Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring

Federal RegisterNov 29, 2013

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 50

[Docket ID OCC-2013-0016]

RIN 1557 AD 74

FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Regulation WW; Docket No. R-1466]

RIN 7100 AE-03

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 329

RIN 3064-AE04

Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring

AGENCIES:

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.

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 requesting comment on a proposed rule (proposed rule) that would implement a quantitative liquidity requirement consistent with the liquidity coverage ratio standard established by the Basel Committee on Banking Supervision. The requirement is designed to promote the short-term resilience of the liquidity risk profile of internationally active banking organizations, thereby improving the banking sector's ability to absorb shocks arising from financial and economic stress, as well as improvements in the measurement and management of liquidity risk. The proposed rule would apply to all internationally active banking organizations, generally, bank holding companies, certain savings and loan holding companies, and depository institutions with more than $250 billion in total assets or more than $10 billion in on-balance sheet foreign exposure, and to their consolidated subsidiaries that are depository institutions with $10 billion or more in total consolidated assets. The proposed rule would also apply to companies designated for supervision by the Board by the Financial Stability Oversight Council under section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that do not have significant insurance operations and to their consolidated subsidiaries that are depository institutions with $10 billion or more in total consolidated assets. The Board also is proposing on its own a modified liquidity coverage ratio standard that is based on a 21-calendar day stress scenario rather than a 30 calendar-day stress scenario 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 in total consolidated assets.

DATES:

Comments on this notice of proposed rulemaking must be received by January 31, 2014.

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 “Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring” 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

http://www.regulations.gov.

Enter “Docket ID OCC-2013-0016” 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-2013-0016” in your comment. In general, 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

http://www.regulations.gov.

Enter “Docket ID OCC-2013-0016” 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. 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-1466, by any of the following methods:

•

Agency Web site:

http://www.federalreserve.gov.

Follow the instructions for submitting comments at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

•

Federal eRulemaking Portal:

http://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.

All public comments are available from the Board's Web site at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as

submitted, unless modified for technical reasons.

Accordingly, your 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 MP-500 of the Board's Martin Building (20th and C Street NW) 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:

http://www.regulations.gov.

Follow the instructions for submitting comments.

•

Agency Web site:

http://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-AE04.” Comments received will be posted without change to

http://www.FDIC.gov/regulations/laws/federal/propose.html

, including any personal information provided.

FOR FURTHER INFORMATION CONTACT:

OCC:

Kerri Corn, Director, Credit and Market Risk Division, (202) 649-6398; Linda M. Jennings, National Bank Examiner, (980) 387-0619; Patrick T. Tierney, Special Counsel, or Tiffany Eng, Law Clerk, Legislative and Regulatory Activities Division, (202) 649-5490; or Adam S. Trost, Senior Attorney, Securities and Corporate Practices Division, (202) 649-5510 Office of the Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219.

Board:

Anna Lee Hewko, Deputy Associate Director, (202) 530-6260; David Emmel, Manager, (202) 912-4612, Credit, Market and Liquidity Risk Policy; Ann McKeehan, Senior Supervisory Financial Analyst, (202) 972-6903; Andrew Willis, Senior Financial Analyst, (202) 912-4323, Capital and Regulatory Policy; April C. Snyder, Senior Counsel, (202) 452-3099; or Dafina Stewart, Senior Attorney, (202) 452-3876, 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:

Kyle Hadley, Chief, Examination Support Section, (202) 898-6532; Rebecca Berryman, Senior Capital Markets Policy Specialist, (202) 898-6901; Eric Schatten, Capital Markets Policy Analyst, (202) 898-7063, Capital Markets Branch Division of Risk Management Supervision, (202) 898-6888; Gregory Feder, Counsel, (202) 898-8724; or Sue Dawley, Senior Attorney, (202) 898-6509, Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. Summary of the Proposed Rule

B. Background

C. Overview of the Proposed Rule

II. Minimum Liquidity Coverage Ratio

A. High-Quality Liquid Assets

1. Liquidity Characteristics of HQLA

a. Risk Profile

b. Market-based Characteristics

c. Central Bank Eligibility

2. Qualifying Criteria for Categories of HQLA

a. Level 1 Liquid Assets

b. Level 2A Liquid Assets

c. Level 2B Liquid Assets

3. Operational Requirements for HQLA

4. Generally Applicable Criteria for HQLA

a. Unencumbered

b. Client Pool Security

c. Treatment of HQLA held by U.S. Consolidated Subsidiaries

e. Exclusion of Rehypothecated Assets

f. Exclusion of Assets Designated as Operational

5. Calculation of the HQLA Amount

a. Calculation of Unadjusted Excess HQLA Amount

b. Calculation of Adjusted Excess HQLA Amount

c. Example HQLA Calculation

B. Total Net Cash Outflow

1. Determining the Maturity of Instruments and Transactions

2. Cash Outflow Categories

a. Unsecured Retail Funding Outflow Amount

b. Structured Transaction Outflow Amount

c. Net Derivative Cash Outflow Amount

d. Mortgage Commitment Outflow Amount

e. Commitment Outflow Amount

f. Collateral Outflow Amount

g. Brokered Deposit Outflow Amount for Retail Customers or Counterparties

h. Unsecured Wholesale Funding Outflow Amount

i. Debt Security Outflow Amount

j. Secured Funding and Asset Exchange Outflow Amount

k. Foreign Central Bank Borrowings

l. Other Contractual Outflow Amounts

m. Excluded Amounts for Intragroup Transactions

3. Total Cash Inflow Amount

a. Items not included as inflows

b. Net Derivatives Cash Inflow Amount

c. Retail Cash Inflow Amount

d. Unsecured Wholesale Cash Inflow Amount

e. Securities Cash Inflow Amount

f. Secured Lending and Asset Exchange Cash Inflow Amount

III. Liquidity Coverage Ratio Shortfall

IV. Transition and Timing

V. Modified Liquidity Coverage Ratio Applicable to Bank and Savings and Loan Holding Companies

A. Overview and Applicability

B. High-Quality Liquid Assets

C. Total Net Cash Outflow

VI. Solicitation of Comments on Use of Plain Language

VII. Regulatory Flexibility Act

VIII. Paperwork Reduction Act

IX. 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 requesting comment on a proposed rule (proposed rule) that would implement a liquidity coverage ratio requirement, consistent with the international liquidity standards published by the Basel Committee on Banking Supervision (BCBS),

for large, internationally active banking organizations, nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision that do not have substantial insurance activities (covered nonbank companies), and their consolidated subsidiary depository institutions with total assets greater than $10 billion. The BCBS published the international liquidity standards in December 2010 as a part of the Basel III reform package

and revised the standards in January 2013 (as revised, the Basel III Revised Liquidity Framework).

The Board also is proposing on its own to implement a modified version of the liquidity coverage ratio requirement as an enhanced prudential standard for bank holding companies and savings and loan holding companies with at least

$50 billion in total consolidated assets that are not internationally active and do not have substantial insurance activities. This modified approach is described in section V of this preamble.

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

http://www.bis.org.

“Basel III: International framework for liquidity risk measurement, standards and monitoring” (December 2010), available at

http://www.bis.org/publ/bcbs188.pdf

(Basel III Liquidity Framework).

“Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” (January 2013), available at

http://www.bis.org/publ/bcbs238.htm.

As described in more detail below, the proposed rule would establish a quantitative minimum liquidity coverage ratio that builds upon the liquidity coverage methodologies traditionally used by banking organizations to assess exposures to contingent liquidity events. The proposed rule would complement existing supervisory guidance and the more qualitative liquidity requirements that the Board proposed, in consultation with the OCC and the FDIC, pursuant to section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)

and would establish transition periods for conformance with the new requirements.

See

“Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies,” 77 FR 594 (Jan. 5, 2010); “Enhanced Prudential Standards and Early Remediation Requirements for Foreign Banking Organizations and Foreign Nonbank Financial Companies,” 77 FR 76628 (Dec. 28, 2012).

B. Background

The recent financial crisis demonstrated significant weaknesses in the liquidity positions of banking organizations, many of which experienced difficulty meeting their obligations due to a breakdown of the funding markets. As a result, many governments and central banks across the world provided unprecedented levels of liquidity support to companies in the financial sector in an effort to sustain the global financial system. In the United States, the Board and the FDIC established various temporary liquidity facilities to provide sources of funding for a range of asset classes.

These events came in the wake of a period characterized by ample liquidity in the financial system. The rapid reversal in market conditions and the declining availability of liquidity during the financial crisis illustrated both the speed with which liquidity can evaporate and the potential for protracted illiquidity during and following these types of market events. In addition, the recent financial crisis highlighted the pervasive detrimental effect of a liquidity crisis on the banking sector, the financial system, and the economy as a whole.

Banking organizations' failure to adequately address these challenges was in part due to lapses in basic liquidity risk management practices. Recognizing the need for banking organizations to improve their liquidity risk management and to control their liquidity risk exposures, the agencies worked with regulators from foreign jurisdictions to establish international liquidity standards. These standards include the principles based on supervisory expectations for liquidity risk management in the “Principles for Sound Liquidity Management and Supervision” (Basel Liquidity Principles).

In addition to these principles, the BCBS established quantitative standards for liquidity in the “Basel III: International framework for liquidity risk measurement, standards and monitoring”

in December 2010, which introduced a liquidity coverage ratio (2010 LCR) and a net stable funding ratio (NSFR), as well as a set of liquidity monitoring tools. These reforms were intended to strengthen liquidity and promote a more resilient financial sector by improving the banking sector's ability to absorb shocks arising from financial and economic stress. Subsequently, in January 2013, the BCBS issued “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” (Basel III LCR),

which updated key components of the 2010 LCR as part of the Basel III liquidity framework.

The agencies acknowledge that there is ongoing international study of the interaction between the Basel III LCR and central bank operations. The agencies are working with the BCBS on these matters and would consider amending the proposal if the BCBS proposes modifications to the Basel III LCR.

Principles for Sound Liquidity Risk Management and Supervision (September 2008), available at

http://www.bis.org/publ/bcbs144.htm.

Basel III Liquidity Framework,

supra

note 2

Basel III Revised Liquidity Framework,

supra

note 3

Key provisions of the 2010 LCR that were updated by the BCBS in 2013 include expanding the definition of high-quality liquid assets, technical changes to the calculation of various inflow and outflow rates, introducing a phase-in period for implementation, and a variety of rules text clarifications.

See http://www.bis.org/press/p130106b.pdf

for a complete list of revisions to the 2010 LCR.

The Basel III LCR establishes for the first time an internationally harmonized quantitative liquidity standard that has the primary objective of promoting the short-term resilience of the liquidity risk profile of internationally active banking organizations. The Basel III LCR is designed to improve the banking sector's ability to absorb, without reliance on government support, shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the broader economy.

Beginning in January 2015, under the Basel III LCR, internationally active banking organizations would be required to hold sufficient high-quality liquid assets (HQLA) to meet their obligations and other liquidity needs that are forecasted to occur during a 30 calendar-day stress scenario. To meet the Basel III LCR standard, the HQLA must be unencumbered by liens and other restrictions on transferability and must be convertible into cash easily and immediately in deep, active private markets.

Current U.S. regulations do not require banking organizations to meet a quantitative liquidity standard. Rather, the agencies evaluate a banking organization's methods for measuring, monitoring, and managing liquidity risk on a case-by-case basis in conjunction with their supervisory processes.

Since the financial crisis, the agencies have worked to establish a more rigorous supervisory and regulatory framework for U.S. banking organizations that would incorporate and build upon the BCBS standards. First, the agencies, together with the National Credit Union Administration and the Conference of State Bank Supervisors, issued guidance titled the “Interagency Policy Statement on Funding and Liquidity Risk Management” (Liquidity Risk Policy Statement) in March 2010.

The Liquidity Risk Policy Statement incorporates elements of the Basel Liquidity Principles and is supplemented by other liquidity risk management principles previously issued by the agencies. The Liquidity Risk Policy Statement specifies supervisory expectations for fundamental liquidity risk management practices, including a comprehensive management process for identifying, measuring, monitoring, and controlling liquidity risk. The Liquidity Risk Policy Statement also emphasizes the central role of corporate governance, cash-flow projections, stress testing, ample liquidity resources, and formal contingency funding plans as necessary tools for effectively measuring and managing liquidity risk.

For instance, the Uniform Financial Rating System adopted by the Federal Financial Institutions Examination Council (FFIEC) requires examiners to assign a supervisory rating that assesses a banking organization's liquidity position and liquidity risk management.

75 FR 13656 (March 22, 2010).

Additionally, in 2012, pursuant to section 165 of the Dodd-Frank Act,

the Board proposed enhanced liquidity standards for large U.S. banking firms,

certain foreign banking organizations, and nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision.

These enhanced liquidity standards include corporate governance provisions, senior management responsibilities, independent review, a requirement to hold highly liquidity assets to cover stressed liquidity needs based on internally developed stress models, a contingency funding plan, and specific limits on potential sources of liquidity risk.

See

12 U.S.C. 5365.

See

77 FR 594 (Jan. 5, 2012); 77 FR 76628 (Dec. 28, 2012).

See

12 U.S.C. 5365.

The proposed rule would further enhance the supervisory efforts described above, which are aimed at measuring and managing liquidity risk, by implementing a minimum quantitative liquidity requirement in the form of a liquidity coverage ratio. This quantitative requirement would focus on short-term liquidity risks and would benefit the financial system as a whole by improving the ability of companies subject to the proposal to absorb potential market and liquidity shocks in a severe stress scenario over a short term. The agencies are proposing to establish a minimum liquidity coverage ratio that would be consistent with the Basel III LCR, with some modifications to reflect characteristics and risks of specific aspects of the U.S. market and U.S. regulatory framework, as described in this preamble. For instance, in recognition of the strong liquidity positions many U.S. banking organizations and other companies that would be subject to the proposal have achieved since the recent financial crisis, the proposed rule includes transition periods that are similar to, but shorter than, those set forth in the Basel III LCR. These proposed transition periods are designed to give companies subject to the proposal sufficient time to adjust to the proposed rule while minimizing any potential adverse impact that implementation could have on the U.S. banking system.

The agencies note that the BCBS is in the process of reviewing the NSFR that was included in the BCBS liquidity framework when it was first published in 2010. While the Basel III LCR is focused on measuring liquidity resilience over a short-term period of severe stress, the NSFR is designed to promote resilience over a one-year time horizon by creating additional incentives for banking organizations and other financial companies that would be subject to the standard to fund their activities with more stable sources and encouraging a sustainable maturity structure of assets and liabilities. Currently, the NSFR is in an international observation period as the agencies work with other BCBS members and the banking industry to gather data and study the impact of the proposed NSFR standard on the banking system. The agencies are carefully considering what changes to the NSFR they may recommend to the BCBS based on the results of this assessment. The agencies anticipate that they would issue a proposed rulemaking implementing the NSFR in advance of its scheduled global implementation in 2018.

C. Overview of the Proposed Rule

The proposed rule would establish a minimum liquidity coverage ratio applicable to all internationally active banking organizations, that is, banking organizations with $250 billion or more in total assets or $10 billion or more in on-balance sheet foreign exposure, and to consolidated subsidiary depository institutions of internationally active banking organizations with $10 billion or more in total consolidated assets (collectively, covered banking organizations). Thus, the rule would not apply to institutions that have opted in to the advanced approaches capital rule;

the agencies are seeking comment on whether to apply the rule to opt-in banking organizations. The proposed rule would also apply to covered nonbank companies, and to consolidated subsidiary depository institutions of covered nonbank companies with $10 billion or more in total consolidated assets (together with covered banking organizations and covered nonbank companies, covered companies). The proposed rule would not apply to a bridge financial company or a subsidiary of a bridge financial company, a new depository institution or a bridge depository institution, as those terms are used in the resolution context.

The agencies believe that requiring the FDIC to maintain a minimum liquidity coverage ratio in these entities would inappropriately constrain the FDIC's ability to resolve a depository institution or its affiliated companies in an orderly manner.

See

12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve), and 12 CFR part 324 (FDIC).

See

12 U.S.C. 1813(i) and 12 U.S.C. 5381(a)(3).

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 an internationally active banking organization. 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. In addition, the OCC is monitoring other emerging initiatives in the U.S. that may impact liquidity risk supervision of Federal branches and agencies of foreign banks before considering applying a liquidity coverage ratio requirement to them.

The Board also is proposing on its own to implement a modified version of the liquidity coverage ratio as an enhanced prudential standard 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 in total consolidated assets, but are not covered companies for the purposes of the proposed rule.

Total consolidated assets for the purposes of the proposed rule would be as reported on a covered 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 Institution Examination Council 009 Country Exposure Report.

The agencies are reserving the authority to apply the proposed rule to a company not meeting the asset thresholds described above if it is determined that the application of the proposed liquidity coverage ratio would be appropriate in light of a company's asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered companies, or risk to the financial system. A covered company would remain subject to the proposed rule until its primary Federal supervisor determines in writing that application of the proposed rule to the company is not appropriate in light of these same factors. Moreover, 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 agencies also are reserving the authority to require a covered company to hold an amount of HQLA greater than otherwise required under the proposed rule, or to take any other measure to improve the covered company's liquidity risk profile, if the relevant agency determines that the

covered company's liquidity requirements as calculated under the proposed rule are not commensurate with its liquidity risks. In making such determinations, the agencies will apply notice and response procedures as set forth in their respective regulations.

The proposed liquidity coverage ratio would require a covered company to maintain an amount of HQLA meeting the criteria set forth in the proposed rule (the numerator of the ratio) that is no less than 100 percent of its total net cash outflows over a prospective 30 calendar-day period, as calculated in accordance with the proposed rule (the denominator of the ratio). Under the proposed rule, certain categories of assets may qualify as HQLA if they are unencumbered by liens and other restrictions on transfer so that they can be converted into cash quickly with little to no loss in value. Access to HQLA would enhance the ability of a covered company to meet its liquidity needs during an acute short-term liquidity stress scenario. A covered company's total net cash outflow amount would be determined by applying outflow and inflow rates, which reflect certain stressed assumptions, against the balances of a covered company's funding sources, obligations, and assets over a prospective 30 calendar-day period.

As further described below, the measures of total cash outflow and total cash inflow, and the outflow and inflow rates used in their determination, are meant to reflect aspects of the stress events experienced during the recent financial crisis. Consistent with the Basel III LCR, these components of the proposed rule take into account the potential impact of idiosyncratic and market-wide shocks, including those that would result in: (1) A partial loss of retail deposits and brokered deposits for retail customers; (2) a partial loss of unsecured wholesale funding capacity; (3) a partial loss of secured, short-term financing with certain collateral and counterparties; (4) losses from derivative positions and the collateral supporting those positions; (5) unscheduled draws on committed credit and liquidity facilities that a covered company has provided to its clients; (6) the potential need for a covered company to buy back debt or to honor non-contractual obligations in order to mitigate reputational and other risks; and (7) other shocks which affect outflows linked to structured financing transactions, mortgages, central bank borrowings, and customer short positions.

As noted above, covered companies generally would be required to maintain, on a consolidated basis, a liquidity coverage ratio equal to or greater than 100 percent. However, the agencies recognize that under certain circumstances, it may be necessary for a covered company's liquidity coverage ratio to briefly fall below 100 percent to fund unanticipated liquidity needs.

However, a liquidity coverage ratio below 100 percent may also reflect a significant deficiency in a covered company's management of liquidity risk. Therefore, the proposed rule would establish a framework for flexible supervisory response when a covered company's liquidity coverage ratio falls below 100 percent. Under the proposed rule, a covered company would be required to notify its primary Federal supervisor on any business day that its liquidity coverage ratio is less than 100 percent. In addition, if the liquidity coverage ratio is below 100 percent for three consecutive business days, a covered company would be required to submit to its primary Federal supervisor a plan for remediation of the shortfall. These procedures, which are described in further detail in this preamble, are intended to enable supervisors to monitor and respond appropriately to the unique circumstances that are giving rise to a covered company's liquidity coverage ratio shortfall.

Consistent with the BCBS liquidity framework, the proposed rule, once finalized, would be effective as of January 1, 2015, subject to a transition period. Under the proposed rule's transition provisions, covered companies would be required to comply with a minimum liquidity coverage ratio of 80 percent as of January 1, 2015. From January 1, 2016, through December 31, 2016, the minimum liquidity coverage ratio would be 90 percent. Beginning on January 1, 2017 and thereafter, all covered companies would be required to maintain a liquidity coverage ratio of 100 percent.

The proposed rule's liquidity coverage ratio is based on a standardized supervisory stress scenario. While the liquidity coverage ratio would establish one scenario for stress testing, supervisors expect companies that would be subject to the proposed rule to maintain robust stress testing frameworks that incorporate additional scenarios that are more tailored to the risks within their firms. Companies should use these additional scenarios in conjunction with the proposed rule's liquidity coverage ratio to appropriately determine their liquidity buffers. The agencies note that the liquidity coverage ratio is a minimum requirement and organizations that pose more systemic risk to the U.S. banking system or whose liquidity stress testing indicates a need for higher liquidity buffers may need to take additional steps beyond meeting the minimum ratio in order to meet supervisory expectations.

The BCBS liquidity framework also establishes liquidity risk monitoring mechanisms designed to strengthen and promote global consistency in liquidity risk supervision. These mechanisms include information on contractual maturity mismatch, concentration of funding, available unencumbered assets, liquidity coverage ratio reporting by significant currency, and market-related monitoring tools. At this time, the agencies are not proposing to implement these monitoring mechanisms as regulatory standards or requirements. However, the agencies intend to obtain information from covered companies to enable the monitoring of liquidity risk exposure through reporting forms and from information the agencies collect through other supervisory processes.

The proposed rule would provide enhanced information about the short-term liquidity profile of a covered company to managers and supervisors. With this information, the covered company's management and supervisors would be better able to assess the company's ability to meet its projected liquidity needs during periods of liquidity stress; take appropriate actions to address liquidity needs; and, in situations of failure, to implement an orderly resolution of the covered company. The agencies anticipate that they will separately seek comment upon proposed regulatory reporting requirements and instructions pertaining to a covered company's disclosure of the proposed rule's liquidity coverage ratio in a subsequent notice.

The agencies request comment on all aspects of the proposed rule, including comment on the specific issues raised throughout this preamble. The agencies request that commenters provide detailed qualitative or quantitative analysis, as appropriate, as well as any relevant data and impact analysis to support their positions.

II. Minimum Liquidity Coverage Ratio

Under the proposed rule, a covered company would be required to calculate its liquidity coverage ratio as of a particular date, which is defined in the proposed rule as the calculation date. The proposed rule would require a covered company to calculate its liquidity coverage ratio daily as of a set time selected by the covered company prior to the effective date of the rule and communicated in writing to its primary

Federal supervisor. Subsequent to this election, a covered company could only change the time as of which it calculates its liquidity coverage ratio daily with the written approval of its Federal supervisor.

A covered company would calculate its liquidity coverage ratio by dividing its amount of HQLA by total net cash outflows, which would be equal to the highest daily amount of cumulative net cash outflows within the 30 calendar days following a calculation date (30 calendar-day stress period). A covered company would not be permitted to double count items in this computation. For example, if an asset is included as a part of the stock of HQLA, such asset may not also be counted as cash inflows in the denominator.

The following discussion addresses the proposed criteria for HQLA, which are meant to reflect the characteristics the agencies believe are associated with the most liquid assets banking organizations typically hold. The discussion also explains how HQLA would be calculated under the proposed rule, including its constituent components, and the proposed caps and haircuts applied to those components.

Next, the discussion describes total net cash outflows, the denominator of the liquidity coverage ratio. This discussion explains the items that would be included in total cash outflows and total cash inflows, as well as rules for determining whether instruments mature or transactions occur within a 30 calendar-day stress period for the purposes of the liquidity coverage ratio's calculation. The discussion concludes by describing the regulatory framework for supervisory response if a covered company's liquidity coverage ratio falls below 100 percent.

What operational or other issues arise from requiring the calculation of the liquidity coverage ratio as of a set time selected by a covered company prior to the effective date of the rule? What significant operational costs, such as technological improvements, or other operational difficulties, if any, may arise from the requirement to calculate the liquidity coverage ratio on a daily basis? What alternatives to daily calculation should the agencies consider and why?

The proposed rule would require a covered company to calculate its HQLA on a daily basis. Should the agencies impose any limits with regard to covered companies' ability to transfer HQLA on an intraday basis between entities? Why or why not? In particular, what appropriate limits should the agencies consider with regard to intraday movements of HQLA between domestic and foreign entities, including foreign branches?

A. High-Quality Liquid Assets

The numerator of the proposed liquidity coverage ratio would be comprised of a covered company's HQLA, subject to the qualifying criteria and compositional limitations described below (HQLA amount). These proposed criteria and limitations are meant to ensure that a covered company's HQLA amount only includes assets with a high potential to generate liquidity through sale or secured borrowing during a stress scenario.

Consistent with the Basel III LCR, the agencies are proposing to divide HQLA into three categories of assets: level 1, level 2A and level 2B liquid assets. Specifically and as described in greater detail below, the agencies are proposing that level 1 liquid assets, which are the highest quality and most liquid assets, be included in a covered company's HQLA amount without a limit. Level 2A and 2B liquid assets have characteristics that are associated with being relatively stable and significant sources of liquidity, but not to the same degree as level 1 liquid assets. Accordingly, level 2A liquid assets would be subject to a 15 percent haircut and, when combined with level 2B liquid assets, could not exceed 40 percent of the total stock of HQLA. Level 2B liquid assets, which are associated with a lesser degree of liquidity and more volatility than level 2A liquid assets, would be subject to a 50 percent haircut and could not exceed 15 percent of the total stock of HQLA. These haircuts and caps are set forth in section 21 of the proposed rule.

A covered company would include assets in each HQLA category as required by the proposed rule as of a calculation date, irrespective of an asset's residual maturity. A description of the methodology for calculating the HQLA amount, including the caps on level 2A and level 2B liquid assets and the requirement to calculate adjusted and unadjusted amounts of HQLA, is described in section II.A.5 below.

1. Liquidity Characteristics of HQLA

Assets that would qualify as HQLA should be easily and immediately convertible into cash with little or no loss of value during a period of liquidity stress. In identifying the types of assets that would qualify as HQLA, the agencies considered the following categories of liquidity characteristics, which are generally consistent with those of the Basel III LCR: (a) Risk profile; (b) market-based characteristics; and (c) central bank eligibility.

a. Risk Profile

Assets that are appropriate for consideration as HQLA tend to be lower risk. There are various forms of risk that can be associated with an asset, including liquidity risk, market risk, credit risk, inflation risk, foreign exchange risk, and the risk of subordination in a bankruptcy or insolvency. Assets appropriate for consideration as HQLA would be expected to remain liquid across various stress scenarios and should not suddenly lose their liquidity upon the occurrence of a certain type of risk. Also, these assets generally experience “flight to quality” during a crisis, wherein investors sell their other holdings to buy more of these assets in order to reduce the risk of loss and increase the ability to monetize assets as necessary to meet their own obligations.

Assets that may be highly liquid under normal conditions but experience wrong-way risk and could become less liquid during a period of stress would not be appropriate for consideration as HQLA. For example, securities issued or guaranteed by many companies in the financial sector

have been more prone to lose value and, as a result, become less liquid and lose value in times of liquidity stress due to the high correlation between the health of these companies and the health of the financial markets generally. This correlation was evident during the recent financial crisis, as most debt issued by such companies traded at significant discounts for a prolonged period. Because of this high potential for wrong-way risk, consistent with the Basel III LCR standard, the proposed rule would exclude assets issued by companies that are primary actors in the financial sector from HQLA.

See infra

section II.A.2.c.

Identification of companies with high potential for wrong-way risk under the proposal is discussed below in section II.A.2.

b. Market-Based Characteristics

The agencies also have found that assets appropriate for consideration as HQLA generally exhibit characteristics that are market-based in nature. First, these assets tend to have active outright sale or repurchase markets at all times with significant diversity in market participants as well as high volume. This market-based liquidity characteristic may be demonstrated by historical evidence, including evidence during recent periods of market liquidity stress, of low bid-ask spreads, high trading volumes, a large and diverse number of market participants, and other factors. Diversity of market participants, on both the buy and sell

sides, is particularly important because it tends to reduce market concentration and is a key indicator that a market will remain liquid. Also, the presence of multiple committed market makers is another sign that a market is liquid.

Second, assets that are appropriate for consideration as HQLA generally tend to have prices that do not incur sharp price declines, even during times of stress. Volatility of traded prices and bid-ask spreads during normal times are simple proxy measures of market volatility; however, there should be historical evidence of relative stability of market terms (such as prices and haircuts) and volumes during stressed periods. To the extent that an asset exhibits price or volume fluctuation during times of stress, assets appropriate for consideration as HQLA tend to increase in value and experience a flight to quality during such times, as historically, the market moves into more liquid assets in times of systemic crisis.

Third, assets that can serve as HQLA tend to be easily and readily valued. The agencies generally have found that an asset's liquidity is typically higher if market participants agree on its valuation. Assets with more standardized, homogenous, and simple structures tend to be more fungible, thereby promoting liquidity. The pricing formula of more liquid assets generally is easy to calculate when it is based upon sound assumptions and publicly available inputs. Whether an asset is listed on an active and developed exchange can serve as a key indicator of an asset's price transparency and liquidity.

c. Central Bank Eligibility

Assets that a covered company can pledge at a central bank as collateral for intraday liquidity needs and overnight liquidity facilities in a jurisdiction and in a currency where the bank has access to the central bank generally tend to be liquid and, as such, are appropriate for consideration as HQLA. In the past, central banks have provided a backstop to the supply of banking system liquidity under conditions of severe stress. Central bank eligibility should, therefore, provide additional assurance that assets could be used in acute liquidity stress events without adversely affecting the broader financial system and economy. However, central bank eligibility is not itself sufficient to categorize an asset as HQLA; all of the proposed rule's requirements for HQLA would need to be met if central bank eligible assets are to qualify as HQLA.

What, if any, other characteristics should be considered by the agencies in analyzing the liquidity of an asset?

2. Qualifying Criteria for Categories of HQLA

The characteristics of HQLA discussed above are reflected in the proposed rule's qualifying criteria for HQLA. The criteria, set forth in section 20 of the proposed rule, are designed to identify assets that exhibit low risk and limited price volatility, are traded in high-volume, deep markets with transparent pricing, and that are eligible to be pledged at a central bank. Consistent with these characteristics and the BCBS LCR framework, the proposed rule would establish general criteria for all HQLA and specific requirements for each category of HQLA. For example, most of the assets in these categories would need to meet the proposed rule's definition of “liquid and readily-marketable” in order to be included in HQLA. Under the proposed rule, an asset would be liquid and readily-marketable if it is traded in an active secondary market with more than two committed market makers, a large number of committed non-market maker participants on both the buying and selling sides of transactions, timely and observable market prices, and high trading volumes. The “liquid and readily-marketable” requirement is meant to ensure that assets included in HQLA exhibit a level of liquidity that would allow a covered company to convert them into cash during times of stress and, therefore, to meet its obligations when other sources of funding may be reduced or unavailable. Timely and observable market prices make it likely that a buyer could be found and that a price could be obtained within a short period of time such that a covered company could convert the assets to cash, as needed.

As noted above, assets that are included in HQLA should not be issued by financial sector entities since they would then be correlated with covered companies (or wrong-way risk assets). In the proposed rule, financial sector entities are defined as regulated financial companies, investment companies, non-regulated funds, pension funds, investment advisers, or a consolidated subsidiary of any of the foregoing. HQLA also could not be issued by any company (or any of its consolidated subsidiaries) that an agency has determined should be treated the same for the purposes of this proposed rule as a regulated financial company, investment company, non-regulated fund, pension fund, or investment adviser, based on activities similar in scope, nature, or operations to those entities (identified company).

The term “regulated financial company” under the proposal would include bank holding companies and savings and loan holding companies (depository institution holding companies); nonbank financial companies supervised by the Board under Title I of the Dodd-Frank Act; depository institutions; foreign banks; credit unions; industrial loan companies, industrial banks, or other similar institutions described in section 2 of the Bank Holding Company Act; national banks, state member banks, or state nonmember banks that are not depository institutions; insurance companies; securities holding companies (as defined in section 618 of the Dodd-Frank Act);

broker-dealers or dealers registered with the SEC; futures commission merchants and swap dealers, each as defined in the Commodity Exchange Act;

or security-based swap dealers defined in section 3 of the Securities Exchange Act.

It would also include any designated financial market utility, as defined in section 803 of the Dodd-Frank Act.

The definition also includes foreign companies if they are supervised and regulated in a manner similar to the institutions listed above.

12 U.S.C. 1850a(a)(4).

7 U.S.C. 1a(28) and (49).

15 U.S.C. 78c(a)(71).

12 U.S.C. 5462(4).

Under paragraph (8) of the proposed rule's definition of “regulated financial company,” the following would not be considered regulated financial companies: U.S. government-sponsored enterprises; small business investment companies, as defined in section 102 of the Small Business Investment Act of 1958 (15 U.S.C. 661

et seq.

); entities designated as Community Development Financial Institutions (CDFIs) under 12 U.S.C. 4701

et seq.

and 12 CFR part 1805; and central banks, the Bank for International Settlements, the International Monetary Fund, or a multilateral development bank.

In addition, a “regulated financial company” would include a company that is included in the organization chart of a depository institution holding company on the Form FR Y-6, as listed in the hierarchy report of the depository institution holding company produced by the National Information Center (NIC) Web site, provided that the top tier depository institution holding company is subject to the proposed rule (FR Y-6 companies).

See

http://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx.

FR Y-6 companies are typically controlled by the filing depository institution holding company under the Bank Holding Company Act. Although many such companies are not consolidated on the financial statements of a depository institution holding company, the links between the

companies are sufficiently significant that the agencies believe it would be appropriate to exclude securities issued by FR Y-6 companies (and their consolidated subsidiaries) from HQLA, for the same policy reasons that other regulated financial companies' securities would be excluded from HQLA under the proposal. The organizational hierarchy chart produced by the NIC Web site reflects (as updates regularly occur) the FR Y-6 companies a depository institution holding company must report on the form. The agencies are proposing this method for identifying these companies in order to reduce burden associated with obtaining the FR Y-6 organizational charts for all depository institution holding companies subject to the proposed rule, because the charts are not uniformly available by electronic means.

Under the proposal, investment companies would include companies registered with the SEC under the Investment Company Act of 1940

and investment advisers would include companies registered with the SEC as investment advisers under the Investment Advisers Act of 1940,

as well as the foreign equivalent of such companies. Non-regulated funds would include hedge funds or private equity funds whose investment advisers are required to file SEC Form PF (Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors), and any consolidated subsidiary of such fund, other than a small business investment company, as defined in section 102 of the Small Business Investment Act of 1958 (15 U.S.C. 661

et seq.

). Pension funds would be defined as employee benefit plans as defined in ERISA and government pension plans,

as well as their foreign equivalents. Securities issued by the foregoing entities or their consolidated subsidiaries would be excluded from HQLA.

15 U.S.C. 80a-1

et seq.

15 U.S.C. 80b-1

et seq.

See

paragraph (7) of § __.3 of the proposed rule's definition of “regulated financial company.”

What, if any, modifications should the agencies consider to the definition of “regulated financial company”? What, if any, entities should be added to, or removed from, the definition and why? What operational difficulties may be involved in identifying a “regulated financial company,” including companies a depository institution holding company must report on the FR Y-6 organizational chart (or in identifying consolidated subsidiaries)? How should those operational difficulties be addressed? What alternatives for identifying companies reported on the FR Y-6 should be considered, and what difficulties may be associated with using the organizational hierarchy chart produced by the NIC Web site?

What, if any, modifications should the agencies consider to the definition of “non-regulated funds”? Should hedge funds or private equity funds whose managers are not required to file Form PF be included in the definition? What operational or other difficulties may covered companies encounter in identifying “non-regulated” funds and their consolidated subsidiaries? What other definitions would generally capture hedge funds and private equity funds in an appropriate and clear manner? Provide detailed suggestions and justifications.

What, if any, modifications should the agencies consider to the definitions of “investment company,” “pension fund,” “investment adviser,” or “identified company”? Should investment companies or investment advisers not required to register with the SEC be included in the respective definitions?

What risk or operational issues should the agencies consider regarding the definitions and the exclusion of securities issued by the companies described above from HQLA, as well as the higher outflow rates applied to such companies, as described below?

What additional factors or characteristics should the agencies consider with respect to identifying those companies whose securities should be excluded from HQLA and should be subject to the accompanying higher outflow rates for such companies, as discussed below?

How well does the proposed definition of “liquid and readily-marketable” meet the agencies' goal of identifying HQLA that could be converted into cash in order to meet a covered company's liquidity needs during times of stress? What other characteristics, if any, of a traded security and relevant markets should the agencies consider? What other approaches for capturing this liquidity characteristic should the agencies consider? Provide detailed description of and justifications for any alternative approaches.

a. Level 1 Liquid Assets

Under the proposed rule, a covered company could include the full fair value of level 1 liquid assets in its HQLA amount. These assets have the highest potential to generate liquidity for a covered company during periods of severe liquidity stress and thus would be includable in a covered company's HQLA amount without limit. As discussed in further detail in this section, the proposed rule would include the following assets in level 1 liquid assets: (1) Federal Reserve Bank balances; (2) foreign withdrawable reserves; (3) securities issued or unconditionally guaranteed as to the timely payment of principal and interest by the U.S. Department of the Treasury; (4) liquid and readily-marketable securities 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 United States government); (5) 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 (6) certain debt securities issued by sovereign entities.

Reserve Bank Balances

Under the BCBS LCR framework, “central bank reserves” are included in HQLA. In the United States, Federal Reserve Banks are generally authorized under the Federal Reserve Act to maintain balances only for “depository institutions” and for other limited types of organizations.

Pursuant to the Federal Reserve Act, there are different kinds of balances that depository institutions may maintain at Federal Reserve Banks, and they are maintained in different kinds of Federal Reserve Bank accounts. Balances that depository institutions must maintain to satisfy a reserve balance requirement must be maintained in the depository institution's “master account” at a Federal Reserve Bank or, if the institution has designated a pass-through correspondent, in the correspondent's master account. A “reserve balance requirement” is the amount that a depository institution must maintain in an account at a Federal Reserve Bank in order to satisfy that portion of the institution's reserve requirement that is not met with vault cash. Balances in excess of those required to be maintained to satisfy a reserve balance requirement, known as “excess balances,” may be maintained in a master account or in an “excess balance account.” Finally, balances maintained for a specified period of time, known as “term deposits,” are

maintained in a term deposit account offered by the Federal Reserve Banks. The proposed rule therefore uses the term “Reserve Bank balances” as the relevant term to capture central bank reserves in the United States.

See

12 U.S.C. 342.

Under the proposed rule, all balances a depository institution maintains at a Federal Reserve Bank (other than balances that an institution maintains on behalf of another institution, such as balances it maintains on behalf of a respondent or on behalf of an excess balance account participant) would be considered level 1 liquid assets, except for certain term deposits as explained immediately below.

Consistent with the concept of “central bank reserves” in the BCBS LCR framework, the proposed rule includes in its definition of “Reserve Bank balances” only those term deposits offered and maintained pursuant to terms and conditions that (1) explicitly and contractually permit such term deposits to be withdrawn upon demand prior to the expiration of the term, or that (2) permit such term deposits to be pledged as collateral for term or automatically-renewing overnight advances from a Federal Reserve Bank. None of the term deposits offered under the Federal Reserve's Term Deposit Facility as currently configured would be included in “Reserve Bank balances” because all term deposits offered to date by the Federal Reserve Banks are not explicitly and contractually repayable on notice. Similarly, all term deposits offered to date may not serve as collateral against which the depository institutions can borrow from a Federal Reserve Bank on a term or automatically renewable basis. Federal Reserve term deposits that are not included in “Reserve Bank balances” and, therefore, would not be considered level 1 liquid assets under the proposed rule could be included in a covered company's inflows, if the terms of such deposits expire within 30 days of the calculation date.

Under the proposed rule, a covered company's reserve balance requirement would be subtracted from its level 1 liquid asset amount, because a depository institution generally satisfies its reserve requirement by maintaining vault cash or a balance in an account at a Federal Reserve Bank.

See

§ __.21(b)(1) of the proposed rule.

Foreign Withdrawable Reserves

The agencies are proposing that reserves held by a covered company in a foreign central bank that are not subject to restrictions on use be included in level 1 liquid assets. Similar to Reserve Bank balances, foreign withdrawable reserves should be able to serve as a medium of exchange in the currency of the country where they are held.

United States Government Securities

The proposed rule would include in level 1 liquid assets securities issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S Department of the Treasury. Generally, these types of securities have exhibited high levels of liquidity even in times of extreme stress to the financial system, and typically are the securities that experience the most “flight to quality” when investors adjust their holdings. Level 1 liquid assets would also include securities issued by any other U.S. government agency whose obligations are fully and explicitly guaranteed by the full faith and credit of the U.S. government, provided that they are liquid and readily-marketable.

Certain Sovereign and Multilateral Organization Securities

The proposed rule would include in level 1 liquid assets securities that are a claim on, or a claim 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, provided that such securities meet the following three requirements.

First, these securities must have been assigned a zero percent risk weight under the standardized approach for risk-weighted assets of the agencies' regulatory capital rules.

Generally, securities issued by sovereigns that are assigned a zero percent risk weight have shown resilient liquidity characteristics. Second, the proposed rule would require these securities to be liquid and readily-marketable, as discussed above. Third, these securities would be required to be issued by an entity whose obligations have a proven record as a reliable source of liquidity in the repurchase or sales markets during stressed market conditions. A covered company could demonstrate a historical record that meets this criterion through reference to historical market prices during times of general liquidity stress, such as the period of financial market stress experienced from 2007 to 2008. Covered companies should also look to other periods of systemic and idiosyncratic stress to see if the asset under consideration has proven to be a reliable source of liquidity. Fourth, these securities could not be an obligation of a regulated financial company, non-regulated fund, pension fund, investment adviser, or identified company or any consolidated subsidiary of such entities.

See

12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve), and 12 CFR part 324 (FDIC).

Certain Foreign Sovereign Debt Securities

Debt securities issued by a foreign sovereign entity that are not assigned a zero percent risk weight under the standardized approach for risk-weighted assets of the agencies' regulatory capital rules may serve as level 1 liquid assets if they are liquid and readily marketable, the sovereign entity issues such debt securities in its own currency, and a covered company holds the debt securities to meet its cash outflows in the jurisdiction of the sovereign entity, as calculated in the outflow section of the proposed rule. These assets would be appropriately included as level 1 liquid assets despite having a risk weight greater than zero because a sovereign often is able to meet obligations in its own currency through control of its monetary system, even during fiscal challenges.

10.

What, if any, alternative factors should be considered in determining the assets that qualify as level 1 liquid assets? What, if any, additional assets should qualify as level 1 liquid assets based on the characteristics for HQLA that the agencies discussed above? Provide detailed justification based on the liquidity characteristics of any such assets, including historical data and observations.

11.

Are there any assets that would qualify as level 1 liquid assets under the proposed rule that should not qualify based on their liquidity characteristics? If so, which assets should not be included and why? Provide detailed justification based on the liquidity characteristics of an asset in question, including historical data and observations.

b. Level 2A Liquid Assets

Under the proposed rule, level 2A liquid assets would include certain claims on, or claims guaranteed by a U.S. government sponsored enterprise (GSE)

and certain claims on, or claims guaranteed by, a sovereign entity or a multilateral development bank. Assets would be required to be liquid and

readily-marketable, as described above, to be considered level 2A liquid assets.

GSEs include the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), the Farm Credit System, and the Federal Home Loan Bank System.

The agencies are aware that some securities issued and guaranteed by U.S. GSEs consistently trade in very large volumes and generally have been highly liquid, including during times of stress. However, the U.S. GSEs remain privately owned corporations, and their obligations do not have the explicit guarantee of the full faith and credit of the United States. The agencies have long held the view that obligations of U.S. GSEs should not be accorded the same treatment as obligations that carry the explicit guarantee of the U.S. government and under the agencies' regulatory capital rules, have currently and historically assigned a 20 percent risk weight to their obligations and guarantees, rather than the zero percent risk weight assigned to securities guaranteed by the full faith and credit of the United States. Consistent with the agencies' regulatory capital rules, the agencies are not assigning the most favorable regulatory treatment to U.S. GSEs' issuances and guarantees under the proposed rule and therefore are assigning them to the level 2A liquid asset category, so long as they are investment grade consistent with the OCC's investment regulation (12 CFR part 1) as of the calculation date. Additionally, consistent with the agencies' regulatory capital rules' higher risk weight for the preferred stock of U.S. GSEs, the agencies are proposing to exclude such preferred stock from HQLA.

Level 2A liquid assets also would include claims on, or claims guaranteed by a sovereign entity or a multilateral development bank that: (1) is not included in level 1 liquid assets; (2) is assigned no higher than a 20 percent risk weight under the standardized approach for risk-weighted assets of the agencies' regulatory capital rules;

(3) is issued by an entity whose obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions; and (4) is not an obligation of a regulated financial company, investment company, non-regulated fund, pension fund, investment adviser, identified company, or any consolidated subsidiary of the foregoing. A covered company could demonstrate that a claim on or claims guaranteed by a sovereign entity or a multilateral development bank that has issued obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions through reference to historical market prices during times of general liquidity stress.

Covered companies should look to multiple periods of systemic and idiosyncratic liquidity stress in compiling such records.

See

12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve), and 12 CFR part 324 (FDIC).

This would be demonstrated if the market price of the security or equivalent securities of the issuer declined by no more than 10 percent or the market haircut demanded by counterparties to secured funding or lending transactions that are collateralized by such security or equivalent securities of the issuer increased by no more than 10 percentage points during a 30 calendar-day period of significant stress.

The proposed rule likely would not permit covered bonds and securities issued by public sector entities, such as a state, local authority, or other government subdivision below the level of a sovereign (including U.S. states and municipalities) to qualify as HQLA at this time. While these assets are assigned a 20 percent risk weight under the standardized approach for risk-weighted assets in the agencies' regulatory capital rules, the agencies believe that, at this time, these assets are not liquid and readily-marketable in U.S. markets and thus do not exhibit the liquidity characteristics necessary to be included in HQLA under this proposed rule. For example, securities issued by public sector entities generally have low average daily trading volumes. Covered bonds, in particular, exhibit significant risks regarding interconnectedness and wrong-way risk among companies in the financial sector such as regulated financial companies, investment companies, and non-regulated funds.

12.

What other assets, if any, should the agencies include in level 2A liquid assets? How should such assets be identified and what are the characteristics of those assets that would justify their inclusion in level 2A liquid assets?

13.

Are there any assets that would qualify as level 2A liquid assets under the proposed rule that should not qualify based on their liquidity characteristics? If so, which assets and why? Provide a detailed justification based on the liquidity characteristics of the asset in question, including historical data and observations.

14.

What alternative treatment, if any, should the agencies consider for obligations of U.S. GSEs and why? Provide justification and supporting data.

c. Level 2B Liquid Assets

Under the proposed rule, level 2B liquid assets would include certain publicly traded corporate debt securities and publicly traded shares of common stock that are liquid and readily-marketable, as discussed above. The limitation of level 2B liquid assets to those that are publicly traded is meant to ensure a minimum level of liquidity, as privately traded assets are less liquid. Under the proposed rule, the definition of “publicly traded” would be consistent with the definition used in the agencies' regulatory capital rules and would identify securities traded on registered exchanges with liquid two-way markets.

A two-way market would be defined as market where there are independent bona fide offers to buy and sell, so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a relatively short time frame, conforming to trade custom. This definition is also consistent with the definition in the agencies' capital rules

and is designed to identify markets with transparent and readily available pricing, which, for the reasons discussed above, is fundamental to the liquidity of an asset.

See id.

Id.

Publicly Traded Corporate Debt Securities

Publicly traded corporate debt securities would be considered level 2B liquid assets under the proposed rule if they meet three requirements (in addition to being liquid and readily-marketable). First, the securities would be required to meet the definition of “investment grade” under 12 CFR part 1 as of a calculation date.

This standard would ensure that assets not meeting the required credit quality standard for bank investment would not be included in HQLA. The agencies believe that meeting this standard is indicative of lower risk and, therefore, higher liquidity for a corporate debt security. Second, the securities would be required to have been issued by an entity whose obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions. A covered company would be required to demonstrate this record of liquidity reliability and lower volatility during times of stress by showing that the market price of the publicly traded debt securities or equivalent securities of the issuer declined by no more than 20 percent or the market haircut demanded by counterparties to secured lending and secured funding transactions that were collateralized by such debt

securities or equivalent securities of the issuer increased by no more than 20 percentage points during a 30 calendar-day period of significant stress. As discussed above, a covered company could demonstrate a historical record that meets this criterion through reference to historical market prices of the debt security during times of general liquidity stress.

12 CFR 1.2(d).

Finally, for the reasons discussed above, the debt securities could not be obligations of a regulated financial company, investment company, non-regulated fund, pension fund, investment adviser, identified company, or any consolidated subsidiary of the foregoing.

Publicly Traded Shares of Common Stock

Under the proposed rule, publicly traded shares of common stock could be included in a covered company's level 2B liquid assets if the shares meet the five requirements set forth below (in addition to being liquid and readily-marketable). Because of general statutory prohibitions on holding equity investments for their own account,

depository institutions subject to the proposed rule would not be able to include common stock in their level 2B liquid assets (including common stock held pursuant to authority for debt previously contracted, as discussed further below). However, a depository institution could include in its consolidated level 2B liquid assets common stock permissibly held by a consolidated subsidiary, where the investments meet the proposed level 2B requirements for publicly traded shares of common stock. Furthermore, a depository institution could only include in its level 2B assets the amount of a consolidated subsidiary's publicly traded shares of common stock if it is held to cover the net cash outflows for the consolidated subsidiary. For example, if Subsidiary A holds level 2B publicly traded common stock of $100 in a legally permissible manner and has outflows of $80, Subsidiary A could not contribute more than $80 of its level 2B publicly traded common stock to its parent depository institution's consolidated level 2B assets.

12 U.S.C. 24(Seventh) (national banks); 12 U.S.C. 1464(c) (federal savings associations); 12 U.S.C. 1831a (state banks); 12 U.S.C. 1831e (state savings associations).

Under the rule, to be considered a level 2B liquid asset, the publicly traded common stock would be required to be included in either: (1) the Standard & Poor's 500 Index (S&P 500); (2) if the stock is held in a non-U.S. jurisdiction to meet liquidity risks in that jurisdiction, an index that the covered company's supervisor in that jurisdiction recognizes for purposes of including the equities as level 2B liquid assets under applicable regulatory policy; or (3) any other index for which the covered company can demonstrate to the satisfaction of its primary federal supervisor that the stock is as liquid and readily-marketable as equities traded on the S&P 500.

The agencies believe that being included in a major stock index is an important indicator of the liquidity of a stock, because such stock tends to have higher trading volumes and lower bid-ask spreads during stressed market conditions than those that are not listed. The agencies identified the S&P 500 as being appropriate for this purpose given that it is considered a major index in the United States and generally includes the most liquid and actively traded stocks. Moreover, stocks that are included in the S&P 500 are selected by a committee that considers, among other characteristics, the volume of trading activity and length of time the stock has been publicly traded.

Second, to be considered a level 2B liquid asset, a covered company's publicly traded common stock would be required to be issued in: (1) U.S. dollars; or (2) the currency of a jurisdiction where the covered company operates and the stock offsets its net cash outflows in that jurisdiction. This requirement is meant to ensure that, upon liquidation of the stock, the currency received from the sale matches the outflow currency.

Third, the common stock would be required to have been issued by an entity whose common stock has a proven record as a reliable source of liquidity in the repurchase or sales markets during stressed market conditions. Under the proposed rule, a covered company would be required to demonstrate this record of reliable liquidity by showing that the market price of the common stock or equivalent securities of the issuer declined by no more than 40 percent or that the market haircut, as evidenced by observable market prices, of secured funding or lending transactions collateralized by such common stock or equivalent securities of the issuer increased by no more than 40 percentage points during a 30 calendar-day period of significant stress. This limitation is meant to account for the volatility inherent in equities, which is a risk to the preservation of liquidity value. As above, a covered company could demonstrate this historical record through reference to the historical market prices of the common stock during times of general liquidity stress.

Fourth, as with the other asset categories of HQLA and for the same reasons, common stock included in level 2B liquid assets may not be issued by a regulated financial company, investment company, non-regulated fund, pension fund, investment adviser, identified company, or any consolidated subsidiary of the foregoing. During the recent financial crisis, the common stock of such companies experienced significant declines in value and the agencies believe that such declines indicate those assets would be less likely to provide substantial liquidity during future periods of stress and, therefore, are not appropriate for inclusion in a covered company's stock of HQLA.

Fifth, if held by a depository institution, the publicly traded common stock could not be acquired in satisfaction of a debt previously contracted (DPC). In general, publicly traded common stock may be acquired by a depository institution to prevent a loss from a DPC. However, in order for a depository institution to avail itself of the authority to hold DPC assets, such as by holding publicly traded common stock, such assets typically must be divested in a timely manner.

The agencies believe that depository institutions should make a good faith effort to dispose of DPC publicly traded common stock as soon as commercially reasonable, subject to the applicable legal time limits for disposition. The agencies are concerned that permitting depository institutions to include DPC publicly traded common stock in level 2B liquid assets may provide an inappropriate incentive for depository institutions to hold such assets beyond a commercially reasonable period for disposition. Therefore, the proposal would prohibit depository institutions from including DPC publicly traded common stock in level 2B liquid assets.

See generally

12 CFR 1.7 (OCC); 12 U.S.C. 1843(c)(2) (Board); 12 CFR 362.1(b)(3) (FDIC).

15.

What, if any, additional criteria should the agencies consider in determining the type of securities that should qualify as level 2B liquid assets? What alternatives to the S&P 500 should be considered in determining the liquidity of an equity security and why? In addition to an investment grade classification, what additional characteristics denote the liquidity quality of corporate debt that the agencies would be legally permitted to use in light of the Dodd-Frank Act prohibition against agencies' regulations referencing credit ratings? The agencies

solicit detailed comment, with supporting data, on the advantages and disadvantages of the proposed investment grade criteria as well as recommended alternatives.

16.

Are there any assets that would qualify as level 2B liquid assets under the proposed rule that should not qualify based on their liquidity characteristics? If so, which assets and why? Provide a detailed justification based on the liquidity characteristics of the asset in question, including historical data and observations.

17.

What other criteria, if any, should the agencies consider for establishing an adequate historical record during times of liquidity stress in order to meet the relevant criteria under the proposed rule? What operational burdens, if any, are associated with this requirement? What other standards, if any, should the agencies consider to achieve the same result?

18.

Is the proposed treatment for publicly traded common stock appropriate? Why or why not? Are there circumstances under which a depository institution may permissibly hold publicly traded common stock that the agencies should not prohibit from being included in level 2B liquid assets? Please provide specific examples. Under what circumstances, if any, should DPC publicly traded common stock be included in a depository institution's level 2B liquid assets and why? What liquidity risks, if any, are introduced or mitigated if DPC publicly traded common stock are permitted in a depository institution's level 2B liquid assets?

3. Operational Requirements for HQLA

Under the proposed rule, an asset that a covered company includes in its HQLA would need to meet the following operational requirements. These operational requirements are intended to better ensure that a covered company's HQLA can be liquidated in times of stress. Several of these requirements relate to the monetization of an asset, by which the agencies mean the receipt of funds from the outright sale of an asset or from the transfer of an asset pursuant to a repurchase agreement.

First, a covered company would be required to have the operational capability to monetize the HQLA. This capability would be demonstrated by: (1) implementing and maintaining appropriate procedures and systems to monetize the asset at any time in accordance with relevant standard settlement periods and procedures; and (2) periodically monetizing a sample of HQLA that reasonably reflects the composition of the covered company's total HQLA portfolio, including with respect to asset type, maturity, and counterparty characteristics. This requirement is designed to ensure a covered company's access to the market, the effectiveness of its processes for monetization, and the availability of the assets for monetization and to minimize the risk of negative signaling during a period of actual stress. The agencies would monitor the procedures, systems, and periodic sample liquidations through their supervisory process.

Second, a covered company would be required to implement policies that require all HQLA to be under the control of the management function of the covered company that is charged with managing liquidity risk. To do so, a covered company would be required either to segregate the assets from other assets, with the sole intent to use them as a source of liquidity or to demonstrate its ability to monetize the assets and have the resulting funds available to the risk management function, without conflicting with another business or risk management strategy. Thus, if an HQLA were being used to hedge a specific transaction, such as holding an asset to hedge a call option that the covered company had written, it could not be included in the HQLA amount because its sale would conflict with another business or risk management strategy. However, if HQLA were being used as a general macro hedge, such as interest rate risk of the covered company's portfolio, it could still be included in the HQLA amount. This requirement is intended to ensure that a central function of a covered company has the authority and capability to liquidate HQLA to meet its obligations in times of stress without exposing the covered company to risks associated with specific transactions and structures that had been hedged. There were instances at specific firms during the recent financial crisis where unencumbered assets of the firms were not available to meet liquidity demands because the firms' treasuries were restricted or did not have access to such assets.

Third, a covered company would be required to include in its total net cash outflow amount the amount of cash outflow that would result from the termination of any specific transaction hedging HQLA. The impact of the hedge would be required to be included in the outflow because if the covered company were to liquidate the asset, it would be required to close out the hedge to avoid creating a risk exposure. This requirement is not intended to apply to general macro hedges such as holding interest rate derivatives to adjust internal duration or interest rate risk measurements, but is intended to cover specific hedges that would become risk exposures if the asset were sold.

Fourth, a covered company would be required to implement and maintain policies and procedures that determine the composition of the assets in its HQLA amount on a daily basis by (1) identifying where its HQLA is held by legal entity, geographical location, currency, custodial or bank account, and other relevant identifying factors, (2) determining that the assets included in a covered company's HQLA amount continue to qualify as HQLA, (3) ensuring that the HQLA in the HQLA amount are appropriately diversified by asset type, counterparty, issuer, currency, borrowing capacity or other factors associated with the liquidity risk of the assets, and (4) ensuring that the amount and type of HQLA included in a covered company's HQLA amount that is held in foreign jurisdictions is appropriate with respect to the covered company's net cash outflows in foreign jurisdictions.

The agencies also recognize that significant international banking activity occurs through non-U.S. branches of legal entities organized in the United States and that a foreign branch's activities may give rise to the need to hold HQLA in the jurisdiction where it is located. While the agencies believe that holding HQLA in a geographic location where it is needed to meet liquidity needs such as those envisioned by the LCR is appropriate, they are concerned that other factors such as taxes, re-hypothecation rights, and legal and regulatory restrictions may encourage certain companies to hold a disproportionate amount of their HQLA in locations outside the United States where unforeseen impediments may prevent timely repatriation of liquidity during a crisis. Nonetheless, establishing quantitative limits on the amount of HQLA that can be held abroad and still count towards a U.S. domiciled legal entity's LCR requirement is complex and can be overly restrictive in some cases.

Therefore, the agencies are proposing to require a covered company to establish policies to ensure that HQLA maintained in locations is appropriate with respect to where the net cash outflows arise. By requiring that there be a correlation between the HQLA amount held outside of the United States and the net cash outflows attributable to non-U.S. operations, the agencies intend to increase the likelihood that HQLA is available to a covered company and to avoid

repatriation concerns from HQLA held in another jurisdiction.

The agencies note that assets that meet the criteria of HQLA and are held by a covered company as either “available-for-sale” or “held-to-maturity” can be included in HQLA, regardless of such designation.

19.

Are the proposed operational criteria sufficiently clear to determine whether an asset could be included in the pool of HQLA? Why or why not? If not, what requirements need clarification?

20.

What costs or other burdens would be incurred as a result of the proposed operational requirements? What modifications should the agencies consider to mitigate such costs or burdens, while establishing appropriate operational criteria for HQLA to ensure its liquidity? Please provide detailed explanations and justifications.

21.

Given that, absent the requirement that a covered company develop and maintain policies and procedures to ensure sufficient HQLA is held domestically, a covered company could theoretically hold its entire HQLA in a foreign branch located in a jurisdiction that could impede its use to support U.S. operations, should the proposed rule be supplemented with quantitative restrictions on the amount of HQLA that can be held in foreign branches and included in the liquidity coverage ratio calculation? If so, how should the rule require a correlation between the geographic location of a covered company's HQLA and the location of the outflows the HQLA is intended to cover?

22.

The agencies seek comment on all aspects of the criteria for HQLA, including issues of domestic and international competitive equity, and the adequacy of the proposed HQLA criteria in meeting the agencies' goal of requiring a covered company to maintain a buffer of liquid assets sufficient to withstand a 30 calendar-day stress period.

4. Generally Applicable Criteria for HQLA

Under the proposed rule, assets would be required to meet the following generally applicable criteria to be considered as HQLA.

a. Unencumbered

To be included in HQLA, an asset would be required to be unencumbered as defined under the proposed rule. First, the asset would be required to be free of legal, regulatory, contractual, or other restrictions on the ability of a covered company to monetize asset. The agencies believe that, as a general matter, HQLA should only include assets that could be converted easily into cash. Second, the asset could not be pledged, explicitly or implicitly, to secure or provide credit-enhancement to any transaction, except that the asset could be pledged to a central bank or a U.S. GSE to secure potential borrowings if credit secured by the asset has not been extended to the covered company or its consolidated subsidiaries. This exception is meant to account for the ability of central banks and U.S. GSEs to lend against the posted HQLA or to return the posted HQLA, in which case a covered company could

sell

or engage in a repurchase agreement with the assets to receive cash. This exception is also meant to permit collateral that is covered by a blanket lien from a U.S. GSE to be included in HQLA.

b. Client Pool Security

An asset included in HQLA could not be a client pool security held in a segregated account or cash received from a repurchase agreement on client pool securities held in a segregated account. The proposed rule defines a client pool security as one that is owned by a customer of a covered company and is not an asset of the organization, regardless of the organization's hypothecation rights to the security. Since client pool securities held in a segregated account are not freely available to meet all possible liquidity needs, they should not count as a source of liquidity.

c. Treatment of HQLA Held by U.S. Consolidated Subsidiaries

Under the proposal, HQLA held in a legal entity that is a U.S. consolidated subsidiary of a covered company would be included in HQLA subject to specific limitations depending on whether the subsidiary is subject to the proposed rule and is therefore required to calculate a liquidity coverage ratio under the proposed rule.

If the consolidated subsidiary is subject to a minimum liquidity coverage ratio under the proposed rule, then a covered company could include in its HQLA amount the HQLA held in the consolidated subsidiary in an amount up to the consolidated subsidiary's net cash outflows calculated to meet its liquidity coverage ratio requirement. The covered company could also include in its HQLA amount any additional amount of HQLA the monetized proceeds from which would be available for transfer to the covered company's top-tier parent entity during times of stress without statutory, regulatory, contractual, or supervisory restrictions. Regulatory restrictions would include, for example, 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). Supervisory restrictions may include, but would not be limited to, enforcement actions, written agreements, supervisory directives or requests to a particular subsidiary that would directly or indirectly restrict the subsidiary's ability to transfer the HQLA to the parent covered company.

If the consolidated subsidiary is not subject to a minimum liquidity coverage ratio under section 10 of the proposed rule, a covered company could include in its HQLA amount the HQLA held in the consolidated subsidiary in an amount up to the net cash outflows of the consolidated subsidiary that are included in the covered company's calculation of its liquidity coverage ratio, plus any additional amount of HQLA held by the consolidated subsidiary the monetized proceeds from which would be available for transfer to the covered company's top tier parent entity during times of stress without statutory, regulatory, contractual, or supervisory restrictions. This treatment is consistent with the Basel III LCR and ensures that assets in the pool of HQLA can be freely monetized and the proceeds can be freely transferred to a covered company's top-tier parent entity in times of a liquidity stress.

d. Treatment of HQLA Held by Non-U.S. Consolidated Subsidiaries

Consistent with the BCBS liquidity framework, HQLA held by a non-U.S. legal entity that is a consolidated subsidiary of a covered company could be included in a covered company's HQLA in an amount up to the net cash outflows of the non-U.S. consolidated subsidiary that are included in the covered company's net cash outflows, plus any additional amount of HQLA held by the non-U.S. consolidated subsidiary that is available for transfer to the covered company's top-tier parent entity during times of stress without statutory, regulatory, contractual, or supervisory restrictions. The proposal would require covered companies with foreign operations to identify the location of HQLA and net cash outflows and exclude any HQLA above net cash outflows that is not freely available for transfer due to statutory, regulatory, contractual or supervisory restrictions. Such transfer restrictions would include liquidity coverage ratio requirements greater than those that would be established by the proposed rule, counterparty exposure limits, and any other regulatory, statutory, or supervisory limitations. While the

agencies believe it is appropriate for a covered company to hold HQLA in a particular geographic location in order to meet liquidity needs there, they do not believe it is appropriate for a covered company to hold a disproportionate amount of HQLA in locations outside the United States given that unforeseen impediments may prevent timely repatriation of liquidity during a crisis. Therefore, under section 20(f) of the proposal, a covered company would be generally expected to maintain in the United States an amount and type of HQLA that is sufficient to meet its total net cash outflow amount in the United States.

23.

What effects may the provision in section 20(f) that a covered company is generally expected to maintain HQLA in the United States sufficient to meet its total net cash outflow amount in the United States have on a company's management of HQLA? Should the agencies be concerned about the transferability of liquidity between national jurisdictions during a time of financial distress and, if so, would such a requirement be sufficient to allay these concerns? Would holding HQLA in a foreign jurisdiction in an amount beyond such jurisdiction's estimated outflow limit the operational capacity of HQLA to meet liquidity needs in the United States; conversely, would the proposed general requirement unnecessarily disrupt overall banking operations? What changes, if any, to section 20(f) should the agencies consider to ensure that a covered company has sufficient HQLA readily available to meet its outflows in the United States? Should the agencies consider quantitative limits to ensure that a covered company has sufficient HQLA readily available in the United States to meet its net outflows in the United States and support its operations during periods of stress? Why or why

not?

e. Exclusion of Rehypothecated Assets

Under the proposed rule, assets that a covered company received under a rehypothecation right where the beneficial owner has a contractual right to withdraw the asset without remuneration at any time during a 30 calendar-day stress period would not be included in HQLA under the proposed rule. This exclusion extends to assets generated from another asset that was received under such a rehypothecation right. If the beneficial owner has such a right and were to exercise it within a 30 calendar-day stress period, the asset would not be available to support the covered company's liquidity position.

f. Exclusion of Assets Designated as Operational

Assets included in a covered company's HQLA amount could not be specifically designated to cover operational costs. The agencies believe that assets specifically designated to cover costs such as wages or facility maintenance generally would not be available to cover liquidity needs that arise during stressed market conditions.

24.

The agencies seek comment on the proposed rule's description of an unencumbered asset. What, if any, additional criteria should be considered in determining whether an asset is unencumbered for purposes of consideration as HQLA?

25.

What difficulties or lack of clarity, if any, may arise from the proposed operational requirement that HQLA not be a client pool security be held in a segregated account? What, if any, terms could the agencies consider to clarify what securities are captured in this provision? For example, what characteristics should be included to describe the types of accounts that should cause client pool securities to be excluded from HQLA treatment?

26.

What, if any, modifications should the agencies consider to the treatment of HQLA held by consolidated U.S. subsidiaries and why?

27.

The agencies solicit comment on the proposed method for including the HQLA held at non-U.S. consolidated subsidiaries in a covered company's HQLA. Is it appropriate to include in HQLA some amount of HQLA that is held in non-U.S. consolidated subsidiaries? If not, why not? Should the proposed rule be supplemented with quantitative restrictions on the amount of HQLA that can be held in foreign branches and subsidiaries for the liquidity coverage ratio calculation of the consolidated U.S. entity? If so, how should the rule require a correlation between the geographic locations of a covered company's HQLA and the location of the outflows the HQLA is intended to cover? What portion of HQLA held by non-U.S. consolidated subsidiaries is freely available for use in connection with a covered company's U.S. operations during times of stress? In determining the amount of HQLA held at a non-U.S. consolidated subsidiary that a covered company can include in its HQLA, should a covered company be required to take into account any net cash outflows arising in connection with transactions between a non-U.S. entity and another affiliate? What challenges, if any, of the proposed methodology are not addressed? Please suggest specific solutions.

5. Calculation of the HQLA Amount

Instructions for calculating the HQLA amount, including the calculation of the required haircuts and asset caps that the agencies are proposing to apply to level 2 liquid assets, are set forth in section 21 of the proposed rule. For the purposes of calculating a covered company's HQLA amount, the value of level 1, level 2A, and level 2B liquid assets would be equal to the fair value of the assets as determined under U.S. Generally Accepted Accounting Principles (GAAP), multiplied by the appropriate haircut factor and taking in consideration the unwinding of certain transactions.

Consistent with the Basel III LCR, the proposed rule would apply a 15 percent haircut to level 2A liquid assets and a 50 percent haircut to level 2B liquid assets.

These haircuts are meant to recognize that level 2 liquid assets generally are less liquid, have larger haircuts in the repurchase markets, and have more volatile prices in the outright sales markets. Also consistent with the Basel III LCR, the proposed rule would cap the amount of level 2 liquid assets that could be included in the HQLA amount. Specifically, level 2 liquid assets could account for no more than 40 percent of the HQLA amount and level 2B liquid assets could account for no more than 15 percent of the HQLA amount. These caps are meant to ensure that these types of assets, which provide less liquidity as compared to level 1 liquid assets, comprise a smaller portion of a covered company's total HQLA amount such that the majority of the HQLA amount is comprised of level 1 liquid assets.

See

Basel III Revised Liquidity Framework, paragraphs 46-54 and Annex 1,

supra

note 3; proposed rule § __.21(b).

As discussed in more detail in section II.A.5.b of this preamble, the agencies believe the proposed level 2 caps and haircuts should be applied to a covered company's HQLA amount both before and after certain transactions are unwound, such as transactions where HQLA will be exchanged for HQLA within the next 30 calendar days in order to ensure that the HQLA portfolio is appropriately diversified. The calculation of adjusted HQLA would prevent a covered company from being able to manipulate its HQLA portfolio by engaging in transactions such as certain repurchase or reverse repurchase transactions because the HQLA amount, including the caps and haircuts, would be calculated both before and after unwinding those transactions. Formulas for calculating the HQLA amount are provided in section 21 of the proposed

rule. Under these provisions, the HQLA amount would be the sum of the three liquid asset category amounts after the application of appropriate haircuts, less the greater of the amount of HQLA that exceeds the level 2 caps on the first day of a calculation period (unadjusted excess HQLA amount) or the amount of HQLA that exceeds the level 2 caps at the end of a 30 calendar-day stress period after unwinding certain transactions (adjusted excess HQLA amount).[

a. Calculation of Unadjusted Excess HQLA Amount

The unadjusted excess HQLA amount is the sum of the level 2 cap excess amount and the level 2B cap excess amount. The calculation of the unadjusted excess HQLA amount applies the 40 percent level 2 liquid asset cap and the 15 percent level 2B liquid asset cap at the start of a 30 calendar-day stressed period by subtracting the amount of level 2 liquid assets that are in excess of the limits. The unadjusted HQLA excess amount enforces the cap limits without unwinding any transactions.

The method of calculating the level 2 cap excess amount and level 2B cap excess amounts is set forth in sections 21(d) and (e) of the proposed rule, respectively. Under those provisions, the level 2 cap excess amount would be calculated by taking the greater of: (1) the level 2A liquid asset amount plus the level 2B liquid asset amount that exceeds 0.6667 (or 40/60, which is the ratio of the allowable level 2 liquid assets to the level 1 liquid assets) times the level 1 liquid asset amount; or (2) zero.

The calculation of the level 2B cap excess amount would be calculated by taking the greater of: (1) the level 2B liquid asset amount less the level 2 cap excess amount and less 0.1765 (or 15/85, which is the ratio of allowable level 2B liquid assets to the sum of level 1 and level 2A liquid assets) times the sum of the level 1 and level 2A liquid asset amount; or (2) zero.

Subtracting the level 2 cap excess amount from the level 2B liquid asset amount when applying the 15 percent level 2B cap is appropriate because the level 2B liquid assets should be excluded before the level 2A liquid assets when applying the 40 percent level 2 cap.

See

§ __.21(d) of the proposed rule.

See

§ __. 21(e) of the proposed rule.

b. Calculation of Adjusted Excess HQLA Amount

To determine its adjusted HQLA excess amount, a covered company must unwind all secured funding transactions, secured lending transactions, asset exchanges, and collateralized derivatives transactions, each as defined by the proposed rule, that mature within a 30 calendar-day stress period where HQLA is exchanged. The unwinding of these transactions and the calculation of adjusted excess HQLA amount is intended to prevent a covered company from having a substantial amount of transactions that would create the appearance of a significant level 1 liquid asset amount at the beginning of a 30 calendar-day stress period, but that would unwind by the end of the 30 calendar-day stress period. For example, absent the unwinding of these transactions, a firm that has all level 2 liquid assets could appear compliant with the level 2 liquid asset cap on a calculation date by borrowing a level 1 liquid asset (such as cash or Treasuries) secured by a level 2 liquid asset overnight. While doing so would lower the covered company's amount of level 2 liquid assets and increase its amount of level 1 liquid assets, the organization would have a concentration of level 2 liquid assets above the 40 percent cap after the transaction is unwound. Therefore, the calculation of the adjusted excess HQLA amount and its subtraction from the HQLA amount, if greater than unadjusted excess HQLA amount, would prevent covered companies from avoiding the liquid asset cap limitations.

The adjusted level 1 liquid asset amount would be the fair value, as determined under GAAP, of the level 1 liquid assets that are held by a covered company upon the unwinding of any secured funding transaction, secured lending transaction, asset exchanges, or collateralized derivatives transaction that mature within a 30 calendar-day stress period and that involves an exchange of HQLA. Similarly, adjusted level 2A and adjusted level 2B liquid assets would only include those transactions involving an exchange HQLA. After unwinding all the appropriate transactions, the asset haircuts of 15 percent and 50 percent would be applied to the level 2A and 2B liquid assets, respectively.

The adjusted excess HQLA amount calculated pursuant to section 21(g) of the proposed rule would be comprised of the adjusted level 2 cap excess amount and adjusted level 2B cap excess amount calculated pursuant to sections 21(h) and 21(i) of the proposed rule, respectively. These excess amounts are calculated in order to maintain the 40 percent cap on level 2 liquid assets and the 15 percent cap on level 2B liquid assets after unwinding a covered company's secured funding transactions, secured lending transactions, asset exchanges, and collateralized derivatives transactions.

The adjusted level 2 cap excess amount would be calculated by taking the greater of: (1) the adjusted level 2A liquid asset amount plus the adjusted level 2B liquid asset amount minus 0.6667 (or 40/60, which is the ratio of the allowable level 2 liquid assets to level 1 liquid assets) times the adjusted level 1 liquid asset amount; or (2) zero.

The adjusted level 2B cap excess amount would be calculated by taking the greater of: (1) the adjusted 2B liquid asset amount less the adjusted level 2 cap excess amount less 0.1765 (or 15/85, which is the ratio of allowable level 2B liquid assets to the sum of level 1 liquid assets and level 2A liquid assets) times the sum of the adjusted level 1 liquid asset amount and the adjusted level 2A liquid asset amount; or (2) zero.

As noted above, the adjusted excess HQLA amount is the sum of the adjusted level 2 cap excess amount and the adjusted level 2B cap excess amount.

Also as noted above, subtracting out the adjusted level 2 cap excess amount from the adjusted level 2B liquid asset amount when applying the 15 percent level 2B cap is appropriate because the adjusted level 2B liquid assets should be excluded before the adjusted level 2A liquid assets when applying the 40 percent level 2 cap.

See

§ __.21(h) of the proposed rule.

See

§ __.21(i) of the proposed rule.

See

§ __.21(g) of the proposed rule.

c. Example HQLA Calculation

The following is an example calculation of the HQLA amount that would be required under the proposed rule. Note that the given liquid asset amounts and adjusted liquid asset amounts already reflect the level 2A and 2B haircuts.

Level 1 liquid asset amount: 15

Level 2A liquid asset amount: 25

Level 2B liquid asset amount: 140

Adjusted level 1 liquid asset amount: 120

Adjusted level 2A liquid asset amount: 50

Adjusted level 2B liquid asset amount: 10

Calculate unadjusted excess HQLA amount (section 21(c))

Step 1: Calculate the level 2 cap excess amount (section 21(d)):

Level 2 cap excess amount = Max (level 2A liquid asset amount + level 2B liquid asset amount −0.6667*Level 1 liquid asset amount, 0)

= Max (25 + 140 − 0.6667*15, 0)

= Max (165 − 10.00, 0)

= Max (155.00, 0)

= 155.00

Step 2: Calculate the level 2B cap excess amount (section 21(e)).

Level 2B cap excess amount = Max (level 2B liquid asset amount − level 2 cap excess amount − 0.1765*(level 1 liquid asset amount + level 2 liquid asset amount), 0)

= Max (140-155.00 − 0.1765*(15+25), 0)

= Max (−15 − 7.06, 0)

= Max (−22.06, 0)

= 0

Step 3: Calculate the unadjusted excess HQLA amount (section 21(c)).

Unadjusted excess HQLA amount = Level 2 cap excess amount + Level 2B cap excess amount

= 155.00 + 0

= 155

Calculate adjusted excess HQLA amount (sections 21(g))

Step 1: Calculate the adjusted level 2 cap excess amount (section 21(h)).

Adjusted level 2 cap excess amount = Max (adjusted level 2A liquid asset amount + adjusted level 2B liquid asset amount − 0.6667*adjusted level 1 liquid asset amount, 0)

= Max (50 + 10 − 0.6667*120, 0)

= Max (60−80.00, 0)

= Max (−20.00, 0)

= 0

Step 2: Calculate the adjusted level 2B cap excess amount (section 21(i)).

Adjusted level 2B cap excess amount = Max (adjusted level 2B liquid asset amount−adjusted level 2 cap excess amount−0.1765*(adjusted level 1 liquid asset amount + adjusted level 2 liquid asset amount, 0)

= Max (10−0−0.1765*(120+50), 0)

= Max (10−30.00, 0)

= Max (−20.00, 0)

= 0

Step 3: Calculate the adjusted excess HQLA amount (section 21(g)).

Adjusted excess HQLA amount = adjusted level 2 cap excess amount + adjusted level 2B cap excess amount

= 0 + 0

= 0

Determine the HQLA amount (section 21(a))

HQLA = Level 1 liquid asset amount + level 2A liquid asset amount + level 2B liquid asset amount−Max(unadjusted excess HQLA amount, adjusted excess HQLA amount)

= 15 + 25 + 140−Max (155, 0)

= 180−155

= 25

B. Total Net Cash Outflow

To determine the liquidity coverage ratio as of a calculation date, the proposed rule would require a covered company to calculate its total stressed net cash outflow amount for each of the 30 calendar days following the calculation date, thereby establishing the dollar value that must be offset by the HQLA amount.

Under section 30 of the proposed rule, the total net cash outflow amount would be the dollar amount on the day within a 30 calendar-day stress period that has the highest amount of net cumulative cash outflows. The agencies believe that using the largest daily calculation as the denominator of the liquidity coverage ratio (rather than using total cash outflows over a 30 calendar-day stress period, which is the method employed by the Basel III LCR) is necessary because it takes into account potential maturity mismatches between a covered company's outflows and inflows, that is, the risk that a covered company could have a substantial amount of contractual inflows late in a 30 calendar-day stress period while also having substantial outflows early in the same period. Such mismatches could threaten the liquidity of the organization. By requiring the recognition of the highest net cumulative outflow day of a particular 30 calendar-day stress period, the agencies believe that the proposed liquidity coverage ratio would better capture a covered company's liquidity risk and help foster more sound liquidity management.

To determine the denominator of the liquidity coverage ratio as of a calculation date, the proposed rule would require a covered company to calculate its total cumulative stressed net cash outflows occurring on each of the 30 calendar days following the calculation date. Under section 30 of the proposed rule, the total net cash outflow amount for each of the next 30 calendar days would be the sum of the cumulative stressed outflow amounts less the sum of the cumulative stressed inflow amounts, with cumulative stressed inflow amounts limited to 75 percent of cumulative stressed outflow amounts. Stressed outflow and inflow amounts would be calculated by multiplying an outflow or inflow rate (designed to reflect a stress scenario) to each category of outflows and inflows. The cumulative stressed outflow amount would be comprised of different groupings of outflow categories, including categories where the instruments and transactions do not have maturity dates

and categories where the instruments mature and transactions occur on or prior to a day 30 calendar days or less after the calculation date.

The cumulative stressed inflow amount, which would be deducted from the cumulative stressed outflow amount, would equal the lesser of (1) the sum of categories where the inflows are grouped together and categories where the instruments mature and transactions occur on or prior to that calendar day

and (2) 75 percent of the cumulative stressed outflow amount for that calendar day.

The largest of these total net cash outflow amounts calculated for each of the 30 calendar days after the calculation date would be equal to the amount of HQLA that a covered company would be required to hold under the proposed rule.

See

§ __.30(b) of the proposed rule.

See

§ __.30(c) of the proposed rule.

See

§ __.30(d)(1) of the proposed rule.

See

§ __.30(d)(2) of the proposed rule.

Consistent with the Basel III LCR and as noted above, in calculating total net cash outflow, cumulative cash inflows would be capped at 75 percent of aggregate cash outflows. This limit would prevent a covered company from relying exclusively on cash inflows (which may not materialize in a period of stress) to cover its liquidity needs under the proposal's stress scenario and ensure that covered companies maintain a minimum level of HQLA to meet unexpected liquidity demands during the 30 calendar-day period of liquidity stress.

Table 1 illustrates the determination of the total net cash outflow amount by applying the daily outflow and inflow calculations for a given 30 calendar-day stress period. Using Table 1, a covered company would, for each day, add (A) cash outflows as calculated under sections 32(a) through 32(g)(2) and cash outflows as calculated under sections 32(g)(3) through 32(l) for instruments and transactions that have no contractual maturity date and (C) cumulative cash outflows as calculated under sections 32(g)(3) through 32(l) for instruments or transactions that have a contractual maturity date up to and including the calculation date (the cumulative sum of amounts in column (B)) to arrive at (D) total cumulative cash outflows. Next, a covered company would subtract the lesser of (F) cumulative cash inflows as calculated under sections 33(b) through 33(f) where the instruments or transactions have a contractual maturity date up to and including the calculation date (the cumulative sum of amounts in column

(E)) or (G) 75 percent of (D) total cumulative cash outflows to determine (H) the net cumulative cash outflow. Based on the example provided below, the peak outflow would occur on Day 18, resulting in a total net cash outflow amount of 285.

Table 1—Determination of Peak Net Contractual Outflow Day

Non-

maturity cash outflows (constant)

Contractual cash outflows with maturity date up to and including the calculation date

Cumulative contractual cash outflows with maturity date up to and including the calculation date

Total

cumulative cash outflows

Contractual cash inflows with

maturity date up to and including the calculation date

Cumulative contractual cash inflows with

maturity date up to and including the calculation date

Maximum inflows

permitted

due to 75%

inflow cap

Net

cumulative

cash outflow

Day 1

200

100

300

225

210

Day 2

200

120

320

240

225

Day 3

200

120

330

100

248

230

Day 4

200

145

345

120

259

225

Day 5

200

165

365

135

274

230

Day 6

200

165

365

135

274

230

Day 7

200

165

365

135

274

230

Day 8

200

175

375

143

281

232

Day 9

200

190

390

150

293

240

Day 10

200

215

415

170

311

245

Day 11

200

250

450

175

338

275

Day 12

200

260

460

190

345

270

Day 13

200

260

460

190

345

270

Day 14

200

260

460

190

345

270

Day 15

200

265

465

195

349

270

Day 16

200

280

480

200

360

280

Day 17

200

285

485

205

364

280

Day 18

200

295

495

210

371

285

Day 19

200

310

510

230

383

280

Day 20

200

310

510

230

383

280

Day 21

200

310

510

230

383

280

Day 22

200

330

530

275

398

255

Day 23

200

350

550

315

413

235

Day 24

200

355

555

335

416

220

Day 25

200

395

595

340

446

255

Day 26

200

403

603

125

465

452

151

Day 27

200

403

603

465

452

151

Day 28

200

403

603

465

452

151

Day 29

200

408

608

475

456

152

Day 30

200

410

610

480

458

153

28.

Does the method the agencies are proposing for determining net cash outflows appropriately capture the potential mismatch between the timing of inflows and outflows under the 30 calendar-day stress period? Why or why not? Are there alternative methodologies for determining the net cumulative cash outflows that would more appropriately capture the maturity mismatch risk within 30 days about which the agencies are concerned? Provide specific suggestions and supporting data or other information.

29.

What costs or other burdens would be incurred as a result of the proposed method for calculating net cash outflows? What modifications should the agencies consider to mitigate such costs or burdens, while establishing appropriate means to capture potential mismatches between the timing of inflows and outflows within a 30 calendar-day stress period?

1. Determining the Maturity of Instruments and Transactions

Under the proposal, a covered company generally would be required to identify the maturity or transaction date that is the most conservative for an instrument or transaction in calculating inflows and outflows (that is, the earliest possible date for outflows and the latest possible date for inflows). In addition, under section 30 of the proposed rule, a covered company's total outflow amount as of a calculation date would include outflow amounts for certain instruments that do not have contractual maturity dates and that mature prior to or on a day 30 calendar days or less after the calculation date. Section 33 of the proposed rule would expressly exclude instruments with no maturity date from a covered company's total inflow amount.

Section 31 of the proposed rule describes how covered companies would determine whether instruments mature or transactions occur within the 30 calendar-day stress period for the purposes of calculating outflows and inflows. Section 31 would require covered companies to assess whether any options, either explicit or embedded, exist that would modify maturity dates such that they would fall within or beyond the 30 calendar-day stress period. If such an option exists for an outflow instrument or transaction, the proposed rule would direct a covered company to assume that the option would be exercised at the earliest possible date. If such an option exists for an inflow instrument or transaction, the proposed rule would require covered companies to assume that the option would be exercised at the latest possible date.

In addition, if an option to adjust the maturity date of an instrument is subject to a notice period, a covered company would be required to either disregard or take into account the notice period, depending upon whether the instrument was an outflow or inflow instrument, respectively.

30.

The agencies solicit commenters' views on the proposed treatment for maturing instruments and for determining the date of transactions. Specifically, what are commenters' views on the proposed provisions that would require covered companies to apply the most conservative treatment with the respect to inflow and outflow dates and embedded options?

31.

What notice requirements, if any, should a covered company be able to recognize for counterparties that have options to accelerate the maturity of transactions and instruments included as outflows? Should a distinction be drawn between wholesale and retail customers or counterparties? Provide justification and supporting information.

2. Cash Outflow Categories

Section 32 of the proposed rule sets forth the outflow categories for calculating cumulative cash outflows and their respective outflow rates, each as described below. The outflow rates are designed to reflect the 30 calendar-day stress scenario that is the basis for the proposed rule. Consistent with the Basel III LCR, the agencies are proposing to assign outflow rates for each category, ranging from 0 percent to 100 percent. These outflow rates would be multiplied by the outstanding balance of each category of funding to arrive at the applicable outflow amount.

a. Unsecured Retail Funding Outflow Amount

Under the proposed rule, unsecured retail funding would include retail deposits (other than brokered deposits), that are not secured under applicable law by a lien on specifically designated assets owned by the covered company and that are provided by a retail customer or counterparty. Unsecured retail funding would be divided into subcategories of stable retail deposits, other retail deposits, and funding from a retail customer or counterparty that is not a retail deposit or a brokered deposit provided by a retail customer or counterparty, each subject to the outflow rates set forth in section 32(a) of the proposed rule, as explained below.

Under the proposed rule, retail customers and counterparties would include individuals and certain small businesses. A small business would qualify as a retail customer or counterparty if its transactions have liquidity risks similar to those of individuals and are managed by a covered company in the same way as comparable transactions with individuals. In addition, to qualify as a small business under the proposed rule the total aggregate funding raised from the small business must be less than $1.5 million. If an entity provides $1.5 million or more in total funding, if it has liquidity risks that are not similar to individuals, or if the covered company manages the customer like corporate customers rather than individual customers, it would be a wholesale customer under the proposed rule. This treatment reflects the agencies' understanding that, during the recent financial crisis, small business customers generally behaved similarly to individual customers with respect to the stability of their deposits.

Supervisory data from stressed or failed institutions indicates that retail depositors withdrew term deposits at a similar rate to deposits without a contractual term. Therefore, the proposed rule would require covered companies to hold the same amount of HQLA to meet retail customer withdrawals in a stressed environment, regardless of whether the deposits have a contractual term. A retail deposit would thus be defined under the proposed rule as a demand or term deposit that is placed with a covered company by a retail customer or counterparty. This definition would not include wholesale brokered deposits or brokered deposits for retail customers or counterparties, which are covered in separate outflow categories.

i. Stable Retail Deposits

The proposed rule would define a stable retail deposit as a retail deposit, the entire amount of which is covered by deposit insurance,

and either (1) held in a transactional account by the depositor or (2) the depositor has another established relationship with a covered company, such that withdrawal of the deposit would be unlikely. Under the proposed rule, the established relationship could be another deposit account, a loan, bill payment services, or any other service or product provided to the depositor, provided that the banking organization demonstrates to the satisfaction of its primary Federal supervisor that the relationship would make deposit withdrawal highly unlikely during a liquidity stress event.

For purposes of the proposed rule, “deposit insurance” is defined to mean deposit insurance provided by the FDIC and does not include other deposit insurance schemes that may exist.

The agencies observe that in the recent financial crisis, retail customers and counterparties with deposit balances below the FDIC's standard maximum deposit insurance amount did not generally withdraw their deposits in such a way as to cause liquidity strains for banking organizations. However, the agencies do not believe the presence of deposit insurance alone is sufficient to consider a retail deposit stable because depositors with only one insured account are generally less stable than depositors with multiple accounts or relationships in a stress scenario. The combination of deposit insurance covering the entire amount of the deposit and the depositors' relationship with the bank, however, makes this category of retail deposits very unlikely to be subject to withdrawal in a stress scenario, due to confidence in FDIC deposit insurance and the inconvenience of moving transactional or multiple accounts. Historical experience has demonstrated that retail customers and counterparties have tended to avoid restructuring direct deposits, automatic payments, and similar banking products that are insured during a stress scenario because they generally have sufficient confidence that insured funds would not be lost in the event of a bank failure and the difficulty of such restructuring does not seem to be worthwhile when funds are insured.

Therefore, under the proposed rule, stable retail deposit balances would be multiplied by the relatively low outflow rate of 3 percent. Notwithstanding the above, the agencies note that a stressed environment could cause a surge in retail deposit inflows, as customers seek the safety of deposit insurance. Over several months or quarters, a surge in deposit inflows could distort a banking organization's liquidity coverage ratio calculation because these funds may not remain in the institution once market conditions and public confidence improves. A covered company's management should be cognizant of this potential distortion and consider appropriate steps to maintain adequate liquidity for the potential future withdrawals.

32.

What, if any, aggregate funding thresholds should the agencies consider for application to individuals, such as the $1.5 million aggregate funding threshold applicable to qualify as a small business under the proposed rule? Provide justification and supporting information.

ii. Other Retail Deposits

Under the proposed rule, other retail deposits would include all deposits from retail customers that are not stable retail deposits as described above. Supervisory data supports a higher outflow rate for deposits that are partially insured in the United States as

compared to entirely insured. During the recent financial crisis, to the extent that retail depositors whose deposits partially exceeded the FDIC's insurance limit withdrew deposits from a banking organization, they tended to withdraw not only the uninsured portion of the deposit, but the entire deposit. Furthermore, as discussed above, the agencies believe that insured retail deposits that are not either transactional account deposits or deposits of a customer with another relationship with the institution are less stable than those that are.

Accordingly, the agencies are proposing to assign an outflow rate of 10 percent for those retail deposits that are not entirely covered by deposit insurance, or that otherwise do not meet the proposed criteria for a stable retail deposit.

All other retail deposits would include retail deposits not insured by the FDIC, whether entirely insured, or insured by other jurisdictions. While the Basel III Liquidity Framework contemplates recognition of foreign deposit insurance, the agencies are proposing to recognize only FDIC deposit insurance in defining stable retail deposits because of the level of variability in terms of coverage and structure found in different foreign deposit insurance systems and because of the forthcoming potential revision of international best practices for deposit insurance. As discussed more fully below, the agencies are contemplating how best to identify and give comparable treatment to foreign deposit insurance systems that are similar to FDIC insurance once international best practices are further developed.

Congress created the FDIC in 1933 to end the banking crisis during the Great Depression, to restore public confidence in the banking system, and to safeguard bank deposits through deposit insurance. In the most recent crisis, the FDIC's deposit insurance guarantee contributed significantly to financial stability in an otherwise unstable financial environment. FDIC insurance has several characteristics that make it effective in stabilizing deposit outflows during liquidity stress events, including, but not limited to: capacity to make insured funds promptly available, usually the next business day after a bank closure; coverage levels sufficient to protect most retail depositors in full; an ex-ante funding mechanism; a rigorous prudential supervision process; timely intervention and resolution protocols; public awareness of deposit insurance; and backing by the full faith and credit of the U.S. government.

National adoption of deposit insurance systems has become prevalent since the 1980s, in part because of similar experiences to the Great Depression (for example, the Mexican peso crisis of the 1990s and the 1997 Asian financial crisis). Numerous international organizations have recognized the necessity of deposit insurance as part of a comprehensive financial stability framework, and there are now at least 112 recognized deposit insurers, with several more jurisdictions in the process of implementing deposit insurance.

Although many countries have implemented deposit insurance programs, deposit insurance around the globe is uneven along a number of dimensions, including terms of coverage, deposit insurer powers, financial resources, and public awareness. At one end of the deposit insurance system spectrum, some systems appear to be similar to the FDIC's insurance framework in terms of uniform coverage and back-up funding options. At the other end, a variety of less structured models exist, including private organizations with only implied or no sovereign support, sovereign guarantees with no deposit insurer, and minimal deposit insurance systems with limited powers.

The international regulatory community has recognized the variance in global deposit insurance as a significant issue. In 2002, the International Association of Deposit Insurers (IADI) was formed to promote best practices in deposit insurance and has developed core principles that are recognized by both the IMF and the World Bank. IADI recently announced that its core principles would be assessed and updated, as necessary, to reflect enhanced guidance, international regulatory developments, and the results of compliance assessment reviews conducted to date.

Today, IADI consists of 70 members, 9 associates, and 12 partner organizations, and is considered to be the standard-setter for deposit insurance by the Financial Stability Board (FSB), the BCBS, the International Monetary Fund (IMF), and the World Bank.

The agencies considered whether foreign deposit insurance systems, particularly those with sovereign backing, should be given the same treatment as FDIC insurance in the proposed rule. While credible sovereign guarantees are useful in reassuring depositors of the safety of their principal balances, experience has proven that without established operational infrastructure or explicit funding arrangement, depositors may not be assured that their funds will be available in a reasonable timeframe. History has shown that if depositors believe that their funds will be unavailable for a protracted period, they may withdraw funds in large numbers to avoid the resulting hardship. The ability of foreign deposit insurers to make funds promptly available varies widely and is often in contrast to the FDIC's next-business-day standard.

See

Financial Stability Board, Thematic Review on Deposit Insurance Systems (February 8, 2012), available at

http://www.financialstabilityboard.org/publications/r_120208.pdf.

33.

The agencies solicit comments on the proposed rule's treatment of deposits that are insured in foreign jurisdictions, views on the stability of foreign-entity insured deposits in a stressed environment, and how to best determine if foreign deposit insurance system is similar to FDIC insurance.

iii. Other Unsecured Retail Funding

The other unsecured retail funding category would apply an outflow rate of 100 percent to all funding provided by retail customers or counterparties that is not a retail deposit or a retail brokered deposit and that matures within 30 days. This is intended to capture all additional types of retail funding that are not otherwise categorized.

34.

The agencies solicit commenters' views on the proposed outflow rates associated with stable retail deposits (3 percent outflow), less-stable retail deposits (10 percent outflow), and other unsecured retail funding (100 percent outflow). What, if any, additional factors should be taken into consideration regarding the proposed outflow rates for these deposit types? Do the proposed outflow rates reflect industry experience? Why or why not? Please provide supporting data.

35.

Is it appropriate to treat certain small business customers like retail customers? Why or why not? What additional criteria, if any, would serve as more appropriate indicators?

36.

The agencies solicit comment on the outflow rate for the insured portion of those deposits that are in excess of deposit insurance limit. Specifically, should the insured portion of a deposit that exceeds $250,000 (e.g., the portion of deposit balances up to and including $250,000) receive a different outflow rate than the uninsured portion of the deposit? Why or why not? Please provide supporting data.

b. Structured Transaction Outflow Amount

The proposed rule's structured transaction outflow amount would capture obligations and exposures associated with structured transactions

sponsored by a covered company, without regard to whether the structured transaction vehicle that is the issuing entity is consolidated on the covered company's balance sheet. Under the proposed rule, the outflow amount for each of a covered company's structured transactions would be the greater of (1) 100 percent of the amount of all debt obligations of the issuing entity that mature 30 days or less from a calculation date and all commitments made by the issuing entity to purchase assets within 30 calendar days or less from the calculation date and (2) the maximum contractual amount of funding the covered company may be required to provide to the issuing entity 30 calendar days or less from such calculation date through a liquidity facility, a return or repurchase of assets from the issuing entity, or other funding agreement.

The agencies believe that the maximum potential amount that a covered company may be required to provide to support its sponsored structured transactions, including potential obligations arising out of commitments to an issuing entity, that arise from structured finance transactions should be fully included in outflows when calculating the proposed liquidity coverage ratio because such transactions, whether issued directly or sponsored by covered companies, have caused severe liquidity demands at covered companies during stressed environments. Their inclusion is important to measuring a covered company's short-term susceptibility to unexpected funding requirements.

37.

What, if any modifications to the structured transaction outflows should the agencies consider? In particular, what, if any, modifications to the definition of structured transaction should be considered? Please provide justifications and supporting data.

c. Net Derivative Cash Outflow Amount

Under the proposed rule, a covered company's net derivative cash outflow amount would equal the sum of the payments and collateral that a covered company will make or deliver to each counterparty under derivative transactions, less, if subject to a valid qualifying master netting agreement,

the sum of payments and collateral due from each counterparty. This calculation would incorporate the amounts due to and from counterparties under the applicable transactions within 30 calendar days of a calculation date. Netting would be permissible at the highest level permitted by a covered company's contracts with its counterparties and could not include inflows where a covered company is already including assets in its HQLA that the counterparty has posted to support those inflows. If the derivative transactions are not subject to a valid qualifying master netting agreement, then the derivative cash outflow for that counterparty would be included in the net derivative cash outflow amount and the derivative cash inflows for that counterparty would be included in the net derivative cash inflow amount, without any netting. Net derivative cash outflow should be calculated in accordance with existing valuation methodologies and expected contractual derivatives cash flows. In the event that net derivative cash outflow for a particular counterparty is less than zero, such amount would be required to be included in a covered company's net derivative cash inflow for that counterparty.

Under the proposal, a “qualifying master netting agreement” would be defined as under the agencies' regulatory capital rules as a legally binding agreement that gives the covered company contractual rights to terminate, accelerate, and close out transactions upon the event of default and liquidate collateral or use it to set off its obligation. The agreement also could not be subject to a stay under bankruptcy or similar proceeding and the covered company would be required to meet certain operational requirements with respect to the agreement, as set forth in section 4 of the proposed rule.

Under the proposed rule, a covered company's net derivative cash outflow amount would not include amounts arising in connection with forward sales of mortgage loans or any derivatives that are mortgage commitments subject to section 32(d) of the proposed rule. Net derivative cash outflow would still include derivatives that hedge interest rate risk associated with a mortgage pipeline.

This category is important to the proposed rule's liquidity coverage ratio in that many covered companies actively use derivatives across their business lines. In a short-term stressed situation, the amount of potential cash outflow associated with derivatives positions can change as positions are adjusted for market conditions and as counterparties demand additional collateral or more conservative contract terms.

38.

What, if any, additional factors or aspects of derivatives transactions should be considered for the treatment of derivatives contracts under the proposed rule?

39.

Is it appropriate to exclude forward sales of mortgage loans from the treatment of derivatives contracts under the proposed rule? Why or why not?

d. Mortgage Commitment Outflow Amount

During the recent financial crisis, it was evident that financial institutions were not able to curtail mortgage loan pipelines and had difficulty liquidating loans held for sale. Accordingly, the proposed rule would require a covered company to recognize potential cash outflows related to commitments to fund retail mortgage loans that could be drawn upon within 30 days of a calculation date. Under the proposal, a retail mortgage would be a mortgage that is primarily secured by a first or subsequent lien on a one-to-four family property.

The proposed rule would require a covered company to use an outflow rate of 10 percent for all retail mortgage commitments that can be drawn upon within a 30 calendar-day stress period. In addition, the proposed rule would not include in inflows proceeds from the potential sale of mortgages in the to-be-announced, specified pool, or similar forward sales market.

The agencies believe that, in a crisis, such inflows may not materialize as investors may curtail most or all of their investment in the mortgage market.

See

§ __.33(a) of the proposed rule.

40.

What, if any, modifications should the agencies make to the mortgage commitment outflow amount? Provide data and other supporting information.

41.

What effect may the treatment for retail mortgage funding under the proposed rule have on the banking system and the mortgage markets, including in combination with the effects of other regulations that apply to the mortgage market? What other treatments, if any, should the agencies consider? Provide data and other supporting information.

e. Commitment Outflow Amount

This category would include the undrawn portion of committed credit and liquidity facilities provided by a covered company to its customers and counterparties that can be drawn down within 30 days of the calculation date. A liquidity facility would be defined under the proposed rule as a legally binding agreement to extend funds at a future date to a counterparty that is made expressly for the purpose of refinancing the debt of the counterparty when it is unable to obtain a primary or anticipated source of funding. A liquidity facility would include an agreement to provide liquidity support to asset-backed commercial paper by lending to, or purchasing assets from, any structure, program, or conduit in

the event that funds are required to repay maturing asset-backed commercial paper. Liquidity facilities would exclude general working capital facilities, such as revolving credit facilities for general corporate or working capital purposes.

A credit facility would be defined as a legally binding agreement to extend funds if requested at a future date, including a general working capital facility such as a revolving credit facility for general corporate or working capital purposes. Under the proposed rule, a credit facility would not include a facility extended expressly for the purpose of refinancing the debt of a counterparty that is otherwise unable to meet its obligations in the ordinary course of business. Facilities that have aspects of both credit and liquidity facilities would be classified as liquidity facilities for the purposes of the proposed rule.

Under the proposed rule, a liquidity or credit facility would be considered committed when the terms governing the facility prohibit a covered company from refusing to extend credit or funding under the facility, except where certain conditions specified by the terms of the facility—other than customary notice, administrative conditions, or changes in financial condition of the borrower—have been met. The undrawn amount for a committed credit or liquidity facility would be the entire undrawn amount of the facility that could be drawn upon within 30 calendar days of the calculation date under the governing agreement, less the fair value of level 1 or level 2A liquid assets, if any, which secure the facility, after recognizing the applicable haircut for the assets serving as collateral. In the case of a liquidity facility, the undrawn amount would not include the portion of the facility that supports customer obligations that do not mature 30 calendar days or less after the calculation date. A covered company's proportionate ownership share of a syndicated credit facility also would be included in the appropriate category of wholesale credit commitments.

The proposed rule would assign the outflow amounts to commitments as set forth in section 32(e) of the proposed rule. First, in contrast to the outflow rates applied to other commitments, those between affiliated depository institutions subject to the proposed rule would receive an outflow rate of 0 percent because the agencies recognize that both institutions should have adequate liquidity to meet their obligations during a stress scenario and therefore should not rely extensively on such liquidity facilities. The other outflow rates are meant to reflect the characteristics of each class of customers and counterparties in a stress scenario, as well as the reputational and legal risks covered companies face if they try to restructure a commitment during a crisis to avoid drawdowns by customers. Accordingly, a relatively low outflow rate of 5 percent is proposed for retail facilities because individuals and small businesses would likely have a lesser need for committed credit facilities in stressed scenarios than institutional or wholesale customers (that is, the correlation between draws on such facilities and the stress scenario of the liquidity coverage ratio is low). The agencies are proposing to assign outflow rates of 10 percent for credit facilities and 30 percent for liquidity facilities committed to entities that are not financial sector companies whose securities are excluded from HQLA

based on their typically longer-term funding structures and perceived higher credit quality profile in the capital markets, particularly during times of financial stress. The proposed rule would assign a 50 percent outflow rate to credit and liquidity facilities committed to depository institutions, depository institution holding companies, and foreign banks (other than commitments between affiliated depository institutions). Commitments to all other regulated financial companies, investment companies, non-regulated funds, pension funds, investment advisers, or identified companies (or to a consolidated subsidiary of any of the foregoing) would be subject to a 40 percent outflow rate for credit facilities and 100 percent for liquidity facilities.

See

section II.A.2. These financial sector companies are regulated financial companies, investment companies, non-regulated funds, pension funds, investment adviser, or identified companies, and consolidated subsidiaries of the foregoing, as defined in the proposal.

The agencies are generally proposing higher outflow rates for liquidity facilities than credit facilities as described above because the crisis scenario that is incorporated into the proposed rule focuses on liquidity pressures increasing the likelihood of large draws on liquidity lines as compared to credit lines, which typically are used more during the normal course of business and not as substantially during a liquidity stress. The lower liquidity commitment outflow rate for depository institutions, depository institution holding companies, and foreign banks compared to other financial sector entities, is reflective of historical experience, which indicates these entities drew on liquidity lines less than other financial sector entities did during periods of liquidity stress. The higher outflow rate for commitments to other types of companies in the financial sector reflects their likely high need to use every available liquidity source during a liquidity crisis in order to meet their obligations and the fact that these entities are less likely to be able to immediately access government liquidity sources.

The agencies are proposing a 100 percent outflow rate for a covered company's liquidity facilities with special purpose entities (SPEs), given SPEs' sensitivity to emergency cash and backstop needs in a short-term stress environment, such as those experienced with SPEs during the recent financial crisis. During that period, many SPEs experienced severe cash shortfalls, as they could not rollover debt and had to rely on borrowing and backstop lines.

Under the proposed rule, the amount of level 1 or level 2A liquid assets securing the undrawn portion of a commitment would reduce the outflow associated with the commitment if certain conditions are met. The amount of level 1 or level 2A liquid assets securing a committed credit or liquidity facility would be the fair value (as determined under GAAP) of all level 1 liquid assets and 85 percent of the fair value of level 2A liquid assets posted or required to be posted upon funding of the commitment as collateral to secure the facility, provided that the following conditions are met during the applicable 30 calendar-day period: (1) the pledged assets meet the criteria for HQLA as set forth in section 20 of the proposed rule; and (2) the covered company has not included the assets in its HQLA amount as calculated under subpart C of the proposed rule.

42.

What, if any, additional factors should be considered in determining the treatment of unfunded commitments under the proposal? What, if any, additional distinctions between different types of unfunded commitments should the agencies consider? If necessary, how might the definitions of credit facility and liquidity facility be further clarified or distinguished? Are the various proposed treatments for unfunded commitments consistent with industry experience? Provide detailed explanations and supporting information.

43.

Is the proposed rule's definition of SPE appropriate, under-inclusive, or over-inclusive? Why?

Consistent with the BCBS LCR, specified run-off rates are not provided for credit card lines, since they are

typically unconditionally cancelable and therefore do not meet the proposed definition of a committed facility. The agencies believe that during a financial crisis, draws on credit card lines would remain relatively constant and predictable; thus, outstanding lines should not materially affect a covered company's liquidity demands in a crisis. Accordingly, undrawn retail credit card lines are not included in cash outflows in the proposed rule. However, for a few banking organizations, these lines are significant relative to their balance sheet and these banking organizations may experience reputational or other risks if lines are withdrawn or significantly reduced during a crisis.

44.

What, if any, outflow rate should the agencies apply to outstanding credit card lines? What factors associated with these lines should the agencies consider?

f. Collateral Outflow Amount

The proposed rule would require a covered company to recognize outflows related to changes in collateral positions that could arise during a period of financial stress. Such changes could include posting additional or higher quality collateral, returning excess collateral, accepting lower quality collateral as a substitute for already-posted collateral, or changing collateral value, all of which could have a significant impact upon a covered company's liquidity profile. The following discussion describes the subcategories of collateral outflow addressed by the proposed rule.

Changes in Financial Condition

Certain contractual clauses in derivatives and other transaction documents, such as material adverse change clauses and downgrade triggers, are aimed at capturing changes in a covered company's financial condition and, if triggered, would require a covered company to post more collateral or accelerate demand features in certain obligations that require collateral. During the recent financial crisis, various companies that would be subject to the proposed rule came under severe liquidity stress as the result of contractual requirements to post collateral following a credit rating downgrade.

Accordingly, the proposed rule would require a covered company to count as an outflow 100 percent of all additional amounts that the covered company would need to post or fund as additional collateral under a contract as a result of a change in its financial condition. A covered company would calculate this outflow amount by evaluating the terms of such contracts and calculating any incremental additional collateral or higher quality collateral that would need to be posted as a result of the triggering of clauses tied to a ratings downgrade or similar event, or change in the covered company's financial condition. If multiple methods of meeting the requirement for additional collateral are available (

i.e.,

providing more collateral of the same type or replacing existing collateral with higher quality collateral) the banks may use the lower calculated outflow amount in its calculation.

45.

What are the operational difficulties in identifying the collateral outflows related to changes in financial condition? What, if any, additional factors should be considered?

Potential Valuation Changes

The proposed rule would apply a 20 percent outflow rate to the fair value of any assets posted as collateral that are not level 1 liquid assets to recognize that a covered company likely would be required to post additional collateral if market prices fell. The agencies are not proposing to apply outflow rates to level 1 liquid assets that are posted as collateral, as they are not expected to face mark-to-market losses in times of stress.

Excess Collateral

The agencies believe that a covered company's counterparty would not maintain any more collateral at the covered company than is required. Therefore, the proposed rule would apply an outflow rate of 100 percent on the fair value of the collateral posted by counterparties that exceeds the current collateral requirement in a governing contract. Under the proposed rule, this category would include unsegregated excess collateral that a covered company may be required to return to a counterparty based on the terms of a derivative or other financial agreement and which is not already excluded from the covered company's HQLA amount.

Contractually-Required Collateral

The proposed rule would require that 100 percent of the fair value of collateral that a covered company is contractually obligated to post, but has not yet posted, be included in the cash outflows calculation. Where a covered company has not yet posted such collateral, the agencies believe that, in stressed market conditions, a covered company's counterparties would likely demand all contractually required collateral.

Collateral Substitution

The proposed rule's collateral substitution outflow amount would be the differential between the post-haircut fair value of HQLA collateral posted by a

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