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

Federal RegisterJun 1, 2016

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 50

[Docket ID OCC-2014-0029]

RIN 1557-AD97

FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Regulation WW; Docket No. R-1537]

RIN 7100-AE 51

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 329

RIN 3064-AE 44

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

AGENCY:

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

ACTION:

Notice of proposed rulemaking with request for public comment.

SUMMARY:

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) are inviting comment on a proposed rule that would implement a stable funding requirement, the net stable funding ratio (NSFR), for large and internationally active banking organizations. The proposed NSFR requirement is designed to reduce the likelihood that disruptions to a banking organization's regular sources of funding will compromise its liquidity position, as well as to promote improvements in the measurement and management of liquidity risk. The proposed rule would also amend certain definitions in the liquidity coverage ratio rule that are also applicable to the NSFR. The proposed NSFR requirement would apply beginning on January 1, 2018, to bank holding companies, certain savings and loan holding companies, and depository institutions that, in each case, have $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure, and to their consolidated subsidiaries that are depository institutions with $10 billion or more in total consolidated assets.

In addition, the Board is proposing a modified NSFR requirement for bank holding companies and certain savings and loan holding companies that, in each case, have $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure. Neither the proposed NSFR requirement nor the proposed modified NSFR requirement would apply to banking organizations with consolidated assets of less than $50 billion and total on-balance sheet foreign exposure of less than $10 billion.

A bank holding company or savings and loan holding company subject to the proposed NSFR requirement or modified NSFR requirement would be required to publicly disclose the company's NSFR and the components of its NSFR each calendar quarter.

DATES:

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

ADDRESSES:

Comments should be directed to:

OCC:

Because paper mail in the Washington, DC area is subject to delay, commenters are encouraged to submit comments by the Federal eRulemaking Portal or email, if possible. Please use the title “Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

•

Federal eRulemaking Portal—“regulations.gov”:

Go to

http://www.regulations.gov

. Enter “Docket ID OCC-2014-0029” in the Search Box and click “Search”. Results can be filtered using the filtering tools on the left side of the screen. Click on “Comment Now” to submit public comments. Click on the “Help” tab on the

Regulations.gov

home page to get information on using

Regulations.gov,

including instructions for submitting public comments.

•

Email: regs.comments@occ.treas.gov

•

Mail:

Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency, 400 7th Street SW., Suite 3E-218, Mail Stop 9W-11, Washington, DC 20219.

•

Hand Delivery/Courier:

400 7th Street SW., Suite 3E-218, Mail Stop 9W-11, Washington, DC 20219.

•

Fax:

(571) 465-4326.

Instructions:

You must include “OCC” as the agency name and “Docket ID OCC-2014-0029” in your comment. In general, the OCC will enter all comments received into the docket and publish them on the

Regulations.gov

Web site without change, including any business or personal information that you provide, such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this rulemaking action by any of the following methods:

•

Viewing Comments Electronically:

Go to

http://www.regulations.gov

. Enter “Docket ID OCC-2014-0029” in the Search box and click “Search”. Comments can be filtered by Agency using the filtering tools on the left side of the screen. Click on the “Help” tab on the

Regulations.gov

home page to get information on using

Regulations.gov,

including instructions for viewing public comments, viewing other supporting and related materials, and viewing the docket after the close of the comment period.

•

Viewing Comments Personally:

You may personally inspect and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649-6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-5597. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments.

•

Docket:

You may also view or request available background documents and project summaries using the methods described above.

Board:

You may submit comments, identified by Docket No. R-1537; RIN 7100 AE-51, by any of the following methods:

•

Agency Web site: 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, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room 3515, 1801 K Street NW., (between 18th and 19th Street NW.) Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.

FDIC:

You may submit comments by any of the following methods:

•

Federal eRulemaking Portal: 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-AE44.” 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:

Christopher McBride, Group Leader, (202) 649-6402, James Weinberger, Technical Expert, (202) 649-5213, or Ang Middleton, Bank Examiner (Risk Specialist), (202) 649-7138, Treasury & Market Risk Policy; Thomas Fursa, Bank Examiner (Capital Markets Lead Expert), (917) 344-4421; Patrick T. Tierney, Assistant Director, Carl Kaminski, Special Counsel, or Henry Barkhausen, Senior Attorney, Legislative and Regulatory Activities Division, (202) 649-5490; or Tena Alexander, Acting Assistant Director, or David Stankiewicz, Counsel, Securities and Corporate Practices Division, (202) 649-5510; for persons who are deaf or hard of hearing, TTY, (202) 649-5597; Office of the Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219.

Board:

Gwendolyn Collins, Assistant Director, (202) 912-4311, Peter Clifford, Manager, (202) 785-6057, Adam S. Trost, Senior Supervisory Financial Analyst, (202) 452-3814, J. Kevin Littler, Senior Supervisory Financial Analyst, (202) 475-6677, or Peter Goodrich, Risk Management Specialist, (202) 872-4997, Risk Policy, Division of Banking Supervision and Regulation; Benjamin W. McDonough, Special Counsel, (202) 452-2036, Dafina Stewart, Counsel, (202) 452-3876, Adam Cohen, Counsel, (202) 912-4658, or Brian Chernoff, Senior Attorney, (202) 452-2952, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.

FDIC:

Bobby R. Bean, Associate Director, (202) 898-6705, Eric W. Schatten, Capital Markets Policy Analyst, (202) 898-7063, Andrew D. Carayiannis, Capital Markets Policy Analyst, (202) 898-6692, Nana Ofori-Ansah, Capital Markets Policy Analyst, (202) 898-3572, Capital Markets Branch, Division of Risk Management Supervision, (202) 898-6888; Gregory S. Feder, Counsel, (202) 898-8724, Andrew B. Williams, II, Counsel, (202) 898-3591, or Suzanne J. Dawley, Senior Attorney, (202) 898-6509, Supervision and Corporate Operations Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (800) 925-4618.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. Summary of the Proposed Rule

B. Background

C. Overview of the Proposed Rule

1. NSFR Calculation, Shortfall Remediation, and Disclosure Requirements

2. Scope of Application of the Proposed Rule

D. Definitions

1. Revisions to Existing Definitions

2. New Definitions

E. Effective Dates

II. Minimum Net Stable Funding Ratio

A. Rules of Construction

1. Balance-Sheet Metric

2. Netting of Certain Transactions

3. Treatment of Securities Received in an Asset Exchange by a Securities Lender

B. Determining Maturity

C. Available Stable Funding

1. Calculation of ASF Amount

2. ASF Factor Framework

3. ASF Factors

D. Required Stable Funding

1. Calculation of the RSF Amount

2. RSF Factor Framework

3. RSF Factors

E. Derivative Transactions

1. NSFR Derivatives Asset or Liability Amount

2. Variation Margin Provided and Received and Initial Margin Received

3. Customer Cleared Derivative Transactions

4. Assets Contributed to a CCP's Mutualized Loss Sharing Arrangement and Initial Margin

5. Derivatives Portfolio Potential Valuation Changes

6. Derivatives RSF Amount

7. Derivatives RSF Amount Numerical Example

F. NSFR Consolidation Limitations

G. Interdependent Assets and Liabilities

III. Net Stable Funding Ratio Shortfall

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

A. Overview and Applicability

B. Available Stable Funding

C. Required Stable Funding

V. Disclosure Requirements

A. Proposed NSFR Disclosure Requirements

B. Quantitative Disclosure Requirements

C. Qualitative Disclosure Requirements

D. Frequency and Timing of Disclosure

VI. Impact Assessment

VII. Solicitation of Comments on Use of Plain Language

VIII. Regulatory Flexibility Act

IX. Riegle Community Development and Regulatory Improvement Act of 1994

X. Paperwork Reduction Act

XI. OCC Unfunded Mandates Reform Act of 1995 Determination

I. Introduction

A. Summary of the Proposed Rule

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) are inviting comment on a proposed rule (proposed rule) that would implement a net stable funding ratio (NSFR) requirement. The proposed NSFR requirement is designed to reduce the likelihood that disruptions to a banking organization's regular sources of funding will compromise its liquidity position, as well as to promote improvements in the measurement and management of liquidity risk. By requiring banking organizations to maintain a stable funding profile, the proposed rule would reduce liquidity risk in the financial sector and provide for a safer and more resilient financial system.

Maturity and liquidity transformation are important components of the financial intermediation performed by banking organizations, which contributes to efficient resource allocation and credit creation in the United States. These activities entail a certain inherent level of funding instability, however. Consequently, the risks of these activities must be well-managed by banking organizations in order to help ensure their ongoing

ability to provide financial intermediation.

The proposed rule would establish a quantitative metric, the NSFR, to measure the stability of a covered company's funding profile.

Under the requirement, a covered company would calculate a weighted measure of the stability of its equity and liabilities over a one-year time horizon (its available stable funding amount or ASF amount). The proposed rule would require a covered company's ASF amount to be greater than or equal to a minimum level of stable funding (its required stable funding amount or RSF amount) calculated based on the liquidity characteristics of its assets, derivative exposures, and commitments over the same one-year time horizon. A covered company's NSFR would measure the ratio of its ASF amount to its RSF amount. Sections II.C and II.D of this

SUPPLEMENTARY INFORMATION

section describe in more detail the calculation of a covered company's ASF and RSF amounts, respectively.

As discussed in section I.C.2 of this

Supplementary Information

section, covered companies are bank holding companies, certain savings and loan holding companies, and depository institutions, in each case with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure, as well as any consolidated subsidiary depository institution with total consolidated assets of $10 billion or more.

The proposed rule would require a covered company to maintain a minimum NSFR of 1.0. Given their size, complexity, scope of activities, and interconnectedness, covered companies with an NSFR of less than 1.0 face an increased likelihood of liquidity stress in the event of demands for repayment of their short- and medium-term liabilities, which may also contribute to financial instability in the broader economy. The NSFR would help to identify a covered company that has a heightened liquidity risk profile and poses greater risk to U.S. financial stability. It would allow the agencies, before a liquidity crisis, to require the covered company to take steps to improve its liquidity and resilience, as discussed in section I.C.1 of this Supplementary Information section.

As part of this proposal, the Board is also inviting comment on a modified NSFR requirement for bank holding companies and savings and loan holding companies without significant insurance or commercial operations that, in each case, have $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure (each, a modified NSFR holding company). This modified NSFR requirement is described in section IV of this

SUPPLEMENTARY INFORMATION

section.

The proposed rule also includes public disclosure requirements for depository institution holding companies that would be subject to the proposed NSFR requirement or modified NSFR requirement.

B. Background

The 2007-2009 financial crisis exposed the vulnerability of large and internationally active banking organizations to liquidity shocks. For example, before the crisis, many banking organizations lacked robust liquidity risk management metrics and relied excessively on short-term wholesale funding to support less liquid assets.

In addition, firms did not sufficiently plan for longer-term liquidity risks, and the control functions of banking organizations failed to challenge such decisions or sufficiently plan for possible disruptions to the organization's regular sources of funding. Instead, the control functions reacted only after funding shortfalls arose.

See

Senior Supervisors Group, Risk Management Lessons from the Global Banking Crisis of 2008, (October 21, 2009), available at

https://www.newyorkfed.org/medialibrary/media/newsevents/news/banking/2009/SSG_report.pdf

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

See id.

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

See, e.g.,

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

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

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

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

; Basel III: the net stable funding ratio (October 2014), available at

http://www.bis.org/bcbs/publ/d295.pdf

The agencies have implemented or proposed several measures to improve the liquidity positions and liquidity risk management of supervised banking organizations. First, the agencies adopted the liquidity coverage ratio (LCR) rule in September 2014,

which requires certain banking organizations to hold a minimum amount of high-quality liquid assets (HQLA) that can be readily converted into cash to meet net cash outflows over a 30-calendar-day period. Second, pursuant to section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act

(Dodd-Frank Act) and in consultation with the OCC and the FDIC, the Board adopted general risk management, liquidity risk management, and stress testing requirements for bank holding companies with total consolidated assets of $50 billion or more in Regulation YY.

Third, the Board adopted a risk-based capital surcharge for global systemically important banking organizations (GSIBs) in the United States that is calculated based on a bank holding company's risk profile, including its reliance on short-term wholesale funding (GSIB surcharge rule).

Fourth, the Board recently proposed a long-term debt requirement and a total loss-absorbing capacity (TLAC) requirement that would apply to U.S. GSIBs and the U.S. operations of certain foreign GSIBs, and would require these firms and operations to have sufficient amounts of equity and eligible long-term debt to improve their ability to absorb significant losses and withstand financial stress, which would also improve the funding profile of these firms.

“Liquidity Coverage Ratio: Liquidity Risk Measurement Standards,” 79 FR 61440 (October 10, 2014), codified at 12 CFR part 50 (OCC), 12 CFR part 249 (Board), and 12 CFR part 329 (FDIC).

Public Law 111-203, 124 Stat. 1376, 1423-1432 (2010) § 165, codified at 12 U.S.C. 5365.

See

“Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations,” 79 FR 17240 (March 27, 2014), codified at 12 CFR part 252.

“Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies,” 80 FR 49082 (August 14, 2015).

“Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of

Systemically Important Foreign Banking Organizations; Regulatory Capital Deduction for Investments in Certain Unsecured Debt of Systemically Important U.S. Bank Holding Companies,” 80 FR 74926 (November 20, 2015).

The agencies have also focused specifically on the importance of banking organizations maintaining a stable funding profile. The agencies have issued supervisory guidance to address the risks arising from excessive reliance on unstable funding, such as short-term wholesale funding, both before and after the 2007-2009 financial crisis, and have incorporated such guidance in their supervisory ratings. For example, in 1990, the Board issued guidance that cautioned against excessive reliance on the use of short-term debt,

and in 2010, the agencies issued interagency guidance emphasizing the importance of diversifying funding sources and tenors.

In addition, there are statutory restrictions under the Federal Deposit Insurance Act (FDI Act) on the ability of an insured depository institution that is less than well capitalized to accept or renew brokered deposits, which can be a less stable form of funding than other retail deposits.

See Supervision and Regulation Letter 90-20 (June 22, 1990), available at

http://www.federalreserve.gov/boarddocs/srletters/1990/sr9020.htm

, superseded by OCC, Board, FDIC, Office of Thrift Supervision, and National Credit Union Administration, “Interagency Policy Statement on Funding and Liquidity Risk Management,” 75 FR 13656 (March 22, 2010) (Interagency 2010 Policy Statement on Funding and Liquidity Risk Management); and Supervision and Regulation Letter 96-38 (December 27, 1996), available at

http://www.federalreserve.gov/boarddocs/srletters/1996/sr9638.htm

See

Interagency 2010 Policy Statement on Funding and Liquidity Risk Management.

See

12 U.S.C. 1831f(a).

The proposed rule would complement existing law and regulations and the proposed TLAC and long-term debt requirements, as well as existing supervisory guidance.

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

See, e.g.,

Interagency 2010 Policy Statement on Funding and Liquidity Risk Management; Supervision and Regulation Letter 12-17 (December 12, 2012), available at

http://www.federalreserve.gov/bankinforeg/srletters/sr1217.htm

; Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks (March 1, 2016), available a:

http://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-7.html

(OCC),

http://www.federalreserve.gov/bankinforeg/srletters/sr1603a1.pdf

(Board), and

https://www.fdic.gov/news/news/financial/2016/fil16012.pdf

(FDIC).

The proposed NSFR requirement would also provide a standardized means for measuring the stability of a covered company's funding structure, promote greater comparability of funding structures across covered companies and foreign firms subject to similar requirements, and improve transparency and increase market discipline through the proposed rule's public disclosure requirements.

The proposed rule would be consistent with the net stable funding ratio standard published by the Basel Committee on Banking Supervision (BCBS)

in October 2014 (Basel III NSFR)

and the net stable funding ratio disclosure standards published by the BCBS in June 2015.

The Basel III NSFR is a longer-term structural funding metric that complements the BCBS's short-term liquidity risk metric, the BCBS liquidity coverage ratio standard (Basel III LCR).

In developing the Basel III NSFR, the agencies and their international counterparts in the BCBS considered a number of possible structural funding metrics. For example, the BCBS considered the traditional “cash capital” measure, which compares a firm's amount of long-term and stable sources of funding to the amount of its illiquid assets. The BCBS found that this cash capital measure failed to account for material funding risks, such as those related to off-balance sheet commitments and certain on-balance sheet short-term funding and lending mismatches. The Basel III NSFR incorporates consideration of these and other funding risks, as would the proposed rule's NSFR requirement.

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

See supra

note 4.

“Net Stable Funding Ratio disclosure standards” (June 2015), available at

http://www.bis.org/bcbs/publ/d324.pdf

(Basel III NSFR Disclosure Standards).

See supra

note 4.

C. Overview of the Proposed Rule

1. NSFR Calculation, Shortfall Remediation, and Disclosure Requirements

The proposed rule would require a covered company to maintain an amount of ASF, or available stable funding, that is no less than the amount of its RSF, or required stable funding, on an ongoing basis. A covered company's NSFR would be expressed as a ratio of its ASF amount (the numerator of the ratio) to its RSF amount (the denominator of the ratio). A covered company's ASF amount would be a weighted measure of the stability of the company's funding over a one-year time horizon. A covered company would calculate its ASF amount by applying standardized weightings (ASF factors) to its equity and liabilities based on their expected stability. Similarly, a covered company would calculate its RSF amount by applying standardized weightings (RSF factors) to its assets, derivative exposures, and commitments based on their liquidity characteristics.

These characteristics would include credit quality, tenor, encumbrances, counterparty type, and characteristics of the market in which an asset trades, as applicable.

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

As noted above, the proposed rule would require a covered company to maintain, on a consolidated basis, an NSFR equal to or greater than 1.0. The proposed rule would require a covered company to take several steps if its NSFR fell below 1.0, as discussed in more detail in section III of this

SUPPLEMENTARY INFORMATION

section. In particular, a covered company would be required to notify its appropriate Federal banking agency of the shortfall no later than 10 business days (or such other period as the appropriate Federal banking agency may require by written notice) following the date that any event has occurred that would cause or has caused the covered company's NSFR to fall below the minimum requirement. In addition, a covered company would be required to submit to its appropriate Federal banking agency a plan to remediate its NSFR shortfall. These procedures would enable supervisors to monitor and respond appropriately to the particular circumstances that give rise to any deficiency in a covered company's funding profile. Given the range of possible reasons, both

idiosyncratic and systemic, for a covered company having an NSFR below 1.0, the proposed rule would establish a framework that would allow for flexible supervisory responses. The agencies expect circumstances where a covered company has an NSFR shortfall to arise only rarely.

Nothing in the proposed rule would limit the authority of the agencies under any other provision of law or regulation to take supervisory or enforcement actions, including actions to address unsafe or unsound practices or conditions, deficient liquidity levels, or violations of law.

The proposed rule would require a covered company that is a depository institution holding company to publicly disclose, each calendar quarter, its NSFR and NSFR components in a standardized tabular format and to discuss certain qualitative features of its NSFR calculation. These disclosures, which are described in further detail in section V of this Supplementary Information section, would enable market participants to assess and compare the liquidity profiles of covered companies and non-U.S. banking organizations.

The proposed NSFR requirement would take effect on January 1, 2018.

2. Scope of Application of the Proposed Rule

The proposed NSFR requirement would apply to the same large and internationally active banking organizations that are subject to the LCR rule: (1) Bank holding companies, savings and loan holding companies without significant commercial or insurance operations, and depository institutions that, in each case, have $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure,

and (2) depository institutions with $10 billion or more in total consolidated assets that are consolidated subsidiaries of such bank holding companies and savings and loan holding companies.

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

The proposed rule would apply to banking organizations that tend to have larger and more complex liquidity risk profiles than smaller and less internationally active banking organizations. While banking organizations of any size can face threats to their safety and soundness based on an unstable funding profile, covered companies' scale, scope, and complexity require heightened measures to manage their liquidity risk. In addition, covered companies with total consolidated assets of $250 billion or more can pose greater risks to U.S. financial stability than smaller banking organizations because of their size, the scale and breadth of their activities, and their interconnectedness with the financial sector. Consequently, threats to the availability of funding to larger firms pose greater risks to the financial system and economy. Likewise, the foreign exposure threshold identifies firms with a significant international presence, which may also present risks to financial stability for similar reasons. By promoting stable funding profiles for large, interconnected institutions, the proposed rule would strengthen the safety and soundness of covered companies and promote a more resilient U.S. financial system and global financial system.

The proposed rule would also apply the NSFR requirement to depository institutions that are the consolidated subsidiaries of covered companies and that have $10 billion or more in total consolidated assets.

These large depository institution subsidiaries can play a significant role in covered companies' funding structures and operations, and present a larger exposure to the FDIC's Deposit Insurance Fund than smaller insured institutions because of the greater volume of their deposit-taking and lending activities. To reduce the potential impacts of a liquidity event on the safety and soundness of such large depository institution subsidiaries, the proposed rule would require that such entities independently have sufficient stable funding.

Pursuant to the International Banking Act (IBA), 12 U.S.C. 3101

et seq.,

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

Consistent with the LCR rule, the proposed rule would not apply to depository institution holding companies with large insurance operations or savings and loan holding companies with large commercial operations because their business models and liquidity risks differ significantly from those of other covered companies.

The proposed rule would also not apply to nonbank financial companies designated by the Financial Stability Oversight Council (Council) for Board supervision (nonbank financial companies).

However, the Board may apply an NSFR requirement and disclosure requirements to these companies in the future by separate rule or order. The Board would assess the business model, capital structure, and risk profile of a nonbank financial company to determine whether, and if so how, the proposed NSFR requirement should apply to a nonbank financial company or to a category of nonbank financial companies, as appropriate. The Board would provide nonbank financial companies, either collectively or individually, with notice and opportunity to comment prior to applying an NSFR requirement.

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

See

12 U.S.C. 5323.

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

The proposed rule would not apply to a “bridge financial company” or a subsidiary of a “bridge financial

company,” a “new depository institution,” or a “bridge depository institution,” as those terms are used in the FDI Act in the resolution context.

Requiring these entities to maintain a minimum NSFR may constrain the FDIC's ability to resolve a depository institution or its affiliates in an orderly manner.

See

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

The Board is also proposing to implement a modified version of the NSFR requirement for bank holding companies and savings and loan holding companies without significant insurance or commercial operations that, in each case, have $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in total on-balance sheet foreign exposure. Modified NSFR holding companies are large financial companies that have sizable operations in banking, brokerage, or other financial activities, as discussed in section IV of this

Supplementary Information

section. Although they generally are smaller in size, less complex in structure, and less reliant on riskier forms of funding than covered companies, these modified NSFR holding companies are nevertheless important providers of credit in the U.S. economy. The Board is therefore proposing a form of the NSFR requirement that is tailored to the less risky liquidity profile of these companies.

The agencies would each reserve the authority to apply the proposed rule to additional companies if the application of the NSFR requirement would be appropriate in light of a company's asset size, complexity, risk profile, scope of operations, affiliation with covered companies, or risk to the financial system. A covered company would remain subject to the proposed NSFR requirement until its appropriate Federal banking agency determines in writing that application of the rule to the company is not appropriate in light of these same factors. The agencies would also reserve the authority to require a covered company to maintain an ASF amount greater than otherwise required under the proposed rule, or to take any other measure to improve the covered company's funding profile, if the appropriate Federal banking agency determines that the covered company's NSFR requirement under the proposed rule is not commensurate with its liquidity risks.

A company that becomes subject to the proposed rule pursuant to § __.1(b)(1) after the effective date would be required to comply with the proposed NSFR requirement beginning on April 1 of the following year. For example, if a bank holding company becomes subject to the proposed rule on December 31, 2020, because it reports on its year-end Consolidated Financial Statements for Holding Companies (FR Y-9C) that it has total consolidated assets of $251 billion, that bank holding company would be required to begin complying with the proposed NSFR requirement on April 1, 2021.

Question 1: Would the proposed one-quarter transition period provide sufficient time for a covered company to make any needed adjustments to its systems to come into compliance with the proposed rule's requirements? What alternative transition period, if any, would be more appropriate and why? What would be the benefits of providing covered companies with a longer or shorter transition period?

D. Definitions

The proposed rule would share definitions with the LCR rule and would be adopted and codified in the same part of the Code of Federal Regulations as the LCR rule for each of the agencies.

In connection with the proposed rule, the agencies are proposing to revise certain of the existing definitions in § __.3 of the LCR rule and to add certain new definitions. This part of the

Supplementary Information

section discusses these definitions.

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

1. Revisions to Existing Definitions

The proposed rule would amend the existing definition of “calculation date” in § __.3 of the LCR rule to define “calculation date” for purposes of the NSFR requirement as any date on which a covered company calculates its NSFR under § __.100.

The existing definition of “collateralized deposit” in § __.3 of the LCR rule includes those fiduciary deposits that a covered company is required by federal law, as applicable to national banks and Federal savings associations, to collateralize using its own assets. The LCR rule excludes collateralized deposits from the set of secured funding transactions that a covered company is required to unwind in its calculation of adjusted liquid asset amounts under § __.21 of the LCR rule. To provide consistent treatment for covered companies subject to state laws that require collateralization of deposits, the proposed rule would amend the definition of “collateralized deposit” to include those deposits collateralized as required under state law, as applicable to state member and nonmember banks and state savings associations. In addition, the proposed rule would amend the definition of “collateralized deposit” to include those fiduciary deposits held at a covered company for which a depository institution affiliate of the covered company is a fiduciary and that the covered company has collateralized pursuant to 12 CFR 9.10(c) (for national banks) or 12 CFR 150.310 (for Federal savings associations). Although a covered company may not be required under applicable law to collateralize fiduciary deposits held at an affiliated depository institution, if the covered company decides to collateralize those deposits, then they should also be excluded from the unwind of applicable secured funding transactions.

The existing definition of “committed” in § __.3 of the LCR rule provides the criteria under which a credit facility or liquidity facility would be considered committed for purposes of the LCR rule, and thus receive an outflow rate as specified in § __.32(e). The definition provides that a credit facility or liquidity facility is committed if (1) the covered company may not refuse to extend credit or funding under the facility or (2) the covered company may refuse to extend credit under the facility (to the extent permitted under applicable law) only upon the satisfaction or occurrence of one or more specified conditions not including change in financial condition of the borrower, customary notice, or administrative conditions.

To more clearly capture the intended meaning of “committed,” the proposed rule would amend the definition to state that a credit or liquidity facility is committed if it is not unconditionally cancelable under the terms of the facility. The proposed rule would define “unconditionally cancelable,” consistent with the agencies' risk-based capital rules, to mean that a covered company may refuse to extend credit under the facility at any time, including without cause (to the extent permitted under applicable law).

For example, a credit or liquidity facility that only permits a covered company to refuse to extend credit upon the occurrence of a specified event (such as a material adverse change) would not be considered unconditionally cancelable, and therefore the facility would be considered committed under the proposed definition. Conversely, a credit or liquidity facility that the covered company may cancel without

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

See

12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), and 12 CFR 324.2 (FDIC).

The proposed rule would revise the definition of “covered nonbank company” to clarify that if the Board requires a company designated by the Council for Board supervision to comply with the LCR rule or the proposed rule, it will do so through a rulemaking that is separate from the LCR rule and this proposed rule or by issuing an order.

The existing definition of “operational deposit” provides the parameters under which funding of a covered company would be considered an operational deposit for purposes of the LCR rule, meaning that the funding amount is necessary for the provision of operational services, as defined in § __.3 of the LCR rule. While the LCR rule defines the term “operational deposit” to refer only to funding of a company, the proposed rule would use the term to refer to both funding and lending. Accordingly, the proposed rule would amend the definition of “operational deposit” to include both deposits received by the covered company in connection with operational services provided by the covered company and deposits placed by the covered company in connection with operational services received by the covered company. The proposed rule would also amend the definition of “operational deposit” to clarify that only deposits, as defined in § __.3 of the LCR rule, can qualify as operational deposits. Other forms of funding from, or provided to, wholesale customers or counterparties (

e.g.,

longer-term unsecured funding) would not qualify as operational deposits. Because operational deposits are limited to accounts that facilitate short-term transactional cash flows associated with operational services, operational deposits also should only have short-term maturities, falling within the proposed rule's less-than-6-month maturity category and generally within the LCR rule's 30 calendar-day period. Notwithstanding the proposed revisions to this definition, the treatment of operational deposits under §§ __.32 and __.33 of the LCR rule would remain the same.

Finally, the proposed rule would revise the definitions of “secured funding transaction” and “secured lending transaction” to clarify that the obligations referenced in those definitions must be secured by a lien on securities or loans (rather than secured by a lien on other assets), that such transactions are only those with wholesale customers or counterparties, and that securities issued or owned by a covered company do not constitute secured funding or lending transactions of the covered company. The treatment of secured transactions in the LCR rule, which adjusts inflow and outflow rates based on the relative liquidity of the collateral, would be appropriate only for transactions where the collateral is securities or loans because these forms of collateral are generally more liquid than others. For example, inflows in a stressed environment associated with lending secured by collateral types that are not generally traded in liquid markets, such as property, plant, and equipment, are typically based on the nature of the counterparty rather than the collateral, thus making the liquidity risk associated with such arrangements more akin to that of unsecured lending. Said another way, lending secured by property, plant, and equipment should not receive a 100 percent inflow rate; rather, the inflow should depend on the characteristics of the borrower, which more accurately reflects the likelihood a covered company will roll over such a loan during a period of significant stress. By the same reasoning, the definition of “unsecured wholesale funding” would be revised to include transactions that are not secured by securities or loans, but that may be secured by other forms of collateral (such as property, plant, and equipment), which are generally less liquid.

By limiting the definitions of “secured funding transaction” and “secured lending transaction” to those transactions with wholesale customers or counterparties, the proposed rule would clarify that funding and lending transactions with a retail customer or counterparty, even if collateralized, are subject to the retail treatment under the LCR rule and the proposed rule. For the same reasons as discussed above, the inflows and outflows associated with funding provided by a retail customer or counterparty, even if collateralized, are more dependent on the retail nature of the counterparty and not any collateral that secures the funding. Lastly, by excluding securities from these definitions, the proposed rule would clarify that securities issued by a covered company or owned by a covered company are treated based on the provisions applicable to securities in the LCR rule and the proposed rule. For example, securities issued through conduit structures that are consolidated on a covered company's balance sheet would not be considered secured funding transactions but rather, would be considered securities issued by the covered company.

Question 2: What modifications, if any, should be made to the proposed revised definitions of “calculation date,” “collateralized deposits,” “committed,” “covered nonbank company,” “operational deposit,” “secured funding transaction,” “secured lending transaction,” and “unsecured wholesale funding” and why? What, if any, are the unintended consequences to the operation of the LCR rule and the proposed rule that may result from the proposed revisions to these definitions?

Question 3: Given that the terms “unsecured wholesale funding” and, as discussed below, “unsecured wholesale lending” would include funding and lending that is secured by certain less liquid forms of collateral, would it be clearer to use different terminology for these terms and “secured funding transaction” and “secured lending transaction?”

Question 4: For the definitions of “secured funding transaction” and “secured lending transaction,” what, if any, assets beyond securities and loans should be included as qualifying collateral because they are sufficiently liquid to be relevant in assigning inflow and outflow rates to such transactions under the LCR rule? What, if any, securities or loans should be excluded from the qualifying collateral because they are not sufficiently liquid and why?

Question 5: Is the term “unsecured wholesale lending” appropriately defined by reference to a liability or obligation of a wholesale customer or counterparty? If not, in what ways should the definition be modified and why? What specific assets, if any, should be, but are not currently, included or excluded from the definition of “unsecured wholesale lending” for purposes of the NSFR? Likewise, what specific liabilities, if any, should be, but are not currently, included or excluded from the definition of “unsecured wholesale funding” for purposes of the NSFR? For example, what assets or liabilities within these terms, if any, such as a receivable based on an insurance claim or a payable for services rendered by a wholesale service provider, should be assigned different RSF and ASF

factors

than other assets or liabilities within these terms?

See

section II.D and II.C of this

Supplementary Information

section for discussion of assignment of RSF and ASF factors, respectively.

Question 6: Given that the definitions in the LCR rule would apply to the proposed rule and the Board's GSIB surcharge rule, are there other definitions or terms, in addition to those noted above, that the agencies should amend and why? For example, should the definition of “liquid and readily-marketable” be amended, including any of its criteria, to provide more clarity or to ease operational burden, given its implication on the determination of HQLA and HQLA treatment under the proposed NSFR requirement, and if so, why? Commenters are invited to provide suggested language to amend any definitions.

2. New Definitions

The proposed rule would add several new defined terms. The proposed rule would define “carrying value” to mean the value on a covered company's balance sheet of an asset, NSFR regulatory capital element, or NSFR liability, as determined in accordance with U.S. generally accepted accounting principles (GAAP). The proposed rule includes this definition because RSF and ASF factors generally would be applied to the carrying value of a covered company's assets, NSFR regulatory capital elements, and NSFR liabilities. By relying on values based on GAAP, the proposed rule would ensure consistency in the application of the NSFR requirement across covered companies and limit operational burdens to comply with the proposed rule because covered companies already prepare financial reports in accordance with GAAP. This definition would be consistent with the definition used in the agencies' regulatory capital rules.

See

12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), and 12 CFR 324.2 (FDIC).

The proposed rule would define “encumbered” using the criteria for an unencumbered asset in § __.22(b) of the LCR rule. The proposed definition does not include any substantive changes to the concept of encumbrance included in the LCR rule. The proposed rule would also use the defined term in place of the criteria enumerated in § __.22(b) of the LCR rule. The addition of this definition is necessary to apply the concept of encumbrance in § __.106(c) and (d) of the proposed rule, as discussed below.

The proposed rule would define two new related terms, “NSFR regulatory capital element” and “NSFR liability.” The proposed rule would define “NSFR regulatory capital element” to mean any capital element included in a covered company's common equity tier 1 capital, additional tier 1 capital, and tier 2 capital, as those terms are defined in the agencies' risk-based capital rules, prior to the application of capital adjustments or deductions set forth in the agencies' risk-based capital rules.

This definition would exclude any debt or equity instrument that does not meet the criteria for additional tier 1 or tier 2 capital instruments in § __.22 of the agencies' risk-based capital rules or that is being phased out of tier 1 or tier 2 capital pursuant to subpart G of the agencies' risk-based capital rules.

The term “NSFR regulatory capital element” would include both equity and liabilities under GAAP that meet the requirements of the definition. This definition of “NSFR regulatory capital element” would generally align with the definition of regulatory capital in the agencies' risk-based capital rules, but would not include capital deductions and adjustments.

Because the proposed rule would require assets that are capital deductions (such as goodwill) to be fully supported by stable funding, as discussed in section II.D.3.a.viii of this

SUPPLEMENTARY INFORMATION

section below, deducting the value of these assets from a covered company's NSFR regulatory capital elements would understate a company's NSFR.

See

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

Tier 2 capital instruments that have a remaining maturity of less than one year are not included in regulatory capital.

See

12 CFR 3.20(d)(1)(iv) (OCC), 12 CFR 217.20(d)(1)(iv) (Board), and 12 CFR 324.20(d)(1)(iv) (FDIC);

see also

12 CFR 3.300 (OCC), 12 CFR 217.300 (Board), and 12 CFR 324.300 (FDIC).

The proposed definition of “NSFR regulatory capital element” would include allowances for loan and lease losses (ALLL) to the same extent as under the risk-based capital rules.

See

12 CFR 3.20(d)(3) (OCC), 12 CFR 217.20(d)(3) (Board), and 12 CFR 324.20(d)(3) (FDIC).

The proposed rule would define “NSFR liability” to mean any liability or equity reported on a covered company's balance sheet that is not an NSFR regulatory capital element. The term “NSFR liability” primarily refers to balance sheet liabilities but may include equity because some equity may not qualify as an NSFR regulatory capital element. The definitions of “NSFR liability” and “NSFR regulatory capital element,” taken together, should capture the entirety of the liability and equity side of a covered company's balance sheet.

The proposed rule would define “QMNA netting set” to refer to a group of derivative transactions with a single counterparty that is subject to a qualifying master netting agreement,

and is netted under the qualifying master netting agreement.

QMNA netting sets would include, in addition to non-cleared derivative transactions, a group of cleared derivative transactions (that is, a group of derivative transactions that have been entered into with, or accepted by, a central counterparty (CCP)) if the applicable governing rules for the group of cleared derivative transactions meet the definition of a qualifying master netting agreement. The proposed rule would use the term “QMNA netting set” in the calculation of a covered company's stable funding requirement attributable to its derivative transactions, as discussed in section II.E of this

Supplementary Information

section.

Each QMNA netting set must meet each of the conditions specified in the definition of “qualifying master netting agreement” under § __.3 of the LCR rule and the operational requirements under § __.4(a) of the LCR rule.

A qualifying master netting agreement may identify a single QMNA netting set (for which the agreement creates a single net payment obligation and for which collection and posting of margin applies on an aggregate net basis) or it may establish multiple QMNA netting sets, each of which would be separate from and exclusive of any other QMNA netting set or derivative transaction covered by the qualifying master netting agreement.

The proposed rule would define “unsecured wholesale lending” as a liability or general obligation of a wholesale customer or counterparty to the covered company that is not a secured lending transaction. Although the term “unsecured wholesale funding” is defined in the LCR rule, “unsecured wholesale lending” is not. The proposed rule's NSFR requirement would require a covered company to hold stable funding against unsecured wholesale lending, so a definition of this term is included in the proposed rule.

Question 7: In what ways, if any, should the agencies modify the newly proposed definitions of “carrying value,” “encumbered,” “NSFR liability,” “NSFR regulatory capital element,” “QMNA netting set,” and “unsecured wholesale lending” and why?

Question 8: What other terms, if any, should the agencies define and why?

Question 9: In the definition of “NSFR regulatory capital element,” what adjustments to, or deductions from, regulatory capital, if any, should the agencies include in NSFR regulatory capital elements and why? For example, should the NSFR regulatory capital elements include adjustments or deductions for changes in the fair value of a liability due to a change in a

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

E. Effective Dates

As noted, the proposed NSFR requirement would be effective as of January 1, 2018. This effective date should provide covered companies with sufficient time to adjust to the requirements of the proposal, including to make any changes to ensure their assets, derivative exposures, and commitments are stably funded and to adjust information systems to calculate and monitor their NSFR. The NSFR is a balance-sheet metric, and its calculations would generally be based on the carrying value, as determined under GAAP, of a covered company's assets, liabilities, and equity. As a result, covered companies should be able to leverage current financial reporting systems to comply with the NSFR requirement.

The revisions to definitions currently used in the LCR rule and that would be used in the proposed rule, as discussed in section I.D.1 of this

SUPPLEMENTARY INFORMATION

section, would become effective for purposes of the LCR rule at the beginning of the calendar quarter after finalization of the proposed rule, instead of on January 1, 2018. Because these revisions would enhance the clarity of certain definitions used in the LCR rule, the agencies are proposing that they become effective sooner than the proposed NSFR effective date.

Question 10: Would the proposed effective date provide sufficient time for covered companies to make any needed adjustments to their systems for compliance with the proposed rule's requirements and to ensure that their assets, derivative exposures, and commitments are stably funded? What alternative effective date, if any, would be more appropriate for the proposed NSFR requirement and why? What would be the benefits of providing covered companies with a longer or shorter period of time to comply with the proposed rule?

Question 11: What alternative effective date, if any, would be more appropriate for the proposed revisions to the existing definitions used in the LCR rule, and why?

II. Minimum Net Stable Funding Ratio

As noted above, a covered company would calculate its NSFR by dividing its ASF amount by its RSF amount. The proposed rule would require a covered company to maintain an NSFR equal to or greater than 1.0 on an ongoing basis. As a result, while the proposed rule would require a covered company that is a depository institution holding company to calculate its NSFR on a quarterly basis in order to comply with the proposed rule's public disclosure requirements (as discussed in section V of this

SUPPLEMENTARY INFORMATION

section), a covered company would need to monitor its funding profile on an ongoing basis to ensure compliance with the NSFR requirement. If a covered company's funding profile materially changes intra-quarter, the agencies expect the company to be able to calculate its NSFR to determine whether it remains compliant with the NSFR requirement, consistent with the notification requirements under § __.110(a) and discussed in section III of this

SUPPLEMENTARY INFORMATION

section.

The following discussion describes the calculation of a covered company's ASF amount and RSF amount.

A. Rules of Construction

The proposed rule would include rules of construction in § __.102 relating to how items recorded on a covered company's balance sheet would be reflected in the covered company's ASF and RSF amounts.

1. Balance-Sheet Metric

As noted above, a covered company would generally determine its ASF and RSF amounts based on the carrying values of its assets, NSFR regulatory capital elements, and NSFR liabilities as determined under GAAP. Under GAAP, certain transactions and exposures are not recorded on the covered company's balance sheet. The proposed rule would include a rule of construction in § __.102(a) specifying that, unless otherwise provided, a transaction or exposure that is not recorded on the balance sheet of a covered company would not be assigned an ASF or RSF factor and, conversely, a transaction or exposure that is recorded on the balance sheet of the covered company would be assigned an ASF or RSF factor. While the proposed rule would generally rely on balance sheet carrying values, it would differ in some cases, such as with respect to determination of a covered company's stable funding requirements relating to derivative transactions, as described in section II.E of this

SUPPLEMENTARY INFORMATION

section, and the undrawn amount of commitments, as described in section II.D.3 of this

SUPPLEMENTARY INFORMATION

section.

2. Netting of Certain Transactions

The proposed rule would include a rule of construction in § __.102(b) that describes the treatment of receivables and payables that are associated with secured funding transactions, secured lending transactions, and asset exchanges with the same counterparty that the covered company has netted against each other. For purposes of determining the carrying value of these transactions, GAAP permits a covered company, when the relevant accounting criteria are met, to offset the gross value of receivables due from a counterparty under secured lending transactions by the amount of payments due to the same counterparty under secured funding transactions (GAAP offset treatment). The proposed rule would require a covered company to satisfy both these accounting criteria and the criteria applied in § __.102(b) before it could treat the applicable receivables and payables on a net basis for the purposes of the NSFR requirement.

Section § __.102(b) would apply the netting criteria specified in the agencies' supplementary leverage ratio rule (SLR rule).

These criteria require, first, that the offsetting transactions have the same explicit final settlement date under their governing agreements. Second, the criteria require that the right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of receivership, insolvency, liquidation, or similar proceeding. Third, the criteria require that under the governing agreements, the counterparties intended to settle net, settle simultaneously, or settle according to a process that is the functional equivalent of net settlement (that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date), where the transactions are settled through the same settlement system, the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of the transactions will occur by the end of the business day, and the settlement of the underlying securities does not interfere with the net cash settlement.

12 CFR 3.10(c)(4)(ii)(E)(

) through (

) (OCC), 12 CFR 217.10(c)(4)(ii)(E)(

) through (

) (Board), and 12 CFR 324.10(c)(4)(ii)(E)(

) through (

) (FDIC).

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

transactions, rather than to the net value. Thus, the gross value of these receivables or payables would be treated as if they were included on the balance sheet of the covered company. If the criteria in § __.102(b) are not met, the cash flows associated with the maturities of these secured lending and secured funding transactions may not align and, therefore, the proposed rule would treat these transactions on an individual basis when assigning them RSF and ASF factors. The proposed rule's incorporation of these netting criteria would also maintain consistency with covered companies' treatment of offset receivables and payables under the SLR rule.

3. Treatment of Securities Received in an Asset Exchange by a Securities Lender

The proposed rule would include a rule of construction in § __.102(c) specifying that when a covered company, acting as a securities lender, receives a security in an asset exchange and has not rehypothecated the security received, the covered company is not required to assign an RSF factor to the security it has received and is not permitted to assign an ASF factor to any liability to return the security. The requirements of § __.102(c), which would be consistent with the treatment of security-for-security transactions under the SLR rule,

are intended to neutralize differences across different accounting frameworks and maintain consistency across covered companies. Because the proposed rule would not require stable funding for the securities received, it would not treat the covered company's obligation to return these securities as stable funding and would not assign an ASF factor to this obligation. If, however, the covered company, acting as the securities lender, sells or rehypothecates the securities received, the proposed rule would require the covered company to assign the appropriate RSF factor or factors under § __.106 to the proceeds of the sale or, in the case of a pledge or rehypothecation, to the securities themselves if they remain on the covered company's balance sheet.

Similarly, the covered company would assign a corresponding ASF factor to the NSFR liability associated with the asset exchange, for example, an obligation to return the security received.

12 CFR 3.10(c)(4)(ii)(A) (OCC), 12 CFR 217.10(c)(4)(ii)(A) (Board), and 12 CFR 324.10(c)(4)(ii)(A) (FDIC).

See

sections II.D.3.c and II.D.3.d of this Supplementary Information section. If the collateral securities received by the securities lender have been rehypothecated but remain on the covered company's balance sheet, the collateral securities would be assigned an RSF factor under § __.106(c) to reflect the encumbrance. If the collateral securities have been rehypothecated but do not remain on the covered company's balance sheet, the covered company may be required to apply an additional encumbrance to the asset it has provided in the asset exchange, pursuant to § __.106(d).

B. Determining Maturity

Under the proposed rule, the ASF and RSF factors assigned to a covered company's NSFR liabilities and assets would depend in part on the maturity of each NSFR liability or asset. The proposed rule would incorporate the maturity assumptions in § __.31(a)(1) and (2) of the LCR rule to determine the maturities of a covered company's NSFR liabilities and assets. These LCR rule provisions generally require a covered company to identify the most conservative maturity date when calculating inflow and outflow amounts—that is, the earliest possible date for an outflow from a covered company and the latest possible date for an inflow to a covered company. These provisions also generally require covered companies to take the most conservative approach when determining maturity with respect to any notice periods and with respect to any options, either explicit or embedded, that may modify maturity dates.

Because the proposed rule would incorporate the LCR rule's maturity assumptions, it would similarly require a covered company to identify the maturity date of its NSFR liabilities and assets in the most conservative manner. Specifically, the proposed rule would require a covered company to apply the earliest possible maturity date to an NSFR liability (which would be assigned an ASF factor) and the latest possible maturity date to an asset (which would be assigned an RSF factor). The proposed rule would also require a covered company to take the most conservative approach when determining maturity with respect to any notice periods and with respect to any options, either explicit or embedded, that may modify maturity dates. For example, a covered company would be required to assume that an option to reduce the maturity of an NSFR liability and an option to extend the maturity of an asset will be exercised.

The proposed rule would treat an NSFR liability that has an “open” maturity (

i.e.,

the NSFR liability has no maturity date and may be closed out on demand) as maturing on the day after the calculation date. For example, an “open” repurchase transaction or a demand deposit placed at a covered company would be treated as maturing on the day after the calculation date. To ensure consistent use of terms in the proposed rule and LCR rule and to avoid ambiguity between perpetual instruments and transactions (

i.e.,

the instrument or transaction has no contractual maturity date and may not be closed out on demand) and open instruments and transactions, the proposed rule would amend the LCR rule to use the term “open” instead of using the phrase “has no maturity date.” This proposed change would have no substantive impact on the LCR rule. The proposed rule would treat a perpetual NSFR liability (such as perpetual securities issued by a covered company) as maturing one year or more after the calculation date.

The proposed rule would treat each principal amount due under a transaction, such as separate principal payments due under an amortizing loan, as a separate transaction for which the covered company would be required to identify the date when the payment is contractually due and apply the appropriate ASF or RSF factor based on that maturity date. This proposed treatment would ensure that a covered company's ASF and RSF amounts reflect the actual timing of a company's cash flows and obligations, rather than treating all principal payments for a transaction as though each were due on the same date (

e.g.,

the last contractual principal payment date of the transaction). For example, if a loan from a counterparty to a covered company requires two contractual principal payments, the first due less than six months from the calculation date and the second due one year or more from the calculation date, only the principal amount that is due one year or more from the calculation date would be assigned a 100 percent ASF factor, which is the factor assigned to liabilities that have a maturity of one year or more from the calculation date. The liability arising from the principal payment due within six months represents a less stable source of funding and would therefore be assigned a lower ASF factor (for example, a zero percent ASF factor if the loan is from a financial sector entity, as discussed in section II.C.3.e of this

SUPPLEMENTARY INFORMATION

section).

For deferred tax liabilities that have no maturity date, the maturity date under the proposed rule would be the first calendar day after the date on which the deferred tax liability could be realized.

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

C. Available Stable Funding

Under the proposed rule, a covered company's ASF amount would measure the stability of its equity and liabilities. An ASF amount that equals or exceeds a covered company's RSF amount would be indicative of a stable funding profile over the NSFR's one-year time horizon.

1. Calculation of ASF Amount

Under § __.103 of the proposed rule, a covered company's ASF amount would equal the sum of the carrying values of the covered company's NSFR regulatory capital elements and NSFR liabilities, each multiplied by the ASF factor assigned in § __.104 or § __.107(c). As described below, these ASF factors would be assigned based on the stability of each category of NSFR liability or NSFR regulatory capital element over the NSFR's one-year time horizon.

As discussed in section II.E of this

SUPPLEMENTARY INFORMATION

section, certain NSFR liabilities relating to derivative transactions are not considered stable funding for purposes of a covered company's NSFR calculation and are assigned a zero percent ASF factor under § __.107(c). In addition, pursuant to § __.108 of the proposed rule, a covered company may include in its ASF amount the available stable funding of a consolidated subsidiary only to the extent that the funding of the subsidiary supports the RSF amount associated with the subsidiary's own assets or is readily available to support RSF amounts associated with the assets of the covered company outside the consolidated subsidiary. This restriction is discussed in more detail in section II.F of this

SUPPLEMENTARY INFORMATION

section.

2. ASF Factor Framework

The proposed rule would use a set of standardized weightings, or ASF factors, to measure the relative stability of a covered company's NSFR liabilities and NSFR regulatory capital elements over a one-year time horizon. ASF factors would be scaled from zero to 100 percent, with a zero percent weighting representing the lowest stability and a 100 percent weighting representing the highest stability. The proposed rule would consider funding to be less stable if there is a greater likelihood that a covered company will need to replace or repay it during the NSFR's one-year time horizon—for example, if the funding matures and the counterparty declines to roll it over. The proposed rule would categorize NSFR liabilities and NSFR regulatory capital elements and assign an ASF factor based on three characteristics relating to the stability of the funding: (1) Funding tenor, (2) funding type, and (3) counterparty type.

Funding tenor.

For purposes of assigning ASF factors, the proposed rule would generally treat funding that has a longer effective maturity (or tenor) as more stable than shorter-term funding. All else being equal, funding that by its terms has a longer remaining tenor should be less susceptible to rollover risk, meaning there is a lower risk that a firm would need to replace maturing funds with less stable funding or potentially monetize less liquid positions at a loss to meet obligations, which could cause a firm's liquidity position to deteriorate. Longer-term funding, therefore, should provide greater stability across all market conditions, but especially during periods of stress. The proposed rule would group the maturities of NSFR liabilities and NSFR regulatory capital elements into one of three categories: Less than six months, six months or more but less than one year, and one year or more. The proposed rule would generally treat funding with a remaining maturity of one year or more as the most stable, because a covered company would not need to roll it over during the NSFR's one-year time horizon. Funding with a remaining maturity of less than six months or an open maturity would generally be treated as the least stable, because a covered company would need to roll it over in the short term. The proposed rule would generally treat funding that matures in six months or more but less than one year as partially stable, because a covered company would not need to roll it over in the shorter term, but would still need to roll it over before the end of the NSFR's one-year time horizon.

As described further below and in section II.C.3 of this

SUPPLEMENTARY INFORMATION

section, funding tenor matters more for the stability of some categories of funding than for others. For example, with respect to stable retail deposits,

contractual maturity generally has less effect on the stability of the funding relative to wholesale deposits.

Section __.3 of the LCR rule defines a “stable retail deposit” as a retail deposit that is entirely covered by deposit insurance and either (1) is held by the depositor in a transactional account or (2) the depositor that holds the account has another established relationship with the covered company such as another deposit account, a loan, bill payment services, or any similar service or product provided to the depositor that the covered company demonstrates, to the satisfaction of the appropriate Federal banking agency, would make the withdrawal of the deposit highly unlikely during a liquidity stress event. “Deposit insurance” is defined in § __.3 as deposit insurance provided by the FDIC under the FDI Act (12 U.S.C. 1811

et seq.

Funding type.

The proposed rule would recognize that certain types of funding are inherently more stable than others, independent of the remaining tenor. For example, as described in section II.C.3.b of this

SUPPLEMENTARY INFORMATION

section, the proposed rule would assign a higher ASF factor to stable retail deposits relative to other retail deposits, due in large part to the presence of full deposit insurance coverage and other stabilizing features that reduce the likelihood of a counterparty discontinuing the funding across a broad range of market conditions. Similarly, the proposed rule would assign a higher ASF factor to operational deposits than to certain other forms of short-term, wholesale deposits, based on the provision of services linked to an operational deposit, as discussed in section II.C.3.d of this

SUPPLEMENTARY INFORMATION

section. Likewise, the proposed rule would assign different ASF factors to different categories of retail brokered deposits, based on features that tend to make these forms of deposit more or less stable, as described in sections II.C.3.c, II.C.3.d, and II.C.3.e of this

SUPPLEMENTARY INFORMATION

section below.

Counterparty type.

The proposed rule's assignment of ASF factors would also take into account the type of counterparty providing funding, using the same counterparty type classifications as the LCR rule: (1) Retail customers or counterparties, (2) wholesale customers or counterparties that are not financial sector entities, and (3) financial sector entities.

described below and in section II.C.3 of this

SUPPLEMENTARY INFORMATION

section, within the NSFR's one-year time horizon, and all other things being equal, the proposed rule would treat most types of deposit funding provided by retail customers or counterparties as more stable than similar types of funding provided by wholesale customers or counterparties. It would also treat most types of funding that matures within six months and that is provided by financial sector entities as less stable than funding of a similar tenor provided by non-financial wholesale customers or counterparties.

Under § __.3 of the LCR rule, the term “retail customer or counterparty” includes individuals, certain small businesses, and certain living or testamentary trusts. The term “wholesale customer or counterparty” refers to any customer or counterparty that is not a retail customer or counterparty. The term “financial sector entity” refers to a regulated financial company, identified company, investment advisor, investment company, pension fund, or non-regulated fund, as such terms are defined in § __.3. The proposed rule would incorporate these definitions. For purposes of determining ASF and RSF factors assigned to assets, commitments, and liabilities where counterparty is relevant, the proposed rule would treat an

unconsolidated affiliate of a covered company as a financial sector entity.

Different types of counterparties may respond to events and market conditions in different ways. For example, differences in business models and liability structures tend to make short-term funding provided by financial sector entities less stable than similar funding provided by non-financial wholesale customers or counterparties. Financial sector entities typically have less stable liability structures than non-financial wholesale customers or counterparties, due to their financial intermediation activities. They tend to be more sensitive to market fluctuations and more susceptible to sudden cash outflows that could cause them to rapidly withdraw funding from a covered company. In contrast, wholesale customers and counterparties that are not financial sector entities typically maintain balances with covered companies to support their non-financial activities, such as production and physical investment, which tend to be impacted by financial market fluctuations to a lesser degree than activities of financial sector entities. In addition, non-financial wholesale customers or counterparties generally rely less on funding that is short-term or that can be withdrawn on demand. Therefore, these non-financial wholesale customers or counterparties may be less likely than financial sector entities to rapidly withdraw funding from a covered company. The proposed rule would accordingly treat most short-term funding provided by financial sector entities as less stable than similar funding provided by non-financial wholesale customers or counterparties.

The proposed rule's assignment of ASF factors would also account for differences in funding provided by retail and wholesale customers or counterparties. For example, retail customers and counterparties typically place deposits at a bank to safeguard their money and access the payments system, which makes them less likely to withdraw these deposits purely as a result of market stress, especially when covered by deposit insurance. Wholesale customers or counterparties, while often motivated by similar considerations, may also be motivated to a greater degree by the return and risk of an investment. In addition, as compared to retail customers or counterparties, wholesale customers or counterparties tend to be more sophisticated and responsive to changing market conditions, and often employ personnel who specialize in the financial management of the company. Therefore, the proposed rule would treat most types of deposit funding provided by retail customers or counterparties as more stable than similar funding provided by wholesale customers or counterparties.

While comprehensive data on the funding of covered companies by counterparty type is limited, the agencies' analysis of available data was consistent with the expectation of funding stability differences across counterparty types.

The agencies reviewed information collected on the Consolidated Reports of Condition and Income (Call Report), Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002), and the Securities and Exchange Commission (SEC) Financial and Operational Combined Uniform Single Report (FOCUS Report) over the period beginning December 31, 2007, and ending December 31, 2008, in combination with more recent FR 2052a report data and supervisory information collected in connection with the LCR rule. In addition, the agencies reviewed supervisory information collected from depository institutions that the FDIC placed into receivership in 2008 and 2009. Although the NSFR requirement is designed to measure the stability of a covered company's funding profile across all market conditions and would not be specifically based on a market stress environment, the agencies focused on a period of stress for purposes of evaluating the relative effects of counterparty type on funding stability. Because a covered company may under normal conditions adjust funding across counterparty types for any number of reasons, focusing on periods of stress allowed the agencies to better measure differences in stability by counterparty type. During these periods of stress, a covered company will generally be trying to roll over its funding, so differences in funding behavior may reasonably be more attributed to its counterparties than business decisions of the covered company.

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

The agencies' analysis of available public and supervisory information found that, during 2008, funding from financial sector entities exhibited less stability than funding provided by non-financial wholesale counterparties, which in turn exhibited less stability than retail deposits. For example, Call Report data on insured deposits, deposit data from the FFIEC 002, and broker-dealer liability data reported on the SEC FOCUS Report showed higher withdrawals in wholesale funding than retail deposits over this period. The agencies' analysis of supervisory data from a sample of large depository institutions that the FDIC placed into receivership in 2008 and 2009 also indicated that, during the periods leading up to receivership, funding provided by wholesale counterparties can be significantly less stable, showing higher average total withdrawals, than funding provided by retail customers and counterparties.

Question 12: The agencies invite comment regarding the foregoing framework. Are funding tenor, funding type, and counterparty type appropriate indicators of funding stability for purposes of the proposed rule? Why or why not? What other funding characteristics should the proposed rule take into account for purposes of assigning ASF factors? Please provide data and analysis to support your conclusions.

3. ASF Factors

a. 100 Percent ASF Factor

NSFR Regulatory Capital Elements and Long-Term NSFR Liabilities

Section __.104(a) of the proposed rule would assign a 100 percent ASF factor to NSFR regulatory capital elements, as defined in § __.3 and described in section I.D of this

SUPPLEMENTARY INFORMATION

section, and to NSFR liabilities that mature one year or more from the calculation date, other than funding provided by retail customers or counterparties. Because NSFR regulatory capital elements and these long-term liabilities do not mature during the NSFR's one-year time horizon, they are not susceptible to rollover risk during this time frame and represent the most stable form of

funding under the proposed rule. This category would include securities issued by a covered company that have a remaining maturity of one year or more. Therefore, the proposed rule would assign the highest possible ASF factor of 100 percent to NSFR regulatory capital elements and most long-term NSFR liabilities. As described in sections II.C.3.b through II.C.3.e of this

SUPPLEMENTARY INFORMATION

section, the proposed rule would assign different ASF factors to retail deposits and other forms of NSFR liabilities provided by retail customers or counterparties.

Question 13: Which, if any, NSFR regulatory capital elements should be assigned an ASF factor of other than 100 percent, and why?

Question 14: Should long-term debt securities issued by a covered company where the company is the primary market maker of such securities be assigned an ASF factor other than 100 percent (such as between 95 and 99 percent) to address the risk of a covered company buying back these debt securities? Please provide supporting data for such alternative factors.

b. 95 Percent ASF Factor

Stable Retail Deposits

Section __.104(b) of the proposed rule would assign a 95 percent ASF factor to stable retail deposits held at a covered company.

The proposed rule would assign a 95 percent ASF factor to stable retail deposits to reflect the fact that such deposits are a highly stable source of funding for covered companies. Specifically, the combination of full deposit insurance coverage, the depositor's relationship with the covered company, and the costs of moving transactional or multiple accounts to another institution substantially reduce the likelihood that retail depositors will withdraw these deposits in significant amounts over a one-year time horizon.

Because stable retail deposits are nearly as stable over the NSFR's one-year time horizon as NSFR regulatory capital elements and long-term NSFR liabilities under § __.104(a) of the proposed rule (described above in section II.C.3.a), the proposed rule would assign to stable deposits an ASF factor that is only slightly lower than that assigned to NSFR regulatory capital elements and long-term NSFR liabilities.

The proposed rule would incorporate the LCR rule's definition of “stable retail deposit.”

See supra

note 36.

See supra

section II.C.2 of this

SUPPLEMENTARY INFORMATION

section.

As discussed in section II.C.2 of this

SUPPLEMENTARY INFORMATION

section, insured retail deposits would be treated as more stable than similar funding from wholesale customers or counterparties, and would therefore be assigned a higher ASF factor.

Consistent with the LCR rule, the maturity and collateralization of stable retail deposits would not affect their treatment under the proposed rule, because the stability of retail deposits is more closely linked to the combination of deposit insurance, the other stabilizing features included in the definition of “stable retail deposit,” and the retail nature of the depositor, rather than maturity or any underlying collateral. Maturity is less relevant, for example, because a covered company may repay a retail term deposit for business and reputational reasons in the event of an early withdrawal request by the depositor despite the absence of a contractual requirement to provide such a repayment within the NSFR's one-year time horizon.

c. 90 Percent ASF Factor

Other Retail Deposits

Section __.104(c) of the proposed rule would assign a 90 percent ASF factor to retail deposits that are neither stable retail deposits nor retail brokered deposits, which includes retail deposits that are not fully insured by the FDIC or are insured under non-FDIC deposit insurance regimes.

The proposed rule would assign a lower ASF factor to deposits that are not entirely covered by deposit insurance relative to that assigned to stable retail deposits because of the elevated risk of depositors withdrawing funds if they become concerned about the condition of the bank, in part, because the depositor will have no guarantee that uninsured funds will promptly be made available through established and timely intervention and resolution protocols. Supervisory experience has demonstrated that retail depositors whose deposits exceed the FDIC's insurance limit have tended to withdraw not only the uninsured portion of the deposit, but the entire deposit under these circumstances. In addition, deposits that are neither transactional deposits nor deposits of a customer that has another relationship with a covered company tend to be less stable than deposits that have such characteristics because the depositor is less reliant on the bank. Therefore, the proposed rule would assign an ASF factor of 90 percent to these deposits, slightly lower than the ASF factor it would assign to stable retail deposits.

Retail customers and counterparties tend to provide deposits that are more stable than funding provided by other types of counterparties, as discussed in section II.C.2 of this

SUPPLEMENTARY INFORMATION

section above, and, thus, retail deposits would be assigned a higher ASF factor than all but the most stable forms of long-term funding from wholesale customers. For the same reasons as discussed above in relation to stable retail deposits, the maturity and collateralization of these other retail deposits would not affect the ASF factor they would be assigned under the proposed rule.

Retail funding that is not in the form of a deposit, such as payables owed to small business service providers, would not be treated as stable funding and would be assigned a zero percent ASF factor, as described in section II.C.3.e of this

SUPPLEMENTARY INFORMATION

section below.

Fully Insured Affiliate, Reciprocal, and Certain Longer-Term Retail Brokered Deposits

Section __.104(c) of the proposed rule would assign a relatively high 90 percent ASF factor to three categories of brokered deposits

provided by retail customers or counterparties that include certain stabilizing features that tend to make them more stable forms of funding than other brokered deposits, as discussed in sections II.C.3.d and II.C.3.e of this

SUPPLEMENTARY INFORMATION

section below.

Retail brokered deposits that would be assigned a 90 percent ASF factor include (1) a reciprocal brokered deposit where the entire amount is covered by deposit insurance;

(2) a brokered sweep deposit that is deposited in accordance with a contract between the retail customer or counterparty and the

covered company, a controlled subsidiary of the covered company, or a company that is a controlled subsidiary of the same top-tier company of which the covered company is a controlled subsidiary, where the entire amount of the deposit is covered by deposit insurance;

and (3) a brokered deposit that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and has a remaining maturity of one year or more. By assigning a 90 percent ASF factor, the proposed rule would treat these brokered deposits as more stable than most other categories of brokered deposits, less stable than stable retail deposits, and comparably stable to retail deposits other than stable retail deposits.

Under § __.3 of the LCR rule, a brokered deposit is a deposit held at the covered company that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker, as that term is defined in section 29(g) of the FDI Act (12 U.S.C. 1831f(g)).

The agencies note that the ASF factors assigned to retail brokered deposits are based solely on the stable funding characteristics of these deposits over a one-year time horizon. The assignment of ASF factors is not intended to reflect the impact of these deposits on a covered company, such as their effect on a company's probability of failure or loss given default, franchise value, or asset growth rate or lending practices. In addition, the assignment of ASF factors does not affect the determination of deposits as brokered, which is addressed under other regulations and guidance.

A “reciprocal brokered deposit” is defined in § __.3 of the LCR rule as a brokered deposit that the covered company receives through a deposit placement network on a reciprocal basis, such that: (1) For any deposit received, the covered company (as agent for the depositors) places the same amount with other depository institutions through the network and (2) each member of the network sets the interest rate to be paid on the entire amount of funds it places with other network members.

Under § __.3 of the LCR rule, a “brokered sweep deposit” is a deposit held at a covered company by a customer or counterparty through a contractual feature that automatically transfers to the covered company from another regulated financial company at the close of each business day amounts identified under the agreement governing the account from which the amount is being transferred. Typically, these transactions involve securities firms or investment companies that transfer (“sweep”) idle customer funds into deposit accounts at one or more banks.

First, § __.104(c)(2) of the proposed rule would assign a 90 percent ASF factor to a reciprocal brokered deposit provided by a retail customer or counterparty, where the entire amount of the deposit is covered by deposit insurance. The reciprocal nature of the brokered deposit means that a deposit placement network contractually provides a covered company with the same amount of deposits that it places with other depository institutions. As a result, and because the deposit is fully insured, the retail customers or counterparties providing the deposit tend to be less likely to withdraw it than other types of brokered deposits.

Second, § __.104(c)(3) of the proposed rule would assign a 90 percent ASF factor to a brokered sweep deposit that is deposited in accordance with a contract between the retail customer or counterparty that provides the deposit and the covered company or an affiliate of the covered company, where the entire amount of the deposit is covered by deposit insurance. A typical brokered sweep deposit arrangement places deposits, usually those in excess of deposit insurance caps, at different banking organizations, with each banking organization receiving the maximum amount that is covered by deposit insurance, according to a priority “waterfall.” Within the waterfall structure, affiliates of the deposit broker tend to be the first to receive deposits and the last from which deposits are withdrawn. With this affiliate relationship, a covered company is more likely to receive and maintain a steady stream of brokered sweep deposits. Based on the reliability of this stream of brokered sweep deposits and the enhanced stability associated with full deposit insurance coverage, the proposed rule would treat this type of brokered deposit, in the aggregate, as more stable than brokered sweep deposits received from unaffiliated institutions.

Third, § __.104(c)(4) of the proposed rule would assign a 90 percent ASF factor to a brokered deposit provided by a retail customer or counterparty that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and has a remaining maturity of one year or more. The contractual term of this category of brokered deposit and the exclusion of accounts used by a customer for transactional purposes make this category of brokered deposit more stable than other types of brokered deposits that would be assigned a lower ASF factor. Like other types of retail deposits with a remaining maturity of one year or more, however, these deposits would not be assigned a 100 percent ASF factor, because a covered company may be more likely to repay retail brokered deposits, in the event of an early withdrawal request by the depositor, for reputational or franchise reasons even without a contractual requirement to make such repayment. In addition, the brokered nature of these deposits makes them no more stable than stable retail deposits, which are assigned a 95 percent ASF factor, or retail deposits other than stable retail deposits and brokered deposits, which are assigned a 90 percent ASF factor, even if the deposit is fully covered by deposit insurance.

The proposed rule would assign lower ASF factors to brokered deposits that do not include these stabilizing factors, as discussed in sections II.C.3.d and II.C.3.e of this

SUPPLEMENTARY INFORMATION

section below.

Question 15: To what extent should the proposed rule consider the contractual term of a retail deposit (in addition to considering it for some forms of brokered deposits) for purposes of assigning an ASF factor? What alternative ASF factors, if any, would be more appropriate, and under what circumstances?

Question 16: The agencies invite commenter views on the proposed 90, 50, and zero percent ASF factors assigned to retail brokered deposits. What, if any, alternative ASF factors should be assigned to these deposits and why?

d. 50 Percent ASF Factor

Section __.104(d) of the proposed rule would assign a 50 percent ASF factor to certain unsecured wholesale funding, and secured funding transactions, depending on the tenor of the transaction and the covered company's counterparty; operational deposits that are placed at the covered company; and certain brokered deposits.

Unsecured Wholesale Funding Provided by, and Secured Funding Transactions With, a Counterparty That Is Not a Financial Sector Entity or Central Bank and With Remaining Maturity of Less Than One Year

Sections __.104(d)(1) and (2) of the proposed rule would assign a 50 percent ASF factor to a secured funding transaction or unsecured wholesale funding (including a wholesale deposit) that, in each case, matures less than one year from the calculation date and is provided by a wholesale customer or counterparty that is not a central bank or a financial sector entity (or a consolidated subsidiary thereof).

The proposed 50 percent ASF factor for this category would be lower than the 100 percent ASF factor assigned to funding from similar counterparties that matures more than a year from the calculation date because the need to roll over the funding during the NSFR's one-year time horizon makes this category of funding less stable. The 50 percent ASF factor would also be lower than the factor assigned to the categories of retail deposits described above, which include features such as deposit insurance and retail counterparty relationships that make those categories of funding more stable, regardless of remaining contractual maturity.

The proposed rule would generally assign an ASF factor to secured funding transactions and unsecured wholesale funding on the basis of counterparty type and maturity, without regard to whether and what type of collateral secures the transaction. This treatment would differ from the LCR rule, which more closely considers the liquidity characteristics of the underlying collateral. This different treatment stems from the fact that the LCR rule considers the immediate liquidity of the underlying collateral and behavior of the counterparty during a 30-calendar day period of significant stress, whereas the proposed rule focuses on the stability of funding over a one-year time horizon, which is less influenced by the underlying collateral.

Unsecured Wholesale Funding Provided by, and Secured Funding Transactions With, a Financial Sector Entity or Central Bank With Remaining Maturity of Six Months or More, But Less Than One Year

Sections __.104(d)(3) and (4) of the proposed rule would assign a 50 percent ASF factor to a secured funding transaction or unsecured wholesale funding that matures six months or more but less than one year from the calculation date and is provided by a financial sector entity or a consolidated subsidiary thereof, or a central bank.

As discussed in section II.C.2 of this

SUPPLEMENTARY INFORMATION

section, to account for the less stable nature of funding from these financial counterparties, the proposed rule would treat this funding more conservatively than funding from other types of wholesale customers or counterparties. If the funding from these counterparties has a maturity of less than six months, the proposed rule would assign a zero percent ASF factor, as described below, which would reflect the higher rollover risk of the funding resulting from the short remaining maturity and the financial nature of the counterparty.

As noted

supra

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

The proposed rule would treat funding from central banks consistently with funding from financial sector entities (

i.e.,

as a less stable form of funding) to discourage potential overreliance on funding from central banks, consistent with the proposed rule's focus on stable funding raised from market sources. In the United States, the Federal Reserve does not currently offer funding arrangements of this term.

Securities Issued by a Covered Company With Remaining Maturity of Six Months or More, But Less Than One Year

Section __.104(d)(5) of the proposed rule would assign a 50 percent ASF factor to securities issued by a covered company that mature in six months or more, but less than one year, from the calculation date. As discussed in section II.C.2 of this

SUPPLEMENTARY INFORMATION

section, in general, the proposed rule would consider funding that has a longer maturity to be more stable. These securities would represent less stable funding than securities issued by a covered company that are perpetual or mature one year or more from the calculation date (which would be assigned an ASF factor of 100 percent, as discussed above), but more stable funding than securities that mature within six months from the calculation date (which would be assigned a zero percent ASF factor, as discussed below).

Unlike other NSFR liabilities for which the proposed rule considers the counterparty type when assigning an ASF factor, the proposed rule would not consider the identities of the holders of the securities issued by a covered company. Because securities may actively trade on secondary markets and may be purchased by a variety of investors including financial sector entities, the identities of current security holders would not be an accurate or consistent factor that affects the stability of this type of funding. In addition, a covered company may not know or be able to track the identities of the holders of its securities that are traded. The proposed rule would therefore treat securities issued by a covered company equivalently to funding provided by a financial sector entity, rather than assuming greater stability based on a different type of counterparty. Therefore, similar to funding provided by a financial sector entity, securities issued by a covered company that mature in six months or more, but less than one year, from the calculation date would be assigned a 50 percent ASF factor.

Operational Deposits

Operational deposits are unsecured wholesale funding in the form of deposits or collateralized deposits that are necessary for the provision of operational services, such as clearing, custody, or cash management services.

In the LCR rule, such funds are assumed to have a lower outflow rate than other types of unsecured wholesale funding during a period of stress based on legal or operational limitations that make significant withdrawals from these accounts within 30 calendar days less likely. For example, an entity that relies on the cash management services of a covered company would find it more difficult to terminate its deposit agreement because it might be subject to early termination fees and might also incur start-up costs to establish a similar operational account with another financial institution.

The agencies note that the methodology that a covered company uses to determine whether and to what extent a deposit is operational for the purposes of the proposed rule must be consistent with the methodology used for the purposes of the LCR rule. See § __.3 of the LCR rule for the full list of services that qualify as operational services and § __.4(b) of the LCR rule for additional requirements for operational deposits.

As noted, a key operating assumption of the NSFR is a one-year time horizon. Under this longer time horizon, it is more reasonable to assume that a counterparty could successfully restructure its operational deposits and place them with another financial institution. Therefore, as compared with the treatment in the LCR rule, the treatment of operational deposits in the proposed rule is closer to that of non-operational deposits, but reflects that there may still be some difficulty and cost associated with switching operational service providers. Accordingly, § __.104(d)(6) of the proposed rule would also treat operational deposits, including those from financial sector entities, as more stable than other forms of short-term wholesale funding and assign them a 50 percent ASF factor.

Other Retail Brokered Deposits

Section __.104(d)(7) of the proposed rule would assign a 50 percent ASF factor to most categories of brokered deposits provided by retail customers or counterparties that do not include the additional stabilizing features required under § __.104(c) and summarized in section II.C.3.c of this

SUPPLEMENTARY INFORMATION

section. Brokered deposits tend to be less stable and exhibit greater volatility than stable retail deposits, even in cases where the deposits are fully or partially insured, as customers can more easily move brokered deposits among institutions. In addition, intermediation by a deposit broker may result in a higher likelihood of withdrawal compared to a non-brokered retail deposit where a direct relationship exists between the depositor and the covered company. Statutory restrictions on certain brokered deposits can also make this form of funding less stable than other deposit types. Specifically, a covered company that becomes less than “well capitalized”

is subject to restrictions on accepting, renewing, or rolling over funds obtained directly or indirectly through a deposit broker.

Thus, as a general matter, the proposed rule would assign a 50 percent ASF factor to most categories of brokered deposits.

As defined in section 38 of the FDI Act, 12 U.S.C. 1831o.

See

12 U.S.C. 1831f.

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

brokered deposit that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and matures in six months or more, but less than one year, from the calculation date; (3) a reciprocal brokered deposit or brokered affiliate sweep deposit where less than the entire amount of the deposit is covered by deposit insurance; and (4) a brokered non-affiliate sweep deposit, regardless of deposit insurance coverage.

Retail brokered deposits to which the proposed rule would assign a 50 percent ASF factor do not have the same combination of stabilizing attributes, such as a combination of being fully covered by deposit insurance, being an affiliated brokered sweep deposit, or having a longer-term maturity, as brokered deposits assigned a 90 percent ASF factor, as discussed in section II.C.3.c of this

SUPPLEMENTARY INFORMATION

section. However, these types of brokered deposits are more stable than brokered deposits that mature in less than six months from the calculation date and are not reciprocal brokered deposits or brokered sweep deposits or held in a transactional account, which are assigned a zero percent ASF factor, as discussed in section II.C.3.e of this

SUPPLEMENTARY INFORMATION

section.

All Other NSFR Liabilities With Remaining Maturity of Six Months or More, But Less Than One Year

Section __.104(d)(8) of the proposed rule would assign a 50 percent ASF factor to all other NSFR liabilities that have a remaining maturity of six months or more, but less than one year. As discussed in section II.C.2 of this

SUPPLEMENTARY INFORMATION

section, a covered company would not need to roll over a liability of this maturity in the shorter-term, but would still need to roll it over before the end of the NSFR's one-year time horizon.

e. Zero Percent ASF Factor

Section __.104(e) of the proposed rule would assign a zero percent ASF factor to NSFR liabilities that demonstrate the least stable funding characteristics, including trade date payables, certain short-term retail brokered deposits, non-deposit retail funding, certain short-term funding from financial sector entities, and any other NSFR liability that matures in less than six months and is not described above.

Trade Date Payables

Section __.104(e)(1) of the proposed rule would assign a zero percent ASF factor to trade date payables that result from purchases by a covered company of financial instruments, foreign currencies, and commodities that are required to settle within the lesser of the market standard settlement period for the particular transactions and five business days from the date of the sale. Trade date payables are established when a covered company buys financial instruments, foreign currencies, and commodities, but the transactions have not yet settled. These payables, which are liabilities, should result in an outflow from a covered company at the settlement date, which varies depending on the specific market, but generally occurs within five business days, so the proposed rule does not treat the liability as stable funding. The failure of a trade date payable to settle within the required settlement period for the transaction would not affect the ASF factor assigned to the transaction under the proposed rule because a trade date payable that has failed to settle also does not represent stable funding. Consistent with the definition of “derivative transaction” in § __.3, the proposed rule would treat a payable with a contractual settlement period that is longer than the lesser of the market standard for the particular instrument or five business days as a derivative transaction under § __.107, rather than as a trade date payable.

Certain Brokered Deposits

Section __.104(e)(2) of the proposed rule would assign a zero percent ASF factor to a brokered deposit provided by a retail customer or counterparty that is not a reciprocal brokered deposit or brokered sweep deposit, is not held in a transactional account, and matures less than six months from the calculation date. In addition to the reasons discussed in section II.C.3.d above, this type of brokered deposit tends to be less stable than other types of brokered deposits because of the absence of incrementally stabilizing features such as being a transactional account or reciprocal or brokered sweep arrangement. As a result, retail customers or counterparties that provide this type of brokered deposit face low costs associated with withdrawing the funding. For example, a retail customer or counterparty providing this type of brokered deposit may seek to deposit funds with the banking organization that offers the highest interest rates, which may not be the covered company.

Non-Deposit Retail Funding

Section __.104(e)(3) of the proposed rule would assign a zero percent ASF factor to retail funding that is not in the form of a deposit. Given that non-deposit retail liabilities are not regular sources of funding or commonly utilized funding arrangements, the proposed rule would not treat any portion of them as stable funding. As noted above, a security issued by the covered company that is held by a retail customer or counterparty would not take into account counterparty type and therefore would not fall within this category.

Short-Term Funding From a Financial Sector Entity or Central Bank

Section __.104(e)(5) of the proposed rule would apply a zero percent ASF factor to funding (other than operational deposits) for which the counterparty is a financial sector entity or a consolidated subsidiary thereof and the transaction matures less than six months from the calculation date.

Financial sector entities and their consolidated subsidiaries are generally the most likely to withdraw funding from a covered company, regardless of whether the funding is secured or unsecured or the nature of any collateral securing the funding, as described in section II.C.2 of this

SUPPLEMENTARY INFORMATION

section.

As noted

supra

Short-term funding from central banks is also assigned a zero percent ASF factor to discourage overreliance on funding from central banks, consistent with the proposed rule's focus on stable funding from market sources, as noted in section II.C.3.d of this Supplementary Information section above. For example, overnight funding from the Federal Reserve's discount window would be assigned a zero percent ASF factor.

Securities Issued by a Covered Company With Remaining Maturity of Less Than Six Months

Section __.104(e)(4) of the proposed rule would assign a zero percent ASF factor to securities that are issued by a covered company and that have a remaining maturity of less than six months. As discussed above, the proposed rule generally treats as less stable those instruments that have shorter tenors and have to be paid within the NSFR's one-year time horizon. Because these liabilities may be actively traded, also as discussed above, the counterparty holding the securities may not be reflective of the stability of the covered company's funding under the securities. As a result, the proposed rule would treat these NSFR liabilities

equivalently to funding with a similar maturity provided by a financial sector entity, rather than assuming greater stability based on a particular type of counterparty.

All Other NSFR Liabilities With Remaining Maturity of Less Than Six Months or an Open Maturity

Section __.104(e)(6) of the proposed rule would assign a zero percent ASF factor to all other NSFR liabilities, including those that mature less than six months from the calculation date and those that have an open maturity. NSFR liabilities that do not fall into one of the categories described above would not represent a regular or reliable source of funding and, therefore, the proposed rule would not treat any portion as stable funding.

Question 17: What, if any, liabilities are not, but should be, specifically addressed in the proposed rule and what ASF factors should be assigned to those liabilities?

Question 18: What, if any, additional ASF factors should be included and to which NSFR liabilities or NSFR regulatory capital elements should they be assigned? Would adding such ASF factors provide for a better calibrated ASF amount and, if so, why?

Question 19: What, if any, liabilities owed to retail customers or counterparties not in the form of a deposit should be assigned an ASF factor greater than zero percent, and why?

D. Required Stable Funding

Under the proposed rule, a covered company would be required to maintain an ASF amount that equals or exceeds its RSF amount. As described below, a covered company's RSF amount would be based on the liquidity characteristics of its assets, derivative exposures, and commitments. In general, the less liquid an asset over the NSFR's one-year time horizon, the greater extent to which the proposed rule would require it to be supported by stable funding. By requiring a covered company to maintain more stable funding to support less liquid assets, the proposed rule would reduce the risk that the covered company may not be able to readily monetize the assets at a reasonable cost or could be required to monetize the assets at fire sale prices or in a manner that contributes to disorderly market conditions.

1. Calculation of the RSF Amount

The proposed rule would require a covered company to calculate its RSF amount as set forth in § __.105. A covered company's RSF amount would equal the sum of two components: (i) The carrying values of a covered company's assets (other than assets included in the calculation of the covered company's derivatives RSF amount) and the undrawn amounts of its commitments, each multiplied by an RSF factor assigned under § __.106 and described in section II.D.3 of this

SUPPLEMENTARY INFORMATION

section; and (ii) the covered company's derivatives RSF amount, as calculated under § __.107 and described in section II.E of this

SUPPLEMENTARY INFORMATION

section.

2. RSF Factor Framework

The proposed rule would use a set of standardized weightings, or RSF factors, to determine the amount of stable funding a covered company must maintain. Specifically, a covered company would calculate its RSF amount by multiplying the carrying values of its assets, the undrawn amounts of its commitments, and its measures of derivative exposures (as discussed in section II.E of this

SUPPLEMENTARY INFORMATION

section) by the assigned RSF factors. This approach would promote consistency of the proposed NSFR measure across covered companies.

RSF factors would be scaled from zero percent to 100 percent based on the liquidity characteristics of an asset, derivative exposure, or commitment. A zero percent RSF factor means that the proposed rule would not require the asset, derivative exposure, or commitment to be supported by available stable funding, and a 100 percent RSF factor means that the proposed rule would require the asset, derivative exposure, or commitment to be fully supported by available stable funding. Accordingly, the proposed rule would generally assign a lower RSF factor to more liquid assets, exposures, and commitments and a higher RSF factor to less liquid assets, exposures, and commitments.

The proposed rule would categorize assets, derivatives exposures, and commitments and assign an RSF factor based on the following characteristics relating to their liquidity over the NSFR's one-year time horizon: (1) Credit quality, (2) tenor, (3) type of counterparty, (4) market characteristics, and (5) encumbrance.

Credit quality.

Credit quality is a factor in an asset's liquidity because market participants tend to be more willing to purchase higher credit quality assets across a range of market and economic conditions, but especially in a stressed environment (sometimes called “flight to quality”). The demand for higher credit quality assets, therefore, is more likely to persist and such assets are more likely to have resilient values, allowing a covered company to monetize them more readily. Assets of lower credit quality, in contrast, are more likely to become delinquent, and that increased credit risk makes these assets less likely to hold their value, particularly in times of market stress. As a result, the proposed rule would generally require assets of lower credit quality to be supported by more stable funding, to reduce the risk that a covered company may have to monetize the lower credit quality asset at a discount.

Tenor.

In general, the proposed rule would require a covered company to maintain more stable funding to support assets that have a longer tenor because of the greater time remaining before the covered company will realize inflows associated with the asset. In addition, assets with a longer tenor may liquidate at a discount because of the increased market and credit risks associated with cash flows occurring further in the future. Assets with a shorter tenor, in contrast, would require a smaller amount of stable funding under the proposed rule because a covered company would have access to the inflows under these assets sooner. Thus, the proposed rule would generally require less stable funding for shorter-term assets compared to longer-term assets. The proposed rule would divide maturities into three categories for purposes of a covered company's RSF amount calculation: less than six months, six months or more but less than one year, and one year or more.

Counterparty type.

A covered company may face pressure to roll over some portion of its assets in order to maintain its franchise value with customers and because a failure to roll over such assets could be perceived by market participants as an indicator of financial distress at the covered company. Typically, these risks are driven by the type of counterparty to the asset. For example, covered companies often consider their lending relationships with a wholesale, non-financial borrower to be important to maintain current business and generate additional business in the future. As a result, a covered company may have concerns about damaging future business prospects if it declines to roll over lending to such a customer for reasons other than a change in the financial condition of the borrower. More broadly, because market participants generally expect a covered company to roll over lending to wholesale, non-financial counterparties

based on relationships, a covered company's failure to do so could be perceived as a sign of liquidity stress at the company, which could itself cause such a liquidity stress.

These concerns are less likely to be a factor with respect to financial counterparties because financial counterparties typically have a wider range of alternate funding sources already in place and face lower transaction costs associated with arranging alternate funding and less expectation of stable lending relationships with any single provider of credit. Therefore, market participants are less likely to assume the covered company is under financial distress if the covered company declines to roll over funding to a financial sector counterparty. In light of these business and reputational considerations, the proposed rule would require a covered company to more stably fund lending to non-financial counterparties than lending to financial counterparties, all else being equal.

As noted

supra

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

Market characteristics.

Assets that are traded in transparent, standardized markets with large numbers of participants and dedicated intermediaries tend to exhibit a higher degree of reliable liquidity. The proposed rule would, therefore, require less stable funding to support such assets than those traded in markets characterized by information asymmetry and relatively few participants.

Depending on the asset class and the market, relevant measures of liquidity may include bid-ask spreads, market size, average trading volume, and price volatility.

While no single metric is likely to provide for a complete assessment of market liquidity, multiple indicators taken together provide relevant information about the extent to which a liquid market exists for a particular asset class. For example, market data reviewed by the agencies show that securities that meet the criteria to qualify as HQLA typically trade with tighter bid-ask spreads than non-HQLA securities and in markets with significantly higher average daily trading volumes, both of which tend to indicate greater liquidity in the markets for HQLA securities.

In general, tighter bid-ask spreads, larger market sizes, higher trading volumes, and more consistent pricing tend to indicate greater market liquidity. The agencies reviewed market data discussed in this section II.D of this

SUPPLEMENTARY INFORMATION

section from the following sources: Bloomberg Finance L.P., Financial Industry Regulatory Authority (FINRA) Trade Reporting and Compliance Engine (TRACE), and Securities Industry and Financial Market Association statistics (

http://www.sifma.org/research/statistics.aspx

Encumbrance.

As described in section II.D.3 of this

SUPPLEMENTARY INFORMATION

section, whether and the degree to which an asset is encumbered will dictate the amount of stable funding the proposed rule would require a covered company to maintain to support the particular asset, as encumbered assets cannot be monetized during the period over which they are encumbered. For example, securities that a covered company has encumbered for a period of greater than one year in order to provide collateral for its longer-term borrowings are not available for the covered company to monetize in the shorter term. In general, the longer an asset is encumbered, the more stable funding the proposed rule would require.

Question 20: The agencies invite comment regarding the foregoing framework. Are the characteristics described above appropriate indicators of the liquidity of a covered company's assets, derivative exposures, and commitments for purposes of the proposed rule? Why or why not? What other characteristics should the proposed rule take into account for purposes of assigning RSF factors? Please provide data and analysis to support your conclusions.

3. RSF Factors

Section __.106 of the proposed rule would assign RSF factors to a covered company's assets and commitments, other than certain assets relating to derivative transactions that are assigned an RSF factor under § __.107. Section __.106 would also set forth specific treatment for nonperforming assets, encumbered assets, assets held in certain segregated accounts, and certain assets relating to secured lending transactions and asset exchanges.

a. Treatment of Unencumbered Assets

i. Zero Percent RSF Factor

As noted above, a covered company's RSF amount reflects the liquidity characteristics of its assets, derivative exposures, and commitments. Section __.106(a)(1) of the proposed rule would assign a zero percent RSF factor to certain assets that can be directly used to meet financial obligations, such as cash, or that are expected, based on contractual terms, to be converted to assets that can be directly used to meet financial obligations over the immediate term. By assigning a zero percent RSF factor to these assets, the proposed rule would not require a covered company to support them with stable funding.

Currency and Coin

Section __.106(a)(1)(i) of the proposed rule would assign a zero percent RSF factor to currency and coin because they can be directly used to meet financial obligations. Currency and coin include U.S. and foreign currency and coin owned and held in all offices of a covered company; currency and coin in transit to a Federal Reserve Bank or to any other depository institution for which the covered company's subsidiaries have not yet received credit; and currency and coin in transit from a Federal Reserve Bank or from any other depository institution for which the accounts of the subsidiaries of the covered company have already been charged.

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

Cash Items in the Process of Collection

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

Despite not being in a form that can be directly used to meet financial obligations at the calculation date, cash items in the process of collection will be in such a form in the immediate term. The proposed rule

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

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

Reserve Bank Balances and Other Claims on a Reserve Bank That Mature in Less Than Six Months

Section __.106(a)(1)(iii) of the proposed rule would assign a zero percent RSF factor to a Reserve Bank balance or other claim on a Reserve Bank that matures in less than six months from the calculation date. The term “Reserve Bank balances” is defined in § __.3 of the LCR rule and includes required reserve balances and excess reserves, but not other balances that a covered company maintains on behalf of another institution, such as balances it maintains on behalf of a respondent for which it acts as a pass-through correspondent

or on behalf of an excess balance account participant.

See

12 CFR 204.5(a)(1)(ii).

See

12 CFR 204.10(d).

The proposed rule would assign a zero percent RSF factor to Reserve Bank balances because these assets can be directly used to meet financial obligations through the Federal Reserve's payment system. The proposed rule would also assign a zero percent RSF factor to a claim on a Reserve Bank that does not meet the definition of a Reserve Bank balance if the claim matures in less than six months. In these cases, while the asset cannot be directly used to meet financial obligations of a covered company, a covered company faces little risk of a counterparty default or harm to its franchise value if it does not roll over the lending and it may therefore realize cash flows associated with the asset in the near term.

Claims on a Foreign Central Bank That Matures in Less Than Six Months

Section __.106(a)(1)(iv) of the proposed rule would assign a zero percent RSF factor to claims on a foreign central bank that mature in less than six months. Similar to claims on a Reserve Bank, claims on a foreign central bank in this category may generally either be directly used to meet financial obligations or will be available for such use in the near term, and a covered company faces little risk of a counterparty default or harm to its franchise value if it does not roll over the lending. The proposed rule would therefore not require that they be supported by stable funding.

Trade Date Receivables

Similar to cash items in the process of collection, a covered company can reasonably expect that certain contractual “trade date” receivables will settle in the near term. These trade date receivables are limited to those due to the covered company that result from the sales of financial instruments, foreign currencies, or commodities that (1) are required to settle within the lesser of the market standard settlement period for the relevant type of transaction, without extension of the standard settlement period, and five business days from the date of the sale; and (2) have not failed to settle within the required settlement period.

Section __.106(a)(1)(v) of the proposed rule would assign a zero percent RSF to these receivables because they are generally reliable, with standardized, widely used settlement procedures and standardized settlement periods that are no longer than five business days. Thus, a covered company will realize inflows from these receivables in the very near term.

Consistent with the definition of “derivative transaction” under § __.3 of the LCR rule, the proposed rule would treat a trade date receivable that has a contractual settlement or delivery lag beyond this period as a derivative transaction under § __.107. (The definition of “derivative transaction” under § __.3 of the LCR rule includes “unsettled securities, commodities, and foreign currency exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or five business days.”) The proposed rule would not treat as a derivative transaction a trade date receivable that has a contractual settlement or delivery lag within the lesser of the market standard settlement period and five business days, but which fails to settle within this period; instead, the proposed rule would assign a 100 percent RSF factor to the trade date receivable under § __.106(a)(8) as an asset not otherwise assigned an RSF factor under § __.106(a)(1) through (7) or § __.107.

Question 21: Given the one-year time horizon of the NSFR, the proposed rule would not require a covered company to support its current reserve balance requirement with stable funding. Because balances that meet reserve balance requirements are not immediately available to be used to directly meet financial obligations, what, if any, RSF factor (such as 100 percent) should be assigned to a covered company's reserve balance requirement and why?

Question 22: Should the proposed rule treat as a trade date receivable (instead of a derivative transaction) any transaction involving the sale of financial instruments, foreign currencies, or commodities, that has a market standard settlement period of greater than five business days from the date of the sale, and if so, why?

ii. 5 Percent RSF Factor

Unencumbered Level 1 Liquid Assets

Section __.106(a)(2)(i) of the proposed rule would assign a 5 percent RSF factor to level 1 liquid assets that would not be assigned a zero percent RSF factor. The proposed rule would incorporate the definition of “level 1 liquid assets” set forth in § __.20(a) of the LCR rule, which does not take into consideration the requirements under § __.22. The following level 1 liquid assets would be assigned a 5 percent RSF factor: (1) Securities issued or unconditionally guaranteed as to the timely payment of principal and interest by the U.S. Department of the Treasury; (2) liquid and readily-marketable securities, as defined in § __.3 of the LCR rule, issued or unconditionally guaranteed as to the timely payment of principal and interest by any other U.S. government agency (provided that its obligations are fully and explicitly guaranteed by the full faith and credit of the U.S. government); (3) certain liquid and readily-marketable securities that are claims on, or claims guaranteed by, a sovereign entity, a central bank, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and European Community, or a multilateral development bank; and (4) certain liquid and readily-marketable debt securities issued by sovereign entities.

Section __106(a)(2)(i) of the proposed rule would assign a relatively low RSF factor of 5 percent to these level 1 liquid assets based on their high credit quality and favorable market liquidity characteristics, which reflect their ability to serve as reliable sources of liquidity. For example, U.S. Treasury securities (a form of level 1 liquid assets) have among the highest credit quality of assets because they are backed by the full faith and credit of the U.S. government. In addition, the market for U.S. Treasury securities has a high average daily trading volume, large market size, and low bid-ask spreads relative to the markets in which other asset classes trade. Assignment of a 5 percent RSF factor would recognize that there are modest transaction costs related to selling U.S. Treasury securities and other level 1 liquid assets but that, other than assets that a covered company can use directly to meet financial obligations (or will be able to use within a matter of days), level 1 liquid assets generally represent the most readily monetizable asset types for a covered company.

Credit and Liquidity Facilities

Section __.106(a)(2)(ii) of the proposed rule would assign a 5 percent RSF factor to the undrawn amount of committed credit and liquidity facilities that a covered company provides to its customers and counterparties. The proposed rule would require a covered company to support these facilities with stable funding, even though they are generally not included on its balance sheet, because of their widespread use and associated material liquidity risk based on the possibility of drawdowns across a range of economic environments. Research conducted by Board staff found increases in drawdowns of as much as 10 percent of committed amounts over a 12-month period from 2006-2011.

Given the proposed rule's application across all counterparties and economic environments, assignment of a 5 percent RSF factor would be appropriate based on the observed drawdowns during this period.

See

Jose M. Berrospide, Ralf R. Meisenzahl, and Briana D. Sullivan, “Credit Line Use and Availability in the Financial Crisis: The Importance of Hedging,” Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series 2012-27 (2012).

The terms “credit facility” and “liquidity facility” are defined in § __.3 of the LCR rule and, as described in section I.D of this Supplementary Information section, the proposed rule would modify the definition of “committed” that is currently in the LCR rule to describe credit and liquidity facilities that cannot be unconditionally canceled by a covered company. Under § __.106(a)(2) of the proposed rule, the undrawn amount is the amount that could be drawn upon within one year of the calculation date, whereas under § __.32(e) of the LCR rule, the undrawn amount is the amount that could be drawn upon within 30 calendar days. When determining the undrawn amount over the proposed rule's one-year time horizon, a covered company would not include amounts that are contingent on the occurrence of a contractual milestone or other event that cannot be reasonably expected to be reached or occur within one year. For example, if a construction company can draw a certain amount from a credit facility only upon meeting a construction milestone that cannot reasonably be expected to be reached within one year, such as entering the final stage of a multi-year project that has just begun, then the undrawn amount would not include the amount that would become available only upon entering the final stage of the project.

Similarly, a letter of credit that meets the definition of credit or liquidity facility may entitle a seller to obtain funds from a covered company if a buyer fails to pay the seller. If, under the terms of the letter of credit, the seller is not legally entitled to obtain funds from the covered company as of the calculation date because the buyer has not failed to perform under the agreement with the seller, and the covered company does not reasonably expect nonperformance within the NSFR's one-year time horizon, then the funds potentially available under the letter of credit are not undrawn amounts. If the seller is legally entitled to obtain the funds available under the letter of credit as of the calculation date (because the buyer has defaulted) or if the buyer should reasonably be expected to default within the NSFR's one-year time horizon, then the funds available under the letter of credit are undrawn amounts.

Unlike the LCR rule, which permits covered companies to net certain level 1 and level 2A liquid assets that secure a committed credit or liquidity facility against the undrawn amount of the facility, the proposed rule would not allow netting of such assets because any draw upon a credit or liquidity facility would become an asset on a covered company's balance sheet regardless of the underlying collateral and would require stable funding.

Question 23: The agencies invite comment on the proposed assignment of a 5 percent RSF factor to the undrawn amount of committed credit and liquidity facilities. What, if any, additional factors should be considered in determining the treatment of unfunded commitments under the proposed rule?

Question 24: What, if any, modifications to the definitions of “credit facility” and “liquidity facility” or the description of the “undrawn amount” for purposes of the proposed rule should the agencies consider?

Question 25: If required to be posted as collateral upon a draw on a committed credit or liquidity facility, should certain level 1 and level 2A liquid assets be netted against the undrawn amount of the facility, and if so, why? Provide detailed explanations and supporting data.

iii. 10 Percent RSF Factor

Secured Lending Transactions With a Financial Sector Entity or a Subsidiary Thereof That Mature Within Six Months and Are Secured by Rehyphothecatable Level 1 Liquid Assets

Section __.106(a)(3) of the proposed rule would assign a 10 percent RSF factor to a secured lending transaction

with a financial sector entity or a consolidated subsidiary thereof that matures within six months of the calculation date and is secured by level 1 liquid assets that are rehypothecatable for the duration of the secured lending transaction.

The proposed rule would modify the definition of “secured lending transaction” that is currently in the LCR rule, as described in section I.D of this

SUPPLEMENTARY INFORMATION

section.

The proposed rule would require a covered company to support short-term lending between financial institutions, where the transaction is secured by rehypothecatable level 1 liquid assets, with a lower amount of available stable funding, relative to most other asset classes, because of a covered company's ability to monetize the level 1 liquid asset collateral for the duration of the transaction. Because of the financial nature of the counterparty, a transaction of this type also presents relatively lower reputational risk to a covered company if it chooses not to roll over the transaction when it matures, as discussed in section II.D.2 of this Supplementary Information section.

As provided in § __.106(d) of the proposed rule and discussed in section II.D.3.d of this

SUPPLEMENTARY INFORMATION

section, the RSF factor applicable to a transaction in this category may increase if the covered company rehypothecates the level 1 liquid asset collateral securing the transaction for a period with more than six months remaining from the calculation date.

iv. 15 Percent RSF Factor

Unencumbered Level 2A Liquid Assets

Section __.106(a)(4)(i) of the proposed rule would assign a 15 percent RSF factor to level 2A liquid assets, as set forth in § __.20(b) of the LCR rule, but would not take into consideration the requirements in § __.22 or the level 2 cap in § __.21. As set forth in the LCR rule, level 2A liquid assets include certain obligations issued or guaranteed by a U.S. government-sponsored enterprise (GSE) and certain obligations issued or guaranteed by a sovereign entity or a multilateral development bank. The LCR rule requires these securities to be liquid and

readily-marketable, as defined in § __.3, to qualify as level 2A liquid assets.

The proposed rule would assign a 15 percent RSF factor to level 2A liquid assets based on the characteristics of these assets, including their high credit quality. This factor would reflect the relatively high level of liquidity of these assets compared to most other asset classes, but lower liquidity than level 1 liquid assets. For example, mortgage-backed securities issued by U.S. GSEs (a widely held form of level 2A liquid assets) have a higher credit quality, higher average daily trading volume, and lower bid-ask spreads relative to corporate debt securities.

Secured Lending Transactions and Unsecured Wholesale Lending With a Financial Sector Entity or a Subsidiary Thereof That Mature Within Six Months

Section __.106(a)(4)(ii) of the proposed rule would assign a 15 percent RSF factor to a secured lending transaction with a financial sector entity or a consolidated subsidiary thereof that is secured by assets other than rehypothecatable level 1 liquid assets and matures within six months of the calculation date. It would assign the same RSF factor to unsecured wholesale lending to a financial sector entity or a consolidated subsidiary thereof that matures within six months of the calculation date.

Such transactions present relatively lower liquidity risk because of their shorter tenors relative to loans with a longer remaining maturity, providing for cash inflows upon repayment of the loan, and generally present lower reputational risk if a covered company chooses not to roll over the transaction because of the financial nature of the counterparties, as discussed in section II.D.2 above. Therefore, the proposed rule would assign a lower RSF factor to these assets than it would to longer-term loans to similar counterparties or to similar-term loans to non-financial counterparties, as described in sections II.D.3.a.v through II.D.3.a.vii below.

As noted

supra

The proposed rule would assign a higher RSF factor to these transactions, however, than it would to a secured lending transaction with a similar maturity and similar counterparty type that is secured by level 1 liquid assets that are rehypothecatable for the duration of the transaction. As described in section II.D.3.a.iii above, the proposed rule would not require a covered company to fund a transaction secured by rehypothecatable level 1 liquid assets with the same level of available stable funding because of the increased liquidity benefit to the covered company from its ability to monetize the level 1 liquid assets securing the transaction for the duration of the transaction.

v. 50 Percent RSF Factor

Unencumbered Level 2B Liquid Assets

Section __.106(a)(5)(i) of the proposed rule would assign a 50 percent RSF factor to level 2B liquid assets, as set forth in § __.20(c) of the LCR rule, but would not take into consideration the requirements in § __.22 or the level 2 caps in § __.21. Level 2B liquid assets include certain publicly traded corporate debt securities and certain publicly traded common equity shares that are liquid and readily-marketable.

The agencies note that nothing in the proposed rule would grant a covered company the authority to engage in activities relating to debt securities and equities not otherwise permitted by applicable law.

Section __.20 of the LCR rule requires an asset to meet certain criteria to qualify as a level 2B liquid asset. For example, equity securities must be part of a major index and corporate debt securities must be “investment grade” under 12 CFR part 1.

Therefore, the proposed rule would assign a lower RSF factor to these assets than it would assign to non-HQLA. The proposed rule would assign a higher RSF factor to level 2B liquid assets, however, than it would to level 1 and level 2A liquid assets, based on level 2B liquid assets' relatively higher credit risk, lower trading volumes, and elevated price volatility. For example, Russell 1000 equities, as a class, have lower average daily trading volume and higher price volatility than U.S. Treasury securities and mortgage-backed securities issued by U.S. GSEs. Similarly, investment grade corporate bonds have higher credit risk and lower average daily trading volume relative to level 1 and level 2A liquid assets. At the same time, the market for level 2B liquid assets is more liquid than the secondary market for longer-term loans, in terms of, for example, average daily trading volume. Accordingly, the proposed rule would assign a 50 percent RSF factor to a covered company's level 2B liquid assets.

12 CFR 1.2(d). In accordance with section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, 1887 (2010) § 939A, codified at 15 U.S.C. 78o-7, the LCR rule does not rely on credit ratings as a standard of creditworthiness. Rather, the LCR rule relies on an assessment by the covered company of the capacity of the issuer of the corporate debt security to meet its financial commitments.

Secured Lending Transactions and Unsecured Wholesale Lending to a Financial Sector Entity or a Subsidiary Thereof or a Central Bank That Mature in Six Months or More, but Less Than One Year

Section __.106(a)(5)(ii) of the proposed rule would assign a 50 percent RSF factor to a secured lending transaction or unsecured wholesale lending that matures in six months or more, but less than one year from the calculation date, where the counterparty is a financial sector entity or a consolidated subsidiary thereof or the counterparty is a central bank.

As discussed above, a covered company faces lower reputational risk if it chooses not to roll over these loans to financial counterparties or claims on a central bank than it would with loans to non-financial counterparties. However, these loans have longer terms—beyond six months—which means that liquidity from principal repayments will not be available in the near term. Therefore, these loans require more stable funding than shorter-term loans, which would be assigned a lower RSF factor, as discussed above. At the same time, given that these loans mature within the NSFR's one-year time horizon, the proposed rule would not require them to be fully supported by stable funding and would assign them a 50 percent RSF factor.

As noted

supra

Operational Deposits Held at Financial Sector Entities.

Section __.106(a)(5)(iii) of the proposed rule would assign a 50 percent RSF factor to an operational deposit, as defined in § __.3, placed by the covered company at another financial sector entity. Consistent with the reasoning for the ASF factor assigned to operational deposits held at a covered company, described in section II.C of this Supplementary Information section, such operational deposits placed by a covered company are less readily monetizable by the covered company. These deposits are placed for operational purposes, and a covered company would face legal or operational limitations to making significant withdrawals during the NSFR's one-year time horizon. Thus, the proposed rule would assign a 50 percent RSF factor to these operational deposits.

General Obligation Securities Issued by a Public Sector Entity

Section __.106(a)(5)(iv) of the proposed rule would assign a 50 percent RSF factor to general obligation securities issued by, or guaranteed as to

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