. As set forth in the LCR rule, level 2A liquid assets include certain obligations issued or guaranteed by a U.S. governmentsponsored enterprise (GSE) and certain obligations issued or guaranteed by a sovereign entity or a multilateral development bank. The LCR rule requires these securities to be liquid and 58 The proposed rule would modify the definition of ‘‘secured lending transaction’’ that is currently in the LCR rule, as described in section I.D of this SUPPLEMENTARY INFORMATION section. E:\FR\FM\01JNP2.SGM 01JNP2 35144 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 readily-marketable, as defined in § ll.3, to qualify as level 2A liquid assets. The proposed rule would assign a 15 percent RSF factor to level 2A liquid assets based on the characteristics of these assets, including their high credit quality. This factor would reflect the relatively high level of liquidity of these assets compared to most other asset classes, but lower liquidity than level 1 liquid assets. For example, mortgagebacked securities issued by U.S. GSEs (a widely held form of level 2A liquid assets) have a higher credit quality, higher average daily trading volume, and lower bid-ask spreads relative to corporate debt securities. Secured Lending Transactions and Unsecured Wholesale Lending With a Financial Sector Entity or a Subsidiary Thereof That Mature Within Six Months Section ll.106(a)(4)(ii) of the proposed rule would assign a 15 percent RSF factor to a secured lending transaction with a financial sector entity or a consolidated subsidiary thereof that is secured by assets other than rehypothecatable level 1 liquid assets and matures within six months of the calculation date. It would assign the same RSF factor to unsecured wholesale lending to a financial sector entity or a consolidated subsidiary thereof that matures within six months of the calculation date.59 Such transactions present relatively lower liquidity risk because of their shorter tenors relative to loans with a longer remaining maturity, providing for cash inflows upon repayment of the loan, and generally present lower reputational risk if a covered company chooses not to roll over the transaction because of the financial nature of the counterparties, as discussed in section II.D.2 above. Therefore, the proposed rule would assign a lower RSF factor to these assets than it would to longer-term loans to similar counterparties or to similar-term loans to non-financial counterparties, as described in sections II.D.3.a.v through II.D.3.a.vii below. The proposed rule would assign a higher RSF factor to these transactions, however, than it would to a secured lending transaction with a similar maturity and similar counterparty type that is secured by level 1 liquid assets that are rehypothecatable for the duration of the transaction. As described in section II.D.3.a.iii above, 59 As noted supra note 37 for purposes of determining ASF and RSF factors assigned to assets, commitments, and liabilities where counterparty is relevant, the proposed rule would treat an unconsolidated affiliate of a covered company as a financial sector entity. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 the proposed rule would not require a covered company to fund a transaction secured by rehypothecatable level 1 liquid assets with the same level of available stable funding because of the increased liquidity benefit to the covered company from its ability to monetize the level 1 liquid assets securing the transaction for the duration of the transaction. v. 50 Percent RSF Factor Unencumbered Level 2B Liquid Assets Section ll.106(a)(5)(i) of the proposed rule would assign a 50 percent RSF factor to level 2B liquid assets, as set forth in § ll.20(c) of the LCR rule, but would not take into consideration the requirements in § ll.22 or the level 2 caps in § ll.21. Level 2B liquid assets include certain publicly traded corporate debt securities and certain publicly traded common equity shares that are liquid and readily-marketable.60 Section ll.20 of the LCR rule requires an asset to meet certain criteria to qualify as a level 2B liquid asset. For example, equity securities must be part of a major index and corporate debt securities must be ‘‘investment grade’’ under 12 CFR part 1.61 Therefore, the proposed rule would assign a lower RSF factor to these assets than it would assign to non-HQLA. The proposed rule would assign a higher RSF factor to level 2B liquid assets, however, than it would to level 1 and level 2A liquid assets, based on level 2B liquid assets’ relatively higher credit risk, lower trading volumes, and elevated price volatility. For example, Russell 1000 equities, as a class, have lower average daily trading volume and higher price volatility than U.S. Treasury securities and mortgage-backed securities issued by U.S. GSEs. Similarly, investment grade corporate bonds have higher credit risk and lower average daily trading volume relative to level 1 and level 2A liquid assets. At the same time, the market for level 2B liquid assets is more liquid than the secondary market for longer-term loans, in terms of, for example, average daily trading volume. Accordingly, the proposed rule would assign a 50 percent RSF factor to a 60 The agencies note that nothing in the proposed rule would grant a covered company the authority to engage in activities relating to debt securities and equities not otherwise permitted by applicable law. 61 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) § 939A, codified at 15 U.S.C. 78o–7, the LCR rule does not rely on credit ratings as a standard of creditworthiness. Rather, the LCR rule relies on an assessment by the covered company of the capacity of the issuer of the corporate debt security to meet its financial commitments. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 covered company’s level 2B liquid assets. Secured Lending Transactions and Unsecured Wholesale Lending to a Financial Sector Entity or a Subsidiary Thereof or a Central Bank That Mature in Six Months or More, but Less Than One Year Section ll.106(a)(5)(ii) of the proposed rule would assign a 50 percent RSF factor to a secured lending transaction or unsecured wholesale lending that matures in six months or more, but less than one year from the calculation date, where the counterparty is a financial sector entity or a consolidated subsidiary thereof or the counterparty is a central bank.62 As discussed above, a covered company faces lower reputational risk if it chooses not to roll over these loans to financial counterparties or claims on a central bank than it would with loans to non-financial counterparties. However, these loans have longer terms—beyond six months—which means that liquidity from principal repayments will not be available in the near term. Therefore, these loans require more stable funding than shorter-term loans, which would be assigned a lower RSF factor, as discussed above. At the same time, given that these loans mature within the NSFR’s one-year time horizon, the proposed rule would not require them to be fully supported by stable funding and would assign them a 50 percent RSF factor. Operational Deposits Held at Financial Sector Entities. Section ll.106(a)(5)(iii) of the proposed rule would assign a 50 percent RSF factor to an operational deposit, as defined in § ll.3, placed by the covered company at another financial sector entity. Consistent with the reasoning for the ASF factor assigned to operational deposits held at a covered company, described in section II.C of this Supplementary Information section, such operational deposits placed by a covered company are less readily monetizable by the covered company. These deposits are placed for operational purposes, and a covered company would face legal or operational limitations to making significant withdrawals during the NSFR’s one-year time horizon. Thus, the proposed rule would assign a 50 percent RSF factor to these operational deposits. 62 As noted supra note 37 for purposes of determining ASF and RSF factors assigned to assets, commitments, and liabilities where counterparty is relevant, the proposed rule would treat an unconsolidated affiliate of a covered company as a financial sector entity. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 General Obligation Securities Issued by a Public Sector Entity Section ll.106(a)(5)(iv) of the proposed rule would assign a 50 percent RSF factor to general obligation securities issued by, or guaranteed as to the timely payment of principal and interest by, a public sector entity.63 Consistent with the definition of ‘‘general obligation’’ in the agencies’ risk-based capital rules, a general obligation security is a bond or similar obligation backed by the full faith and credit of a public sector entity.64 Securities that are not backed by the full faith and credit of a public sector entity, including revenue bonds, would not be considered general obligation securities. U.S. general obligation securities issued by a public sector entity,65 which are backed by the general taxing authority of the issuer, are assigned a risk weight of 20 percent under subpart D of the agencies’ risk-based capital rules.66 These securities have more favorable credit risk characteristics than exposures that would receive a risk weight greater than 20 percent under the agencies’ risk-based capital rules, such as revenue bonds, which are assigned a 50 percent risk weight.67 Revenue bonds depend on revenue from a single source, or a limited number of sources, and therefore present greater credit risk relative to a U.S. general obligation security issued by a public sector entity. As discussed in section II.D.2 of this SUPPLEMENTARY INFORMATION section, high credit quality generally indicates that an asset will maintain liquidity, as market participants tend to be more willing to purchase higher credit quality assets across a range of market and economic conditions. Accordingly, the proposed rule would only assign a 50 percent RSF factor to those securities issued by a U.S. public sector entity with sufficiently high credit quality, which is reflected by the fact that they 63 On April 1, 2016, the Board finalized an amendment to the Board’s LCR rule to include certain municipal securities as level 2B liquid assets. 81 FR 21223 (April 11, 2016). As a result of this amendment, certain municipal securities held by covered companies that are Board-regulated institutions would be assigned the 50 percent RSF factor as level 2B liquid assets, notwithstanding this proposed treatment for all general obligation municipal securities. 64 See 12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), and 12 CFR 324.2 (FDIC). 65 Section ll.3 of the LCR rule defines a ‘‘public sector entity’’ as a state, local authority, or other governmental subdivision below the U.S. sovereign entity level. 66 See 12 CFR 3.32(e)(1)(i) (OCC), 12 CFR 217.32(e)(1)(i) (Board), and 12 CFR 324.32(e)(1)(i) (FDIC). 67 See 12 CFR 3.32(e)(1)(ii) (OCC), 12 CFR 217.32(e)(1)(ii) (Board), and 12 CFR 324.32(e)(1)(ii) (FDIC). VerDate Sep<11>2014 19:24 May 31, 2016 Jkt 238001 are assigned a risk weight of no greater than 20 percent under the standardized approach in the agencies’ risk-based capital rules. Because the agencies expect that covered companies will be able to at least partially monetize these securities within the proposed rule’s one-year time horizon, the proposed rule would not require a covered company to fully support these securities with stable funding. Secured Lending Transactions and Unsecured Wholesale Lending to Counterparties That Are Not Financial Sector Entities and Are Not Central Banks and That Mature in Less Than One Year Section ll.106(a)(5)(v) of the proposed rule would assign a 50 percent RSF factor to lending to a wholesale customer or counterparty that is not a financial sector entity or central bank, including a non-financial corporate, sovereign, or public sector entity, that matures in less than one year from the calculation date. Unlike with lending to financial sector entities and central banks, the proposed rule would assign the same RSF factor to lending with a remaining maturity of less than six months as it would assign to lending with a remaining maturity of six months or more, but less than one year. This treatment reflects the fact that a covered company is likely to have stronger incentives to continue to lend to these counterparties due to reputational risk and a covered company’s need to maintain its franchise value, even when the lending is scheduled to mature in the nearer term, as discussed in section II.D.2 of this SUPPLEMENTARY INFORMATION section. Because of that need to continue lending for reputational reasons or the longer term of certain of these loans, the proposed rule would require significant stable funding to support such lending. However, the proposed rule would not require this lending to be fully supported by stable funding, based on its maturity within the NSFR’s one-year time horizon and the assumption that a covered company may be able to reduce its lending to some degree over the NSFR’s one-year time horizon. Thus, the proposed rule would assign an RSF factor of 50 percent to lending in this category. Lending to Retail Customers and Counterparties That Matures in Less Than One Year Section ll.106(a)(5)(v) of the proposed rule would assign a 50 percent RSF factor to lending to retail customers or counterparties (including certain small businesses), as defined in § ll.3 PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 35145 of the LCR rule, for the same reputational and franchise value maintenance reasons for which it would assign a 50 percent RSF factor to lending to wholesale customers and counterparties that are not financial sector entities or central banks, as discussed in section II.D.2 of this Supplementary Information section. All Other Assets That Mature in Less Than One Year Section ll.106(a)(5)(v) of the proposed rule would assign a 50 percent RSF factor to all other assets that mature within one year of the calculation date but are not described in the categories above. The shorter maturity of an asset in this category reduces its liquidity risk, since it provides for cash inflows upon repayment during the NSFR’s oneyear time horizon. However, a covered company may not be able to readily monetize assets that are not part of one of the identified asset classes addressed in the other provisions of the proposed rule. Thus, the proposed rule would require stable funding to support these assets by assigning a 50 percent RSF factor. vi. 65 Percent RSF Factor Retail Mortgages That Mature in One Year or More and Are Assigned a Risk Weight of No Greater Than 50 Percent Section ll.106(a)(6)(i) of the proposed rule would assign a 65 percent RSF factor to retail mortgages that mature one year or more from the calculation date and are assigned a risk weight of no greater than 50 percent under subpart D of the agencies’ riskbased capital rules. Under the agencies’ risk-based capital rules, residential mortgage exposures secured by a first lien on a one-to-four family property that are prudently underwritten, are not 90 days or more past due or carried in nonaccrual status, and that are neither restructured nor modified generally receive a 50 percent risk weight.68 These mortgage loans should be easier to monetize because of their less risky nature compared to mortgage loans that have a risk weight greater than 50 percent, but generally are not as liquid as lending that matures within the NSFR’s one-year time horizon. Thus, the proposed rule would require a 68 See 12 CFR 3.32(g) (OCC), 12 CFR 217.32(g) (Board), and 12 CFR 324.32(g) (FDIC). The proposed rule would be consistent with the Basel III NSFR, which assigns a 65 percent RSF factor to residential mortgages that receive a 35 percent risk weight under the Basel II standardized approach for credit risk, because the agencies’ risk-based capital rules assign a 50 percent risk weight to residential mortgage exposures that meet the same criteria as those that receive a 35 percent risk weight under the Basel II standardized approach for credit risk. E:\FR\FM\01JNP2.SGM 01JNP2 35146 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules substantial amount of stable funding to support these assets by assigning a 65 percent RSF factor to them. Secured Lending Transactions, Unsecured Wholesale Lending, and Lending to Retail Customers and Counterparties That Mature in One Year or More and Are Assigned a Risk Weight of No Greater Than 20 Percent Section ll.106(a)(6)(ii) of the proposed rule would assign a 65 percent RSF factor to secured lending transactions, unsecured wholesale lending, and lending to retail customers and counterparties that are not otherwise assigned an RSF factor, that mature one year or more from the calculation date, that are assigned a risk weight of no greater than 20 percent under subpart D of the agencies’ riskbased capital rules, and where the borrower is not a financial sector entity or a consolidated subsidiary thereof.69 These loans have more favorable liquidity characteristics because of their less risky nature compared to similar loans that have a risk weight greater than 20 percent. However, more stable funding would be required than for lending that matures and provides liquidity within the NSFR’s one-year time horizon. vii. 85 Percent RSF Factor sradovich on DSK3TPTVN1PROD with PROPOSALS2 Retail Mortgages That Mature in One Year or More and Are Assigned a Risk Weight of Greater Than 50 Percent Section ll.106(a)(7)(i) of the proposed rule would assign an 85 percent RSF factor to retail mortgages that mature one year or more from the calculation date and are assigned a risk weight of greater than 50 percent under subpart D of the agencies’ risk-based capital rules. As noted above, under subpart D of the agencies’ risk-based capital rules, a retail mortgage is assigned a risk weight of 50 percent if it is secured by a first lien on a one-tofour family property, prudently underwritten, not 90 days or more past due or carried in nonaccrual status, and has not been restructured or modified.70 Mortgages that do not meet these criteria are assigned a risk weight of greater than 50 percent.71 Because these exposures 69 See 12 CFR 3.32 (OCC), 12 CFR 217.32 (Board), and 12 CFR 324.32 (FDIC). The proposed rule would be consistent with the Basel III NSFR, which assigns a 65 percent RSF factor to loans that receive a 35 percent or lower risk weight under the Basel II standardized approach for credit risk, because the standardized approach in the agencies’ risk-based capital rules does not assign a risk weight that is between 20 and 35 percent to such loans. 70 See supra note 68. 71 Under the agencies’ risk-based capital rules, the risk weight on mortgages may be reduced to less than 50 percent if certain conditions are satisfied. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 are generally riskier than mortgages that receive a risk weight of 50 percent or less and may, as a result, be more difficult to monetize, the proposed rule would require that they be supported by more stable funding and would assign an 85 percent RSF factor to them. Secured Lending Transactions, Unsecured Wholesale Lending, and Lending to Retail Customers and Counterparties That Mature in One Year or More and Are Assigned a Risk Weight of Greater Than 20 Percent Section ll.106(a)(7)(ii) of the proposed rule would assign an 85 percent RSF factor to secured lending transactions, unsecured wholesale lending, and lending to retail customers and counterparties that are not otherwise assigned an RSF factor (such as retail mortgages), that mature one year or more from the calculation date, that are assigned a risk weight greater than 20 percent under subpart D of the agencies’ risk-based capital rules, and for which the borrower is not a financial sector entity or consolidated subsidiary thereof. These loans involve riskier exposures than similar loans with lower risk weights, and thus, have less favorable liquidity characteristics. Accordingly, the proposed rule would require a covered company to support this lending with more stable funding relative to loans that have lower risk weights or that are shorter term. Publicly Traded Common Equity Shares That Are Not HQLA and Other Securities That Mature in One Year or More That Are Not HQLA Sections ll.106(a)(7)(iii) and (iv) of the proposed rule would assign an 85 percent RSF factor to publicly traded common equity shares that are not HQLA and other non-HQLA securities that mature one year or more from the calculation date, which includes, for example, certain corporate debt securities, as well as private-label mortgage-backed securities, other assetbacked securities, and covered bonds. Relative to securities that are HQLA, these securities have less favorable credit and liquidity characteristics, as they do not meet the criteria required by the LCR rule to be treated as HQLA, such as the requirement that they be investment grade and liquid and readily-marketable. For example, high yield corporate debt securities that do not meet the investment grade criterion In these cases, the proposed rule would assign an RSF factor of 65 percent, which is the RSF factor assigned to retail mortgages that mature in one year or more and are assigned a risk weight of no greater than 50 percent. See 12 CFR 3.36 (OCC), 12 CFR 217.36 (Board), and 12 CFR 324.36 (FDIC). PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 in the LCR rule to be treated as HQLA generally have a higher price volatility than other corporate bonds that qualify as HQLA. Despite the less liquid nature of these securities, however, they are tradable and can to some degree be monetized in the secondary market, so the proposed rule would assign an RSF factor of 85 percent to these assets. Commodities Section ll.106(a)(7)(v) of the proposed rule would assign an 85 percent RSF factor to commodities held by a covered company for which a liquid market exists, as indicated by whether derivative transactions for the commodity are traded on a U.S. board of trade or trading facility designated as a contract market (DCM) under sections 5 and 6 of the Commodity Exchange Act72 or on a U.S. swap execution facility (SEF) registered under section 5h of the Commodity Exchange Act.73 The proposal would assign a 100 percent RSF factor to all other commodities held by a covered company. In general, commodities as an asset class have historically experienced greater price volatility than other asset classes. As such, the proposed rule would require a covered company to support its commodities positions with a substantial amount of stable funding. The proposed rule would assign an 85 percent RSF factor, rather than a 100 percent RSF factor, to commodities for which derivative transactions are traded on a U.S. DCM or U.S. SEF because the exchange trading of derivatives on a commodity tends to indicate a greater degree of standardization, fungibility, and liquidity in the market for the commodity.74 For instance, a market for a commodity for which a derivative transaction is traded on a U.S. DCM or U.S. SEF is more likely to have established standards (for example, with respect to different grades of commodities) that are relied upon in determining the commodities that can be provided to effect physical settlement under a derivative transaction. In addition, the exchange-traded market for a commodity derivative transaction generally increases price transparency for the underlying commodity. A covered company could therefore more easily monetize a commodity that meets this requirement than a commodity that does not, either through the spot market or through derivative transactions based on the commodity. The proposed rule 72 7 U.S.C. 7 and 7 U.S.C. 8. U.S.C. 7b-3. 74 Examples of commodities that currently meet this requirement are gold, oil, natural gas, and various agricultural products. 73 7 E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules would accordingly require less stable funding to support holdings of commodities for which derivative transactions are traded on a U.S. DCM or U.S. SEF than it would require for other commodities, which a covered company may not be able to monetize as easily. The agencies note that nothing in the proposed rule would grant a covered company the authority to engage in any activities relating to commodities not otherwise permitted by applicable law. Commodities that would be assigned an 85 percent RSF factor do not include commodity derivatives, which would be included with other derivatives under § ll.107 of the proposed rule. Question 26: What, if any, commodities are traded in a liquid market, but for which there is not a derivative transaction traded on a U.S. DCM or U.S. SEF, such that the commodity should qualify for an 85 percent RSF factor, rather than a 100 percent RSF factor? Question 27: What, if any, commodities would be assigned an 85 percent RSF factor under the proposed rule that should instead be assigned a 100 percent RSF factor? Question 28: The Basel III NSFR assigns an RSF factor of 85 percent to secured lending transactions, unsecured wholesale lending, and lending to retail customers and counterparties that mature in one year or more and are assigned a risk weight of greater than 35 percent, whereas the proposed rule would assign an 85 percent RSF factor to the set of these transactions that are assigned a risk weight of greater than 20 percent. What assets, if any, receive a risk weight between 20 and 35 percent under the standardized approach in the agencies’ risk-based capital rules and should be assigned a 65 percent RSF factor, instead of an 85 percent RSF factor? viii. 100 Percent RSF Factor sradovich on DSK3TPTVN1PROD with PROPOSALS2 All Other Assets Not Described Above Section ll.106(a)(8) of the proposed rule would assign a 100 percent RSF factor to all other assets not otherwise assigned an RSF factor under § ll.106 or § ll.107. These assets include, but are not limited to, loans to financial institutions (including to an unconsolidated affiliate) that mature in one year or more; assets deducted from regulatory capital; 75 common equity 75 Assets deducted from regulatory capital include, but are not limited to, goodwill, deferred tax assets, mortgage servicing assets, and defined benefit pension fund net assets. 12 CFR 3.22 (OCC), VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 shares that are not traded on a public exchange; unposted debits; and trade date receivables that have failed to settle within the lesser of the market standard settlement period for the relevant type of transaction, without extension of the standard settlement period, and five business days from the date of the sale. All assets that are not otherwise assigned an RSF factor of less than 100 percent may not consistently exhibit liquidity characteristics that would suggest a covered company should support them with anything less than full stable funding. Question 29: The agencies invite comment on all aspects of the RSF calculation and the assignment of RSF factors to various assets, derivative exposures, and commitments. For example, what issues of domestic and international competitive equity, if any, might be raised by the proposed assignment of RSF factors? Is the proposed RSF amount calculation adequate to meet the agencies’ goal of ensuring covered companies maintain appropriate amounts of stable funding? Why or why not? Provide detailed explanations and supporting data. b. Nonperforming Assets Section ll.106(b) of the proposed rule would assign a 100 percent RSF factor to any asset on a covered company’s balance sheet that is past due by more than 90 days or nonaccrual.76 Because cash inflows from these assets have an elevated risk of non-payment, these assets tend to be illiquid. The proposed rule would therefore require a covered company to fully support them with stable funding, in order to reduce its risk of having to liquidate them at a discount. c. Treatment of Encumbered Assets Under the proposed rule, the RSF factor assigned to an asset would depend on whether or not the asset is encumbered. As discussed in section I.D of this SUPPLEMENTARY INFORMATION section, the proposed rule would define ‘‘encumbered’’ (a newly defined term under § ll.3), as the converse of the term ‘‘unencumbered’’ currently used in the LCR rule. Encumbered assets generally cannot be monetized during the period in which they are encumbered. Thus, the proposed rule would require encumbered assets to be supported by stable funding depending on the tenor 12 CFR 217.22 (Board), and 12 CFR 324.22 (FDIC). These assets, as a class, tend to be difficult for a covered company to readily monetize. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 35147 of the encumbrance. An asset that is encumbered for less than six months from the calculation date would be assigned the same RSF factor as would be assigned to the asset if it were unencumbered. Because a covered company will have access to the asset and the ability to monetize it in the near term (i.e., within six months), the proposed rule would not require additional stable funding to support it as a result of the encumbrance. An asset that is encumbered for a period of six months or more, but less than one year, would be assigned an RSF factor equal to the greater of 50 percent and the RSF factor the asset would be assigned if it were not encumbered. This treatment would reflect a covered company’s more limited ability to monetize an asset that is subject to an encumbrance period of this length and the corresponding need to support the asset with additional stable funding. For an asset that would receive an RSF factor of less than 50 percent if it were unencumbered, an RSF factor of 50 percent reflects the covered company’s reduced ability to monetize the asset in the near term. For example, a security issued by a U.S. GSE that a covered company has encumbered for a remaining period of six months or more, but less than one year, would be assigned a 50 percent RSF factor, rather than the 15 percent RSF factor that would be assigned if the security were unencumbered. For an asset that would receive an RSF factor of greater than 50 percent if it were unencumbered, the proposed rule’s treatment would reflect the less liquid nature of the asset, which an encumbrance period of less than one year would only marginally make less liquid. For example, a non-HQLA security would continue to be assigned an 85 percent RSF factor if it is encumbered for a remaining period of six months or more, but less than one year. The proposed rule would assign a 100 percent RSF factor to an asset that is encumbered for a remaining period of one year or more because the asset would be unavailable to the covered company for the entirety of the NSFR’s one-year time horizon, so it should be fully supported by stable funding. Table 1 sets forth the RSF factors for assets that are encumbered. 76 The proposed rule’s description of nonperforming assets in § ll.106(b) would be consistent with the definition of ‘‘nonperforming exposure’’ in § ll.3 of the LCR rule. E:\FR\FM\01JNP2.SGM 01JNP2 35148 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules TABLE 1—RSF FACTORS FOR ENCUMBERED ASSETS Asset encumbered ≥1 year (percent) Asset encumbered <6 months Asset encumbered ≥6 months <1 year If RSF factor for unencumbered asset is ≤50 percent: RSF factor for the asset as if it were unencumbered ......... If RSF factor for unencumbered asset is > 50 percent: RSF factor for the asset as if it were unencumbered ......... 50 percent .................................................................................. 100 RSF factor for the asset as if it were unencumbered ................ 100 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Under the proposed rule, the duration of an encumbrance of an asset may exceed the maturity of that asset, as short-dated assets may provide support for longer-dated transactions where the short-dated asset would have to be replaced upon its maturity. Because of this required replacement, a covered company would have to continue funding an eligible asset for the entirety of the encumbrance period. In these cases, although the maturity of the asset is short-term, because the asset provides support for a longer-dated transaction, the encumbrance period more accurately represents the duration of the covered company’s funding requirement. For example, a U.S. Treasury security that matures in three months that is used as collateral in a one-year repurchase agreement would need to be replaced upon the maturity of the security with an asset that meets the requirements of the repurchase agreement. Thus, even though the collateral is short-dated, a covered company would need to fully support an asset with stable funding for the duration of the one-year repurchase agreement, so the required stable funding would be based on a one-year encumbrance period. solely because it is held in a segregated account. Because the inability to monetize the assets in a segregated account is primarily based on the decisions and behaviors of a customer relating to the purpose for which the customer holds the account, the proposed rule would not treat the restriction as a longer-term encumbrance. For example, customer free credits, which are customer funds held prior to their investment, must be segregated until the customer decides to invest or withdraw the funds, so the duration of the restriction is solely based on the behavior of the customer. Accordingly, the proposed rule would treat cash that a covered company places on deposit with a third-party depository institution in accordance with segregation requirements as a short-term loan to a financial sector entity, which would be assigned a 15 percent RSF factor. Similarly, U.S. Treasury securities held by a covered company in a segregated account pursuant to applicable customer protection requirements would be assigned a 5 percent RSF factor. Assets Held in Certain Customer Protection Segregated Accounts Section ll.106(c)(3) of the proposed rule specifies how a covered company would determine the RSF amount associated with an asset held in a segregated account maintained pursuant to statutory or regulatory requirements for the protection of customer assets. Specifically, the proposed rule would require a covered company to assign an RSF factor to an asset held in a segregated account of this type equal to the RSF factor that would be assigned to the asset under § ll.106 as if it were not held in a segregated account. For example, the proposed rule would not consider an asset held pursuant to the SEC’s Rule 15c3–3 77 or the Commodity Futures Trading Commission’s Rule 1.20 or Part 22 78 to be encumbered Section ll.106(d) of the proposed rule specifies how a covered company would determine the RSF amount for a transaction involving either an offbalance sheet asset that secures an NSFR liability or the sale of an offbalance sheet asset that results in an NSFR liability (for instance, in the case of a short sale). For example, a covered company may obtain a security as collateral in a lending transaction (such as a reverse repurchase agreement) with rehypothecation rights and subsequently pledge the security in a borrowing transaction (such as a repurchase agreement). Under this arrangement, it may be the case that the asset obtained and pledged by the covered company is not included on the covered company’s balance sheet under GAAP, in which case the asset would not have a carrying value that would be assigned an RSF factor under 77 17 CFR 240.15c3–3. 78 17 CFR 1.20; 17 CFR part 22. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 d. Treatment of Rehypothecated OffBalance Sheet Assets PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 § ll.106(a) of the proposed rule.79 Nevertheless, such arrangements still affect a covered company’s liquidity risk profile. In cases where a covered company has rehypothecated the offbalance sheet collateral, it has reduced its ability to monetize or recognize inflows from the lending transaction for the duration of the rehypothecation. For example, if a covered company obtains a security as collateral in a lending transaction and rehypothecates the security as collateral in a borrowing transaction, the covered company may need to roll over the lending transaction if it matures before the borrowing transaction. Alternatively, the covered company would need to obtain a replacement asset for the rehypothecated collateral to return to the counterparty under the lending transaction. At the same time, the NSFR liability generated by the borrowing transaction could increase the covered company’s ASF amount, depending on the maturity and other characteristics of the NSFR liability and, absent the proposed treatment in § ll.106(d), the proposed rule would not properly account for the covered company’s increased funding risk. Section ll.106(d) of the proposed rule would address these considerations based on the manner in which the covered company obtained the offbalance sheet asset: Through a lending transaction, asset exchange, or other transaction. Under § ll.106(d)(1) of the proposed rule, if a covered company has obtained the off-balance sheet asset under a lending transaction, the proposed rule would treat the lending transaction as encumbered for the longer of (1) the remaining maturity of the NSFR liability secured by the offbalance sheet asset or resulting from the sale of the off-balance asset, as the case may be, and (2) any other encumbrance period already applicable to the lending transaction. For example, § ll.106(d)(1) would apply if a covered company obtains a level 2A 79 See § ll.102(a) of the proposed rule (rules of construction), as described in section II.A.1 of this SUPPLEMENTARY INFORMATION section. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 liquid asset as collateral under an overnight reverse repurchase agreement with a financial counterparty, and subsequently pledges the level 2A liquid asset as collateral in a repurchase transaction with a maturity of one year or more, but does not include the level 2A liquid asset on its balance sheet. In this case, the proposed rule would treat the balance-sheet receivable associated with the reverse repurchase agreement as encumbered for a period of one year or more, since the remaining maturity of the repurchase agreement secured by the rehypothecated level 2A liquid is one year or more. Accordingly, the proposed rule would assign the reverse repurchase agreement an RSF factor of 100 percent instead of 15 percent. Under this example, the proposed rule would require the covered company to maintain additional stable funding to account for its need to roll over the overnight reverse repurchase agreement for the duration of the repurchase agreement’s maturity or obtain an alternative level 2A liquid asset to return to the counterparty under the reverse repurchase agreement. Under § ll.106(d)(2) of the proposed rule, if a covered company has obtained the off-balance sheet asset under an asset exchange, the proposed rule would treat the asset provided by the covered company in the asset exchange as encumbered for the longer of (1) the remaining maturity of the NSFR liability secured by the offbalance sheet asset or resulting from the sale of the off-balance asset, as the case may be, and (2) any encumbrance period already applicable to the provided asset. For example, § ll.106(d)(2) of the proposed rule would apply if a covered company, acting as a securities borrower, provides a level 2A liquid asset and obtains a level 1 liquid asset under an asset exchange with a remaining maturity of six months, and subsequently provides the level 1 liquid asset as collateral to secure a repurchase agreement that matures in one year or more without including the level 1 liquid asset on its balance sheet.80 In this case, under 80 Where a covered company engages in an asset exchange, acting as a securities borrower, under GAAP, the asset provided by the covered company typically remains on the covered company’s balance sheet while the received asset, if not rehypothecated, would not be on the covered company’s balance sheet. To the extent a covered company includes on its balance sheet an asset received in an asset exchange that the covered company uses as collateral to secure a separate NSFR liability, § ll.106(d) would not apply. Instead, the asset used as collateral would be assigned an RSF factor in the same manner as other assets on the covered company’s balance sheet (including by taking into account that the asset VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 § ll.106(d)(2), the proposed rule would treat the level 2A liquid asset provided by the covered company as encumbered for a period of one year or more (equal to the remaining maturity of the repurchase agreement secured by the rehypothecated level 1 liquid asset) instead of six months (equal to the remaining maturity of the asset exchange) and would assign an RSF factor of 100 percent instead of 50 percent to the level 2A liquid asset. In this case, the proposed rule would require the covered company to maintain additional stable funding to account for its need to roll over the asset exchange for the duration of the secured funding transaction’s maturity or obtain an alternative level 1 liquid asset to return to the counterparty under the asset exchange. If a covered company has an encumbered off-balance sheet asset that it did not obtain under either a lending transaction or an asset exchange, § ll.106(d)(3) of the proposed rule would require the covered company to treat the off-balance sheet asset as if it were on the covered company’s balance sheet and encumbered for a period equal to the remaining maturity of the NSFR liability. This treatment would prevent a covered company from recognizing available stable funding amounts from the NSFR liability without recognizing corresponding required stable funding amounts associated with the encumbered offbalance sheet asset. In cases where a covered company has provided an asset as collateral, and the company operationally could have provided either an off-balance sheet asset or an identical on-balance sheet asset from its inventory, the proposed rule would not restrict the covered company’s ability to identify either the off-balance sheet asset or the identical on-balance sheet asset as the provided collateral, for purposes of determining encumbrance treatment under § ll.106(c) and (d). The covered company’s identification for purposes of § ll.106(c) and (d) must be consistent with contractual and other applicable requirements and the rest of the covered company’s NSFR calculations. For example, if a covered company receives a security in a reverse repurchase agreement that is identical to a security the covered company already owns, and the covered company provides one of these securities as collateral to secure a repurchase agreement, the proposed rule would not restrict the covered company from identifying, for purposes would be encumbered) pursuant to § ll.106(a) through (c) or § ll.107, as applicable. PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 35149 of determining encumbrance treatment under § ll.106(c) and (d), either the owned or borrowed security as the collateral for the repurchase agreement, provided that the covered company has the operational and legal capability to provide either one of the securities. If the covered company chooses to treat the off-balance sheet security received from the reverse repurchase agreement as the collateral securing the repurchase agreement, § ll.106(d)(1) would apply and the covered company would treat the reverse repurchase agreement as encumbered for purposes of assigning an RSF factor. If the covered company instead chooses to treat the owned security as the collateral encumbered by the repurchase agreement, the covered company would apply the appropriate RSF factor (reflecting the encumbrance) to the owned security under § ll.106(c) and no additional encumbrance would apply to the reverse repurchase agreement under § ll.106(d). The same treatment would apply for a covered company’s sale of a security and the covered company’s ability to identify whether it has sold a security from its inventory or an identical security received from a lending transaction, asset exchange, or other transaction. Question 30: The agencies invite comment on possible alternative approaches relating to off-balance sheet assets that secure NSFR liabilities of the covered company. Please include discussion as to whether and why any alternative approach would more accurately reflect a covered company’s funding risk, provide greater consistency across transactional structures, or be more operationally efficient than the approach in § ll.106(d) of the proposed rule. Question 31: The agencies request comment on a possible alternative that would, instead of applying an additional encumbrance to a related onbalance sheet asset, assign an RSF factor to the off-balance sheet asset and an ASF factor to an obligation to return the asset as if both the off-balance sheet asset and the obligation to return the asset were included on the covered company’s balance sheet. If adopted, should such an alternative apply in all cases, or only where the covered company encumbers the asset for a period longer than the maturity of the obligation to return it? Question 32: Should the approach in § ll.106(d) of the proposed rule be modified to more specifically describe how the encumbrance treatment would apply if a covered company has rehypothecated only a portion of the E:\FR\FM\01JNP2.SGM 01JNP2 35150 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules collateral received under a lending transaction or asset exchange? Question 33: To the extent a covered company encumbers off-balance sheet assets received under a lending transaction or asset exchange and the value of the assets exceeds the value of the lending transaction or asset provided by the covered company, should an RSF factor be assigned to the excess value of the off-balance sheet assets as if they were included on the balance sheet of the covered company? Question 34: Is it appropriate to apply any encumbrance treatment to transactions involving off-balance sheet collateral? Would the proposed approach in § ll.106(d) present operational difficulties, and if so, what modifications could be made to reduce such difficulties? To what extent would operational ease or difficulties vary based on the type of transactions involved, such as whether a covered company has obtained an off-balance sheet asset from a lending transaction or an asset exchange? sradovich on DSK3TPTVN1PROD with PROPOSALS2 E. Derivative Transactions Under the proposed rule, a covered company would calculate its required stable funding relating to its derivative transactions 81 (its derivatives RSF amount) separately from its other assets and commitments.82 This calculation would be separate based on the generally more complex features of derivative transactions and variable nature of derivative exposures. For similar reasons, the proposed rule would not separately treat derivatives liabilities as available stable funding, as described below. A covered company’s derivatives RSF amount would reflect three components: (1) The current value 81 As defined in § ll.3 of the LCR rule, ‘‘derivative transaction’’ means a financial contract whose value is derived from the values of one or more underlying assets, reference rates, or indices of asset values or reference rates. Derivative contracts include interest rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, credit derivative contracts, forward contracts, and any other instrument that poses similar counterparty credit risks. Derivative contracts also include unsettled securities, commodities, and foreign currency exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or five business days. A derivative does not include any identified banking product, as that term is defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)). 82 The proposed rule would include mortgage commitments that are derivative transactions in the general derivative transactions treatment, in contrast to the LCR rule, which excludes those transactions and applies a separate, self-contained mortgage treatment. See § ll.32(c) and (d) of the LCR rule. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 of a covered company’s derivatives assets and liabilities, (2) initial margin provided by a covered company pursuant to derivative transactions and assets contributed by a covered company to a CCP’s mutualized loss sharing arrangement in connection with cleared derivative transactions, and (3) potential future changes in the value of a covered company’s derivatives portfolio. Section II.E.7 of this SUPPLEMENTARY INFORMATION section below includes an example of a derivatives RSF amount calculation. 1. NSFR Derivatives Asset or Liability Amount Under the proposed rule, the stable funding requirement for the current value of a covered company’s derivative assets and liabilities would be based on an aggregated measure of the covered company’s derivatives portfolio. As described below, a covered company would sum its derivative asset and liability positions across transactions, taking into account variation margin.83 A covered company would then net the derivative asset and liability totals against each other to determine whether its portfolio has an overall asset or liability position (an NSFR derivatives asset amount or NSFR derivatives liability amount, respectively). By netting across different counterparties and different derivative transactions (including different types of derivative transactions), the proposed rule would estimate the overall current position and funding needs associated with a covered company’s derivatives portfolio in a manner that offers operational and administrative efficiencies relative to other approaches. In addition, use of a standardized measure would promote greater consistency and comparability across covered companies. A covered company would determine its NSFR derivatives asset amount or NSFR derivatives liability amount, whichever the case may be, by the following calculation steps, which are set forth in § ll.107 of the proposed rule: 83 As discussed in section II.E.5 of this section below, § ll.107(b)(5) of the proposed rule would require a covered company, when it calculates its required stable funding amount associated with potential future derivatives portfolio valuation changes, to disregard settlement payments based on changes in the value of its derivative transactions. This adjustment would apply only for purposes of the calculation under § ll.107(b)(5). Accordingly, a covered company would not exclude these settlement payments for purposes of calculating its required stable funding amount associated with the current value of its derivative transactions under § ll.107(b)(1) and (d) through (f). SUPPLEMENTARY INFORMATION PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 Step 1: Calculation of Derivatives Asset and Liability Values Under § ll.107(f) of the proposed rule, a covered company would calculate the asset and liability values of its derivative transactions after netting certain variation margin received and provided. For each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set of a covered company, the derivatives asset value would equal the asset value to the covered company after netting any cash variation margin received by the covered company that meets the conditions of § ll.10(c)(4)(ii)(C)(1) through (7) of the SLR rule,84 or the derivatives liability value would equal the liability value to the covered company after netting any variation margin provided by the covered company. (Each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set would have either a derivatives asset value or derivatives liability value.) The proposed rule would restrict netting of variation margin received by a covered company but not variation margin provided by a covered company for purposes of this calculation in order to prevent understatement of the covered company’s derivatives RSF amount. For variation margin received by a covered company, the proposed rule would recognize only netting of cash variation margin because other forms of variation margin, such as securities, may have associated risks, such as market risk, that are not present with cash. The proposed rule would also require variation margin received to meet the conditions of § ll.10(c)(4)(ii)(C)(1) through (7) the SLR rule in order to be recognized as netting the asset value of a derivative transaction.85 The regular and timely 84 12 CFR 3.10(c)(4)(ii)(C) (OCC), 12 CFR 217.10(c)(4)(ii)(C) (Board), and 12 CFR 324.10(c)(4)(ii)(C) (FDIC). See infra note 85. 85 Id. These conditions are: (1) Cash collateral received is not segregated; (2) variation margin is calculated on a daily basis based on mark-to-fair value of the derivative contract; (3) variation margin transferred is the full amount necessary to fully extinguish the net current credit exposure to the counterparty, subject to the applicable threshold and minimum transfer amounts; (4) variation margin is cash in the same currency as the settlement currency in the contract; (5) the derivative contract and the variation margin are governed by a qualifying master netting agreement between the counterparties to the contract, which stipulates that the counterparties agree to settle any payment obligations on a net basis, taking into account any variation margin received or provided; (6) variation margin is used to reduce the current credit exposure of the derivative contract and not the PFE (as that term is defined in the SLR rule); E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules exchange of cash variation margin that meets these conditions helps to protect a covered company from the effects of a counterparty default. In contrast to the treatment of variation margin received by a covered company, the proposed rule would recognize netting of all forms of variation margin provided by a covered company. As described in step 3 below, a covered company’s derivatives liability values would ultimately be netted against its derivatives asset values, which are assigned a 100 percent RSF factor. Because variation margin provided by a covered company reduces its derivatives liability values, a limitation on netting variation margin provided would lower a covered company’s derivatives RSF amount, which would be the opposite effect of the proposed rule’s limitation on netting variation margin received and could lead to an understatement of a covered company’s stable funding requirement. For this reason, all forms of variation margin provided by a covered company would be netted against its derivatives liabilities. The proposed rule would not permit a covered company to net initial margin provided or received against its derivatives liability or asset values as part of its calculation of its NSFR derivatives asset or liability amount. Unlike variation margin, which the parties to a derivative transaction exchange to account for valuation changes of the transaction, initial margin is meant to cover a party’s potential losses in connection with a counterparty’s default (e.g., the cost a party would incur to replace the defaulted transaction with a new, equivalent transaction with a different counterparty). Therefore, while variation margin is relevant to the calculation of the current value of a covered company’s derivatives portfolio, initial margin would not factor into the proposed rule’s measure of the current value of a covered company’s derivatives portfolio. Initial margin would be subject to a separate treatment under the proposed rule, as described in further detail below. sradovich on DSK3TPTVN1PROD with PROPOSALS2 Step 2: Calculation of Total Derivatives Asset and Liability Amounts Under § ll.107(e) of the proposed rule, a covered company would sum all of its derivatives asset values, as calculated under § ll.107(f)(1), to arrive at its ‘‘total derivatives asset and (7) variation margin may not reduce net or gross credit exposure for purposes of calculating the Net-to-gross Ratio (as that term is defined in the SLR rule). VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 amount’’ and sum all of its derivatives liability values, as calculated under § ll.107(f)(2), to arrive at its ‘‘total derivatives liability amount.’’ These amounts would represent the covered company’s aggregated derivatives assets and liabilities, inclusive of netting certain variation margin. Step 3: Calculation of NSFR Derivatives Asset or Liability Amount Under § ll.107(d) of the proposed rule, a covered company would net its total derivatives asset amount against its total derivatives liability amount, each as calculated under § ll.107(e). If a covered company’s total derivatives asset amount exceeds its total derivatives liability amount, the covered company would have an ‘‘NSFR derivatives asset amount.’’ Conversely, if the total derivatives liability amount exceeds the total derivatives asset amount, the covered company would have an ‘‘NSFR derivatives liability amount.’’ Section ll.107(b)(1) of the proposed rule would assign a 100 percent RSF factor to a covered company’s NSFR derivatives asset amount because, as an asset class, derivative assets have a wide range of risk and volatility, and, therefore, a covered company should have full stable funding for such assets. Section ll.107(c)(1) of the proposed rule would assign a zero percent ASF factor to a covered company’s NSFR derivatives liability amount. Because of the variable nature of such liabilities, this amount would not represent stable funding. Question 35: What changes, if any, should be made to the proposed rule’s mechanics for calculating a covered company’s RSF and ASF amounts associated with its current exposures under derivative transactions and why? What alternative approach, if any, would be more appropriate? For example, should ASF and RSF factors be assigned to the current asset or liability values of each separate derivative transaction or QMNA netting set using the frameworks specified in §§ ll.104 and ll.106? 2. Variation Margin Provided and Received and Initial Margin Received As described in section II.E.1 above of this SUPPLEMENTARY INFORMATION section, a covered company’s calculation of its current derivative transaction values would take into account netting due to variation margin received and provided by the covered company. The proposed rule would, in addition, require a covered company to maintain stable funding for assets on its balance sheet that it has received as PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 35151 variation margin and certain assets that it has provided as variation margin in connection with derivative transactions. Variation margin provided by a covered company. Sections ll.107(b)(2) and (3) of the proposed rule would assign an RSF factor to variation margin provided by a covered company based on whether the variation margin reduces the covered company’s derivatives liability value under the relevant derivative transaction or QMNA netting set or whether it is ‘‘excess’’ variation margin. If the variation margin reduces a covered company’s derivatives liability value for a particular QMNA netting set or derivative transaction not subject to a qualifying master netting agreement, the proposed rule would assign the carrying value of such variation margin a zero percent RSF factor. As described above, such variation margin provided already reduces the covered company’s derivatives liabilities that are able to net against its derivatives assets. To the extent a covered company provides ‘‘excess’’ variation margin with respect to a derivative transaction or QMNA netting set—meaning, an amount of variation margin that does not reduce the covered company’s derivatives liability value—and includes the excess variation margin asset on its balance sheet, the proposed rule would assign such excess variation margin an RSF factor under § ll.106, according to the characteristics of the asset or balance sheet receivable associated with the asset, as applicable. Because excess variation margin does not reduce a covered company’s derivatives liabilities that are able to net against its derivatives assets, the covered company’s NSFR derivatives asset or liability amount would not already account for these assets. The proposed rule would therefore assign RSF factors to excess variation margin remaining on a covered company’s balance sheet to reflect the required stable funding appropriate for the assets. Variation margin received by a covered company. Section ll.107(b)(4) of the proposed rule would require all variation margin received by a covered company that is on the covered company’s balance sheet to be assigned an RSF factor under § ll.106, according to the characteristics of each asset received. Cash variation margin received, for example, would be assigned an RSF factor of zero percent. If that cash is used to purchase another asset, the new asset would be assigned the appropriate RSF factor under § ll.106. The proposed rule would assign a zero percent ASF factor to any NSFR E:\FR\FM\01JNP2.SGM 01JNP2 35152 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 liability that arises from an obligation to return initial margin or variation margin received by a covered company related to its derivative transactions. Given that these liabilities can change based on the underlying derivative transactions and remain, at most, only for the duration of the associated derivative transactions, they do not represent stable funding for a covered company. This treatment would apply regardless of the form of the initial margin or variation margin, whether securities or cash, because the liability is dependent on the underlying derivative transactions in either case. Question 36: What changes, if any, should be made to the proposed rule’s treatment of variation margin, including the RSF factors that are assigned to variation margin received or provided by a covered company? Question 37: Are there alternative RSF factors that should be applied to variation margin received by a covered company that does not meet the conditions of § ll.10(c)(4)(ii)(C)(1) through (7) of the SLR rule and is not excess variation margin and, if so, why would the alternative RSF factor be more appropriate? Question 38: Are there any liabilities associated with the obligation to return variation margin that should be assigned an alternative ASF factor and why? For example, the Basel III NSFR does not explicitly exclude assigning an ASF factor to obligations to return variation margin that meet the conditions of § ll.10(c)(4)(ii)(C)(1) through (7) of the SLR rule. Are there any liabilities associated with the obligations to return this variation margin that would have a sufficiently long maturity to be assigned an alternative ASF factor (i.e., six months or greater)? 3. Customer Cleared Derivative Transactions For a covered company that is a clearing member of a CCP, the covered company’s NSFR derivatives asset amount or NSFR derivatives liability amount would not include the value of a cleared derivative transaction that the covered company, acting as agent, has submitted to the CCP on behalf of the covered company’s customer, including when the covered company has provided a guarantee to the CCP for the performance of the customer. These derivative transactions are assets or liabilities of a covered company’s customer, and the proposed rule would not include them as derivative assets or liabilities of the covered company. Similarly, because variation margin provided or received in connection with customer derivative transactions would VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 not impact the current value of the covered company’s derivative transactions, these amounts would also not be included in the covered company’s calculations under § ll.107. To the extent a covered company includes on its balance sheet under GAAP a derivative asset or liability value (as opposed to a receivable or payable in connection with a derivative transaction, as discussed below) associated with a customer cleared derivative transaction, the derivative transaction would constitute a derivative transaction of the covered company for purposes of § ll.107 of the proposed rule. For example, if the covered company must perform according to a guarantee to the CCP of the performance of the customer such that the transaction becomes a derivative transaction of the covered company (e.g., following a default by a covered company’s customer), such transaction would typically be included on the balance sheet of the covered company and would fall within the proposed rule’s derivatives treatment under § ll.107. To the extent a covered company has an asset or liability on its balance sheet associated with a customer derivative transaction that is not a derivative asset or liability—for example, if a covered company has extended credit on behalf of a customer to cover a variation margin payment or a covered company holds customer funds relating to derivative transactions in a customer protection segregated account discussed in section II.D.3.c of this SUPPLEMENTARY INFORMATION section—such asset or liability of the covered company would be assigned an RSF factor under § ll.106 or an ASF factor under § ll.104, respectively. Accordingly, to the extent a covered company’s balance sheet includes a receivable asset owed by a CCP or payable liability owed to a CCP in connection with customer receipts and payments under derivative transactions, this asset or liability would not constitute a derivative asset or liability of the covered company and would not be included in the covered company’s calculations under § ll.107 of the proposed rule. A covered company’s NSFR derivatives asset amount or NSFR derivatives liability amount would include the asset or liability values of derivative transactions between a CCP and a covered company where the covered company has entered into an offsetting transaction (commonly known as a ‘‘back-to-back’’ transaction). Because a covered company would have obligations as a principal under both PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 derivative transactions comprising the back-to-back transaction, any asset or liability values arising from these transactions, or any variation margin provided or received in connection with these transactions, would be included in the covered company’s calculations under § ll.107. Question 39: Under what circumstances, if any, should the asset or liability values of a covered company’s customer’s cleared derivative transactions be included in the calculation of a covered company’s NSFR derivatives asset amount or NSFR derivatives liability amount? Question 40: Other than in connection with a default by a covered company’s customer, under what circumstances, if any, would the value of a cleared derivative transaction that the covered company, acting as agent, has submitted to a CCP on behalf of the covered company’s customer, appear on a covered company’s balance sheet? If there are such circumstances, should these derivative assets or liabilities be excluded from a covered company’s calculation of its derivatives RSF amount under § ll.107 of the proposed rule, and why? 4. Assets Contributed to a CCP’s Mutualized Loss Sharing Arrangement and Initial Margin Section ll.107(b)(6) of the proposed rule would assign an 85 percent RSF factor to the fair value of assets contributed by a covered company to a CCP’s mutualized loss sharing arrangement. Similarly, § ll.107(b)(7) of the proposed rule would assign to the fair value of initial margin provided by a covered company the higher of an 85 percent RSF factor or the RSF factor assigned to the initial margin asset pursuant to § ll.106. The proposed rule would assign an RSF factor of at least 85 percent to these forms of collateral based on the assumption that a covered company generally must maintain its initial margin or CCP mutualized loss sharing arrangement contributions in order to maintain its derivatives activities. The proposed rule would not set the RSF factor at 100 percent, however, because a covered company, to some degree, may be able to reduce or otherwise adjust its derivatives activities such that they require a smaller amount of contributions to CCP mutualized loss sharing arrangements or initial margin. In cases where a covered company provides as initial margin an asset that would be assigned an RSF factor of greater than 85 percent if it were not provided as initial margin, the covered company would assign the normally E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules applicable RSF factor to the asset rather than reducing the RSF factor to 85 percent. For example, if a covered company provides as initial margin an asset that would otherwise be assigned a 100 percent RSF factor under § ll.106 of the proposed rule, the covered company’s act of providing the asset as initial margin would not enhance the asset’s liquidity such that the applicable RSF factor should be reduced to 85 percent. Instead, the asset would continue to be assigned an RSF factor of 100 percent. The proposed rule would assign an RSF factor to the fair value of a covered company’s contributions to a CCP’s mutualized loss sharing arrangement or initial margin provided by a covered company regardless of whether the contribution or initial margin is included on the covered company’s balance sheet. A covered company would face the same funding requirements and risks associated with these assets regardless of whether or not it includes the assets on its balance sheet. To the extent a covered company includes on its balance sheet a receivable for an asset contributed to a CCP’s mutualized loss sharing arrangement or provided as initial margin, rather than the asset itself, the proposed rule would assign an RSF factor to the fair value of the asset, ignoring the receivable, in order to avoid double counting. The proposed rule would not assign an RSF factor under § ll.107 of the proposed rule to initial margin provided by a covered company acting as an agent for a customer’s cleared derivative transactions where the covered company does not provide a guarantee to the customer with respect to the return of the initial margin to the customer. A covered company would not include this form of initial margin in its derivatives RSF amount because the customer is obligated to fund the initial margin under the customer transaction for the duration of the transaction, so the covered company faces limited liquidity risk. To the extent a covered company includes on its balance sheet any such initial margin, this initial margin would instead be assigned an RSF factor pursuant to § ll.106 of the proposed rule and any corresponding liability would be assigned an ASF factor pursuant to § ll.104. Question 41: What other RSF factor, if any, would be more appropriate for initial margin and assets contributed to a mutualized loss sharing arrangement? For example, would it be more appropriate to apply a 100 percent RSF factor, based on an assumption that a VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 covered company would generally maintain its derivatives activities at current levels, such that the covered company should be required to fully support these obligations with stable funding? Question 42: Should assets contributed by a covered company to a CCP’s mutualized loss sharing arrangement be treated differently than initial margin provided by a covered company? If so, how should these assets be treated and why? 5. Derivatives Portfolio Potential Valuation Changes As the value of a company’s derivative transactions decline, the company may be required to provide variation margin or make settlement payments to its counterparty. The proposed rule would therefore require a covered company to maintain available stable funding to support these potential variation margin and settlement payment outflows. Specifically, a covered company’s derivatives RSF amount would include an additional component that is intended to address liquidity risk associated with potential changes in the value of the covered company’s derivative transactions. Under § ll.107(b)(5) of the proposed rule, this additional component would equal 20 percent of the sum of a covered company’s ‘‘gross derivative values’’ that are liabilities under each of its derivative transactions not subject to a qualifying master netting agreement and each of its QMNA netting sets, multiplied by an RSF factor of 100 percent.86 For purposes of this calculation, the ‘‘gross derivative value’’ of a derivative transaction not subject to a qualifying master netting agreement or of a QMNA netting set would equal the value to the covered company, calculated as if no variation margin had been exchanged and no settlement payments had been made based on changes in the values of the derivative transaction or QMNA netting set.87 A covered company would 86 As discussed in section II.E.3 of this section, for a covered company that is a clearing member of a CCP, the company’s calculation of its RSF measure for potential derivatives future valuation changes would generally not include gross derivative values of the covered company’s customers’ cleared derivative transactions where the covered company acts as agent for the customers. As with other components of a covered company’s derivatives RSF amount calculation, however, the RSF measure for potential future valuation changes would include such derivative transactions that the covered company includes on its balance sheet under GAAP. 87 Other payments made under a derivative transaction, such as periodic fixed-for-floating payments under an interest rate swap, would not SUPPLEMENTARY INFORMATION PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 35153 not include in the sum any gross derivative values that are assets. For example, if a covered company has a derivative transaction not subject to a qualifying master netting agreement whose value on day 1 is $0, and the value moves to ¥$10 on day 2 and the covered company provides $10 of variation margin, the covered company’s gross derivative value on day 2 (if day 2 is an NSFR calculation date) attributable to the derivative transaction for purposes of this calculation would be a liability of $10. If the value subsequently moves to ¥$8 on day 3 and the covered company receives $2 of variation margin returned (resulting in a net of $8 of variation margin provided by the covered company), the covered company’s gross derivative value on day 3 (if day 3 is an NSFR calculation date) attributable to the derivative transaction for purposes of this calculation would be a liability of $8. The gross derivative values on day 2 and day 3 for purposes of this calculation would be the same if the covered company had provided a net of $10 and $8 in settlement payments, respectively, over the life of the same derivative transaction instead of $10 and $8 of variation margin. In considering the appropriate measure to account for these risks in the NSFR calculation, the agencies reviewed public and supervisory information on the volatility of derivatives assets and liabilities and the associated value of collateral received and provided, including the fair value of derivatives assets and liabilities as reported on GAAP financial statements, the fair value of derivatives assets and liabilities excluding collateral received or provided, the proportion of collateralized and uncollateralized derivatives assets and liabilities, and the fair value of collateral provided and received. Over the periods reviewed, collateral inflows and outflows associated with derivative valuation changes—and consequent liquidity risks—exhibited material volatility. The proposed 20 percent factor falls within the range of observed volatility when measured relative to derivatives liabilities excluding collateral received or provided. The proposed rule would treat variation margin and settlement payments based on changes in the value of a derivative transaction similarly because both variation margin and these settlement payments are intended to reduce a party’s current exposure under a derivative transaction or QMNA be considered settlement payments based on changes in the value of a derivative transaction for purposes of this calculation. E:\FR\FM\01JNP2.SGM 01JNP2 35154 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 netting set. This RSF measure for potential valuation changes would account for the different liquidity risks faced by a covered company that has little or no derivatives activity versus the liquidity risks of a covered company that has a significant amount of derivative transactions, but that has to date covered all changes in the value of derivative transactions with variation margin or settlement payments. Question 43: The agencies are considering alternative methodologies for capturing the potential volatility of a covered company’s derivatives portfolio, and associated funding needs, within the NSFR framework. One alternative to the proposed treatment would be to require an RSF amount based on a covered company’s historical experience. Under such an alternative, a factor could be based on the historical changes in a covered company’s aggregate derivatives position, such as the largest, 99th, or 95th percentile annual change in the value of a covered company’s derivative transactions over the prior two or five years. Another alternative could be to require an RSF amount based on modeled estimates of potential future exposure. Commenters are encouraged to provide feedback on methodologies, both those discussed and other potential alternatives, that best capture the funding risk associated with potential valuation changes in a covered company’s derivatives portfolio, are conceptually sound, and are supported by data. Question 44: What operational challenges, if any, arise from the proposed measurement of gross derivatives liabilities? Question 45: Is it appropriate to treat variation margin payments and settlement payments identically for purposes of the RSF measure for derivative portfolio potential future valuation changes? Should the agencies distinguish between variation margin payments that are treated as collateral and payments that settle an outstanding derivatives liability, and if so, why? If it is appropriate to distinguish between these types of payments, what legal, accounting, or other criteria should be used to distinguish between them? 6. Derivatives RSF Amount Under the proposed rule, a covered company would sum the required stable funding amounts calculated under § ll.107 to determine the company’s derivatives RSF amount. As described in section II.D.1 of this Supplementary Information section, a covered company would add its derivatives RSF amount to its other required stable funding amounts calculated under § ll.105(a) VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 of the proposed rule to determine its overall RSF amount, which would be the denominator of its NSFR. A covered company’s derivatives RSF amount would include the following components under § ll.107(b) of the proposed rule: (1) The required stable funding amount for the current value of a covered company’s derivatives assets and liabilities, which, as described in section II.E.1 of this SUPPLEMENTARY INFORMATION section, is equal to the covered company’s NSFR derivatives asset amount, multiplied by an RSF factor of 100 percent; (2) The required stable funding amount for non-excess variation margin provided by the covered company, which, as described in section II.E.2 of this SUPPLEMENTARY INFORMATION section, equals the carrying value of variation margin provided by the covered company under each of its derivative transactions not subject to a qualifying master netting agreement and each of its QMNA netting sets that reduces the covered company’s derivatives liability value of the relevant derivative transaction or QMNA netting set, multiplied by an RSF factor of zero percent; (3) The required stable funding amount for excess variation margin provided by the covered company, which, as described in section II.E.2 of this SUPPLEMENTARY INFORMATION section, equals the sum of the carrying values of each excess variation margin asset provided by the covered company, multiplied by the RSF factor assigned to the asset pursuant to § ll.106; (4) The required stable funding amount for variation margin received by the covered company, which, as described in section II.E.2 of this SUPPLEMENTARY INFORMATION section, equals the sum carrying values of each variation margin asset received by the covered company, multiplied by the RSF factor assigned to the asset pursuant to § ll.106; (5) The required stable funding amount for potential future valuation changes of the covered company’s derivatives portfolio, which, as described in section II.E.5 of this SUPPLEMENTARY INFORMATION section, equals 20 percent of the sum of the covered company’s gross derivatives liabilities, when calculated as if no variation margin had been exchanged and no settlement payments had been made based on changes in the values of the derivative transactions, multiplied by an RSF factor of 100 percent; (6) The required stable funding amount for the covered company’s contributions to CCP mutualized loss PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 sharing arrangements, which, as described in section II.E.4 of this SUPPLEMENTARY INFORMATION section, equals the sum of the fair values of the covered company’s contributions to CCPs’ mutualized loss sharing arrangements (regardless of whether a contribution is included on the covered company’s balance sheet), multiplied by an RSF factor of 85 percent; and (7) The required stable funding amount for initial margin provided by the covered company, which, as described in section II.E.4 of this SUPPLEMENTARY INFORMATION section, equals the sum of fair values of each initial margin asset provided by the covered company for derivative transactions (regardless of whether it is included on the covered company’s balance sheet), multiplied by the higher of an RSF factor of 85 percent and the RSF factor assigned to the initial margin asset pursuant to § ll.106. As noted above, the covered company would not include as part of its derivatives RSF amount under § ll.107 initial margin provided for a derivative transaction under which the covered company acts as agent for a customer and does not guarantee the obligations of the customer’s counterparty, such as a CCP, to the customer under the derivative transaction. (Such initial margin would instead be assigned an RSF factor pursuant to § ll.106 of the proposed rule, as described in section II.E.4 of this Supplementary Information section.) Question 46: The agencies invite comment regarding the proposed rule’s approach for determining RSF and ASF amounts with respect to derivative transactions. What alternative approach, if any, would be more appropriate? 7. Derivatives RSF Amount Numerical Example The following is a numerical example illustrating the calculation of a covered company’s derivatives RSF amount under the proposed rule. Table 2 sets forth the facts of the example, which assumes that: (1) A qualifying master netting agreement exists between each of the counterparties and each of the transactions thereunder are part of a single QMNA netting set, (2) any variation margin received is in the form of cash and meets the conditions of § ll.10(c)(4)(ii)(C)(1) through (7) of the SLR rule,88 (3) no variation margin provided by the covered company remains on the covered company’s balance sheet, (4) the covered company 88 12 CFR 3.10(c)(4)(ii)(C)(1)–(7) (OCC), 12 CFR 217.10(c)(4)(ii)(C)(1)–(7) (Board), and 12 CFR 324.10(c)(4)(ii)(C)(1)–(7) (FDIC). E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules has provided U.S. Treasuries as initial margin to its counterparties, and (5) the derivative transactions are not cleared through a CCP (i.e., the covered company has not contributed any assets 35155 to a CCP’s mutualized loss sharing arrangement). TABLE 2—DERIVATIVE TRANSACTIONS NUMERICAL EXAMPLE FACT PATTERN Asset (liability) value for the covered company, prior to netting variation margin sradovich on DSK3TPTVN1PROD with PROPOSALS2 Counterparty A: Derivative 1A Derivative 2A Counterparty B: Derivative 1B Derivative 2B Counterparty C: Derivative 1C Variation margin provided (received) by the covered company Initial margin provided by the covered company ...................................................................................................... ...................................................................................................... 10 (2) (2) 2 ...................................................................................................... ...................................................................................................... (10) 5 3 1 ...................................................................................................... (2) 0 0 Calculation of derivatives assets and liabilities. (1) The derivatives asset value for counterparty A = (10¥2)¥2 = 6. (2) The derivatives liability value for counterparty B = (10¥5)¥3 = 2. The derivatives liability value for counterparty C = 2. Calculation of total derivatives asset and liability amounts. (1) The covered company’s total derivatives asset amount = 6. (2) The covered company’s total derivatives liability amount = 2 + 2 = 4. Calculation of NSFR derivatives asset or liability amount. (1) The covered company’s NSFR derivatives asset amount = max (0, 6¥4) = 2. (2) The covered company’s NSFR derivatives liability amount = max (0, 4¥6) = 0. Required stable funding relating to derivative transactions. The covered company’s derivatives RSF amount is equal to the sum of the following: (1) NSFR derivatives asset amount × 100% = 2 × 1.0 = 2; (2) Non-excess variation margin provided × 0% = 3 × 0.0 = 0; (3) Excess variation provided × applicable RSF factor(s) = 0; (4) Variation margin received × applicable RSF factor(s) = 2 × 0.0 = 0; (5) Gross derivatives liabilities × 20% × 100% = (5 + 2) × 0.2 × 1.0 = 1.4; (6) Contributions to CCP mutualized loss-sharing arrangements × 85% = 0 × 0.85 = 0; and (7) Initial margin provided × higher of 85% or applicable RSF factor(s) = (2 + 1) × max (0.85, 0.05) = 2.55. The covered company’s derivatives RSF amount = 2 + 0 + 0 + 0 + 1.4 + 0 + 2.55 = 5.95. VerDate Sep<11>2014 19:24 May 31, 2016 Jkt 238001 F. NSFR Consolidation Limitations In general, the proposed rule would require a covered company to calculate its NSFR on a consolidated basis. When calculating ASF amounts from a consolidated subsidiary, however, the proposed rule would require a covered company to take into account restrictions on the availability of stable funding of the consolidated subsidiary to support assets, derivative exposures, and commitments of the covered company held at entities other than the subsidiary. Specifically, to the extent a covered company has an ASF amount associated with a consolidated subsidiary that exceeds the RSF amount associated with the subsidiary (each as calculated by the covered company for purposes of the covered company’s NSFR),89 the proposed rule would permit the covered company to include such ‘‘excess’’ ASF amounts in its consolidated ASF amount only to the extent the consolidated subsidiary may transfer assets to the top-tier entity of the covered company, taking into account statutory, regulatory, contractual, or supervisory restrictions. For example, if a covered company calculates a required stable funding amount of $90 based on the assets, derivative exposures, and commitments of a consolidated subsidiary and an available stable funding amount of $100 89 ASF amounts associated with a consolidated subsidiary, in this context, refer to those amounts that would be calculated from the perspective of the covered company (e.g., in calculating the ASF amount of a consolidated subsidiary that can be included in the covered company’s consolidated ASF amount, the covered company would not include certain transactions between consolidated subsidiaries that are netted under GAAP). For this reason, an ASF amount of a consolidated subsidiary that is included in a covered company’s consolidated NSFR calculation may not be equal to the ASF amount of the consolidated subsidiary when calculated on a standalone basis if the consolidated subsidiary is itself a covered company. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 based on the NSFR regulatory capital elements and NSFR liabilities of the consolidated subsidiary, the consolidated subsidiary would have an ‘‘excess’’ ASF amount of $10 for purposes of this consolidation restriction. The covered company may only include any of this $10 excess available stable funding in its consolidated ASF amount to the extent the consolidated subsidiary may transfer assets to the top-tier entity of the covered company (for example, through a loan from the subsidiary to the top-tier covered company), taking into account statutory, regulatory, contractual, or supervisory restrictions. Examples of restrictions on transfers of assets that a covered company would be required to take into account in calculating its NSFR include sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 12 U.S.C. 371c–1); the Board’s Regulation W (12 CFR part 223); any restrictions imposed on a consolidated subsidiary by state or Federal law, such as restrictions imposed by a state banking or insurance supervisor; and any restrictions imposed on a consolidated subsidiary or branches of a U.S. entity domiciled outside the United States by a foreign regulatory authority, such as a foreign banking supervisor. This limitation on the ASF amount of a consolidated subsidiary includable in a covered company’s NSFR would apply to both U.S. and non-U.S. consolidated subsidiaries. The proposed rule would permit a covered company’s ASF amount to include any portion of the ASF amount of a consolidated subsidiary that is less than or equal to the subsidiary’s RSF amount because the subsidiary’s NSFR liabilities and NSFR regulatory capital elements generating that ASF amount are available to stably fund the subsidiary’s assets. The proposed rule E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 35156 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules would limit inclusion of excess ASF amounts, however, because the proceeds of stable funding at one entity of the covered company may not always be available to support liquidity needs at another entity. Even though it may be consistent with sound risk management practices for a subsidiary to maintain an excess ASF amount, the proposed rule would not permit the excess ASF amount to count towards the covered company’s consolidated NSFR if the subsidiary is unable to transfer assets to its parent. This approach to calculating a covered company’s consolidated ASF amount would be similar to the approach taken in the LCR rule to calculate a covered company’s HQLA amount. The proposed rule would require a covered company that includes a consolidated subsidiary’s excess ASF amount in its consolidated NSFR to implement and maintain written procedures to identify and monitor restrictions on transferring assets from its consolidated subsidiaries. In this case, the covered company would be required to document the types of transactions, such as loans or dividends, a covered company’s consolidated subsidiary could use to transfer assets and how the transactions comply with applicable restrictions. The covered company should be able to demonstrate to the satisfaction of its appropriate Federal banking agency that such excess amounts may be transferred freely in compliance with statutory, regulatory, contractual, or supervisory restrictions that may apply in any relevant jurisdiction. A covered company that does not include any excess ASF amount from its consolidated subsidiaries in its NSFR would not be required to have such procedures in place. Question 47: What alternative approaches, if any, should the agencies consider regarding the treatment of the excess ASF amount of a consolidated subsidiary of a covered company to appropriately reflect constraints on the ability of stable funding at one entity to support the assets of a different entity? Does the proposed rule’s approach sufficiently reflect restrictions on transfers of assets between entities of a covered company, given that these constraints may vary, and why? For example, would the proposed rule’s approach adequately address a situation in which, during an idiosyncratic or systemic liquidity stress event, one or more entities of a covered company becomes subject to more stringent restrictions on transferring assets than they might face during normal times, and why? VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 Question 48: What operational burdens would covered companies face from the proposed approach with respect to excess ASF amounts of consolidated subsidiaries? Question 49: Should this approach regarding the treatment of the excess ASF amount of a consolidated subsidiary be limited to a certain set of covered companies, such as GSIBs? If so, please provide reasoning as to why the proposed consolidation provisions would be more appropriate for these covered companies as opposed to others. G. Interdependent Assets and Liabilities The Basel III NSFR provides that, in limited circumstances, it may be appropriate for an interdependent asset and liability to be assigned a zero percent RSF factor and a zero percent ASF factor, respectively, if they meet strict conditions. Currently, it does not appear that U.S. banking organizations engage in transactions that would meet these conditions in the Basel III NSFR. The proposed rule therefore does not include a framework for interdependent assets and liabilities. In order for an asset and liability to be considered interdependent, the Basel III NSFR would require the following conditions to be met: (1) The interdependence of the asset and liability must be established on the basis of contractual arrangements, (2) the liability cannot fall due while the asset remains on the balance sheet, (3) the principal payment flows from the asset cannot be used for purposes other than repaying the liability, (4) the liability cannot be used to fund other assets, (5) the individual interdependent asset and liability must be clearly identifiable, (6) the maturity and principal amount of both the interdependent liability and asset must be the same, (7) the bank must be acting solely as a pass-through unit to channel the funding received from the liability into the corresponding interdependent asset, and (8) the counterparties for each pair of interdependent liabilities and assets must not be the same.90 The Basel III NSFR conditions for establishing interdependence are intended to ensure that the specific liability will, under all circumstances, remain for the life of the asset and all cash flows during the life of the asset and at maturity are perfectly matched with cash flows of the liability. Under such conditions, a covered company would face no funding risk or benefit arising from the interdependent asset or liability. For example, if a sovereign 90 Basel PO 00000 III NSFR, supra note 4 at para 45. Frm 00034 Fmt 4701 Sfmt 4702 entity establishes a program where it provides funding through financial institutions that act as pass-through entities to make loans to third parties, and all the conditions set forth in the Basel III NSFR are met, the liquidity profile of a financial institution would not be affected by its participation in the program. As such, the assets of the financial institution created through such a program could be considered interdependent with the liabilities that would also be created through the program, and the assets and liabilities could be assigned a zero percent RSF factor and a zero percent ASF factor, respectively. Currently, no such programs exist in the United States. Other transactional structures of covered companies reviewed by the agencies do not appear to meet the Basel III NSFR conditions for interdependent asset and liability treatment and present liquidity risks such that zero percent RSF and ASF factors would not be warranted. For example, a covered company may have a short position under an equity total return swap (TRS) with a customer that the covered company has hedged with a long position in the equity securities underlying the TRS. This set of transactions would not appear to meet the Basel III NSFR conditions for interdependent treatment on several bases, including: the liability funding the equity position could fall due while the equity position remains on the covered company’s balance sheet; the maturity of the equity position and the liability funding the equity position would not be the same (the equity is perpetual and the liability could have a short-term maturity); and the covered company would not be acting solely as a pass-through unit to channel the funding received from the repurchase agreement. As another example, a covered company might enter into a securities borrowing transaction to facilitate a customer short sale of securities. This set of transactions would also not appear to meet the Basel III NSFR conditions for interdependent treatment on several bases, including: The interdependence of the asset and liability may not be established on the basis of contractual arrangements; the liability could fall due while the asset remained on the balance sheet; and the maturity and principal amount of both the interdependent liability and asset may not be the same. For the reasons described above, the proposed rule would not include a framework for interdependent assets and liabilities. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 Question 50: What assets and liabilities of covered companies, if any, meet the conditions for the interdependent treatment described by the Basel III NSFR and merit zero percent RSF and ASF factors? III. Net Stable Funding Ratio Shortfall As noted above, the proposed rule would require a covered company to maintain an NSFR of at least 1.0 on an ongoing basis. The agencies expect circumstances where a covered company has an NSFR below 1.0 to arise only rarely. However, given the range of reasons, both idiosyncratic and systemic, a covered company could have an NSFR below 1.0 (for example, a covered company’s NSFR might temporarily fall below 1.0 during a period of extreme liquidity stress), the proposed rule would not prescribe a particular supervisory response to address a violation of the NSFR requirement. Instead, the proposed rule would provide flexibility for the appropriate Federal banking agency to respond based on the circumstances of a particular case. Potential supervisory responses could include, for example, an informal supervisory action, a ceaseand-desist order, or a civil money penalty. The proposed rule would require a covered company to notify its appropriate Federal banking agency of an NSFR shortfall or potential shortfall. Specifically, a covered company would be required to notify its appropriate Federal banking agency no later than 10 business days, or such other period as the appropriate Federal banking agency may otherwise require by written notice, following the date that any event has occurred that has caused or would cause the covered company’s NSFR to fall below the minimum requirement. In addition, a covered company would be required to develop a plan for remediation in the event of an NSFR shortfall. The proposed rule would require a covered company to submit its remediation plan to its appropriate Federal banking agency no later than 10 business days, or such other period as the appropriate Federal banking agency may otherwise require by written notice, after: (1) The covered company’s NSFR falls below, or is likely to fall below, the minimum requirement and the covered company has or should have notified the appropriate Federal banking agency, as required under the proposed rule; (2) the covered company’s required NSFR disclosures or other regulatory reports or disclosures indicate that its NSFR is below the minimum requirement; or (3) the appropriate Federal banking agency notifies the covered company that it VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 must submit a plan for NSFR remediation and the agency provides a reason for requiring such a plan. As set forth in § ll.110(b)(2), such a plan would be required to include an assessment of the covered company’s liquidity profile, the actions the covered company has taken and will take to achieve full compliance with the proposed rule (including a plan for adjusting the covered company’s liquidity profile to comply with the proposed rule’s NSFR requirement and a plan for fixing any operational or management issues that may have contributed to the covered company’s noncompliance), and an estimated time frame for achieving compliance. Moreover, the covered company would be required to report to the appropriate Federal banking agency no less than monthly (or other frequency, as required by the agency) on its progress towards achieving full compliance with the proposed rule. These reports would be mandatory until the firm’s NSFR is equal to or greater than 1.0. Supervisors would retain the authority to take supervisory action against a covered company that fails to comply with the NSFR requirement.91 Any action taken would depend on the circumstances surrounding the funding shortfall, including, but not limited to operational issues at a covered company, the frequency or magnitude of the noncompliance, the nature of the event that caused a shortfall, and whether such an event was temporary or unusual. The proposed rule’s framework would be similar to the shortfall framework in the LCR rule, which does not prescribe a particular supervisory response to address an LCR shortfall, and provides flexibility for the appropriate Federal banking agency to respond based on the circumstances of a particular case. Question 51: Is the proposed NSFR shortfall supervisory procedure appropriate to address instances when a covered company is out of compliance with the proposed NSFR requirement? Why or why not? If not, please provide justifications supporting that view as well as procedures that may be more appropriate. Question 52: The agencies invite comment on all aspects of the proposed NSFR shortfall supervisory procedures. Should a de minimis exception to an NSFR shortfall be implemented, such that a covered company would not need to report such a shortfall, provided its 91 See also the discussion of the agencies’ reservation of authority in section I.C.2 of the Supplementary Information section. PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 35157 NSFR returns to the required minimum within a short grace period? If so, what de minimis amount would be appropriate and why? What duration of grace period would be appropriate and why? Question 53: What amount of time would be most appropriate for a covered company that is noncompliant with the NSFR requirement to prepare a plan for working towards compliance? The proposed rule provides 10 business days (or such other period as the appropriate Federal banking agency may require), but would a longer period, such as 20 business days, be more appropriate and, if so, why? IV. Modified Net Stable Funding Ratio Applicable to Certain Covered Depository Institution Holding Companies A. Overview and Applicability The Board is proposing a modified NSFR requirement that would be tailored for modified NSFR holding companies and would be less stringent than the proposed NSFR requirement that would apply to covered companies. A modified NSFR holding company would be required to maintain a lower minimum amount of stable funding, equivalent to 70 percent of the amount that would be required for a covered company. As discussed in section I.A of this Supplementary Information section, a modified NSFR holding company would be a bank holding company or savings and loan holding company without significant insurance or commercial operations that, in either case, has $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure.92 Modified NSFR holding companies are large financial companies, and many have sizable operations in banking, brokerage, or other financial activities. Compared to covered companies, however, they are smaller in size and 92 The proposed modified NSFR requirement would not apply to: (i) A grandfathered unitary savings and loan holding company (as described in section 10(c)(9)(A) of the Home Owners’ Loan Act, 12 U.S.C. 1467a(c)(9)(A)) that derives 50 percent or more of its total consolidated assets or 50 percent of its total revenues on an enterprise-wide basis from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)); (ii) a top-tier bank holding company or savings and loan holding company that is an insurance underwriting company; or (iii) a top-tier bank holding company or savings and loan holding company that has 25 percent or more of its total consolidated assets in subsidiaries that are insurance underwriting companies. For purposes of (iii), the company must calculate its total consolidated assets in accordance with GAAP or estimate its total consolidated assets, subject to review and adjustment by the Board. E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 35158 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules generally less complex in structure, less interconnected with other financial companies, and less reliant on riskier forms of funding. Their activities tend to be more limited in scope and they tend to have fewer international activities. Modified NSFR holding companies also tend to have simpler balance sheets, which, in the event of disruptions to a company’s regular sources of funding, better enables the company’s management and its supervisors to identify risks and take corrective actions more quickly, as compared to covered companies. For many of these same reasons, modified NSFR holding companies also would likely not present as great a risk to U.S. financial stability as covered companies. Nevertheless, modified NSFR holding companies do face more complex liquidity risk management challenges than smaller banking organizations and are important providers of credit in the U.S. economy. The failure or distress of one or more modified NSFR holding companies could still pose risks to U.S. financial stability, though to a lesser degree than the failure or distress of one or more covered companies. Therefore, the Board is proposing a minimum stable funding requirement for modified NSFR holding companies that would not be as stringent as the proposed NSFR requirement that would apply to covered companies. A modified NSFR holding company that becomes subject to the proposed rule pursuant to § 249.1(b)(v) after the effective date would be required to comply with the proposed modified NSFR requirement one year after the date it meets the applicable thresholds. This one-year transition period would provide newly subject modified NSFR holding companies sufficient time to adjust to the requirements of the proposal. Other than the lower RSF amount requirement and longer transition period, the proposed modified NSFR requirement would be identical to the proposed NSFR requirement for covered companies. Modified NSFR holding companies would also be subject to the public disclosure requirements under §§ ll.130 and ll.131 of the proposed rule, described in section V of this SUPPLEMENTARY INFORMATION section. B. Available Stable Funding A modified NSFR holding company would calculate its ASF amount in the same manner as a covered company, pursuant to § ll.103 of the proposed rule. The ASF amount would comprise the equity and liabilities held by a modified NSFR holding company VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 multiplied by the same standardized ASF factors as those that would be used by a covered company to determine the expected stability of its funding over a one-year time horizon. These ASF factors would be applicable to modified NSFR holding companies because they represent the proportionate amount of NSFR equity and liabilities that can be considered stable funding available to support assets, derivative exposures, and commitments. C. Required Stable Funding A modified NSFR holding company would calculate its RSF amount in the same manner as a covered company, pursuant to § ll.105 of the proposed rule, except that a modified NSFR holding company would multiply its RSF amount by 70 percent. As discussed above, the modified NSFR requirement would not require these firms to maintain as high an amount of stable funding as covered companies, based on the different risks of these firms. Question 54: What, if any, modifications to the modified NSFR requirement should the Board consider? Is the proposed 70 percent of the RSF amount appropriate for the modified NSFR holding companies based on their relative complexity and size? Please provide justification and supporting data. Question 55: What operational burdens would modified NSFR holding companies face in complying with the proposed modified NSFR requirement? Question 56: Should the rules for consolidation under § ll.108 of the proposed rule be limited to covered companies, rather than applying to both covered companies and modified NSFR holding companies, and, if so, why? V. Disclosure Requirements A. Proposed NSFR Disclosure Requirements The disclosure requirements of the proposed rule would apply to covered companies that are bank holding companies and savings and loan holding companies and to modified NSFR holding companies. The disclosure requirements of the proposed rule would not apply to depository institutions that are subject to the proposed rule.93 The proposed rule would require public disclosures of a company’s NSFR 93 In the future, the agencies may develop a different or modified reporting form that would be required for both depository institutions and depository institution holding companies subject to the proposed rule. The agencies anticipate that they would solicit public comment on any such new reporting form. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 and the components of its NSFR in a standardized tabular format (NSFR disclosure template). The proposed rule would also require sufficient discussion of certain qualitative features of a company’s NSFR and its components to facilitate an understanding of the company’s calculation and results. The NSFR disclosure template is similar to the common disclosure template published by the BCBS as part of the Basel III Disclosure Standards (BCBS common template). The proposed rule would require a company to provide timely public disclosures each calendar quarter of the information in the NSFR disclosure template and the qualitative disclosures in a direct and prominent manner on its public internet site or in a public financial report or other public regulatory report. Such disclosures would need to remain publicly available for at least five years after the date of the disclosure. In order to reduce compliance costs and provide relevant information to the public about the funding profile of a company, the proposed rule’s quantitative disclosures would reflect data that a company would be required to calculate in order to comply with the proposed rule. Question 57: The agencies invite comment on all aspects of the disclosure requirements of the proposed rule. Specifically, what changes, if any, could improve the clarity and utility of the disclosures? B. Quantitative Disclosure Requirements The proposed rule would require a company subject to the proposed disclosure requirements to publicly disclose the company’s NSFR and its components. By using a standardized tabular format that is similar to the BCBS common template, the NSFR disclosure template would enable market participants to compare funding characteristics of covered companies in the United States and other banking organizations subject to similar stable funding requirements in other jurisdictions. However, the disclosure requirements of the proposed rule and the accompanying NSFR disclosure template also reflect differences between the proposed rule and the Basel III NSFR, as discussed below. The NSFR disclosure template would include components of a company’s ASF and RSF calculations (ASF components and RSF components, respectively), as well as the company’s ASF amount, RSF amount, and NSFR. For most ASF and RSF components, the proposed rule would require disclosure of both ‘‘unweighted’’ and ‘‘weighted’’ amounts. The ‘‘unweighted’’ amount E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules generally refers to values of ASF or RSF components prior to applying the ASF or RSF factors assigned under §§ ll.104, ll.106, or ll.107, as applicable, whereas the ‘‘weighted’’ amount generally refers to the amounts resulting after applying the ASF or RSF factors. For certain line items in the proposed NSFR disclosure template relating to derivative transactions that include components of multi-step calculations before an ASF or RSF factor is applied, as described in section II.E of this Supplementary Information section, a company would only be required to disclose a single amount for the component. For most ASF or RSF components, the proposed NSFR disclosure template would require the unweighted amount to be separated based on maturity categories relevant to the NSFR requirement: Open maturity; less than six months after the calculation date; six months or more, but less than one year after the calculation date; one year or more after the calculation date; and perpetual. For purposes of comparability of disclosures across jurisdictions, while the BCBS common template does not distinguish between the ‘‘open’’ and ‘‘perpetual’’ maturity categories (grouping them together under the heading ‘‘no maturity’’), the proposed rule would require a company to disclose amounts in those two maturity categories separately because the categories are on opposite ends of the maturity spectrum for purposes of the proposed rule. As noted in section II.B of this SUPPLEMENTARY INFORMATION section, the ‘‘open’’ maturity category is meant to capture instruments that do not have a stated contractual maturity and may be closed out on demand, such as demand deposits. The ‘‘perpetual’’ category is intended to capture instruments that contractually never mature and may not be closed out on demand, such as equity securities. Separating these two categories into two disclosure columns improves the transparency and quality of the disclosure without undermining the ability to compare the NSFR component disclosures of banking organizations in other jurisdictions that utilize the BCBS common template, because these two columns can be summed for comparison purposes. For certain ASF and RSF components that represent calculations that do not depend on maturities, such as the NSFR derivatives asset or liability amount, the proposed NSFR disclosure template would not require a company to separate its disclosed amount by maturity category. As described further below, the proposed rule identifies the ASF and VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 RSF components that a company must include in each row of the proposed NSFR disclosure template, including cross-references to the relevant sections of the proposed rule. The numbered rows of the proposed NSFR disclosure template do not always map on a oneto-one basis with provisions of the proposed rule relating to the calculation of a company’s NSFR. In some cases, the proposed NSFR disclosure template requires instruments that are assigned identical ASF or RSF factors to be disclosed in different rows or columns, and some rows and columns combine disclosure of instruments that are assigned different ASF or RSF factors. For example, the proposed NSFR disclosure template includes all level 1 liquid assets in a single row, even though the proposed rule would assign a zero percent, 5 percent, or higher RSF factor to various level 1 liquid assets under § ll.106(a)(1) (such as Reserve Bank balances), § ll.106(a)(2) (such as unencumbered U.S. Treasury securities), or § ll_. 106(c) (if the level 1 liquid asset is encumbered), respectively.94 For consistency, the proposed NSFR disclosure template would require a company to clearly indicate the as-of date for disclosed amounts and report all amounts on a consolidated basis and expressed in millions of U.S. dollars or as a percentage, as applicable. Question 58: What, if any, unintended consequences might result from publicly disclosing a company’s NSFR and its components, particularly in terms of liquidity risk? What modifications should be made to the proposed disclosure requirements to address any unintended consequences? 1. Disclosure of ASF Components The proposed rule would require a company to disclose its ASF components, separated into the following categories: (1) Capital and securities, which includes NSFR regulatory capital elements and other capital elements and securities; (2) retail funding, which includes stable retail deposits, less stable retail deposits, retail brokered deposits, and other retail funding; (3) wholesale funding, which includes operational deposits and other wholesale funding; and (4) other liabilities, which include the company’s NSFR derivatives liability amount and any other liabilities not included in other categories. The proposed NSFR disclosure template would differ from the BCBS 94 See discussion in sections II.D.3.a.i, II.D.3.a.ii, and II.D.3.c of this SUPPLEMENTARY INFORMATION section. PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 35159 common template by including some additional ASF categories that are not separately broken out under the Basel III NSFR, such as retail brokered deposits. The proposed template would also provide market participants with additional information relevant to understanding a company’s liquidity profile, such as the total derivatives liabilities amount (a component of the NSFR derivatives liabilities amount). These differences from the BCBS common template would provide greater public transparency without reducing comparability across jurisdictions, since the broken-out line items could simply be added back together to produce a comparable total and the extra line items can simply be ignored. 2. Disclosure of RSF Components The proposed disclosure requirements would require a company to disclose its RSF components, separated into the following categories: (1) Total HQLA and each of its component asset categories (i.e., level 1, level 2A, and level 2B liquid assets); (2) assets other than HQLA that are assigned a zero percent RSF factor; (3) operational deposits; (4) loans and securities, separated into categories including retail mortgages and securities that are not HQLA; (5) other assets, which include commodities, certain components of the company’s derivatives RSF amount, and all other assets not included in another category (including nonperforming assets); 95 and (6) undrawn amounts of committed credit and liquidity facilities. Similar to the proposed disclosure format with respect to ASF components, the proposed NSFR disclosure template would differ in some respects from the BCBS common template to provide more granular information regarding RSF components without undermining comparability across jurisdictions. For example, the proposed rule would require disclosure of a company’s level 1, level 2A, and level 2B liquid assets by maturity category, which is not required by the BCBS common template, to assist market participants and other parties in assessing the composition of a company’s HQLA.96 Additionally, because some assets that would be assigned a zero percent RSF factor are not included as HQLA under the LCR rule, such as ‘‘currency and coin’’ and certain ‘‘trade date 95 A company would be required to disclose nonperforming assets as part of the line item for other assets and nonperforming assets, rather than as part of a line item based on the type of asset that has become nonperforming. 96 See § ll.20 of the LCR rule. E:\FR\FM\01JNP2.SGM 01JNP2 35160 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 receivables,’’ the proposed template includes a distinct category for ‘‘zero percent RSF assets that are not level 1 liquid assets’’ that the BCBS common template does not include. The proposed NSFR disclosure template also differs from the BCBS common template in its presentation of the components of a company’s derivatives RSF amount, generally to improve the clarity of disclosure by separating components into distinct rows and by including the total derivatives asset amount so that market participants can better understand a company’s NSFR derivatives calculation. As discussed in sections II.D.3.c and d of this SUPPLEMENTARY INFORMATION section, the proposed rule would assign RSF factors to encumbered assets under § ll.106(c) and (d). A company would be required to include encumbered assets in a cell of the NSFR disclosure template based on the asset category and asset maturity rather than based on the encumbrance period. For example, a level 2A liquid asset that matures in one year or more that is encumbered for a remaining period of nine months would be included in the level 2A liquid asset row and maturity of one year or more column, along with other level 2A liquid assets that have a similar maturity. This location in the NSFR disclosure template would not change the RSF factor assigned to the asset. In the preceding example, therefore, the covered company’s weighted amount for the row would reflect an RSF factor of 50 percent assigned to the encumbered level 2A liquid asset. Similar treatment would apply for an asset provided or received by a company as variation margin to which an RSF factor is assigned under § ll.107. Disclosure by asset category and maturity would provide market participants a better understanding of the actual assets of a company rather than having rows that combine asset categories. C. Qualitative Disclosure Requirements A covered company subject to the proposed disclosure requirements would be required to provide a qualitative discussion of the company’s NSFR and its components sufficient to facilitate an understanding of the calculation and results. This qualitative discussion would supplement the quantitative information disclosures in a company’s NSFR disclosure template described above and would enable market participants and other parties to better understand a company’s NSFR and its components. The proposed rule would not prescribe the content or format of a company’s qualitative disclosures; rather, it would allow VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 flexibility for discussion based on each company’s particular circumstances. The proposed rule would, however, provide guidance through examples of topics that a company may discuss. These examples include (1) the main drivers of the company’s NSFR; (2) changes in the company’s NSFR over time and the causes of such changes (for example, changes in strategies or circumstances); (3) concentrations of funding sources and changes in funding structure; (4) concentrations of available and required stable funding within a covered company’s corporate structure (for example, across legal entities); and (5) other sources of funding or other factors in the NSFR calculation that the company considers to be relevant to facilitate an understanding of its liquidity profile. The Board recently proposed disclosure requirements under the LCR rule, which also include a qualitative disclosure section.97 Given that the proposed rule and the LCR rule would be complementary quantitative liquidity requirements, a company subject to both disclosure requirements would be permitted to combine the two qualitative disclosures, as long as the specific qualitative disclosure requirements of each are satisfied by such a combined qualitative disclosure section. D. Frequency and Timing of Disclosure The proposed rule would require a company to provide timely public disclosures after each calendar quarter. Disclosure on a quarterly basis would provide market participants and other parties with information to help assess the liquidity risk profiles of companies making the disclosures, while reducing compliance costs that could result from more frequent public disclosure. A quarterly disclosure period would alleviate burden by aligning with the frequency of periodic public disclosures in other contexts, such as those required under Federal securities laws and regulations. The purpose of the proposed rule’s public disclosure requirements would be to provide market participants and the public with periodic information regarding a company’s funding structure, rather than real-time information or event-driven disclosures regarding a company’s liquidity profile. The agencies will have access to other sources of information to enable ongoing monitoring of companies’ 97 ‘‘Liquidity Coverage Ratio: Public Disclosure Requirements; Extension of Compliance Period for Certain Companies to Meet the Liquidity Coverage Ratio Requirements,’’ 80 FR 75010 (December 1, 2015). PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 liquidity risk profiles and compliance with the proposed rule. The proposed rule would recognize that the timing of disclosures required under the Federal banking laws may not always coincide with the timing of disclosures required under other Federal laws, including disclosures required under the Federal securities laws. For calendar quarters that do not correspond to a company’s fiscal year or quarter end, the agencies would consider those disclosures that are made within 45 days of the end of the calendar quarter (or within 60 days for the limited purpose of the company’s first reporting period in which it is subject to the proposed rule’s disclosure requirements) as timely. In general, where a company’s fiscal year end coincides with the end of a calendar quarter, the agencies consider disclosures to be timely if they are made no later than the applicable SEC disclosure deadline for the corresponding Form 10–K annual report. In cases where a company’s fiscal year end does not coincide with the end of a calendar quarter, the agencies would consider the timeliness of disclosures on a case-by-case basis. This approach to timely disclosures is consistent with the approach to public disclosures that the agencies have taken in the context of other regulatory reporting and disclosure requirements. For example, the agencies have used the same indicia of timeliness with respect to public disclosures required under the agencies’ risk-based capital rules and proposed under the LCR rule.98 As noted above, a company must publicly disclose, in a direct and prominent manner, the information required by the proposed rule on its public internet site or in its public financial or other public regulatory reports. The agencies are not proposing specific criteria for what it means for a disclosure to be ‘‘direct and prominent,’’ but the agencies expect that the disclosures should be readily accessible to the general public for a period of at least five years after the disclosure date. The first reporting period for which a company would be required to disclose the company’s NSFR and its components is the calendar quarter that begins on the date the company becomes subject to the proposed NSFR requirement. For example, a company that becomes subject to the proposed NSFR requirement on January 1, 2018, would be required to commence providing the public disclosures for the calendar quarter that ends on March 31, 98 See 78 FR 62018, 62129 (October 11, 2013); 80 FR 75010, 75013 (December 1, 2015). E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules 2018. Its disclosures for this period would then be required to remain publicly available until at least March 31, 2023. Question 59: Under what circumstances, if any, should the agencies require more frequent or less frequent public disclosures of a company’s NSFR and its components? What benefits or negative effects may result if, in addition to required quarterly public disclosures, the agencies require a company to publicly disclose qualitative or quantitative information about the company’s NSFR or its components with 30 days’ prior written notice within a calendar quarter? Question 60: Should the agencies issue any guidance regarding the term ‘‘direct and prominent?’’ If so, what factors should be included in such guidance? VI. Impact Assessment The agencies assessed the potential impact of the proposed rule 99 and, based on available information, expect the benefits to exceed the costs.100 As discussed in section I of this SUPPLEMENTARY INFORMATION section, the proposed rule is designed to reduce the likelihood that disruptions to a covered company or modified NSFR holding company’s regular sources of funding will compromise its liquidity position, as well as to promote improvements in the measurement and management of liquidity risk. By requiring covered companies and modified NSFR holding companies to maintain stable funding profiles, the proposed rule is intended to reduce liquidity risk in the financial sector and provide for a safer and more resilient financial system. The potential costs considered by the agencies include the extent to which covered companies and modified NSFR holding companies would currently fall short of the proposed NSFR requirement and any costs associated with balancesheet adjustments that would be necessary to come into compliance or future balance-sheet adjustments to 99 As discussed in section XI of this section, the OCC also analyzed the proposed rule under the factors in the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532). 100 The BCBS recently published a review of the literature on the costs and benefits of liquidity regulation and found that existing literature, although limited given that many liquidity requirements are relatively new, supports the view that the net social benefit of liquidity regulation is expected to be significantly positive. See Basel Committee on Banking Supervision, ‘‘Literature review on integration of regulatory capital and liquidity instruments’’ (March 2016), available at https://www.bis.org/bcbs/publ/wp30.pdf (BCBS literature review). maintain compliance in the future; 101 ongoing operational and administrative costs related to the proposed rule’s calculation, disclosure, and shortfall notification requirements; possible costs to customers in the form of increased borrowing costs; and the possibility of reduced financial intermediation or economic output in the United States. The potential benefits considered include a reduction in the likelihood, relative to a banking system without an NSFR requirement, that a covered company or modified NSFR holding company would fail or experience material financial distress; the reduced likelihood of a financial crisis occurring and the reduced severity of a financial crisis if one were to occur; and the improved transparency and improved market discipline due to the proposed rule’s public disclosure requirements. A. Analysis of Potential Costs The agencies considered the extent to which any covered companies or modified NSFR holding companies would fall short of the proposed NSFR requirement or modified NSFR requirement, respectively, if they were currently in effect and would need to make balance-sheet adjustments, such as reducing short-term funding or increasing holdings of liquid assets, in order to come into compliance. To estimate shortfall amounts, the agencies calculated ASF and RSF amounts at the consolidated level for depository institution holding companies that would be subject to the NSFR requirement or modified NSFR requirement. These estimates were based on information submitted by certain depository institution holding companies for inclusion in the most recent Basel III Quantitative Impact Study (QIS), as well as other available information, including data collected on the FR 2052a report and publicly available data.102 In addition, for covered companies and modified NSFR holding companies that did not submit data through the QIS process, the estimates were based on information collected on Federal Reserve forms FR sradovich on DSK3TPTVN1PROD with PROPOSALS2 SUPPLEMENTARY INFORMATION VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 101 Analysis of potential shortfalls focused on the consolidated level for covered companies that are depository institution holding companies and did not include separate shortfall analyses for covered companies that are depository institutions. See infra note 103. The OCC’s impact analysis, discussed in section XI of this SUPPLEMENTARY INFORMATION section estimates the shortfall and costs for national banks and Federal savings associations. 102 See https://www.bis.org/bcbs/qis for additional QIS information. Individual company submission data is confidential supervisory information. Shortfall analysis used QIS data as of June 30, 2015. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 35161 Y–9C and FR 2052b, as well as other supervisory data. As of December 2015, 15 depository institution holding companies would be covered companies under the proposed rule and 20 depository institution holding companies would be modified NSFR holding companies. Using the approach described above, the agencies estimate that nearly all of these companies would be in compliance with the proposed NSFR or modified NSFR requirement if those requirements were in effect today. In the aggregate, the agencies estimate that covered companies and modified NSFR holding companies would face a shortfall of approximately $39 billion, equivalent to 0.5 percent of the aggregate RSF amount that would apply across all firms. For the limited number of firms that would have a shortfall, the $39 billion shortfall would be equivalent to 4.3 percent of their total RSF amount. Because nearly all covered companies and modified NSFR holding companies are estimated to be in compliance with the proposed NSFR requirement and modified NSFR requirement, respectively, and because the aggregated ASF shortfall amount is estimated to be small relative to the aggregate size of these companies, the agencies do not expect most companies to incur significant costs in connection with making changes to their funding structures, assets, commitments, or derivative exposures to comply with the proposed NSFR requirement.103 If the companies with a shortfall elect to eliminate it by replacing liabilities that are assigned a lower ASF factor with liabilities that are assigned a higher ASF factor, they would likely incur a greater interest expense. If all companies with a shortfall were to take this approach, the agencies currently estimate an increase in those companies’ interest expense of approximately $519 million per year.104 This $519 million increase 103 The agencies expect similar results for covered companies that are depository institutions, given the lack of a shortfall at these companies’ parent holding companies; the extent to which the consolidated assets, liabilities, commitments, and exposures of the parent holding companies are attributable to the depository institution subsidiary; and the greater focus of depository institutions on traditional banking activities such as deposit-taking that tend to result in a higher NSFR than a consolidated NSFR that may also include non-bank entities and activities, such as broker-dealer or derivatives business lines. 104 This approximate cost is based on an estimated difference in relative interest expense between funding from financial sector entities that matures in 90 days or less (assigned a zero percent ASF factor) and unsecured debt that matures in 3 years (assigned a 100 percent ASF factor) of approximately 1.33 percent, based on rates as of E:\FR\FM\01JNP2.SGM Continued 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 35162 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules per year in interest expense is only 0.38 percent of the total net income of $138 billion for all covered companies and modified NSFR holding companies, as reported for calendar year 2015 on form FR Y–9C. However, for the companies with a shortfall, it is a materially higher percentage of their total net income for calendar year 2015. In addition, it is possible that covered companies and modified NSFR holding companies could incur marginal costs in the future if they must make balancesheet adjustments that they would not otherwise make in order to maintain compliance with the proposed rule. For example, a company subject to the proposed rule may fund expansion of its balance sheet with more equity or longterm debt than it otherwise would have. On the margin, such equity or long-term debt could be more expensive than alternative, less stable forms of funding, such as short-term wholesale funding. At the same time, however, a company subject to the proposed rule may have lower funding costs due to a more stable funding profile, which could offset some of the increased funding costs. Thus, the agencies do not expect covered companies and modified NSFR holding companies to incur significant costs in connection with balance-sheet adjustments to maintain compliance with the proposed requirements; however, these costs may increase depending on a variety of factors, including future differences between the rates on short- and long-term liabilities. As noted above in this SUPPLEMENTARY INFORMATION section, operational and administrative compliance costs in connection with the proposed rule are expected to be relatively modest. Calculation and disclosure requirements under the proposed rule would be based largely on the carrying values, as determined under GAAP, of the assets, liabilities, and equity of covered companies and modified NSFR holding companies. As a result, in most cases these firms should be able to leverage existing management information systems to comply with the proposed rule’s calculation and disclosure requirements. The agencies therefore expect any additional operational costs associated with ongoing compliance with the proposed rule to be relatively minor. Because most covered companies and modified NSFR holding companies are not expected to incur significant costs in connection with balance-sheet adjustments to comply with the March 31, 2016. $39 billion × 0.0133 = $519 million. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 proposed requirements or manage operational compliance, the agencies do not expect the proposed rule to result in material costs being passed on to customers, for example in the form of higher interest rates or fees.105 Similarly, the agencies do not expect covered companies or modified NSFR holding companies to materially alter their levels of lending as a result of the proposed rule. Accordingly, the agencies also do not expect the proposed rule to cause a material reduction in aggregate financial intermediation or economic output in the United States. It is possible that the proposed rule could impose some macroeconomic costs. For example, it is possible that covered companies and modified NSFR holding companies could respond to the proposed requirements by ‘‘hoarding’’ liquidity to some degree rather than using it to relieve funding needs during a period of significant stress—possibly out of fear that dipping below a certain NSFR could project weakness to counterparties, investors, or market analysts. Incentives to hoard liquidity already exist in the market, even without the proposed requirement, as demonstrated by the hoarding of liquidity by financial firms during the 2007–2009 financial crisis.106 Potential effects of the proposed rule on this dynamic are difficult to assess and quantify given the degree of uncertainty that exists during periods of significant stress, but there are factors that may mitigate or counter it. For example, existing market incentives to hoard liquidity may be lessened to some degree based on a covered company’s or modified NSFR holding company’s stronger funding position going into a period of significant stress based on 105 The BCBS literature review reports that existing studies tend to show that, to the extent banking organizations incur costs in connection with liquidity requirements, these firms typically face market constraints on their ability to pass along these costs to customers in the form of higher lending charges. See supra note 100. The combination of these constraints and the fact that most covered companies and modified NSFR holding companies currently exceed the proposed rule’s minimum stable funding requirement (meaning these companies in the aggregate are likely to face only relatively modest costs in connection with coming into compliance with the proposed NSFR requirement or modified NSFR requirement), suggest that the proposed rule should not result in significant costs being passed on to customers. 106 See Markus Brunnermeier, ‘‘Deciphering the Liquidity and Credit Crunch 2007–2008,’’ 23 Journal of Economic Perspectives 77 (2009); Mark Carlson, ‘‘Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity,’’ Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series 2013–11 (2013). PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 compliance with the proposed rule.107 The proposed rule’s supervisory response framework is also designed to mitigate incentives that would cause firms to hoard liquidity; as discussed in section III of this SUPPLEMENTARY INFORMATION section, the proposed rule would provide flexibility for the appropriate Federal banking agency to respond based on the circumstances of a particular case—for example, if a covered company’s NSFR were to fall below 1.0 based on the company’s use of liquidity during a period of market stress. B. Analysis of Potential Benefits The proposed rule is designed to reduce the likelihood that disruptions to a covered company’s or a modified NSFR holding company’s regular sources of funding will compromise its liquidity position and lead to or exacerbate an idiosyncratic or systemic stress. For example, the proposed NSFR requirement would limit overreliance on short-term wholesale funding from financial sector entities (which would be assigned a low ASF factor) to fund holdings of illiquid assets (which would be assigned high RSF factors). The proposed rule’s quantitative requirements are also designed to facilitate better management of liquidity risks beyond the LCR rule’s 30-calendar day period, complementing the LCR rule and other aspects of the agencies’ liquidity risk regulatory framework, and provide a consistent and comparable metric to measure funding stability across covered companies, modified NSFR holding companies, and other banking organizations subject to similar stable funding requirements in other jurisdictions. To estimate the potential macroeconomic benefits of the proposed rule, the agencies considered the extent to which the proposed rule could reduce the likelihood or severity of a financial crisis. A BCBS study entitled, ‘‘An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements’’ (the BCBS Economic Impact report) estimated that, prior to the regulatory reforms undertaken since 2009, the probability that a financial crisis could occur in a given year was between 3.5 percent and 5.2 percent and that the cumulative economic cost of any single crisis was between 20 percent and 100 percent of 107 As discussed further below, a more resilient funding profile heading into a period of significant stress can alleviate pressure on a covered company or modified NSFR holding company to reduce credit availability in response to the stress. See infra note 111. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 annual global economic output.108 If the NSFR reduces the probability of a financial crisis even slightly, then the benefits of avoiding the costs of a crisis, specifically a decline in output, would outweigh the relatively modest aggregate cost of the rule. As the 2007–2009 financial crisis demonstrated, unstable funding structures at major financial institutions can play a very large role in causing and deepening financial crises.109 For example, a large banking organization that relies heavily on unstable funding may be forced to sell illiquid assets at fire sale prices to meet its current obligations, which could further contribute to the firm’s liquidity deterioration, exacerbate fire sale conditions in the broader financial markets, and amplify stresses at other financial firms. Conversely, maintenance of a more resilient funding profile heading into a period of significant stress can lessen pressure on a covered company or modified NSFR holding company to sell illiquid assets or reduce credit availability in response to the stress.110 The BCBS Economic Impact report estimated significant net benefits from the Basel III reforms, including the Basel III NSFR, in connection with reducing the likelihood and severity of financial crises.111 In addition, the proposed rule’s public disclosure requirements are designed to improve transparency to the public and market participants regarding a covered company’s or 108 Basel Committee on Bank Supervision, ‘‘An assessment of the long-term economic impact of stronger capital and liquidity requirements’’ (August 2010), available at https://www.bis.org/publ/ bcbs173.pdf. 109 See, e.g., Brunnermeier supra note 106; Gary Gorton and Andrew Metrick, ‘‘Securitized Banking and the Run on Repo,’’ National Bureau of Economic Research Working Paper 15223 (2009); and Marcin Kacperczyk and Philipp Schnabl, ‘‘When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007–2009,’’ 34 Journal of Economic Perspectives 29 (2010). 110 The BCBS literature review discusses studies of lending by banking organizations in the United States and France during the 2007–2009 financial crisis, which showed that banking organizations with more stable funding profiles continued lending during the crisis to a greater degree than banking organizations that had weaker profiles. See BCBS literature review, supra note 100, pp. 26–27. See also Marcia Millon Cornett, Jamie John McNutt, Philip E. Strahan, and Hassan Tehranian, ‘‘Liquidity Risk Management and Credit Supply in the Financial Crisis,’’ 101 Journal of Financial Economics 297 (2011), and Pierre Pessarossi and ´ ´ Frederic Vinas, ‘‘The Supply of Long-Term Credit after a Funding Shock: Evidence from 2007–2009,’’ ´ ´ Banque de France, Debat economiques et financiers (2014, updated 2015). 111 See BCBS Economic Impact report. While the BCBS Economic Impact report was based on an earlier version of the Basel III NSFR, its conclusions are also consistent with the final version issued by the BCBS. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 modified NSFR holding company’s funding profile, including with respect to drivers of a company’s liquidity risk. As discussed in section V.B of this SUPPLEMENTARY INFORMATION section, the proposed rule’s use of a consistent, quantitative metric across covered companies and a standardized disclosure format should enable market participants to better assess and compare funding characteristics of covered companies in the United States and other banking organizations subject to similar stable funding requirements in other jurisdictions. Question 61: The agencies invite comment on all aspects of the foregoing impact assessment associated with the proposed rule. What, if any, additional costs and benefits should be considered? Commenters are encouraged to submit data on potential shortfalls of covered companies or modified NSFR holding companies, as well as potential costs or benefits of the proposed rule that the agencies may not have considered. VII. Solicitation of Comments on Use of Plain Language Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, sec. 722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Federal banking agencies invite your comments on how to make this proposal easier to understand. For example: • Have the agencies 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 (e.g., 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 agencies do to make the regulation easier to understand? VIII. Regulatory Flexibility Act The Regulatory Flexibility Act 112 (RFA) requires an agency to either provide an initial regulatory flexibility analysis with a proposed rule for which 112 5 PO 00000 U.S.C. 601 et seq. Frm 00041 Fmt 4701 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 the proposed rule. The OCC and FDIC are certifying that the proposed rule will not have a significant economic impact on a substantial number of small entities. Board 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 comments received during the public comment period have been considered. The proposed rule is intended to implement a quantitative liquidity requirement applicable for certain bank holding companies, savings and loan holding companies, and state member banks. Under regulations issued by the Small Business Administration, a ‘‘small entity’’ includes firms within the ‘‘Finance and Insurance’’ sector with asset sizes that vary from $7.5 million or less in assets to $550 million or less in assets.113 The Board believes that the Finance and Insurance sector constitutes a reasonable universe of firms for these purposes because such firms generally engage in activities that are financial in nature. Consequently, bank holding companies, savings and loan holding companies, and state member banks with asset sizes of $550 million or less are small entities for purposes of the RFA. 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 in section I.C.2 of this SUPPLEMENTARY INFORMATION section, the proposed rule would generally apply to Board-regulated institutions with: (i) Consolidated total assets equal to $250 billion or more; (ii) consolidated total on-balance sheet foreign exposure equal to $10 billion or more; or (iii) consolidated total assets equal to $10 billion or more if that Board-regulated institution is a consolidated subsidiary of a company described in (i) or (ii). The 113 13 Sfmt 4702 35163 E:\FR\FM\01JNP2.SGM CFR 121.201. 01JNP2 35164 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 Board is also proposing to implement a modified NSFR requirement for top-tier bank holding companies and savings and loan holding companies that have consolidated total assets of $50 billion or more, but less than $250 billion, and that have less than $10 billion of consolidated total on-balance sheet foreign exposure. Neither the proposed NSFR requirement nor the proposed modified NSFR requirement would apply to (i) a grandfathered unitary savings and loan holding company 114 that derives 50 percent or more of its total consolidated assets or 50 percent of its total revenues on an enterprise-wide basis from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act; 115 (ii) a top-tier bank holding company or savings and loan holding company that is an insurance underwriting company; or (iii) a top-tier bank holding company or savings and loan holding company that has 25 percent or more of its total consolidated assets in subsidiaries that are insurance underwriting companies.116 Companies that are subject to the proposed rule therefore substantially exceed the $550 million asset threshold at which a banking entity is considered a ‘‘small entity’’ under SBA regulations. Because the proposed rule, if adopted in final form, would not apply to any company with assets of $550 million or less, the proposed rule is not expected to apply to any small entity for purposes of the RFA. The Board does not believe that the proposed rule duplicates, overlaps, or conflicts with any other Federal rules. In light of the foregoing, the Board does not believe that the proposed rule, if adopted in final form, would have a significant economic impact on a substantial number of small entities supervised. Nonetheless, the Board seeks comment on whether the proposed rule would impose undue burdens on, or have unintended consequences for, small organizations, and whether there are ways such potential burdens or consequences could be minimized. OCC The RFA requires an agency to provide an initial regulatory flexibility analysis with a proposed rule or to certify that the rule will not have a significant economic impact on a substantial number of small entities 114 As described in section 10(c)(9)(A) of the Home Owners’ Loan Act, 12 U.S.C. 1467a(c)(9)(A). 115 12 U.S.C. 1843(k). 116 For purposes of (iii), the company must calculate its total consolidated assets in accordance with GAAP or estimate its total consolidated assets, subject to review and adjustment by the Board. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 (defined for purposes of the RFA to include banking entities with total assets of $550 million or less and trust companies with assets of $38.5 million or less). As discussed previously in this SUPPLEMENTARY INFORMATION section, the proposed rule generally would apply to national banks and Federal savings associations with: (i) Consolidated total assets equal to $250 billion or more; (ii) consolidated total on-balance sheet foreign exposure equal to $10 billion or more; or (iii) consolidated total assets equal to $10 billion or more if a national bank or Federal savings association is a consolidated subsidiary of a company subject to the proposed rule. As of March 25, 2016, the OCC supervises 1,032 small entities. Since the proposed rule would only apply to institutions that have consolidated total assets or consolidated total on-balance sheet foreign exposure equal to $10 billion or more, the proposed rule would not have any impact on small banks and small Federal savings associations. Therefore, the proposed rule would not have a significant economic impact on a substantial number of small OCCsupervised entities. The OCC certifies that the proposed rule would not have a significant economic impact on a substantial number of small national banks and small Federal savings associations. FDIC The RFA requires an agency to provide an initial regulatory flexibility analysis with a proposed rule or to certify that the rule will not have a significant economic impact on a substantial number of small entities (defined for purposes of the RFA to include banking entities with total assets of $550 million or less). As described in section I of this SUPPLEMENTARY INFORMATION section, the proposed rule would establish a quantitative liquidity standard for large and internationally active banking organizations with $250 billion or more in total assets or $10 billion or more of on-balance sheet foreign exposure and their consolidated subsidiary depository institutions with $10 billion or more in total consolidated assets. One FDICsupervised institution satisfies the foregoing criteria, and it is not a small entity. As of December 31, 2015, based on a $550 million threshold, 2 (out of 3,262) small FDIC-supervised institutions were subsidiaries of a covered company. Therefore, the proposed rule will not have a significant economic impact on a substantial number of small entities under its supervisory jurisdiction. PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 The FDIC certifies that the proposed rule would not have a significant economic impact on a substantial number of small FDIC-supervised institutions. IX. Riegle Community Development and Regulatory Improvement Act of 1994 The Riegle Community Development and Regulatory Improvement Act of 1994 (RCDRIA) requires that each Federal banking agency, in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. 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 that begins on or after the date on which the regulations are published in final form.117 The agencies note that comment on these matters has been solicited in other sections of this SUPPLEMENTARY INFORMATION section, and that the requirements of RCDRIA will be considered as part of the overall rulemaking process. In addition, the agencies also invite any other comments that further will inform the agencies’ consideration of RCDRIA. X. Paperwork Reduction Act Certain provisions of the proposed rule contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501–3521). In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently-valid Office of Management and Budget (OMB) control number. The OMB control number for the Board is 7100– 0367 and will be extended, with revision. The information collection requirements contained in this proposed rulemaking have been submitted by the OCC and FDIC to OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 117 12 E:\FR\FM\01JNP2.SGM U.S.C. 4802. 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 1320.11 of the OMB’s implementing regulations (5 CFR 1320). The OCC and FDIC are seeking a new control number. The Board reviewed the proposed rule under the authority delegated to the Board by OMB. Comments are invited on: (a) Whether the collections of information are necessary for the proper performance of the agencies’ functions, including whether the information has practical utility; (b) The accuracy of the estimates of the burden of the information collections, including the validity of the methodology and assumptions used; (c) Ways to enhance the quality, utility, and clarity of the information to be collected; (d) Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to the addresses listed in the ADDRESSES section of this document. A copy of the comments may also be submitted to the OMB desk officer for the agencies: by mail to U.S. Office of Management and Budget, 725 17th Street NW., # 10235, Washington, DC 20503; by facsimile to (202) 395–5806; or by email to: oira_submission@ omb.eop.gov, Attention, Federal Banking Agency Desk Officer. Proposed Information Collection Title of Information Collection: Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements Frequency of Response: Quarterly, monthly, and event generated. Affected Public: Businesses or other for-profit. Respondents: FDIC: Insured state nonmember banks and state savings associations, insured state branches of foreign banks, and certain subsidiaries of these entities. OCC: National banks, Federal savings associations, or, pursuant to 12 CFR 5.34(e)(3), an operating subsidiary thereof. Board: Insured state member banks, bank holding companies, and savings and loan holding companies. Abstract: The reporting requirements in the proposed rule are found in VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 § ll.110, the recordkeeping requirements are found in §§ ll.108(b) and ll.110(b), and the disclosure requirements are found in §§ ll.130 and ll.131. The disclosure requirements are only for Board supervised entities. Section ll.110 would require a covered company to take certain actions following any NSFR shortfall. A covered company would be required to notify its appropriate Federal banking agency of the shortfall no later than 10 business days (or such other period as the appropriate Federal banking agency may otherwise require by written notice) following the date that any event has occurred that would cause or has caused the covered company’s NSFR to be less than 1.0. It must also submit to its appropriate Federal banking agency its plan for remediation of its NSFR to at least 1.0, and submit at least monthly reports on its progress to achieve compliance. Section ll.108(b) provides that if an institution includes an ASF amount in excess of the RSF amount of the consolidated subsidiary, it must implement and maintain written procedures to identify and monitor applicable statutory, regulatory, contractual, supervisory, or other restrictions on transferring assets from the consolidated subsidiaries. These procedures must document which types of transactions the institution could use to transfer assets from a consolidated subsidiary to the institution and how these types of transactions comply with applicable statutory, regulatory, contractual, supervisory, or other restrictions. Section ll.110(b) requires preparation of a plan for remediation to achieve an NSFR of at least equal to 1.0, as required under § ll.100. Section ll.130 requires that a depository institution holding company subject to the proposed NSFR or modified NSFR requirements publicly disclose its NSFR calculated on the last business day of each calendar quarter, in a direct and prominent manner on its public internet site or in its public financial or other public regulatory reports. These disclosures must remain publicly available for at least five years after the date of disclosure. Section ll.131 specifies the quantitative and qualitative disclosures required and provides the disclosure template to be used. PRA Burden Estimates Estimated average hour per response: Reporting Burden: § ll.110(a)—0.25 hours. § ll.110(b)—0.50 hours. Recordkeeping Burden: PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 35165 § ll.108(b)—20 hours. § ll.110(b)—100 hours. Disclosure Burden (Board only): §§ ll.130 and ll.131—24 hours. OCC Number of Respondents: 17 (17 for reporting requirements and § ll.40(b) and § ll.110(b) recordkeeping requirements; 17 for § ll.22(a)(2), § ll.22(a)(5), and § ll.108(b) recordkeeping requirements). Total Estimated Annual Burden: 2,112 hours. Board Number of Respondents: 39 (3 for reporting requirements and § ll.40(b) and § ll.110(b) recordkeeping requirements; 39 for § ll.22(a)(2), § ll.22(a)(5), and § ll.108(b) recordkeeping requirements; 35 for disclosure requirements). Current Total Estimated Annual Burden: 1,153 hours. Proposed Total Estimated Annual Burden: 4,453 hours. FDIC Number of Respondents: 1 (1 for reporting requirements and § ll.40(b) and § ll.110(b) recordkeeping requirements; 1 for § ll.22(a)(2), § ll.22(a)(5), and § ll.108(b) recordkeeping requirements). Total Estimated Annual Burden: 124.25 hours. XI. OCC Unfunded Mandates Reform Act of 1995 Determination The OCC has analyzed the proposed rule under the factors in the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532). Under this analysis, the OCC considered whether the proposed rule includes a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted annually for inflation). The OCC has determined this proposed rule is likely to result in the expenditure by the private sector of $100 million or more in any one year (adjusted annually for inflation). The OCC has prepared a budgetary impact analysis and identified and considered alternative approaches. When the proposed rule is published in the Federal Register, the full text of the OCC’s analysis will be available at: https://www.regulations.gov, Docket ID OCC–2014–0029. E:\FR\FM\01JNP2.SGM 01JNP2 35166 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules Text of Common Rule (All agencies) PART [INSERT PART]—LIQUIDITY RISK MEASUREMENT, STANDARDS, AND MONITORING Subparts H, I, and J—Reserved Subpart K—Net Stable Funding Ratio § ll.100 Net stable funding ratio. (a) Minimum net stable funding ratio requirement. Beginning January 1, 2018, a [BANK] must maintain a net stable funding ratio that is equal to or greater than 1.0 on an ongoing basis in accordance with this subpart. (b) Calculation of the net stable funding ratio. For purposes of this part, a [BANK]’s net stable funding ratio equals: (1) The [BANK]’s ASF amount, calculated pursuant to § ll.103 of this part, as of the calculation date; divided by (2) The [BANK]’s RSF amount, calculated pursuant to § ll.105 of this part, as of the calculation date. sradovich on DSK3TPTVN1PROD with PROPOSALS2 § ll.101 Determining maturity. For purposes of calculating its net stable funding ratio, including its ASF amount and RSF amount, under subparts K through N, a [BANK] shall assume each of the following: (a) With respect to any NSFR liability, the NSFR liability matures according to § ll.31(a)(1) of this part without regard to whether the NSFR liability is subject to § ll.32 of this part; (b) With respect to an asset, the asset matures according to § ll.31(a)(2) of this part without regard to whether the asset is subject to § ll.33 of this part; (c) With respect to an NSFR liability or asset that is perpetual, the NSFR liability or asset matures one year or more after the calculation date; (d) With respect to an NSFR liability or asset that has an open maturity, the NSFR liability or asset matures on the first calendar day after the calculation date, except that in the case of a deferred tax liability, the NSFR liability matures on the first calendar day after the calculation date on which the deferred tax liability could be realized; and (e) With respect to any principal payment of an NSFR liability or asset, such as an amortizing loan, that is due prior to the maturity of the NSFR liability or asset, the payment matures on the date on which it is contractually due. § ll.102 Rules of construction. (a) Balance-sheet metric. Unless otherwise provided in this subpart, an VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 NSFR regulatory capital element, NSFR liability, or asset that is not included on a [BANK]’s balance sheet is not assigned an RSF factor or ASF factor, as applicable; and an NSFR regulatory capital element, NSFR liability, or asset that is included on a [BANK]’s balance sheet is assigned an RSF factor or ASF factor, as applicable. (b) Netting of certain transactions. Where a [BANK] has secured lending transactions, secured funding transactions, or asset exchanges with the same counterparty and has offset the gross value of receivables due from the counterparty under the transactions by the gross value of payables under the transactions due to the counterparty, the receivables or payables associated with the offsetting transactions that are not included on the [BANK]’s balance sheet are treated as if they were included on the [BANK]’s balance sheet with carrying values, unless the criteria in [§ ll.10(c)(4)(ii)(E)(1) through (3) of the AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE] are met. (c) Treatment of Securities Received in an Asset Exchange by a Securities Lender. Where a [BANK] receives a security in an asset exchange, acts as a securities lender, includes the carrying value of the security on its balance sheet, and has not rehypothecated the security received: (1) The security received by the [BANK] is not assigned an RSF factor; and (2) The obligation to return the security received by the [BANK] is not assigned an ASF factor. § ll.103 Calculation of available stable funding amount. A [BANK]’s ASF amount equals the sum of the carrying values of the [BANK]’s NSFR regulatory capital elements and NSFR liabilities, in each case multiplied by the ASF factor applicable in § ll.104 or § ll.107(c) and consolidated in accordance with § ll.108. § ll.104 ASF factors. (a) NSFR regulatory capital elements and NSFR liabilities assigned a 100 percent ASF factor. An NSFR regulatory capital element or NSFR liability of a [BANK] is assigned a 100 percent ASF factor if it is one of the following: (1) An NSFR regulatory capital element; or (2) An NSFR liability that has a maturity of one year or more from the calculation date, is not described in paragraph (e)(3) of this section, and is not a retail deposit or brokered deposit provided by a retail customer or counterparty. PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 (b) NSFR liabilities assigned a 95 percent ASF factor. An NSFR liability of a [BANK] is assigned a 95 percent ASF factor if it is a stable retail deposit (regardless of maturity or collateralization) held at the [BANK]. (c) NSFR liabilities assigned a 90 percent ASF factor. An NSFR liability of a [BANK] is assigned a 90 percent ASF factor if it is funding provided by a retail customer or counterparty that is: (1) A retail deposit (regardless of maturity or collateralization) other than a stable retail deposit or brokered deposit; (2) A reciprocal brokered deposit where the entire amount is covered by deposit insurance; (3) A brokered sweep deposit that is deposited in accordance with a contract between the retail customer or counterparty and the [BANK], a controlled subsidiary of the [BANK], or a company that is a controlled subsidiary of the same top-tier company of which the [BANK] is a controlled subsidiary, where the entire amount of the deposit is covered by deposit insurance; or (4) A brokered deposit that is not a reciprocal brokered deposit or a brokered sweep deposit, that is not held in a transactional account, and that matures one year or more from the calculation date. (d) NSFR liabilities assigned a 50 percent ASF factor. An NSFR liability of a [BANK] is assigned a 50 percent ASF factor if it is one of the following: (1) Unsecured wholesale funding that: (i) Is not provided by a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank; (ii) Matures less than one year from the calculation date; and (iii) Is not a security issued by the [BANK] or an operational deposit placed at the [BANK]; (2) A secured funding transaction with the following characteristics: (i) The counterparty is not a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank; (ii) The secured funding transaction matures less than one year from the calculation date; and (iii) The secured funding transaction is not a collateralized deposit that is an operational deposit placed at the [BANK]; (3) Unsecured wholesale funding that: (i) Is provided by a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank; (ii) Matures six months or more, but less than one year, from the calculation date; and E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules (iii) Is not a security issued by the [BANK] or an operational deposit; (4) A secured funding transaction with the following characteristics: (i) The counterparty is a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank; (ii) The secured funding transaction matures six months or more, but less than one year, from the calculation date; and (iii) The secured funding transaction is not a collateralized deposit that is an operational deposit; (5) A security issued by the [BANK] that matures six months or more, but less than one year, from the calculation date; (6) An operational deposit placed at the [BANK]; (7) A brokered deposit provided by a retail customer or counterparty that is not described in paragraphs (c) or (e)(2) of this section; or (8) Any other NSFR liability that matures six months or more, but less than one year, from the calculation date and is not described in paragraphs (a) through (c), (d)(1) through (d)(7), or (e)(3) of this section. (e) NSFR liabilities assigned a zero percent ASF factor. An NSFR liability of a [BANK] is assigned a zero percent ASF factor if it is one of the following: (1) A trade date payable that results from a purchase by the [BANK] of a financial instrument, foreign currency, or commodity that is contractually required to settle within the lesser of the market standard settlement period for the particular transaction and five business days from the date of the sale; (2) A brokered deposit provided by a retail customer or counterparty that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and matures less than six months from the calculation date; (3) An NSFR liability owed to a retail customer or counterparty that is not a deposit and is not a security issued by the [BANK]; (4) A security issued by the [BANK] that matures less than six months from the calculation date; or (5) An NSFR liability with the following characteristics: (i) The counterparty is a financial sector entity, a consolidated subsidiary, or a central bank; (ii) The NSFR liability matures less than six months from the calculation date or has an open maturity; and (iii) The NSFR liability is not a security issued by the [BANK] or an operational deposit placed at the [BANK]; or VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 (6) Any other NSFR liability that matures less than six months from the calculation date and is not described in paragraphs (a) through (d) or (e)(1) through (5) of this section. § ll.105 Calculation of required stable funding amount. A [BANK]’s RSF amount equals the sum of: (a) The carrying values of a [BANK]’s assets (other than amounts included in the calculation of the derivatives RSF amount pursuant to § ll.107(b)) and the undrawn amounts of a [BANK]’s credit and liquidity facilities, in each case multiplied by the RSF factors applicable in § ll.106; and (b) The [BANK]’s derivatives RSF amount calculated pursuant to § ll.107(b). § ll.106 RSF Factors. (a) Unencumbered assets and commitments. All assets and undrawn amounts under credit and liquidity facilities, unless otherwise provided in § ll.107(b) relating to derivative transactions or paragraphs (b) through (d) of this section, are assigned RSF factors as follows: (1) Unencumbered assets assigned a zero percent RSF factor. An asset of a [BANK] is assigned a zero percent RSF factor if it is one of the following: (i) Currency and coin; (ii) A cash item in the process of collection; (iii) A Reserve Bank balance or other claim on a Reserve Bank that matures less than six months from the calculation date; (iv) A claim on a foreign central bank that matures less than six months from the calculation date; or (v) A trade date receivable due to the [BANK] resulting from the [BANK]’s sale of a financial instrument, foreign currency, or commodity that is required to settle within the lesser of the market standard settlement period, without extension, for the particular transaction and five business days from the date of the sale, and that has not failed to settle within the required settlement period. (2) Unencumbered assets and commitments assigned a 5 percent RSF factor. An asset or undrawn amount under a credit or liquidity facility of a [BANK] is assigned a 5 percent RSF factor if it is one of the following: (i) A level 1 liquid asset, other than a level 1 liquid asset described in paragraph (a)(1) of this section; or (ii) The undrawn amount of any committed credit facility or committed liquidity facility extended by the [BANK]. For the purposes of this paragraph (a)(2)(ii), the undrawn PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 35167 amount of a committed credit facility or committed liquidity facility is the entire unused amount of the facility that could be drawn upon within one year of the calculation date under the governing agreement. (3) Unencumbered assets assigned a 10 percent RSF factor. An asset of a [BANK] is assigned a 10 percent RSF factor if it is a secured lending transaction with the following characteristics: (i) The secured lending transaction matures less than six months from the calculation date; (ii) The secured lending transaction is secured by level 1 liquid assets; (iii) The borrower is a financial sector entity or a consolidated subsidiary thereof; and (iv) The [BANK] retains the right to rehypothecate the collateral provided by the counterparty for the duration of the secured lending transaction. (4) Unencumbered assets assigned a 15 percent RSF factor. An asset of a [BANK] is assigned a 15 percent RSF factor if it is one of the following: (i) A level 2A liquid asset; or (ii) A secured lending transaction or unsecured wholesale lending with the following characteristics: (A) The asset matures less than six months from the calculation date; (B) The borrower is a financial sector entity or a consolidated subsidiary thereof; and (C) The asset is not described in paragraph (a)(3) of this section and is not an operational deposit described in paragraph (a)(5)(iii) of this section. (5) Unencumbered assets assigned a 50 percent RSF factor. An asset of a [BANK] is assigned a 50 percent RSF factor if it is one of the following: (i) A level 2B liquid asset; (ii) A secured lending transaction or unsecured wholesale lending with the following characteristics: (A) The asset matures six months or more, but less than one year, from the calculation date; (B) The borrower is a financial sector entity, a consolidated subsidiary thereof, or a central bank; and (C) The asset is not an operational deposit described in paragraph (a)(5)(iii) of this section; (iii) An operational deposit placed by the [BANK] at a financial sector entity or a consolidated subsidiary thereof; (iv) A general obligation security issued by, or guaranteed as to the timely payment of principal and interest by, a public sector entity that is not described in paragraph (a)(5)(i); or (v) An asset that is not described in paragraphs (a)(1) through (a)(4) or (a)(5)(i) through (a)(5)(iv) of this section E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 35168 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules that matures less than one year from the calculation date, including: (A) A secured lending transaction or unsecured wholesale lending where the borrower is a wholesale customer or counterparty that is not a financial sector entity, a consolidated subsidiary thereof, or a central bank; or (B) Lending to a retail customer or counterparty. (6) Unencumbered assets assigned a 65 percent RSF factor. An asset of a [BANK] is assigned a 65 percent RSF factor if it is one of the following: (i) A retail mortgage that matures one year or more from the calculation date and is assigned a risk weight of no greater than 50 percent under subpart D of [AGENCY CAPITAL REGULATION]; or (ii) A secured lending transaction, unsecured wholesale lending, or lending to a retail customer or counterparty with the following characteristics: (A) The asset is not described in paragraphs (a)(1) through (a)(6)(i) of this section; (B) The borrower is not a financial sector entity or a consolidated subsidiary thereof; (C) The asset matures one year or more from the calculation date; and (D) The asset is assigned a risk weight of no greater than 20 percent under subpart D of [AGENCY CAPITAL REGULATION]. (7) Unencumbered assets assigned an 85 percent RSF factor. An asset of a [BANK] is assigned an 85 percent RSF factor if it is one of the following: (i) A retail mortgage that matures one year or more from the calculation date and is assigned a risk weight of greater than 50 percent under subpart D of [AGENCY CAPITAL REGULATION]; or (ii) A secured lending transaction, unsecured wholesale lending, or lending to a retail customer or counterparty with the following characteristics: (A) The asset is not described in paragraphs (a)(1) through (a)(7)(i) of this section; (B) The borrower is not a financial sector entity or a consolidated subsidiary thereof; (C) The asset matures one year or more from the calculation date; and (D) The asset is assigned a risk weight of greater than 20 percent under subpart D of [AGENCY CAPITAL REGULATION]; (iii) A publicly traded common equity share that is not HQLA; (iv) A security, other than a common equity share, that matures one year or more from the calculation date and is not HQLA; and VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 (v) A commodity for which derivative transactions are traded on a U.S. board of trade or trading facility designated as a contract market under sections 5 and 6 of the Commodity Exchange Act (7 U.S.C. 7 and 8) or on a U.S. swap execution facility registered under section 5h of the Commodity Exchange Act (7 U.S.C. 7b–3). (8) Unencumbered assets assigned a 100 percent RSF factor. An asset of a [BANK] is assigned a 100 percent RSF factor if it is not described in paragraphs (a)(1) through (a)(7) of this section, including a secured lending transaction or unsecured wholesale lending where the borrower is a financial sector entity or a consolidated subsidiary thereof and that matures one year or more from the calculation date. (b) Nonperforming assets. An RSF factor of 100 percent is assigned to any asset that is past due by more than 90 days or nonaccrual. (c) Encumbered assets. An encumbered asset, unless otherwise provided in § ll.107(b) relating to derivative transactions, is assigned an RSF factor as follows: (1)(i) Encumbered assets with less than six months remaining in the encumbrance period. For an encumbered asset with less than six months remaining in the encumbrance period, the same RSF factor is assigned to the asset as would be assigned if the asset were not encumbered. (ii) Encumbered assets with six months or more, but less than one year, remaining in the encumbrance period. For an encumbered asset with six months or more, but less than one year, remaining in the encumbrance period: (A) If the asset would be assigned an RSF factor of 50 percent or less under paragraphs (a)(1) through (a)(5) of this section if the asset were not encumbered, an RSF factor of 50 percent is assigned to the asset. (B) If the asset would be assigned an RSF factor of greater than 50 percent under paragraphs (a)(6) through (a)(8) of this section if the asset were not encumbered, the same RSF factor is assigned to the asset as would be assigned if it were not encumbered. (iii) Encumbered assets with one year or more remaining in the encumbrance period. For an encumbered asset with one year or more remaining in the encumbrance period, an RSF factor of 100 percent is assigned to the asset. (2) If an asset is encumbered for an encumbrance period longer than the asset’s maturity, the asset is assigned an RSF factor under paragraph (c)(1) of this section based on the length of the encumbrance period. PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 (3) Segregated account assets. An asset held in a segregated account maintained pursuant to statutory or regulatory requirements for the protection of customer assets is not considered encumbered for purposes of this paragraph solely because such asset is held in the segregated account. (d) Off-balance sheet rehypothecated assets. For an NSFR liability of a [BANK] that is secured by an off-balance sheet asset or results from the [BANK] selling an off-balance sheet asset (for instance, in the case of a short sale): (1) If the [BANK] received the offbalance sheet asset under a lending transaction, an RSF factor is assigned to the lending transaction as if it were encumbered for the longer of (A) the remaining maturity of the NSFR liability and (B) any other encumbrance period applicable to the lending transaction; (2) If the [BANK] received the offbalance asset under an asset exchange, an RSF factor is assigned to the asset provided by the [BANK] in the asset exchange as if the provided asset were encumbered for the longer of (A) the remaining maturity of the NSFR liability and (B) any other encumbrance period applicable to the provided asset; or (3) If the [BANK] did not receive the off-balance sheet asset under a lending transaction or asset exchange, the offbalance sheet asset is assigned an RSF factor as if it were included on the balance sheet of the [BANK] and encumbered for the longer of (A) the remaining maturity of the NSFR liability and (B) any other encumbrance period applicable to the off-balance sheet asset. § ll.107 amounts. Calculation of NSFR derivatives (a) General requirement. A [BANK] must calculate its derivatives RSF amount and certain components of its ASF amount relating to the [BANK]’s derivative transactions (which includes cleared derivative transactions of a customer with respect to which the [BANK] is acting as agent for the customer that are included on the [BANK]’s balance sheet under GAAP) in accordance with this section. (b) Calculation of required stable funding amount relating to derivative transactions. A [BANK]’s derivatives RSF amount equals the sum of: (1) Current derivative transaction values. The [BANK]’s NSFR derivatives asset amount, as calculated under paragraph (d)(1) of this section, multiplied by an RSF factor of 100 percent; (2) Variation margin provided. The carrying value of variation margin provided by the [BANK] under each derivative transaction not subject to a E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules qualifying master netting agreement and each QMNA netting set, to the extent the variation margin reduces the [BANK]’s derivatives liability value under the derivative transaction or QMNA netting set, as calculated under paragraph (f)(2) of this section, multiplied by an RSF factor of zero percent; (3) Excess variation margin provided. The carrying value of variation margin provided by the [BANK] under each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set in excess of the amount described in section (b)(2) for each derivative transaction or QMNA netting set, multiplied by the RSF factor assigned to each asset comprising the variation margin pursuant to § ll.106; (4) Variation margin received. The carrying value of variation margin received by the [BANK], multiplied by the RSF factor assigned to each asset comprising the variation margin pursuant to § ll.106; (5) Potential valuation changes. (i) An amount equal to 20 percent of the sum of the gross derivative values of the [BANK] that are liabilities, as calculated under paragraph (ii), for each of the [BANK]’s derivative transactions not subject to a qualifying master netting agreement and each of its QMNA netting sets, multiplied by an RSF factor of 100 percent; (ii) For purposes of paragraph (i), the gross derivative value of a derivative transaction not subject to a qualifying master netting agreement or of a QMNA netting set is equal to the value to the [BANK], calculated as if no variation margin had been exchanged and no settlement payments had been made based on changes in the value of the derivative transaction or QMNA netting set. (6) Contributions to central counterparty mutualized loss sharing arrangements. The fair value of a [BANK]’s contribution to a central counterparty’s mutualized loss sharing arrangement (regardless of whether the contribution is included on the [BANK]’s balance sheet), multiplied by an RSF factor of 85 percent; and (7) Initial margin provided. The fair value of initial margin provided by the [BANK] for derivative transactions (regardless of whether the initial margin is included on the [BANK]’s balance sheet), which does not include initial margin provided by the [BANK] for cleared derivative transactions with respect to which the [BANK] is acting as agent for a customer and the [BANK] does not guarantee the obligations of the customer’s counterparty to the customer under the derivative transaction (such VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 initial margin would be assigned an RSF factor pursuant to § ll.106 to the extent the initial margin is included on the [BANK]’s balance sheet), multiplied by an RSF factor equal to the higher of 85 percent or the RSF factor assigned to each asset comprising the initial margin pursuant to § ll.106. (c) Calculation of available stable funding amount relating to derivative transactions. The following amounts of a [BANK] are assigned a zero percent ASF factor: (1) The [BANK]’s NSFR derivatives liability amount, as calculated under paragraph (d)(2) of this section; and (2) The carrying value of NSFR liabilities in the form of an obligation to return initial margin or variation margin received by the [BANK]. (d) Calculation of NSFR derivatives asset or liability amount. (1) A [BANK]’s NSFR derivatives asset amount is the greater of: (i) Zero; and (ii) The [BANK]’s total derivatives asset amount, as calculated under paragraph (e)(1) of this section, less the [BANK]’s total derivatives liability amount, as calculated under paragraph (e)(2) of this section. (2) A [BANK]’s NSFR derivatives liability amount is the greater of: (i) Zero; and (ii) The [BANK]’s total derivatives liability amount, as calculated under paragraph (e)(2) of this section, less the [BANK]’s total derivatives asset amount, as calculated under paragraph (e)(1) of this section. (e) Calculation of total derivatives asset and liability amounts. (1) A [BANK]’s total derivatives asset amount is the sum of the [BANK]’s derivatives asset values, as calculated under paragraph (f)(1) of this section, for each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set. (2) A [BANK]’s total derivatives liability amount is the sum of the [BANK]’s derivatives liability values, as calculated under paragraph (f)(2) of this section, for each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set. (f) Calculation of derivatives asset and liability values. For each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set: (1) The derivatives asset value is equal to the asset value to the [BANK], after taking into account any variation margin received by the [BANK] that meets the conditions of [§ ll.10(c)(4)(ii)(C)(1) through (7) of PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 35169 the AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE]; or (2) The derivatives liability value is equal to the liability value to the [BANK], after taking into account any variation margin provided by the [BANK]. § ll.108 Rules for consolidation. (a) Consolidated subsidiary available stable funding amount. For available stable funding of a legal entity that is a consolidated subsidiary of a [BANK], including a consolidated subsidiary organized under the laws of a foreign jurisdiction, the [BANK] may include the available stable funding of the consolidated subsidiary in its ASF amount up to: (1) The RSF amount of the consolidated subsidiary, as calculated by the [BANK] for the [BANK]’s net stable funding ratio under this part; plus (2) Any amount in excess of the RSF amount of the consolidated subsidiary, as calculated by the [BANK] for the [BANK]’s net stable funding ratio under this part, to the extent the consolidated subsidiary may transfer assets to the top-tier [BANK], taking into account statutory, regulatory, contractual, or supervisory restrictions, such as sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 12 U.S.C. 371c–1) and Regulation W (12 CFR part 223). (b) Required consolidation procedures. To the extent a [BANK] includes an ASF amount in excess of the RSF amount of the consolidated subsidiary, the [BANK] must implement and maintain written procedures to identify and monitor applicable statutory, regulatory, contractual, supervisory, or other restrictions on transferring assets from any of its consolidated subsidiaries. These procedures must document which types of transactions the [BANK] could use to transfer assets from a consolidated subsidiary to the [BANK] and how these types of transactions comply with applicable statutory, regulatory, contractual, supervisory, or other restrictions. Subpart L—Net Stable Funding Shortfall § ll.110 NSFR shortfall: supervisory framework. (a) Notification requirements. A [BANK] must notify the [AGENCY] no later than 10 business days, or such other period as the [AGENCY] may otherwise require by written notice, following the date that any event has occurred that would cause or has caused the [BANK]’s net stable funding ratio to E:\FR\FM\01JNP2.SGM 01JNP2 35170 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules be less than 1.0 as required under § ll.100. (b) Liquidity Plan. (1) A [BANK] must within 10 business days, or such other period as the [AGENCY] may otherwise require by written notice, provide to the [AGENCY] a plan for achieving a net stable funding ratio equal to or greater than 1.0 as required under § ll.100 if: (i) The [BANK] has or should have provided notice, pursuant to § ll.110(a), that the [BANK]’s net stable funding ratio is, or will become, less than 1.0 as required under § ll.100; (ii) The [BANK]’s reports or disclosures to the [AGENCY] indicate that the [BANK]’s net stable funding ratio is less than 1.0 as required under § ll.100; or (iii) The [AGENCY] notifies the [BANK] in writing that a plan is required and provides a reason for requiring such a plan. (2) The plan must include, as applicable: (i) An assessment of the [BANK]’s liquidity profile; (ii) The actions the [BANK] has taken and will take to achieve a net stable funding ratio equal to or greater than 1.0 as required under § ll.100, including: (A) A plan for adjusting the [BANK]’s liquidity profile; (B) A plan for remediating any operational or management issues that contributed to noncompliance with subpart K of this part; and (iii) An estimated time frame for achieving full compliance with § ll.100. (3) The [BANK] must report to the [AGENCY] at least monthly, or such other frequency as required by the [AGENCY], on progress to achieve full compliance with § ll. 100. (c) Supervisory and enforcement actions. The [AGENCY] may, at its discretion, take additional supervisory or enforcement actions to address noncompliance with the minimum net stable funding ratio and other requirements of subparts K through N of this part (see also § ll.2(c)). Subpart M—Reserved Subpart N—NSFR Public Disclosure sradovich on DSK3TPTVN1PROD with PROPOSALS2 § ll.130 Timing, method, and retention of disclosures. (a) Applicability. A covered depository institution holding company VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 that is subject to the minimum stable funding requirement in § ll.100 of this part must publicly disclose the information required under this subpart. (b) Timing of disclosure. A covered depository institution holding company must provide timely public disclosures each calendar quarter of all of the information required under this subpart, beginning when the covered depository institution holding company is first required to comply with the requirements of this part pursuant to § ll.100 and continuing thereafter. (c) Disclosure method. A covered depository institution holding company must publicly disclose, in a direct and prominent manner, the information required under this subpart on its public internet site or in its public financial or other public regulatory reports. (d) Availability. The disclosures provided under this subpart must remain publicly available for at least five years after the date of disclosure. § ll.131 Disclosure requirements. (a) General. A covered depository institution holding company must publicly disclose the information required by this subpart in the format provided in Table 1 below. (b) Calculation of disclosed amounts. (1) General. (i) A covered depository institution holding company must calculate its disclosed amounts: (A) On a consolidated basis and presented in millions of U.S. dollars or as a decimal, as applicable; and (B) As of the last business day of each calendar quarter. (ii) A covered depository institution holding company must include the asof date for the disclosed amounts. (2) Calculation of unweighted amounts. (i) For each component of a covered depository institution holding company’s ASF amount calculation, other than the NSFR derivatives liability amount and total derivatives liability amount, the ‘‘unweighted amount’’ means the sum of the carrying values of the covered depository institution holding company’s NSFR regulatory capital elements and NSFR liabilities, as applicable, determined before applying the appropriate ASF factors, and subdivided into the following maturity categories, as applicable: Open maturity; less than six months after the PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 calculation date; six months or more, but less than one year, after the calculation date; one year or more after the calculation date; and perpetual. (ii) For each component of a covered depository institution holding company’s RSF amount calculation, other than amounts included in paragraphs (c)(2)(xvi) through (xix) of this section, the ‘‘unweighted amount’’ means the sum of the carrying values of the covered depository institution holding company’s assets and undrawn amounts of committed credit facilities and committed liquidity facilities extended by the covered depository institution holding company, as applicable, determined before applying the appropriate RSF factors, and subdivided by maturity into the following maturity categories, as applicable: Open maturity; less than six months after the calculation date; six months or more, but less than one year, after the calculation date; one year or more after the calculation date; and perpetual. (3) Calculation of weighted amounts. (i) For each component of a covered depository institution holding company’s ASF amount calculation, other than the NSFR derivatives liability amount and total derivatives liability amount, the ‘‘weighted amount’’ means the sum of the carrying values of the covered depository institution holding company’s NSFR regulatory capital elements and NSFR liabilities, as applicable, multiplied by the appropriate ASF factors. (ii) For each component of a covered depository institution holding company’s RSF amount calculation, other than amounts included in paragraphs (c)(2)(xvi) through (xix) of this section, the ‘‘weighted amount’’ means the sum of the carrying values of the covered depository institution holding company’s assets and undrawn amounts of committed credit facilities and committed liquidity facilities extended by the covered depository institution holding company, multiplied by the appropriate RSF factors. BILLING CODE P E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules 35171 Table 1 to § _.131(a)- Disclosure Template Quarter ended XX/XX/XXXX In millions of U.S. dollars Open Maturity Unweighted Amount <6 6 months months to< 1 year > 1 vear I Pn11dual Weighted Amount ASFITEM 1 Capital and securities: NSFR regulatory capital 2 elements Other capital elements 3 and securities Retail fi1ndinQ: 4 5 Stable deposits 6 Less stable deposits 7 Retail brokered deposits 8 Other retail " 9 Wholesale fnnrlincr 10 Operational r1P.p0sits Other wholesale fimding 11 12 14 15 TOTALASF RSFITEM Total high-quality liquid 16 assets (II~LA) 17 Level 1 liquid assets 18 Level 2A liquid assets 19 Level 2B liquid assets Zero percent RSF assets that are not level 1 liquid 20 assets Operational deposits placed at financial sector entities or their consolidated 21 subsidiaries 22 Loans and securi ties: VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4725 E:\FR\FM\01JNP2.SGM 01JNP2 EP01JN16.011</GPH> sradovich on DSK3TPTVN1PROD with PROPOSALS2 13 Other liabilities: NSFR derivatives liability amount Total derivatives liability amount All other liabilities not included in the above r.::.tegories 35172 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules Quarter ended XX/XX/XXXX In millions of U.S. dollars Open Maturity 28 Perpetual Weighted Amount Loans to financial sector entities secured by level 1 liquid assets Loans to financial sector entities secured by assets other than level 1 liquid assets and unsecured loans to financial sector entities Loans to wholesale customers or counterparties that are not financial sector entities and loans to retail customers or counterparti es Ofwhich: With a risk weight no greater than 20 percent under [AGENCY CAPITAL REGULATION] Retail mortgages Ofwhich: With a risk weight of no greater than 50 percent under [AGENCY CAPITAL REGULATION] 29 Unwei2:hted Amount <6 6 months to< 1 year > 1 vear months Securities that do not qualify as HQLA 23 24 25 26 27 Other assets: 31 VerDate Sep<11>2014 Commodities Assets provided as initial margin for derivative transactions and contributions to CCPs' mutualized losssharing arrangements 19:02 May 31, 2016 Jkt 238001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4725 E:\FR\FM\01JNP2.SGM 01JNP2 EP01JN16.012</GPH> sradovich on DSK3TPTVN1PROD with PROPOSALS2 30 sradovich on DSK3TPTVN1PROD with PROPOSALS2 BILLING CODE C (c) Quantitative disclosures. A covered depository institution holding company must disclose all of the information required under Table 1 to § ll.131(a)—Disclosure Template, including: (1) Disclosures of ASF amount calculations: (i) The sum of the weighted amounts and, for each applicable maturity category, the sum of the unweighted amounts of paragraphs (c)(1)(ii) and (iii) of this section (row 1); (ii) The weighted amount and, for each applicable maturity category, the unweighted amount of NSFR regulatory capital elements described in § ll104(a)(1) (row 2); (iii) The weighted amount and, for each applicable maturity category, the unweighted amount of securities described in §§ ll.104(a)(2), ll.104(d)(5), and ll.104(e)(4) (row 3); (iv) The sum of the weighted amounts and, for each applicable maturity category, the sum of the unweighted amounts of paragraphs (c)(1)(v) through (viii) of this section (row 4); (v) The weighted amount and, for each applicable maturity category, the unweighted amount of stable retail deposits held at the covered depository institution holding company described in § ll.104(b) (row 5); (vi) The weighted amount and, for each applicable maturity category, the unweighted amount of retail deposits other than stable retail deposits or VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 brokered deposits, described in § ll.104(c)(1) (row 6); (vii) The weighted amount and, for each applicable maturity category, the unweighted amount of brokered deposits provided by a retail customer or counterparty described in §§ ll.104(c)(2), ll.104(c)(3), ll.104(c)(4), ll.104(d)(7), and ll.104(e)(2) (row 7); (viii) The weighted amount and, for each applicable maturity category, the unweighted amount of other funding provided by a retail customer or counterparty described in § ll.104(e)(3) (row 8); (ix) The sum of the weighted amounts and, for each applicable maturity category, the sum of the unweighted amounts of paragraphs (c)(1)(x) and (xi) of this section (row 9); (x) The weighted amount and, for each applicable maturity category, the unweighted amount of operational deposits placed at the covered depository institution holding company described in § ll.104(d)(6) (row 10); (xi) The weighted amount and, for each applicable maturity category, the unweighted amount of other wholesale funding described in §§ ll.104(a)(2), ll.104(d)(1), ll.104(d)(2), ll.104(d)(3), ll.104(d)(4), ll.104(d)(8), and ll.104(e)(5) (row 11); (xii) In the ‘‘unweighted’’ cell, the NSFR derivatives liability amount described in § ll.107(d)(2) (row 12); (xiii) In the ‘‘unweighted’’ cell, the total derivatives liability amount described in § ll.107(e)(2) (row 13); PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 35173 (xiv) The weighted amount and, for each applicable maturity category, the unweighted amount of all other liabilities not included in amounts disclosed under paragraphs (c)(1)(i) through (xiii) of this section (row 14); (xv) The ASF amount described in § ll.103 (row 15); (2) Disclosures of RSF amount calculations, including to reflect any encumbrances under §§ ll.106(c) and ll.106(d): (i) The sum of the weighted amounts and the sum of the unweighted amounts of paragraphs (c)(2)(ii) through (iv) of this section (row 16); (ii) The weighted amount and, for each applicable maturity category, the unweighted amount of level 1 liquid assets described in §§ ll.106(a)(1) and ll.106(a)(2)(i) (row 17); (iii) The weighted amount and, for each applicable maturity category, the unweighted amount of level 2A liquid assets described in § ll.106(a)(4)(i) (row 18); (iv) The weighted amount and, for each applicable maturity category, the unweighted amount of level 2B liquid assets described in § ll.106(a)(5)(i) (row 19); (v) The weighted amount and, for each applicable maturity category, the unweighted amount of assets described in § ll.106(a)(1), other than level 1 liquid assets included in amounts disclosed under paragraph (c)(2)(ii) of this section (row 20); (vi) The weighted amount and, for each applicable maturity category, the unweighted amount of operational E:\FR\FM\01JNP2.SGM 01JNP2 EP01JN16.013</GPH> Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 35174 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules deposits placed at financial sector entities or consolidated subsidiaries thereof described in § ll.106(a)(5)(iii) (row 21); (vii) The sum of the weighted amounts and, for each applicable maturity category, the sum of the unweighted amounts of paragraphs (c)(2)(viii), (ix), (x), (xii), and (xiv) of this section (row 22); (viii) The weighted amount and, for each applicable maturity category, the unweighted amount of secured lending transactions where the borrower is a financial sector entity or a consolidated subsidiary of a financial sector entity and the secured lending transaction is secured by level 1 liquid assets, described in §§ ll.106(a)(3), ll.106(a)(4)(ii), ll.106(a)(5)(ii), and ll.106(a)(8) (row 23); (ix) The weighted amount and, for each applicable maturity category, the unweighted amount of secured lending transactions that are secured by assets other than level 1 liquid assets and unsecured wholesale lending, in each case where the borrower is a financial sector entity or a consolidated subsidiary of a financial sector entity, described in §§ ll.106(a)(4)(ii), ll.106(a)(5)(ii), and ll.106(a)(8) (row 24); (x) The weighted amount and, for each applicable maturity category, the unweighted amount of secured lending transactions and unsecured wholesale lending to wholesale customers or counterparties that are not financial sector entities or consolidated subsidiaries thereof, and lending to retail customers and counterparties other than retail mortgages, described in §§ ll.106(a)(5)(ii), ll.106(a)(5)(v), ll.106(a)(6)(ii), and ll.106(a)(7)(ii) (row 25); (xi) The weighted amount and, for each applicable maturity category, the unweighted amount of secured lending transactions, unsecured wholesale lending, and lending to retail customers or counterparties that are assigned a risk weight of no greater than 20 percent under subpart D of [AGENCY CAPITAL REGULATION] described in §§ ll.106(a)(5)(ii), ll.106(a)(5)(v), and ll.106(a)(6)(ii) (row 26); (xii) The weighted amount and, for each applicable maturity category, the unweighted amount of retail mortgages described in §§ ll.106(a)(5)(v), ll.106(a)(6)(i), and ll.106(a)(7)(i) (row 27); (xiii) The weighted amount and, for each applicable maturity category, the unweighted amount of retail mortgages assigned a risk weight of no greater than 50 percent under subpart D of [AGENCY CAPITAL REGULATION] described in VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 §§ ll.106(a)(5)(v) and ll.106(a)(6)(i) (row 28); (xiv) The weighted amount and, for each applicable maturity category, the unweighted amount of publicly traded common equity shares and other securities that are not HQLA and are not nonperforming assets described in §§ ll.106(a)(5)(iv), ll.106(a)(7)(iii), and ll.106(a)(7)(iv) (row 29); (xv) The weighted amount and unweighted amount of commodities described in §§ ll.106(a)(7)(v) and ll.106(a)(8) (row 30); (xvi) The unweighted amount and weighted amount of the sum of (A) assets contributed by the covered depository institution holding company to a central counterparty’s mutualized loss-sharing arrangement described in § ll.107(b)(6) (in which case the ‘‘unweighted amount’’ shall equal the fair value and the ‘‘weighted amount’’ shall equal the unweighted amount multiplied by 85 percent) and (B) assets provided as initial margin by the covered depository institution holding company for derivative transactions described in § ll.107(b)(7) (in which case the ‘‘unweighted amount’’ shall equal the fair value and the ‘‘weighted amount’’ shall equal the unweighted amount multiplied by the higher of 85 percent or the RSF factor assigned to the asset pursuant to § ll.106) (row 31); (xvii) In the ‘‘unweighted’’ cell, the covered depository institution holding company’s NSFR derivatives asset amount under § ll.107(d)(1) and in the ‘‘weighted’’ cell, the covered depository institution holding company’s NSFR derivatives asset amount multiplied by 100 percent (row 32); (xviii) In the ‘‘unweighted’’ cell, the covered depository institution holding company’s total derivatives asset amount described in § ll.107(e)(1) (row 33); (xix) (A) In the ‘‘unweighted’’ cell, the sum of the gross derivative liability values of the covered depository institution holding company that are liabilities for each of its derivative transactions not subject to a qualifying master netting agreement and each of its QMNA netting sets, described in § ll.107(b)(5) and (B) in the ‘‘weighted’’ cell, such sum multiplied by 20 percent, as described in § ll.107(b)(5) (row 34); (xx) The weighted amount and, for each applicable maturity category, the unweighted amount of all other asset amounts not included in amounts disclosed under paragraphs (c)(2)(i) through (xix) of this section, including nonperforming assets (row 35); PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 (xxi) The weighted and unweighted amount of undrawn credit and liquidity facilities described in § ll.106(a)(2)(ii) (row 36); (xxii) The RSF amount described in § ll.105 (row 37); (3) The net stable funding ratio under § ll.100(b) (row 38); (d) Qualitative disclosures. (1) A covered depository institution holding company must provide a sufficient qualitative discussion to facilitate an understanding of the covered depository institution holding company’s net stable funding ratio and its components. (2) For purposes of paragraph (d)(1) of this section, a covered depository institution holding company’s qualitative discussion may include, but need not be limited to, the following items, to the extent they are significant to the covered depository institution holding company’s net stable funding ratio and facilitate an understanding of the data provided: (i) The main drivers of the net stable funding ratio; (ii) Changes in the net stable funding ratio results over time and the causes of such changes (for example, changes in strategies and circumstances); (iii) Concentrations of funding sources and changes in funding structure; (iv) Concentrations of available and required stable funding within a covered company’s corporate structure (for example, across legal entities); or (iv) Other sources of funding or other factors in the net stable funding ratio calculation that the covered depository institution holding company considers to be relevant to facilitate an understanding of its liquidity profile. [End of Proposed Common Rule Text] List of Subjects 12 CFR Part 50 Administrative practice and procedure; Banks, banking; Liquidity; Reporting and recordkeeping requirements; Savings associations. 12 CFR Part 249 Administrative practice and procedure; Banks, banking; Federal Reserve System; Holding companies; Liquidity; Reporting and recordkeeping requirements. 12 CFR Part 329 Administrative practice and procedure; Banks, banking; Federal Deposit Insurance Corporation, FDIC; Liquidity; Reporting and recordkeeping requirements; Savings associations. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules Adoption of the Common Rule Text The proposed adoption of the common rules by the agencies, as modified by agency-specific text, is set forth below: Department of the Treasury Office of the Comptroller of the Currency 12 CFR Chapter I Authority and Issuance For the reasons set forth in the common preamble, the OCC proposes to amend part 50 of chapter I of title 12 to add the text of the common rule as set forth at the end of the SUPPLEMENTARY INFORMATION section and is further amended as follows: PART 50—LIQUIDITY RISK MEASUREMENT STANDARDS 1. The authority citation for part 50 continues to read as follows: ■ Authority: 12 U.S.C. 1 et seq., 93a, 481, 1818, and 1462 et seq. 2. Amend § 50.1 by: a. Revising paragraph (a) and (b)(1); b. Redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4) through (6) respectively and adding new paragraph (b)(3); The additions and revisions read as follows: ■ ■ ■ sradovich on DSK3TPTVN1PROD with PROPOSALS2 § 50.1 Purpose and applicability. (a) Purpose. This part establishes a minimum liquidity standard and a minimum stable funding standard for certain national banks and Federal savings associations on a consolidated basis, as set forth herein. (b) Applicability. (1) A national bank or Federal savings association is subject to the minimum liquidity standard and the minimum stable funding standard, and other requirements of this part if: (i) The national bank or Federal savings association has total consolidated assets equal to $250 billion or more, as reported on the most recent year-end Consolidated Report of Condition and Income; (ii) The national bank or Federal savings association has total consolidated on-balance sheet foreign exposure at the most recent year end equal to $10 billion or more (where total 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 VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 products, calculated in accordance with the Federal Financial Institutions Examination Council (FFIEC) 009 Country Exposure Report); (iii) The national bank or Federal savings association is a depository institution that has total consolidated assets equal to $10 billion or more, as reported on the most recent year-end Consolidated Report of Condition and Income and is a consolidated subsidiary of one of the following: (A) A covered depository institution holding company that has total assets equal to $250 billion or more, as reported on the most recent year-end Consolidated Financial Statements for Holding Companies reporting form (FR Y–9C), or, if the covered depository institution holding company is not required to report on the FR Y–9C, its estimated total consolidated assets as of the most recent year-end, calculated in accordance with the instructions to the FR Y–9C; (B) A depository institution that has total consolidated assets equal to $250 billion or more, as reported on the most recent year-end Consolidated Report of Condition and Income; (C) A covered depository institution holding company or depository institution that has total consolidated on-balance sheet foreign exposure at the most recent year-end equal to $10 billion or more (where total 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 Federal Financial Institutions Examination Council (FFIEC) 009 Country Exposure Report); or (D) A covered nonbank company; or (iv) The OCC has determined that application of this part is appropriate in light of the national bank’s or Federal savings association’s asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system. * * * * * (3)(i) A national bank or Federal savings association that becomes subject to the minimum stable funding standard and other requirements of subparts K through N of this part under paragraphs (b)(1)(i) through (iii) of this section after the effective date must comply with the requirements of subparts K through N of this part beginning on April 1 of the PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 35175 year in which the national bank or Federal savings association becomes subject to the minimum stable funding standard and the requirements of subparts K through N of this part; and (ii) A national bank or Federal savings association that becomes subject to the minimum stable funding standard and other requirements of subparts K through N of this part under paragraph (b)(1)(iv) of this section after the effective date must comply with the requirements of subparts K through N of this part on the date specified by the OCC. * * * * * ■ 3. Amend § 50.2, by redesignating paragraph (b) as paragraph (c), adding new paragraph (b), and revising newlyredesignated paragraph (c) to read as follows: § 50.2 Reservation of authority. * * * * * (b) The OCC may require a national bank or Federal savings association to hold an amount of available stable funding (ASF) greater than otherwise required under this part, or to take any other measure to improve the national bank’s or Federal savings association’s stable funding, if the OCC determines that the national bank’s or Federal savings association’s stable funding requirements as calculated under this part are not commensurate with the national bank’s or Federal savings association’s funding risks. In making determinations under this section, the OCC will apply notice and response procedures as set forth in 12 CFR 3.404. (c) Nothing in this part limits the authority of the OCC under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient liquidity levels, deficient stable funding levels, or violations of law. ■ 4. Amend § 50.3 by: ■ a. Revising the definition for ‘‘Calculation date’’; ■ b. Adding the definition ‘‘Carrying value’’; ■ c. Revising the definitions for ‘‘Collateralized deposit’’, ‘‘Committed’’ and ‘‘Covered nonbank company’’; ■ d. Adding the definitions for ‘‘Encumbered’’, ‘‘NSFR liability’’ and ‘‘NSFR regulatory capital element’’; ■ e. Revising the definition for ‘‘Operational Deposit’’; ■ f. Adding the definition for ‘‘QMNA netting set’’; ■ g. Revising the definitions for:Secured funding transaction’’ and ‘‘Secured lending transaction’’; E:\FR\FM\01JNP2.SGM 01JNP2 35176 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules h. Adding the definition for ‘‘Unconditionally cancelable’’; ■ i. Revising the definition for ‘‘Unsecured wholesale funding’’; and ■ j. Adding the definition for ‘‘Unsecured wholesale lending’’. The additions and revisions read as follows: ■ § 50.3 Definitions. sradovich on DSK3TPTVN1PROD with PROPOSALS2 * * * * * Calculation date means, for subparts B through J of this part, any date on which a national bank or Federal savings association calculates its liquidity coverage ratio under § 50.10, and for subparts K through N of this part, any date on which a national bank or Federal savings association calculates its net stable funding ratio under § 50.100. Carrying value means, with respect to an asset, NSFR regulatory capital element, or NSFR liability, the value on the balance sheet of the national bank or Federal savings association, each as determined in accordance with GAAP. * * * * * Collateralized deposit means: (1) A deposit of a public sector entity held at the national bank or Federal savings association that is required to be secured under applicable law by a lien on assets owned by the national bank or Federal savings association and that gives the depositor, as holder of the lien, priority over the assets in the event the national bank or Federal savings association enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding; (2) A deposit of a fiduciary account awaiting investment or distribution held at the national bank or Federal savings association for which the national bank or Federal savings association is a fiduciary and is required under 12 CFR 9.10(b) (national banks), 12 CFR 150.300 through 150.320 (Federal savings associations), or applicable state law (state member and nonmember banks, and state savings associations) to set aside assets owned by the national bank or Federal savings association as security, which gives the depositor priority over the assets in the event the national bank or Federal savings association enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding; or (3) A deposit of a fiduciary account awaiting investment or distribution held at the national bank or Federal savings association for which the national bank’s or Federal savings association’s affiliated insured depository institution is a fiduciary and where the national bank or Federal savings association under 12 CFR 9.10(c) (national banks) or VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 12 CFR 150.310 (Federal savings associations) has set aside assets owned by the national bank or Federal savings association as security, which gives the depositor priority over the assets in the event the national bank or Federal savings association enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Committed means, with respect to a credit or liquidity facility, that under the terms of the facility, it is not unconditionally cancelable. * * * * * Covered nonbank company means a designated company that the Board of Governors of the Federal Reserve System has required by separate rule or order to comply with the requirements of 12 CFR part 249. * * * * * Encumbered means, with respect to an asset, that the asset: (1) Is subject to legal, regulatory, contractual, or other restriction on the ability of the national bank or Federal savings association to monetize the asset; or (2) Is pledged, explicitly or implicitly, to secure or to provide credit enhancement to any transaction, not including when the asset is pledged to a central bank or a U.S. governmentsponsored enterprise where: (i) Potential credit secured by the asset is not currently extended to the national bank or Federal savings association or its consolidated subsidiaries; and (ii) The pledged asset is not required to support access to the payment services of a central bank. * * * * * NSFR liability means any liability or equity reported on a national bank’s or Federal savings association’s balance sheet that is not an NSFR regulatory capital element. NSFR regulatory capital element means any capital element included in a national bank’s or Federal savings association’s common equity tier 1 capital, additional tier 1 capital, and tier 2 capital, in each case as defined in 12 CFR 3.20, prior to application of capital adjustments or deductions as set forth in 12 CFR 3.22, excluding any debt or equity instrument that does not meet the criteria for additional tier 1 or tier 2 capital instruments in 12 CFR 3.22 and is being phased out of tier 1 capital or tier 2 capital pursuant to subpart G of 12 CFR part 3. Operational deposit means short-term unsecured wholesale funding that is a deposit, unsecured wholesale lending that is a deposit, or a collateralized PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 deposit, in each case that meets the requirements of § 50.4(b) with respect to that deposit and is necessary for the provision of operational services as an independent third-party intermediary, agent, or administrator to the wholesale customer or counterparty providing the deposit. * * * * * QMNA netting set means a group of derivative transactions with a single counterparty that is subject to a qualifying master netting agreement and is netted under the qualifying master netting agreement. * * * * * Secured funding transaction means any funding transaction that is subject to a legally binding agreement that gives rise to a cash obligation of the national bank or Federal savings association to a wholesale customer or counterparty that is secured under applicable law by a lien on securities or loans provided by the national bank or Federal savings association, which gives the wholesale customer or counterparty, as holder of the lien, priority over the securities or loans in the event the national bank or Federal savings association enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Secured funding transactions include repurchase transactions, securities lending transactions, other secured loans, and borrowings from a Federal Reserve Bank. Secured funding transactions do not include securities. Secured lending transaction means any lending transaction that is subject to a legally binding agreement that gives rise to a cash obligation of a wholesale customer or counterparty to the national bank or Federal savings association that is secured under applicable law by a lien on securities or loans provided by the wholesale customer or counterparty, which gives the national bank or Federal savings association, as holder of the lien, priority over the securities or loans in the event the counterparty enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Secured lending transactions include reverse repurchase transactions and securities borrowing transactions. Secured lending transactions do not include securities. * * * * * Unconditionally cancelable means, with respect to a credit or liquidity facility, that a national bank or Federal savings association may, at any time, with or without cause, refuse to extend credit under the facility (to the extent permitted under applicable law). E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules Unsecured wholesale funding means a liability or general obligation of the national bank or Federal savings association to a wholesale customer or counterparty that is not a secured funding transaction. Unsecured wholesale funding includes wholesale deposits. Unsecured wholesale lending means a liability or general obligation of a wholesale customer or counterparty to the national bank or Federal savings association that is not a secured lending transaction or a security. * * * * * ■ 5. Amend § 50.22, by revising paragraph (b)(1) to read as follows: § 50.22 Requirements for eligible highquality liquid assets. * * * * * (b) * * * (1) The assets are not encumbered. * * * * * ■ 6. Amend § 50.30, by revising paragraph (b)(3) to read as follows: § 50.30 Subpart G [Added and Reserved] ■ sradovich on DSK3TPTVN1PROD with PROPOSALS2 Determining maturity. (a) * * * (1) With respect to an instrument or transaction subject to § 50.32, on the earliest possible contractual maturity date or the earliest possible date the transaction could occur, taking into account any option that could accelerate the maturity date or the date of the transaction, except that when considering the earliest possible contractual maturity date or the earliest possible date the transaction could occur, the national bank or Federal savings association should exclude any contingent options that are triggered only by regulatory actions or changes in law or regulation, as follows: * * * * * (2) With respect to an instrument or transaction subject to § 50.33, on the latest possible contractual maturity date or the latest possible date the transaction could occur, taking into account any option that could extend the maturity date or the date of the transaction, except that when considering the latest possible contractual maturity date or the latest 19:02 May 31, 2016 Jkt 238001 8a. Part 50 is amended by adding subparts H, I, J, K, L, M, and N as set forth at the end of the common preamble. ■ Total net cash outflow amount. VerDate Sep<11>2014 8. Add and reserve subpart G. Subparts H, I, J, K, L, M, and N [Added] (b) * * * (3) Other than the transactions identified in § 50.32(h)(2), (h)(5), or (j) or § 50.33(d) or (f), the maturity of which is determined under § 50.31(a), transactions that have an open maturity are not included in the calculation of the maturity mismatch add-on. ■ 7. Amend § 50.31, by revising paragraphs (a)(1), (a)(2), and (a)(4) to read as follows: § 50.31 possible date the transaction could occur, the national bank or Federal savings association may exclude any contingent options that are triggered only by regulatory actions or changes in law or regulation, as follows: * * * * * (4) With respect to a transaction that has an open maturity, is not an operational deposit, and is subject to the provisions of § 50.32(h)(2), (h)(5), (j), or (k) or § 50.33(d) or (f), the maturity date is the first calendar day after the calculation date. Any other transaction that has an open maturity and is subject to the provisions of § 50.32 shall be considered to mature within 30 calendar days of the calculation date. * * * * * Subparts K and L [Amended] 9. Subparts K and L to part 50 are amended by: ■ a. Removing ‘‘[AGENCY]’’ and adding ‘‘OCC’’ in its place wherever it appears. ■ b. Removing ‘‘[AGENCY CAPITAL REGULATION]’’ and adding ‘‘12 CFR part 3’’ in its place wherever it appears. ■ c. Removing ‘‘[BANK]’’ and adding ‘‘national bank or Federal savings association’’ in its place wherever it appears. ■ d. Removing ‘‘[BANK]’s’’ and adding ‘‘national bank’s or Federal savings association’s’’ in its place wherever it appears. ■ e. Removing ‘‘[§ ll.10(c)(4)(ii)(C)(1) through (7) of the AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE]’’ and adding ‘‘12 CFR 3.10(c)(4)(ii)(C)(1) through (7)’’ in its place wherever it appears. ■ f. Removing ‘‘[§ ll.10(c)(4)(ii)(E)(1) through (3) of the AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE]’’ and adding ‘‘12 CFR 3.10(c)(4)(ii)(E)(1) through (3)’’ in its place wherever it appears. ■ g. Removing ‘‘[INSERT PART]’’ and adding ‘‘50’’ in its place wherever it appears. ■ Subpart N [Removed and Reserved] ■ 10. Remove and reserve subpart N. PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 35177 Board of Governors of the Federal Reserve System 12 CFR Chapter II Authority and Issuance For the reasons set forth in the common preamble, part 249 of chapter II of title 12 of the Code of Federal Regulations is amended to add the text of the common rule as set forth at the end of the SUPPLEMENTARY INFORMATION section and is further amended as follows: PART 249—LIQUIDITY RISK MEASUREMENT, STANDARDS, AND MONITORING (REGULATION WW) 11. 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. 12. Revise the heading for part 249 as set forth above. ■ 13. Amend § 249.1 by: ■ a. Revising paragraphs (a) and (b)(1); ■ b. Redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4) through (6), respectively, and adding paragraph (b)(3); The additions and revisions read as follows: ■ § 249.1 Purpose and applicability. (a) Purpose. This part establishes a minimum liquidity standard and a minimum stable funding standard for certain Board-regulated institutions on a consolidated basis, as set forth herein. (b) Applicability. (1) A Boardregulated institution is subject to the minimum liquidity standard and the minimum stable funding standard, and other requirements of this part if: (i) It has total consolidated assets equal to $250 billion or more, as reported on the most recent year end (as applicable): (A) Consolidated Financial Statements for Holding Companies reporting form (FR Y–9C), or, if the Board-regulated institution is not required to report on the FR Y–9C, its estimated total consolidated assets as of the most recent year end, calculated in accordance with the instructions to the FR Y–9C; or (B) Consolidated Report of Condition and Income (Call Report); (ii) It has total consolidated onbalance sheet foreign exposure at the most recent year end equal to $10 billion or more (where total 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 E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 35178 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules the head office or guarantor plus local country claims on local residents plus revaluation gains on foreign exchange and derivative products, calculated in accordance with the Federal Financial Institutions Examination Council (FFIEC) 009 Country Exposure Report); (iii) It is a depository institution that is a consolidated subsidiary of a company described in paragraphs (b)(1)(i) or (ii) of this section and has total consolidated assets equal to $10 billion or more, as reported on the most recent year-end Consolidated Report of Condition and Income; (iv) It is a covered nonbank company; (v) It is a covered depository institution holding company that meets the criteria in section 249.60(a) or section 249.120(a) but does not meet the criteria in paragraphs (b)(1)(i) or (ii) of this section, and is subject to complying with the requirements of this part in accordance with subpart G or M of this part, respectively; or (vi) The Board has determined that application of this part is appropriate in light of the Board-regulated institution’s asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system. * * * * * (3)(i) A Board-regulated institution that becomes subject to the minimum stable funding standard and other requirements of subparts K through N of this part under paragraphs (b)(1)(i) through (iii) of this section after the effective date must comply with the requirements of subparts K through N of this part beginning on April 1 of the year in which the Board-regulated institution becomes subject to the minimum stable funding standard and the requirements of subparts K through N of this part; and (ii) A Board-regulated institution that becomes subject to the minimum stable funding standard and other requirements of subparts K through N of this part under paragraph (b)(1)(iv) of this section after the effective date must comply with the requirements of subparts K through N of this part on the date specified by the Board. * * * * * ■ 14. Amend § 249.2, by redesignating paragraph (b) as paragraph (c), adding new paragraph (b), and revising newlyredesignated paragraph (c) to read as follows: § 249.2 Reservation of authority. * * * * * (b) The Board may require a Boardregulated institution to hold an amount of available stable funding (ASF) greater VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 than otherwise required under this part, or to take any other measure to improve the Board-regulated institution’s stable funding, if the Board determines that the Board-regulated institution’s stable funding requirements as calculated under this part are not commensurate with the Board-regulated institution’s funding risks. In making determinations under this section, the Board will apply notice and response procedures as set forth in 12 CFR 263.202. (c) Nothing in this part limits the authority of the Board under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient liquidity levels, deficient stable funding levels, or violations of law. ■ 15. Amend § 249.3 by: ■ a. Revising the definition for ‘‘Calculation date’’; ■ b. Adding the definition for ‘‘Carrying value’’; ■ c. Revising the definitions for ‘‘Collateralized deposit’’, ‘‘Committed’’, and ‘‘Covered nonbank company’’; ■ d. Adding the definitions for ‘‘Encumbered’’, ‘‘NSFR liability’’, and ‘‘NSFR regulatory capital element’’; ■ e. Revising the definition for ‘‘Operational Deposit’’; ■ f. Adding the definition for ‘‘QMNA netting set’’; ■ g. Revising the definitions for ‘‘Secured funding transaction’’ and ‘‘Secured lending transaction’’; ■ h. Adding the definition for ‘‘Unconditionally cancelable’’; ■ i. Revising the definition for ‘‘Unsecured wholesale funding’’; and ■ j. Adding the definition for ‘‘Unsecured wholesale lending’’. The additions and revisions read in alphabetical order as follows: § 249.3 Definitions. * * * * * Calculation date means, for subparts B through J of this part, any date on which a Board-regulated institution calculates its liquidity coverage ratio under § 249.10, and for subparts K through N of this part, any date on which a Board-regulated institution calculates its net stable funding ratio under § 249.100. Carrying value means, with respect to an asset, NSFR regulatory capital element, or NSFR liability, the value on the balance sheet of the Board-regulated institution, each as determined in accordance with GAAP. * * * * * Collateralized deposit means: (1) A deposit of a public sector entity held at the Board-regulated institution PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 that is required to be secured under applicable law by a lien on assets owned by the Board-regulated institution and that gives the depositor, as holder of the lien, priority over the assets in the event the Board-regulated institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding; (2) A deposit of a fiduciary account awaiting investment or distribution held at the Board-regulated institution for which the Board-regulated institution is a fiduciary and is required under 12 CFR 9.10(b) (national banks), 12 CFR 150.300 through 150.320 (Federal savings associations), or applicable state law (state member and nonmember banks, and state savings associations) to set aside assets owned by the Boardregulated institution as security, which gives the depositor priority over the assets in the event the Board-regulated institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding; or (3) A deposit of a fiduciary account awaiting investment or distribution held at the Board-regulated institution for which the Board-regulated institution’s affiliated insured depository institution is a fiduciary and where the Boardregulated institution under 12 CFR 9.10(c) (national banks) or 12 CFR 150.310 (Federal savings associations) has set aside assets owned by the Boardregulated institution as security, which gives the depositor priority over the assets in the event the Board-regulated institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Committed means, with respect to a credit or liquidity facility, that under the terms of the facility, it is not unconditionally cancelable. * * * * * Covered nonbank company means a designated company that the Board of Governors of the Federal Reserve System has required by separate rule or order to comply with the requirements of 12 CFR part 249. * * * * * Encumbered means, with respect to an asset, that the asset: (1) Is subject to legal, regulatory, contractual, or other restriction on the ability of the Board-regulated institution to monetize the asset; or (2) Is pledged, explicitly or implicitly, to secure or to provide credit enhancement to any transaction, not including when the asset is pledged to a central bank or a U.S. governmentsponsored enterprise where: (i) Potential credit secured by the asset is not currently extended to the E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules Board-regulated institution or its consolidated subsidiaries; and (ii) The pledged asset is not required to support access to the payment services of a central bank. * * * * * NSFR liability means any liability or equity reported on a Board-regulated institution’s balance sheet that is not an NSFR regulatory capital element. NSFR regulatory capital element means any capital element included in a Board-regulated institution’s common equity tier 1 capital, additional tier 1 capital, and tier 2 capital, in each case as defined in § 217.20 of Regulation Q (12 CFR part 217), prior to application of capital adjustments or deductions as set forth in § 217.22 of Regulation Q (12 CFR part 217), excluding any debt or equity instrument that does not meet the criteria for additional tier 1 or tier 2 capital instruments in § 217.22 of Regulation Q (12 CFR part 217) and is being phased out of tier 1 capital or tier 2 capital pursuant to subpart G of Regulation Q (12 CFR part 217). Operational deposit means short-term unsecured wholesale funding that is a deposit, unsecured wholesale lending that is a deposit, or a collateralized deposit, in each case that meets the requirements of § 249.4(b) with respect to that deposit and is necessary for the provision of operational services as an independent third-party intermediary, agent, or administrator to the wholesale customer or counterparty providing the deposit. * * * * * QMNA netting set means a group of derivative transactions with a single counterparty that is subject to a qualifying master netting agreement and is netted under the qualifying master netting agreement. * * * * * Secured funding transaction means any funding transaction that is subject to a legally binding agreement that gives rise to a cash obligation of the Boardregulated institution to a wholesale customer or counterparty that is secured under applicable law by a lien on securities or loans provided by the Board-regulated institution, which gives the wholesale customer or counterparty, as holder of the lien, priority over the securities or loans in the event the Board-regulated institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Secured funding transactions include repurchase transactions, securities lending transactions, other secured loans, and borrowings from a Federal Reserve VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 Bank. Secured funding transactions do not include securities. Secured lending transaction means any lending transaction that is subject to a legally binding agreement that gives rise to a cash obligation of a wholesale customer or counterparty to the Boardregulated institution that is secured under applicable law by a lien on securities or loans provided by the wholesale customer or counterparty, which gives the Board-regulated institution, as holder of the lien, priority over the securities or loans in the event the counterparty enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Secured lending transactions include reverse repurchase transactions and securities borrowing transactions. Secured lending transactions do not include securities. * * * * * Unconditionally cancelable means, with respect to a credit or liquidity facility, that a Board-regulated institution may, at any time, with or without cause, refuse to extend credit under the facility (to the extent permitted under applicable law). Unsecured wholesale funding means a liability or general obligation of the Board-regulated institution to a wholesale customer or counterparty that is not a secured funding transaction. Unsecured wholesale funding includes wholesale deposits. Unsecured wholesale lending means a liability or general obligation of a wholesale customer or counterparty to the Board-regulated institution that is not a secured lending transaction or a security. * * * * * ■ 16. Amend § 249.22, by revising paragraph (b)(1) to read as follows: § 249.22 Requirements for eligible highquality liquid assets. * * * * * (b) * * * (1) The assets are not encumbered. * * * * * ■ 17. Amend § 249.30, by revising paragraph (b)(3) to read as follows: § 249.30 Total net cash outflow amount. (b) * * * (3) Other than the transactions identified in § 249.32(h)(2), (h)(5), or (j) or § 249.33(d) or (f), the maturity of which is determined under § 249.31(a), transactions that have an open maturity are not included in the calculation of the maturity mismatch add-on. ■ 18. Amend § 249.31, by revising paragraphs (a)(1), (a)(2), and (a)(4) to read as follows: PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 § 249.31 35179 Determining maturity. (a) * * * (1) With respect to an instrument or transaction subject to § 249.32, on the earliest possible contractual maturity date or the earliest possible date the transaction could occur, taking into account any option that could accelerate the maturity date or the date of the transaction, except that when considering the earliest possible contractual maturity date or the earliest possible date the transaction could occur, the Board-regulated institution should exclude any contingent options that are triggered only by regulatory actions or changes in law or regulation, as follows: * * * * * (2) With respect to an instrument or transaction subject to § 249.33, on the latest possible contractual maturity date or the latest possible date the transaction could occur, taking into account any option that could extend the maturity date or the date of the transaction, except that when considering the latest possible contractual maturity date or the latest possible date the transaction could occur, the Board-regulated institution may exclude any contingent options that are triggered only by regulatory actions or changes in law or regulation, as follows: * * * * * (4) With respect to a transaction that has an open maturity, is not an operational deposit, and is subject to the provisions of § 249.32(h)(2), (h)(5), (j), or (k) or § 249.33(d) or (f), the maturity date is the first calendar day after the calculation date. Any other transaction that has an open maturity and is subject to the provisions of § 249.32 shall be considered to mature within 30 calendar days of the calculation date. * * * * * Subparts H, I, J, K, and L, M, and N [Added] 19. Amend part 249 by adding subparts H, I, J, K, L, M, and N as set forth at the end of the common preamble. ■ Subparts K, L, and N [Amended] 20. Amend subparts K, L, and N of part 249 by: ■ a. Removing ‘‘[AGENCY]’’ and adding ‘‘Board’’ in its place wherever it appears. ■ b. Removing ‘‘[AGENCY CAPITAL REGULATION]’’ and adding ‘‘Regulation Q (12 CFR part 217)’’ in its place wherever it appears. ■ c. Removing ‘‘[§ ll.10(c)(4)(ii)(C)(1) through (7) of the AGENCY ■ E:\FR\FM\01JNP2.SGM 01JNP2 35180 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules SUPPLEMENTARY LEVERAGE RATIO RULE]’’ and adding ‘‘12 CFR 217.10(c)(4)(ii)(C)(1) through (7)’’ in its place wherever it appears. ■ d. Removing ‘‘[§ ll.10(c)(4)(ii)(E)(1) through (3) of the AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE]’’ and adding ‘‘12 CFR 217.10(c)(4)(ii)(E)(1) through (3)’’ in its place wherever it appears ■ e. Removing ‘‘[BANK]’’ and adding ‘‘Board-regulated institution’’ in its place wherever it appears. ■ f. Removing ‘‘[BANK]’s’’ and adding ‘‘Board-regulated institution’s’’ in its place wherever it appears. ■ 21. Revise subpart M of part 249 to read as follows: Subpart M—Net stable funding ratio for certain depository institution holding companies Sec. 249.120 Applicability. 249.121 Net stable funding ratio requirement. Federal Deposit Insurance Corporation 12 CFR Chapter III Subpart M—Net stable funding ratio for certain depository institution holding companies sradovich on DSK3TPTVN1PROD with PROPOSALS2 § 249.120 Applicability. (a) Scope. This subpart applies to a covered depository institution holding company domiciled in the United States that has total consolidated assets equal to $50 billion or more, based on the average of the covered depository institution holding company’s total consolidated assets in the four most recent quarters as reported on the FR Y– 9C (or, if a savings and loan holding company is not required to report on the FR Y–9C, based on the average of its estimated total consolidated assets for the most recent four quarters, calculated in accordance with the instructions to the FR Y–9C) and does not meet the applicability criteria set forth in § 249.1(b). (b) Applicable provisions. Except as otherwise provided in this subpart, the provisions of subparts A, K, L, and N of this part apply to covered depository institution holding companies that are subject to this subpart. (c) Applicability. A covered depository institution holding company that meets the threshold for applicability of this subpart under paragraph (a) of this section after the effective date must comply with the requirements of this subpart beginning one year after the date it meets the threshold set forth in paragraph (a) of this section. § 249.121 Net stable funding ratio requirement. (a) Calculation of the net stable funding ratio. A covered depository VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 institution holding company subject to this subpart must calculate and maintain a net stable funding ratio in accordance with § 249.100 and this subpart. (b) Available stable funding amount. A covered depository institution holding company subject to this subpart must calculate its ASF amount in accordance with subpart K of this part. (c) Required stable funding amount. A covered depository institution holding company subject to this subpart must calculate its RSF amount in accordance with subpart K of this part, provided, however, that the RSF amount of a covered depository institution holding company subject to this subpart equals 70 percent of the RSF amount calculated in accordance with subpart K of this part. Authority and Issuance For the reasons set forth in the common preamble, the Federal Deposit Insurance Corporation proposes to amend chapter III of title 12 of the Code of Federal Regulations to add the text of the common rule as set forth at the end of the SUPPLEMENTARY INFORMATION section and is further amended as follows: PART 329—LIQUIDITY RISK MEASUREMENT STANDARDS 22. The authority citation for part 329 continues to read as follows: ■ Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p–1, 5412. 23. Amend § 329.1 by: a. Revising paragraphs (a) and (b)(1); b. Redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4) through (6), respectively, and adding new paragraph (b)(3); The additions and revisions read as follows: ■ ■ ■ § 329.1 Purpose and applicability. (a) Purpose. This part establishes a minimum liquidity standard and a minimum stable funding standard for certain FDIC-supervised institutions on a consolidated basis, as set forth herein. (b) Applicability. (1) An FDICsupervised institution is subject to the minimum liquidity standard and the minimum stable funding standard, and other requirements of this part if: (i) The FDIC-supervised institution has total consolidated assets equal to $250 billion or more, as reported on the most recent year-end Consolidated Report of Condition and Income; (ii) The FDIC-supervised institution has total consolidated on-balance sheet PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 foreign exposure at the most recent year end equal to $10 billion or more (where total 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 products, calculated in accordance with the Federal Financial Institutions Examination Council (FFIEC) 009 Country Exposure Report); (iii) The FDIC-supervised institution is a depository institution that has total consolidated assets equal to $10 billion or more, as reported on the most recent year-end Consolidated Report of Condition and Income and is a consolidated subsidiary of one of the following: (A) A covered depository institution holding company that has total assets equal to $250 billion or more, as reported on the most recent year-end Consolidated Financial Statements for Holding Companies reporting form (FR Y–9C), or, if the covered depository institution holding company is not required to report on the FR Y–9C, its estimated total consolidated assets as of the most recent year-end, calculated in accordance with the instructions to the FR Y–9C; (B) A depository institution that has total consolidated assets equal to $250 billion or more, as reported on the most recent year-end Consolidated Report of Condition and Income; (C) A covered depository institution holding company or depository institution that has total consolidated on-balance sheet foreign exposure at the most recent year-end equal to $10 billion or more (where total 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 Federal Financial Institutions Examination Council (FFIEC) 009 Country Exposure Report); or (D) A covered nonbank company; or (iv) The FDIC has determined that application of this part is appropriate in light of the FDIC-supervised institution’s asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules domestic covered entities, or risk to the financial system. * * * * * (3)(i) An FDIC-supervised institution that becomes subject to the minimum stable funding standard and other requirements of subparts K through N of this part under paragraphs (b)(1)(i) through (iii) of this section after the effective date must comply with the requirements of subparts K through N of this part beginning on April 1 of the year in which the FDIC-supervised institution becomes subject to the minimum stable funding standard and the requirements of subparts K through N of this part; and (ii) An FDIC-supervised institution that becomes subject to the minimum stable funding standard and other requirements of subparts K through N of this part under paragraph (b)(1)(iv) of this section after the effective date must comply with the requirements of subparts K through N of this part on the date specified by the FDIC. * * * * * ■ 24. Amend § 329.2, by redesignating paragraph (b) as paragraph (c), adding new paragraph (b), and revising newlyredesignated paragraph (c) to read as follows: § 329.2 Reservation of authority. sradovich on DSK3TPTVN1PROD with PROPOSALS2 * * * * * (b) The FDIC may require an FDICsupervised institution to hold an amount of available stable funding (ASF) greater than otherwise required under this part, or to take any other measure to improve the FDICsupervised institution’s stable funding, if the FDIC determines that the FDICsupervised institution’s stable funding requirements as calculated under this part are not commensurate with the FDIC-supervised institution’s funding risks. In making determinations under this section, the FDIC will apply notice and response procedures as set forth in 12 CFR 324.5. (c) Nothing in this part limits the authority of the FDIC under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient liquidity levels, deficient stable funding levels, or violations of law. ■ 25. Amend § 329.3 by: ■ a. Revising the definition for ‘‘Calculation date’’; ■ b. Adding the definition for ‘‘Carrying value’’; ■ c. Revising the definitions for ‘‘Collateralized deposit’’, ‘‘Committed’’, and ‘‘Covered nonbank company’’; VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 d. Adding the definitions for ‘‘Encumbered’’, ‘‘NSFR liability’’, and ‘‘NSFR regulatory capital’’; ■ e. Revising the definition for ‘‘Operational Deposit’’; ■ f. Adding the definition for ‘‘QMNA netting set’’; ■ g. Revising the definitions for ‘‘Secured funding transaction’’, and ‘‘Secured lending transaction’’; ■ h. Adding the definition for ‘‘Unconditionally cancelable’’; ■ i. Revising the definitions for ‘‘Unsecured wholesale funding’’; and ■ j. Adding the definition for ‘‘Unsecured wholesale lending’’. The additions and revisions read as follows: ■ § 329.3 Definitions. * * * * * Calculation date means, for subparts B through J of this part, any date on which an FDIC-supervised institution calculates its liquidity coverage ratio under § 329.10, and for subparts K through N of this part, any date on which an FDIC-supervised institution calculates its net stable funding ratio under § 329.100. Carrying value means, with respect to an asset, NSFR regulatory capital element, or NSFR liability, the value on the balance sheet of the FDICsupervised institution, each as determined in accordance with GAAP. * * * * * Collateralized deposit means: (1) A deposit of a public sector entity held at the FDIC-supervised institution that is required to be secured under applicable law by a lien on assets owned by the FDIC-supervised institution and that gives the depositor, as holder of the lien, priority over the assets in the event the FDIC-supervised institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding; (2) A deposit of a fiduciary account awaiting investment or distribution held at the FDIC-supervised institution for which the FDIC-supervised institution is a fiduciary and is required under 12 CFR 9.10(b) (national banks), 12 CFR 150.300 through 150.320 (Federal savings associations), or applicable state law (state member and nonmember banks, and state savings associations) to set aside assets owned by the FDICsupervised institution as security, which gives the depositor priority over the assets in the event the FDICsupervised institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding; or (3) A deposit of a fiduciary account awaiting investment or distribution held PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 35181 at the FDIC-supervised institution for which the FDIC-supervised institution’s affiliated insured depository institution is a fiduciary and where the FDICsupervised institution under 12 CFR 9.10(c) (national banks) or 12 CFR 150.310 (Federal savings associations) has set aside assets owned by the FDICsupervised institution as security, which gives the depositor priority over the assets in the event the FDICsupervised institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Committed means, with respect to a credit or liquidity facility, that under the terms of the facility, it is not unconditionally cancelable. * * * * * Covered nonbank company means a designated company that the Board of Governors of the Federal Reserve System has required by separate rule or order to comply with the requirements of 12 CFR part 249. * * * * * Encumbered means, with respect to an asset, that the asset: (1) Is subject to legal, regulatory, contractual, or other restriction on the ability of the FDIC-supervised institution to monetize the asset; or (2) Is pledged, explicitly or implicitly, to secure or to provide credit enhancement to any transaction, not including when the asset is pledged to a central bank or a U.S. governmentsponsored enterprise where: (i) Potential credit secured by the asset is not currently extended to the FDIC-supervised institution or its consolidated subsidiaries; and (ii) The pledged asset is not required to support access to the payment services of a central bank. * * * * * NSFR liability means any liability or equity reported on an FDIC-supervised institution’s balance sheet that is not an NSFR regulatory capital element. NSFR regulatory capital element means any capital element included in an FDIC-supervised institution’s common equity tier 1 capital, additional tier 1 capital, and tier 2 capital, in each case as defined in 12 CFR 324.20, prior to application of capital adjustments or deductions as set forth in 12 CFR 324.22, excluding any debt or equity instrument that does not meet the criteria for additional tier 1 or tier 2 capital instruments in 12 CFR 324.22 and is being phased out of tier 1 capital or tier 2 capital pursuant to subpart G of 12 CFR 324. Operational deposit means short-term unsecured wholesale funding that is a E:\FR\FM\01JNP2.SGM 01JNP2 sradovich on DSK3TPTVN1PROD with PROPOSALS2 35182 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules deposit, unsecured wholesale lending that is a deposit, or a collateralized deposit, in each case that meets the requirements of § 329.4(b) with respect to that deposit and is necessary for the provision of operational services as an independent third-party intermediary, agent, or administrator to the wholesale customer or counterparty providing the deposit. * * * * * QMNA netting set means a group of derivative transactions with a single counterparty that is subject to a qualifying master netting agreement and is netted under the qualifying master netting agreement. * * * * * Secured funding transaction means any funding transaction that is subject to a legally binding agreement that gives rise to a cash obligation of the FDICsupervised institution to a wholesale customer or counterparty that is secured under applicable law by a lien on securities or loans provided by the FDIC-supervised institution, which gives the wholesale customer or counterparty, as holder of the lien, priority over the securities or loans in the event the FDIC-supervised institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Secured funding transactions include repurchase transactions, securities lending transactions, other secured loans, and borrowings from a Federal Reserve Bank. Secured funding transactions do not include securities. Secured lending transaction means any lending transaction that is subject to a legally binding agreement that gives rise to a cash obligation of a wholesale customer or counterparty to the FDICsupervised institution that is secured under applicable law by a lien on securities or loans provided by the wholesale customer or counterparty, which gives the FDIC-supervised institution, as holder of the lien, priority over the securities or loans in the event the counterparty enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Secured lending transactions include reverse repurchase transactions and securities borrowing transactions. Secured lending transactions do not include securities. * * * * * Unconditionally cancelable means, with respect to a credit or liquidity facility, that an FDIC-supervised institution may, at any time, with or without cause, refuse to extend credit under the facility (to the extent permitted under applicable law). VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 Unsecured wholesale funding means a liability or general obligation of the FDIC-supervised institution to a wholesale customer or counterparty that is not a secured funding transaction. Unsecured wholesale funding includes wholesale deposits. Unsecured wholesale lending means a liability or general obligation of a wholesale customer or counterparty to the FDIC-supervised institution that is not a secured lending transaction or a security. * * * * * ■ 26. Amend § 329.22, by revising paragraph (b)(1) to read as follows: § 329.22 Requirements for eligible highquality liquid assets. * * * * * (b) * * * (1) The assets are not encumbered. * * * * * ■ 27. Amend § 329.30, by revising paragraph (b)(3) to read as follows: § 329.30 Total net cash outflow amount. * * * * * (b) * * * (3) Other than the transactions identified in § 329.32(h)(2), (h)(5), or (j) or § 329.33(d) or (f), the maturity of which is determined under § 329.31(a), transactions that have an open maturity are not included in the calculation of the maturity mismatch add-on. ■ 28. Amend § 329.31, by revising paragraphs (a)(1), (a)(2), and (a)(4) to read as follows: § 329.31 Determining maturity. (a) * * * (1) With respect to an instrument or transaction subject to § 329.32, on the earliest possible contractual maturity date or the earliest possible date the transaction could occur, taking into account any option that could accelerate the maturity date or the date of the transaction, except that when considering the earliest possible contractual maturity date or the earliest possible date the transaction could occur, the FDIC-supervised institution should exclude any contingent options that are triggered only by regulatory actions or changes in law or regulation, as follows: * * * * * (2) With respect to an instrument or transaction subject to § 329.33, on the latest possible contractual maturity date or the latest possible date the transaction could occur, taking into account any option that could extend the maturity date or the date of the transaction, except that when considering the latest possible contractual maturity date or the latest PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 possible date the transaction could occur, the FDIC-supervised institution may exclude any contingent options that are triggered only by regulatory actions or changes in law or regulation, as follows: * * * * * (4) With respect to a transaction that has an open maturity, is not an operational deposit, and is subject to the provisions of § 329.32(h)(2), (h)(5), (j), or (k) or § 329.33(d) or (f), the maturity date is the first calendar day after the calculation date. Any other transaction that has an open maturity and is subject to the provisions of § 329.32 shall be considered to mature within 30 calendar days of the calculation date. * * * * * Subpart G [Added and Reserved] ■ 29. Add reserve subpart G. Subparts H, I, J, K, L, M, and N [Added] 30. Part 329 is amended by adding subparts H, I, J, K, L, M, and N as set forth at the end of the common preamble. ■ Subparts K and L [Amended] 31. Subparts K and L to part 329 are amended by: ■ a. Removing ‘‘[AGENCY]’’ and adding ‘‘FDIC’’ in its place wherever it appears. ■ b. Removing ‘‘[AGENCY CAPITAL REGULATION]’’ and adding ‘‘12 CFR part 324’’ in its place wherever it appears. ■ c. Removing ‘‘A [BANK]’’ and adding ‘‘An FDIC-supervised institution’’ in its place wherever it appears. ■ d. Removing ‘‘a [BANK]’’ and add ‘‘an FDIC-supervised institution’’ in its place wherever it appears. ■ e. Removing ‘‘[BANK]’’ and adding ‘‘FDIC-supervised institution’’ in its place wherever it appears. ■ f. Removing ‘‘[§ ll.10(c)(4)(ii)(C)(1) through (7) of the AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE]’’ and adding ‘‘12 CFR 324.10(c)(4)(ii)(C)(1) through (7)’’ in its place wherever it appears. ■ g. Removing ‘‘[§ ll.10(c)(4)(ii)(E)(1) through (3) of the AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE]’’ and adding ‘‘12 CFR 324.10(c)(4)(ii)(E)(1) through (3)’’ in its place wherever it appears. ■ h. Removing ‘‘[INSERT PART]’’ and adding ‘‘329’’ in its place wherever it appears. ■ Subpart N [Removed and Reserved] ■ 32. Remove and reserve subpart N. E:\FR\FM\01JNP2.SGM 01JNP2 Federal Register / Vol. 81, No. 105 / Wednesday, June 1, 2016 / Proposed Rules sradovich on DSK3TPTVN1PROD with PROPOSALS2 Dated: May 13, 2016. Thomas J. Curry, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, May 3, 2016. Robert deV. Frierson, Secretary of the Board. Dated at Washington, DC, this 26th day of April, 2016. VerDate Sep<11>2014 19:02 May 31, 2016 Jkt 238001 By order of the Board of Directors. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary. [FR Doc. 2016–11505 Filed 5–31–16; 8:45 am] BILLING CODE P PO 00000 Frm 00061 Fmt 4701 Sfmt 9990 E:\FR\FM\01JNP2.SGM 01JNP2 35183

Agencies

[Federal Register Volume 81, Number 105 (Wednesday, June 1, 2016)]
[Proposed Rules]
[Pages 35123-35183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11505]

[[Page 35123]]

Vol. 81

Wednesday,

No. 105

June 1, 2016

Part II

Department of the Treasury

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Office of the Comptroller of the Currency

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12 CFR Part 50

Federal Reserve System

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12 CFR Part 249

Federal Deposit Insurance Corporation

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12 CFR Part 329

Net Stable Funding Ratio: Liquidity Risk Measurement Standards and
Disclosure Requirements; Proposed Rule

Federal Register / Vol. 81 , No. 105 / Wednesday, June 1, 2016 /
Proposed Rules

[[Page 35124]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 50

[Docket ID OCC-2014-0029]
RIN 1557-AD97

FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Regulation WW; Docket No. R-1537]
RIN 7100-AE 51

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 329

RIN 3064-AE 44

Net Stable Funding Ratio: Liquidity Risk Measurement Standards
and Disclosure Requirements

AGENCY: Office of the Comptroller of the Currency, Department of the
Treasury; Board of Governors of the Federal Reserve System; and Federal
Deposit Insurance Corporation.

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

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) are inviting comment on a proposed
rule that would implement a stable funding requirement, the net stable
funding ratio (NSFR), for large and internationally active banking
organizations. The proposed NSFR requirement is designed to reduce the
likelihood that disruptions to a banking organization's regular sources
of funding will compromise its liquidity position, as well as to
promote improvements in the measurement and management of liquidity
risk. The proposed rule would also amend certain definitions in the
liquidity coverage ratio rule that are also applicable to the NSFR. The
proposed NSFR requirement would apply beginning on January 1, 2018, to
bank holding companies, certain savings and loan holding companies, and
depository institutions that, in each case, have $250 billion or more
in total consolidated assets or $10 billion or more in total on-balance
sheet foreign exposure, and to their consolidated subsidiaries that are
depository institutions with $10 billion or more in total consolidated
assets.
In addition, the Board is proposing a modified NSFR requirement for
bank holding companies and certain savings and loan holding companies
that, in each case, have $50 billion or more, but less than $250
billion, in total consolidated assets and less than $10 billion in
total on-balance sheet foreign exposure. Neither the proposed NSFR
requirement nor the proposed modified NSFR requirement would apply to
banking organizations with consolidated assets of less than $50 billion
and total on-balance sheet foreign exposure of less than $10 billion.
A bank holding company or savings and loan holding company subject
to the proposed NSFR requirement or modified NSFR requirement would be
required to publicly disclose the company's NSFR and the components of
its NSFR each calendar quarter.

DATES: Comments on this notice of proposed rulemaking must be received
by August 5, 2016.

ADDRESSES: Comments should be directed to: OCC: Because paper mail in
the Washington, DC area is subject to delay, commenters are encouraged
to submit comments by the Federal eRulemaking Portal or email, if
possible. Please use the title ``Net Stable Funding Ratio: Liquidity
Risk Measurement Standards and Disclosure Requirements'' to facilitate
the organization and distribution of the comments. You may submit
comments by any of the following methods:
Federal eRulemaking Portal--``regulations.gov'': Go to
https://www.regulations.gov. Enter ``Docket ID OCC-2014-0029'' in the
Search Box and click ``Search''. Results can be filtered using the
filtering tools on the left side of the screen. Click on ``Comment
Now'' to submit public comments. Click on the ``Help'' tab on the
Regulations.gov home page to get information on using Regulations.gov,
including instructions for submitting public comments.
Email: regs.comments@occ.treas.gov.
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2014-0029'' in your comment. In general, the OCC will
enter all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide, such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
Viewing Comments Electronically: Go to https://www.regulations.gov. Enter ``Docket ID OCC-2014-0029'' in the Search
box and click ``Search''. Comments can be filtered by Agency using the
filtering tools on the left side of the screen. Click on the ``Help''
tab on the Regulations.gov home page to get information on using
Regulations.gov, including instructions for viewing public comments,
viewing other supporting and related materials, and viewing the docket
after the close of the comment period.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-
5597. Upon arrival, visitors will be required to present valid
government-issued photo identification and to submit to security
screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board: You may submit comments, identified by Docket No. R-1537;
RIN 7100 AE-51, 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 deV. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.

[[Page 35125]]

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 9:00 a.m. and 5:00 p.m. on weekdays.
FDIC: You may submit comments by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web site: https://www.FDIC.gov/regulations/laws/federal/propose.html.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW., Washington, DC 20429.
Hand Delivered/Courier: The guard station at the rear of
the 550 17th Street Building (located on F Street), on business days
between 7:00 a.m. and 5:00 p.m.
Email: comments@FDIC.gov.
Instructions: Comments submitted must include ``FDIC'' and ``RIN:
3064-AE44.'' Comments received will be posted without change to https://www.FDIC.gov/regulations/laws/federal/propose.html, including any
personal information provided.

FOR FURTHER INFORMATION CONTACT:
OCC: Christopher McBride, Group Leader, (202) 649-6402, James
Weinberger, Technical Expert, (202) 649-5213, or Ang Middleton, Bank
Examiner (Risk Specialist), (202) 649-7138, Treasury & Market Risk
Policy; Thomas Fursa, Bank Examiner (Capital Markets Lead Expert),
(917) 344-4421; Patrick T. Tierney, Assistant Director, Carl Kaminski,
Special Counsel, or Henry Barkhausen, Senior Attorney, Legislative and
Regulatory Activities Division, (202) 649-5490; or Tena Alexander,
Acting Assistant Director, or David Stankiewicz, Counsel, Securities
and Corporate Practices Division, (202) 649-5510; for persons who are
deaf or hard of hearing, TTY, (202) 649-5597; Office of the Comptroller
of the Currency, 400 7th Street SW., Washington, DC 20219.
Board: Gwendolyn Collins, Assistant Director, (202) 912-4311, Peter
Clifford, Manager, (202) 785-6057, Adam S. Trost, Senior Supervisory
Financial Analyst, (202) 452-3814, J. Kevin Littler, Senior Supervisory
Financial Analyst, (202) 475-6677, or Peter Goodrich, Risk Management
Specialist, (202) 872-4997, Risk Policy, Division of Banking
Supervision and Regulation; Benjamin W. McDonough, Special Counsel,
(202) 452-2036, Dafina Stewart, Counsel, (202) 452-3876, Adam Cohen,
Counsel, (202) 912-4658, or Brian Chernoff, Senior Attorney, (202) 452-
2952, Legal Division, Board of Governors of the Federal Reserve System,
20th and C Streets NW., Washington, DC 20551. For the hearing impaired
only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Bobby R. Bean, Associate Director, (202) 898-6705, Eric W.
Schatten, Capital Markets Policy Analyst, (202) 898-7063, Andrew D.
Carayiannis, Capital Markets Policy Analyst, (202) 898-6692, Nana
Ofori-Ansah, Capital Markets Policy Analyst, (202) 898-3572, Capital
Markets Branch, Division of Risk Management Supervision, (202) 898-
6888; Gregory S. Feder, Counsel, (202) 898-8724, Andrew B. Williams,
II, Counsel, (202) 898-3591, or Suzanne J. Dawley, Senior Attorney,
(202) 898-6509, Supervision and Corporate Operations Branch, Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street NW.,
Washington, DC 20429. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), (800) 925-4618.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
A. Summary of the Proposed Rule
B. Background
C. Overview of the Proposed Rule
1. NSFR Calculation, Shortfall Remediation, and Disclosure
Requirements
2. Scope of Application of the Proposed Rule
D. Definitions
1. Revisions to Existing Definitions
2. New Definitions
E. Effective Dates
II. Minimum Net Stable Funding Ratio
A. Rules of Construction
1. Balance-Sheet Metric
2. Netting of Certain Transactions
3. Treatment of Securities Received in an Asset Exchange by a
Securities Lender
B. Determining Maturity
C. Available Stable Funding
1. Calculation of ASF Amount
2. ASF Factor Framework
3. ASF Factors
D. Required Stable Funding
1. Calculation of the RSF Amount
2. RSF Factor Framework
3. RSF Factors
E. Derivative Transactions
1. NSFR Derivatives Asset or Liability Amount
2. Variation Margin Provided and Received and Initial Margin
Received
3. Customer Cleared Derivative Transactions
4. Assets Contributed to a CCP's Mutualized Loss Sharing
Arrangement and Initial Margin
5. Derivatives Portfolio Potential Valuation Changes
6. Derivatives RSF Amount
7. Derivatives RSF Amount Numerical Example
F. NSFR Consolidation Limitations
G. Interdependent Assets and Liabilities
III. Net Stable Funding Ratio Shortfall
IV. Modified Net Stable Funding Ratio Applicable to Certain Covered
Depository Institution Holding Companies
A. Overview and Applicability
B. Available Stable Funding
C. Required Stable Funding
V. Disclosure Requirements
A. Proposed NSFR Disclosure Requirements
B. Quantitative Disclosure Requirements
C. Qualitative Disclosure Requirements
D. Frequency and Timing of Disclosure
VI. Impact Assessment
VII. Solicitation of Comments on Use of Plain Language
VIII. Regulatory Flexibility Act
IX. Riegle Community Development and Regulatory Improvement Act of
1994
X. Paperwork Reduction Act
XI. OCC Unfunded Mandates Reform Act of 1995 Determination

I. Introduction

A. Summary of the Proposed Rule

The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
inviting comment on a proposed rule (proposed rule) that would
implement a net stable funding ratio (NSFR) requirement. The proposed
NSFR requirement is designed to reduce the likelihood that disruptions
to a banking organization's regular sources of funding will compromise
its liquidity position, as well as to promote improvements in the
measurement and management of liquidity risk. By requiring banking
organizations to maintain a stable funding profile, the proposed rule
would reduce liquidity risk in the financial sector and provide for a
safer and more resilient financial system.
Maturity and liquidity transformation are important components of
the financial intermediation performed by banking organizations, which
contributes to efficient resource allocation and credit creation in the
United States. These activities entail a certain inherent level of
funding instability, however. Consequently, the risks of these
activities must be well-managed by banking organizations in order to
help ensure their ongoing

[[Page 35126]]

ability to provide financial intermediation.
The proposed rule would establish a quantitative metric, the NSFR,
to measure the stability of a covered company's funding profile.\1\
Under the requirement, a covered company would calculate a weighted
measure of the stability of its equity and liabilities over a one-year
time horizon (its available stable funding amount or ASF amount). The
proposed rule would require a covered company's ASF amount to be
greater than or equal to a minimum level of stable funding (its
required stable funding amount or RSF amount) calculated based on the
liquidity characteristics of its assets, derivative exposures, and
commitments over the same one-year time horizon. A covered company's
NSFR would measure the ratio of its ASF amount to its RSF amount.
Sections II.C and II.D of this SUPPLEMENTARY INFORMATION section
describe in more detail the calculation of a covered company's ASF and
RSF amounts, respectively.
---------------------------------------------------------------------------

\1\ As discussed in section I.C.2 of this Supplementary
Information section, covered companies are bank holding companies,
certain savings and loan holding companies, and depository
institutions, in each case with $250 billion or more in total
consolidated assets or $10 billion or more in total on-balance sheet
foreign exposure, as well as any consolidated subsidiary depository
institution with total consolidated assets of $10 billion or more.
---------------------------------------------------------------------------

The proposed rule would require a covered company to maintain a
minimum NSFR of 1.0. Given their size, complexity, scope of activities,
and interconnectedness, covered companies with an NSFR of less than 1.0
face an increased likelihood of liquidity stress in the event of
demands for repayment of their short- and medium-term liabilities,
which may also contribute to financial instability in the broader
economy. The NSFR would help to identify a covered company that has a
heightened liquidity risk profile and poses greater risk to U.S.
financial stability. It would allow the agencies, before a liquidity
crisis, to require the covered company to take steps to improve its
liquidity and resilience, as discussed in section I.C.1 of this
Supplementary Information section.
As part of this proposal, the Board is also inviting comment on a
modified NSFR requirement for bank holding companies and savings and
loan holding companies without significant insurance or commercial
operations that, in each case, have $50 billion or more, but less than
$250 billion, in total consolidated assets and less than $10 billion in
total on-balance sheet foreign exposure (each, a modified NSFR holding
company). This modified NSFR requirement is described in section IV of
this SUPPLEMENTARY INFORMATION section.
The proposed rule also includes public disclosure requirements for
depository institution holding companies that would be subject to the
proposed NSFR requirement or modified NSFR requirement.

B. Background

The 2007-2009 financial crisis exposed the vulnerability of large
and internationally active banking organizations to liquidity shocks.
For example, before the crisis, many banking organizations lacked
robust liquidity risk management metrics and relied excessively on
short-term wholesale funding to support less liquid assets.\2\ In
addition, firms did not sufficiently plan for longer-term liquidity
risks, and the control functions of banking organizations failed to
challenge such decisions or sufficiently plan for possible disruptions
to the organization's regular sources of funding. Instead, the control
functions reacted only after funding shortfalls arose.
---------------------------------------------------------------------------

\2\ See Senior Supervisors Group, Risk Management Lessons from
the Global Banking Crisis of 2008, (October 21, 2009), available at
https://www.newyorkfed.org/medialibrary/media/newsevents/news/banking/2009/SSG_report.pdf.
---------------------------------------------------------------------------

During the crisis, many banking organizations experienced severe
contractions in the supply of funding. As access to funding became
limited and asset prices fell, many banking organizations faced the
possibility of default and failure. The threat this presented to the
financial system caused governments and central banks around the world
to provide significant levels of support to these institutions to
maintain global financial stability. This experience demonstrated a
need to address these shortcomings at banking organizations and to
implement a more rigorous approach to identifying, measuring,
monitoring, and limiting reliance by banking organizations on less
stable sources of funding.\3\
---------------------------------------------------------------------------

\3\ See id.
---------------------------------------------------------------------------

Since the 2007-2009 financial crisis, the agencies have developed
quantitative and qualitative standards focused on strengthening banking
organizations' overall risk management, liquidity positions, and
liquidity risk management. By improving banking organizations' ability
to absorb shocks arising from financial and economic stress, these
measures, in turn, promote a more resilient banking sector and
financial system. This work has taken into account ongoing supervisory
reviews and analysis in the United States, as well as international
discussions regarding appropriate liquidity standards.\4\
---------------------------------------------------------------------------

\4\ See, e.g., Principles for Sound Liquidity Risk Management
and Supervision (September 2008), available at https://www.bis.org/publ/bcbs144.htm; Basel III: The Liquidity Coverage Ratio and
liquidity risk monitoring tools (January 2013), available at https://www.bis.org/publ/bcbs238.pdf; Basel III: the net stable funding
ratio (October 2014), available at https://www.bis.org/bcbs/publ/d295.pdf.
---------------------------------------------------------------------------

The agencies have implemented or proposed several measures to
improve the liquidity positions and liquidity risk management of
supervised banking organizations. First, the agencies adopted the
liquidity coverage ratio (LCR) rule in September 2014,\5\ which
requires certain banking organizations to hold a minimum amount of
high-quality liquid assets (HQLA) that can be readily converted into
cash to meet net cash outflows over a 30-calendar-day period. Second,
pursuant to section 165 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act \6\ (Dodd-Frank Act) and in consultation with
the OCC and the FDIC, the Board adopted general risk management,
liquidity risk management, and stress testing requirements for bank
holding companies with total consolidated assets of $50 billion or more
in Regulation YY.\7\ Third, the Board adopted a risk-based capital
surcharge for global systemically important banking organizations
(GSIBs) in the United States that is calculated based on a bank holding
company's risk profile, including its reliance on short-term wholesale
funding (GSIB surcharge rule).\8\ Fourth, the Board recently proposed a
long-term debt requirement and a total loss-absorbing capacity (TLAC)
requirement that would apply to U.S. GSIBs and the U.S. operations of
certain foreign GSIBs, and would require these firms and operations to
have sufficient amounts of equity and eligible long-term debt to
improve their ability to absorb significant losses and withstand
financial stress, which would also improve the funding profile of these
firms.\9\
---------------------------------------------------------------------------

\5\ ``Liquidity Coverage Ratio: Liquidity Risk Measurement
Standards,'' 79 FR 61440 (October 10, 2014), codified at 12 CFR part
50 (OCC), 12 CFR part 249 (Board), and 12 CFR part 329 (FDIC).
\6\ Public Law 111-203, 124 Stat. 1376, 1423-1432 (2010) Sec.
165, codified at 12 U.S.C. 5365.
\7\ See ``Enhanced Prudential Standards for Bank Holding
Companies and Foreign Banking Organizations,'' 79 FR 17240 (March
27, 2014), codified at 12 CFR part 252.
\8\ ``Regulatory Capital Rules: Implementation of Risk-Based
Capital Surcharges for Global Systemically Important Bank Holding
Companies,'' 80 FR 49082 (August 14, 2015).
\9\ ``Total Loss-Absorbing Capacity, Long-Term Debt, and Clean
Holding Company Requirements for Systemically Important U.S. Bank
Holding Companies and Intermediate Holding Companies of Systemically
Important Foreign Banking Organizations; Regulatory Capital
Deduction for Investments in Certain Unsecured Debt of Systemically
Important U.S. Bank Holding Companies,'' 80 FR 74926 (November 20,
2015).

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

[[Page 35127]]

The agencies have also focused specifically on the importance of
banking organizations maintaining a stable funding profile. The
agencies have issued supervisory guidance to address the risks arising
from excessive reliance on unstable funding, such as short-term
wholesale funding, both before and after the 2007-2009 financial
crisis, and have incorporated such guidance in their supervisory
ratings. For example, in 1990, the Board issued guidance that cautioned
against excessive reliance on the use of short-term debt,\10\ and in
2010, the agencies issued interagency guidance emphasizing the
importance of diversifying funding sources and tenors.\11\ In addition,
there are statutory restrictions under the Federal Deposit Insurance
Act (FDI Act) on the ability of an insured depository institution that
is less than well capitalized to accept or renew brokered deposits,
which can be a less stable form of funding than other retail
deposits.\12\
---------------------------------------------------------------------------

\10\ See Supervision and Regulation Letter 90-20 (June 22,
1990), available at https://www.federalreserve.gov/boarddocs/srletters/1990/sr9020.htm, superseded by OCC, Board, FDIC, Office of
Thrift Supervision, and National Credit Union Administration,
``Interagency Policy Statement on Funding and Liquidity Risk
Management,'' 75 FR 13656 (March 22, 2010) (Interagency 2010 Policy
Statement on Funding and Liquidity Risk Management); and Supervision
and Regulation Letter 96-38 (December 27, 1996), available at https://www.federalreserve.gov/boarddocs/srletters/1996/sr9638.htm.
\11\ See Interagency 2010 Policy Statement on Funding and
Liquidity Risk Management.
\12\ See 12 U.S.C. 1831f(a).
---------------------------------------------------------------------------

The proposed rule would complement existing law and regulations and
the proposed TLAC and long-term debt requirements, as well as existing
supervisory guidance.\13\ For example, it would build on the LCR rule's
goal of improving resilience to short-term economic and financial
stress by focusing on the stability of a covered company's structural
funding profile over a longer, one-year time horizon. It would also
address liquidity risks that are not readily mitigated by the agencies'
capital requirements. In a financial crisis, financial institutions
without stable funding sources may be forced by creditors to monetize
assets at the same time, driving down asset prices. The proposed rule
would mitigate such risks by directly increasing the funding resilience
of individual covered companies, thereby indirectly increasing the
overall resilience of the U.S. financial system.
---------------------------------------------------------------------------

\13\ See, e.g., Interagency 2010 Policy Statement on Funding and
Liquidity Risk Management; Supervision and Regulation Letter 12-17
(December 12, 2012), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1217.htm; Interagency Guidance on Funds
Transfer Pricing Related to Funding and Contingent Liquidity Risks
(March 1, 2016), available a: https://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-7.html (OCC), https://www.federalreserve.gov/bankinforeg/srletters/sr1603a1.pdf (Board),
and https://www.fdic.gov/news/news/financial/2016/fil16012.pdf
(FDIC).
---------------------------------------------------------------------------

The proposed NSFR requirement would also provide a standardized
means for measuring the stability of a covered company's funding
structure, promote greater comparability of funding structures across
covered companies and foreign firms subject to similar requirements,
and improve transparency and increase market discipline through the
proposed rule's public disclosure requirements.
The proposed rule would be consistent with the net stable funding
ratio standard published by the Basel Committee on Banking Supervision
(BCBS) \14\ in October 2014 (Basel III NSFR) \15\ and the net stable
funding ratio disclosure standards published by the BCBS in June
2015.\16\ The Basel III NSFR is a longer-term structural funding metric
that complements the BCBS's short-term liquidity risk metric, the BCBS
liquidity coverage ratio standard (Basel III LCR).\17\ In developing
the Basel III NSFR, the agencies and their international counterparts
in the BCBS considered a number of possible structural funding metrics.
For example, the BCBS considered the traditional ``cash capital''
measure, which compares a firm's amount of long-term and stable sources
of funding to the amount of its illiquid assets. The BCBS found that
this cash capital measure failed to account for material funding risks,
such as those related to off-balance sheet commitments and certain on-
balance sheet short-term funding and lending mismatches. The Basel III
NSFR incorporates consideration of these and other funding risks, as
would the proposed rule's NSFR requirement.
---------------------------------------------------------------------------

\14\ The BCBS is a committee of banking supervisory authorities
that was established by the central bank governors of the G10
countries in 1975. It currently consists of senior representatives
of bank supervisory authorities and central banks from Argentina,
Australia, Belgium, Brazil, Canada, China, France, Germany, Hong
Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore, South Africa,
Sweden, Switzerland, Turkey, the United Kingdom, and the United
States. Documents issued by the BCBS are available through the Bank
for International Settlements Web site at https://www.bis.org.
\15\ See supra note 4.
\16\ ``Net Stable Funding Ratio disclosure standards'' (June
2015), available at https://www.bis.org/bcbs/publ/d324.pdf (Basel III
NSFR Disclosure Standards).
\17\ See supra note 4.
---------------------------------------------------------------------------

C. Overview of the Proposed Rule

1. NSFR Calculation, Shortfall Remediation, and Disclosure Requirements
The proposed rule would require a covered company to maintain an
amount of ASF, or available stable funding, that is no less than the
amount of its RSF, or required stable funding, on an ongoing basis. A
covered company's NSFR would be expressed as a ratio of its ASF amount
(the numerator of the ratio) to its RSF amount (the denominator of the
ratio). A covered company's ASF amount would be a weighted measure of
the stability of the company's funding over a one-year time horizon. A
covered company would calculate its ASF amount by applying standardized
weightings (ASF factors) to its equity and liabilities based on their
expected stability. Similarly, a covered company would calculate its
RSF amount by applying standardized weightings (RSF factors) to its
assets, derivative exposures, and commitments based on their liquidity
characteristics.\18\ These characteristics would include credit
quality, tenor, encumbrances, counterparty type, and characteristics of
the market in which an asset trades, as applicable.
---------------------------------------------------------------------------

\18\ ASF factors are described in section II.C, RSF factors are
described in section II.D, and the derivatives RSF amount is
described in section II.E of this Supplementary Information section.
---------------------------------------------------------------------------

As noted above, the proposed rule would require a covered company
to maintain, on a consolidated basis, an NSFR equal to or greater than
1.0. The proposed rule would require a covered company to take several
steps if its NSFR fell below 1.0, as discussed in more detail in
section III of this SUPPLEMENTARY INFORMATION section. In particular, a
covered company would be required to notify its appropriate Federal
banking agency of the shortfall no later than 10 business days (or such
other period as the appropriate Federal banking agency may require by
written notice) following the date that any event has occurred that
would cause or has caused the covered company's NSFR to fall below the
minimum requirement. In addition, a covered company would be required
to submit to its appropriate Federal banking agency a plan to remediate
its NSFR shortfall. These procedures would enable supervisors to
monitor and respond appropriately to the particular circumstances that
give rise to any deficiency in a covered company's funding profile.
Given the range of possible reasons, both

[[Page 35128]]

idiosyncratic and systemic, for a covered company having an NSFR below
1.0, the proposed rule would establish a framework that would allow for
flexible supervisory responses. The agencies expect circumstances where
a covered company has an NSFR shortfall to arise only rarely.
Nothing in the proposed rule would limit the authority of the
agencies under any other provision of law or regulation to take
supervisory or enforcement actions, including actions to address unsafe
or unsound practices or conditions, deficient liquidity levels, or
violations of law.
The proposed rule would require a covered company that is a
depository institution holding company to publicly disclose, each
calendar quarter, its NSFR and NSFR components in a standardized
tabular format and to discuss certain qualitative features of its NSFR
calculation. These disclosures, which are described in further detail
in section V of this Supplementary Information section, would enable
market participants to assess and compare the liquidity profiles of
covered companies and non-U.S. banking organizations.
The proposed NSFR requirement would take effect on January 1, 2018.
2. Scope of Application of the Proposed Rule
The proposed NSFR requirement would apply to the same large and
internationally active banking organizations that are subject to the
LCR rule: (1) Bank holding companies, savings and loan holding
companies without significant commercial or insurance operations, and
depository institutions that, in each case, have $250 billion or more
in total consolidated assets or $10 billion or more in on-balance sheet
foreign exposure,\19\ and (2) depository institutions with $10 billion
or more in total consolidated assets that are consolidated subsidiaries
of such bank holding companies and savings and loan holding companies.
---------------------------------------------------------------------------

\19\ Total consolidated assets for the purposes of the proposed
rule would be as reported on a banking organization's most recent
year-end Consolidated Reports of Condition and Income or
Consolidated Financial Statements for Bank Holding Companies,
Federal Reserve Form FR Y-9C. Foreign exposure data would be
calculated in accordance with the Federal Financial Institutions
Examination Council 009 Country Exposure Report.
---------------------------------------------------------------------------

The proposed rule would apply to banking organizations that tend to
have larger and more complex liquidity risk profiles than smaller and
less internationally active banking organizations. While banking
organizations of any size can face threats to their safety and
soundness based on an unstable funding profile, covered companies'
scale, scope, and complexity require heightened measures to manage
their liquidity risk. In addition, covered companies with total
consolidated assets of $250 billion or more can pose greater risks to
U.S. financial stability than smaller banking organizations because of
their size, the scale and breadth of their activities, and their
interconnectedness with the financial sector. Consequently, threats to
the availability of funding to larger firms pose greater risks to the
financial system and economy. Likewise, the foreign exposure threshold
identifies firms with a significant international presence, which may
also present risks to financial stability for similar reasons. By
promoting stable funding profiles for large, interconnected
institutions, the proposed rule would strengthen the safety and
soundness of covered companies and promote a more resilient U.S.
financial system and global financial system.
The proposed rule would also apply the NSFR requirement to
depository institutions that are the consolidated subsidiaries of
covered companies and that have $10 billion or more in total
consolidated assets.\20\ These large depository institution
subsidiaries can play a significant role in covered companies' funding
structures and operations, and present a larger exposure to the FDIC's
Deposit Insurance Fund than smaller insured institutions because of the
greater volume of their deposit-taking and lending activities. To
reduce the potential impacts of a liquidity event on the safety and
soundness of such large depository institution subsidiaries, the
proposed rule would require that such entities independently have
sufficient stable funding.
---------------------------------------------------------------------------

\20\ Pursuant to the International Banking Act (IBA), 12 U.S.C.
3101 et seq., and OCC regulation, 12 CFR 28.13(a)(1), a Federal
branch or agency regulated and supervised by the OCC has the same
rights and responsibilities as a national bank operating at the same
location. Thus, as a general matter, Federal branches and agencies
are subject to the same laws as national banks. The IBA and the OCC
regulation state, however, that this general standard does not apply
when the IBA or other applicable law provides other specific
standards for Federal branches or agencies or when the OCC
determines that the general standard should not apply. This proposal
would not apply to Federal branches and agencies of foreign banks
operating in the United States. At this time, these entities have
assets that are substantially below the proposed $250 billion asset
threshold for applying the proposed liquidity standard to large and
internationally active banking organizations. As part of its
supervisory program for Federal branches and agencies of foreign
banks, the OCC reviews liquidity risks and takes appropriate action
to limit such risks in those entities.
---------------------------------------------------------------------------

Consistent with the LCR rule, the proposed rule would not apply to
depository institution holding companies with large insurance
operations or savings and loan holding companies with large commercial
operations because their business models and liquidity risks differ
significantly from those of other covered companies.\21\ The proposed
rule would also not apply to nonbank financial companies designated by
the Financial Stability Oversight Council (Council) for Board
supervision (nonbank financial companies).\22\ However, the Board may
apply an NSFR requirement and disclosure requirements to these
companies in the future by separate rule or order. The Board would
assess the business model, capital structure, and risk profile of a
nonbank financial company to determine whether, and if so how, the
proposed NSFR requirement should apply to a nonbank financial company
or to a category of nonbank financial companies, as appropriate. The
Board would provide nonbank financial companies, either collectively or
individually, with notice and opportunity to comment prior to applying
an NSFR requirement.
---------------------------------------------------------------------------

\21\ The proposed rule would not apply to: (i) A grandfathered
unitary savings and loan holding company (as described in section
10(c)(9)(A) of the Home Owners' Loan Act, 12 U.S.C. 1467a(c)(9)(A))
that derives 50 percent or more of its total consolidated assets or
50 percent of its total revenues on an enterprise-wide basis from
activities that are not financial in nature under section 4(k) of
the Bank Holding Company Act (12 U.S.C. 1843(k)); (ii) a top-tier
bank holding company or savings and loan holding company that is an
insurance underwriting company; or (iii) a top-tier bank holding
company or savings and loan holding company that has 25 percent or
more of its total consolidated assets in subsidiaries that are
insurance underwriting companies. For purposes of (iii), the company
must calculate its total consolidated assets in accordance with GAAP
or estimate its total consolidated assets, subject to review and
adjustment by the Board.
\22\ See 12 U.S.C. 5323.
---------------------------------------------------------------------------

The proposed rule would also not apply to the U.S. operations of
foreign banking organizations or intermediate holding companies
required to be formed under the Board's Regulation YY that do not
otherwise meet the requirements to be a covered company (for example,
as a U.S. bank holding company with more than $250 billion in total
consolidated assets). The Board anticipates implementing an NSFR
requirement through a future, separate rulemaking for the U.S.
operations of foreign banking organizations with $50 billion or more in
combined U.S. assets.
The proposed rule would not apply to a ``bridge financial company''
or a subsidiary of a ``bridge financial

[[Page 35129]]

company,'' a ``new depository institution,'' or a ``bridge depository
institution,'' as those terms are used in the FDI Act in the resolution
context.\23\ Requiring these entities to maintain a minimum NSFR may
constrain the FDIC's ability to resolve a depository institution or its
affiliates in an orderly manner.
---------------------------------------------------------------------------

\23\ See 12 U.S.C. 1813(i) and 12 U.S.C. 5381(a)(3).
---------------------------------------------------------------------------

The Board is also proposing to implement a modified version of the
NSFR requirement for bank holding companies and savings and loan
holding companies without significant insurance or commercial
operations that, in each case, have $50 billion or more, but less than
$250 billion, in total consolidated assets and less than $10 billion in
total on-balance sheet foreign exposure. Modified NSFR holding
companies are large financial companies that have sizable operations in
banking, brokerage, or other financial activities, as discussed in
section IV of this Supplementary Information section. Although they
generally are smaller in size, less complex in structure, and less
reliant on riskier forms of funding than covered companies, these
modified NSFR holding companies are nevertheless important providers of
credit in the U.S. economy. The Board is therefore proposing a form of
the NSFR requirement that is tailored to the less risky liquidity
profile of these companies.
The agencies would each reserve the authority to apply the proposed
rule to additional companies if the application of the NSFR requirement
would be appropriate in light of a company's asset size, complexity,
risk profile, scope of operations, affiliation with covered companies,
or risk to the financial system. A covered company would remain subject
to the proposed NSFR requirement until its appropriate Federal banking
agency determines in writing that application of the rule to the
company is not appropriate in light of these same factors. The agencies
would also reserve the authority to require a covered company to
maintain an ASF amount greater than otherwise required under the
proposed rule, or to take any other measure to improve the covered
company's funding profile, if the appropriate Federal banking agency
determines that the covered company's NSFR requirement under the
proposed rule is not commensurate with its liquidity risks.
A company that becomes subject to the proposed rule pursuant to
Sec. __.1(b)(1) after the effective date would be required to comply
with the proposed NSFR requirement beginning on April 1 of the
following year. For example, if a bank holding company becomes subject
to the proposed rule on December 31, 2020, because it reports on its
year-end Consolidated Financial Statements for Holding Companies (FR Y-
9C) that it has total consolidated assets of $251 billion, that bank
holding company would be required to begin complying with the proposed
NSFR requirement on April 1, 2021.
Question 1: Would the proposed one-quarter transition period
provide sufficient time for a covered company to make any needed
adjustments to its systems to come into compliance with the proposed
rule's requirements? What alternative transition period, if any, would
be more appropriate and why? What would be the benefits of providing
covered companies with a longer or shorter transition period?

D. Definitions

The proposed rule would share definitions with the LCR rule and
would be adopted and codified in the same part of the Code of Federal
Regulations as the LCR rule for each of the agencies.\24\ In connection
with the proposed rule, the agencies are proposing to revise certain of
the existing definitions in Sec. __.3 of the LCR rule and to add
certain new definitions. This part of the Supplementary Information
section discusses these definitions.
---------------------------------------------------------------------------

\24\ 12 CFR part 50 (OCC), 12 CFR part 249 (Board), and 12 CFR
part 329 (FDIC).
---------------------------------------------------------------------------

1. Revisions to Existing Definitions
The proposed rule would amend the existing definition of
``calculation date'' in Sec. __.3 of the LCR rule to define
``calculation date'' for purposes of the NSFR requirement as any date
on which a covered company calculates its NSFR under Sec. __.100.
The existing definition of ``collateralized deposit'' in Sec. __.3
of the LCR rule includes those fiduciary deposits that a covered
company is required by federal law, as applicable to national banks and
Federal savings associations, to collateralize using its own assets.
The LCR rule excludes collateralized deposits from the set of secured
funding transactions that a covered company is required to unwind in
its calculation of adjusted liquid asset amounts under Sec. __.21 of
the LCR rule. To provide consistent treatment for covered companies
subject to state laws that require collateralization of deposits, the
proposed rule would amend the definition of ``collateralized deposit''
to include those deposits collateralized as required under state law,
as applicable to state member and nonmember banks and state savings
associations. In addition, the proposed rule would amend the definition
of ``collateralized deposit'' to include those fiduciary deposits held
at a covered company for which a depository institution affiliate of
the covered company is a fiduciary and that the covered company has
collateralized pursuant to 12 CFR 9.10(c) (for national banks) or 12
CFR 150.310 (for Federal savings associations). Although a covered
company may not be required under applicable law to collateralize
fiduciary deposits held at an affiliated depository institution, if the
covered company decides to collateralize those deposits, then they
should also be excluded from the unwind of applicable secured funding
transactions.
The existing definition of ``committed'' in Sec. __.3 of the LCR
rule provides the criteria under which a credit facility or liquidity
facility would be considered committed for purposes of the LCR rule,
and thus receive an outflow rate as specified in Sec. __.32(e). The
definition provides that a credit facility or liquidity facility is
committed if (1) the covered company may not refuse to extend credit or
funding under the facility or (2) the covered company may refuse to
extend credit under the facility (to the extent permitted under
applicable law) only upon the satisfaction or occurrence of one or more
specified conditions not including change in financial condition of the
borrower, customary notice, or administrative conditions.
To more clearly capture the intended meaning of ``committed,'' the
proposed rule would amend the definition to state that a credit or
liquidity facility is committed if it is not unconditionally cancelable
under the terms of the facility. The proposed rule would define
``unconditionally cancelable,'' consistent with the agencies' risk-
based capital rules, to mean that a covered company may refuse to
extend credit under the facility at any time, including without cause
(to the extent permitted under applicable law).\25\ For example, a
credit or liquidity facility that only permits a covered company to
refuse to extend credit upon the occurrence of a specified event (such
as a material adverse change) would not be considered unconditionally
cancelable, and therefore the facility would be considered committed
under the proposed definition. Conversely, a credit or liquidity
facility that the covered company may cancel without

[[Page 35130]]

cause would not be considered committed because the covered company may
refuse to extend credit under the facility at any time. For example,
home equity lines of credit and credit cards lines that are cancelable
without cause (to the extent permitted under applicable law), as is
generally the case, would not be considered committed under the
proposed amendment to the definition.
---------------------------------------------------------------------------

\25\ See 12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), and 12 CFR
324.2 (FDIC).
---------------------------------------------------------------------------

The proposed rule would revise the definition of ``covered nonbank
company'' to clarify that if the Board requires a company designated by
the Council for Board supervision to comply with the LCR rule or the
proposed rule, it will do so through a rulemaking that is separate from
the LCR rule and this proposed rule or by issuing an order.
The existing definition of ``operational deposit'' provides the
parameters under which funding of a covered company would be considered
an operational deposit for purposes of the LCR rule, meaning that the
funding amount is necessary for the provision of operational services,
as defined in Sec. __.3 of the LCR rule. While the LCR rule defines
the term ``operational deposit'' to refer only to funding of a company,
the proposed rule would use the term to refer to both funding and
lending. Accordingly, the proposed rule would amend the definition of
``operational deposit'' to include both deposits received by the
covered company in connection with operational services provided by the
covered company and deposits placed by the covered company in
connection with operational services received by the covered company.
The proposed rule would also amend the definition of ``operational
deposit'' to clarify that only deposits, as defined in Sec. __.3 of
the LCR rule, can qualify as operational deposits. Other forms of
funding from, or provided to, wholesale customers or counterparties
(e.g., longer-term unsecured funding) would not qualify as operational
deposits. Because operational deposits are limited to accounts that
facilitate short-term transactional cash flows associated with
operational services, operational deposits also should only have short-
term maturities, falling within the proposed rule's less-than-6-month
maturity category and generally within the LCR rule's 30 calendar-day
period. Notwithstanding the proposed revisions to this definition, the
treatment of operational deposits under Sec. Sec. __.32 and __.33 of
the LCR rule would remain the same.
Finally, the proposed rule would revise the definitions of
``secured funding transaction'' and ``secured lending transaction'' to
clarify that the obligations referenced in those definitions must be
secured by a lien on securities or loans (rather than secured by a lien
on other assets), that such transactions are only those with wholesale
customers or counterparties, and that securities issued or owned by a
covered company do not constitute secured funding or lending
transactions of the covered company. The treatment of secured
transactions in the LCR rule, which adjusts inflow and outflow rates
based on the relative liquidity of the collateral, would be appropriate
only for transactions where the collateral is securities or loans
because these forms of collateral are generally more liquid than
others. For example, inflows in a stressed environment associated with
lending secured by collateral types that are not generally traded in
liquid markets, such as property, plant, and equipment, are typically
based on the nature of the counterparty rather than the collateral,
thus making the liquidity risk associated with such arrangements more
akin to that of unsecured lending. Said another way, lending secured by
property, plant, and equipment should not receive a 100 percent inflow
rate; rather, the inflow should depend on the characteristics of the
borrower, which more accurately reflects the likelihood a covered
company will roll over such a loan during a period of significant
stress. By the same reasoning, the definition of ``unsecured wholesale
funding'' would be revised to include transactions that are not secured
by securities or loans, but that may be secured by other forms of
collateral (such as property, plant, and equipment), which are
generally less liquid.
By limiting the definitions of ``secured funding transaction'' and
``secured lending transaction'' to those transactions with wholesale
customers or counterparties, the proposed rule would clarify that
funding and lending transactions with a retail customer or
counterparty, even if collateralized, are subject to the retail
treatment under the LCR rule and the proposed rule. For the same
reasons as discussed above, the inflows and outflows associated with
funding provided by a retail customer or counterparty, even if
collateralized, are more dependent on the retail nature of the
counterparty and not any collateral that secures the funding. Lastly,
by excluding securities from these definitions, the proposed rule would
clarify that securities issued by a covered company or owned by a
covered company are treated based on the provisions applicable to
securities in the LCR rule and the proposed rule. For example,
securities issued through conduit structures that are consolidated on a
covered company's balance sheet would not be considered secured funding
transactions but rather, would be considered securities issued by the
covered company.
Question 2: What modifications, if any, should be made to the
proposed revised definitions of ``calculation date,'' ``collateralized
deposits,'' ``committed,'' ``covered nonbank company,'' ``operational
deposit,'' ``secured funding transaction,'' ``secured lending
transaction,'' and ``unsecured wholesale funding'' and why? What, if
any, are the unintended consequences to the operation of the LCR rule
and the proposed rule that may result from the proposed revisions to
these definitions?
Question 3: Given that the terms ``unsecured wholesale funding''
and, as discussed below, ``unsecured wholesale lending'' would include
funding and lending that is secured by certain less liquid forms of
collateral, would it be clearer to use different terminology for these
terms and ``secured funding transaction'' and ``secured lending
transaction?''
Question 4: For the definitions of ``secured funding transaction''
and ``secured lending transaction,'' what, if any, assets beyond
securities and loans should be included as qualifying collateral
because they are sufficiently liquid to be relevant in assigning inflow
and outflow rates to such transactions under the LCR rule? What, if
any, securities or loans should be excluded from the qualifying
collateral because they are not sufficiently liquid and why?
Question 5: Is the term ``unsecured wholesale lending''
appropriately defined by reference to a liability or obligation of a
wholesale customer or counterparty? If not, in what ways should the
definition be modified and why? What specific assets, if any, should
be, but are not currently, included or excluded from the definition of
``unsecured wholesale lending'' for purposes of the NSFR? Likewise,
what specific liabilities, if any, should be, but are not currently,
included or excluded from the definition of ``unsecured wholesale
funding'' for purposes of the NSFR? For example, what assets or
liabilities within these terms, if any, such as a receivable based on
an insurance claim or a payable for services rendered by a wholesale
service provider, should be assigned different RSF and ASF

[[Page 35131]]

factors \26\ than other assets or liabilities within these terms?
---------------------------------------------------------------------------

\26\ See section II.D and II.C of this Supplementary Information
section for discussion of assignment of RSF and ASF factors,
respectively.
---------------------------------------------------------------------------

Question 6: Given that the definitions in the LCR rule would apply
to the proposed rule and the Board's GSIB surcharge rule, are there
other definitions or terms, in addition to those noted above, that the
agencies should amend and why? For example, should the definition of
``liquid and readily-marketable'' be amended, including any of its
criteria, to provide more clarity or to ease operational burden, given
its implication on the determination of HQLA and HQLA treatment under
the proposed NSFR requirement, and if so, why? Commenters are invited
to provide suggested language to amend any definitions.
2. New Definitions
The proposed rule would add several new defined terms. The proposed
rule would define ``carrying value'' to mean the value on a covered
company's balance sheet of an asset, NSFR regulatory capital element,
or NSFR liability, as determined in accordance with U.S. generally
accepted accounting principles (GAAP). The proposed rule includes this
definition because RSF and ASF factors generally would be applied to
the carrying value of a covered company's assets, NSFR regulatory
capital elements, and NSFR liabilities. By relying on values based on
GAAP, the proposed rule would ensure consistency in the application of
the NSFR requirement across covered companies and limit operational
burdens to comply with the proposed rule because covered companies
already prepare financial reports in accordance with GAAP. This
definition would be consistent with the definition used in the
agencies' regulatory capital rules.\27\
---------------------------------------------------------------------------

\27\ See 12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), and 12 CFR
324.2 (FDIC).
---------------------------------------------------------------------------

The proposed rule would define ``encumbered'' using the criteria
for an unencumbered asset in Sec. __.22(b) of the LCR rule. The
proposed definition does not include any substantive changes to the
concept of encumbrance included in the LCR rule. The proposed rule
would also use the defined term in place of the criteria enumerated in
Sec. __.22(b) of the LCR rule. The addition of this definition is
necessary to apply the concept of encumbrance in Sec. __.106(c) and
(d) of the proposed rule, as discussed below.
The proposed rule would define two new related terms, ``NSFR
regulatory capital element'' and ``NSFR liability.'' The proposed rule
would define ``NSFR regulatory capital element'' to mean any capital
element included in a covered company's common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital, as those terms are
defined in the agencies' risk-based capital rules, prior to the
application of capital adjustments or deductions set forth in the
agencies' risk-based capital rules.\28\ This definition would exclude
any debt or equity instrument that does not meet the criteria for
additional tier 1 or tier 2 capital instruments in Sec. __.22 of the
agencies' risk-based capital rules or that is being phased out of tier
1 or tier 2 capital pursuant to subpart G of the agencies' risk-based
capital rules.\29\ The term ``NSFR regulatory capital element'' would
include both equity and liabilities under GAAP that meet the
requirements of the definition. This definition of ``NSFR regulatory
capital element'' would generally align with the definition of
regulatory capital in the agencies' risk-based capital rules, but would
not include capital deductions and adjustments.\30\ Because the
proposed rule would require assets that are capital deductions (such as
goodwill) to be fully supported by stable funding, as discussed in
section II.D.3.a.viii of this SUPPLEMENTARY INFORMATION section below,
deducting the value of these assets from a covered company's NSFR
regulatory capital elements would understate a company's NSFR.
---------------------------------------------------------------------------

\28\ See 12 CFR part 3 (OCC), 12 CFR part 217 (Board), and 12
CFR part 324 (FDIC).
\29\ Tier 2 capital instruments that have a remaining maturity
of less than one year are not included in regulatory capital. See 12
CFR 3.20(d)(1)(iv) (OCC), 12 CFR 217.20(d)(1)(iv) (Board), and 12
CFR 324.20(d)(1)(iv) (FDIC); see also 12 CFR 3.300 (OCC), 12 CFR
217.300 (Board), and 12 CFR 324.300 (FDIC).
\30\ The proposed definition of ``NSFR regulatory capital
element'' would include allowances for loan and lease losses (ALLL)
to the same extent as under the risk-based capital rules. See 12 CFR
3.20(d)(3) (OCC), 12 CFR 217.20(d)(3) (Board), and 12 CFR
324.20(d)(3) (FDIC).
---------------------------------------------------------------------------

The proposed rule would define ``NSFR liability'' to mean any
liability or equity reported on a covered company's balance sheet that
is not an NSFR regulatory capital element. The term ``NSFR liability''
primarily refers to balance sheet liabilities but may include equity
because some equity may not qualify as an NSFR regulatory capital
element. The definitions of ``NSFR liability'' and ``NSFR regulatory
capital element,'' taken together, should capture the entirety of the
liability and equity side of a covered company's balance sheet.
The proposed rule would define ``QMNA netting set'' to refer to a
group of derivative transactions with a single counterparty that is
subject to a qualifying master netting agreement,\31\ and is netted
under the qualifying master netting agreement.\32\ QMNA netting sets
would include, in addition to non-cleared derivative transactions, a
group of cleared derivative transactions (that is, a group of
derivative transactions that have been entered into with, or accepted
by, a central counterparty (CCP)) if the applicable governing rules for
the group of cleared derivative transactions meet the definition of a
qualifying master netting agreement. The proposed rule would use the
term ``QMNA netting set'' in the calculation of a covered company's
stable funding requirement attributable to its derivative transactions,
as discussed in section II.E of this Supplementary Information section.
---------------------------------------------------------------------------

\31\ Each QMNA netting set must meet each of the conditions
specified in the definition of ``qualifying master netting
agreement'' under Sec. __.3 of the LCR rule and the operational
requirements under Sec. __.4(a) of the LCR rule.
\32\ A qualifying master netting agreement may identify a single
QMNA netting set (for which the agreement creates a single net
payment obligation and for which collection and posting of margin
applies on an aggregate net basis) or it may establish multiple QMNA
netting sets, each of which would be separate from and exclusive of
any other QMNA netting set or derivative transaction covered by the
qualifying master netting agreement.
---------------------------------------------------------------------------

The proposed rule would define ``unsecured wholesale lending'' as a
liability or general obligation of a wholesale customer or counterparty
to the covered company that is not a secured lending transaction.
Although the term ``unsecured wholesale funding'' is defined in the LCR
rule, ``unsecured wholesale lending'' is not. The proposed rule's NSFR
requirement would require a covered company to hold stable funding
against unsecured wholesale lending, so a definition of this term is
included in the proposed rule.
Question 7: In what ways, if any, should the agencies modify the
newly proposed definitions of ``carrying value,'' ``encumbered,''
``NSFR liability,'' ``NSFR regulatory capital element,'' ``QMNA netting
set,'' and ``unsecured wholesale lending'' and why?
Question 8: What other terms, if any, should the agencies define
and why?
Question 9: In the definition of ``NSFR regulatory capital
element,'' what adjustments to, or deductions from, regulatory capital,
if any, should the agencies include in NSFR regulatory capital elements
and why? For example, should the NSFR regulatory capital elements
include adjustments or deductions for changes in the fair value of a
liability due to a change in a

[[Page 35132]]

covered company's own credit risk? If so, why?

E. Effective Dates

As noted, the proposed NSFR requirement would be effective as of
January 1, 2018. This effective date should provide covered companies
with sufficient time to adjust to the requirements of the proposal,
including to make any changes to ensure their assets, derivative
exposures, and commitments are stably funded and to adjust information
systems to calculate and monitor their NSFR. The NSFR is a balance-
sheet metric, and its calculations would generally be based on the
carrying value, as determined under GAAP, of a covered company's
assets, liabilities, and equity. As a result, covered companies should
be able to leverage current financial reporting systems to comply with
the NSFR requirement.
The revisions to definitions currently used in the LCR rule and
that would be used in the proposed rule, as discussed in section I.D.1
of this SUPPLEMENTARY INFORMATION section, would become effective for
purposes of the LCR rule at the beginning of the calendar quarter after
finalization of the proposed rule, instead of on January 1, 2018.
Because these revisions would enhance the clarity of certain
definitions used in the LCR rule, the agencies are proposing that they
become effective sooner than the proposed NSFR effective date.
Question 10: Would the proposed effective date provide sufficient
time for covered companies to make any needed adjustments to their
systems for compliance with the proposed rule's requirements and to
ensure that their assets, derivative exposures, and commitments are
stably funded? What alternative effective date, if any, would be more
appropriate for the proposed NSFR requirement and why? What would be
the benefits of providing covered companies with a longer or shorter
period of time to comply with the proposed rule?
Question 11: What alternative effective date, if any, would be more
appropriate for the proposed revisions to the existing definitions used
in the LCR rule, and why?

II. Minimum Net Stable Funding Ratio

As noted above, a covered company would calculate its NSFR by
dividing its ASF amount by its RSF amount. The proposed rule would
require a covered company to maintain an NSFR equal to or greater than
1.0 on an ongoing basis. As a result, while the proposed rule would
require a covered company that is a depository institution holding
company to calculate its NSFR on a quarterly basis in order to comply
with the proposed rule's public disclosure requirements (as discussed
in section V of this SUPPLEMENTARY INFORMATION section), a covered
company would need to monitor its funding profile on an ongoing basis
to ensure compliance with the NSFR requirement. If a covered company's
funding profile materially changes intra-quarter, the agencies expect
the company to be able to calculate its NSFR to determine whether it
remains compliant with the NSFR requirement, consistent with the
notification requirements under Sec. __.110(a) and discussed in
section III of this SUPPLEMENTARY INFORMATION section.
The following discussion describes the calculation of a covered
company's ASF amount and RSF amount.

A. Rules of Construction

The proposed rule would include rules of construction in Sec.
__.102 relating to how items recorded on a covered company's balance
sheet would be reflected in the covered company's ASF and RSF amounts.
1. Balance-Sheet Metric
As noted above, a covered company would generally determine its ASF
and RSF amounts based on the carrying values of its assets, NSFR
regulatory capital elements, and NSFR liabilities as determined under
GAAP. Under GAAP, certain transactions and exposures are not recorded
on the covered company's balance sheet. The proposed rule would include
a rule of construction in Sec. __.102(a) specifying that, unless
otherwise provided, a transaction or exposure that is not recorded on
the balance sheet of a covered company would not be assigned an ASF or
RSF factor and, conversely, a transaction or exposure that is recorded
on the balance sheet of the covered company would be assigned an ASF or
RSF factor. While the proposed rule would generally rely on balance
sheet carrying values, it would differ in some cases, such as with
respect to determination of a covered company's stable funding
requirements relating to derivative transactions, as described in
section II.E of this SUPPLEMENTARY INFORMATION section, and the undrawn
amount of commitments, as described in section II.D.3 of this
SUPPLEMENTARY INFORMATION section.
2. Netting of Certain Transactions
The proposed rule would include a rule of construction in Sec.
__.102(b) that describes the treatment of receivables and payables that
are associated with secured funding transactions, secured lending
transactions, and asset exchanges with the same counterparty that the
covered company has netted against each other. For purposes of
determining the carrying value of these transactions, GAAP permits a
covered company, when the relevant accounting criteria are met, to
offset the gross value of receivables due from a counterparty under
secured lending transactions by the amount of payments due to the same
counterparty under secured funding transactions (GAAP offset
treatment). The proposed rule would require a covered company to
satisfy both these accounting criteria and the criteria applied in
Sec. __.102(b) before it could treat the applicable receivables and
payables on a net basis for the purposes of the NSFR requirement.
Section Sec. __.102(b) would apply the netting criteria specified
in the agencies' supplementary leverage ratio rule (SLR rule).\33\
These criteria require, first, that the offsetting transactions have
the same explicit final settlement date under their governing
agreements. Second, the criteria require that the right to offset the
amount owed to the counterparty with the amount owed by the
counterparty is legally enforceable in the normal course of business
and in the event of receivership, insolvency, liquidation, or similar
proceeding. Third, the criteria require that under the governing
agreements, the counterparties intended to settle net, settle
simultaneously, or settle according to a process that is the functional
equivalent of net settlement (that is, the cash flows of the
transactions are equivalent, in effect, to a single net amount on the
settlement date), where the transactions are settled through the same
settlement system, the settlement arrangements are supported by cash or
intraday credit facilities intended to ensure that settlement of the
transactions will occur by the end of the business day, and the
settlement of the underlying securities does not interfere with the net
cash settlement.
---------------------------------------------------------------------------

\33\ 12 CFR 3.10(c)(4)(ii)(E)(1) through (3) (OCC), 12 CFR
217.10(c)(4)(ii)(E)(1) through (3) (Board), and 12 CFR
324.10(c)(4)(ii)(E)(1) through (3) (FDIC).
---------------------------------------------------------------------------

If a covered company entered into secured funding and secured
lending transactions with the same counterparty and applied the GAAP
offset treatment when recording the carrying value of these
transactions, but the transactions did not meet the criteria in Sec.
__.102(b), the covered company would be required to assign the
appropriate RSF and ASF factors to the gross value of the receivables
and payables associated with these

[[Page 35133]]

transactions, rather than to the net value. Thus, the gross value of
these receivables or payables would be treated as if they were included
on the balance sheet of the covered company. If the criteria in Sec.
__.102(b) are not met, the cash flows associated with the maturities of
these secured lending and secured funding transactions may not align
and, therefore, the proposed rule would treat these transactions on an
individual basis when assigning them RSF and ASF factors. The proposed
rule's incorporation of these netting criteria would also maintain
consistency with covered companies' treatment of offset receivables and
payables under the SLR rule.
3. Treatment of Securities Received in an Asset Exchange by a
Securities Lender
The proposed rule would include a rule of construction in Sec.
__.102(c) specifying that when a covered company, acting as a
securities lender, receives a security in an asset exchange and has not
rehypothecated the security received, the covered company is not
required to assign an RSF factor to the security it has received and is
not permitted to assign an ASF factor to any liability to return the
security. The requirements of Sec. __.102(c), which would be
consistent with the treatment of security-for-security transactions
under the SLR rule,\34\ are intended to neutralize differences across
different accounting frameworks and maintain consistency across covered
companies. Because the proposed rule would not require stable funding
for the securities received, it would not treat the covered company's
obligation to return these securities as stable funding and would not
assign an ASF factor to this obligation. If, however, the covered
company, acting as the securities lender, sells or rehypothecates the
securities received, the proposed rule would require the covered
company to assign the appropriate RSF factor or factors under Sec.
__.106 to the proceeds of the sale or, in the case of a pledge or
rehypothecation, to the securities themselves if they remain on the
covered company's balance sheet.\35\ Similarly, the covered company
would assign a corresponding ASF factor to the NSFR liability
associated with the asset exchange, for example, an obligation to
return the security received.
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\34\ 12 CFR 3.10(c)(4)(ii)(A) (OCC), 12 CFR 217.10(c)(4)(ii)(A)
(Board), and 12 CFR 324.10(c)(4)(ii)(A) (FDIC).
\35\ See sections II.D.3.c and II.D.3.d of this Supplementary
Information section. If the collateral securities received by the
securities lender have been rehypothecated but remain on the covered
company's balance sheet, the collateral securities would be assigned
an RSF factor under Sec. __.106(c) to reflect the encumbrance. If
the collateral securities have been rehypothecated but do not remain
on the covered company's balance sheet, the covered company may be
required to apply an additional encumbrance to the asset it has
provided in the asset exchange, pursuant to Sec. __.106(d).
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B. Determining Maturity

Under the proposed rule, the ASF and RSF factors assigned to a
covered company's NSFR liabilities and assets would depend in part on
the maturity of each NSFR liability or asset. The proposed rule would
incorporate the maturity assumptions in Sec. __.31(a)(1) and (2) of
the LCR rule to determine the maturities of a covered company's NSFR
liabilities and assets. These LCR rule provisions generally require a
covered company to identify the most conservative maturity date when
calculating inflow and outflow amounts--that is, the earliest possible
date for an outflow from a covered company and the latest possible date
for an inflow to a covered company. These provisions also generally
require covered companies to take the most conservative approach when
determining maturity with respect to any notice periods and with
respect to any options, either explicit or embedded, that may modify
maturity dates.
Because the proposed rule would incorporate the LCR rule's maturity
assumptions, it would similarly require a covered company to identify
the maturity date of its NSFR liabilities and assets in the most
conservative manner. Specifically, the proposed rule would require a
covered company to apply the earliest possible maturity date to an NSFR
liability (which would be assigned an ASF factor) and the latest
possible maturity date to an asset (which would be assigned an RSF
factor). The proposed rule would also require a covered company to take
the most conservative approach when determining maturity with respect
to any notice periods and with respect to any options, either explicit
or embedded, that may modify maturity dates. For example, a covered
company would be required to assume that an option to reduce the
maturity of an NSFR liability and an option to extend the maturity of
an asset will be exercised.
The proposed rule would treat an NSFR liability that has an
``open'' maturity (i.e., the NSFR liability has no maturity date and
may be closed out on demand) as maturing on the day after the
calculation date. For example, an ``open'' repurchase transaction or a
demand deposit placed at a covered company would be treated as maturing
on the day after the calculation date. To ensure consistent use of
terms in the proposed rule and LCR rule and to avoid ambiguity between
perpetual instruments and transactions (i.e., the instrument or
transaction has no contractual maturity date and may not be closed out
on demand) and open instruments and transactions, the proposed rule
would amend the LCR rule to use the term ``open'' instead of using the
phrase ``has no maturity date.'' This proposed change would have no
substantive impact on the LCR rule. The proposed rule would treat a
perpetual NSFR liability (such as perpetual securities issued by a
covered company) as maturing one year or more after the calculation
date.
The proposed rule would treat each principal amount due under a
transaction, such as separate principal payments due under an
amortizing loan, as a separate transaction for which the covered
company would be required to identify the date when the payment is
contractually due and apply the appropriate ASF or RSF factor based on
that maturity date. This proposed treatment would ensure that a covered
company's ASF and RSF amounts reflect the actual timing of a company's
cash flows and obligations, rather than treating all principal payments
for a transaction as though each were due on the same date (e.g., the
last contractual principal payment date of the transaction). For
example, if a loan from a counterparty to a covered company requires
two contractual principal payments, the first due less than six months
from the calculation date and the second due one year or more from the
calculation date, only the principal amount that is due one year or
more from the calculation date would be assigned a 100 percent ASF
factor, which is the factor assigned to liabilities that have a
maturity of one year or more from the calculation date. The liability
arising from the principal payment due within six months represents a
less stable source of funding and would therefore be assigned a lower
ASF factor (for example, a zero percent ASF factor if the loan is from
a financial sector entity, as discussed in section II.C.3.e of this
SUPPLEMENTARY INFORMATION section).
For deferred tax liabilities that have no maturity date, the
maturity date under the proposed rule would be the first calendar day
after the date on which the deferred tax liability could be realized.

[[Page 35134]]

The proposed rule would not apply the LCR rule's maturity
assumptions to a covered company's NSFR regulatory capital elements.
Unlike NSFR liabilities, which have varying maturities, NSFR regulatory
capital elements are longer-term by definition, and as such, the
proposed rule would assign a 100 percent ASF factor to all NSFR
regulatory capital elements.

C. Available Stable Funding

Under the proposed rule, a covered company's ASF amount would
measure the stability of its equity and liabilities. An ASF amount that
equals or exceeds a covered company's RSF amount would be indicative of
a stable funding profile over the NSFR's one-year time horizon.
1. Calculation of ASF Amount
Under Sec. __.103 of the proposed rule, a covered company's ASF
amount would equal the sum of the carrying values of the covered
company's NSFR regulatory capital elements and NSFR liabilities, each
multiplied by the ASF factor assigned in Sec. __.104 or Sec.
__.107(c). As described below, these ASF factors would be assigned
based on the stability of each category of NSFR liability or NSFR
regulatory capital element over the NSFR's one-year time horizon.
As discussed in section II.E of this SUPPLEMENTARY INFORMATION
section, certain NSFR liabilities relating to derivative transactions
are not considered stable funding for purposes of a covered company's
NSFR calculation and are assigned a zero percent ASF factor under Sec.
__.107(c). In addition, pursuant to Sec. __.108 of the proposed rule,
a covered company may include in its ASF amount the available stable
funding of a consolidated subsidiary only to the extent that the
funding of the subsidiary supports the RSF amount associated with the
subsidiary's own assets or is readily available to support RSF amounts
associated with the assets of the covered company outside the
consolidated subsidiary. This restriction is discussed in more detail
in section II.F of this SUPPLEMENTARY INFORMATION section.
2. ASF Factor Framework
The proposed rule would use a set of standardized weightings, or
ASF factors, to measure the relative stability of a covered company's
NSFR liabilities and NSFR regulatory capital elements over a one-year
time horizon. ASF factors would be scaled from zero to 100 percent,
with a zero percent weighting representing the lowest stability and a
100 percent weighting representing the highest stability. The proposed
rule would consider funding to be less stable if there is a greater
likelihood that a covered company will need to replace or repay it
during the NSFR's one-year time horizon--for example, if the funding
matures and the counterparty declines to roll it over. The proposed
rule would categorize NSFR liabilities and NSFR regulatory capital
elements and assign an ASF factor based on three characteristics
relating to the stability of the funding: (1) Funding tenor, (2)
funding type, and (3) counterparty type.
Funding tenor. For purposes of assigning ASF factors, the proposed
rule would generally treat funding that has a longer effective maturity
(or tenor) as more stable than shorter-term funding. All else being
equal, funding that by its terms has a longer remaining tenor should be
less susceptible to rollover risk, meaning there is a lower risk that a
firm would need to replace maturing funds with less stable funding or
potentially monetize less liquid positions at a loss to meet
obligations, which could cause a firm's liquidity position to
deteriorate. Longer-term funding, therefore, should provide greater
stability across all market conditions, but especially during periods
of stress. The proposed rule would group the maturities of NSFR
liabilities and NSFR regulatory capital elements into one of three
categories: Less than six months, six months or more but less than one
year, and one year or more. The proposed rule would generally treat
funding with a remaining maturity of one year or more as the most
stable, because a covered company would not need to roll it over during
the NSFR's one-year time horizon. Funding with a remaining maturity of
less than six months or an open maturity would generally be treated as
the least stable, because a covered company would need to roll it over
in the short term. The proposed rule would generally treat funding that
matures in six months or more but less than one year as partially
stable, because a covered company would not need to roll it over in the
shorter term, but would still need to roll it over before the end of
the NSFR's one-year time horizon.
As described further below and in section II.C.3 of this
SUPPLEMENTARY INFORMATION section, funding tenor matters more for the
stability of some categories of funding than for others. For example,
with respect to stable retail deposits,\36\ contractual maturity
generally has less effect on the stability of the funding relative to
wholesale deposits.
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\36\ Section __.3 of the LCR rule defines a ``stable retail
deposit'' as a retail deposit that is entirely covered by deposit
insurance and either (1) is held by the depositor in a transactional
account or (2) the depositor that holds the account has another
established relationship with the covered company such as another
deposit account, a loan, bill payment services, or any similar
service or product provided to the depositor that the covered
company demonstrates, to the satisfaction of the appropriate Federal
banking agency, would make the withdrawal of the deposit highly
unlikely during a liquidity stress event. ``Deposit insurance'' is
defined in Sec. __.3 as deposit insurance provided by the FDIC
under the FDI Act (12 U.S.C. 1811 et seq.).
---------------------------------------------------------------------------

Funding type. The proposed rule would recognize that certain types
of funding are inherently more stable than others, independent of the
remaining tenor. For example, as described in section II.C.3.b of this
SUPPLEMENTARY INFORMATION section, the proposed rule would assign a
higher ASF factor to stable retail deposits relative to other retail
deposits, due in large part to the presence of full deposit insurance
coverage and other stabilizing features that reduce the likelihood of a
counterparty discontinuing the funding across a broad range of market
conditions. Similarly, the proposed rule would assign a higher ASF
factor to operational deposits than to certain other forms of short-
term, wholesale deposits, based on the provision of services linked to
an operational deposit, as discussed in section II.C.3.d of this
SUPPLEMENTARY INFORMATION section. Likewise, the proposed rule would
assign different ASF factors to different categories of retail brokered
deposits, based on features that tend to make these forms of deposit
more or less stable, as described in sections II.C.3.c, II.C.3.d, and
II.C.3.e of this SUPPLEMENTARY INFORMATION section below.
Counterparty type. The proposed rule's assignment of ASF factors
would also take into account the type of counterparty providing
funding, using the same counterparty type classifications as the LCR
rule: (1) Retail customers or counterparties, (2) wholesale customers
or counterparties that are not financial sector entities, and (3)
financial sector entities.\37\ As

[[Page 35135]]

described below and in section II.C.3 of this SUPPLEMENTARY INFORMATION
section, within the NSFR's one-year time horizon, and all other things
being equal, the proposed rule would treat most types of deposit
funding provided by retail customers or counterparties as more stable
than similar types of funding provided by wholesale customers or
counterparties. It would also treat most types of funding that matures
within six months and that is provided by financial sector entities as
less stable than funding of a similar tenor provided by non-financial
wholesale customers or counterparties.
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\37\ Under Sec. __.3 of the LCR rule, the term ``retail
customer or counterparty'' includes individuals, certain small
businesses, and certain living or testamentary trusts. The term
``wholesale customer or counterparty'' refers to any customer or
counterparty that is not a retail customer or counterparty. The term
``financial sector entity'' refers to a regulated financial company,
identified company, investment advisor, investment company, pension
fund, or non-regulated fund, as such terms are defined in Sec.
__.3. The proposed rule would incorporate these definitions. For
purposes of determining ASF and RSF factors assigned to assets,
commitments, and liabilities where counterparty is relevant, the
proposed rule would treat an unconsolidated affiliate of a covered
company as a financial sector entity.
---------------------------------------------------------------------------

Different types of counterparties may respond to events and market
conditions in different ways. For example, differences in business
models and liability structures tend to make short-term funding
provided by financial sector entities less stable than similar funding
provided by non-financial wholesale customers or counterparties.
Financial sector entities typically have less stable liability
structures than non-financial wholesale customers or counterparties,
due to their financial intermediation activities. They tend to be more
sensitive to market fluctuations and more susceptible to sudden cash
outflows that could cause them to rapidly withdraw funding from a
covered company. In contrast, wholesale customers and counterparties
that are not financial sector entities typically maintain balances with
covered companies to support their non-financial activities, such as
production and physical investment, which tend to be impacted by
financial market fluctuations to a lesser degree than activities of
financial sector entities. In addition, non-financial wholesale
customers or counterparties generally rely less on funding that is
short-term or that can be withdrawn on demand. Therefore, these non-
financial wholesale customers or counterparties may be less likely than
financial sector entities to rapidly withdraw funding from a covered
company. The proposed rule would accordingly treat most short-term
funding provided by financial sector entities as less stable than
similar funding provided by non-financial wholesale customers or
counterparties.
The proposed rule's assignment of ASF factors would also account
for differences in funding provided by retail and wholesale customers
or counterparties. For example, retail customers and counterparties
typically place deposits at a bank to safeguard their money and access
the payments system, which makes them less likely to withdraw these
deposits purely as a result of market stress, especially when covered
by deposit insurance. Wholesale customers or counterparties, while
often motivated by similar considerations, may also be motivated to a
greater degree by the return and risk of an investment. In addition, as
compared to retail customers or counterparties, wholesale customers or
counterparties tend to be more sophisticated and responsive to changing
market conditions, and often employ personnel who specialize in the
financial management of the company. Therefore, the proposed rule would
treat most types of deposit funding provided by retail customers or
counterparties as more stable than similar funding provided by
wholesale customers or counterparties.
While comprehensive data on the funding of covered companies by
counterparty type is limited, the agencies' analysis of available data
was consistent with the expectation of funding stability differences
across counterparty types.\38\ The agencies reviewed information
collected on the Consolidated Reports of Condition and Income (Call
Report), Report of Assets and Liabilities of U.S. Branches and Agencies
of Foreign Banks (FFIEC 002), and the Securities and Exchange
Commission (SEC) Financial and Operational Combined Uniform Single
Report (FOCUS Report) over the period beginning December 31, 2007, and
ending December 31, 2008, in combination with more recent FR 2052a
report data and supervisory information collected in connection with
the LCR rule. In addition, the agencies reviewed supervisory
information collected from depository institutions that the FDIC placed
into receivership in 2008 and 2009. Although the NSFR requirement is
designed to measure the stability of a covered company's funding
profile across all market conditions and would not be specifically
based on a market stress environment, the agencies focused on a period
of stress for purposes of evaluating the relative effects of
counterparty type on funding stability. Because a covered company may
under normal conditions adjust funding across counterparty types for
any number of reasons, focusing on periods of stress allowed the
agencies to better measure differences in stability by counterparty
type. During these periods of stress, a covered company will generally
be trying to roll over its funding, so differences in funding behavior
may reasonably be more attributed to its counterparties than business
decisions of the covered company.
---------------------------------------------------------------------------

\38\ Prior to the 2007-2009 financial crisis, covered companies
did not consistently report or disclose detailed liquidity
information. On November 17, 2015, the Board adopted the revised FR
2052a Complex Institutions Liquidity Monitoring Report (FR 2052a
report) to collect quantitative information on selected assets,
liabilities, funding activities, and contingent liabilities from
certain large banking organizations.
---------------------------------------------------------------------------

The agencies' analysis of available public and supervisory
information found that, during 2008, funding from financial sector
entities exhibited less stability than funding provided by non-
financial wholesale counterparties, which in turn exhibited less
stability than retail deposits. For example, Call Report data on
insured deposits, deposit data from the FFIEC 002, and broker-dealer
liability data reported on the SEC FOCUS Report showed higher
withdrawals in wholesale funding than retail deposits over this period.
The agencies' analysis of supervisory data from a sample of large
depository institutions that the FDIC placed into receivership in 2008
and 2009 also indicated that, during the periods leading up to
receivership, funding provided by wholesale counterparties can be
significantly less stable, showing higher average total withdrawals,
than funding provided by retail customers and counterparties.
Question 12: The agencies invite comment regarding the foregoing
framework. Are funding tenor, funding type, and counterparty type
appropriate indicators of funding stability for purposes of the
proposed rule? Why or why not? What other funding characteristics
should the proposed rule take into account for purposes of assigning
ASF factors? Please provide data and analysis to support your
conclusions.
3. ASF Factors
a. 100 Percent ASF Factor
NSFR Regulatory Capital Elements and Long-Term NSFR Liabilities
Section __.104(a) of the proposed rule would assign a 100 percent
ASF factor to NSFR regulatory capital elements, as defined in Sec.
__.3 and described in section I.D of this SUPPLEMENTARY INFORMATION
section, and to NSFR liabilities that mature one year or more from the
calculation date, other than funding provided by retail customers or
counterparties. Because NSFR regulatory capital elements and these
long-term liabilities do not mature during the NSFR's one-year time
horizon, they are not susceptible to rollover risk during this time
frame and represent the most stable form of

[[Page 35136]]

funding under the proposed rule. This category would include securities
issued by a covered company that have a remaining maturity of one year
or more. Therefore, the proposed rule would assign the highest possible
ASF factor of 100 percent to NSFR regulatory capital elements and most
long-term NSFR liabilities. As described in sections II.C.3.b through
II.C.3.e of this SUPPLEMENTARY INFORMATION section, the proposed rule
would assign different ASF factors to retail deposits and other forms
of NSFR liabilities provided by retail customers or counterparties.
Question 13: Which, if any, NSFR regulatory capital elements should
be assigned an ASF factor of other than 100 percent, and why?
Question 14: Should long-term debt securities issued by a covered
company where the company is the primary market maker of such
securities be assigned an ASF factor other than 100 percent (such as
between 95 and 99 percent) to address the risk of a covered company
buying back these debt securities? Please provide supporting data for
such alternative factors.
b. 95 Percent ASF Factor
Stable Retail Deposits
Section __.104(b) of the proposed rule would assign a 95 percent
ASF factor to stable retail deposits held at a covered company.\39\ The
proposed rule would assign a 95 percent ASF factor to stable retail
deposits to reflect the fact that such deposits are a highly stable
source of funding for covered companies. Specifically, the combination
of full deposit insurance coverage, the depositor's relationship with
the covered company, and the costs of moving transactional or multiple
accounts to another institution substantially reduce the likelihood
that retail depositors will withdraw these deposits in significant
amounts over a one-year time horizon.\40\ Because stable retail
deposits are nearly as stable over the NSFR's one-year time horizon as
NSFR regulatory capital elements and long-term NSFR liabilities under
Sec. __.104(a) of the proposed rule (described above in section
II.C.3.a), the proposed rule would assign to stable deposits an ASF
factor that is only slightly lower than that assigned to NSFR
regulatory capital elements and long-term NSFR liabilities.
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\39\ The proposed rule would incorporate the LCR rule's
definition of ``stable retail deposit.'' See supra note 36.
\40\ See supra section II.C.2 of this SUPPLEMENTARY INFORMATION
section.
---------------------------------------------------------------------------

As discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION
section, insured retail deposits would be treated as more stable than
similar funding from wholesale customers or counterparties, and would
therefore be assigned a higher ASF factor.
Consistent with the LCR rule, the maturity and collateralization of
stable retail deposits would not affect their treatment under the
proposed rule, because the stability of retail deposits is more closely
linked to the combination of deposit insurance, the other stabilizing
features included in the definition of ``stable retail deposit,'' and
the retail nature of the depositor, rather than maturity or any
underlying collateral. Maturity is less relevant, for example, because
a covered company may repay a retail term deposit for business and
reputational reasons in the event of an early withdrawal request by the
depositor despite the absence of a contractual requirement to provide
such a repayment within the NSFR's one-year time horizon.
c. 90 Percent ASF Factor
Other Retail Deposits
Section __.104(c) of the proposed rule would assign a 90 percent
ASF factor to retail deposits that are neither stable retail deposits
nor retail brokered deposits, which includes retail deposits that are
not fully insured by the FDIC or are insured under non-FDIC deposit
insurance regimes.
The proposed rule would assign a lower ASF factor to deposits that
are not entirely covered by deposit insurance relative to that assigned
to stable retail deposits because of the elevated risk of depositors
withdrawing funds if they become concerned about the condition of the
bank, in part, because the depositor will have no guarantee that
uninsured funds will promptly be made available through established and
timely intervention and resolution protocols. Supervisory experience
has demonstrated that retail depositors whose deposits exceed the
FDIC's insurance limit have tended to withdraw not only the uninsured
portion of the deposit, but the entire deposit under these
circumstances. In addition, deposits that are neither transactional
deposits nor deposits of a customer that has another relationship with
a covered company tend to be less stable than deposits that have such
characteristics because the depositor is less reliant on the bank.
Therefore, the proposed rule would assign an ASF factor of 90 percent
to these deposits, slightly lower than the ASF factor it would assign
to stable retail deposits.
Retail customers and counterparties tend to provide deposits that
are more stable than funding provided by other types of counterparties,
as discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION
section above, and, thus, retail deposits would be assigned a higher
ASF factor than all but the most stable forms of long-term funding from
wholesale customers. For the same reasons as discussed above in
relation to stable retail deposits, the maturity and collateralization
of these other retail deposits would not affect the ASF factor they
would be assigned under the proposed rule.
Retail funding that is not in the form of a deposit, such as
payables owed to small business service providers, would not be treated
as stable funding and would be assigned a zero percent ASF factor, as
described in section II.C.3.e of this SUPPLEMENTARY INFORMATION section
below.
Fully Insured Affiliate, Reciprocal, and Certain Longer-Term Retail
Brokered Deposits
Section __.104(c) of the proposed rule would assign a relatively
high 90 percent ASF factor to three categories of brokered deposits
\41\ provided by retail customers or counterparties that include
certain stabilizing features that tend to make them more stable forms
of funding than other brokered deposits, as discussed in sections
II.C.3.d and II.C.3.e of this SUPPLEMENTARY INFORMATION section
below.\42\ Retail brokered deposits that would be assigned a 90 percent
ASF factor include (1) a reciprocal brokered deposit where the entire
amount is covered by deposit insurance; \43\ (2) a brokered sweep
deposit that is deposited in accordance with a contract between the
retail customer or counterparty and the

[[Page 35137]]

covered company, a controlled subsidiary of the covered company, or a
company that is a controlled subsidiary of the same top-tier company of
which the covered company is a controlled subsidiary, where the entire
amount of the deposit is covered by deposit insurance; \44\ and (3) a
brokered deposit that is not a reciprocal brokered deposit or brokered
sweep deposit, is not held in a transactional account, and has a
remaining maturity of one year or more. By assigning a 90 percent ASF
factor, the proposed rule would treat these brokered deposits as more
stable than most other categories of brokered deposits, less stable
than stable retail deposits, and comparably stable to retail deposits
other than stable retail deposits.
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\41\ Under Sec. __.3 of the LCR rule, a brokered deposit is a
deposit held at the covered company that is obtained, directly or
indirectly, from or through the mediation or assistance of a deposit
broker, as that term is defined in section 29(g) of the FDI Act (12
U.S.C. 1831f(g)).
\42\ The agencies note that the ASF factors assigned to retail
brokered deposits are based solely on the stable funding
characteristics of these deposits over a one-year time horizon. The
assignment of ASF factors is not intended to reflect the impact of
these deposits on a covered company, such as their effect on a
company's probability of failure or loss given default, franchise
value, or asset growth rate or lending practices. In addition, the
assignment of ASF factors does not affect the determination of
deposits as brokered, which is addressed under other regulations and
guidance.
\43\ A ``reciprocal brokered deposit'' is defined in Sec. __.3
of the LCR rule as a brokered deposit that the covered company
receives through a deposit placement network on a reciprocal basis,
such that: (1) For any deposit received, the covered company (as
agent for the depositors) places the same amount with other
depository institutions through the network and (2) each member of
the network sets the interest rate to be paid on the entire amount
of funds it places with other network members.
\44\ Under Sec. __.3 of the LCR rule, a ``brokered sweep
deposit'' is a deposit held at a covered company by a customer or
counterparty through a contractual feature that automatically
transfers to the covered company from another regulated financial
company at the close of each business day amounts identified under
the agreement governing the account from which the amount is being
transferred. Typically, these transactions involve securities firms
or investment companies that transfer (``sweep'') idle customer
funds into deposit accounts at one or more banks.
---------------------------------------------------------------------------

First, Sec. __.104(c)(2) of the proposed rule would assign a 90
percent ASF factor to a reciprocal brokered deposit provided by a
retail customer or counterparty, where the entire amount of the deposit
is covered by deposit insurance. The reciprocal nature of the brokered
deposit means that a deposit placement network contractually provides a
covered company with the same amount of deposits that it places with
other depository institutions. As a result, and because the deposit is
fully insured, the retail customers or counterparties providing the
deposit tend to be less likely to withdraw it than other types of
brokered deposits.
Second, Sec. __.104(c)(3) of the proposed rule would assign a 90
percent ASF factor to a brokered sweep deposit that is deposited in
accordance with a contract between the retail customer or counterparty
that provides the deposit and the covered company or an affiliate of
the covered company, where the entire amount of the deposit is covered
by deposit insurance. A typical brokered sweep deposit arrangement
places deposits, usually those in excess of deposit insurance caps, at
different banking organizations, with each banking organization
receiving the maximum amount that is covered by deposit insurance,
according to a priority ``waterfall.'' Within the waterfall structure,
affiliates of the deposit broker tend to be the first to receive
deposits and the last from which deposits are withdrawn. With this
affiliate relationship, a covered company is more likely to receive and
maintain a steady stream of brokered sweep deposits. Based on the
reliability of this stream of brokered sweep deposits and the enhanced
stability associated with full deposit insurance coverage, the proposed
rule would treat this type of brokered deposit, in the aggregate, as
more stable than brokered sweep deposits received from unaffiliated
institutions.
Third, Sec. __.104(c)(4) of the proposed rule would assign a 90
percent ASF factor to a brokered deposit provided by a retail customer
or counterparty that is not a reciprocal brokered deposit or brokered
sweep deposit, is not held in a transactional account, and has a
remaining maturity of one year or more. The contractual term of this
category of brokered deposit and the exclusion of accounts used by a
customer for transactional purposes make this category of brokered
deposit more stable than other types of brokered deposits that would be
assigned a lower ASF factor. Like other types of retail deposits with a
remaining maturity of one year or more, however, these deposits would
not be assigned a 100 percent ASF factor, because a covered company may
be more likely to repay retail brokered deposits, in the event of an
early withdrawal request by the depositor, for reputational or
franchise reasons even without a contractual requirement to make such
repayment. In addition, the brokered nature of these deposits makes
them no more stable than stable retail deposits, which are assigned a
95 percent ASF factor, or retail deposits other than stable retail
deposits and brokered deposits, which are assigned a 90 percent ASF
factor, even if the deposit is fully covered by deposit insurance.
The proposed rule would assign lower ASF factors to brokered
deposits that do not include these stabilizing factors, as discussed in
sections II.C.3.d and II.C.3.e of this SUPPLEMENTARY INFORMATION
section below.
Question 15: To what extent should the proposed rule consider the
contractual term of a retail deposit (in addition to considering it for
some forms of brokered deposits) for purposes of assigning an ASF
factor? What alternative ASF factors, if any, would be more
appropriate, and under what circumstances?
Question 16: The agencies invite commenter views on the proposed
90, 50, and zero percent ASF factors assigned to retail brokered
deposits. What, if any, alternative ASF factors should be assigned to
these deposits and why?
d. 50 Percent ASF Factor
Section __.104(d) of the proposed rule would assign a 50 percent
ASF factor to certain unsecured wholesale funding, and secured funding
transactions, depending on the tenor of the transaction and the covered
company's counterparty; operational deposits that are placed at the
covered company; and certain brokered deposits.
Unsecured Wholesale Funding Provided by, and Secured Funding
Transactions With, a Counterparty That Is Not a Financial Sector Entity
or Central Bank and With Remaining Maturity of Less Than One Year
Sections __.104(d)(1) and (2) of the proposed rule would assign a
50 percent ASF factor to a secured funding transaction or unsecured
wholesale funding (including a wholesale deposit) that, in each case,
matures less than one year from the calculation date and is provided by
a wholesale customer or counterparty that is not a central bank or a
financial sector entity (or a consolidated subsidiary thereof).
The proposed 50 percent ASF factor for this category would be lower
than the 100 percent ASF factor assigned to funding from similar
counterparties that matures more than a year from the calculation date
because the need to roll over the funding during the NSFR's one-year
time horizon makes this category of funding less stable. The 50 percent
ASF factor would also be lower than the factor assigned to the
categories of retail deposits described above, which include features
such as deposit insurance and retail counterparty relationships that
make those categories of funding more stable, regardless of remaining
contractual maturity.
The proposed rule would generally assign an ASF factor to secured
funding transactions and unsecured wholesale funding on the basis of
counterparty type and maturity, without regard to whether and what type
of collateral secures the transaction. This treatment would differ from
the LCR rule, which more closely considers the liquidity
characteristics of the underlying collateral. This different treatment
stems from the fact that the LCR rule considers the immediate liquidity
of the underlying collateral and behavior of the counterparty during a
30-calendar day period of significant stress, whereas the proposed rule
focuses on the stability of funding over a one-year time horizon, which
is less influenced by the underlying collateral.

[[Page 35138]]

Unsecured Wholesale Funding Provided by, and Secured Funding
Transactions With, a Financial Sector Entity or Central Bank With
Remaining Maturity of Six Months or More, But Less Than One Year
Sections __.104(d)(3) and (4) of the proposed rule would assign a
50 percent ASF factor to a secured funding transaction or unsecured
wholesale funding that matures six months or more but less than one
year from the calculation date and is provided by a financial sector
entity or a consolidated subsidiary thereof, or a central bank.\45\ As
discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION section,
to account for the less stable nature of funding from these financial
counterparties, the proposed rule would treat this funding more
conservatively than funding from other types of wholesale customers or
counterparties. If the funding from these counterparties has a maturity
of less than six months, the proposed rule would assign a zero percent
ASF factor, as described below, which would reflect the higher rollover
risk of the funding resulting from the short remaining maturity and the
financial nature of the counterparty.
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\45\ As noted supra note 37 for purposes of determining ASF and
RSF factors assigned to assets, commitments, and liabilities where
counterparty is relevant, the proposed rule would treat an
unconsolidated affiliate of a covered company as a financial sector
entity.
---------------------------------------------------------------------------

The proposed rule would treat funding from central banks
consistently with funding from financial sector entities (i.e., as a
less stable form of funding) to discourage potential overreliance on
funding from central banks, consistent with the proposed rule's focus
on stable funding raised from market sources. In the United States, the
Federal Reserve does not currently offer funding arrangements of this
term.
Securities Issued by a Covered Company With Remaining Maturity of Six
Months or More, But Less Than One Year
Section __.104(d)(5) of the proposed rule would assign a 50 percent
ASF factor to securities issued by a covered company that mature in six
months or more, but less than one year, from the calculation date. As
discussed in section II.C.2 of this SUPPLEMENTARY INFORMATION section,
in general, the proposed rule would consider funding that has a longer
maturity to be more stable. These securities would represent less
stable funding than securities issued by a covered company that are
perpetual or mature one year or more from the calculation date (which
would be assigned an ASF factor of 100 percent, as discussed above),
but more stable funding than securities that mature within six months
from the calculation date (which would be assigned a zero percent ASF
factor, as discussed below).
Unlike other NSFR liabilities for which the proposed rule considers
the counterparty type when assigning an ASF factor, the proposed rule
would not consider the identities of the holders of the securities
issued by a covered company. Because securities may actively trade on
secondary markets and may be purchased by a variety of investors
including financial sector entities, the identities of current security
holders would not be an accurate or consistent factor that affects the
stability of this type of funding. In addition, a covered company may
not know or be able to track the identities of the holders of its
securities that are traded. The proposed rule would therefore treat
securities issued by a covered company equivalently to funding provided
by a financial sector entity, rather than assuming greater stability
based on a different type of counterparty. Therefore, similar to
funding provided by a financial sector entity, securities issued by a
covered company that mature in six months or more, but less than one
year, from the calculation date would be assigned a 50 percent ASF
factor.
Operational Deposits
Operational deposits are unsecured wholesale funding in the form of
deposits or collateralized deposits that are necessary for the
provision of operational services, such as clearing, custody, or cash
management services.\46\ In the LCR rule, such funds are assumed to
have a lower outflow rate than other types of unsecured wholesale
funding during a period of stress based on legal or operational
limitations that make significant withdrawals from these accounts
within 30 calendar days less likely. For example, an entity that relies
on the cash management services of a covered company would find it more
difficult to terminate its deposit agreement because it might be
subject to early termination fees and might also incur start-up costs
to establish a similar operational account with another financial
institution.
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\46\ The agencies note that the methodology that a covered
company uses to determine whether and to what extent a deposit is
operational for the purposes of the proposed rule must be consistent
with the methodology used for the purposes of the LCR rule. See
Sec. __.3 of the LCR rule for the full list of services that
qualify as operational services and Sec. __.4(b) of the LCR rule
for additional requirements for operational deposits.
---------------------------------------------------------------------------

As noted, a key operating assumption of the NSFR is a one-year time
horizon. Under this longer time horizon, it is more reasonable to
assume that a counterparty could successfully restructure its
operational deposits and place them with another financial institution.
Therefore, as compared with the treatment in the LCR rule, the
treatment of operational deposits in the proposed rule is closer to
that of non-operational deposits, but reflects that there may still be
some difficulty and cost associated with switching operational service
providers. Accordingly, Sec. __.104(d)(6) of the proposed rule would
also treat operational deposits, including those from financial sector
entities, as more stable than other forms of short-term wholesale
funding and assign them a 50 percent ASF factor.
Other Retail Brokered Deposits
Section __.104(d)(7) of the proposed rule would assign a 50 percent
ASF factor to most categories of brokered deposits provided by retail
customers or counterparties that do not include the additional
stabilizing features required under Sec. __.104(c) and summarized in
section II.C.3.c of this SUPPLEMENTARY INFORMATION section. Brokered
deposits tend to be less stable and exhibit greater volatility than
stable retail deposits, even in cases where the deposits are fully or
partially insured, as customers can more easily move brokered deposits
among institutions. In addition, intermediation by a deposit broker may
result in a higher likelihood of withdrawal compared to a non-brokered
retail deposit where a direct relationship exists between the depositor
and the covered company. Statutory restrictions on certain brokered
deposits can also make this form of funding less stable than other
deposit types. Specifically, a covered company that becomes less than
``well capitalized'' \47\ is subject to restrictions on accepting,
renewing, or rolling over funds obtained directly or indirectly through
a deposit broker.\48\ Thus, as a general matter, the proposed rule
would assign a 50 percent ASF factor to most categories of brokered
deposits.
---------------------------------------------------------------------------

\47\ As defined in section 38 of the FDI Act, 12 U.S.C. 1831o.
\48\ See 12 U.S.C. 1831f.
---------------------------------------------------------------------------

Retail brokered deposits that would be assigned a 50 percent ASF
factor include (1) a brokered deposit that is not a reciprocal brokered
deposit or brokered sweep deposit and that is held in a transactional
account; (2) a

[[Page 35139]]

brokered deposit that is not a reciprocal brokered deposit or brokered
sweep deposit, is not held in a transactional account, and matures in
six months or more, but less than one year, from the calculation date;
(3) a reciprocal brokered deposit or brokered affiliate sweep deposit
where less than the entire amount of the deposit is covered by deposit
insurance; and (4) a brokered non-affiliate sweep deposit, regardless
of deposit insurance coverage.
Retail brokered deposits to which the proposed rule would assign a
50 percent ASF factor do not have the same combination of stabilizing
attributes, such as a combination of being fully covered by deposit
insurance, being an affiliated brokered sweep deposit, or having a
longer-term maturity, as brokered deposits assigned a 90 percent ASF
factor, as discussed in section II.C.3.c of this SUPPLEMENTARY
INFORMATION section. However, these types of brokered deposits are more
stable than brokered deposits that mature in less than six months from
the calculation date and are not reciprocal brokered deposits or
brokered sweep deposits or held in a transactional account, which are
assigned a zero percent ASF factor, as discussed in section II.C.3.e of
this SUPPLEMENTARY INFORMATION section.
All Other NSFR Liabilities With Remaining Maturity of Six Months or
More, But Less Than One Year
Section __.104(d)(8) of the proposed rule would assign a 50 percent
ASF factor to all other NSFR liabilities that have a remaining maturity
of six months or more, but less than one year. As discussed in section
II.C.2 of this SUPPLEMENTARY INFORMATION section, a covered company
would not need to roll over a liability of this maturity in the
shorter-term, but would still need to roll it over before the end of
the NSFR's one-year time horizon.
e. Zero Percent ASF Factor
Section __.104(e) of the proposed rule would assign a zero percent
ASF factor to NSFR liabilities that demonstrate the least stable
funding characteristics, including trade date payables, certain short-
term retail brokered deposits, non-deposit retail funding, certain
short-term funding from financial sector entities, and any other NSFR
liability that matures in less than six months and is not described
above.
Trade Date Payables
Section __.104(e)(1) of the proposed rule would assign a zero
percent ASF factor to trade date payables that result from purchases by
a covered company of financial instruments, foreign currencies, and
commodities that are required to settle within the lesser of the market
standard settlement period for the particular transactions and five
business days from the date of the sale. Trade date payables are
established when a covered company buys financial instruments, foreign
currencies, and commodities, but the transactions have not yet settled.
These payables, which are liabilities, should result in an outflow from
a covered company at the settlement date, which varies depending on the
specific market, but generally occurs within five business days, so the
proposed rule does not treat the liability as stable funding. The
failure of a trade date payable to settle within the required
settlement period for the transaction would not affect the ASF factor
assigned to the transaction under the proposed rule because a trade
date payable that has failed to settle also does not represent stable
funding. Consistent with the definition of ``derivative transaction''
in Sec. __.3, the proposed rule would treat a payable with a
contractual settlement period that is longer than the lesser of the
market standard for the particular instrument or five business days as
a derivative transaction under Sec. __.107, rather than as a trade
date payable.
Certain Brokered Deposits
Section __.104(e)(2) of the proposed rule would assign a zero
percent ASF factor to a brokered deposit provided by a retail customer
or counterparty that is not a reciprocal brokered deposit or brokered
sweep deposit, is not held in a transactional account, and matures less
than six months from the calculation date. In addition to the reasons
discussed in section II.C.3.d above, this type of brokered deposit
tends to be less stable than other types of brokered deposits because
of the absence of incrementally stabilizing features such as being a
transactional account or reciprocal or brokered sweep arrangement. As a
result, retail customers or counterparties that provide this type of
brokered deposit face low costs associated with withdrawing the
funding. For example, a retail customer or counterparty providing this
type of brokered deposit may seek to deposit funds with the banking
organization that offers the highest interest rates, which may not be
the covered company.
Non-Deposit Retail Funding
Section __.104(e)(3) of the proposed rule would assign a zero
percent ASF factor to retail funding that is not in the form of a
deposit. Given that non-deposit retail liabilities are not regular
sources of funding or commonly utilized funding arrangements, the
proposed rule would not treat any portion of them as stable funding. As
noted above, a security issued by the covered company that is held by a
retail customer or counterparty would not take into account
counterparty type and therefore would not fall within this category.
Short-Term Funding From a Financial Sector Entity or Central Bank
Section __.104(e)(5) of the proposed rule would apply a zero
percent ASF factor to funding (other than operational deposits) for
which the counterparty is a financial sector entity or a consolidated
subsidiary thereof and the transaction matures less than six months
from the calculation date.\49\ Financial sector entities and their
consolidated subsidiaries are generally the most likely to withdraw
funding from a covered company, regardless of whether the funding is
secured or unsecured or the nature of any collateral securing the
funding, as described in section II.C.2 of this SUPPLEMENTARY
INFORMATION section.
---------------------------------------------------------------------------

\49\ As noted supra note 37 for purposes of determining ASF and
RSF factors assigned to assets, commitments, and liabilities where
counterparty is relevant, the proposed rule would treat an
unconsolidated affiliate of a covered company as a financial sector
entity.
---------------------------------------------------------------------------

Short-term funding from central banks is also assigned a zero
percent ASF factor to discourage overreliance on funding from central
banks, consistent with the proposed rule's focus on stable funding from
market sources, as noted in section II.C.3.d of this Supplementary
Information section above. For example, overnight funding from the
Federal Reserve's discount window would be assigned a zero percent ASF
factor.
Securities Issued by a Covered Company With Remaining Maturity of Less
Than Six Months
Section __.104(e)(4) of the proposed rule would assign a zero
percent ASF factor to securities that are issued by a covered company
and that have a remaining maturity of less than six months. As
discussed above, the proposed rule generally treats as less stable
those instruments that have shorter tenors and have to be paid within
the NSFR's one-year time horizon. Because these liabilities may be
actively traded, also as discussed above, the counterparty holding the
securities may not be reflective of the stability of the covered
company's funding under the securities. As a result, the proposed rule
would treat these NSFR liabilities

[[Page 35140]]

equivalently to funding with a similar maturity provided by a financial
sector entity, rather than assuming greater stability based on a
particular type of counterparty.
All Other NSFR Liabilities With Remaining Maturity of Less Than Six
Months or an Open Maturity
Section __.104(e)(6) of the proposed rule would assign a zero
percent ASF factor to all other NSFR liabilities, including those that
mature less than six months from the calculation date and those that
have an open maturity. NSFR liabilities that do not fall into one of
the categories described above would not represent a regular or
reliable source of funding and, therefore, the proposed rule would not
treat any portion as stable funding.
Question 17: What, if any, liabilities are not, but should be,
specifically addressed in the proposed rule and what ASF factors should
be assigned to those liabilities?
Question 18: What, if any, additional ASF factors should be
included and to which NSFR liabilities or NSFR regulatory capital
elements should they be assigned? Would adding such ASF factors provide
for a better calibrated ASF amount and, if so, why?
Question 19: What, if any, liabilities owed to retail customers or
counterparties not in the form of a deposit should be assigned an ASF
factor greater than zero percent, and why?

D. Required Stable Funding

Under the proposed rule, a covered company would be required to
maintain an ASF amount that equals or exceeds its RSF amount. As
described below, a covered company's RSF amount would be based on the
liquidity characteristics of its assets, derivative exposures, and
commitments. In general, the less liquid an asset over the NSFR's one-
year time horizon, the greater extent to which the proposed rule would
require it to be supported by stable funding. By requiring a covered
company to maintain more stable funding to support less liquid assets,
the proposed rule would reduce the risk that the covered company may
not be able to readily monetize the assets at a reasonable cost or
could be required to monetize the assets at fire sale prices or in a
manner that contributes to disorderly market conditions.
1. Calculation of the RSF Amount
The proposed rule would require a covered company to calculate its
RSF amount as set forth in Sec. __.105. A covered company's RSF amount
would equal the sum of two components: (i) The carrying values of a
covered company's assets (other than assets included in the calculation
of the covered company's derivatives RSF amount) and the undrawn
amounts of its commitments, each multiplied by an RSF factor assigned
under Sec. __.106 and described in section II.D.3 of this
SUPPLEMENTARY INFORMATION section; and (ii) the covered company's
derivatives RSF amount, as calculated under Sec. __.107 and described
in section II.E of this SUPPLEMENTARY INFORMATION section.
2. RSF Factor Framework
The proposed rule would use a set of standardized weightings, or
RSF factors, to determine the amount of stable funding a covered
company must maintain. Specifically, a covered company would calculate
its RSF amount by multiplying the carrying values of its assets, the
undrawn amounts of its commitments, and its measures of derivative
exposures (as discussed in section II.E of this SUPPLEMENTARY
INFORMATION section) by the assigned RSF factors. This approach would
promote consistency of the proposed NSFR measure across covered
companies.
RSF factors would be scaled from zero percent to 100 percent based
on the liquidity characteristics of an asset, derivative exposure, or
commitment. A zero percent RSF factor means that the proposed rule
would not require the asset, derivative exposure, or commitment to be
supported by available stable funding, and a 100 percent RSF factor
means that the proposed rule would require the asset, derivative
exposure, or commitment to be fully supported by available stable
funding. Accordingly, the proposed rule would generally assign a lower
RSF factor to more liquid assets, exposures, and commitments and a
higher RSF factor to less liquid assets, exposures, and commitments.
The proposed rule would categorize assets, derivatives exposures,
and commitments and assign an RSF factor based on the following
characteristics relating to their liquidity over the NSFR's one-year
time horizon: (1) Credit quality, (2) tenor, (3) type of counterparty,
(4) market characteristics, and (5) encumbrance.
Credit quality. Credit quality is a factor in an asset's liquidity
because market participants tend to be more willing to purchase higher
credit quality assets across a range of market and economic conditions,
but especially in a stressed environment (sometimes called ``flight to
quality''). The demand for higher credit quality assets, therefore, is
more likely to persist and such assets are more likely to have
resilient values, allowing a covered company to monetize them more
readily. Assets of lower credit quality, in contrast, are more likely
to become delinquent, and that increased credit risk makes these assets
less likely to hold their value, particularly in times of market
stress. As a result, the proposed rule would generally require assets
of lower credit quality to be supported by more stable funding, to
reduce the risk that a covered company may have to monetize the lower
credit quality asset at a discount.
Tenor. In general, the proposed rule would require a covered
company to maintain more stable funding to support assets that have a
longer tenor because of the greater time remaining before the covered
company will realize inflows associated with the asset. In addition,
assets with a longer tenor may liquidate at a discount because of the
increased market and credit risks associated with cash flows occurring
further in the future. Assets with a shorter tenor, in contrast, would
require a smaller amount of stable funding under the proposed rule
because a covered company would have access to the inflows under these
assets sooner. Thus, the proposed rule would generally require less
stable funding for shorter-term assets compared to longer-term assets.
The proposed rule would divide maturities into three categories for
purposes of a covered company's RSF amount calculation: less than six
months, six months or more but less than one year, and one year or
more.
Counterparty type. A covered company may face pressure to roll over
some portion of its assets in order to maintain its franchise value
with customers and because a failure to roll over such assets could be
perceived by market participants as an indicator of financial distress
at the covered company. Typically, these risks are driven by the type
of counterparty to the asset. For example, covered companies often
consider their lending relationships with a wholesale, non-financial
borrower to be important to maintain current business and generate
additional business in the future. As a result, a covered company may
have concerns about damaging future business prospects if it declines
to roll over lending to such a customer for reasons other than a change
in the financial condition of the borrower. More broadly, because
market participants generally expect a covered company to roll over
lending to wholesale, non-financial counterparties

[[Page 35141]]

based on relationships, a covered company's failure to do so could be
perceived as a sign of liquidity stress at the company, which could
itself cause such a liquidity stress.
These concerns are less likely to be a factor with respect to
financial counterparties because financial counterparties typically
have a wider range of alternate funding sources already in place and
face lower transaction costs associated with arranging alternate
funding and less expectation of stable lending relationships with any
single provider of credit. Therefore, market participants are less
likely to assume the covered company is under financial distress if the
covered company declines to roll over funding to a financial sector
counterparty. In light of these business and reputational
considerations, the proposed rule would require a covered company to
more stably fund lending to non-financial counterparties than lending
to financial counterparties, all else being equal.\50\
---------------------------------------------------------------------------

\50\ As noted supra note 37 for purposes of determining ASF and
RSF factors assigned to assets, commitments, and liabilities where
counterparty is relevant, an unconsolidated affiliate of a covered
company would be treated as a financial sector entity.
---------------------------------------------------------------------------

Market characteristics. Assets that are traded in transparent,
standardized markets with large numbers of participants and dedicated
intermediaries tend to exhibit a higher degree of reliable liquidity.
The proposed rule would, therefore, require less stable funding to
support such assets than those traded in markets characterized by
information asymmetry and relatively few participants.
Depending on the asset class and the market, relevant measures of
liquidity may include bid-ask spreads, market size, average trading
volume, and price volatility.\51\ While no single metric is likely to
provide for a complete assessment of market liquidity, multiple
indicators taken together provide relevant information about the extent
to which a liquid market exists for a particular asset class. For
example, market data reviewed by the agencies show that securities that
meet the criteria to qualify as HQLA typically trade with tighter bid-
ask spreads than non-HQLA securities and in markets with significantly
higher average daily trading volumes, both of which tend to indicate
greater liquidity in the markets for HQLA securities.
---------------------------------------------------------------------------

\51\ In general, tighter bid-ask spreads, larger market sizes,
higher trading volumes, and more consistent pricing tend to indicate
greater market liquidity. The agencies reviewed market data
discussed in this section II.D of this SUPPLEMENTARY INFORMATION
section from the following sources: Bloomberg Finance L.P.,
Financial Industry Regulatory Authority (FINRA) Trade Reporting and
Compliance Engine (TRACE), and Securities Industry and Financial
Market Association statistics (https://www.sifma.org/research/statistics.aspx).
---------------------------------------------------------------------------

Encumbrance. As described in section II.D.3 of this SUPPLEMENTARY
INFORMATION section, whether and the degree to which an asset is
encumbered will dictate the amount of stable funding the proposed rule
would require a covered company to maintain to support the particular
asset, as encumbered assets cannot be monetized during the period over
which they are encumbered. For example, securities that a covered
company has encumbered for a period of greater than one year in order
to provide collateral for its longer-term borrowings are not available
for the covered company to monetize in the shorter term. In general,
the longer an asset is encumbered, the more stable funding the proposed
rule would require.
Question 20: The agencies invite comment regarding the foregoing
framework. Are the characteristics described above appropriate
indicators of the liquidity of a covered company's assets, derivative
exposures, and commitments for purposes of the proposed rule? Why or
why not? What other characteristics should the proposed rule take into
account for purposes of assigning RSF factors? Please provide data and
analysis to support your conclusions.
3. RSF Factors
Section __.106 of the proposed rule would assign RSF factors to a
covered company's assets and commitments, other than certain assets
relating to derivative transactions that are assigned an RSF factor
under Sec. __.107. Section __.106 would also set forth specific
treatment for nonperforming assets, encumbered assets, assets held in
certain segregated accounts, and certain assets relating to secured
lending transactions and asset exchanges.
a. Treatment of Unencumbered Assets
i. Zero Percent RSF Factor
As noted above, a covered company's RSF amount reflects the
liquidity characteristics of its assets, derivative exposures, and
commitments. Section __.106(a)(1) of the proposed rule would assign a
zero percent RSF factor to certain assets that can be directly used to
meet financial obligations, such as cash, or that are expected, based
on contractual terms, to be converted to assets that can be directly
used to meet financial obligations over the immediate term. By
assigning a zero percent RSF factor to these assets, the proposed rule
would not require a covered company to support them with stable
funding.
Currency and Coin
Section __.106(a)(1)(i) of the proposed rule would assign a zero
percent RSF factor to currency and coin because they can be directly
used to meet financial obligations. Currency and coin include U.S. and
foreign currency and coin owned and held in all offices of a covered
company; currency and coin in transit to a Federal Reserve Bank or to
any other depository institution for which the covered company's
subsidiaries have not yet received credit; and currency and coin in
transit from a Federal Reserve Bank or from any other depository
institution for which the accounts of the subsidiaries of the covered
company have already been charged.\52\
---------------------------------------------------------------------------

\52\ This description of currency and coin is consistent with
the treatment of currency and coin in Federal Reserve form FR Y-9C.
---------------------------------------------------------------------------

Cash Items in the Process of Collection
Section __.106(a)(1)(ii) of the proposed rule would assign a zero
percent RSF factor to cash items in the process of collection. These
items would include: (1) Checks or drafts in process of collection that
are drawn on another depository institution (or a Federal Reserve Bank)
and that are payable immediately upon presentation in the country where
the covered company's office that is clearing or collecting the check
or draft is located, including checks or drafts drawn on other
institutions that have already been forwarded for collection but for
which the covered company has not yet been given credit (known as cash
letters), and checks or drafts on hand that will be presented for
payment or forwarded for collection on the following business day; (2)
government checks drawn on the Treasury of the United States or any
other government agency that are payable immediately upon presentation
and that are in process of collection; and (3) such other items in
process of collection that are payable immediately upon presentation
and that are customarily cleared or collected as cash items by
depository institutions in the country where the covered company's
office which is clearing or collecting the item is located.\53\ Despite
not being in a form that can be directly used to meet financial
obligations at the calculation date, cash items in the process of
collection will be in such a form in the immediate term. The proposed
rule

[[Page 35142]]

would therefore not require these assets to be supported by stable
funding.
---------------------------------------------------------------------------

\53\ This description of cash items in the process of collection
is consistent with the treatment of cash items in process of
collection in Federal Reserve Form FR Y-9C.
---------------------------------------------------------------------------

Reserve Bank Balances and Other Claims on a Reserve Bank That Mature in
Less Than Six Months
Section __.106(a)(1)(iii) of the proposed rule would assign a zero
percent RSF factor to a Reserve Bank balance or other claim on a
Reserve Bank that matures in less than six months from the calculation
date. The term ``Reserve Bank balances'' is defined in Sec. __.3 of
the LCR rule and includes required reserve balances and excess
reserves, but not other balances that a covered company maintains on
behalf of another institution, such as balances it maintains on behalf
of a respondent for which it acts as a pass-through correspondent \54\
or on behalf of an excess balance account participant.\55\
---------------------------------------------------------------------------

\54\ See 12 CFR 204.5(a)(1)(ii).
\55\ See 12 CFR 204.10(d).
---------------------------------------------------------------------------

The proposed rule would assign a zero percent RSF factor to Reserve
Bank balances because these assets can be directly used to meet
financial obligations through the Federal Reserve's payment system. The
proposed rule would also assign a zero percent RSF factor to a claim on
a Reserve Bank that does not meet the definition of a Reserve Bank
balance if the claim matures in less than six months. In these cases,
while the asset cannot be directly used to meet financial obligations
of a covered company, a covered company faces little risk of a
counterparty default or harm to its franchise value if it does not roll
over the lending and it may therefore realize cash flows associated
with the asset in the near term.
Claims on a Foreign Central Bank That Matures in Less Than Six Months
Section __.106(a)(1)(iv) of the proposed rule would assign a zero
percent RSF factor to claims on a foreign central bank that mature in
less than six months. Similar to claims on a Reserve Bank, claims on a
foreign central bank in this category may generally either be directly
used to meet financial obligations or will be available for such use in
the near term, and a covered company faces little risk of a
counterparty default or harm to its franchise value if it does not roll
over the lending. The proposed rule would therefore not require that
they be supported by stable funding.
Trade Date Receivables
Similar to cash items in the process of collection, a covered
company can reasonably expect that certain contractual ``trade date''
receivables will settle in the near term. These trade date receivables
are limited to those due to the covered company that result from the
sales of financial instruments, foreign currencies, or commodities that
(1) are required to settle within the lesser of the market standard
settlement period for the relevant type of transaction, without
extension of the standard settlement period, and five business days
from the date of the sale; and (2) have not failed to settle within the
required settlement period.\56\ Section __.106(a)(1)(v) of the proposed
rule would assign a zero percent RSF to these receivables because they
are generally reliable, with standardized, widely used settlement
procedures and standardized settlement periods that are no longer than
five business days. Thus, a covered company will realize inflows from
these receivables in the very near term.
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\56\ Consistent with the definition of ``derivative
transaction'' under Sec. __.3 of the LCR rule, the proposed rule
would treat a trade date receivable that has a contractual
settlement or delivery lag beyond this period as a derivative
transaction under Sec. __.107. (The definition of ``derivative
transaction'' under Sec. __.3 of the LCR rule includes ``unsettled
securities, commodities, and foreign currency exchange transactions
with a contractual settlement or delivery lag that is longer than
the lesser of the market standard for the particular instrument or
five business days.'') The proposed rule would not treat as a
derivative transaction a trade date receivable that has a
contractual settlement or delivery lag within the lesser of the
market standard settlement period and five business days, but which
fails to settle within this period; instead, the proposed rule would
assign a 100 percent RSF factor to the trade date receivable under
Sec. __.106(a)(8) as an asset not otherwise assigned an RSF factor
under Sec. __.106(a)(1) through (7) or Sec. __.107.
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Question 21: Given the one-year time horizon of the NSFR, the
proposed rule would not require a covered company to support its
current reserve balance requirement with stable funding. Because
balances that meet reserve balance requirements are not immediately
available to be used to directly meet financial obligations, what, if
any, RSF factor (such as 100 percent) should be assigned to a covered
company's reserve balance requirement and why?
Question 22: Should the proposed rule treat as a trade date
receivable (instead of a derivative transaction) any transaction
involving the sale of financial instruments, foreign currencies, or
commodities, that has a market standard settlement period of greater
than five business days from the date of the sale, and if so, why?
ii. 5 Percent RSF Factor
Unencumbered Level 1 Liquid Assets
Section __.106(a)(2)(i) of the proposed rule would assign a 5
percent RSF factor to level 1 liquid assets that would not be assigned
a zero percent RSF factor. The proposed rule would incorporate the
definition of ``level 1 liquid assets'' set forth in Sec. __.20(a) of
the LCR rule, which does not take into consideration the requirements
under Sec. __.22. The following level 1 liquid assets would be
assigned a 5 percent RSF factor: (1) Securities issued or
unconditionally guaranteed as to the timely payment of principal and
interest by the U.S. Department of the Treasury; (2) liquid and
readily-marketable securities, as defined in Sec. __.3 of the LCR
rule, issued or unconditionally guaranteed as to the timely payment of
principal and interest by any other U.S. government agency (provided
that its obligations are fully and explicitly guaranteed by the full
faith and credit of the U.S. government); (3) certain liquid and
readily-marketable securities that are claims on, or claims guaranteed
by, a sovereign entity, a central bank, the Bank for International
Settlements, the International Monetary Fund, the European Central Bank
and European Community, or a multilateral development bank; and (4)
certain liquid and readily-marketable debt securities issued by
sovereign entities.
Section __106(a)(2)(i) of the proposed rule would assign a
relatively low RSF factor of 5 percent to these level 1 liquid assets
based on their high credit quality and favorable market liquidity
characteristics, which reflect their ability to serve as reliable
sources of liquidity. For example, U.S. Treasury securities (a form of
level 1 liquid assets) have among the highest credit quality of assets
because they are backed by the full faith and credit of the U.S.
government. In addition, the market for U.S. Treasury securities has a
high average daily trading volume, large market size, and low bid-ask
spreads relative to the markets in which other asset classes trade.
Assignment of a 5 percent RSF factor would recognize that there are
modest transaction costs related to selling U.S. Treasury securities
and other level 1 liquid assets but that, other than assets that a
covered company can use directly to meet financial obligations (or will
be able to use within a matter of days), level 1 liquid assets
generally represent the most readily monetizable asset types for a
covered company.

[[Page 35143]]

Credit and Liquidity Facilities
Section __.106(a)(2)(ii) of the proposed rule would assign a 5
percent RSF factor to the undrawn amount of committed credit and
liquidity facilities that a covered company provides to its customers
and counterparties. The proposed rule would require a covered company
to support these facilities with stable funding, even though they are
generally not included on its balance sheet, because of their
widespread use and associated material liquidity risk based on the
possibility of drawdowns across a range of economic environments.
Research conducted by Board staff found increases in drawdowns of as
much as 10 percent of committed amounts over a 12-month period from
2006-2011.\57\ Given the proposed rule's application across all
counterparties and economic environments, assignment of a 5 percent RSF
factor would be appropriate based on the observed drawdowns during this
period.
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\57\ See Jose M. Berrospide, Ralf R. Meisenzahl, and Briana D.
Sullivan, ``Credit Line Use and Availability in the Financial
Crisis: The Importance of Hedging,'' Board of Governors of the
Federal Reserve System, Finance and Economics Discussion Series
2012-27 (2012).
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The terms ``credit facility'' and ``liquidity facility'' are
defined in Sec. __.3 of the LCR rule and, as described in section I.D
of this Supplementary Information section, the proposed rule would
modify the definition of ``committed'' that is currently in the LCR
rule to describe credit and liquidity facilities that cannot be
unconditionally canceled by a covered company. Under Sec. __.106(a)(2)
of the proposed rule, the undrawn amount is the amount that could be
drawn upon within one year of the calculation date, whereas under Sec.
__.32(e) of the LCR rule, the undrawn amount is the amount that could
be drawn upon within 30 calendar days. When determining the undrawn
amount over the proposed rule's one-year time horizon, a covered
company would not include amounts that are contingent on the occurrence
of a contractual milestone or other event that cannot be reasonably
expected to be reached or occur within one year. For example, if a
construction company can draw a certain amount from a credit facility
only upon meeting a construction milestone that cannot reasonably be
expected to be reached within one year, such as entering the final
stage of a multi-year project that has just begun, then the undrawn
amount would not include the amount that would become available only
upon entering the final stage of the project.
Similarly, a letter of credit that meets the definition of credit
or liquidity facility may entitle a seller to obtain funds from a
covered company if a buyer fails to pay the seller. If, under the terms
of the letter of credit, the seller is not legally entitled to obtain
funds from the covered company as of the calculation date because the
buyer has not failed to perform under the agreement with the seller,
and the covered company does not reasonably expect nonperformance
within the NSFR's one-year time horizon, then the funds potentially
available under the letter of credit are not undrawn amounts. If the
seller is legally entitled to obtain the funds available under the
letter of credit as of the calculation date (because the buyer has
defaulted) or if the buyer should reasonably be expected to default
within the NSFR's one-year time horizon, then the funds available under
the letter of credit are undrawn amounts.
Unlike the LCR rule, which permits covered companies to net certain
level 1 and level 2A liquid assets that secure a committed credit or
liquidity facility against the undrawn amount of the facility, the
proposed rule would not allow netting of such assets because any draw
upon a credit or liquidity facility would become an asset on a covered
company's balance sheet regardless of the underlying collateral and
would require stable funding.
Question 23: The agencies invite comment on the proposed assignment
of a 5 percent RSF factor to the undrawn amount of committed credit and
liquidity facilities. What, if any, additional factors should be
considered in determining the treatment of unfunded commitments under
the proposed rule?
Question 24: What, if any, modifications to the definitions of
``credit facility'' and ``liquidity facility'' or the description of
the ``undrawn amount'' for purposes of the proposed rule should the
agencies consider?
Question 25: If required to be posted as collateral upon a draw on
a committed credit or liquidity facility, should certain level 1 and
level 2A liquid assets be netted against the undrawn amount of the
facility, and if so, why? Provide detailed explanations and supporting
data.
iii. 10 Percent RSF Factor
Secured Lending Transactions With a Financial Sector Entity or a
Subsidiary Thereof That Mature Within Six Months and Are Secured by
Rehyphothecatable Level 1 Liquid Assets
Section __.106(a)(3) of the proposed rule would assign a 10 percent
RSF factor to a secured lending transaction \58\ with a financial
sector entity or a consolidated subsidiary thereof that matures within
six months of the calculation date and is secured by level 1 liquid
assets that are rehypothecatable for the duration of the secured
lending transaction.
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\58\ The proposed rule would modify the definition of ``secured
lending transaction'' that is currently in the LCR rule, as
described in section I.D of this SUPPLEMENTARY INFORMATION section.
---------------------------------------------------------------------------

The proposed rule would require a covered company to support short-
term lending between financial institutions, where the transaction is
secured by rehypothecatable level 1 liquid assets, with a lower amount
of available stable funding, relative to most other asset classes,
because of a covered company's ability to monetize the level 1 liquid
asset collateral for the duration of the transaction. Because of the
financial nature of the counterparty, a transaction of this type also
presents relatively lower reputational risk to a covered company if it
chooses not to roll over the transaction when it matures, as discussed
in section II.D.2 of this Supplementary Information section.
As provided in Sec. __.106(d) of the proposed rule and discussed
in section II.D.3.d of this SUPPLEMENTARY INFORMATION section, the RSF
factor applicable to a transaction in this category may increase if the
covered company rehypothecates the level 1 liquid asset collateral
securing the transaction for a period with more than six months
remaining from the calculation date.
iv. 15 Percent RSF Factor
Unencumbered Level 2A Liquid Assets
Section __.106(a)(4)(i) of the proposed rule would assign a 15
percent RSF factor to level 2A liquid assets, as set forth in Sec.
__.20(b) of the LCR rule, but would not take into consideration the
requirements in Sec. __.22 or the level 2 cap in Sec. __.21. As set
forth in the LCR rule, 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. The LCR rule
requires these securities to be liquid and

[[Page 35144]]

readily-marketable, as defined in Sec. __.3, to qualify as level 2A
liquid assets.
The proposed rule would assign a 15 percent RSF factor to level 2A
liquid assets based on the characteristics of these assets, including
their high credit quality. This factor would reflect the relatively
high level of liquidity of these assets compared to most other asset
classes, but lower liquidity than level 1 liquid assets. For example,
mortgage-backed securities issued by U.S. GSEs (a widely held form of
level 2A liquid assets) have a higher credit quality, higher average
daily trading volume, and lower bid-ask spreads relative to corporate
debt securities.
Secured Lending Transactions and Unsecured Wholesale Lending With a
Financial Sector Entity or a Subsidiary Thereof That Mature Within Six
Months
Section __.106(a)(4)(ii) of the proposed rule would assign a 15
percent RSF factor to a secured lending transaction with a financial
sector entity or a consolidated subsidiary thereof that is secured by
assets other than rehypothecatable level 1 liquid assets and matures
within six months of the calculation date. It would assign the same RSF
factor to unsecured wholesale lending to a financial sector entity or a
consolidated subsidiary thereof that matures within six months of the
calculation date.\59\ Such transactions present relatively lower
liquidity risk because of their shorter tenors relative to loans with a
longer remaining maturity, providing for cash inflows upon repayment of
the loan, and generally present lower reputational risk if a covered
company chooses not to roll over the transaction because of the
financial nature of the counterparties, as discussed in section II.D.2
above. Therefore, the proposed rule would assign a lower RSF factor to
these assets than it would to longer-term loans to similar
counterparties or to similar-term loans to non-financial
counterparties, as described in sections II.D.3.a.v through
II.D.3.a.vii below.
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\59\ As noted supra note 37 for purposes of determining ASF and
RSF factors assigned to assets, commitments, and liabilities where
counterparty is relevant, the proposed rule would treat an
unconsolidated affiliate of a covered company as a financial sector
entity.
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The proposed rule would assign a higher RSF factor to these
transactions, however, than it would to a secured lending transaction
with a similar maturity and similar counterparty type that is secured
by level 1 liquid assets that are rehypothecatable for the duration of
the transaction. As described in section II.D.3.a.iii above, the
proposed rule would not require a covered company to fund a transaction
secured by rehypothecatable level 1 liquid assets with the same level
of available stable funding because of the increased liquidity benefit
to the covered company from its ability to monetize the level 1 liquid
assets securing the transaction for the duration of the transaction.
v. 50 Percent RSF Factor
Unencumbered Level 2B Liquid Assets
Section __.106(a)(5)(i) of the proposed rule would assign a 50
percent RSF factor to level 2B liquid assets, as set forth in Sec.
__.20(c) of the LCR rule, but would not take into consideration the
requirements in Sec. __.22 or the level 2 caps in Sec. __.21. Level
2B liquid assets include certain publicly traded corporate debt
securities and certain publicly traded common equity shares that are
liquid and readily-marketable.\60\
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\60\ The agencies note that nothing in the proposed rule would
grant a covered company the authority to engage in activities
relating to debt securities and equities not otherwise permitted by
applicable law.
---------------------------------------------------------------------------

Section __.20 of the LCR rule requires an asset to meet certain
criteria to qualify as a level 2B liquid asset. For example, equity
securities must be part of a major index and corporate debt securities
must be ``investment grade'' under 12 CFR part 1.\61\ Therefore, the
proposed rule would assign a lower RSF factor to these assets than it
would assign to non-HQLA. The proposed rule would assign a higher RSF
factor to level 2B liquid assets, however, than it would to level 1 and
level 2A liquid assets, based on level 2B liquid assets' relatively
higher credit risk, lower trading volumes, and elevated price
volatility. For example, Russell 1000 equities, as a class, have lower
average daily trading volume and higher price volatility than U.S.
Treasury securities and mortgage-backed securities issued by U.S. GSEs.
Similarly, investment grade corporate bonds have higher credit risk and
lower average daily trading volume relative to level 1 and level 2A
liquid assets. At the same time, the market for level 2B liquid assets
is more liquid than the secondary market for longer-term loans, in
terms of, for example, average daily trading volume. Accordingly, the
proposed rule would assign a 50 percent RSF factor to a covered
company's level 2B liquid assets.
---------------------------------------------------------------------------

\61\ 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) Sec. 939A, codified at 15
U.S.C. 78o-7, the LCR rule does not rely on credit ratings as a
standard of creditworthiness. Rather, the LCR rule relies on an
assessment by the covered company of the capacity of the issuer of
the corporate debt security to meet its financial commitments.
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Secured Lending Transactions and Unsecured Wholesale Lending to a
Financial Sector Entity or a Subsidiary Thereof or a Central Bank That
Mature in Six Months or More, but Less Than One Year
Section __.106(a)(5)(ii) of the proposed rule would assign a 50
percent RSF factor to a secured lending transaction or unsecured
wholesale lending that matures in six months or more, but less than one
year from the calculation date, where the counterparty is a financial
sector entity or a consolidated subsidiary thereof or the counterparty
is a central bank.\62\ As discussed above, a covered company faces
lower reputational risk if it chooses not to roll over these loans to
financial counterparties or claims on a central bank than it would with
loans to non-financial counterparties. However, these loans have longer
terms--beyond six months--which means that liquidity from principal
repayments will not be available in the near term. Therefore, these
loans require more stable funding than shorter-term loans, which would
be assigned a lower RSF factor, as discussed above. At the same time,
given that these loans mature within the NSFR's one-year time horizon,
the proposed rule would not require them to be fully supported by
stable funding and would assign them a 50 percent RSF factor.
---------------------------------------------------------------------------

\62\ As noted supra note 37 for purposes of determining ASF and
RSF factors assigned to assets, commitments, and liabilities where
counterparty is relevant, the proposed rule would treat an
unconsolidated affiliate of a covered company as a financial sector
entity.
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Operational Deposits Held at Financial Sector Entities.
Section __.106(a)(5)(iii) of the proposed rule would assign a 50
percent RSF factor to an operational deposit, as defined in Sec. __.3,
placed by the covered company at another financial sector entity.
Consistent with the reasoning for the ASF factor assigned to
operational deposits held at a covered company, described in section
II.C of this Supplementary Information section, such operational
deposits placed by a covered company are less readily monetizable by
the covered company. These deposits are placed for operational
purposes, and a covered company would face legal or operational
limitations to making significant withdrawals during the NSFR's one-
year time horizon. Thus, the proposed rule would assign a 50 percent
RSF factor to these operational deposits.

[[Page 35145]]

General Obligation Securities Issued by a Public Sector Entity
Section __.106(a)(5)(iv) of the proposed rule would assign a 50
percent RSF factor to general obligation securities issued by, or
guaranteed as to the timely payment of principal and interest by, a
public sector entity.\63\ Consistent with the definition of ``general
obligation'' in the agencies' risk-based capital rules, a general
obligation security is a bond or similar obligation backed by the full
faith and credit of a public sector entity.\64\ Securities that are not
backed by the full faith and credit of a public sector entity,
including revenue bonds, would not be considered general obligation
securities.
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\63\ On April 1, 2016, the Board finalized an amendment to the
Board's LCR rule to include certain municipal securities as level 2B
liquid assets. 81 FR 21223 (April 11, 2016). As a result of this
amendment, certain municipal securities held by covered companies
that are Board-regulated institutions would be assigned the 50
percent RSF factor as level 2B liquid assets, notwithstanding this
proposed treatment for all general obligation municipal securities.
\64\ See 12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), and 12 CFR
324.2 (FDIC).
---------------------------------------------------------------------------

U.S. general obligation securities issued by a public sector
entity,\65\ which are backed by the general taxing authority of the
issuer, are assigned a risk weight of 20 percent under subpart D of the
agencies' risk-based capital rules.\66\ These securities have more
favorable credit risk characteristics than exposures that would receive
a risk weight greater than 20 percent under the agencies' risk-based
capital rules, such as revenue bonds, which are assigned a 50 percent
risk weight.\67\ Revenue bonds depend on revenue from a single source,
or a limited number of sources, and therefore present greater credit
risk relative to a U.S. general obligation security issued by a public
sector entity. As discussed in section II.D.2 of this Supplementary
Information section, high credit quality generally indicates that an
asset will maintain liquidity, as market participants tend to be more
willing to purchase higher credit quality assets across a range of
market and economic conditions. Accordingly, the proposed rule would
only assign a 50 percent RSF factor to those securities issued by a
U.S. public sector entity with sufficiently high credit quality, which
is reflected by the fact that they are assigned a risk weight of no
greater than 20 percent under the standardized approach in the
agencies' risk-based capital rules. Because the agencies expect that
covered companies will be able to at least partially monetize these
securities within the proposed rule's one-year time horizon, the
proposed rule would not require a covered company to fully support
these securities with stable funding.
---------------------------------------------------------------------------

\65\ Section __.3 of the LCR rule defines a ``public sector
entity'' as a state, local authority, or other governmental
subdivision below the U.S. sovereign entity level.
\66\ See 12 CFR 3.32(e)(1)(i) (OCC), 12 CFR 217.32(e)(1)(i)
(Board), and 12 CFR 324.32(e)(1)(i) (FDIC).
\67\ See 12 CFR 3.32(e)(1)(ii) (OCC), 12 CFR 217.32(e)(1)(ii)
(Board), and 12 CFR 324.32(e)(1)(ii) (FDIC).
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Secured Lending Transactions and Unsecured Wholesale Lending to
Counterparties That Are Not Financial Sector Entities and Are Not
Central Banks and That Mature in Less Than One Year
Section __.106(a)(5)(v) of the proposed rule would assign a 50
percent RSF factor to lending to a wholesale customer or counterparty
that is not a financial sector entity or central bank, including a non-
financial corporate, sovereign, or public sector entity, that matures
in less than one year from the calculation date. Unlike with lending to
financial sector entities and central banks, the proposed rule would
assign the same RSF factor to lending with a remaining maturity of less
than six months as it would assign to lending with a remaining maturity
of six months or more, but less than one year. This treatment reflects
the fact that a covered company is likely to have stronger incentives
to continue to lend to these counterparties due to reputational risk
and a covered company's need to maintain its franchise value, even when
the lending is scheduled to mature in the nearer term, as discussed in
section II.D.2 of this Supplementary Information section. Because of
that need to continue lending for reputational reasons or the longer
term of certain of these loans, the proposed rule would require
significant stable funding to support such lending. However, the
proposed rule would not require this lending to be fully supported by
stable funding, based on its maturity within the NSFR's one-year time
horizon and the assumption that a covered company may be able to reduce
its lending to some degree over the NSFR's one-year time horizon. Thus,
the proposed rule would assign an RSF factor of 50 percent to lending
in this category.
Lending to Retail Customers and Counterparties That Matures in Less
Than One Year
Section __.106(a)(5)(v) of the proposed rule would assign a 50
percent RSF factor to lending to retail customers or counterparties
(including certain small businesses), as defined in Sec. __.3 of the
LCR rule, for the same reputational and franchise value maintenance
reasons for which it would assign a 50 percent RSF factor to lending to
wholesale customers and counterparties that are not financial sector
entities or central banks, as discussed in section II.D.2 of this
Supplementary Information section.
All Other Assets That Mature in Less Than One Year
Section __.106(a)(5)(v) of the proposed rule would assign a 50
percent RSF factor to all other assets that mature within one year of
the calculation date but are not described in the categories above. The
shorter maturity of an asset in this category reduces its liquidity
risk, since it provides for cash inflows upon repayment during the
NSFR's one-year time horizon. However, a covered company may not be
able to readily monetize assets that are not part of one of the
identified asset classes addressed in the other provisions of the
proposed rule. Thus, the proposed rule would require stable funding to
support these assets by assigning a 50 percent RSF factor.
vi. 65 Percent RSF Factor
Retail Mortgages That Mature in One Year or More and Are Assigned a
Risk Weight of No Greater Than 50 Percent
Section __.106(a)(6)(i) of the proposed rule would assign a 65
percent RSF factor to retail mortgages that mature one year or more
from the calculation date and are assigned a risk weight of no greater
than 50 percent under subpart D of the agencies' risk-based capital
rules. Under the agencies' risk-based capital rules, residential
mortgage exposures secured by a first lien on a one-to-four family
property that are prudently underwritten, are not 90 days or more past
due or carried in nonaccrual status, and that are neither restructured
nor modified generally receive a 50 percent risk weight.\68\ These
mortgage loans should be easier to monetize because of their less risky
nature compared to mortgage loans that have a risk weight greater than
50 percent, but generally are not as liquid as lending that matures
within the NSFR's one-year time horizon. Thus, the proposed rule would
require a

[[Page 35146]]

substantial amount of stable funding to support these assets by
assigning a 65 percent RSF factor to them.
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\68\ See 12 CFR 3.32(g) (OCC), 12 CFR 217.32(g) (Board), and 12
CFR 324.32(g) (FDIC). The proposed rule would be consistent with the
Basel III NSFR, which assigns a 65 percent RSF factor to residential
mortgages that receive a 35 percent risk weight under the Basel II
standardized approach for credit risk, because the agencies' risk-
based capital rules assign a 50 percent risk weight to residential
mortgage exposures that meet the same criteria as those that receive
a 35 percent risk weight under the Basel II standardized approach
for credit risk.
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Secured Lending Transactions, Unsecured Wholesale Lending, and Lending
to Retail Customers and Counterparties That Mature in One Year or More
and Are Assigned a Risk Weight of No Greater Than 20 Percent
Section __.106(a)(6)(ii) of the proposed rule would assign a 65
percent RSF factor to secured lending transactions, unsecured wholesale
lending, and lending to retail customers and counterparties that are
not otherwise assigned an RSF factor, that mature one year or more from
the calculation date, that are assigned a risk weight of no greater
than 20 percent under subpart D of the agencies' risk-based capital
rules, and where the borrower is not a financial sector entity or a
consolidated subsidiary thereof.\69\ These loans have more favorable
liquidity characteristics because of their less risky nature compared
to similar loans that have a risk weight greater than 20 percent.
However, more stable funding would be required than for lending that
matures and provides liquidity within the NSFR's one-year time horizon.
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\69\ See 12 CFR 3.32 (OCC), 12 CFR 217.32 (Board), and 12 CFR
324.32 (FDIC). The proposed rule would be consistent with the Basel
III NSFR, which assigns a 65 percent RSF factor to loans that
receive a 35 percent or lower risk weight under the Basel II
standardized approach for credit risk, because the standardized
approach in the agencies' risk-based capital rules does not assign a
risk weight that is between 20 and 35 percent to such loans.
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vii. 85 Percent RSF Factor
Retail Mortgages That Mature in One Year or More and Are Assigned a
Risk Weight of Greater Than 50 Percent
Section __.106(a)(7)(i) of the proposed rule would assign an 85
percent RSF factor to retail mortgages that mature one year or more
from the calculation date and are assigned a risk weight of greater
than 50 percent under subpart D of the agencies' risk-based capital
rules. As noted above, under subpart D of the agencies' risk-based
capital rules, a retail mortgage is assigned a risk weight of 50
percent if it is secured by a first lien on a one-to-four family
property, prudently underwritten, not 90 days or more past due or
carried in nonaccrual status, and has not been restructured or
modified.\70\ Mortgages that do not meet these criteria are assigned a
risk weight of greater than 50 percent.\71\ Because these exposures are
generally riskier than mortgages that receive a risk weight of 50
percent or less and may, as a result, be more difficult to monetize,
the proposed rule would require that they be supported by more stable
funding and would assign an 85 percent RSF factor to them.
---------------------------------------------------------------------------

\70\ See supra note 68.
\71\ Under the agencies' risk-based capital rules, the risk
weight on mortgages may be reduced to less than 50 percent if
certain conditions are satisfied. In these cases, the proposed rule
would assign an RSF factor of 65 percent, which is the RSF factor
assigned to retail mortgages that mature in one year or more and are
assigned a risk weight of no greater than 50 percent. See 12 CFR
3.36 (OCC), 12 CFR 217.36 (Board), and 12 CFR 324.36 (FDIC).
---------------------------------------------------------------------------

Secured Lending Transactions, Unsecured Wholesale Lending, and Lending
to Retail Customers and Counterparties That Mature in One Year or More
and Are Assigned a Risk Weight of Greater Than 20 Percent
Section __.106(a)(7)(ii) of the proposed rule would assign an 85
percent RSF factor to secured lending transactions, unsecured wholesale
lending, and lending to retail customers and counterparties that are
not otherwise assigned an RSF factor (such as retail mortgages), that
mature one year or more from the calculation date, that are assigned a
risk weight greater than 20 percent under subpart D of the agencies'
risk-based capital rules, and for which the borrower is not a financial
sector entity or consolidated subsidiary thereof. These loans involve
riskier exposures than similar loans with lower risk weights, and thus,
have less favorable liquidity characteristics. Accordingly, the
proposed rule would require a covered company to support this lending
with more stable funding relative to loans that have lower risk weights
or that are shorter term.
Publicly Traded Common Equity Shares That Are Not HQLA and Other
Securities That Mature in One Year or More That Are Not HQLA
Sections __.106(a)(7)(iii) and (iv) of the proposed rule would
assign an 85 percent RSF factor to publicly traded common equity shares
that are not HQLA and other non-HQLA securities that mature one year or
more from the calculation date, which includes, for example, certain
corporate debt securities, as well as private-label mortgage-backed
securities, other asset-backed securities, and covered bonds. Relative
to securities that are HQLA, these securities have less favorable
credit and liquidity characteristics, as they do not meet the criteria
required by the LCR rule to be treated as HQLA, such as the requirement
that they be investment grade and liquid and readily-marketable. For
example, high yield corporate debt securities that do not meet the
investment grade criterion in the LCR rule to be treated as HQLA
generally have a higher price volatility than other corporate bonds
that qualify as HQLA. Despite the less liquid nature of these
securities, however, they are tradable and can to some degree be
monetized in the secondary market, so the proposed rule would assign an
RSF factor of 85 percent to these assets.
Commodities
Section __.106(a)(7)(v) of the proposed rule would assign an 85
percent RSF factor to commodities held by a covered company for which a
liquid market exists, as indicated by whether derivative transactions
for the commodity are traded on a U.S. board of trade or trading
facility designated as a contract market (DCM) under sections 5 and 6
of the Commodity Exchange Act\72\ or on a U.S. swap execution facility
(SEF) registered under section 5h of the Commodity Exchange Act.\73\
The proposal would assign a 100 percent RSF factor to all other
commodities held by a covered company. In general, commodities as an
asset class have historically experienced greater price volatility than
other asset classes. As such, the proposed rule would require a covered
company to support its commodities positions with a substantial amount
of stable funding.
---------------------------------------------------------------------------

\72\ 7 U.S.C. 7 and 7 U.S.C. 8.
\73\ 7 U.S.C. 7b-3.
---------------------------------------------------------------------------

The proposed rule would assign an 85 percent RSF factor, rather
than a 100 percent RSF factor, to commodities for which derivative
transactions are traded on a U.S. DCM or U.S. SEF because the exchange
trading of derivatives on a commodity tends to indicate a greater
degree of standardization, fungibility, and liquidity in the market for
the commodity.\74\ For instance, a market for a commodity for which a
derivative transaction is traded on a U.S. DCM or U.S. SEF is more
likely to have established standards (for example, with respect to
different grades of commodities) that are relied upon in determining
the commodities that can be provided to effect physical settlement
under a derivative transaction. In addition, the exchange-traded market
for a commodity derivative transaction generally increases price
transparency for the underlying commodity. A covered company could
therefore more easily monetize a commodity that meets this requirement
than a commodity that does not, either through the spot market or
through derivative transactions based on the commodity. The proposed
rule

[[Page 35147]]

would accordingly require less stable funding to support holdings of
commodities for which derivative transactions are traded on a U.S. DCM
or U.S. SEF than it would require for other commodities, which a
covered company may not be able to monetize as easily.
---------------------------------------------------------------------------

\74\ Examples of commodities that currently meet this
requirement are gold, oil, natural gas, and various agricultural
products.
---------------------------------------------------------------------------

The agencies note that nothing in the proposed rule would grant a
covered company the authority to engage in any activities relating to
commodities not otherwise permitted by applicable law.
Commodities that would be assigned an 85 percent RSF factor do not
include commodity derivatives, which would be included with other
derivatives under Sec. __.107 of the proposed rule.
Question 26: What, if any, commodities are traded in a liquid
market, but for which there is not a derivative transaction traded on a
U.S. DCM or U.S. SEF, such that the commodity should qualify for an 85
percent RSF factor, rather than a 100 percent RSF factor?
Question 27: What, if any, commodities would be assigned an 85
percent RSF factor under the proposed rule that should instead be
assigned a 100 percent RSF factor?
Question 28: The Basel III NSFR assigns an RSF factor of 85 percent
to secured lending transactions, unsecured wholesale lending, and
lending to retail customers and counterparties that mature in one year
or more and are assigned a risk weight of greater than 35 percent,
whereas the proposed rule would assign an 85 percent RSF factor to the
set of these transactions that are assigned a risk weight of greater
than 20 percent. What assets, if any, receive a risk weight between 20
and 35 percent under the standardized approach in the agencies' risk-
based capital rules and should be assigned a 65 percent RSF factor,
instead of an 85 percent RSF factor?
viii. 100 Percent RSF Factor
All Other Assets Not Described Above
Section __.106(a)(8) of the proposed rule would assign a 100
percent RSF factor to all other assets not otherwise assigned an RSF
factor under Sec. __.106 or Sec. __.107. These assets include, but
are not limited to, loans to financial institutions (including to an
unconsolidated affiliate) that mature in one year or more; assets
deducted from regulatory capital; \75\ common equity shares that are
not traded on a public exchange; unposted debits; and trade date
receivables that have failed to settle within the lesser of the market
standard settlement period for the relevant type of transaction,
without extension of the standard settlement period, and five business
days from the date of the sale. All assets that are not otherwise
assigned an RSF factor of less than 100 percent may not consistently
exhibit liquidity characteristics that would suggest a covered company
should support them with anything less than full stable funding.
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\75\ Assets deducted from regulatory capital include, but are
not limited to, goodwill, deferred tax assets, mortgage servicing
assets, and defined benefit pension fund net assets. 12 CFR 3.22
(OCC), 12 CFR 217.22 (Board), and 12 CFR 324.22 (FDIC). These
assets, as a class, tend to be difficult for a covered company to
readily monetize.
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Question 29: The agencies invite comment on all aspects of the RSF
calculation and the assignment of RSF factors to various assets,
derivative exposures, and commitments. For example, what issues of
domestic and international competitive equity, if any, might be raised
by the proposed assignment of RSF factors? Is the proposed RSF amount
calculation adequate to meet the agencies' goal of ensuring covered
companies maintain appropriate amounts of stable funding? Why or why
not? Provide detailed explanations and supporting data.
b. Nonperforming Assets
Section __.106(b) of the proposed rule would assign a 100 percent
RSF factor to any asset on a covered company's balance sheet that is
past due by more than 90 days or nonaccrual.\76\ Because cash inflows
from these assets have an elevated risk of non-payment, these assets
tend to be illiquid. The proposed rule would therefore require a
covered company to fully support them with stable funding, in order to
reduce its risk of having to liquidate them at a discount.
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\76\ The proposed rule's description of nonperforming assets in
Sec. __.106(b) would be consistent with the definition of
``nonperforming exposure'' in Sec. __.3 of the LCR rule.
---------------------------------------------------------------------------

c. Treatment of Encumbered Assets
Under the proposed rule, the RSF factor assigned to an asset would
depend on whether or not the asset is encumbered. As discussed in
section I.D of this SUPPLEMENTARY INFORMATION section, the proposed
rule would define ``encumbered'' (a newly defined term under Sec.
__.3), as the converse of the term ``unencumbered'' currently used in
the LCR rule.
Encumbered assets generally cannot be monetized during the period
in which they are encumbered. Thus, the proposed rule would require
encumbered assets to be supported by stable funding depending on the
tenor of the encumbrance. An asset that is encumbered for less than six
months from the calculation date would be assigned the same RSF factor
as would be assigned to the asset if it were unencumbered. Because a
covered company will have access to the asset and the ability to
monetize it in the near term (i.e., within six months), the proposed
rule would not require additional stable funding to support it as a
result of the encumbrance.
An asset that is encumbered for a period of six months or more, but
less than one year, would be assigned an RSF factor equal to the
greater of 50 percent and the RSF factor the asset would be assigned if
it were not encumbered. This treatment would reflect a covered
company's more limited ability to monetize an asset that is subject to
an encumbrance period of this length and the corresponding need to
support the asset with additional stable funding. For an asset that
would receive an RSF factor of less than 50 percent if it were
unencumbered, an RSF factor of 50 percent reflects the covered
company's reduced ability to monetize the asset in the near term. For
example, a security issued by a U.S. GSE that a covered company has
encumbered for a remaining period of six months or more, but less than
one year, would be assigned a 50 percent RSF factor, rather than the 15
percent RSF factor that would be assigned if the security were
unencumbered. For an asset that would receive an RSF factor of greater
than 50 percent if it were unencumbered, the proposed rule's treatment
would reflect the less liquid nature of the asset, which an encumbrance
period of less than one year would only marginally make less liquid.
For example, a non-HQLA security would continue to be assigned an 85
percent RSF factor if it is encumbered for a remaining period of six
months or more, but less than one year.
The proposed rule would assign a 100 percent RSF factor to an asset
that is encumbered for a remaining period of one year or more because
the asset would be unavailable to the covered company for the entirety
of the NSFR's one-year time horizon, so it should be fully supported by
stable funding. Table 1 sets forth the RSF factors for assets that are
encumbered.

[[Page 35148]]

Table 1--RSF Factors for Encumbered Assets
------------------------------------------------------------------------
Asset
Asset encumbered >=6 encumbered
Asset encumbered <6 months months <1 year >=1 year
(percent)
------------------------------------------------------------------------
If RSF factor for unencumbered
asset is <=50 percent:
RSF factor for the asset as if 50 percent.......... 100
it were unencumbered.
If RSF factor for unencumbered
asset is > 50 percent:
RSF factor for the asset as if RSF factor for the 100
it were unencumbered. asset as if it were
unencumbered.
------------------------------------------------------------------------

Under the proposed rule, the duration of an encumbrance of an asset
may exceed the maturity of that asset, as short-dated assets may
provide support for longer-dated transactions where the short-dated
asset would have to be replaced upon its maturity. Because of this
required replacement, a covered company would have to continue funding
an eligible asset for the entirety of the encumbrance period. In these
cases, although the maturity of the asset is short-term, because the
asset provides support for a longer-dated transaction, the encumbrance
period more accurately represents the duration of the covered company's
funding requirement. For example, a U.S. Treasury security that matures
in three months that is used as collateral in a one-year repurchase
agreement would need to be replaced upon the maturity of the security
with an asset that meets the requirements of the repurchase agreement.
Thus, even though the collateral is short-dated, a covered company
would need to fully support an asset with stable funding for the
duration of the one-year repurchase agreement, so the required stable
funding would be based on a one-year encumbrance period.
Assets Held in Certain Customer Protection Segregated Accounts
Section __.106(c)(3) of the proposed rule specifies how a covered
company would determine the RSF amount associated with an asset held in
a segregated account maintained pursuant to statutory or regulatory
requirements for the protection of customer assets. Specifically, the
proposed rule would require a covered company to assign an RSF factor
to an asset held in a segregated account of this type equal to the RSF
factor that would be assigned to the asset under Sec. __.106 as if it
were not held in a segregated account. For example, the proposed rule
would not consider an asset held pursuant to the SEC's Rule 15c3-3 \77\
or the Commodity Futures Trading Commission's Rule 1.20 or Part 22 \78\
to be encumbered solely because it is held in a segregated account.
Because the inability to monetize the assets in a segregated account is
primarily based on the decisions and behaviors of a customer relating
to the purpose for which the customer holds the account, the proposed
rule would not treat the restriction as a longer-term encumbrance. For
example, customer free credits, which are customer funds held prior to
their investment, must be segregated until the customer decides to
invest or withdraw the funds, so the duration of the restriction is
solely based on the behavior of the customer. Accordingly, the proposed
rule would treat cash that a covered company places on deposit with a
third-party depository institution in accordance with segregation
requirements as a short-term loan to a financial sector entity, which
would be assigned a 15 percent RSF factor. Similarly, U.S. Treasury
securities held by a covered company in a segregated account pursuant
to applicable customer protection requirements would be assigned a 5
percent RSF factor.
---------------------------------------------------------------------------

\77\ 17 CFR 240.15c3-3.
\78\ 17 CFR 1.20; 17 CFR part 22.
---------------------------------------------------------------------------

d. Treatment of Rehypothecated Off-Balance Sheet Assets
Section __.106(d) of the proposed rule specifies how a covered
company would determine the RSF amount for a transaction involving
either an off-balance sheet asset that secures an NSFR liability or the
sale of an off-balance sheet asset that results in an NSFR liability
(for instance, in the case of a short sale). For example, a covered
company may obtain a security as collateral in a lending transaction
(such as a reverse repurchase agreement) with rehypothecation rights
and subsequently pledge the security in a borrowing transaction (such
as a repurchase agreement). Under this arrangement, it may be the case
that the asset obtained and pledged by the covered company is not
included on the covered company's balance sheet under GAAP, in which
case the asset would not have a carrying value that would be assigned
an RSF factor under Sec. __.106(a) of the proposed rule.\79\
Nevertheless, such arrangements still affect a covered company's
liquidity risk profile. In cases where a covered company has
rehypothecated the off-balance sheet collateral, it has reduced its
ability to monetize or recognize inflows from the lending transaction
for the duration of the rehypothecation.
---------------------------------------------------------------------------

\79\ See Sec. __.102(a) of the proposed rule (rules of
construction), as described in section II.A.1 of this SUPPLEMENTARY
INFORMATION section.
---------------------------------------------------------------------------

For example, if a covered company obtains a security as collateral
in a lending transaction and rehypothecates the security as collateral
in a borrowing transaction, the covered company may need to roll over
the lending transaction if it matures before the borrowing transaction.
Alternatively, the covered company would need to obtain a replacement
asset for the rehypothecated collateral to return to the counterparty
under the lending transaction. At the same time, the NSFR liability
generated by the borrowing transaction could increase the covered
company's ASF amount, depending on the maturity and other
characteristics of the NSFR liability and, absent the proposed
treatment in Sec. __.106(d), the proposed rule would not properly
account for the covered company's increased funding risk.
Section __.106(d) of the proposed rule would address these
considerations based on the manner in which the covered company
obtained the off-balance sheet asset: Through a lending transaction,
asset exchange, or other transaction.
Under Sec. __.106(d)(1) of the proposed rule, if a covered company
has obtained the off-balance sheet asset under a lending transaction,
the proposed rule would treat the lending transaction as encumbered for
the longer of (1) the remaining maturity of the NSFR liability secured
by the off-balance sheet asset or resulting from the sale of the off-
balance asset, as the case may be, and (2) any other encumbrance period
already applicable to the lending transaction. For example, Sec.
__.106(d)(1) would apply if a covered company obtains a level 2A

[[Page 35149]]

liquid asset as collateral under an overnight reverse repurchase
agreement with a financial counterparty, and subsequently pledges the
level 2A liquid asset as collateral in a repurchase transaction with a
maturity of one year or more, but does not include the level 2A liquid
asset on its balance sheet. In this case, the proposed rule would treat
the balance-sheet receivable associated with the reverse repurchase
agreement as encumbered for a period of one year or more, since the
remaining maturity of the repurchase agreement secured by the
rehypothecated level 2A liquid is one year or more. Accordingly, the
proposed rule would assign the reverse repurchase agreement an RSF
factor of 100 percent instead of 15 percent. Under this example, the
proposed rule would require the covered company to maintain additional
stable funding to account for its need to roll over the overnight
reverse repurchase agreement for the duration of the repurchase
agreement's maturity or obtain an alternative level 2A liquid asset to
return to the counterparty under the reverse repurchase agreement.
Under Sec. __.106(d)(2) of the proposed rule, if a covered company
has obtained the off-balance sheet asset under an asset exchange, the
proposed rule would treat the asset provided by the covered company in
the asset exchange as encumbered for the longer of (1) the remaining
maturity of the NSFR liability secured by the off-balance sheet asset
or resulting from the sale of the off-balance asset, as the case may
be, and (2) any encumbrance period already applicable to the provided
asset. For example, Sec. __.106(d)(2) of the proposed rule would apply
if a covered company, acting as a securities borrower, provides a level
2A liquid asset and obtains a level 1 liquid asset under an asset
exchange with a remaining maturity of six months, and subsequently
provides the level 1 liquid asset as collateral to secure a repurchase
agreement that matures in one year or more without including the level
1 liquid asset on its balance sheet.\80\ In this case, under Sec.
__.106(d)(2), the proposed rule would treat the level 2A liquid asset
provided by the covered company as encumbered for a period of one year
or more (equal to the remaining maturity of the repurchase agreement
secured by the rehypothecated level 1 liquid asset) instead of six
months (equal to the remaining maturity of the asset exchange) and
would assign an RSF factor of 100 percent instead of 50 percent to the
level 2A liquid asset. In this case, the proposed rule would require
the covered company to maintain additional stable funding to account
for its need to roll over the asset exchange for the duration of the
secured funding transaction's maturity or obtain an alternative level 1
liquid asset to return to the counterparty under the asset exchange.
---------------------------------------------------------------------------

\80\ Where a covered company engages in an asset exchange,
acting as a securities borrower, under GAAP, the asset provided by
the covered company typically remains on the covered company's
balance sheet while the received asset, if not rehypothecated, would
not be on the covered company's balance sheet. To the extent a
covered company includes on its balance sheet an asset received in
an asset exchange that the covered company uses as collateral to
secure a separate NSFR liability, Sec. __.106(d) would not apply.
Instead, the asset used as collateral would be assigned an RSF
factor in the same manner as other assets on the covered company's
balance sheet (including by taking into account that the asset would
be encumbered) pursuant to Sec. __.106(a) through (c) or Sec.
__.107, as applicable.
---------------------------------------------------------------------------

If a covered company has an encumbered off-balance sheet asset that
it did not obtain under either a lending transaction or an asset
exchange, Sec. __.106(d)(3) of the proposed rule would require the
covered company to treat the off-balance sheet asset as if it were on
the covered company's balance sheet and encumbered for a period equal
to the remaining maturity of the NSFR liability. This treatment would
prevent a covered company from recognizing available stable funding
amounts from the NSFR liability without recognizing corresponding
required stable funding amounts associated with the encumbered off-
balance sheet asset.
In cases where a covered company has provided an asset as
collateral, and the company operationally could have provided either an
off-balance sheet asset or an identical on-balance sheet asset from its
inventory, the proposed rule would not restrict the covered company's
ability to identify either the off-balance sheet asset or the identical
on-balance sheet asset as the provided collateral, for purposes of
determining encumbrance treatment under Sec. __.106(c) and (d). The
covered company's identification for purposes of Sec. __.106(c) and
(d) must be consistent with contractual and other applicable
requirements and the rest of the covered company's NSFR calculations.
For example, if a covered company receives a security in a reverse
repurchase agreement that is identical to a security the covered
company already owns, and the covered company provides one of these
securities as collateral to secure a repurchase agreement, the proposed
rule would not restrict the covered company from identifying, for
purposes of determining encumbrance treatment under Sec. __.106(c) and
(d), either the owned or borrowed security as the collateral for the
repurchase agreement, provided that the covered company has the
operational and legal capability to provide either one of the
securities. If the covered company chooses to treat the off-balance
sheet security received from the reverse repurchase agreement as the
collateral securing the repurchase agreement, Sec. __.106(d)(1) would
apply and the covered company would treat the reverse repurchase
agreement as encumbered for purposes of assigning an RSF factor. If the
covered company instead chooses to treat the owned security as the
collateral encumbered by the repurchase agreement, the covered company
would apply the appropriate RSF factor (reflecting the encumbrance) to
the owned security under Sec. __.106(c) and no additional encumbrance
would apply to the reverse repurchase agreement under Sec. __.106(d).
The same treatment would apply for a covered company's sale of a
security and the covered company's ability to identify whether it has
sold a security from its inventory or an identical security received
from a lending transaction, asset exchange, or other transaction.
Question 30: The agencies invite comment on possible alternative
approaches relating to off-balance sheet assets that secure NSFR
liabilities of the covered company. Please include discussion as to
whether and why any alternative approach would more accurately reflect
a covered company's funding risk, provide greater consistency across
transactional structures, or be more operationally efficient than the
approach in Sec. __.106(d) of the proposed rule.
Question 31: The agencies request comment on a possible alternative
that would, instead of applying an additional encumbrance to a related
on-balance sheet asset, assign an RSF factor to the off-balance sheet
asset and an ASF factor to an obligation to return the asset as if both
the off-balance sheet asset and the obligation to return the asset were
included on the covered company's balance sheet. If adopted, should
such an alternative apply in all cases, or only where the covered
company encumbers the asset for a period longer than the maturity of
the obligation to return it?
Question 32: Should the approach in Sec. __.106(d) of the proposed
rule be modified to more specifically describe how the encumbrance
treatment would apply if a covered company has rehypothecated only a
portion of the

[[Page 35150]]

collateral received under a lending transaction or asset exchange?
Question 33: To the extent a covered company encumbers off-balance
sheet assets received under a lending transaction or asset exchange and
the value of the assets exceeds the value of the lending transaction or
asset provided by the covered company, should an RSF factor be assigned
to the excess value of the off-balance sheet assets as if they were
included on the balance sheet of the covered company?
Question 34: Is it appropriate to apply any encumbrance treatment
to transactions involving off-balance sheet collateral? Would the
proposed approach in Sec. __.106(d) present operational difficulties,
and if so, what modifications could be made to reduce such
difficulties? To what extent would operational ease or difficulties
vary based on the type of transactions involved, such as whether a
covered company has obtained an off-balance sheet asset from a lending
transaction or an asset exchange?

E. Derivative Transactions

Under the proposed rule, a covered company would calculate its
required stable funding relating to its derivative transactions \81\
(its derivatives RSF amount) separately from its other assets and
commitments.\82\ This calculation would be separate based on the
generally more complex features of derivative transactions and variable
nature of derivative exposures. For similar reasons, the proposed rule
would not separately treat derivatives liabilities as available stable
funding, as described below. A covered company's derivatives RSF amount
would reflect three components: (1) The current value of a covered
company's derivatives assets and liabilities, (2) initial margin
provided by a covered company pursuant to derivative transactions and
assets contributed by a covered company to a CCP's mutualized loss
sharing arrangement in connection with cleared derivative transactions,
and (3) potential future changes in the value of a covered company's
derivatives portfolio. Section II.E.7 of this SUPPLEMENTARY INFORMATION
section below includes an example of a derivatives RSF amount
calculation.
---------------------------------------------------------------------------

\81\ As defined in Sec. __.3 of the LCR rule, ``derivative
transaction'' means a financial contract whose value is derived from
the values of one or more underlying assets, reference rates, or
indices of asset values or reference rates. Derivative contracts
include interest rate derivative contracts, exchange rate derivative
contracts, equity derivative contracts, commodity derivative
contracts, credit derivative contracts, forward contracts, and any
other instrument that poses similar counterparty credit risks.
Derivative contracts also include unsettled securities, commodities,
and foreign currency exchange transactions with a contractual
settlement or delivery lag that is longer than the lesser of the
market standard for the particular instrument or five business days.
A derivative does not include any identified banking product, as
that term is defined in section 402(b) of the Legal Certainty for
Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to
section 403(a) of that Act (7 U.S.C. 27a(a)).
\82\ The proposed rule would include mortgage commitments that
are derivative transactions in the general derivative transactions
treatment, in contrast to the LCR rule, which excludes those
transactions and applies a separate, self-contained mortgage
treatment. See Sec. __.32(c) and (d) of the LCR rule.
---------------------------------------------------------------------------

1. NSFR Derivatives Asset or Liability Amount
Under the proposed rule, the stable funding requirement for the
current value of a covered company's derivative assets and liabilities
would be based on an aggregated measure of the covered company's
derivatives portfolio. As described below, a covered company would sum
its derivative asset and liability positions across transactions,
taking into account variation margin.\83\ A covered company would then
net the derivative asset and liability totals against each other to
determine whether its portfolio has an overall asset or liability
position (an NSFR derivatives asset amount or NSFR derivatives
liability amount, respectively). By netting across different
counterparties and different derivative transactions (including
different types of derivative transactions), the proposed rule would
estimate the overall current position and funding needs associated with
a covered company's derivatives portfolio in a manner that offers
operational and administrative efficiencies relative to other
approaches. In addition, use of a standardized measure would promote
greater consistency and comparability across covered companies.
---------------------------------------------------------------------------

\83\ As discussed in section II.E.5 of this SUPPLEMENTARY
INFORMATION section below, Sec. __.107(b)(5) of the proposed rule
would require a covered company, when it calculates its required
stable funding amount associated with potential future derivatives
portfolio valuation changes, to disregard settlement payments based
on changes in the value of its derivative transactions. This
adjustment would apply only for purposes of the calculation under
Sec. __.107(b)(5). Accordingly, a covered company would not exclude
these settlement payments for purposes of calculating its required
stable funding amount associated with the current value of its
derivative transactions under Sec. __.107(b)(1) and (d) through
(f).
---------------------------------------------------------------------------

A covered company would determine its NSFR derivatives asset amount
or NSFR derivatives liability amount, whichever the case may be, by the
following calculation steps, which are set forth in Sec. __.107 of the
proposed rule:
Step 1: Calculation of Derivatives Asset and Liability Values
Under Sec. __.107(f) of the proposed rule, a covered company would
calculate the asset and liability values of its derivative transactions
after netting certain variation margin received and provided. For each
derivative transaction not subject to a qualifying master netting
agreement and each QMNA netting set of a covered company, the
derivatives asset value would equal the asset value to the covered
company after netting any cash variation margin received by the covered
company that meets the conditions of Sec. __.10(c)(4)(ii)(C)(1)
through (7) of the SLR rule,\84\ or the derivatives liability value
would equal the liability value to the covered company after netting
any variation margin provided by the covered company. (Each derivative
transaction not subject to a qualifying master netting agreement and
each QMNA netting set would have either a derivatives asset value or
derivatives liability value.)
---------------------------------------------------------------------------

\84\ 12 CFR 3.10(c)(4)(ii)(C) (OCC), 12 CFR 217.10(c)(4)(ii)(C)
(Board), and 12 CFR 324.10(c)(4)(ii)(C) (FDIC). See infra note 85.
---------------------------------------------------------------------------

The proposed rule would restrict netting of variation margin
received by a covered company but not variation margin provided by a
covered company for purposes of this calculation in order to prevent
understatement of the covered company's derivatives RSF amount. For
variation margin received by a covered company, the proposed rule would
recognize only netting of cash variation margin because other forms of
variation margin, such as securities, may have associated risks, such
as market risk, that are not present with cash. The proposed rule would
also require variation margin received to meet the conditions of Sec.
__.10(c)(4)(ii)(C)(1) through (7) the SLR rule in order to be
recognized as netting the asset value of a derivative transaction.\85\
The regular and timely

[[Page 35151]]

exchange of cash variation margin that meets these conditions helps to
protect a covered company from the effects of a counterparty default.
---------------------------------------------------------------------------

\85\ Id. These conditions are: (1) Cash collateral received is
not segregated; (2) variation margin is calculated on a daily basis
based on mark-to-fair value of the derivative contract; (3)
variation margin transferred is the full amount necessary to fully
extinguish the net current credit exposure to the counterparty,
subject to the applicable threshold and minimum transfer amounts;
(4) variation margin is cash in the same currency as the settlement
currency in the contract; (5) the derivative contract and the
variation margin are governed by a qualifying master netting
agreement between the counterparties to the contract, which
stipulates that the counterparties agree to settle any payment
obligations on a net basis, taking into account any variation margin
received or provided; (6) variation margin is used to reduce the
current credit exposure of the derivative contract and not the PFE
(as that term is defined in the SLR rule); and (7) variation margin
may not reduce net or gross credit exposure for purposes of
calculating the Net-to-gross Ratio (as that term is defined in the
SLR rule).
---------------------------------------------------------------------------

In contrast to the treatment of variation margin received by a
covered company, the proposed rule would recognize netting of all forms
of variation margin provided by a covered company. As described in step
3 below, a covered company's derivatives liability values would
ultimately be netted against its derivatives asset values, which are
assigned a 100 percent RSF factor. Because variation margin provided by
a covered company reduces its derivatives liability values, a
limitation on netting variation margin provided would lower a covered
company's derivatives RSF amount, which would be the opposite effect of
the proposed rule's limitation on netting variation margin received and
could lead to an understatement of a covered company's stable funding
requirement. For this reason, all forms of variation margin provided by
a covered company would be netted against its derivatives liabilities.
The proposed rule would not permit a covered company to net initial
margin provided or received against its derivatives liability or asset
values as part of its calculation of its NSFR derivatives asset or
liability amount. Unlike variation margin, which the parties to a
derivative transaction exchange to account for valuation changes of the
transaction, initial margin is meant to cover a party's potential
losses in connection with a counterparty's default (e.g., the cost a
party would incur to replace the defaulted transaction with a new,
equivalent transaction with a different counterparty). Therefore, while
variation margin is relevant to the calculation of the current value of
a covered company's derivatives portfolio, initial margin would not
factor into the proposed rule's measure of the current value of a
covered company's derivatives portfolio. Initial margin would be
subject to a separate treatment under the proposed rule, as described
in further detail below.
Step 2: Calculation of Total Derivatives Asset and Liability Amounts
Under Sec. __.107(e) of the proposed rule, a covered company would
sum all of its derivatives asset values, as calculated under Sec.
__.107(f)(1), to arrive at its ``total derivatives asset amount'' and
sum all of its derivatives liability values, as calculated under Sec.
__.107(f)(2), to arrive at its ``total derivatives liability amount.''
These amounts would represent the covered company's aggregated
derivatives assets and liabilities, inclusive of netting certain
variation margin.
Step 3: Calculation of NSFR Derivatives Asset or Liability Amount
Under Sec. __.107(d) of the proposed rule, a covered company would
net its total derivatives asset amount against its total derivatives
liability amount, each as calculated under Sec. __.107(e). If a
covered company's total derivatives asset amount exceeds its total
derivatives liability amount, the covered company would have an ``NSFR
derivatives asset amount.'' Conversely, if the total derivatives
liability amount exceeds the total derivatives asset amount, the
covered company would have an ``NSFR derivatives liability amount.''
Section __.107(b)(1) of the proposed rule would assign a 100
percent RSF factor to a covered company's NSFR derivatives asset amount
because, as an asset class, derivative assets have a wide range of risk
and volatility, and, therefore, a covered company should have full
stable funding for such assets. Section __.107(c)(1) of the proposed
rule would assign a zero percent ASF factor to a covered company's NSFR
derivatives liability amount. Because of the variable nature of such
liabilities, this amount would not represent stable funding.
Question 35: What changes, if any, should be made to the proposed
rule's mechanics for calculating a covered company's RSF and ASF
amounts associated with its current exposures under derivative
transactions and why? What alternative approach, if any, would be more
appropriate? For example, should ASF and RSF factors be assigned to the
current asset or liability values of each separate derivative
transaction or QMNA netting set using the frameworks specified in
Sec. Sec. __.104 and __.106?
2. Variation Margin Provided and Received and Initial Margin Received
As described in section II.E.1 above of this SUPPLEMENTARY
INFORMATION section, a covered company's calculation of its current
derivative transaction values would take into account netting due to
variation margin received and provided by the covered company. The
proposed rule would, in addition, require a covered company to maintain
stable funding for assets on its balance sheet that it has received as
variation margin and certain assets that it has provided as variation
margin in connection with derivative transactions.
Variation margin provided by a covered company. Sections
__.107(b)(2) and (3) of the proposed rule would assign an RSF factor to
variation margin provided by a covered company based on whether the
variation margin reduces the covered company's derivatives liability
value under the relevant derivative transaction or QMNA netting set or
whether it is ``excess'' variation margin. If the variation margin
reduces a covered company's derivatives liability value for a
particular QMNA netting set or derivative transaction not subject to a
qualifying master netting agreement, the proposed rule would assign the
carrying value of such variation margin a zero percent RSF factor. As
described above, such variation margin provided already reduces the
covered company's derivatives liabilities that are able to net against
its derivatives assets.
To the extent a covered company provides ``excess'' variation
margin with respect to a derivative transaction or QMNA netting set--
meaning, an amount of variation margin that does not reduce the covered
company's derivatives liability value--and includes the excess
variation margin asset on its balance sheet, the proposed rule would
assign such excess variation margin an RSF factor under Sec. __.106,
according to the characteristics of the asset or balance sheet
receivable associated with the asset, as applicable. Because excess
variation margin does not reduce a covered company's derivatives
liabilities that are able to net against its derivatives assets, the
covered company's NSFR derivatives asset or liability amount would not
already account for these assets. The proposed rule would therefore
assign RSF factors to excess variation margin remaining on a covered
company's balance sheet to reflect the required stable funding
appropriate for the assets.
Variation margin received by a covered company. Section
__.107(b)(4) of the proposed rule would require all variation margin
received by a covered company that is on the covered company's balance
sheet to be assigned an RSF factor under Sec. __.106, according to the
characteristics of each asset received. Cash variation margin received,
for example, would be assigned an RSF factor of zero percent. If that
cash is used to purchase another asset, the new asset would be assigned
the appropriate RSF factor under Sec. __.106.
The proposed rule would assign a zero percent ASF factor to any
NSFR

[[Page 35152]]

liability that arises from an obligation to return initial margin or
variation margin received by a covered company related to its
derivative transactions. Given that these liabilities can change based
on the underlying derivative transactions and remain, at most, only for
the duration of the associated derivative transactions, they do not
represent stable funding for a covered company. This treatment would
apply regardless of the form of the initial margin or variation margin,
whether securities or cash, because the liability is dependent on the
underlying derivative transactions in either case.
Question 36: What changes, if any, should be made to the proposed
rule's treatment of variation margin, including the RSF factors that
are assigned to variation margin received or provided by a covered
company?
Question 37: Are there alternative RSF factors that should be
applied to variation margin received by a covered company that does not
meet the conditions of Sec. __.10(c)(4)(ii)(C)(1) through (7) of the
SLR rule and is not excess variation margin and, if so, why would the
alternative RSF factor be more appropriate?
Question 38: Are there any liabilities associated with the
obligation to return variation margin that should be assigned an
alternative ASF factor and why? For example, the Basel III NSFR does
not explicitly exclude assigning an ASF factor to obligations to return
variation margin that meet the conditions of Sec.
__.10(c)(4)(ii)(C)(1) through (7) of the SLR rule. Are there any
liabilities associated with the obligations to return this variation
margin that would have a sufficiently long maturity to be assigned an
alternative ASF factor (i.e., six months or greater)?
3. Customer Cleared Derivative Transactions
For a covered company that is a clearing member of a CCP, the
covered company's NSFR derivatives asset amount or NSFR derivatives
liability amount would not include the value of a cleared derivative
transaction that the covered company, acting as agent, has submitted to
the CCP on behalf of the covered company's customer, including when the
covered company has provided a guarantee to the CCP for the performance
of the customer. These derivative transactions are assets or
liabilities of a covered company's customer, and the proposed rule
would not include them as derivative assets or liabilities of the
covered company. Similarly, because variation margin provided or
received in connection with customer derivative transactions would not
impact the current value of the covered company's derivative
transactions, these amounts would also not be included in the covered
company's calculations under Sec. __.107.
To the extent a covered company includes on its balance sheet under
GAAP a derivative asset or liability value (as opposed to a receivable
or payable in connection with a derivative transaction, as discussed
below) associated with a customer cleared derivative transaction, the
derivative transaction would constitute a derivative transaction of the
covered company for purposes of Sec. __.107 of the proposed rule. For
example, if the covered company must perform according to a guarantee
to the CCP of the performance of the customer such that the transaction
becomes a derivative transaction of the covered company (e.g.,
following a default by a covered company's customer), such transaction
would typically be included on the balance sheet of the covered company
and would fall within the proposed rule's derivatives treatment under
Sec. __.107.
To the extent a covered company has an asset or liability on its
balance sheet associated with a customer derivative transaction that is
not a derivative asset or liability--for example, if a covered company
has extended credit on behalf of a customer to cover a variation margin
payment or a covered company holds customer funds relating to
derivative transactions in a customer protection segregated account
discussed in section II.D.3.c of this Supplementary Information
section--such asset or liability of the covered company would be
assigned an RSF factor under Sec. __.106 or an ASF factor under Sec.
__.104, respectively. Accordingly, to the extent a covered company's
balance sheet includes a receivable asset owed by a CCP or payable
liability owed to a CCP in connection with customer receipts and
payments under derivative transactions, this asset or liability would
not constitute a derivative asset or liability of the covered company
and would not be included in the covered company's calculations under
Sec. __.107 of the proposed rule.
A covered company's NSFR derivatives asset amount or NSFR
derivatives liability amount would include the asset or liability
values of derivative transactions between a CCP and a covered company
where the covered company has entered into an offsetting transaction
(commonly known as a ``back-to-back'' transaction). Because a covered
company would have obligations as a principal under both derivative
transactions comprising the back-to-back transaction, any asset or
liability values arising from these transactions, or any variation
margin provided or received in connection with these transactions,
would be included in the covered company's calculations under Sec.
__.107.
Question 39: Under what circumstances, if any, should the asset or
liability values of a covered company's customer's cleared derivative
transactions be included in the calculation of a covered company's NSFR
derivatives asset amount or NSFR derivatives liability amount?
Question 40: Other than in connection with a default by a covered
company's customer, under what circumstances, if any, would the value
of a cleared derivative transaction that the covered company, acting as
agent, has submitted to a CCP on behalf of the covered company's
customer, appear on a covered company's balance sheet? If there are
such circumstances, should these derivative assets or liabilities be
excluded from a covered company's calculation of its derivatives RSF
amount under Sec. __.107 of the proposed rule, and why?
4. Assets Contributed to a CCP's Mutualized Loss Sharing Arrangement
and Initial Margin
Section __.107(b)(6) of the proposed rule would assign an 85
percent RSF factor to the fair value of assets contributed by a covered
company to a CCP's mutualized loss sharing arrangement. Similarly,
Sec. __.107(b)(7) of the proposed rule would assign to the fair value
of initial margin provided by a covered company the higher of an 85
percent RSF factor or the RSF factor assigned to the initial margin
asset pursuant to Sec. __.106. The proposed rule would assign an RSF
factor of at least 85 percent to these forms of collateral based on the
assumption that a covered company generally must maintain its initial
margin or CCP mutualized loss sharing arrangement contributions in
order to maintain its derivatives activities. The proposed rule would
not set the RSF factor at 100 percent, however, because a covered
company, to some degree, may be able to reduce or otherwise adjust its
derivatives activities such that they require a smaller amount of
contributions to CCP mutualized loss sharing arrangements or initial
margin.
In cases where a covered company provides as initial margin an
asset that would be assigned an RSF factor of greater than 85 percent
if it were not provided as initial margin, the covered company would
assign the normally

[[Page 35153]]

applicable RSF factor to the asset rather than reducing the RSF factor
to 85 percent. For example, if a covered company provides as initial
margin an asset that would otherwise be assigned a 100 percent RSF
factor under Sec. __.106 of the proposed rule, the covered company's
act of providing the asset as initial margin would not enhance the
asset's liquidity such that the applicable RSF factor should be reduced
to 85 percent. Instead, the asset would continue to be assigned an RSF
factor of 100 percent.
The proposed rule would assign an RSF factor to the fair value of a
covered company's contributions to a CCP's mutualized loss sharing
arrangement or initial margin provided by a covered company regardless
of whether the contribution or initial margin is included on the
covered company's balance sheet. A covered company would face the same
funding requirements and risks associated with these assets regardless
of whether or not it includes the assets on its balance sheet. To the
extent a covered company includes on its balance sheet a receivable for
an asset contributed to a CCP's mutualized loss sharing arrangement or
provided as initial margin, rather than the asset itself, the proposed
rule would assign an RSF factor to the fair value of the asset,
ignoring the receivable, in order to avoid double counting.
The proposed rule would not assign an RSF factor under Sec. __.107
of the proposed rule to initial margin provided by a covered company
acting as an agent for a customer's cleared derivative transactions
where the covered company does not provide a guarantee to the customer
with respect to the return of the initial margin to the customer. A
covered company would not include this form of initial margin in its
derivatives RSF amount because the customer is obligated to fund the
initial margin under the customer transaction for the duration of the
transaction, so the covered company faces limited liquidity risk. To
the extent a covered company includes on its balance sheet any such
initial margin, this initial margin would instead be assigned an RSF
factor pursuant to Sec. __.106 of the proposed rule and any
corresponding liability would be assigned an ASF factor pursuant to
Sec. __.104.
Question 41: What other RSF factor, if any, would be more
appropriate for initial margin and assets contributed to a mutualized
loss sharing arrangement? For example, would it be more appropriate to
apply a 100 percent RSF factor, based on an assumption that a covered
company would generally maintain its derivatives activities at current
levels, such that the covered company should be required to fully
support these obligations with stable funding?
Question 42: Should assets contributed by a covered company to a
CCP's mutualized loss sharing arrangement be treated differently than
initial margin provided by a covered company? If so, how should these
assets be treated and why?
5. Derivatives Portfolio Potential Valuation Changes
As the value of a company's derivative transactions decline, the
company may be required to provide variation margin or make settlement
payments to its counterparty. The proposed rule would therefore require
a covered company to maintain available stable funding to support these
potential variation margin and settlement payment outflows.
Specifically, a covered company's derivatives RSF amount would include
an additional component that is intended to address liquidity risk
associated with potential changes in the value of the covered company's
derivative transactions.
Under Sec. __.107(b)(5) of the proposed rule, this additional
component would equal 20 percent of the sum of a covered company's
``gross derivative values'' that are liabilities under each of its
derivative transactions not subject to a qualifying master netting
agreement and each of its QMNA netting sets, multiplied by an RSF
factor of 100 percent.\86\ For purposes of this calculation, the
``gross derivative value'' of a derivative transaction not subject to a
qualifying master netting agreement or of a QMNA netting set would
equal the value to the covered company, calculated as if no variation
margin had been exchanged and no settlement payments had been made
based on changes in the values of the derivative transaction or QMNA
netting set.\87\ A covered company would not include in the sum any
gross derivative values that are assets.
---------------------------------------------------------------------------

\86\ As discussed in section II.E.3 of this Supplementary
Information section, for a covered company that is a clearing member
of a CCP, the company's calculation of its RSF measure for potential
derivatives future valuation changes would generally not include
gross derivative values of the covered company's customers' cleared
derivative transactions where the covered company acts as agent for
the customers. As with other components of a covered company's
derivatives RSF amount calculation, however, the RSF measure for
potential future valuation changes would include such derivative
transactions that the covered company includes on its balance sheet
under GAAP.
\87\ Other payments made under a derivative transaction, such as
periodic fixed-for-floating payments under an interest rate swap,
would not be considered settlement payments based on changes in the
value of a derivative transaction for purposes of this calculation.
---------------------------------------------------------------------------

For example, if a covered company has a derivative transaction not
subject to a qualifying master netting agreement whose value on day 1
is $0, and the value moves to -$10 on day 2 and the covered company
provides $10 of variation margin, the covered company's gross
derivative value on day 2 (if day 2 is an NSFR calculation date)
attributable to the derivative transaction for purposes of this
calculation would be a liability of $10. If the value subsequently
moves to -$8 on day 3 and the covered company receives $2 of variation
margin returned (resulting in a net of $8 of variation margin provided
by the covered company), the covered company's gross derivative value
on day 3 (if day 3 is an NSFR calculation date) attributable to the
derivative transaction for purposes of this calculation would be a
liability of $8. The gross derivative values on day 2 and day 3 for
purposes of this calculation would be the same if the covered company
had provided a net of $10 and $8 in settlement payments, respectively,
over the life of the same derivative transaction instead of $10 and $8
of variation margin.
In considering the appropriate measure to account for these risks
in the NSFR calculation, the agencies reviewed public and supervisory
information on the volatility of derivatives assets and liabilities and
the associated value of collateral received and provided, including the
fair value of derivatives assets and liabilities as reported on GAAP
financial statements, the fair value of derivatives assets and
liabilities excluding collateral received or provided, the proportion
of collateralized and uncollateralized derivatives assets and
liabilities, and the fair value of collateral provided and received.
Over the periods reviewed, collateral inflows and outflows associated
with derivative valuation changes--and consequent liquidity risks--
exhibited material volatility. The proposed 20 percent factor falls
within the range of observed volatility when measured relative to
derivatives liabilities excluding collateral received or provided.
The proposed rule would treat variation margin and settlement
payments based on changes in the value of a derivative transaction
similarly because both variation margin and these settlement payments
are intended to reduce a party's current exposure under a derivative
transaction or QMNA

[[Page 35154]]

netting set. This RSF measure for potential valuation changes would
account for the different liquidity risks faced by a covered company
that has little or no derivatives activity versus the liquidity risks
of a covered company that has a significant amount of derivative
transactions, but that has to date covered all changes in the value of
derivative transactions with variation margin or settlement payments.
Question 43: The agencies are considering alternative methodologies
for capturing the potential volatility of a covered company's
derivatives portfolio, and associated funding needs, within the NSFR
framework. One alternative to the proposed treatment would be to
require an RSF amount based on a covered company's historical
experience. Under such an alternative, a factor could be based on the
historical changes in a covered company's aggregate derivatives
position, such as the largest, 99th, or 95th percentile annual change
in the value of a covered company's derivative transactions over the
prior two or five years. Another alternative could be to require an RSF
amount based on modeled estimates of potential future exposure.
Commenters are encouraged to provide feedback on methodologies, both
those discussed and other potential alternatives, that best capture the
funding risk associated with potential valuation changes in a covered
company's derivatives portfolio, are conceptually sound, and are
supported by data.
Question 44: What operational challenges, if any, arise from the
proposed measurement of gross derivatives liabilities?
Question 45: Is it appropriate to treat variation margin payments
and settlement payments identically for purposes of the RSF measure for
derivative portfolio potential future valuation changes? Should the
agencies distinguish between variation margin payments that are treated
as collateral and payments that settle an outstanding derivatives
liability, and if so, why? If it is appropriate to distinguish between
these types of payments, what legal, accounting, or other criteria
should be used to distinguish between them?
6. Derivatives RSF Amount
Under the proposed rule, a covered company would sum the required
stable funding amounts calculated under Sec. __.107 to determine the
company's derivatives RSF amount. As described in section II.D.1 of
this Supplementary Information section, a covered company would add its
derivatives RSF amount to its other required stable funding amounts
calculated under Sec. __.105(a) of the proposed rule to determine its
overall RSF amount, which would be the denominator of its NSFR.
A covered company's derivatives RSF amount would include the
following components under Sec. __.107(b) of the proposed rule:
(1) The required stable funding amount for the current value of a
covered company's derivatives assets and liabilities, which, as
described in section II.E.1 of this Supplementary Information section,
is equal to the covered company's NSFR derivatives asset amount,
multiplied by an RSF factor of 100 percent;
(2) The required stable funding amount for non-excess variation
margin provided by the covered company, which, as described in section
II.E.2 of this Supplementary Information section, equals the carrying
value of variation margin provided by the covered company under each of
its derivative transactions not subject to a qualifying master netting
agreement and each of its QMNA netting sets that reduces the covered
company's derivatives liability value of the relevant derivative
transaction or QMNA netting set, multiplied by an RSF factor of zero
percent;
(3) The required stable funding amount for excess variation margin
provided by the covered company, which, as described in section II.E.2
of this Supplementary Information section, equals the sum of the
carrying values of each excess variation margin asset provided by the
covered company, multiplied by the RSF factor assigned to the asset
pursuant to Sec. __.106;
(4) The required stable funding amount for variation margin
received by the covered company, which, as described in section II.E.2
of this Supplementary Information section, equals the sum carrying
values of each variation margin asset received by the covered company,
multiplied by the RSF factor assigned to the asset pursuant to Sec.
__.106;
(5) The required stable funding amount for potential future
valuation changes of the covered company's derivatives portfolio,
which, as described in section II.E.5 of this Supplementary Information
section, equals 20 percent of the sum of the covered company's gross
derivatives liabilities, when calculated as if no variation margin had
been exchanged and no settlement payments had been made based on
changes in the values of the derivative transactions, multiplied by an
RSF factor of 100 percent;
(6) The required stable funding amount for the covered company's
contributions to CCP mutualized loss sharing arrangements, which, as
described in section II.E.4 of this Supplementary Information section,
equals the sum of the fair values of the covered company's
contributions to CCPs' mutualized loss sharing arrangements (regardless
of whether a contribution is included on the covered company's balance
sheet), multiplied by an RSF factor of 85 percent; and
(7) The required stable funding amount for initial margin provided
by the covered company, which, as described in section II.E.4 of this
Supplementary Information section, equals the sum of fair values of
each initial margin asset provided by the covered company for
derivative transactions (regardless of whether it is included on the
covered company's balance sheet), multiplied by the higher of an RSF
factor of 85 percent and the RSF factor assigned to the initial margin
asset pursuant to Sec. __.106. As noted above, the covered company
would not include as part of its derivatives RSF amount under Sec.
__.107 initial margin provided for a derivative transaction under which
the covered company acts as agent for a customer and does not guarantee
the obligations of the customer's counterparty, such as a CCP, to the
customer under the derivative transaction. (Such initial margin would
instead be assigned an RSF factor pursuant to Sec. __.106 of the
proposed rule, as described in section II.E.4 of this Supplementary
Information section.)
Question 46: The agencies invite comment regarding the proposed
rule's approach for determining RSF and ASF amounts with respect to
derivative transactions. What alternative approach, if any, would be
more appropriate?
7. Derivatives RSF Amount Numerical Example
The following is a numerical example illustrating the calculation
of a covered company's derivatives RSF amount under the proposed rule.
Table 2 sets forth the facts of the example, which assumes that: (1) A
qualifying master netting agreement exists between each of the
counterparties and each of the transactions thereunder are part of a
single QMNA netting set, (2) any variation margin received is in the
form of cash and meets the conditions of Sec. __.10(c)(4)(ii)(C)(1)
through (7) of the SLR rule,\88\ (3) no variation margin provided by
the covered company remains on the covered company's balance sheet, (4)
the covered company

[[Page 35155]]

has provided U.S. Treasuries as initial margin to its counterparties,
and (5) the derivative transactions are not cleared through a CCP
(i.e., the covered company has not contributed any assets to a CCP's
mutualized loss sharing arrangement).
---------------------------------------------------------------------------

\88\ 12 CFR 3.10(c)(4)(ii)(C)(1)-(7) (OCC), 12 CFR
217.10(c)(4)(ii)(C)(1)-(7) (Board), and 12 CFR
324.10(c)(4)(ii)(C)(1)-(7) (FDIC).

Table 2--Derivative Transactions Numerical Example Fact Pattern
----------------------------------------------------------------------------------------------------------------
Asset (liability)
value for the Variation margin Initial margin
covered company, provided provided by the
prior to netting (received) by the covered company
variation margin covered company
----------------------------------------------------------------------------------------------------------------
Counterparty A:
Derivative 1A...................................... 10 (2) 2
Derivative 2A...................................... (2)
Counterparty B:
Derivative 1B...................................... (10) 3 1
Derivative 2B...................................... 5
Counterparty C:
Derivative 1C...................................... (2) 0 0
----------------------------------------------------------------------------------------------------------------

Calculation of derivatives assets and liabilities.
(1) The derivatives asset value for counterparty A = (10-2)-2 = 6.
(2) The derivatives liability value for counterparty B = (10-5)-3 =
2.
The derivatives liability value for counterparty C = 2.
Calculation of total derivatives asset and liability amounts.
(1) The covered company's total derivatives asset amount = 6.
(2) The covered company's total derivatives liability amount = 2 +
2 = 4.
Calculation of NSFR derivatives asset or liability amount.
(1) The covered company's NSFR derivatives asset amount = max (0,
6-4) = 2.
(2) The covered company's NSFR derivatives liability amount = max
(0, 4-6) = 0.
Required stable funding relating to derivative transactions.
The covered company's derivatives RSF amount is equal to the sum of
the following:
(1) NSFR derivatives asset amount x 100% = 2 x 1.0 = 2;
(2) Non-excess variation margin provided x 0% = 3 x 0.0 = 0;
(3) Excess variation provided x applicable RSF factor(s) = 0;
(4) Variation margin received x applicable RSF factor(s) = 2 x 0.0
= 0;
(5) Gross derivatives liabilities x 20% x 100% = (5 + 2) x 0.2 x
1.0 = 1.4;
(6) Contributions to CCP mutualized loss-sharing arrangements x 85%
= 0 x 0.85 = 0; and
(7) Initial margin provided x higher of 85% or applicable RSF
factor(s) = (2 + 1) x max (0.85, 0.05) = 2.55.
The covered company's derivatives RSF amount = 2 + 0 + 0 + 0 + 1.4
+ 0 + 2.55 = 5.95.

F. NSFR Consolidation Limitations

In general, the proposed rule would require a covered company to
calculate its NSFR on a consolidated basis. When calculating ASF
amounts from a consolidated subsidiary, however, the proposed rule
would require a covered company to take into account restrictions on
the availability of stable funding of the consolidated subsidiary to
support assets, derivative exposures, and commitments of the covered
company held at entities other than the subsidiary. Specifically, to
the extent a covered company has an ASF amount associated with a
consolidated subsidiary that exceeds the RSF amount associated with the
subsidiary (each as calculated by the covered company for purposes of
the covered company's NSFR),\89\ the proposed rule would permit the
covered company to include such ``excess'' ASF amounts in its
consolidated ASF amount only to the extent the consolidated subsidiary
may transfer assets to the top-tier entity of the covered company,
taking into account statutory, regulatory, contractual, or supervisory
restrictions.
---------------------------------------------------------------------------

\89\ ASF amounts associated with a consolidated subsidiary, in
this context, refer to those amounts that would be calculated from
the perspective of the covered company (e.g., in calculating the ASF
amount of a consolidated subsidiary that can be included in the
covered company's consolidated ASF amount, the covered company would
not include certain transactions between consolidated subsidiaries
that are netted under GAAP). For this reason, an ASF amount of a
consolidated subsidiary that is included in a covered company's
consolidated NSFR calculation may not be equal to the ASF amount of
the consolidated subsidiary when calculated on a standalone basis if
the consolidated subsidiary is itself a covered company.
---------------------------------------------------------------------------

For example, if a covered company calculates a required stable
funding amount of $90 based on the assets, derivative exposures, and
commitments of a consolidated subsidiary and an available stable
funding amount of $100 based on the NSFR regulatory capital elements
and NSFR liabilities of the consolidated subsidiary, the consolidated
subsidiary would have an ``excess'' ASF amount of $10 for purposes of
this consolidation restriction. The covered company may only include
any of this $10 excess available stable funding in its consolidated ASF
amount to the extent the consolidated subsidiary may transfer assets to
the top-tier entity of the covered company (for example, through a loan
from the subsidiary to the top-tier covered company), taking into
account statutory, regulatory, contractual, or supervisory
restrictions. Examples of restrictions on transfers of assets that a
covered company would be required to take into account in calculating
its NSFR include sections 23A and 23B of the Federal Reserve Act (12
U.S.C. 371c and 12 U.S.C. 371c-1); the Board's Regulation W (12 CFR
part 223); any restrictions imposed on a consolidated subsidiary by
state or Federal law, such as restrictions imposed by a state banking
or insurance supervisor; and any restrictions imposed on a consolidated
subsidiary or branches of a U.S. entity domiciled outside the United
States by a foreign regulatory authority, such as a foreign banking
supervisor. This limitation on the ASF amount of a consolidated
subsidiary includable in a covered company's NSFR would apply to both
U.S. and non-U.S. consolidated subsidiaries.
The proposed rule would permit a covered company's ASF amount to
include any portion of the ASF amount of a consolidated subsidiary that
is less than or equal to the subsidiary's RSF amount because the
subsidiary's NSFR liabilities and NSFR regulatory capital elements
generating that ASF amount are available to stably fund the
subsidiary's assets. The proposed rule

[[Page 35156]]

would limit inclusion of excess ASF amounts, however, because the
proceeds of stable funding at one entity of the covered company may not
always be available to support liquidity needs at another entity. Even
though it may be consistent with sound risk management practices for a
subsidiary to maintain an excess ASF amount, the proposed rule would
not permit the excess ASF amount to count towards the covered company's
consolidated NSFR if the subsidiary is unable to transfer assets to its
parent. This approach to calculating a covered company's consolidated
ASF amount would be similar to the approach taken in the LCR rule to
calculate a covered company's HQLA amount.
The proposed rule would require a covered company that includes a
consolidated subsidiary's excess ASF amount in its consolidated NSFR to
implement and maintain written procedures to identify and monitor
restrictions on transferring assets from its consolidated subsidiaries.
In this case, the covered company would be required to document the
types of transactions, such as loans or dividends, a covered company's
consolidated subsidiary could use to transfer assets and how the
transactions comply with applicable restrictions. The covered company
should be able to demonstrate to the satisfaction of its appropriate
Federal banking agency that such excess amounts may be transferred
freely in compliance with statutory, regulatory, contractual, or
supervisory restrictions that may apply in any relevant jurisdiction. A
covered company that does not include any excess ASF amount from its
consolidated subsidiaries in its NSFR would not be required to have
such procedures in place.
Question 47: What alternative approaches, if any, should the
agencies consider regarding the treatment of the excess ASF amount of a
consolidated subsidiary of a covered company to appropriately reflect
constraints on the ability of stable funding at one entity to support
the assets of a different entity? Does the proposed rule's approach
sufficiently reflect restrictions on transfers of assets between
entities of a covered company, given that these constraints may vary,
and why? For example, would the proposed rule's approach adequately
address a situation in which, during an idiosyncratic or systemic
liquidity stress event, one or more entities of a covered company
becomes subject to more stringent restrictions on transferring assets
than they might face during normal times, and why?
Question 48: What operational burdens would covered companies face
from the proposed approach with respect to excess ASF amounts of
consolidated subsidiaries?
Question 49: Should this approach regarding the treatment of the
excess ASF amount of a consolidated subsidiary be limited to a certain
set of covered companies, such as GSIBs? If so, please provide
reasoning as to why the proposed consolidation provisions would be more
appropriate for these covered companies as opposed to others.

G. Interdependent Assets and Liabilities

The Basel III NSFR provides that, in limited circumstances, it may
be appropriate for an interdependent asset and liability to be assigned
a zero percent RSF factor and a zero percent ASF factor, respectively,
if they meet strict conditions. Currently, it does not appear that U.S.
banking organizations engage in transactions that would meet these
conditions in the Basel III NSFR. The proposed rule therefore does not
include a framework for interdependent assets and liabilities.
In order for an asset and liability to be considered
interdependent, the Basel III NSFR would require the following
conditions to be met: (1) The interdependence of the asset and
liability must be established on the basis of contractual arrangements,
(2) the liability cannot fall due while the asset remains on the
balance sheet, (3) the principal payment flows from the asset cannot be
used for purposes other than repaying the liability, (4) the liability
cannot be used to fund other assets, (5) the individual interdependent
asset and liability must be clearly identifiable, (6) the maturity and
principal amount of both the interdependent liability and asset must be
the same, (7) the bank must be acting solely as a pass-through unit to
channel the funding received from the liability into the corresponding
interdependent asset, and (8) the counterparties for each pair of
interdependent liabilities and assets must not be the same.\90\
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\90\ Basel III NSFR, supra note 4 at para 45.
---------------------------------------------------------------------------

The Basel III NSFR conditions for establishing interdependence are
intended to ensure that the specific liability will, under all
circumstances, remain for the life of the asset and all cash flows
during the life of the asset and at maturity are perfectly matched with
cash flows of the liability. Under such conditions, a covered company
would face no funding risk or benefit arising from the interdependent
asset or liability. For example, if a sovereign entity establishes a
program where it provides funding through financial institutions that
act as pass-through entities to make loans to third parties, and all
the conditions set forth in the Basel III NSFR are met, the liquidity
profile of a financial institution would not be affected by its
participation in the program. As such, the assets of the financial
institution created through such a program could be considered
interdependent with the liabilities that would also be created through
the program, and the assets and liabilities could be assigned a zero
percent RSF factor and a zero percent ASF factor, respectively.
Currently, no such programs exist in the United States.
Other transactional structures of covered companies reviewed by the
agencies do not appear to meet the Basel III NSFR conditions for
interdependent asset and liability treatment and present liquidity
risks such that zero percent RSF and ASF factors would not be
warranted. For example, a covered company may have a short position
under an equity total return swap (TRS) with a customer that the
covered company has hedged with a long position in the equity
securities underlying the TRS. This set of transactions would not
appear to meet the Basel III NSFR conditions for interdependent
treatment on several bases, including: the liability funding the equity
position could fall due while the equity position remains on the
covered company's balance sheet; the maturity of the equity position
and the liability funding the equity position would not be the same
(the equity is perpetual and the liability could have a short-term
maturity); and the covered company would not be acting solely as a
pass-through unit to channel the funding received from the repurchase
agreement.
As another example, a covered company might enter into a securities
borrowing transaction to facilitate a customer short sale of
securities. This set of transactions would also not appear to meet the
Basel III NSFR conditions for interdependent treatment on several
bases, including: The interdependence of the asset and liability may
not be established on the basis of contractual arrangements; the
liability could fall due while the asset remained on the balance sheet;
and the maturity and principal amount of both the interdependent
liability and asset may not be the same.
For the reasons described above, the proposed rule would not
include a framework for interdependent assets and liabilities.

[[Page 35157]]

Question 50: What assets and liabilities of covered companies, if
any, meet the conditions for the interdependent treatment described by
the Basel III NSFR and merit zero percent RSF and ASF factors?

III. Net Stable Funding Ratio Shortfall

As noted above, the proposed rule would require a covered company
to maintain an NSFR of at least 1.0 on an ongoing basis. The agencies
expect circumstances where a covered company has an NSFR below 1.0 to
arise only rarely. However, given the range of reasons, both
idiosyncratic and systemic, a covered company could have an NSFR below
1.0 (for example, a covered company's NSFR might temporarily fall below
1.0 during a period of extreme liquidity stress), the proposed rule
would not prescribe a particular supervisory response to address a
violation of the NSFR requirement. Instead, the proposed rule would
provide flexibility for the appropriate Federal banking agency to
respond based on the circumstances of a particular case. Potential
supervisory responses could include, for example, an informal
supervisory action, a cease-and-desist order, or a civil money penalty.
The proposed rule would require a covered company to notify its
appropriate Federal banking agency of an NSFR shortfall or potential
shortfall. Specifically, a covered company would be required to notify
its appropriate Federal banking agency no later than 10 business days,
or such other period as the appropriate Federal banking agency may
otherwise require by written notice, following the date that any event
has occurred that has caused or would cause the covered company's NSFR
to fall below the minimum requirement.
In addition, a covered company would be required to develop a plan
for remediation in the event of an NSFR shortfall. The proposed rule
would require a covered company to submit its remediation plan to its
appropriate Federal banking agency no later than 10 business days, or
such other period as the appropriate Federal banking agency may
otherwise require by written notice, after: (1) The covered company's
NSFR falls below, or is likely to fall below, the minimum requirement
and the covered company has or should have notified the appropriate
Federal banking agency, as required under the proposed rule; (2) the
covered company's required NSFR disclosures or other regulatory reports
or disclosures indicate that its NSFR is below the minimum requirement;
or (3) the appropriate Federal banking agency notifies the covered
company that it must submit a plan for NSFR remediation and the agency
provides a reason for requiring such a plan. As set forth in Sec.
__.110(b)(2), such a plan would be required to include an assessment of
the covered company's liquidity profile, the actions the covered
company has taken and will take to achieve full compliance with the
proposed rule (including a plan for adjusting the covered company's
liquidity profile to comply with the proposed rule's NSFR requirement
and a plan for fixing any operational or management issues that may
have contributed to the covered company's noncompliance), and an
estimated time frame for achieving compliance.
Moreover, the covered company would be required to report to the
appropriate Federal banking agency no less than monthly (or other
frequency, as required by the agency) on its progress towards achieving
full compliance with the proposed rule. These reports would be
mandatory until the firm's NSFR is equal to or greater than 1.0.
Supervisors would retain the authority to take supervisory action
against a covered company that fails to comply with the NSFR
requirement.\91\ Any action taken would depend on the circumstances
surrounding the funding shortfall, including, but not limited to
operational issues at a covered company, the frequency or magnitude of
the noncompliance, the nature of the event that caused a shortfall, and
whether such an event was temporary or unusual.
---------------------------------------------------------------------------

\91\ See also the discussion of the agencies' reservation of
authority in section I.C.2 of the Supplementary Information section.
---------------------------------------------------------------------------

The proposed rule's framework would be similar to the shortfall
framework in the LCR rule, which does not prescribe a particular
supervisory response to address an LCR shortfall, and provides
flexibility for the appropriate Federal banking agency to respond based
on the circumstances of a particular case.
Question 51: Is the proposed NSFR shortfall supervisory procedure
appropriate to address instances when a covered company is out of
compliance with the proposed NSFR requirement? Why or why not? If not,
please provide justifications supporting that view as well as
procedures that may be more appropriate.
Question 52: The agencies invite comment on all aspects of the
proposed NSFR shortfall supervisory procedures. Should a de minimis
exception to an NSFR shortfall be implemented, such that a covered
company would not need to report such a shortfall, provided its NSFR
returns to the required minimum within a short grace period? If so,
what de minimis amount would be appropriate and why? What duration of
grace period would be appropriate and why?
Question 53: What amount of time would be most appropriate for a
covered company that is noncompliant with the NSFR requirement to
prepare a plan for working towards compliance? The proposed rule
provides 10 business days (or such other period as the appropriate
Federal banking agency may require), but would a longer period, such as
20 business days, be more appropriate and, if so, why?

IV. Modified Net Stable Funding Ratio Applicable to Certain Covered
Depository Institution Holding Companies

A. Overview and Applicability

The Board is proposing a modified NSFR requirement that would be
tailored for modified NSFR holding companies and would be less
stringent than the proposed NSFR requirement that would apply to
covered companies. A modified NSFR holding company would be required to
maintain a lower minimum amount of stable funding, equivalent to 70
percent of the amount that would be required for a covered company. As
discussed in section I.A of this Supplementary Information section, a
modified NSFR holding company would be a bank holding company or
savings and loan holding company without significant insurance or
commercial operations that, in either case, has $50 billion or more,
but less than $250 billion, in total consolidated assets and less than
$10 billion in total on-balance sheet foreign exposure.\92\
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\92\ The proposed modified NSFR requirement would not apply to:
(i) A grandfathered unitary savings and loan holding company (as
described in section 10(c)(9)(A) of the Home Owners' Loan Act, 12
U.S.C. 1467a(c)(9)(A)) that derives 50 percent or more of its total
consolidated assets or 50 percent of its total revenues on an
enterprise-wide basis from activities that are not financial in
nature under section 4(k) of the Bank Holding Company Act (12 U.S.C.
1843(k)); (ii) a top-tier bank holding company or savings and loan
holding company that is an insurance underwriting company; or (iii)
a top-tier bank holding company or savings and loan holding company
that has 25 percent or more of its total consolidated assets in
subsidiaries that are insurance underwriting companies. For purposes
of (iii), the company must calculate its total consolidated assets
in accordance with GAAP or estimate its total consolidated assets,
subject to review and adjustment by the Board.
---------------------------------------------------------------------------

Modified NSFR holding companies are large financial companies, and
many have sizable operations in banking, brokerage, or other financial
activities. Compared to covered companies, however, they are smaller in
size and

[[Page 35158]]

generally less complex in structure, less interconnected with other
financial companies, and less reliant on riskier forms of funding.
Their activities tend to be more limited in scope and they tend to have
fewer international activities. Modified NSFR holding companies also
tend to have simpler balance sheets, which, in the event of disruptions
to a company's regular sources of funding, better enables the company's
management and its supervisors to identify risks and take corrective
actions more quickly, as compared to covered companies. For many of
these same reasons, modified NSFR holding companies also would likely
not present as great a risk to U.S. financial stability as covered
companies.
Nevertheless, modified NSFR holding companies do face more complex
liquidity risk management challenges than smaller banking organizations
and are important providers of credit in the U.S. economy. The failure
or distress of one or more modified NSFR holding companies could still
pose risks to U.S. financial stability, though to a lesser degree than
the failure or distress of one or more covered companies. Therefore,
the Board is proposing a minimum stable funding requirement for
modified NSFR holding companies that would not be as stringent as the
proposed NSFR requirement that would apply to covered companies.
A modified NSFR holding company that becomes subject to the
proposed rule pursuant to Sec. 249.1(b)(v) after the effective date
would be required to comply with the proposed modified NSFR requirement
one year after the date it meets the applicable thresholds. This one-
year transition period would provide newly subject modified NSFR
holding companies sufficient time to adjust to the requirements of the
proposal.
Other than the lower RSF amount requirement and longer transition
period, the proposed modified NSFR requirement would be identical to
the proposed NSFR requirement for covered companies. Modified NSFR
holding companies would also be subject to the public disclosure
requirements under Sec. Sec. __.130 and __.131 of the proposed rule,
described in section V of this Supplementary Information section.

B. Available Stable Funding

A modified NSFR holding company would calculate its ASF amount in
the same manner as a covered company, pursuant to Sec. __.103 of the
proposed rule. The ASF amount would comprise the equity and liabilities
held by a modified NSFR holding company multiplied by the same
standardized ASF factors as those that would be used by a covered
company to determine the expected stability of its funding over a one-
year time horizon. These ASF factors would be applicable to modified
NSFR holding companies because they represent the proportionate amount
of NSFR equity and liabilities that can be considered stable funding
available to support assets, derivative exposures, and commitments.

C. Required Stable Funding

A modified NSFR holding company would calculate its RSF amount in
the same manner as a covered company, pursuant to Sec. __.105 of the
proposed rule, except that a modified NSFR holding company would
multiply its RSF amount by 70 percent. As discussed above, the modified
NSFR requirement would not require these firms to maintain as high an
amount of stable funding as covered companies, based on the different
risks of these firms.
Question 54: What, if any, modifications to the modified NSFR
requirement should the Board consider? Is the proposed 70 percent of
the RSF amount appropriate for the modified NSFR holding companies
based on their relative complexity and size? Please provide
justification and supporting data.
Question 55: What operational burdens would modified NSFR holding
companies face in complying with the proposed modified NSFR
requirement?
Question 56: Should the rules for consolidation under Sec. __.108
of the proposed rule be limited to covered companies, rather than
applying to both covered companies and modified NSFR holding companies,
and, if so, why?

V. Disclosure Requirements

A. Proposed NSFR Disclosure Requirements

The disclosure requirements of the proposed rule would apply to
covered companies that are bank holding companies and savings and loan
holding companies and to modified NSFR holding companies. The
disclosure requirements of the proposed rule would not apply to
depository institutions that are subject to the proposed rule.\93\
---------------------------------------------------------------------------

\93\ In the future, the agencies may develop a different or
modified reporting form that would be required for both depository
institutions and depository institution holding companies subject to
the proposed rule. The agencies anticipate that they would solicit
public comment on any such new reporting form.
---------------------------------------------------------------------------

The proposed rule would require public disclosures of a company's
NSFR and the components of its NSFR in a standardized tabular format
(NSFR disclosure template). The proposed rule would also require
sufficient discussion of certain qualitative features of a company's
NSFR and its components to facilitate an understanding of the company's
calculation and results. The NSFR disclosure template is similar to the
common disclosure template published by the BCBS as part of the Basel
III Disclosure Standards (BCBS common template). The proposed rule
would require a company to provide timely public disclosures each
calendar quarter of the information in the NSFR disclosure template and
the qualitative disclosures in a direct and prominent manner on its
public internet site or in a public financial report or other public
regulatory report. Such disclosures would need to remain publicly
available for at least five years after the date of the disclosure.
In order to reduce compliance costs and provide relevant
information to the public about the funding profile of a company, the
proposed rule's quantitative disclosures would reflect data that a
company would be required to calculate in order to comply with the
proposed rule.
Question 57: The agencies invite comment on all aspects of the
disclosure requirements of the proposed rule. Specifically, what
changes, if any, could improve the clarity and utility of the
disclosures?

B. Quantitative Disclosure Requirements

The proposed rule would require a company subject to the proposed
disclosure requirements to publicly disclose the company's NSFR and its
components. By using a standardized tabular format that is similar to
the BCBS common template, the NSFR disclosure template would enable
market participants to compare funding characteristics of covered
companies in the United States and other banking organizations subject
to similar stable funding requirements in other jurisdictions. However,
the disclosure requirements of the proposed rule and the accompanying
NSFR disclosure template also reflect differences between the proposed
rule and the Basel III NSFR, as discussed below.
The NSFR disclosure template would include components of a
company's ASF and RSF calculations (ASF components and RSF components,
respectively), as well as the company's ASF amount, RSF amount, and
NSFR. For most ASF and RSF components, the proposed rule would require
disclosure of both ``unweighted'' and ``weighted'' amounts. The
``unweighted'' amount

[[Page 35159]]

generally refers to values of ASF or RSF components prior to applying
the ASF or RSF factors assigned under Sec. Sec. __.104, __.106, or
__.107, as applicable, whereas the ``weighted'' amount generally refers
to the amounts resulting after applying the ASF or RSF factors. For
certain line items in the proposed NSFR disclosure template relating to
derivative transactions that include components of multi-step
calculations before an ASF or RSF factor is applied, as described in
section II.E of this Supplementary Information section, a company would
only be required to disclose a single amount for the component.
For most ASF or RSF components, the proposed NSFR disclosure
template would require the unweighted amount to be separated based on
maturity categories relevant to the NSFR requirement: Open maturity;
less than six months after the calculation date; six months or more,
but less than one year after the calculation date; one year or more
after the calculation date; and perpetual. For purposes of
comparability of disclosures across jurisdictions, while the BCBS
common template does not distinguish between the ``open'' and
``perpetual'' maturity categories (grouping them together under the
heading ``no maturity''), the proposed rule would require a company to
disclose amounts in those two maturity categories separately because
the categories are on opposite ends of the maturity spectrum for
purposes of the proposed rule. As noted in section II.B of this
Supplementary Information section, the ``open'' maturity category is
meant to capture instruments that do not have a stated contractual
maturity and may be closed out on demand, such as demand deposits. The
``perpetual'' category is intended to capture instruments that
contractually never mature and may not be closed out on demand, such as
equity securities. Separating these two categories into two disclosure
columns improves the transparency and quality of the disclosure without
undermining the ability to compare the NSFR component disclosures of
banking organizations in other jurisdictions that utilize the BCBS
common template, because these two columns can be summed for comparison
purposes. For certain ASF and RSF components that represent
calculations that do not depend on maturities, such as the NSFR
derivatives asset or liability amount, the proposed NSFR disclosure
template would not require a company to separate its disclosed amount
by maturity category.
As described further below, the proposed rule identifies the ASF
and RSF components that a company must include in each row of the
proposed NSFR disclosure template, including cross-references to the
relevant sections of the proposed rule. The numbered rows of the
proposed NSFR disclosure template do not always map on a one-to-one
basis with provisions of the proposed rule relating to the calculation
of a company's NSFR. In some cases, the proposed NSFR disclosure
template requires instruments that are assigned identical ASF or RSF
factors to be disclosed in different rows or columns, and some rows and
columns combine disclosure of instruments that are assigned different
ASF or RSF factors. For example, the proposed NSFR disclosure template
includes all level 1 liquid assets in a single row, even though the
proposed rule would assign a zero percent, 5 percent, or higher RSF
factor to various level 1 liquid assets under Sec. __.106(a)(1) (such
as Reserve Bank balances), Sec. __.106(a)(2) (such as unencumbered
U.S. Treasury securities), or Sec. ___. 106(c) (if the level 1 liquid
asset is encumbered), respectively.\94\
---------------------------------------------------------------------------

\94\ See discussion in sections II.D.3.a.i, II.D.3.a.ii, and
II.D.3.c of this SUPPLEMENTARY INFORMATION section.
---------------------------------------------------------------------------

For consistency, the proposed NSFR disclosure template would
require a company to clearly indicate the as-of date for disclosed
amounts and report all amounts on a consolidated basis and expressed in
millions of U.S. dollars or as a percentage, as applicable.
Question 58: What, if any, unintended consequences might result
from publicly disclosing a company's NSFR and its components,
particularly in terms of liquidity risk? What modifications should be
made to the proposed disclosure requirements to address any unintended
consequences?
1. Disclosure of ASF Components
The proposed rule would require a company to disclose its ASF
components, separated into the following categories: (1) Capital and
securities, which includes NSFR regulatory capital elements and other
capital elements and securities; (2) retail funding, which includes
stable retail deposits, less stable retail deposits, retail brokered
deposits, and other retail funding; (3) wholesale funding, which
includes operational deposits and other wholesale funding; and (4)
other liabilities, which include the company's NSFR derivatives
liability amount and any other liabilities not included in other
categories.
The proposed NSFR disclosure template would differ from the BCBS
common template by including some additional ASF categories that are
not separately broken out under the Basel III NSFR, such as retail
brokered deposits. The proposed template would also provide market
participants with additional information relevant to understanding a
company's liquidity profile, such as the total derivatives liabilities
amount (a component of the NSFR derivatives liabilities amount). These
differences from the BCBS common template would provide greater public
transparency without reducing comparability across jurisdictions, since
the broken-out line items could simply be added back together to
produce a comparable total and the extra line items can simply be
ignored.
2. Disclosure of RSF Components
The proposed disclosure requirements would require a company to
disclose its RSF components, separated into the following categories:
(1) Total HQLA and each of its component asset categories (i.e., level
1, level 2A, and level 2B liquid assets); (2) assets other than HQLA
that are assigned a zero percent RSF factor; (3) operational deposits;
(4) loans and securities, separated into categories including retail
mortgages and securities that are not HQLA; (5) other assets, which
include commodities, certain components of the company's derivatives
RSF amount, and all other assets not included in another category
(including nonperforming assets); \95\ and (6) undrawn amounts of
committed credit and liquidity facilities.
---------------------------------------------------------------------------

\95\ A company would be required to disclose nonperforming
assets as part of the line item for other assets and nonperforming
assets, rather than as part of a line item based on the type of
asset that has become nonperforming.
---------------------------------------------------------------------------

Similar to the proposed disclosure format with respect to ASF
components, the proposed NSFR disclosure template would differ in some
respects from the BCBS common template to provide more granular
information regarding RSF components without undermining comparability
across jurisdictions. For example, the proposed rule would require
disclosure of a company's level 1, level 2A, and level 2B liquid assets
by maturity category, which is not required by the BCBS common
template, to assist market participants and other parties in assessing
the composition of a company's HQLA.\96\ Additionally, because some
assets that would be assigned a zero percent RSF factor are not
included as HQLA under the LCR rule, such as ``currency and coin'' and
certain ``trade date

[[Page 35160]]

receivables,'' the proposed template includes a distinct category for
``zero percent RSF assets that are not level 1 liquid assets'' that the
BCBS common template does not include. The proposed NSFR disclosure
template also differs from the BCBS common template in its presentation
of the components of a company's derivatives RSF amount, generally to
improve the clarity of disclosure by separating components into
distinct rows and by including the total derivatives asset amount so
that market participants can better understand a company's NSFR
derivatives calculation.
---------------------------------------------------------------------------

\96\ See Sec. __.20 of the LCR rule.
---------------------------------------------------------------------------

As discussed in sections II.D.3.c and d of this SUPPLEMENTARY
INFORMATION section, the proposed rule would assign RSF factors to
encumbered assets under Sec. __.106(c) and (d). A company would be
required to include encumbered assets in a cell of the NSFR disclosure
template based on the asset category and asset maturity rather than
based on the encumbrance period. For example, a level 2A liquid asset
that matures in one year or more that is encumbered for a remaining
period of nine months would be included in the level 2A liquid asset
row and maturity of one year or more column, along with other level 2A
liquid assets that have a similar maturity. This location in the NSFR
disclosure template would not change the RSF factor assigned to the
asset. In the preceding example, therefore, the covered company's
weighted amount for the row would reflect an RSF factor of 50 percent
assigned to the encumbered level 2A liquid asset. Similar treatment
would apply for an asset provided or received by a company as variation
margin to which an RSF factor is assigned under Sec. __.107.
Disclosure by asset category and maturity would provide market
participants a better understanding of the actual assets of a company
rather than having rows that combine asset categories.

C. Qualitative Disclosure Requirements

A covered company subject to the proposed disclosure requirements
would be required to provide a qualitative discussion of the company's
NSFR and its components sufficient to facilitate an understanding of
the calculation and results. This qualitative discussion would
supplement the quantitative information disclosures in a company's NSFR
disclosure template described above and would enable market
participants and other parties to better understand a company's NSFR
and its components. The proposed rule would not prescribe the content
or format of a company's qualitative disclosures; rather, it would
allow flexibility for discussion based on each company's particular
circumstances. The proposed rule would, however, provide guidance
through examples of topics that a company may discuss. These examples
include (1) the main drivers of the company's NSFR; (2) changes in the
company's NSFR over time and the causes of such changes (for example,
changes in strategies or circumstances); (3) concentrations of funding
sources and changes in funding structure; (4) concentrations of
available and required stable funding within a covered company's
corporate structure (for example, across legal entities); and (5) other
sources of funding or other factors in the NSFR calculation that the
company considers to be relevant to facilitate an understanding of its
liquidity profile.
The Board recently proposed disclosure requirements under the LCR
rule, which also include a qualitative disclosure section.\97\ Given
that the proposed rule and the LCR rule would be complementary
quantitative liquidity requirements, a company subject to both
disclosure requirements would be permitted to combine the two
qualitative disclosures, as long as the specific qualitative disclosure
requirements of each are satisfied by such a combined qualitative
disclosure section.
---------------------------------------------------------------------------

\97\ ``Liquidity Coverage Ratio: Public Disclosure Requirements;
Extension of Compliance Period for Certain Companies to Meet the
Liquidity Coverage Ratio Requirements,'' 80 FR 75010 (December 1,
2015).
---------------------------------------------------------------------------

D. Frequency and Timing of Disclosure

The proposed rule would require a company to provide timely public
disclosures after each calendar quarter. Disclosure on a quarterly
basis would provide market participants and other parties with
information to help assess the liquidity risk profiles of companies
making the disclosures, while reducing compliance costs that could
result from more frequent public disclosure. A quarterly disclosure
period would alleviate burden by aligning with the frequency of
periodic public disclosures in other contexts, such as those required
under Federal securities laws and regulations.
The purpose of the proposed rule's public disclosure requirements
would be to provide market participants and the public with periodic
information regarding a company's funding structure, rather than real-
time information or event-driven disclosures regarding a company's
liquidity profile. The agencies will have access to other sources of
information to enable ongoing monitoring of companies' liquidity risk
profiles and compliance with the proposed rule.
The proposed rule would recognize that the timing of disclosures
required under the Federal banking laws may not always coincide with
the timing of disclosures required under other Federal laws, including
disclosures required under the Federal securities laws. For calendar
quarters that do not correspond to a company's fiscal year or quarter
end, the agencies would consider those disclosures that are made within
45 days of the end of the calendar quarter (or within 60 days for the
limited purpose of the company's first reporting period in which it is
subject to the proposed rule's disclosure requirements) as timely. In
general, where a company's fiscal year end coincides with the end of a
calendar quarter, the agencies consider disclosures to be timely if
they are made no later than the applicable SEC disclosure deadline for
the corresponding Form 10-K annual report. In cases where a company's
fiscal year end does not coincide with the end of a calendar quarter,
the agencies would consider the timeliness of disclosures on a case-by-
case basis.
This approach to timely disclosures is consistent with the approach
to public disclosures that the agencies have taken in the context of
other regulatory reporting and disclosure requirements. For example,
the agencies have used the same indicia of timeliness with respect to
public disclosures required under the agencies' risk-based capital
rules and proposed under the LCR rule.\98\
---------------------------------------------------------------------------

\98\ See 78 FR 62018, 62129 (October 11, 2013); 80 FR 75010,
75013 (December 1, 2015).
---------------------------------------------------------------------------

As noted above, a company must publicly disclose, in a direct and
prominent manner, the information required by the proposed rule on its
public internet site or in its public financial or other public
regulatory reports. The agencies are not proposing specific criteria
for what it means for a disclosure to be ``direct and prominent,'' but
the agencies expect that the disclosures should be readily accessible
to the general public for a period of at least five years after the
disclosure date.
The first reporting period for which a company would be required to
disclose the company's NSFR and its components is the calendar quarter
that begins on the date the company becomes subject to the proposed
NSFR requirement. For example, a company that becomes subject to the
proposed NSFR requirement on January 1, 2018, would be required to
commence providing the public disclosures for the calendar quarter that
ends on March 31,

[[Page 35161]]

2018. Its disclosures for this period would then be required to remain
publicly available until at least March 31, 2023.
Question 59: Under what circumstances, if any, should the agencies
require more frequent or less frequent public disclosures of a
company's NSFR and its components? What benefits or negative effects
may result if, in addition to required quarterly public disclosures,
the agencies require a company to publicly disclose qualitative or
quantitative information about the company's NSFR or its components
with 30 days' prior written notice within a calendar quarter?
Question 60: Should the agencies issue any guidance regarding the
term ``direct and prominent?'' If so, what factors should be included
in such guidance?

VI. Impact Assessment

The agencies assessed the potential impact of the proposed rule
\99\ and, based on available information, expect the benefits to exceed
the costs.\100\ As discussed in section I of this SUPPLEMENTARY
INFORMATION section, the proposed rule is designed to reduce the
likelihood that disruptions to a covered company or modified NSFR
holding company's regular sources of funding will compromise its
liquidity position, as well as to promote improvements in the
measurement and management of liquidity risk. By requiring covered
companies and modified NSFR holding companies to maintain stable
funding profiles, the proposed rule is intended to reduce liquidity
risk in the financial sector and provide for a safer and more resilient
financial system.
---------------------------------------------------------------------------

\99\ As discussed in section XI of this SUPPLEMENTARY
INFORMATION section, the OCC also analyzed the proposed rule under
the factors in the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1532).
\100\ The BCBS recently published a review of the literature on
the costs and benefits of liquidity regulation and found that
existing literature, although limited given that many liquidity
requirements are relatively new, supports the view that the net
social benefit of liquidity regulation is expected to be
significantly positive. See Basel Committee on Banking Supervision,
``Literature review on integration of regulatory capital and
liquidity instruments'' (March 2016), available at https://www.bis.org/bcbs/publ/wp30.pdf (BCBS literature review).
---------------------------------------------------------------------------

The potential costs considered by the agencies include the extent
to which covered companies and modified NSFR holding companies would
currently fall short of the proposed NSFR requirement and any costs
associated with balance-sheet adjustments that would be necessary to
come into compliance or future balance-sheet adjustments to maintain
compliance in the future; \101\ ongoing operational and administrative
costs related to the proposed rule's calculation, disclosure, and
shortfall notification requirements; possible costs to customers in the
form of increased borrowing costs; and the possibility of reduced
financial intermediation or economic output in the United States.
---------------------------------------------------------------------------

\101\ Analysis of potential shortfalls focused on the
consolidated level for covered companies that are depository
institution holding companies and did not include separate shortfall
analyses for covered companies that are depository institutions. See
infra note 103. The OCC's impact analysis, discussed in section XI
of this SUPPLEMENTARY INFORMATION section estimates the shortfall
and costs for national banks and Federal savings associations.
---------------------------------------------------------------------------

The potential benefits considered include a reduction in the
likelihood, relative to a banking system without an NSFR requirement,
that a covered company or modified NSFR holding company would fail or
experience material financial distress; the reduced likelihood of a
financial crisis occurring and the reduced severity of a financial
crisis if one were to occur; and the improved transparency and improved
market discipline due to the proposed rule's public disclosure
requirements.

A. Analysis of Potential Costs

The agencies considered the extent to which any covered companies
or modified NSFR holding companies would fall short of the proposed
NSFR requirement or modified NSFR requirement, respectively, if they
were currently in effect and would need to make balance-sheet
adjustments, such as reducing short-term funding or increasing holdings
of liquid assets, in order to come into compliance.
To estimate shortfall amounts, the agencies calculated ASF and RSF
amounts at the consolidated level for depository institution holding
companies that would be subject to the NSFR requirement or modified
NSFR requirement. These estimates were based on information submitted
by certain depository institution holding companies for inclusion in
the most recent Basel III Quantitative Impact Study (QIS), as well as
other available information, including data collected on the FR 2052a
report and publicly available data.\102\ In addition, for covered
companies and modified NSFR holding companies that did not submit data
through the QIS process, the estimates were based on information
collected on Federal Reserve forms FR Y-9C and FR 2052b, as well as
other supervisory data.
---------------------------------------------------------------------------

\102\ See https://www.bis.org/bcbs/qis for additional QIS
information. Individual company submission data is confidential
supervisory information. Shortfall analysis used QIS data as of June
30, 2015.
---------------------------------------------------------------------------

As of December 2015, 15 depository institution holding companies
would be covered companies under the proposed rule and 20 depository
institution holding companies would be modified NSFR holding companies.
Using the approach described above, the agencies estimate that nearly
all of these companies would be in compliance with the proposed NSFR or
modified NSFR requirement if those requirements were in effect today.
In the aggregate, the agencies estimate that covered companies and
modified NSFR holding companies would face a shortfall of approximately
$39 billion, equivalent to 0.5 percent of the aggregate RSF amount that
would apply across all firms. For the limited number of firms that
would have a shortfall, the $39 billion shortfall would be equivalent
to 4.3 percent of their total RSF amount.
Because nearly all covered companies and modified NSFR holding
companies are estimated to be in compliance with the proposed NSFR
requirement and modified NSFR requirement, respectively, and because
the aggregated ASF shortfall amount is estimated to be small relative
to the aggregate size of these companies, the agencies do not expect
most companies to incur significant costs in connection with making
changes to their funding structures, assets, commitments, or derivative
exposures to comply with the proposed NSFR requirement.\103\ If the
companies with a shortfall elect to eliminate it by replacing
liabilities that are assigned a lower ASF factor with liabilities that
are assigned a higher ASF factor, they would likely incur a greater
interest expense. If all companies with a shortfall were to take this
approach, the agencies currently estimate an increase in those
companies' interest expense of approximately $519 million per
year.\104\ This $519 million increase

[[Page 35162]]

per year in interest expense is only 0.38 percent of the total net
income of $138 billion for all covered companies and modified NSFR
holding companies, as reported for calendar year 2015 on form FR Y-9C.
However, for the companies with a shortfall, it is a materially higher
percentage of their total net income for calendar year 2015.
---------------------------------------------------------------------------

\103\ The agencies expect similar results for covered companies
that are depository institutions, given the lack of a shortfall at
these companies' parent holding companies; the extent to which the
consolidated assets, liabilities, commitments, and exposures of the
parent holding companies are attributable to the depository
institution subsidiary; and the greater focus of depository
institutions on traditional banking activities such as deposit-
taking that tend to result in a higher NSFR than a consolidated NSFR
that may also include non-bank entities and activities, such as
broker-dealer or derivatives business lines.
\104\ This approximate cost is based on an estimated difference
in relative interest expense between funding from financial sector
entities that matures in 90 days or less (assigned a zero percent
ASF factor) and unsecured debt that matures in 3 years (assigned a
100 percent ASF factor) of approximately 1.33 percent, based on
rates as of March 31, 2016. $39 billion x 0.0133 = $519 million.
---------------------------------------------------------------------------

In addition, it is possible that covered companies and modified
NSFR holding companies could incur marginal costs in the future if they
must make balance-sheet adjustments that they would not otherwise make
in order to maintain compliance with the proposed rule. For example, a
company subject to the proposed rule may fund expansion of its balance
sheet with more equity or long-term debt than it otherwise would have.
On the margin, such equity or long-term debt could be more expensive
than alternative, less stable forms of funding, such as short-term
wholesale funding. At the same time, however, a company subject to the
proposed rule may have lower funding costs due to a more stable funding
profile, which could offset some of the increased funding costs. Thus,
the agencies do not expect covered companies and modified NSFR holding
companies to incur significant costs in connection with balance-sheet
adjustments to maintain compliance with the proposed requirements;
however, these costs may increase depending on a variety of factors,
including future differences between the rates on short- and long-term
liabilities.
As noted above in this SUPPLEMENTARY INFORMATION section,
operational and administrative compliance costs in connection with the
proposed rule are expected to be relatively modest. Calculation and
disclosure requirements under the proposed rule would be based largely
on the carrying values, as determined under GAAP, of the assets,
liabilities, and equity of covered companies and modified NSFR holding
companies. As a result, in most cases these firms should be able to
leverage existing management information systems to comply with the
proposed rule's calculation and disclosure requirements. The agencies
therefore expect any additional operational costs associated with
ongoing compliance with the proposed rule to be relatively minor.
Because most covered companies and modified NSFR holding companies
are not expected to incur significant costs in connection with balance-
sheet adjustments to comply with the proposed requirements or manage
operational compliance, the agencies do not expect the proposed rule to
result in material costs being passed on to customers, for example in
the form of higher interest rates or fees.\105\ Similarly, the agencies
do not expect covered companies or modified NSFR holding companies to
materially alter their levels of lending as a result of the proposed
rule. Accordingly, the agencies also do not expect the proposed rule to
cause a material reduction in aggregate financial intermediation or
economic output in the United States.
---------------------------------------------------------------------------

\105\ The BCBS literature review reports that existing studies
tend to show that, to the extent banking organizations incur costs
in connection with liquidity requirements, these firms typically
face market constraints on their ability to pass along these costs
to customers in the form of higher lending charges. See supra note
100. The combination of these constraints and the fact that most
covered companies and modified NSFR holding companies currently
exceed the proposed rule's minimum stable funding requirement
(meaning these companies in the aggregate are likely to face only
relatively modest costs in connection with coming into compliance
with the proposed NSFR requirement or modified NSFR requirement),
suggest that the proposed rule should not result in significant
costs being passed on to customers.
---------------------------------------------------------------------------

It is possible that the proposed rule could impose some
macroeconomic costs. For example, it is possible that covered companies
and modified NSFR holding companies could respond to the proposed
requirements by ``hoarding'' liquidity to some degree rather than using
it to relieve funding needs during a period of significant stress--
possibly out of fear that dipping below a certain NSFR could project
weakness to counterparties, investors, or market analysts. Incentives
to hoard liquidity already exist in the market, even without the
proposed requirement, as demonstrated by the hoarding of liquidity by
financial firms during the 2007-2009 financial crisis.\106\ Potential
effects of the proposed rule on this dynamic are difficult to assess
and quantify given the degree of uncertainty that exists during periods
of significant stress, but there are factors that may mitigate or
counter it. For example, existing market incentives to hoard liquidity
may be lessened to some degree based on a covered company's or modified
NSFR holding company's stronger funding position going into a period of
significant stress based on compliance with the proposed rule.\107\ The
proposed rule's supervisory response framework is also designed to
mitigate incentives that would cause firms to hoard liquidity; as
discussed in section III of this SUPPLEMENTARY INFORMATION section, the
proposed rule would provide flexibility for the appropriate Federal
banking agency to respond based on the circumstances of a particular
case--for example, if a covered company's NSFR were to fall below 1.0
based on the company's use of liquidity during a period of market
stress.
---------------------------------------------------------------------------

\106\ See Markus Brunnermeier, ``Deciphering the Liquidity and
Credit Crunch 2007-2008,'' 23 Journal of Economic Perspectives 77
(2009); Mark Carlson, ``Lessons from the Historical Use of Reserve
Requirements in the United States to Promote Bank Liquidity,'' Board
of Governors of the Federal Reserve System, Finance and Economics
Discussion Series 2013-11 (2013).
\107\ As discussed further below, a more resilient funding
profile heading into a period of significant stress can alleviate
pressure on a covered company or modified NSFR holding company to
reduce credit availability in response to the stress. See infra note
111.
---------------------------------------------------------------------------

B. Analysis of Potential Benefits

The proposed rule is designed to reduce the likelihood that
disruptions to a covered company's or a modified NSFR holding company's
regular sources of funding will compromise its liquidity position and
lead to or exacerbate an idiosyncratic or systemic stress. For example,
the proposed NSFR requirement would limit overreliance on short-term
wholesale funding from financial sector entities (which would be
assigned a low ASF factor) to fund holdings of illiquid assets (which
would be assigned high RSF factors). The proposed rule's quantitative
requirements are also designed to facilitate better management of
liquidity risks beyond the LCR rule's 30-calendar day period,
complementing the LCR rule and other aspects of the agencies' liquidity
risk regulatory framework, and provide a consistent and comparable
metric to measure funding stability across covered companies, modified
NSFR holding companies, and other banking organizations subject to
similar stable funding requirements in other jurisdictions.
To estimate the potential macroeconomic benefits of the proposed
rule, the agencies considered the extent to which the proposed rule
could reduce the likelihood or severity of a financial crisis. A BCBS
study entitled, ``An Assessment of the Long-Term Economic Impact of
Stronger Capital and Liquidity Requirements'' (the BCBS Economic Impact
report) estimated that, prior to the regulatory reforms undertaken
since 2009, the probability that a financial crisis could occur in a
given year was between 3.5 percent and 5.2 percent and that the
cumulative economic cost of any single crisis was between 20 percent
and 100 percent of

[[Page 35163]]

annual global economic output.\108\ If the NSFR reduces the probability
of a financial crisis even slightly, then the benefits of avoiding the
costs of a crisis, specifically a decline in output, would outweigh the
relatively modest aggregate cost of the rule.
---------------------------------------------------------------------------

\108\ Basel Committee on Bank Supervision, ``An assessment of
the long-term economic impact of stronger capital and liquidity
requirements'' (August 2010), available at https://www.bis.org/publ/bcbs173.pdf.
---------------------------------------------------------------------------

As the 2007-2009 financial crisis demonstrated, unstable funding
structures at major financial institutions can play a very large role
in causing and deepening financial crises.\109\ For example, a large
banking organization that relies heavily on unstable funding may be
forced to sell illiquid assets at fire sale prices to meet its current
obligations, which could further contribute to the firm's liquidity
deterioration, exacerbate fire sale conditions in the broader financial
markets, and amplify stresses at other financial firms. Conversely,
maintenance of a more resilient funding profile heading into a period
of significant stress can lessen pressure on a covered company or
modified NSFR holding company to sell illiquid assets or reduce credit
availability in response to the stress.\110\ The BCBS Economic Impact
report estimated significant net benefits from the Basel III reforms,
including the Basel III NSFR, in connection with reducing the
likelihood and severity of financial crises.\111\
---------------------------------------------------------------------------

\109\ See, e.g., Brunnermeier supra note 106; Gary Gorton and
Andrew Metrick, ``Securitized Banking and the Run on Repo,''
National Bureau of Economic Research Working Paper 15223 (2009); and
Marcin Kacperczyk and Philipp Schnabl, ``When Safe Proved Risky:
Commercial Paper during the Financial Crisis of 2007-2009,'' 34
Journal of Economic Perspectives 29 (2010).
\110\ The BCBS literature review discusses studies of lending by
banking organizations in the United States and France during the
2007-2009 financial crisis, which showed that banking organizations
with more stable funding profiles continued lending during the
crisis to a greater degree than banking organizations that had
weaker profiles. See BCBS literature review, supra note 100, pp. 26-
27. See also Marcia Millon Cornett, Jamie John McNutt, Philip E.
Strahan, and Hassan Tehranian, ``Liquidity Risk Management and
Credit Supply in the Financial Crisis,'' 101 Journal of Financial
Economics 297 (2011), and Pierre Pessarossi and
Fr[eacute]d[eacute]ric Vinas, ``The Supply of Long-Term Credit after
a Funding Shock: Evidence from 2007-2009,'' Banque de France,
D[eacute]bat [eacute]conomiques et financiers (2014, updated 2015).
\111\ See BCBS Economic Impact report. While the BCBS Economic
Impact report was based on an earlier version of the Basel III NSFR,
its conclusions are also consistent with the final version issued by
the BCBS.
---------------------------------------------------------------------------

In addition, the proposed rule's public disclosure requirements are
designed to improve transparency to the public and market participants
regarding a covered company's or modified NSFR holding company's
funding profile, including with respect to drivers of a company's
liquidity risk. As discussed in section V.B of this SUPPLEMENTARY
INFORMATION section, the proposed rule's use of a consistent,
quantitative metric across covered companies and a standardized
disclosure format should enable market participants to better assess
and compare funding characteristics of covered companies in the United
States and other banking organizations subject to similar stable
funding requirements in other jurisdictions.
Question 61: The agencies invite comment on all aspects of the
foregoing impact assessment associated with the proposed rule. What, if
any, additional costs and benefits should be considered? Commenters are
encouraged to submit data on potential shortfalls of covered companies
or modified NSFR holding companies, as well as potential costs or
benefits of the proposed rule that the agencies may not have
considered.

VII. Solicitation of Comments on Use of Plain Language

Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, sec.
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking
agencies to use plain language in all proposed and final rules
published after January 1, 2000. The Federal banking agencies invite
your comments on how to make this proposal easier to understand. For
example:
Have the agencies 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 (e.g., 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 agencies do to make the regulation
easier to understand?

VIII. Regulatory Flexibility Act

The Regulatory Flexibility Act \112\ (RFA) requires an agency to
either provide an initial regulatory flexibility analysis with a
proposed rule for which 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 the proposed rule. The OCC and FDIC are certifying that the
proposed rule will not have a significant economic impact on a
substantial number of small entities.
---------------------------------------------------------------------------

\112\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

Board

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 comments
received during the public comment period have been considered.
The proposed rule is intended to implement a quantitative liquidity
requirement applicable for certain bank holding companies, savings and
loan holding companies, and state member banks.
Under regulations issued by the Small Business Administration, a
``small entity'' includes firms within the ``Finance and Insurance''
sector with asset sizes that vary from $7.5 million or less in assets
to $550 million or less in assets.\113\ The Board believes that the
Finance and Insurance sector constitutes a reasonable universe of firms
for these purposes because such firms generally engage in activities
that are financial in nature. Consequently, bank holding companies,
savings and loan holding companies, and state member banks with asset
sizes of $550 million or less are small entities for purposes of the
RFA. 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.
---------------------------------------------------------------------------

\113\ 13 CFR 121.201.
---------------------------------------------------------------------------

As discussed in section I.C.2 of this SUPPLEMENTARY INFORMATION
section, the proposed rule would generally apply to Board-regulated
institutions with: (i) Consolidated total assets equal to $250 billion
or more; (ii) consolidated total on-balance sheet foreign exposure
equal to $10 billion or more; or (iii) consolidated total assets equal
to $10 billion or more if that Board-regulated institution is a
consolidated subsidiary of a company described in (i) or (ii). The

[[Page 35164]]

Board is also proposing to implement a modified NSFR requirement for
top-tier bank holding companies and savings and loan holding companies
that have consolidated total assets of $50 billion or more, but less
than $250 billion, and that have less than $10 billion of consolidated
total on-balance sheet foreign exposure. Neither the proposed NSFR
requirement nor the proposed modified NSFR requirement would apply to
(i) a grandfathered unitary savings and loan holding company \114\ that
derives 50 percent or more of its total consolidated assets or 50
percent of its total revenues on an enterprise-wide basis from
activities that are not financial in nature under section 4(k) of the
Bank Holding Company Act; \115\ (ii) a top-tier bank holding company or
savings and loan holding company that is an insurance underwriting
company; or (iii) a top-tier bank holding company or savings and loan
holding company that has 25 percent or more of its total consolidated
assets in subsidiaries that are insurance underwriting companies.\116\
---------------------------------------------------------------------------

\114\ As described in section 10(c)(9)(A) of the Home Owners'
Loan Act, 12 U.S.C. 1467a(c)(9)(A).
\115\ 12 U.S.C. 1843(k).
\116\ For purposes of (iii), the company must calculate its
total consolidated assets in accordance with GAAP or estimate its
total consolidated assets, subject to review and adjustment by the
Board.
---------------------------------------------------------------------------

Companies that are subject to the proposed rule therefore
substantially exceed the $550 million asset threshold at which a
banking entity is considered a ``small entity'' under SBA regulations.
Because the proposed rule, if adopted in final form, would not apply to
any company with assets of $550 million or less, the proposed rule is
not expected to apply to any small entity for purposes of the RFA. The
Board does not believe that the proposed rule duplicates, overlaps, or
conflicts with any other Federal rules. In light of the foregoing, the
Board does not believe that the proposed rule, if adopted in final
form, would have a significant economic impact on a substantial number
of small entities supervised. Nonetheless, the Board seeks comment on
whether the proposed rule would impose undue burdens on, or have
unintended consequences for, small organizations, and whether there are
ways such potential burdens or consequences could be minimized.

OCC

The RFA requires an agency to provide an initial regulatory
flexibility analysis with a proposed rule or to certify that the rule
will not have a significant economic impact on a substantial number of
small entities (defined for purposes of the RFA to include banking
entities with total assets of $550 million or less and trust companies
with assets of $38.5 million or less).
As discussed previously in this SUPPLEMENTARY INFORMATION section,
the proposed rule generally would apply to national banks and Federal
savings associations with: (i) Consolidated total assets equal to $250
billion or more; (ii) consolidated total on-balance sheet foreign
exposure equal to $10 billion or more; or (iii) consolidated total
assets equal to $10 billion or more if a national bank or Federal
savings association is a consolidated subsidiary of a company subject
to the proposed rule. As of March 25, 2016, the OCC supervises 1,032
small entities. Since the proposed rule would only apply to
institutions that have consolidated total assets or consolidated total
on-balance sheet foreign exposure equal to $10 billion or more, the
proposed rule would not have any impact on small banks and small
Federal savings associations. Therefore, the proposed rule would not
have a significant economic impact on a substantial number of small
OCC-supervised entities.
The OCC certifies that the proposed rule would not have a
significant economic impact on a substantial number of small national
banks and small Federal savings associations.

FDIC

The RFA requires an agency to provide an initial regulatory
flexibility analysis with a proposed rule or to certify that the rule
will not have a significant economic impact on a substantial number of
small entities (defined for purposes of the RFA to include banking
entities with total assets of $550 million or less).
As described in section I of this SUPPLEMENTARY INFORMATION
section, the proposed rule would establish a quantitative liquidity
standard for large and internationally active banking organizations
with $250 billion or more in total assets or $10 billion or more of on-
balance sheet foreign exposure and their consolidated subsidiary
depository institutions with $10 billion or more in total consolidated
assets. One FDIC-supervised institution satisfies the foregoing
criteria, and it is not a small entity. As of December 31, 2015, based
on a $550 million threshold, 2 (out of 3,262) small FDIC-supervised
institutions were subsidiaries of a covered company. Therefore, the
proposed rule will not have a significant economic impact on a
substantial number of small entities under its supervisory
jurisdiction.
The FDIC certifies that the proposed rule would not have a
significant economic impact on a substantial number of small FDIC-
supervised institutions.

IX. Riegle Community Development and Regulatory Improvement Act of 1994

The Riegle Community Development and Regulatory Improvement Act of
1994 (RCDRIA) requires that each Federal banking agency, in determining
the effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on insured depository institutions, consider, consistent
with principles of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such regulations.
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 that begins on or after the date on which the regulations are
published in final form.\117\
---------------------------------------------------------------------------

\117\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

The agencies note that comment on these matters has been solicited
in other sections of this SUPPLEMENTARY INFORMATION section, and that
the requirements of RCDRIA will be considered as part of the overall
rulemaking process. In addition, the agencies also invite any other
comments that further will inform the agencies' consideration of
RCDRIA.

X. Paperwork Reduction Act

Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and the respondent is not required to respond to, an information
collection unless it displays a currently-valid Office of Management
and Budget (OMB) control number. The OMB control number for the Board
is 7100-0367 and will be extended, with revision. The information
collection requirements contained in this proposed rulemaking have been
submitted by the OCC and FDIC to OMB for review and approval under
section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section

[[Page 35165]]

1320.11 of the OMB's implementing regulations (5 CFR 1320). The OCC and
FDIC are seeking a new control number. The Board reviewed the proposed
rule under the authority delegated to the Board by OMB.
Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section of this document. A copy of
the comments may also be submitted to the OMB desk officer for the
agencies: by mail to U.S. Office of Management and Budget, 725 17th
Street NW., # 10235, Washington, DC 20503; by facsimile to (202) 395-
5806; or by email to: oira_submission@omb.eop.gov, Attention, Federal
Banking Agency Desk Officer.

Proposed Information Collection

Title of Information Collection: Net Stable Funding Ratio:
Liquidity Risk Measurement Standards and Disclosure Requirements
Frequency of Response: Quarterly, monthly, and event generated.
Affected Public: Businesses or other for-profit.
Respondents:
FDIC: Insured state nonmember banks and state savings associations,
insured state branches of foreign banks, and certain subsidiaries of
these entities.
OCC: National banks, Federal savings associations, or, pursuant to
12 CFR 5.34(e)(3), an operating subsidiary thereof.
Board: Insured state member banks, bank holding companies, and
savings and loan holding companies.
Abstract: The reporting requirements in the proposed rule are found
in Sec. __.110, the recordkeeping requirements are found in Sec. Sec.
__.108(b) and __.110(b), and the disclosure requirements are found in
Sec. Sec. __.130 and __.131. The disclosure requirements are only for
Board supervised entities.
Section __.110 would require a covered company to take certain
actions following any NSFR shortfall. A covered company would be
required to notify its appropriate Federal banking agency of the
shortfall no later than 10 business days (or such other period as the
appropriate Federal banking agency may otherwise require by written
notice) following the date that any event has occurred that would cause
or has caused the covered company's NSFR to be less than 1.0. It must
also submit to its appropriate Federal banking agency its plan for
remediation of its NSFR to at least 1.0, and submit at least monthly
reports on its progress to achieve compliance.
Section __.108(b) provides that if an institution includes an ASF
amount in excess of the RSF amount of the consolidated subsidiary, it
must implement and maintain written procedures to identify and monitor
applicable statutory, regulatory, contractual, supervisory, or other
restrictions on transferring assets from the consolidated subsidiaries.
These procedures must document which types of transactions the
institution could use to transfer assets from a consolidated subsidiary
to the institution and how these types of transactions comply with
applicable statutory, regulatory, contractual, supervisory, or other
restrictions. Section __.110(b) requires preparation of a plan for
remediation to achieve an NSFR of at least equal to 1.0, as required
under Sec. __.100.
Section __.130 requires that a depository institution holding
company subject to the proposed NSFR or modified NSFR requirements
publicly disclose its NSFR calculated on the last business day of each
calendar quarter, in a direct and prominent manner on its public
internet site or in its public financial or other public regulatory
reports. These disclosures must remain publicly available for at least
five years after the date of disclosure. Section __.131 specifies the
quantitative and qualitative disclosures required and provides the
disclosure template to be used.

PRA Burden Estimates

Estimated average hour per response:
Reporting Burden:
Sec. __.110(a)--0.25 hours.
Sec. __.110(b)--0.50 hours.
Recordkeeping Burden:
Sec. __.108(b)--20 hours.
Sec. __.110(b)--100 hours.
Disclosure Burden (Board only):
Sec. Sec. __.130 and __.131--24 hours.
OCC
Number of Respondents: 17 (17 for reporting requirements and Sec.
__.40(b) and Sec. __.110(b) recordkeeping requirements; 17 for Sec.
__.22(a)(2), Sec. __.22(a)(5), and Sec. __.108(b) recordkeeping
requirements).
Total Estimated Annual Burden: 2,112 hours.

Board

Number of Respondents: 39 (3 for reporting requirements and Sec.
__.40(b) and Sec. __.110(b) recordkeeping requirements; 39 for Sec.
__.22(a)(2), Sec. __.22(a)(5), and Sec. __.108(b) recordkeeping
requirements; 35 for disclosure requirements).
Current Total Estimated Annual Burden: 1,153 hours.
Proposed Total Estimated Annual Burden: 4,453 hours.
FDIC
Number of Respondents: 1 (1 for reporting requirements and Sec.
__.40(b) and Sec. __.110(b) recordkeeping requirements; 1 for Sec.
__.22(a)(2), Sec. __.22(a)(5), and Sec. __.108(b) recordkeeping
requirements).
Total Estimated Annual Burden: 124.25 hours.

XI. OCC Unfunded Mandates Reform Act of 1995 Determination

The OCC has analyzed the proposed rule under the factors in the
Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532). Under this
analysis, the OCC considered whether the proposed rule includes a
Federal mandate that may result in the expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted annually for inflation).
The OCC has determined this proposed rule is likely to result in
the expenditure by the private sector of $100 million or more in any
one year (adjusted annually for inflation). The OCC has prepared a
budgetary impact analysis and identified and considered alternative
approaches. When the proposed rule is published in the Federal
Register, the full text of the OCC's analysis will be available at:
https://www.regulations.gov, Docket ID OCC-2014-0029.

[[Page 35166]]

Text of Common Rule

(All agencies)

PART [INSERT PART]--LIQUIDITY RISK MEASUREMENT, STANDARDS, AND
MONITORING

Subparts H, I, and J--Reserved

Subpart K--Net Stable Funding Ratio

Sec. __.100 Net stable funding ratio.

(a) Minimum net stable funding ratio requirement. Beginning January
1, 2018, a [BANK] must maintain a net stable funding ratio that is
equal to or greater than 1.0 on an ongoing basis in accordance with
this subpart.
(b) Calculation of the net stable funding ratio. For purposes of
this part, a [BANK]'s net stable funding ratio equals:
(1) The [BANK]'s ASF amount, calculated pursuant to Sec. __.103 of
this part, as of the calculation date; divided by
(2) The [BANK]'s RSF amount, calculated pursuant to Sec. __.105 of
this part, as of the calculation date.

Sec. __.101 Determining maturity.

For purposes of calculating its net stable funding ratio, including
its ASF amount and RSF amount, under subparts K through N, a [BANK]
shall assume each of the following:
(a) With respect to any NSFR liability, the NSFR liability matures
according to Sec. __.31(a)(1) of this part without regard to whether
the NSFR liability is subject to Sec. __.32 of this part;
(b) With respect to an asset, the asset matures according to Sec.
__.31(a)(2) of this part without regard to whether the asset is subject
to Sec. __.33 of this part;
(c) With respect to an NSFR liability or asset that is perpetual,
the NSFR liability or asset matures one year or more after the
calculation date;
(d) With respect to an NSFR liability or asset that has an open
maturity, the NSFR liability or asset matures on the first calendar day
after the calculation date, except that in the case of a deferred tax
liability, the NSFR liability matures on the first calendar day after
the calculation date on which the deferred tax liability could be
realized; and
(e) With respect to any principal payment of an NSFR liability or
asset, such as an amortizing loan, that is due prior to the maturity of
the NSFR liability or asset, the payment matures on the date on which
it is contractually due.

Sec. __.102 Rules of construction.

(a) Balance-sheet metric. Unless otherwise provided in this
subpart, an NSFR regulatory capital element, NSFR liability, or asset
that is not included on a [BANK]'s balance sheet is not assigned an RSF
factor or ASF factor, as applicable; and an NSFR regulatory capital
element, NSFR liability, or asset that is included on a [BANK]'s
balance sheet is assigned an RSF factor or ASF factor, as applicable.
(b) Netting of certain transactions. Where a [BANK] has secured
lending transactions, secured funding transactions, or asset exchanges
with the same counterparty and has offset the gross value of
receivables due from the counterparty under the transactions by the
gross value of payables under the transactions due to the counterparty,
the receivables or payables associated with the offsetting transactions
that are not included on the [BANK]'s balance sheet are treated as if
they were included on the [BANK]'s balance sheet with carrying values,
unless the criteria in [Sec. __.10(c)(4)(ii)(E)(1) through (3) of the
AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE] are met.
(c) Treatment of Securities Received in an Asset Exchange by a
Securities Lender. Where a [BANK] receives a security in an asset
exchange, acts as a securities lender, includes the carrying value of
the security on its balance sheet, and has not rehypothecated the
security received:
(1) The security received by the [BANK] is not assigned an RSF
factor; and
(2) The obligation to return the security received by the [BANK] is
not assigned an ASF factor.

Sec. __.103 Calculation of available stable funding amount.

A [BANK]'s ASF amount equals the sum of the carrying values of the
[BANK]'s NSFR regulatory capital elements and NSFR liabilities, in each
case multiplied by the ASF factor applicable in Sec. __.104 or Sec.
__.107(c) and consolidated in accordance with Sec. __.108.

Sec. __.104 ASF factors.

(a) NSFR regulatory capital elements and NSFR liabilities assigned
a 100 percent ASF factor. An NSFR regulatory capital element or NSFR
liability of a [BANK] is assigned a 100 percent ASF factor if it is one
of the following:
(1) An NSFR regulatory capital element; or
(2) An NSFR liability that has a maturity of one year or more from
the calculation date, is not described in paragraph (e)(3) of this
section, and is not a retail deposit or brokered deposit provided by a
retail customer or counterparty.
(b) NSFR liabilities assigned a 95 percent ASF factor. An NSFR
liability of a [BANK] is assigned a 95 percent ASF factor if it is a
stable retail deposit (regardless of maturity or collateralization)
held at the [BANK].
(c) NSFR liabilities assigned a 90 percent ASF factor. An NSFR
liability of a [BANK] is assigned a 90 percent ASF factor if it is
funding provided by a retail customer or counterparty that is:
(1) A retail deposit (regardless of maturity or collateralization)
other than a stable retail deposit or brokered deposit;
(2) A reciprocal brokered deposit where the entire amount is
covered by deposit insurance;
(3) A brokered sweep deposit that is deposited in accordance with a
contract between the retail customer or counterparty and the [BANK], a
controlled subsidiary of the [BANK], or a company that is a controlled
subsidiary of the same top-tier company of which the [BANK] is a
controlled subsidiary, where the entire amount of the deposit is
covered by deposit insurance; or
(4) A brokered deposit that is not a reciprocal brokered deposit or
a brokered sweep deposit, that is not held in a transactional account,
and that matures one year or more from the calculation date.
(d) NSFR liabilities assigned a 50 percent ASF factor. An NSFR
liability of a [BANK] is assigned a 50 percent ASF factor if it is one
of the following:
(1) Unsecured wholesale funding that:
(i) Is not provided by a financial sector entity, a consolidated
subsidiary of a financial sector entity, or a central bank;
(ii) Matures less than one year from the calculation date; and
(iii) Is not a security issued by the [BANK] or an operational
deposit placed at the [BANK];
(2) A secured funding transaction with the following
characteristics:
(i) The counterparty is not a financial sector entity, a
consolidated subsidiary of a financial sector entity, or a central
bank;
(ii) The secured funding transaction matures less than one year
from the calculation date; and
(iii) The secured funding transaction is not a collateralized
deposit that is an operational deposit placed at the [BANK];
(3) Unsecured wholesale funding that:
(i) Is provided by a financial sector entity, a consolidated
subsidiary of a financial sector entity, or a central bank;
(ii) Matures six months or more, but less than one year, from the
calculation date; and

[[Page 35167]]

(iii) Is not a security issued by the [BANK] or an operational
deposit;
(4) A secured funding transaction with the following
characteristics:
(i) The counterparty is a financial sector entity, a consolidated
subsidiary of a financial sector entity, or a central bank;
(ii) The secured funding transaction matures six months or more,
but less than one year, from the calculation date; and
(iii) The secured funding transaction is not a collateralized
deposit that is an operational deposit;
(5) A security issued by the [BANK] that matures six months or
more, but less than one year, from the calculation date;
(6) An operational deposit placed at the [BANK];
(7) A brokered deposit provided by a retail customer or
counterparty that is not described in paragraphs (c) or (e)(2) of this
section; or
(8) Any other NSFR liability that matures six months or more, but
less than one year, from the calculation date and is not described in
paragraphs (a) through (c), (d)(1) through (d)(7), or (e)(3) of this
section.
(e) NSFR liabilities assigned a zero percent ASF factor. An NSFR
liability of a [BANK] is assigned a zero percent ASF factor if it is
one of the following:
(1) A trade date payable that results from a purchase by the [BANK]
of a financial instrument, foreign currency, or commodity that is
contractually required to settle within the lesser of the market
standard settlement period for the particular transaction and five
business days from the date of the sale;
(2) A brokered deposit provided by a retail customer or
counterparty that is not a reciprocal brokered deposit or brokered
sweep deposit, is not held in a transactional account, and matures less
than six months from the calculation date;
(3) An NSFR liability owed to a retail customer or counterparty
that is not a deposit and is not a security issued by the [BANK];
(4) A security issued by the [BANK] that matures less than six
months from the calculation date; or
(5) An NSFR liability with the following characteristics:
(i) The counterparty is a financial sector entity, a consolidated
subsidiary, or a central bank;
(ii) The NSFR liability matures less than six months from the
calculation date or has an open maturity; and
(iii) The NSFR liability is not a security issued by the [BANK] or
an operational deposit placed at the [BANK]; or
(6) Any other NSFR liability that matures less than six months from
the calculation date and is not described in paragraphs (a) through (d)
or (e)(1) through (5) of this section.

Sec. __.105 Calculation of required stable funding amount.

A [BANK]'s RSF amount equals the sum of:
(a) The carrying values of a [BANK]'s assets (other than amounts
included in the calculation of the derivatives RSF amount pursuant to
Sec. __.107(b)) and the undrawn amounts of a [BANK]'s credit and
liquidity facilities, in each case multiplied by the RSF factors
applicable in Sec. __.106; and
(b) The [BANK]'s derivatives RSF amount calculated pursuant to
Sec. __.107(b).

Sec. __.106 RSF Factors.

(a) Unencumbered assets and commitments. All assets and undrawn
amounts under credit and liquidity facilities, unless otherwise
provided in Sec. __.107(b) relating to derivative transactions or
paragraphs (b) through (d) of this section, are assigned RSF factors as
follows:
(1) Unencumbered assets assigned a zero percent RSF factor. An
asset of a [BANK] is assigned a zero percent RSF factor if it is one of
the following:
(i) Currency and coin;
(ii) A cash item in the process of collection;
(iii) A Reserve Bank balance or other claim on a Reserve Bank that
matures less than six months from the calculation date;
(iv) A claim on a foreign central bank that matures less than six
months from the calculation date; or
(v) A trade date receivable due to the [BANK] resulting from the
[BANK]'s sale of a financial instrument, foreign currency, or commodity
that is required to settle within the lesser of the market standard
settlement period, without extension, for the particular transaction
and five business days from the date of the sale, and that has not
failed to settle within the required settlement period.
(2) Unencumbered assets and commitments assigned a 5 percent RSF
factor. An asset or undrawn amount under a credit or liquidity facility
of a [BANK] is assigned a 5 percent RSF factor if it is one of the
following:
(i) A level 1 liquid asset, other than a level 1 liquid asset
described in paragraph (a)(1) of this section; or
(ii) The undrawn amount of any committed credit facility or
committed liquidity facility extended by the [BANK]. For the purposes
of this paragraph (a)(2)(ii), the undrawn amount of a committed credit
facility or committed liquidity facility is the entire unused amount of
the facility that could be drawn upon within one year of the
calculation date under the governing agreement.
(3) Unencumbered assets assigned a 10 percent RSF factor. An asset
of a [BANK] is assigned a 10 percent RSF factor if it is a secured
lending transaction with the following characteristics:
(i) The secured lending transaction matures less than six months
from the calculation date;
(ii) The secured lending transaction is secured by level 1 liquid
assets;
(iii) The borrower is a financial sector entity or a consolidated
subsidiary thereof; and
(iv) The [BANK] retains the right to rehypothecate the collateral
provided by the counterparty for the duration of the secured lending
transaction.
(4) Unencumbered assets assigned a 15 percent RSF factor. An asset
of a [BANK] is assigned a 15 percent RSF factor if it is one of the
following:
(i) A level 2A liquid asset; or
(ii) A secured lending transaction or unsecured wholesale lending
with the following characteristics:
(A) The asset matures less than six months from the calculation
date;
(B) The borrower is a financial sector entity or a consolidated
subsidiary thereof; and
(C) The asset is not described in paragraph (a)(3) of this section
and is not an operational deposit described in paragraph (a)(5)(iii) of
this section.
(5) Unencumbered assets assigned a 50 percent RSF factor. An asset
of a [BANK] is assigned a 50 percent RSF factor if it is one of the
following:
(i) A level 2B liquid asset;
(ii) A secured lending transaction or unsecured wholesale lending
with the following characteristics:
(A) The asset matures six months or more, but less than one year,
from the calculation date;
(B) The borrower is a financial sector entity, a consolidated
subsidiary thereof, or a central bank; and
(C) The asset is not an operational deposit described in paragraph
(a)(5)(iii) of this section;
(iii) An operational deposit placed by the [BANK] at a financial
sector entity or a consolidated subsidiary thereof;
(iv) A general obligation security issued by, or guaranteed as to
the timely payment of principal and interest by, a public sector entity
that is not described in paragraph (a)(5)(i); or
(v) An asset that is not described in paragraphs (a)(1) through
(a)(4) or (a)(5)(i) through (a)(5)(iv) of this section

[[Page 35168]]

that matures less than one year from the calculation date, including:
(A) A secured lending transaction or unsecured wholesale lending
where the borrower is a wholesale customer or counterparty that is not
a financial sector entity, a consolidated subsidiary thereof, or a
central bank; or
(B) Lending to a retail customer or counterparty.
(6) Unencumbered assets assigned a 65 percent RSF factor. An asset
of a [BANK] is assigned a 65 percent RSF factor if it is one of the
following:
(i) A retail mortgage that matures one year or more from the
calculation date and is assigned a risk weight of no greater than 50
percent under subpart D of [AGENCY CAPITAL REGULATION]; or
(ii) A secured lending transaction, unsecured wholesale lending, or
lending to a retail customer or counterparty with the following
characteristics:
(A) The asset is not described in paragraphs (a)(1) through
(a)(6)(i) of this section;
(B) The borrower is not a financial sector entity or a consolidated
subsidiary thereof;
(C) The asset matures one year or more from the calculation date;
and
(D) The asset is assigned a risk weight of no greater than 20
percent under subpart D of [AGENCY CAPITAL REGULATION].
(7) Unencumbered assets assigned an 85 percent RSF factor. An asset
of a [BANK] is assigned an 85 percent RSF factor if it is one of the
following:
(i) A retail mortgage that matures one year or more from the
calculation date and is assigned a risk weight of greater than 50
percent under subpart D of [AGENCY CAPITAL REGULATION]; or
(ii) A secured lending transaction, unsecured wholesale lending, or
lending to a retail customer or counterparty with the following
characteristics:
(A) The asset is not described in paragraphs (a)(1) through
(a)(7)(i) of this section;
(B) The borrower is not a financial sector entity or a consolidated
subsidiary thereof;
(C) The asset matures one year or more from the calculation date;
and
(D) The asset is assigned a risk weight of greater than 20 percent
under subpart D of [AGENCY CAPITAL REGULATION];
(iii) A publicly traded common equity share that is not HQLA;
(iv) A security, other than a common equity share, that matures one
year or more from the calculation date and is not HQLA; and
(v) A commodity for which derivative transactions are traded on a
U.S. board of trade or trading facility designated as a contract market
under sections 5 and 6 of the Commodity Exchange Act (7 U.S.C. 7 and 8)
or on a U.S. swap execution facility registered under section 5h of the
Commodity Exchange Act (7 U.S.C. 7b-3).
(8) Unencumbered assets assigned a 100 percent RSF factor. An asset
of a [BANK] is assigned a 100 percent RSF factor if it is not described
in paragraphs (a)(1) through (a)(7) of this section, including a
secured lending transaction or unsecured wholesale lending where the
borrower is a financial sector entity or a consolidated subsidiary
thereof and that matures one year or more from the calculation date.
(b) Nonperforming assets. An RSF factor of 100 percent is assigned
to any asset that is past due by more than 90 days or nonaccrual.
(c) Encumbered assets. An encumbered asset, unless otherwise
provided in Sec. __.107(b) relating to derivative transactions, is
assigned an RSF factor as follows:
(1)(i) Encumbered assets with less than six months remaining in the
encumbrance period. For an encumbered asset with less than six months
remaining in the encumbrance period, the same RSF factor is assigned to
the asset as would be assigned if the asset were not encumbered.
(ii) Encumbered assets with six months or more, but less than one
year, remaining in the encumbrance period. For an encumbered asset with
six months or more, but less than one year, remaining in the
encumbrance period:
(A) If the asset would be assigned an RSF factor of 50 percent or
less under paragraphs (a)(1) through (a)(5) of this section if the
asset were not encumbered, an RSF factor of 50 percent is assigned to
the asset.
(B) If the asset would be assigned an RSF factor of greater than 50
percent under paragraphs (a)(6) through (a)(8) of this section if the
asset were not encumbered, the same RSF factor is assigned to the asset
as would be assigned if it were not encumbered.
(iii) Encumbered assets with one year or more remaining in the
encumbrance period. For an encumbered asset with one year or more
remaining in the encumbrance period, an RSF factor of 100 percent is
assigned to the asset.
(2) If an asset is encumbered for an encumbrance period longer than
the asset's maturity, the asset is assigned an RSF factor under
paragraph (c)(1) of this section based on the length of the encumbrance
period.
(3) Segregated account assets. An asset held in a segregated
account maintained pursuant to statutory or regulatory requirements for
the protection of customer assets is not considered encumbered for
purposes of this paragraph solely because such asset is held in the
segregated account.
(d) Off-balance sheet rehypothecated assets. For an NSFR liability
of a [BANK] that is secured by an off-balance sheet asset or results
from the [BANK] selling an off-balance sheet asset (for instance, in
the case of a short sale):
(1) If the [BANK] received the off-balance sheet asset under a
lending transaction, an RSF factor is assigned to the lending
transaction as if it were encumbered for the longer of (A) the
remaining maturity of the NSFR liability and (B) any other encumbrance
period applicable to the lending transaction;
(2) If the [BANK] received the off-balance asset under an asset
exchange, an RSF factor is assigned to the asset provided by the [BANK]
in the asset exchange as if the provided asset were encumbered for the
longer of (A) the remaining maturity of the NSFR liability and (B) any
other encumbrance period applicable to the provided asset; or
(3) If the [BANK] did not receive the off-balance sheet asset under
a lending transaction or asset exchange, the off-balance sheet asset is
assigned an RSF factor as if it were included on the balance sheet of
the [BANK] and encumbered for the longer of (A) the remaining maturity
of the NSFR liability and (B) any other encumbrance period applicable
to the off-balance sheet asset.

Sec. __.107 Calculation of NSFR derivatives amounts.

(a) General requirement. A [BANK] must calculate its derivatives
RSF amount and certain components of its ASF amount relating to the
[BANK]'s derivative transactions (which includes cleared derivative
transactions of a customer with respect to which the [BANK] is acting
as agent for the customer that are included on the [BANK]'s balance
sheet under GAAP) in accordance with this section.
(b) Calculation of required stable funding amount relating to
derivative transactions. A [BANK]'s derivatives RSF amount equals the
sum of:
(1) Current derivative transaction values. The [BANK]'s NSFR
derivatives asset amount, as calculated under paragraph (d)(1) of this
section, multiplied by an RSF factor of 100 percent;
(2) Variation margin provided. The carrying value of variation
margin provided by the [BANK] under each derivative transaction not
subject to a

[[Page 35169]]

qualifying master netting agreement and each QMNA netting set, to the
extent the variation margin reduces the [BANK]'s derivatives liability
value under the derivative transaction or QMNA netting set, as
calculated under paragraph (f)(2) of this section, multiplied by an RSF
factor of zero percent;
(3) Excess variation margin provided. The carrying value of
variation margin provided by the [BANK] under each derivative
transaction not subject to a qualifying master netting agreement and
each QMNA netting set in excess of the amount described in section
(b)(2) for each derivative transaction or QMNA netting set, multiplied
by the RSF factor assigned to each asset comprising the variation
margin pursuant to Sec. __.106;
(4) Variation margin received. The carrying value of variation
margin received by the [BANK], multiplied by the RSF factor assigned to
each asset comprising the variation margin pursuant to Sec. __.106;
(5) Potential valuation changes.
(i) An amount equal to 20 percent of the sum of the gross
derivative values of the [BANK] that are liabilities, as calculated
under paragraph (ii), for each of the [BANK]'s derivative transactions
not subject to a qualifying master netting agreement and each of its
QMNA netting sets, multiplied by an RSF factor of 100 percent;
(ii) For purposes of paragraph (i), the gross derivative value of a
derivative transaction not subject to a qualifying master netting
agreement or of a QMNA netting set is equal to the value to the [BANK],
calculated as if no variation margin had been exchanged and no
settlement payments had been made based on changes in the value of the
derivative transaction or QMNA netting set.
(6) Contributions to central counterparty mutualized loss sharing
arrangements. The fair value of a [BANK]'s contribution to a central
counterparty's mutualized loss sharing arrangement (regardless of
whether the contribution is included on the [BANK]'s balance sheet),
multiplied by an RSF factor of 85 percent; and
(7) Initial margin provided. The fair value of initial margin
provided by the [BANK] for derivative transactions (regardless of
whether the initial margin is included on the [BANK]'s balance sheet),
which does not include initial margin provided by the [BANK] for
cleared derivative transactions with respect to which the [BANK] is
acting as agent for a customer and the [BANK] does not guarantee the
obligations of the customer's counterparty to the customer under the
derivative transaction (such initial margin would be assigned an RSF
factor pursuant to Sec. __.106 to the extent the initial margin is
included on the [BANK]'s balance sheet), multiplied by an RSF factor
equal to the higher of 85 percent or the RSF factor assigned to each
asset comprising the initial margin pursuant to Sec. __.106.
(c) Calculation of available stable funding amount relating to
derivative transactions. The following amounts of a [BANK] are assigned
a zero percent ASF factor:
(1) The [BANK]'s NSFR derivatives liability amount, as calculated
under paragraph (d)(2) of this section; and
(2) The carrying value of NSFR liabilities in the form of an
obligation to return initial margin or variation margin received by the
[BANK].
(d) Calculation of NSFR derivatives asset or liability amount.
(1) A [BANK]'s NSFR derivatives asset amount is the greater of:
(i) Zero; and
(ii) The [BANK]'s total derivatives asset amount, as calculated
under paragraph (e)(1) of this section, less the [BANK]'s total
derivatives liability amount, as calculated under paragraph (e)(2) of
this section.
(2) A [BANK]'s NSFR derivatives liability amount is the greater of:
(i) Zero; and
(ii) The [BANK]'s total derivatives liability amount, as calculated
under paragraph (e)(2) of this section, less the [BANK]'s total
derivatives asset amount, as calculated under paragraph (e)(1) of this
section.
(e) Calculation of total derivatives asset and liability amounts.
(1) A [BANK]'s total derivatives asset amount is the sum of the
[BANK]'s derivatives asset values, as calculated under paragraph (f)(1)
of this section, for each derivative transaction not subject to a
qualifying master netting agreement and each QMNA netting set.
(2) A [BANK]'s total derivatives liability amount is the sum of the
[BANK]'s derivatives liability values, as calculated under paragraph
(f)(2) of this section, for each derivative transaction not subject to
a qualifying master netting agreement and each QMNA netting set.
(f) Calculation of derivatives asset and liability values. For each
derivative transaction not subject to a qualifying master netting
agreement and each QMNA netting set:
(1) The derivatives asset value is equal to the asset value to the
[BANK], after taking into account any variation margin received by the
[BANK] that meets the conditions of [Sec. __.10(c)(4)(ii)(C)(1)
through (7) of the AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE]; or
(2) The derivatives liability value is equal to the liability value
to the [BANK], after taking into account any variation margin provided
by the [BANK].

Sec. __.108 Rules for consolidation.

(a) Consolidated subsidiary available stable funding amount. For
available stable funding of a legal entity that is a consolidated
subsidiary of a [BANK], including a consolidated subsidiary organized
under the laws of a foreign jurisdiction, the [BANK] may include the
available stable funding of the consolidated subsidiary in its ASF
amount up to:
(1) The RSF amount of the consolidated subsidiary, as calculated by
the [BANK] for the [BANK]'s net stable funding ratio under this part;
plus
(2) Any amount in excess of the RSF amount of the consolidated
subsidiary, as calculated by the [BANK] for the [BANK]'s net stable
funding ratio under this part, to the extent the consolidated
subsidiary may transfer assets to the top-tier [BANK], taking into
account statutory, regulatory, contractual, or supervisory
restrictions, such as sections 23A and 23B of the Federal Reserve Act
(12 U.S.C. 371c and 12 U.S.C. 371c-1) and Regulation W (12 CFR part
223).
(b) Required consolidation procedures. To the extent a [BANK]
includes an ASF amount in excess of the RSF amount of the consolidated
subsidiary, the [BANK] must implement and maintain written procedures
to identify and monitor applicable statutory, regulatory, contractual,
supervisory, or other restrictions on transferring assets from any of
its consolidated subsidiaries. These procedures must document which
types of transactions the [BANK] could use to transfer assets from a
consolidated subsidiary to the [BANK] and how these types of
transactions comply with applicable statutory, regulatory, contractual,
supervisory, or other restrictions.

Subpart L--Net Stable Funding Shortfall

Sec. __.110 NSFR shortfall: supervisory framework.

(a) Notification requirements. A [BANK] must notify the [AGENCY] no
later than 10 business days, or such other period as the [AGENCY] may
otherwise require by written notice, following the date that any event
has occurred that would cause or has caused the [BANK]'s net stable
funding ratio to

[[Page 35170]]

be less than 1.0 as required under Sec. __.100.
(b) Liquidity Plan. (1) A [BANK] must within 10 business days, or
such other period as the [AGENCY] may otherwise require by written
notice, provide to the [AGENCY] a plan for achieving a net stable
funding ratio equal to or greater than 1.0 as required under Sec.
__.100 if:
(i) The [BANK] has or should have provided notice, pursuant to
Sec. __.110(a), that the [BANK]'s net stable funding ratio is, or will
become, less than 1.0 as required under Sec. __.100;
(ii) The [BANK]'s reports or disclosures to the [AGENCY] indicate
that the [BANK]'s net stable funding ratio is less than 1.0 as required
under Sec. __.100; or
(iii) The [AGENCY] notifies the [BANK] in writing that a plan is
required and provides a reason for requiring such a plan.
(2) The plan must include, as applicable:
(i) An assessment of the [BANK]'s liquidity profile;
(ii) The actions the [BANK] has taken and will take to achieve a
net stable funding ratio equal to or greater than 1.0 as required under
Sec. __.100, including:
(A) A plan for adjusting the [BANK]'s liquidity profile;
(B) A plan for remediating any operational or management issues
that contributed to noncompliance with subpart K of this part; and
(iii) An estimated time frame for achieving full compliance with
Sec. __.100.
(3) The [BANK] must report to the [AGENCY] at least monthly, or
such other frequency as required by the [AGENCY], on progress to
achieve full compliance with Sec. __. 100.
(c) Supervisory and enforcement actions. The [AGENCY] may, at its
discretion, take additional supervisory or enforcement actions to
address noncompliance with the minimum net stable funding ratio and
other requirements of subparts K through N of this part (see also Sec.
__.2(c)).

Subpart M--Reserved

Subpart N--NSFR Public Disclosure

Sec. __.130 Timing, method, and retention of disclosures.

(a) Applicability. A covered depository institution holding company
that is subject to the minimum stable funding requirement in Sec.
__.100 of this part must publicly disclose the information required
under this subpart.
(b) Timing of disclosure. A covered depository institution holding
company must provide timely public disclosures each calendar quarter of
all of the information required under this subpart, beginning when the
covered depository institution holding company is first required to
comply with the requirements of this part pursuant to Sec. __.100 and
continuing thereafter.
(c) Disclosure method. A covered depository institution holding
company must publicly disclose, in a direct and prominent manner, the
information required under this subpart on its public internet site or
in its public financial or other public regulatory reports.
(d) Availability. The disclosures provided under this subpart must
remain publicly available for at least five years after the date of
disclosure.

Sec. __.131 Disclosure requirements.

(a) General. A covered depository institution holding company must
publicly disclose the information required by this subpart in the
format provided in Table 1 below.
(b) Calculation of disclosed amounts.
(1) General.
(i) A covered depository institution holding company must calculate
its disclosed amounts:
(A) On a consolidated basis and presented in millions of U.S.
dollars or as a decimal, as applicable; and
(B) As of the last business day of each calendar quarter.
(ii) A covered depository institution holding company must include
the as-of date for the disclosed amounts.
(2) Calculation of unweighted amounts.
(i) For each component of a covered depository institution holding
company's ASF amount calculation, other than the NSFR derivatives
liability amount and total derivatives liability amount, the
``unweighted amount'' means the sum of the carrying values of the
covered depository institution holding company's NSFR regulatory
capital elements and NSFR liabilities, as applicable, determined before
applying the appropriate ASF factors, and subdivided into the following
maturity categories, as applicable: Open maturity; less than six months
after the calculation date; six months or more, but less than one year,
after the calculation date; one year or more after the calculation
date; and perpetual.
(ii) For each component of a covered depository institution holding
company's RSF amount calculation, other than amounts included in
paragraphs (c)(2)(xvi) through (xix) of this section, the ``unweighted
amount'' means the sum of the carrying values of the covered depository
institution holding company's assets and undrawn amounts of committed
credit facilities and committed liquidity facilities extended by the
covered depository institution holding company, as applicable,
determined before applying the appropriate RSF factors, and subdivided
by maturity into the following maturity categories, as applicable: Open
maturity; less than six months after the calculation date; six months
or more, but less than one year, after the calculation date; one year
or more after the calculation date; and perpetual.
(3) Calculation of weighted amounts.
(i) For each component of a covered depository institution holding
company's ASF amount calculation, other than the NSFR derivatives
liability amount and total derivatives liability amount, the ``weighted
amount'' means the sum of the carrying values of the covered depository
institution holding company's NSFR regulatory capital elements and NSFR
liabilities, as applicable, multiplied by the appropriate ASF factors.
(ii) For each component of a covered depository institution holding
company's RSF amount calculation, other than amounts included in
paragraphs (c)(2)(xvi) through (xix) of this section, the ``weighted
amount'' means the sum of the carrying values of the covered depository
institution holding company's assets and undrawn amounts of committed
credit facilities and committed liquidity facilities extended by the
covered depository institution holding company, multiplied by the
appropriate RSF factors.
BILLING CODE P

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BILLING CODE C
(c) Quantitative disclosures. A covered depository institution
holding company must disclose all of the information required under
Table 1 to Sec. __.131(a)--Disclosure Template, including:
(1) Disclosures of ASF amount calculations:
(i) The sum of the weighted amounts and, for each applicable
maturity category, the sum of the unweighted amounts of paragraphs
(c)(1)(ii) and (iii) of this section (row 1);
(ii) The weighted amount and, for each applicable maturity
category, the unweighted amount of NSFR regulatory capital elements
described in Sec. __104(a)(1) (row 2);
(iii) The weighted amount and, for each applicable maturity
category, the unweighted amount of securities described in Sec. Sec.
__.104(a)(2), __.104(d)(5), and __.104(e)(4) (row 3);
(iv) The sum of the weighted amounts and, for each applicable
maturity category, the sum of the unweighted amounts of paragraphs
(c)(1)(v) through (viii) of this section (row 4);
(v) The weighted amount and, for each applicable maturity category,
the unweighted amount of stable retail deposits held at the covered
depository institution holding company described in Sec. __.104(b)
(row 5);
(vi) The weighted amount and, for each applicable maturity
category, the unweighted amount of retail deposits other than stable
retail deposits or brokered deposits, described in Sec. __.104(c)(1)
(row 6);
(vii) The weighted amount and, for each applicable maturity
category, the unweighted amount of brokered deposits provided by a
retail customer or counterparty described in Sec. Sec. __.104(c)(2),
__.104(c)(3), __.104(c)(4), __.104(d)(7), and __.104(e)(2) (row 7);
(viii) The weighted amount and, for each applicable maturity
category, the unweighted amount of other funding provided by a retail
customer or counterparty described in Sec. __.104(e)(3) (row 8);
(ix) The sum of the weighted amounts and, for each applicable
maturity category, the sum of the unweighted amounts of paragraphs
(c)(1)(x) and (xi) of this section (row 9);
(x) The weighted amount and, for each applicable maturity category,
the unweighted amount of operational deposits placed at the covered
depository institution holding company described in Sec. __.104(d)(6)
(row 10);
(xi) The weighted amount and, for each applicable maturity
category, the unweighted amount of other wholesale funding described in
Sec. Sec. __.104(a)(2), __.104(d)(1), __.104(d)(2), __.104(d)(3),
__.104(d)(4), __.104(d)(8), and __.104(e)(5) (row 11);
(xii) In the ``unweighted'' cell, the NSFR derivatives liability
amount described in Sec. __.107(d)(2) (row 12);
(xiii) In the ``unweighted'' cell, the total derivatives liability
amount described in Sec. __.107(e)(2) (row 13);
(xiv) The weighted amount and, for each applicable maturity
category, the unweighted amount of all other liabilities not included
in amounts disclosed under paragraphs (c)(1)(i) through (xiii) of this
section (row 14);
(xv) The ASF amount described in Sec. __.103 (row 15);
(2) Disclosures of RSF amount calculations, including to reflect
any encumbrances under Sec. Sec. __.106(c) and __.106(d):
(i) The sum of the weighted amounts and the sum of the unweighted
amounts of paragraphs (c)(2)(ii) through (iv) of this section (row 16);
(ii) The weighted amount and, for each applicable maturity
category, the unweighted amount of level 1 liquid assets described in
Sec. Sec. __.106(a)(1) and __.106(a)(2)(i) (row 17);
(iii) The weighted amount and, for each applicable maturity
category, the unweighted amount of level 2A liquid assets described in
Sec. __.106(a)(4)(i) (row 18);
(iv) The weighted amount and, for each applicable maturity
category, the unweighted amount of level 2B liquid assets described in
Sec. __.106(a)(5)(i) (row 19);
(v) The weighted amount and, for each applicable maturity category,
the unweighted amount of assets described in Sec. __.106(a)(1), other
than level 1 liquid assets included in amounts disclosed under
paragraph (c)(2)(ii) of this section (row 20);
(vi) The weighted amount and, for each applicable maturity
category, the unweighted amount of operational

[[Page 35174]]

deposits placed at financial sector entities or consolidated
subsidiaries thereof described in Sec. __.106(a)(5)(iii) (row 21);
(vii) The sum of the weighted amounts and, for each applicable
maturity category, the sum of the unweighted amounts of paragraphs
(c)(2)(viii), (ix), (x), (xii), and (xiv) of this section (row 22);
(viii) The weighted amount and, for each applicable maturity
category, the unweighted amount of secured lending transactions where
the borrower is a financial sector entity or a consolidated subsidiary
of a financial sector entity and the secured lending transaction is
secured by level 1 liquid assets, described in Sec. Sec. __.106(a)(3),
__.106(a)(4)(ii), __.106(a)(5)(ii), and __.106(a)(8) (row 23);
(ix) The weighted amount and, for each applicable maturity
category, the unweighted amount of secured lending transactions that
are secured by assets other than level 1 liquid assets and unsecured
wholesale lending, in each case where the borrower is a financial
sector entity or a consolidated subsidiary of a financial sector
entity, described in Sec. Sec. __.106(a)(4)(ii), __.106(a)(5)(ii), and
__.106(a)(8) (row 24);
(x) The weighted amount and, for each applicable maturity category,
the unweighted amount of secured lending transactions and unsecured
wholesale lending to wholesale customers or counterparties that are not
financial sector entities or consolidated subsidiaries thereof, and
lending to retail customers and counterparties other than retail
mortgages, described in Sec. Sec. __.106(a)(5)(ii), __.106(a)(5)(v),
__.106(a)(6)(ii), and __.106(a)(7)(ii) (row 25);
(xi) The weighted amount and, for each applicable maturity
category, the unweighted amount of secured lending transactions,
unsecured wholesale lending, and lending to retail customers or
counterparties that are assigned a risk weight of no greater than 20
percent under subpart D of [AGENCY CAPITAL REGULATION] described in
Sec. Sec. __.106(a)(5)(ii), __.106(a)(5)(v), and __.106(a)(6)(ii) (row
26);
(xii) The weighted amount and, for each applicable maturity
category, the unweighted amount of retail mortgages described in
Sec. Sec. __.106(a)(5)(v), __.106(a)(6)(i), and __.106(a)(7)(i) (row
27);
(xiii) The weighted amount and, for each applicable maturity
category, the unweighted amount of retail mortgages assigned a risk
weight of no greater than 50 percent under subpart D of [AGENCY CAPITAL
REGULATION] described in Sec. Sec. __.106(a)(5)(v) and __.106(a)(6)(i)
(row 28);
(xiv) The weighted amount and, for each applicable maturity
category, the unweighted amount of publicly traded common equity shares
and other securities that are not HQLA and are not nonperforming assets
described in Sec. Sec. __.106(a)(5)(iv), __.106(a)(7)(iii), and
__.106(a)(7)(iv) (row 29);
(xv) The weighted amount and unweighted amount of commodities
described in Sec. Sec. __.106(a)(7)(v) and __.106(a)(8) (row 30);
(xvi) The unweighted amount and weighted amount of the sum of (A)
assets contributed by the covered depository institution holding
company to a central counterparty's mutualized loss-sharing arrangement
described in Sec. __.107(b)(6) (in which case the ``unweighted
amount'' shall equal the fair value and the ``weighted amount'' shall
equal the unweighted amount multiplied by 85 percent) and (B) assets
provided as initial margin by the covered depository institution
holding company for derivative transactions described in Sec.
__.107(b)(7) (in which case the ``unweighted amount'' shall equal the
fair value and the ``weighted amount'' shall equal the unweighted
amount multiplied by the higher of 85 percent or the RSF factor
assigned to the asset pursuant to Sec. __.106) (row 31);
(xvii) In the ``unweighted'' cell, the covered depository
institution holding company's NSFR derivatives asset amount under Sec.
__.107(d)(1) and in the ``weighted'' cell, the covered depository
institution holding company's NSFR derivatives asset amount multiplied
by 100 percent (row 32);
(xviii) In the ``unweighted'' cell, the covered depository
institution holding company's total derivatives asset amount described
in Sec. __.107(e)(1) (row 33);
(xix) (A) In the ``unweighted'' cell, the sum of the gross
derivative liability values of the covered depository institution
holding company that are liabilities for each of its derivative
transactions not subject to a qualifying master netting agreement and
each of its QMNA netting sets, described in Sec. __.107(b)(5) and (B)
in the ``weighted'' cell, such sum multiplied by 20 percent, as
described in Sec. __.107(b)(5) (row 34);
(xx) The weighted amount and, for each applicable maturity
category, the unweighted amount of all other asset amounts not included
in amounts disclosed under paragraphs (c)(2)(i) through (xix) of this
section, including nonperforming assets (row 35);
(xxi) The weighted and unweighted amount of undrawn credit and
liquidity facilities described in Sec. __.106(a)(2)(ii) (row 36);
(xxii) The RSF amount described in Sec. __.105 (row 37);
(3) The net stable funding ratio under Sec. __.100(b) (row 38);
(d) Qualitative disclosures.
(1) A covered depository institution holding company must provide a
sufficient qualitative discussion to facilitate an understanding of the
covered depository institution holding company's net stable funding
ratio and its components.
(2) For purposes of paragraph (d)(1) of this section, a covered
depository institution holding company's qualitative discussion may
include, but need not be limited to, the following items, to the extent
they are significant to the covered depository institution holding
company's net stable funding ratio and facilitate an understanding of
the data provided:
(i) The main drivers of the net stable funding ratio;
(ii) Changes in the net stable funding ratio results over time and
the causes of such changes (for example, changes in strategies and
circumstances);
(iii) Concentrations of funding sources and changes in funding
structure;
(iv) Concentrations of available and required stable funding within
a covered company's corporate structure (for example, across legal
entities); or
(iv) Other sources of funding or other factors in the net stable
funding ratio calculation that the covered depository institution
holding company considers to be relevant to facilitate an understanding
of its liquidity profile.
[End of Proposed Common Rule Text]

List of Subjects

12 CFR Part 50

Administrative practice and procedure; Banks, banking; Liquidity;
Reporting and recordkeeping requirements; Savings associations.

12 CFR Part 249

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

12 CFR Part 329

Administrative practice and procedure; Banks, banking; Federal
Deposit Insurance Corporation, FDIC; Liquidity; Reporting and
recordkeeping requirements; Savings associations.

[[Page 35175]]

Adoption of the Common Rule Text

The proposed adoption of the common rules by the agencies, as
modified by agency-specific text, is set forth below:

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons set forth in the common preamble, the OCC proposes
to amend part 50 of chapter I of title 12 to add the text of the common
rule as set forth at the end of the SUPPLEMENTARY INFORMATION section
and is further amended as follows:

PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS

0
1. The authority citation for part 50 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 93a, 481, 1818, and 1462 et
seq.

0
2. Amend Sec. 50.1 by:
0
a. Revising paragraph (a) and (b)(1);
0
b. Redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4)
through (6) respectively and adding new paragraph (b)(3);
The additions and revisions read as follows:

Sec. 50.1 Purpose and applicability.

(a) Purpose. This part establishes a minimum liquidity standard and
a minimum stable funding standard for certain national banks and
Federal savings associations on a consolidated basis, as set forth
herein.
(b) Applicability. (1) A national bank or Federal savings
association is subject to the minimum liquidity standard and the
minimum stable funding standard, and other requirements of this part
if:
(i) The national bank or Federal savings association has total
consolidated assets equal to $250 billion or more, as reported on the
most recent year-end Consolidated Report of Condition and Income;
(ii) The national bank or Federal savings association has total
consolidated on-balance sheet foreign exposure at the most recent year
end equal to $10 billion or more (where total 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 products, calculated in accordance with
the Federal Financial Institutions Examination Council (FFIEC) 009
Country Exposure Report);
(iii) The national bank or Federal savings association is a
depository institution that has total consolidated assets equal to $10
billion or more, as reported on the most recent year-end Consolidated
Report of Condition and Income and is a consolidated subsidiary of one
of the following:
(A) A covered depository institution holding company that has total
assets equal to $250 billion or more, as reported on the most recent
year-end Consolidated Financial Statements for Holding Companies
reporting form (FR Y-9C), or, if the covered depository institution
holding company is not required to report on the FR Y-9C, its estimated
total consolidated assets as of the most recent year-end, calculated in
accordance with the instructions to the FR Y-9C;
(B) A depository institution that has total consolidated assets
equal to $250 billion or more, as reported on the most recent year-end
Consolidated Report of Condition and Income;
(C) A covered depository institution holding company or depository
institution that has total consolidated on-balance sheet foreign
exposure at the most recent year-end equal to $10 billion or more
(where total 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 Federal Financial
Institutions Examination Council (FFIEC) 009 Country Exposure Report);
or
(D) A covered nonbank company; or
(iv) The OCC has determined that application of this part is
appropriate in light of the national bank's or Federal savings
association's asset size, level of complexity, risk profile, scope of
operations, affiliation with foreign or domestic covered entities, or
risk to the financial system.
* * * * *
(3)(i) A national bank or Federal savings association that becomes
subject to the minimum stable funding standard and other requirements
of subparts K through N of this part under paragraphs (b)(1)(i) through
(iii) of this section after the effective date must comply with the
requirements of subparts K through N of this part beginning on April 1
of the year in which the national bank or Federal savings association
becomes subject to the minimum stable funding standard and the
requirements of subparts K through N of this part; and
(ii) A national bank or Federal savings association that becomes
subject to the minimum stable funding standard and other requirements
of subparts K through N of this part under paragraph (b)(1)(iv) of this
section after the effective date must comply with the requirements of
subparts K through N of this part on the date specified by the OCC.
* * * * *
0
3. Amend Sec. 50.2, by redesignating paragraph (b) as paragraph (c),
adding new paragraph (b), and revising newly-redesignated paragraph (c)
to read as follows:

Sec. 50.2 Reservation of authority.

* * * * *
(b) The OCC may require a national bank or Federal savings
association to hold an amount of available stable funding (ASF) greater
than otherwise required under this part, or to take any other measure
to improve the national bank's or Federal savings association's stable
funding, if the OCC determines that the national bank's or Federal
savings association's stable funding requirements as calculated under
this part are not commensurate with the national bank's or Federal
savings association's funding risks. In making determinations under
this section, the OCC will apply notice and response procedures as set
forth in 12 CFR 3.404.
(c) Nothing in this part limits the authority of the OCC under any
other provision of law or regulation to take supervisory or enforcement
action, including action to address unsafe or unsound practices or
conditions, deficient liquidity levels, deficient stable funding
levels, or violations of law.
0
4. Amend Sec. 50.3 by:
0
a. Revising the definition for ``Calculation date'';
0
b. Adding the definition ``Carrying value'';
0
c. Revising the definitions for ``Collateralized deposit'',
``Committed'' and ``Covered nonbank company'';
0
d. Adding the definitions for ``Encumbered'', ``NSFR liability'' and
``NSFR regulatory capital element'';
0
e. Revising the definition for ``Operational Deposit'';
0
f. Adding the definition for ``QMNA netting set'';
0
g. Revising the definitions for:Secured funding transaction'' and
``Secured lending transaction'';

[[Page 35176]]

0
h. Adding the definition for ``Unconditionally cancelable'';
0
i. Revising the definition for ``Unsecured wholesale funding''; and
0
j. Adding the definition for ``Unsecured wholesale lending''.
The additions and revisions read as follows:

Sec. 50.3 Definitions.

* * * * *
Calculation date means, for subparts B through J of this part, any
date on which a national bank or Federal savings association calculates
its liquidity coverage ratio under Sec. 50.10, and for subparts K
through N of this part, any date on which a national bank or Federal
savings association calculates its net stable funding ratio under Sec.
50.100.
Carrying value means, with respect to an asset, NSFR regulatory
capital element, or NSFR liability, the value on the balance sheet of
the national bank or Federal savings association, each as determined in
accordance with GAAP.
* * * * *
Collateralized deposit means:
(1) A deposit of a public sector entity held at the national bank
or Federal savings association that is required to be secured under
applicable law by a lien on assets owned by the national bank or
Federal savings association and that gives the depositor, as holder of
the lien, priority over the assets in the event the national bank or
Federal savings association enters into receivership, bankruptcy,
insolvency, liquidation, resolution, or similar proceeding;
(2) A deposit of a fiduciary account awaiting investment or
distribution held at the national bank or Federal savings association
for which the national bank or Federal savings association is a
fiduciary and is required under 12 CFR 9.10(b) (national banks), 12 CFR
150.300 through 150.320 (Federal savings associations), or applicable
state law (state member and nonmember banks, and state savings
associations) to set aside assets owned by the national bank or Federal
savings association as security, which gives the depositor priority
over the assets in the event the national bank or Federal savings
association enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding; or
(3) A deposit of a fiduciary account awaiting investment or
distribution held at the national bank or Federal savings association
for which the national bank's or Federal savings association's
affiliated insured depository institution is a fiduciary and where the
national bank or Federal savings association under 12 CFR 9.10(c)
(national banks) or 12 CFR 150.310 (Federal savings associations) has
set aside assets owned by the national bank or Federal savings
association as security, which gives the depositor priority over the
assets in the event the national bank or Federal savings association
enters into receivership, bankruptcy, insolvency, liquidation,
resolution, or similar proceeding.
Committed means, with respect to a credit or liquidity facility,
that under the terms of the facility, it is not unconditionally
cancelable.
* * * * *
Covered nonbank company means a designated company that the Board
of Governors of the Federal Reserve System has required by separate
rule or order to comply with the requirements of 12 CFR part 249.
* * * * *
Encumbered means, with respect to an asset, that the asset:
(1) Is subject to legal, regulatory, contractual, or other
restriction on the ability of the national bank or Federal savings
association to monetize the asset; or
(2) Is pledged, explicitly or implicitly, to secure or to provide
credit enhancement to any transaction, not including when the asset is
pledged to a central bank or a U.S. government-sponsored enterprise
where:
(i) Potential credit secured by the asset is not currently extended
to the national bank or Federal savings association or its consolidated
subsidiaries; and
(ii) The pledged asset is not required to support access to the
payment services of a central bank.
* * * * *
NSFR liability means any liability or equity reported on a national
bank's or Federal savings association's balance sheet that is not an
NSFR regulatory capital element.
NSFR regulatory capital element means any capital element included
in a national bank's or Federal savings association's common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital, in each
case as defined in 12 CFR 3.20, prior to application of capital
adjustments or deductions as set forth in 12 CFR 3.22, excluding any
debt or equity instrument that does not meet the criteria for
additional tier 1 or tier 2 capital instruments in 12 CFR 3.22 and is
being phased out of tier 1 capital or tier 2 capital pursuant to
subpart G of 12 CFR part 3.
Operational deposit means short-term unsecured wholesale funding
that is a deposit, unsecured wholesale lending that is a deposit, or a
collateralized deposit, in each case that meets the requirements of
Sec. 50.4(b) with respect to that deposit and is necessary for the
provision of operational services as an independent third-party
intermediary, agent, or administrator to the wholesale customer or
counterparty providing the deposit.
* * * * *
QMNA netting set means a group of derivative transactions with a
single counterparty that is subject to a qualifying master netting
agreement and is netted under the qualifying master netting agreement.
* * * * *
Secured funding transaction means any funding transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of the national bank or Federal savings association to a
wholesale customer or counterparty that is secured under applicable law
by a lien on securities or loans provided by the national bank or
Federal savings association, which gives the wholesale customer or
counterparty, as holder of the lien, priority over the securities or
loans in the event the national bank or Federal savings association
enters into receivership, bankruptcy, insolvency, liquidation,
resolution, or similar proceeding. Secured funding transactions include
repurchase transactions, securities lending transactions, other secured
loans, and borrowings from a Federal Reserve Bank. Secured funding
transactions do not include securities.
Secured lending transaction means any lending transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of a wholesale customer or counterparty to the national bank
or Federal savings association that is secured under applicable law by
a lien on securities or loans provided by the wholesale customer or
counterparty, which gives the national bank or Federal savings
association, as holder of the lien, priority over the securities or
loans in the event the counterparty enters into receivership,
bankruptcy, insolvency, liquidation, resolution, or similar proceeding.
Secured lending transactions include reverse repurchase transactions
and securities borrowing transactions. Secured lending transactions do
not include securities.
* * * * *
Unconditionally cancelable means, with respect to a credit or
liquidity facility, that a national bank or Federal savings association
may, at any time, with or without cause, refuse to extend credit under
the facility (to the extent permitted under applicable law).

[[Page 35177]]

Unsecured wholesale funding means a liability or general obligation
of the national bank or Federal savings association to a wholesale
customer or counterparty that is not a secured funding transaction.
Unsecured wholesale funding includes wholesale deposits.
Unsecured wholesale lending means a liability or general obligation
of a wholesale customer or counterparty to the national bank or Federal
savings association that is not a secured lending transaction or a
security.
* * * * *
0
5. Amend Sec. 50.22, by revising paragraph (b)(1) to read as follows:

Sec. 50.22 Requirements for eligible high-quality liquid assets.

* * * * *
(b) * * *
(1) The assets are not encumbered.
* * * * *
0
6. Amend Sec. 50.30, by revising paragraph (b)(3) to read as follows:

Sec. 50.30 Total net cash outflow amount.

(b) * * *
(3) Other than the transactions identified in Sec. 50.32(h)(2),
(h)(5), or (j) or Sec. 50.33(d) or (f), the maturity of which is
determined under Sec. 50.31(a), transactions that have an open
maturity are not included in the calculation of the maturity mismatch
add-on.
0
7. Amend Sec. 50.31, by revising paragraphs (a)(1), (a)(2), and (a)(4)
to read as follows:

Sec. 50.31 Determining maturity.

(a) * * *
(1) With respect to an instrument or transaction subject to Sec.
50.32, on the earliest possible contractual maturity date or the
earliest possible date the transaction could occur, taking into account
any option that could accelerate the maturity date or the date of the
transaction, except that when considering the earliest possible
contractual maturity date or the earliest possible date the transaction
could occur, the national bank or Federal savings association should
exclude any contingent options that are triggered only by regulatory
actions or changes in law or regulation, as follows:
* * * * *
(2) With respect to an instrument or transaction subject to Sec.
50.33, on the latest possible contractual maturity date or the latest
possible date the transaction could occur, taking into account any
option that could extend the maturity date or the date of the
transaction, except that when considering the latest possible
contractual maturity date or the latest possible date the transaction
could occur, the national bank or Federal savings association may
exclude any contingent options that are triggered only by regulatory
actions or changes in law or regulation, as follows:
* * * * *
(4) With respect to a transaction that has an open maturity, is not
an operational deposit, and is subject to the provisions of Sec.
50.32(h)(2), (h)(5), (j), or (k) or Sec. 50.33(d) or (f), the maturity
date is the first calendar day after the calculation date. Any other
transaction that has an open maturity and is subject to the provisions
of Sec. 50.32 shall be considered to mature within 30 calendar days of
the calculation date.
* * * * *

Subpart G [Added and Reserved]

0
8. Add and reserve subpart G.

Subparts H, I, J, K, L, M, and N [Added]

0
8a. Part 50 is amended by adding subparts H, I, J, K, L, M, and N as
set forth at the end of the common preamble.

Subparts K and L [Amended]

0
9. Subparts K and L to part 50 are amended by:
0
a. Removing ``[AGENCY]'' and adding ``OCC'' in its place wherever it
appears.
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``12 CFR part
3'' in its place wherever it appears.
0
c. Removing ``[BANK]'' and adding ``national bank or Federal savings
association'' in its place wherever it appears.
0
d. Removing ``[BANK]'s'' and adding ``national bank's or Federal
savings association's'' in its place wherever it appears.
0
e. Removing ``[Sec. __.10(c)(4)(ii)(C)(1) through (7) of the AGENCY
SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
3.10(c)(4)(ii)(C)(1) through (7)'' in its place wherever it appears.
0
f. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
3.10(c)(4)(ii)(E)(1) through (3)'' in its place wherever it appears.
0
g. Removing ``[INSERT PART]'' and adding ``50'' in its place wherever
it appears.

Subpart N [Removed and Reserved]

0
10. Remove and reserve subpart N.

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

For the reasons set forth in the common preamble, part 249 of
chapter II of title 12 of the Code of Federal Regulations is amended to
add the text of the common rule as set forth at the end of the
SUPPLEMENTARY INFORMATION section and is further amended as follows:

PART 249--LIQUIDITY RISK MEASUREMENT, STANDARDS, AND MONITORING
(REGULATION WW)

0
11. 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
12. Revise the heading for part 249 as set forth above.
0
13. Amend Sec. 249.1 by:
0
a. Revising paragraphs (a) and (b)(1);
0
b. Redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4)
through (6), respectively, and adding paragraph (b)(3);
The additions and revisions read as follows:

Sec. 249.1 Purpose and applicability.

(a) Purpose. This part establishes a minimum liquidity standard and
a minimum stable funding standard for certain Board-regulated
institutions on a consolidated basis, as set forth herein.
(b) Applicability. (1) A Board-regulated institution is subject to
the minimum liquidity standard and the minimum stable funding standard,
and other requirements of this part if:
(i) It has total consolidated assets equal to $250 billion or more,
as reported on the most recent year end (as applicable):
(A) Consolidated Financial Statements for Holding Companies
reporting form (FR Y-9C), or, if the Board-regulated institution is not
required to report on the FR Y-9C, its estimated total consolidated
assets as of the most recent year end, calculated in accordance with
the instructions to the FR Y-9C; or
(B) Consolidated Report of Condition and Income (Call Report);
(ii) It has total consolidated on-balance sheet foreign exposure at
the most recent year end equal to $10 billion or more (where total 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

[[Page 35178]]

the head office or guarantor plus local country claims on local
residents plus revaluation gains on foreign exchange and derivative
products, calculated in accordance with the Federal Financial
Institutions Examination Council (FFIEC) 009 Country Exposure Report);
(iii) It is a depository institution that is a consolidated
subsidiary of a company described in paragraphs (b)(1)(i) or (ii) of
this section and has total consolidated assets equal to $10 billion or
more, as reported on the most recent year-end Consolidated Report of
Condition and Income;
(iv) It is a covered nonbank company;
(v) It is a covered depository institution holding company that
meets the criteria in section 249.60(a) or section 249.120(a) but does
not meet the criteria in paragraphs (b)(1)(i) or (ii) of this section,
and is subject to complying with the requirements of this part in
accordance with subpart G or M of this part, respectively; or
(vi) The Board has determined that application of this part is
appropriate in light of the Board-regulated institution's asset size,
level of complexity, risk profile, scope of operations, affiliation
with foreign or domestic covered entities, or risk to the financial
system.
* * * * *
(3)(i) A Board-regulated institution that becomes subject to the
minimum stable funding standard and other requirements of subparts K
through N of this part under paragraphs (b)(1)(i) through (iii) of this
section after the effective date must comply with the requirements of
subparts K through N of this part beginning on April 1 of the year in
which the Board-regulated institution becomes subject to the minimum
stable funding standard and the requirements of subparts K through N of
this part; and
(ii) A Board-regulated institution that becomes subject to the
minimum stable funding standard and other requirements of subparts K
through N of this part under paragraph (b)(1)(iv) of this section after
the effective date must comply with the requirements of subparts K
through N of this part on the date specified by the Board.
* * * * *
0
14. Amend Sec. 249.2, by redesignating paragraph (b) as paragraph (c),
adding new paragraph (b), and revising newly-redesignated paragraph (c)
to read as follows:

Sec. 249.2 Reservation of authority.

* * * * *
(b) The Board may require a Board-regulated institution to hold an
amount of available stable funding (ASF) greater than otherwise
required under this part, or to take any other measure to improve the
Board-regulated institution's stable funding, if the Board determines
that the Board-regulated institution's stable funding requirements as
calculated under this part are not commensurate with the Board-
regulated institution's funding risks. In making determinations under
this section, the Board will apply notice and response procedures as
set forth in 12 CFR 263.202.
(c) Nothing in this part limits the authority of the Board under
any other provision of law or regulation to take supervisory or
enforcement action, including action to address unsafe or unsound
practices or conditions, deficient liquidity levels, deficient stable
funding levels, or violations of law.
0
15. Amend Sec. 249.3 by:
0
a. Revising the definition for ``Calculation date'';
0
b. Adding the definition for ``Carrying value'';
0
c. Revising the definitions for ``Collateralized deposit'',
``Committed'', and ``Covered nonbank company'';
0
d. Adding the definitions for ``Encumbered'', ``NSFR liability'', and
``NSFR regulatory capital element'';
0
e. Revising the definition for ``Operational Deposit'';
0
f. Adding the definition for ``QMNA netting set'';
0
g. Revising the definitions for ``Secured funding transaction'' and
``Secured lending transaction'';
0
h. Adding the definition for ``Unconditionally cancelable'';
0
i. Revising the definition for ``Unsecured wholesale funding''; and
0
j. Adding the definition for ``Unsecured wholesale lending''.
The additions and revisions read in alphabetical order as follows:

Sec. 249.3 Definitions.

* * * * *
Calculation date means, for subparts B through J of this part, any
date on which a Board-regulated institution calculates its liquidity
coverage ratio under Sec. 249.10, and for subparts K through N of this
part, any date on which a Board-regulated institution calculates its
net stable funding ratio under Sec. 249.100.
Carrying value means, with respect to an asset, NSFR regulatory
capital element, or NSFR liability, the value on the balance sheet of
the Board-regulated institution, each as determined in accordance with
GAAP.
* * * * *
Collateralized deposit means:
(1) A deposit of a public sector entity held at the Board-regulated
institution that is required to be secured under applicable law by a
lien on assets owned by the Board-regulated institution and that gives
the depositor, as holder of the lien, priority over the assets in the
event the Board-regulated institution enters into receivership,
bankruptcy, insolvency, liquidation, resolution, or similar proceeding;
(2) A deposit of a fiduciary account awaiting investment or
distribution held at the Board-regulated institution for which the
Board-regulated institution is a fiduciary and is required under 12 CFR
9.10(b) (national banks), 12 CFR 150.300 through 150.320 (Federal
savings associations), or applicable state law (state member and
nonmember banks, and state savings associations) to set aside assets
owned by the Board-regulated institution as security, which gives the
depositor priority over the assets in the event the Board-regulated
institution enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding; or
(3) A deposit of a fiduciary account awaiting investment or
distribution held at the Board-regulated institution for which the
Board-regulated institution's affiliated insured depository institution
is a fiduciary and where the Board-regulated institution under 12 CFR
9.10(c) (national banks) or 12 CFR 150.310 (Federal savings
associations) has set aside assets owned by the Board-regulated
institution as security, which gives the depositor priority over the
assets in the event the Board-regulated institution enters into
receivership, bankruptcy, insolvency, liquidation, resolution, or
similar proceeding.
Committed means, with respect to a credit or liquidity facility,
that under the terms of the facility, it is not unconditionally
cancelable.
* * * * *
Covered nonbank company means a designated company that the Board
of Governors of the Federal Reserve System has required by separate
rule or order to comply with the requirements of 12 CFR part 249.
* * * * *
Encumbered means, with respect to an asset, that the asset:
(1) Is subject to legal, regulatory, contractual, or other
restriction on the ability of the Board-regulated institution to
monetize the asset; or
(2) Is pledged, explicitly or implicitly, to secure or to provide
credit enhancement to any transaction, not including when the asset is
pledged to a central bank or a U.S. government-sponsored enterprise
where:
(i) Potential credit secured by the asset is not currently extended
to the

[[Page 35179]]

Board-regulated institution or its consolidated subsidiaries; and
(ii) The pledged asset is not required to support access to the
payment services of a central bank.
* * * * *
NSFR liability means any liability or equity reported on a Board-
regulated institution's balance sheet that is not an NSFR regulatory
capital element.
NSFR regulatory capital element means any capital element included
in a Board-regulated institution's common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital, in each case as defined
in Sec. 217.20 of Regulation Q (12 CFR part 217), prior to application
of capital adjustments or deductions as set forth in Sec. 217.22 of
Regulation Q (12 CFR part 217), excluding any debt or equity instrument
that does not meet the criteria for additional tier 1 or tier 2 capital
instruments in Sec. 217.22 of Regulation Q (12 CFR part 217) and is
being phased out of tier 1 capital or tier 2 capital pursuant to
subpart G of Regulation Q (12 CFR part 217).
Operational deposit means short-term unsecured wholesale funding
that is a deposit, unsecured wholesale lending that is a deposit, or a
collateralized deposit, in each case that meets the requirements of
Sec. 249.4(b) with respect to that deposit and is necessary for the
provision of operational services as an independent third-party
intermediary, agent, or administrator to the wholesale customer or
counterparty providing the deposit.
* * * * *
QMNA netting set means a group of derivative transactions with a
single counterparty that is subject to a qualifying master netting
agreement and is netted under the qualifying master netting agreement.
* * * * *
Secured funding transaction means any funding transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of the Board-regulated institution to a wholesale customer
or counterparty that is secured under applicable law by a lien on
securities or loans provided by the Board-regulated institution, which
gives the wholesale customer or counterparty, as holder of the lien,
priority over the securities or loans in the event the Board-regulated
institution enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding. Secured funding
transactions include repurchase transactions, securities lending
transactions, other secured loans, and borrowings from a Federal
Reserve Bank. Secured funding transactions do not include securities.
Secured lending transaction means any lending transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of a wholesale customer or counterparty to the Board-
regulated institution that is secured under applicable law by a lien on
securities or loans provided by the wholesale customer or counterparty,
which gives the Board-regulated institution, as holder of the lien,
priority over the securities or loans in the event the counterparty
enters into receivership, bankruptcy, insolvency, liquidation,
resolution, or similar proceeding. Secured lending transactions include
reverse repurchase transactions and securities borrowing transactions.
Secured lending transactions do not include securities.
* * * * *
Unconditionally cancelable means, with respect to a credit or
liquidity facility, that a Board-regulated institution may, at any
time, with or without cause, refuse to extend credit under the facility
(to the extent permitted under applicable law).
Unsecured wholesale funding means a liability or general obligation
of the Board-regulated institution to a wholesale customer or
counterparty that is not a secured funding transaction. Unsecured
wholesale funding includes wholesale deposits.
Unsecured wholesale lending means a liability or general obligation
of a wholesale customer or counterparty to the Board-regulated
institution that is not a secured lending transaction or a security.
* * * * *
0
16. Amend Sec. 249.22, by revising paragraph (b)(1) to read as
follows:

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

* * * * *
(b) * * *
(1) The assets are not encumbered.
* * * * *
0
17. Amend Sec. 249.30, by revising paragraph (b)(3) to read as
follows:

Sec. 249.30 Total net cash outflow amount.

(b) * * *
(3) Other than the transactions identified in Sec. 249.32(h)(2),
(h)(5), or (j) or Sec. 249.33(d) or (f), the maturity of which is
determined under Sec. 249.31(a), transactions that have an open
maturity are not included in the calculation of the maturity mismatch
add-on.
0
18. Amend Sec. 249.31, by revising paragraphs (a)(1), (a)(2), and
(a)(4) to read as follows:

Sec. 249.31 Determining maturity.

(a) * * *
(1) With respect to an instrument or transaction subject to Sec.
249.32, on the earliest possible contractual maturity date or the
earliest possible date the transaction could occur, taking into account
any option that could accelerate the maturity date or the date of the
transaction, except that when considering the earliest possible
contractual maturity date or the earliest possible date the transaction
could occur, the Board-regulated institution should exclude any
contingent options that are triggered only by regulatory actions or
changes in law or regulation, as follows:
* * * * *
(2) With respect to an instrument or transaction subject to Sec.
249.33, on the latest possible contractual maturity date or the latest
possible date the transaction could occur, taking into account any
option that could extend the maturity date or the date of the
transaction, except that when considering the latest possible
contractual maturity date or the latest possible date the transaction
could occur, the Board-regulated institution may exclude any contingent
options that are triggered only by regulatory actions or changes in law
or regulation, as follows:
* * * * *
(4) With respect to a transaction that has an open maturity, is not
an operational deposit, and is subject to the provisions of Sec.
249.32(h)(2), (h)(5), (j), or (k) or Sec. 249.33(d) or (f), the
maturity date is the first calendar day after the calculation date. Any
other transaction that has an open maturity and is subject to the
provisions of Sec. 249.32 shall be considered to mature within 30
calendar days of the calculation date.
* * * * *

Subparts H, I, J, K, and L, M, and N [Added]

0
19. Amend part 249 by adding subparts H, I, J, K, L, M, and N as set
forth at the end of the common preamble.

Subparts K, L, and N [Amended]

0
20. Amend subparts K, L, and N of part 249 by:
0
a. Removing ``[AGENCY]'' and adding ``Board'' in its place wherever it
appears.
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``Regulation Q
(12 CFR part 217)'' in its place wherever it appears.
0
c. Removing ``[Sec. __.10(c)(4)(ii)(C)(1) through (7) of the AGENCY

[[Page 35180]]

SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
217.10(c)(4)(ii)(C)(1) through (7)'' in its place wherever it appears.
0
d. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
217.10(c)(4)(ii)(E)(1) through (3)'' in its place wherever it appears
0
e. Removing ``[BANK]'' and adding ``Board-regulated institution'' in
its place wherever it appears.
0
f. Removing ``[BANK]'s'' and adding ``Board-regulated institution's''
in its place wherever it appears.
0
21. Revise subpart M of part 249 to read as follows:
Subpart M--Net stable funding ratio for certain depository institution
holding companies
Sec.
249.120 Applicability.
249.121 Net stable funding ratio requirement.

Subpart M--Net stable funding ratio for certain depository
institution holding companies

Sec. 249.120 Applicability.

(a) Scope. This subpart applies to a covered depository institution
holding company domiciled in the United States that has total
consolidated assets equal to $50 billion or more, based on the average
of the covered depository institution holding company's total
consolidated assets in the four most recent quarters as reported on the
FR Y-9C (or, if a savings and loan holding company is not required to
report on the FR Y-9C, based on the average of its estimated total
consolidated assets for the most recent four quarters, calculated in
accordance with the instructions to the FR Y-9C) and does not meet the
applicability criteria set forth in Sec. 249.1(b).
(b) Applicable provisions. Except as otherwise provided in this
subpart, the provisions of subparts A, K, L, and N of this part apply
to covered depository institution holding companies that are subject to
this subpart.
(c) Applicability. A covered depository institution holding company
that meets the threshold for applicability of this subpart under
paragraph (a) of this section after the effective date must comply with
the requirements of this subpart beginning one year after the date it
meets the threshold set forth in paragraph (a) of this section.

Sec. 249.121 Net stable funding ratio requirement.

(a) Calculation of the net stable funding ratio. A covered
depository institution holding company subject to this subpart must
calculate and maintain a net stable funding ratio in accordance with
Sec. 249.100 and this subpart.
(b) Available stable funding amount. A covered depository
institution holding company subject to this subpart must calculate its
ASF amount in accordance with subpart K of this part.
(c) Required stable funding amount. A covered depository
institution holding company subject to this subpart must calculate its
RSF amount in accordance with subpart K of this part, provided,
however, that the RSF amount of a covered depository institution
holding company subject to this subpart equals 70 percent of the RSF
amount calculated in accordance with subpart K of this part.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

For the reasons set forth in the common preamble, the Federal
Deposit Insurance Corporation proposes to amend chapter III of title 12
of the Code of Federal Regulations to add the text of the common rule
as set forth at the end of the SUPPLEMENTARY INFORMATION section and is
further amended as follows:

PART 329--LIQUIDITY RISK MEASUREMENT STANDARDS

0
22. The authority citation for part 329 continues to read as follows:

Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1,
5412.

0
23. Amend Sec. 329.1 by:
0
a. Revising paragraphs (a) and (b)(1);
0
b. Redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4)
through (6), respectively, and adding new paragraph (b)(3);
The additions and revisions read as follows:

Sec. 329.1 Purpose and applicability.

(a) Purpose. This part establishes a minimum liquidity standard and
a minimum stable funding standard for certain FDIC-supervised
institutions on a consolidated basis, as set forth herein.
(b) Applicability. (1) An FDIC-supervised institution is subject to
the minimum liquidity standard and the minimum stable funding standard,
and other requirements of this part if:
(i) The FDIC-supervised institution has total consolidated assets
equal to $250 billion or more, as reported on the most recent year-end
Consolidated Report of Condition and Income;
(ii) The FDIC-supervised institution has total consolidated on-
balance sheet foreign exposure at the most recent year end equal to $10
billion or more (where total 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 products, calculated in accordance with the Federal
Financial Institutions Examination Council (FFIEC) 009 Country Exposure
Report);
(iii) The FDIC-supervised institution is a depository institution
that has total consolidated assets equal to $10 billion or more, as
reported on the most recent year-end Consolidated Report of Condition
and Income and is a consolidated subsidiary of one of the following:
(A) A covered depository institution holding company that has total
assets equal to $250 billion or more, as reported on the most recent
year-end Consolidated Financial Statements for Holding Companies
reporting form (FR Y-9C), or, if the covered depository institution
holding company is not required to report on the FR Y-9C, its estimated
total consolidated assets as of the most recent year-end, calculated in
accordance with the instructions to the FR Y-9C;
(B) A depository institution that has total consolidated assets
equal to $250 billion or more, as reported on the most recent year-end
Consolidated Report of Condition and Income;
(C) A covered depository institution holding company or depository
institution that has total consolidated on-balance sheet foreign
exposure at the most recent year-end equal to $10 billion or more
(where total 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 Federal Financial
Institutions Examination Council (FFIEC) 009 Country Exposure Report);
or
(D) A covered nonbank company; or
(iv) The FDIC has determined that application of this part is
appropriate in light of the FDIC-supervised institution's asset size,
level of complexity, risk profile, scope of operations, affiliation
with foreign or

[[Page 35181]]

domestic covered entities, or risk to the financial system.
* * * * *
(3)(i) An FDIC-supervised institution that becomes subject to the
minimum stable funding standard and other requirements of subparts K
through N of this part under paragraphs (b)(1)(i) through (iii) of this
section after the effective date must comply with the requirements of
subparts K through N of this part beginning on April 1 of the year in
which the FDIC-supervised institution becomes subject to the minimum
stable funding standard and the requirements of subparts K through N of
this part; and
(ii) An FDIC-supervised institution that becomes subject to the
minimum stable funding standard and other requirements of subparts K
through N of this part under paragraph (b)(1)(iv) of this section after
the effective date must comply with the requirements of subparts K
through N of this part on the date specified by the FDIC.
* * * * *
0
24. Amend Sec. 329.2, by redesignating paragraph (b) as paragraph (c),
adding new paragraph (b), and revising newly-redesignated paragraph (c)
to read as follows:

Sec. 329.2 Reservation of authority.

* * * * *
(b) The FDIC may require an FDIC-supervised institution to hold an
amount of available stable funding (ASF) greater than otherwise
required under this part, or to take any other measure to improve the
FDIC-supervised institution's stable funding, if the FDIC determines
that the FDIC-supervised institution's stable funding requirements as
calculated under this part are not commensurate with the FDIC-
supervised institution's funding risks. In making determinations under
this section, the FDIC will apply notice and response procedures as set
forth in 12 CFR 324.5.
(c) Nothing in this part limits the authority of the FDIC under any
other provision of law or regulation to take supervisory or enforcement
action, including action to address unsafe or unsound practices or
conditions, deficient liquidity levels, deficient stable funding
levels, or violations of law.
0
25. Amend Sec. 329.3 by:
0
a. Revising the definition for ``Calculation date'';
0
b. Adding the definition for ``Carrying value'';
0
c. Revising the definitions for ``Collateralized deposit'',
``Committed'', and ``Covered nonbank company'';
0
d. Adding the definitions for ``Encumbered'', ``NSFR liability'', and
``NSFR regulatory capital'';
0
e. Revising the definition for ``Operational Deposit'';
0
f. Adding the definition for ``QMNA netting set'';
0
g. Revising the definitions for ``Secured funding transaction'', and
``Secured lending transaction'';
0
h. Adding the definition for ``Unconditionally cancelable'';
0
i. Revising the definitions for ``Unsecured wholesale funding''; and
0
j. Adding the definition for ``Unsecured wholesale lending''.
The additions and revisions read as follows:

Sec. 329.3 Definitions.

* * * * *
Calculation date means, for subparts B through J of this part, any
date on which an FDIC-supervised institution calculates its liquidity
coverage ratio under Sec. 329.10, and for subparts K through N of this
part, any date on which an FDIC-supervised institution calculates its
net stable funding ratio under Sec. 329.100.
Carrying value means, with respect to an asset, NSFR regulatory
capital element, or NSFR liability, the value on the balance sheet of
the FDIC-supervised institution, each as determined in accordance with
GAAP.
* * * * *
Collateralized deposit means:
(1) A deposit of a public sector entity held at the FDIC-supervised
institution that is required to be secured under applicable law by a
lien on assets owned by the FDIC-supervised institution and that gives
the depositor, as holder of the lien, priority over the assets in the
event the FDIC-supervised institution enters into receivership,
bankruptcy, insolvency, liquidation, resolution, or similar proceeding;
(2) A deposit of a fiduciary account awaiting investment or
distribution held at the FDIC-supervised institution for which the
FDIC-supervised institution is a fiduciary and is required under 12 CFR
9.10(b) (national banks), 12 CFR 150.300 through 150.320 (Federal
savings associations), or applicable state law (state member and
nonmember banks, and state savings associations) to set aside assets
owned by the FDIC-supervised institution as security, which gives the
depositor priority over the assets in the event the FDIC-supervised
institution enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding; or
(3) A deposit of a fiduciary account awaiting investment or
distribution held at the FDIC-supervised institution for which the
FDIC-supervised institution's affiliated insured depository institution
is a fiduciary and where the FDIC-supervised institution under 12 CFR
9.10(c) (national banks) or 12 CFR 150.310 (Federal savings
associations) has set aside assets owned by the FDIC-supervised
institution as security, which gives the depositor priority over the
assets in the event the FDIC-supervised institution enters into
receivership, bankruptcy, insolvency, liquidation, resolution, or
similar proceeding.
Committed means, with respect to a credit or liquidity facility,
that under the terms of the facility, it is not unconditionally
cancelable.
* * * * *
Covered nonbank company means a designated company that the Board
of Governors of the Federal Reserve System has required by separate
rule or order to comply with the requirements of 12 CFR part 249.
* * * * *
Encumbered means, with respect to an asset, that the asset:
(1) Is subject to legal, regulatory, contractual, or other
restriction on the ability of the FDIC-supervised institution to
monetize the asset; or
(2) Is pledged, explicitly or implicitly, to secure or to provide
credit enhancement to any transaction, not including when the asset is
pledged to a central bank or a U.S. government-sponsored enterprise
where:
(i) Potential credit secured by the asset is not currently extended
to the FDIC-supervised institution or its consolidated subsidiaries;
and
(ii) The pledged asset is not required to support access to the
payment services of a central bank.
* * * * *
NSFR liability means any liability or equity reported on an FDIC-
supervised institution's balance sheet that is not an NSFR regulatory
capital element.
NSFR regulatory capital element means any capital element included
in an FDIC-supervised institution's common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital, in each case as defined
in 12 CFR 324.20, prior to application of capital adjustments or
deductions as set forth in 12 CFR 324.22, excluding any debt or equity
instrument that does not meet the criteria for additional tier 1 or
tier 2 capital instruments in 12 CFR 324.22 and is being phased out of
tier 1 capital or tier 2 capital pursuant to subpart G of 12 CFR 324.
Operational deposit means short-term unsecured wholesale funding
that is a

[[Page 35182]]

deposit, unsecured wholesale lending that is a deposit, or a
collateralized deposit, in each case that meets the requirements of
Sec. 329.4(b) with respect to that deposit and is necessary for the
provision of operational services as an independent third-party
intermediary, agent, or administrator to the wholesale customer or
counterparty providing the deposit.
* * * * *
QMNA netting set means a group of derivative transactions with a
single counterparty that is subject to a qualifying master netting
agreement and is netted under the qualifying master netting agreement.
* * * * *
Secured funding transaction means any funding transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of the FDIC-supervised institution to a wholesale customer
or counterparty that is secured under applicable law by a lien on
securities or loans provided by the FDIC-supervised institution, which
gives the wholesale customer or counterparty, as holder of the lien,
priority over the securities or loans in the event the FDIC-supervised
institution enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding. Secured funding
transactions include repurchase transactions, securities lending
transactions, other secured loans, and borrowings from a Federal
Reserve Bank. Secured funding transactions do not include securities.
Secured lending transaction means any lending transaction that is
subject to a legally binding agreement that gives rise to a cash
obligation of a wholesale customer or counterparty to the FDIC-
supervised institution that is secured under applicable law by a lien
on securities or loans provided by the wholesale customer or
counterparty, which gives the FDIC-supervised institution, as holder of
the lien, priority over the securities or loans in the event the
counterparty enters into receivership, bankruptcy, insolvency,
liquidation, resolution, or similar proceeding. Secured lending
transactions include reverse repurchase transactions and securities
borrowing transactions. Secured lending transactions do not include
securities.
* * * * *
Unconditionally cancelable means, with respect to a credit or
liquidity facility, that an FDIC-supervised institution may, at any
time, with or without cause, refuse to extend credit under the facility
(to the extent permitted under applicable law).
Unsecured wholesale funding means a liability or general obligation
of the FDIC-supervised institution to a wholesale customer or
counterparty that is not a secured funding transaction. Unsecured
wholesale funding includes wholesale deposits.
Unsecured wholesale lending means a liability or general obligation
of a wholesale customer or counterparty to the FDIC-supervised
institution that is not a secured lending transaction or a security.
* * * * *
0
26. Amend Sec. 329.22, by revising paragraph (b)(1) to read as
follows:

Sec. 329.22 Requirements for eligible high-quality liquid assets.

* * * * *
(b) * * *
(1) The assets are not encumbered.
* * * * *
0
27. Amend Sec. 329.30, by revising paragraph (b)(3) to read as
follows:

Sec. 329.30 Total net cash outflow amount.

* * * * *
(b) * * *
(3) Other than the transactions identified in Sec. 329.32(h)(2),
(h)(5), or (j) or Sec. 329.33(d) or (f), the maturity of which is
determined under Sec. 329.31(a), transactions that have an open
maturity are not included in the calculation of the maturity mismatch
add-on.
0
28. Amend Sec. 329.31, by revising paragraphs (a)(1), (a)(2), and
(a)(4) to read as follows:

Sec. 329.31 Determining maturity.

(a) * * *
(1) With respect to an instrument or transaction subject to Sec.
329.32, on the earliest possible contractual maturity date or the
earliest possible date the transaction could occur, taking into account
any option that could accelerate the maturity date or the date of the
transaction, except that when considering the earliest possible
contractual maturity date or the earliest possible date the transaction
could occur, the FDIC-supervised institution should exclude any
contingent options that are triggered only by regulatory actions or
changes in law or regulation, as follows:
* * * * *
(2) With respect to an instrument or transaction subject to Sec.
329.33, on the latest possible contractual maturity date or the latest
possible date the transaction could occur, taking into account any
option that could extend the maturity date or the date of the
transaction, except that when considering the latest possible
contractual maturity date or the latest possible date the transaction
could occur, the FDIC-supervised institution may exclude any contingent
options that are triggered only by regulatory actions or changes in law
or regulation, as follows:
* * * * *
(4) With respect to a transaction that has an open maturity, is not
an operational deposit, and is subject to the provisions of Sec.
329.32(h)(2), (h)(5), (j), or (k) or Sec. 329.33(d) or (f), the
maturity date is the first calendar day after the calculation date. Any
other transaction that has an open maturity and is subject to the
provisions of Sec. 329.32 shall be considered to mature within 30
calendar days of the calculation date.
* * * * *

Subpart G [Added and Reserved]

0
29. Add reserve subpart G.

Subparts H, I, J, K, L, M, and N [Added]

0
30. Part 329 is amended by adding subparts H, I, J, K, L, M, and N as
set forth at the end of the common preamble.

Subparts K and L [Amended]

0
31. Subparts K and L to part 329 are amended by:
0
a. Removing ``[AGENCY]'' and adding ``FDIC'' in its place wherever it
appears.
0
b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``12 CFR part
324'' in its place wherever it appears.
0
c. Removing ``A [BANK]'' and adding ``An FDIC-supervised institution''
in its place wherever it appears.
0
d. Removing ``a [BANK]'' and add ``an FDIC-supervised institution'' in
its place wherever it appears.
0
e. Removing ``[BANK]'' and adding ``FDIC-supervised institution'' in
its place wherever it appears.
0
f. Removing ``[Sec. __.10(c)(4)(ii)(C)(1) through (7) of the AGENCY
SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
324.10(c)(4)(ii)(C)(1) through (7)'' in its place wherever it appears.
0
g. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
324.10(c)(4)(ii)(E)(1) through (3)'' in its place wherever it appears.
0
h. Removing ``[INSERT PART]'' and adding ``329'' in its place wherever
it appears.

Subpart N [Removed and Reserved]

0
32. Remove and reserve subpart N.

[[Page 35183]]

Dated: May 13, 2016.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, May 3, 2016.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 26th day of April, 2016.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2016-11505 Filed 5-31-16; 8:45 am]
BILLING CODE P

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