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

Federal RegisterFeb 11, 2021

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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:

Final rule.

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) (collectively, the agencies) are adopting a final rule that implements a stable funding requirement, known as the net stable funding ratio (NSFR), for certain large banking organizations. The final rule establishes a quantitative metric, the NSFR, to measure the stability of the funding profile of certain large banking organizations and requires these banking organizations to maintain minimum amounts of stable funding to support their assets, commitments, and derivatives exposures over a one-year time horizon. The NSFR is designed to reduce the likelihood that disruptions to a banking organization's regular sources of funding will compromise its liquidity position, promote effective liquidity risk management, and support the ability of banking organizations to provide financial intermediation to businesses and households across a range of market conditions. The NSFR supports financial stability by requiring banking organizations to fund their activities with stable sources of funding on an ongoing basis, reducing the possibility that funding shocks would substantially increase distress at individual banking organizations. The final rule applies to certain large U.S. depository institution holding companies, depository institutions, and U.S. intermediate holding companies of foreign banking organizations, each with total consolidated assets of $100 billion or more, together with certain depository institution subsidiaries (together, covered companies). Under the final rule, the NSFR requirement increases in stringency based on risk-based measures of the top-tier covered company. U.S. depository institution holding companies and U.S. intermediate holding companies subject to the final rule are required to publicly disclose their NSFR and certain components of their NSFR every second and fourth calendar quarter for each of the two immediately preceding calendar quarters. The final rule also amends certain definitions in the agencies' liquidity coverage ratio rule that are also applicable to the NSFR.

DATES:

Effective Date:

July 1, 2021.

FOR FURTHER INFORMATION CONTACT:

OCC:

Christopher McBride, Director, James Weinberger, Technical Expert, or Ang Middleton, Bank Examiner (Risk Specialist), (202) 649-6360, Treasury & Market Risk Policy; Dave Toxie, Capital Markets Lead Expert, (202) 649-6833; Patrick T. Tierney, Assistant Director, Henry Barkhausen, Counsel, or Daniel Perez, Counsel, Chief Counsel's Office, (202) 649-5490; 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:

Juan Climent, Assistant Director, (202) 872-7526, Kathryn Ballintine, Manager, (202) 452-2555, J. Kevin Littler, Lead Financial Institution Policy Analyst, (202) 475-6677, Michael Ofori-Kuragu, Senior Financial Institution Policy Analyst II, (202) 475-6623 or Christopher Powell, Senior Financial Institution Policy Analyst II, (202) 452-3442, Division of Supervision and Regulation; Benjamin W. McDonough, Associate General Counsel, (202) 452-2036, Steve Bowne, Senior Counsel, (202) 452-3900, Jason Shafer, Senior Counsel, (202) 728-5811, Laura Bain, Counsel, (202) 736-5546, or Jeffery Zhang, Attorney, (202) 736-1968, 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,

bbean@fdic.gov;

Brian Cox, Chief, Capital Markets Strategies Section,

brcox@fdic.gov;

Eric Schatten, Senior Policy Analyst,

eschatten@fdic.gov;

Andrew Carayiannis, Senior Policy Analyst,

acarayiannis@fdic.gov;

Kyle McCormick, Capital Markets Policy Analyst,

kmccormick@fdic.gov;

Capital Markets Branch, Division of Risk Management Supervision, (202) 898-6888; Gregory S. Feder, Counsel,

gfeder@fdic.gov,

Andrew B. Williams, II, Counsel, and

williams@fdic.gov,

or Suzanne J. Dawley, Counsel,

sudawley@fdic.gov,

Supervision, Legislation & Enforcement 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

II. Background

III. Overview of the Proposed Rule and Proposed Scope of Application

A. The Proposed Stable Funding Requirement

B. Revised Scope of Application

IV. Summary of Comments and Overview of Significant Changes to the Proposals

V. The Final Rule's Purpose, Design, Scope of Application, and Minimum Requirements

A. Purpose of the Final Rule

B. Comments on the Need for the NSFR Requirement

C. The NSFR's Conceptual Framework, Design, and Calibration

1. Use of an Aggregate Balance Sheet Measure and Weightings

2. Use of a Simplified and Standardized Point-in-Time Metric

3. Use of a Time Horizon

4. Stress Perspectives and Using Elements From the LCR Rule

5. Analytical Basis of Factor Calibrations and Supervisory Considerations

D. Adjusting Calibration for the U.S. Implementation of the NSFR

E. NSFR Scope and Minimum Requirement Under the Final Rule—Full and Reduced NSFR

1. Proposed Minimum Requirement and the Tailoring Final Rule

2. Applicability of the Final Rule to U.S. Intermediate Holding Companies and Use of the Risk-Based Indicators

3. NSFR Minimum Requirements Under the Final Rule: Applicability and Calibration

4. Applicability to Depository Institution Subsidiaries

VI. Definitions

A. Revisions to Existing Definitions

1. Revised Definitions for Which the Agencies Received no Comments

2. Revised Definitions for Which the Agencies Received Comments

3. Other Definitions and Requirements for Which the Agencies Received Comments

4. Other Definitions and Requirements for Which the Agencies Did Not Receive Comments

B. New Definitions

1. New Definitions for Which the Agencies Received no Comments

2. New Definitions for Which the Agencies Received Comments

VII. NSFR Requirement Under the Final Rule

A. Rules of Construction

1. Balance-Sheet Values

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 the ASF Amount

2. Characteristics for Assignment of ASF Factors

3. Categories of ASF Factors

D. Required Stable Funding

1. Calculation of the RSF Amount

2. Characteristics for Assignment of RSF Factors

3. Categories of RSF Factors for Unencumbered Assets and Commitments

4. Treatment of Rehypothecated Off-Balance Sheet Assets

E. Derivative Transactions

1. Scope of Derivatives Transactions Subject to § __.107 of the Final Rule

2. Current Net Value Component

3. Initial Margin Received by a Covered Company

4. Customer Cleared Derivative Transactions

5. Initial Margin Component

6. Future Value Component

7. Comments on the Effect on Capital Markets and Commercial End Users

8. Derivatives RSF Amount Calculation

9. Derivatives RSF Amount Numerical Example

F. NSFR Consolidation Limitations

G. Treatment of Certain Facilities

H. Interdependent Assets and Liabilities

VIII. Net Stable Funding Ratio Shortfall

IX. Disclosure Requirements

A. NSFR Public Disclosure Requirements

B. Quantitative Disclosure Requirements

1. Disclosure of ASF Components

2. Disclosure of RSF Components

C. Qualitative Disclosure Requirements

D. Frequency and Timing of Disclosure

X. Impact Assessment

A. Impact on Funding

B. Costs and Benefits of an RSF Factor for Level 1 HQLA, Both Held Outright and as Collateral for Short-Term Lending Transactions

C. Response to Comments

XI. Effective Dates and Transitions

A. Effective Dates

B. Transitions

1. Initial Transitions for Banking Organizations That Become Subject to NSFR Rule After the Effective Date

2. Transitions for Changes to an NSFR Requirement

3. Reservation of Authority To Extend Transitions

4. Cessation of Applicability

XII. Administrative Law Matters

A. Congressional Review Act

B. Plain Language

C. Regulatory Flexibility Act

D. Riegle Community Development and Regulatory Improvement Act of 1994

E. Paperwork Reduction Act

F. OCC Unfunded Mandates Reform Act of 1995 Determination

I. Introduction

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 adopting in final form the agencies' 2016 proposal to implement a net stable funding ratio (NSFR) requirement (the proposed rule), with certain adjustments.

The agencies also are finalizing two proposals released subsequent to issuance of the proposed rule to revise the criteria for determining the scope of application of the NSFR requirement (tailoring proposals).

The Board will issue a separate proposal for notice and comment to amend its information collection under its Complex Institution Liquidity Monitoring Report (FR 2052a) to collect information and data related to the requirements of the final rule.

See

“Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” 81 FR 35124 (June 1, 2016).

See

Proposed Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements, 83 FR 66024 (December 21, 2018) (domestic tailoring proposal); Changes to Applicability Thresholds for Regulatory Capital Requirements for Certain U.S. Subsidiaries of Foreign Banking Organizations and Application of Liquidity Requirements to Foreign Banking Organizations, Certain U.S. Depository Institution Holding Companies, and Certain Depository Institution Subsidiaries, 84 FR 24296 (May 24, 2019) (FBO tailoring proposal). The agencies indicated that comments regarding the NSFR proposed rule would be addressed in the context of a final rule to adopt a NSFR requirement for large U.S. banking organizations and foreign banking organizations.

The final rule establishes a quantitative metric, the NSFR, to measure the stability of the funding profile of large U.S. banking organizations, U.S. intermediate holding companies of foreign banking organizations, and their depository institution subsidiaries with $10 billion or more in total consolidated assets. The final rule also requires these banking organizations to maintain minimum amounts of stable funding to support their assets, commitments, and derivatives exposures.

By requiring banking organizations to maintain a stable funding profile, the final rule reduces liquidity risk in the financial sector and provides for a safer and more resilient financial system.

See further discussion of balance sheet funding in section V.C below.

Sections II and III of this Supplementary Information section provide background on the agencies' proposed rule and the tailoring proposals (together, the proposals). Section IV provides an overview of comments received on the proposals and significant changes to the proposals under this final rule. Section V describes the final rule's purpose, design, scope of application, and minimum requirements. The discussion of the final rule in sections VI through IX describes amendments to certain applicable definitions, the calculation of the NSFR, requirements imposed on a banking organization that fails to meet its minimum NSFR requirement, and the public disclosure requirements for U.S. depository institution holding companies and U.S. intermediate holding companies subject to the final rule. Sections X through XII describe the agencies' impact assessment, the effective date and transitions under the final rule, and certain administrative matters.

II. Background

The 2007-2009 financial crisis revealed significant weaknesses in banking organizations' liquidity risk management and liquidity positions, including how banking organizations managed their liabilities to fund their assets in light of the risks inherent in their on-balance sheet assets and off-balance sheet commitments.

The 2007-2009 financial crisis also revealed an overreliance on short-term, less-stable funding, and demonstrated the vulnerability of large and internationally active banking organizations to funding shocks. For example, weaknesses in funding management at many banking organizations made them vulnerable to contractions in funding supply, and they had difficulties renewing short-term funding that they had used to support longer term or illiquid assets. As access to funding became limited and asset prices fell, many banking organizations faced an increased possibility of default and failure. To stabilize the global financial markets, governments and central banks around the world provided significant levels of support to these institutions in the form of liquidity facilities and capital injections.

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.

In response to the 2007-2009 financial crisis, the Basel Committee on Banking Supervision (BCBS) established two international liquidity standards. In January 2013, the BCBS established a short-term liquidity metric, the liquidity coverage ratio (LCR), to mitigate the risks arising when banking organizations face significantly increased net cash outflows in a period

of stress (Basel LCR standard).

As a complement to the LCR, the BCBS in October 2014 established the net stable funding ratio standard (Basel NSFR standard) to mitigate the risks presented by banking organizations supporting their assets with insufficiently stable funding; the Basel NSFR standard requires banking organizations to maintain a stable funding profile over a longer, one-year time horizon.

The agencies have been, and remain, actively involved in the BCBS' international efforts, including the continued development and monitoring of the BCBS's framework for liquidity.

See

“Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” at

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

See

“Basel III: the net stable funding ratio” at

https://www.bis.org/bcbs/publ/d295.htm.

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

See

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

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

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

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

Following the 2007-2009 financial crisis, the agencies implemented several requirements designed to improve the largest and most complex banking organizations' liquidity positions and liquidity risk management practices. In 2014, the agencies adopted the LCR rule to improve the banking sector's resiliency to a short-term liquidity stress by requiring large U.S. banking organizations to hold a minimum amount of unencumbered high-quality liquid assets (HQLA) that can be readily converted into cash to meet projected net cash outflows over a prospective 30 calendar-day stress period.

In addition, 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 FDIC, the Board adopted the enhanced prudential standards rule, which established general risk management, liquidity risk management, and stress testing requirements for certain bank holding companies and foreign banking organizations.

These reforms in the post-crisis regulatory framework did not include a requirement that directly addresses the relationship between a banking organization's funding profile and its composition of assets and off-balance commitments.

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

See also

“Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations,” 79 FR 17240 (March 27, 2014). The Economic Growth, Regulatory Relief, and Consumer Protection Act, which became law on May 24, 2018, subsequently raised the asset thresholds for applicability of enhanced prudential standards under section 165 of the Dodd-Frank Act.

See

Public Law 115-174, 132 Stat. 1296 (2018). The Board amended the scope of application of these requirements in October 2019.

See

84 FR 59032, (November 1, 2019).

During the same period, the Board implemented requirements designed to enhance the capital positions and loss-absorbing capabilities for global systemically important banking organizations (GSIBs), which can also have the effect of improving the funding profiles of these firms. The Board adopted a risk-based capital surcharge for 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 (the GSIB capital surcharge rule).

See

12 CFR 217 subpart H. The Board also adopted a total loss-absorbing capacity (TLAC) requirement and a long-term debt requirement (LTD) requirement (the TLAC/LTD rule) for U.S. GSIBs and the U.S. operations of certain foreign GSIBs, which requires 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 and to improve their resolvability in the event of failure or material distress.

See

12 CFR 252 subparts G and P.

III. Overview of the Proposed Rule and Proposed Scope of Application

A. The Proposed Stable Funding Requirement

In June 2016, the agencies invited comment on a proposal to implement a net stable funding requirement for the U.S. banking organizations that were subject to the LCR rule at that time.

The proposed rule was generally consistent with the Basel NSFR standard, with adjustments to reflect the characteristics of U.S. banking organizations, markets, and other U.S. specific considerations.

See

“Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements,” 81 FR 35124 (June 1, 2016).

The BCBS developed the Basel NSFR standard as a longer-term balance sheet funding metric to complement the Basel LCR standard's short-term liquidity stress metric. In developing the Basel NSFR standard, the agencies and their international counterparts in the BCBS considered a number of possible funding metrics. For example, the BCBS considered the traditional “cash capital” measure, which compares the amount of a firm's long-term and stable sources of funding to the amount of the firm's 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 NSFR standard incorporates consideration of these and other funding risks, as does this final rule.

The proposed rule would have required a banking organization to maintain an amount of available stable funding (ASF) equal to or greater than the banking organization's projected minimum funding needs, or required stable funding (RSF), over a one-year time horizon.

A banking organization's NSFR would have been expressed as the ratio of its ASF amount to its RSF amount, with a banking organization required to maintain a minimum NSFR of 1.0.

For certain depository institution holding companies with $50 billion or more, but less than $250 billion, in total consolidated assets and less than $10 billion in on-balance sheet foreign exposure, the Board separately proposed a modified NSFR requirement.

Under the Board's proposed modified NSFR requirement, a depository institution holding company subject to a modified NSFR would have been required to maintain an NSFR of 1.0 but would have calculated such ratio using a lower minimum RSF amount in the denominator of the ratio, equivalent to 70 percent of the holding company's RSF amount as calculated under the agencies' proposed rule.

Under the proposed rule, a banking organization's ASF amount would have been calculated as the sum of the carrying values of the banking organization's liabilities and regulatory capital, each multiplied by a standardized weighting (ASF factor) ranging from zero to 100 percent to reflect the relative stability of such liabilities and capital over a one-year time horizon. Similarly, a banking organization's minimum RSF amount would have been calculated as (1) the sum of the carrying values of its assets, each multiplied by a standardized weighting (RSF factor) ranging from zero to 100 percent to reflect the relative need for funding over a one-year time horizon based on the liquidity characteristics of the asset, plus (2) RSF amounts based on the banking organization's committed facilities and derivative exposures. The proposed rule also would have included public disclosure requirements for depository institution holding companies subject to the proposed rule.

B. Revised Scope of Application

The proposed rule would have applied to: (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. In addition, the Board proposed a modified NSFR requirement that would have applied to certain depository institution holding companies with total consolidated assets of $50 billion or more.

Subsequent to the issuance of the proposed rule, certain foreign banking organizations with substantial operations in the United States were required to form or designate U.S. intermediate holding companies. The scope of application under the proposed rule would have included certain U.S.

bank holding company subsidiaries of foreign banking organizations.

Subsequent to the proposed rule, the agencies published the tailoring proposals to modify the application of the LCR rule and the proposed rule consistent with considerations and factors set forth under section 165 of the Dodd-Frank Act, as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).

As part of the tailoring proposals, the agencies proposed to establish four risk-based categories for determining applicability of requirements under the LCR rule and the proposed rule. The requirements would have increased in stringency based on measures of size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposures (risk-based indicators). In addition, the tailoring proposals would have removed the Board's proposed modified NSFR requirement for certain depository institution holding companies.

Public Law 115-174, 132 Stat. 1296 (2018).

The tailoring proposals also would have removed the LCR rule's modified LCR requirement that at the time applied to certain depository institution holding companies with total consolidated assets of $50 billion or more.

In October 2019, the agencies adopted a final rule (tailoring final rule) that amended the scope of application of the LCR rule so that it applies to certain U.S. banking organizations and U.S. intermediate holding companies of foreign banking organizations, each with $100 billion or more in total consolidated assets, together with certain of their depository institution subsidiaries.

The tailoring final rule applies LCR requirements on the basis of the four risk-based categories determined by the risk profile of the top-tier banking organization, including a depository institution that is not a subsidiary of a depository institution holding company.

The effective date of the revisions to the LCR rule's scope was December 31, 2019.

84 FR 59230 (November 1, 2019). In a change from the tailoring proposals, the tailoring final rule applied LCR requirements to a U.S. intermediate holding company of a foreign banking organization on the basis of risk-based indicators measured for the U.S intermediate holding company and not the foreign banking organization's combined U.S. operations.

A “top-tier banking organization” means the top-tier bank holding company, U.S. intermediate holding company, savings and loan holding company, or depository institution domiciled in the United States.

The tailoring final rule noted that comments regarding the NSFR proposal would be addressed in the context of any final rule to adopt a NSFR requirement for large U.S. banking organizations and U.S. intermediate holding companies. 84 FR at 59235.

IV. Summary of Comments and Overview of Significant Changes to the Proposals

The agencies received approximately 30 comments on the proposed rule, as well as approximately 20 comments related to the NSFR rule in response to the tailoring proposals. Commenters included U.S. and foreign banking organizations, trade groups, public interest groups, and other interested parties. Agency staff also met with some commenters at their request to discuss their comments on the proposed rule and the tailoring proposals.

Although many commenters supported the goal of improving funding stability, many commenters expressed concern regarding the overall proposal and criticized specific aspects of the proposed rule.

Summaries of these meetings are available on the agencies' public websites.

See https://www.regulations.gov/docket?D=OCC-2014-0029

(OCC),

https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R%2D1537&doc_ver=1

(Board), and

https://www.fdic.gov/regulations/laws/federal/2016/2016-net_stable-funding-ratio-3064-ae44.html

(FDIC).

A number of commenters argued that the proposed rule was unnecessary because it would target risks already addressed by existing regulations, such as the LCR rule. Other commenters expressed concern regarding the design and calibration of the proposed rule. These commenters requested clarification on the conceptual underpinnings of the NSFR, requested additional quantitative support for the proposed ASF and RSF factors, and argued that the proposed rule did not satisfy Administrative Procedure Act (APA) requirements because it provided insufficient support for its design and calibration. Some commenters criticized the proposed rule as not being appropriately tailored for implementation in the United States and argued that the proposed rule was more stringent than the Basel NSFR standard such that it could disadvantage U.S. banking organizations relative to their foreign competitors. Relatedly, certain commenters requested that the agencies conform the final rule to the European Union's implementation of the Basel NSFR standard (EU NSFR rule) in order to minimize potential adverse effects on U.S. banking organizations.

The European Union (EU) implementation of the NSFR requirement, effective 2021, includes targeted adjustments from the Basel NSFR standard in order to reflect EU specificities generally consistent with the EU implementation of the Basel LCR standard. The EU's NSFR requirements also include targeted adjustments to support sovereign bond markets.

See

Regulation (EU) 2019/876 of the European Parliament and the Council, May 20, 2019,

available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32019R0876

(EU NSFR rule).

Some commenters expressed concern that the proposed rule could result in increased costs to banking organizations and the financial system that would exceed the proposed rule's benefits.

Specifically, some commenters argued that the proposed rule could increase funding and compliance costs, which could cause banking organizations to withdraw from or reduce the scale of certain business activities with low margins, including certain capital markets-related activities. According to the commenters, this could have the effect of tightening credit and increasing borrowing costs for households and businesses in the United States. Commenters also argued that the funding and compliance costs of the proposed rule could increase financial stability risk by shifting certain financial intermediation activities from the banking sector to less regulated “shadow banking” channels. Commenters also expressed concern that the proposed rule could have pro-cyclical effects, for example, by incentivizing banking organizations to restrict lending to improve their NSFRs during periods of stress.

The agencies received a number of comments that were not specifically responsive to the proposed rule but more generally requested that the agencies assess the combined costs of post-crisis regulations on the availability of credit and the economy.

Additionally, many commenters requested changes to specific elements of the proposed rule. For example, commenters recommended the agencies assign higher ASF factors for certain liabilities, such as certain types of deposits, and lower RSF factors for certain categories of assets and committed facilities. Some commenters recommended changes to the proposed rule's treatment of derivatives, particularly the treatment of variation margin and the treatment of potential valuation changes in a derivatives portfolio. In addition, a number of commenters requested that the agencies modify the proposed rule to assign zero percent RSF and ASF factors to certain assets and liabilities commenters viewed as interdependent such that the specific, identifiable assets are funded by the specific, identifiable liabilities of an equal or similar tenor and, therefore, present little or minimal funding risk. Finally, some commenters requested that the agencies delay implementation of the NSFR requirement to allow banking organizations additional time to build internal reporting systems and comply with disclosure requirements.

The agencies received a number of comments requesting the agencies reconsider the proposed rule's scope of application. Specifically, many commenters argued that the proposed thresholds for application were arbitrary and insufficiently risk-sensitive and requested the agencies further tailor the scope of the proposed rule. The agencies also received a number of comments on the appropriateness of the revised scope of application in the tailoring proposals.

As discussed throughout this Supplementary Information section, the final rule retains the general design for the NSFR calculation and calibrates minimum requirements to the risk profiles of banking organizations in a manner consistent with the tailoring final rule. However, the final rule includes a number of modifications, including:

• The final rule assigns a zero percent RSF factor to unencumbered level 1 liquid asset securities and certain short-term secured lending transactions backed by level 1 liquid asset securities (see section VII.D of this Supplementary Information section).

• The final rule provides more favorable treatment for certain affiliate sweep deposits and non-deposit retail funding (see section VII.C of this Supplementary Information section).

• The final rule permits cash variation margin to be eligible to offset a covered company's current exposures under its derivatives transactions even if it does not meet all of the criteria in the agencies' supplementary leverage ratio rule (SLR rule).

In addition, variation margin received in the form of rehypothecatable level 1 liquid asset securities also would be eligible to offset a covered company's current exposures (see section VII.E of this Supplementary Information section).

12 CFR 3.10(c)(4) (OCC); 12 CFR 217.10(c)(4) (Board); 12 CFR 324.10(c)(4) (FDIC). In addition, the final rule includes a new provision to exclude assets received by a covered company as variation margin under derivative transactions from the treatment of rehypothecated assets that are off-balance sheet assets in accordance with U.S. generally accepted accounting principles (GAAP).

• The final rule reduces the amount of a covered company's gross derivatives liabilities that will be assigned a 100 percent RSF factor (see section VII.E of this Supplementary Information section).

V. The Final Rule's Purpose, Design, Scope of Application, and Minimum Requirements

A. Purpose of the Final Rule

The NSFR is designed to address risks that are inherent in the business of banking. Banking organizations perform maturity and liquidity transformation,

which is an important financial intermediation process that contributes to efficient resource allocation and credit creation. To conduct maturity and liquidity transformation and meet the long-term credit needs of businesses and households, banking organizations also must address the short-term liquidity preferences of funds providers. These transformation activities create a certain inherent level of risk to banking organizations, the U.S. financial system, and the broader economy caused by banking organizations' potential overreliance on unstable funding sources relative to the composition of their balance sheets. Such overreliance could potentially result in the failure of banking organizations, disruptions to asset prices, and reduction in the provision of credit to households and businesses.

To conduct financial intermediation, banking organizations obtain resources that are currently surplus to the needs of certain parts of the economy (funds providers) and lend them to other parts of the economy that currently need those resources (users of funds). Funds providers generally prefer to supply their resources on a short-term basis with easy access to their funds (liquid resources); for example, household savings. Users of funds often need these resources on a long-term basis and in ways that make such resources difficult to convert to cash (illiquid resources); for example, building factories or capital for business growth. Maturity and liquidity transformation refers to the process of bridging the competing needs of funds providers and users of funds.

A banking organization may mitigate these risks by having funding sources that are appropriately stable over time. Because short-term funding generally tends to be less expensive than longer-term funding, banking organizations have incentives to fund their longer-term or less-liquid assets with less stable, shorter-term liabilities. While this approach may benefit short-term earnings, it may lead to imbalances between how a banking organization chooses to fund its assets and the funding it may need to maintain the assets over time, as well as increases in liquidity and funding risk arising from potential customer and counterparty runs and a more interconnected financial sector. In turn, this creates a funding risk for banking organizations, the financial system, and the broader economy. The final rule requires large banking organizations to avoid excessively funding long-term and less-liquid assets with short-term or less-reliable funding and thus reduces the likelihood that disruptions in a banking organization's regular funding sources would compromise its funding stability and liquidity position.

The final rule establishes a minimum NSFR requirement that is applicable on a consolidated basis to certain top-tier banking organizations with total consolidated assets of $100 billion or more, together with certain depository institution subsidiaries (together, covered companies). Consistent with the proposed rule, the final rule requires a covered company to calculate an NSFR based on the ratio of its ASF amount to its RSF amount and maintain an NSFR equal to or greater than 1.0 on an ongoing basis.

In addition, the final rule, like the proposed rule, includes public disclosure requirements for U.S. depository institution holding companies and U.S. intermediate holding companies of foreign banking organizations that are subject to the final rule.

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

B. Comments on the Need for the NSFR Requirement

Banking organizations have improved their liquidity risk management practices and liquidity positions since the 2007-2009 financial crisis, including by holding larger liquidity buffers, avoiding excessive reliance on very short-term unstable wholesale funding sources, and improving their internal controls and governance structures surrounding liquidity risk management. The NSFR requirement aims to preserve these improvements and help position covered companies to act as resilient financial intermediaries through potential future periods of instability. The agencies received a number of comments arguing that the proposed rule is unnecessary because other elements of the agencies' regulatory framework already sufficiently address liquidity and funding risk at covered companies.

Some commenters also argued that the agencies should not apply an NSFR requirement because many covered companies have improved their current funding profiles relative to the period leading up to the 2007-2009 financial crisis. By contrast, one commenter supported the proposed rule, asserting that it would be an important complement to the LCR rule because it would address funding stability and

maturity mismatch more broadly and over a longer time horizon.

Commenters provided examples, including the LCR rule; the Board's enhanced prudential standards rule; the TLAC/LTD rule; the GSIB capital surcharge rule (which includes a measure of weighted short-term wholesale funding), SLR rule, and other capital requirements; single counterparty credit limits; mandatory clearing requirements and margin requirements for non-cleared swaps and non-cleared security-based swaps; and Board and FDIC supervisory guidance relating to liquidity in connection with resolution planning.

The final rule is intended to complement and reinforce other elements of the agencies' regulatory framework that strengthen financial sector resiliency by addressing risks that are not directly addressed by the agencies' other regulatory measures. For example, the NSFR rule provides an important complement to the LCR rule, which addresses the risk of increased net cash outflows over a 30-calendar day period of stress by requiring banking organizations to hold HQLA that can be readily converted to cash. While addressing short-term cash-flow related risks is a core component of a banking organization's liquidity risk management, a banking organization could comply with the LCR requirement and still fund its long-term or illiquid assets and commitments with short-term liabilities not sufficiently stable to preserve these assets over an extended period.

The final rule further complements the LCR rule by mitigating the risk of a banking organization concentrating funding just outside the LCR's 30-day window. The final rule also complements requirements related to firm-specific measures of funding risk under the Board's enhanced prudential standards rule by providing a standardized measure of the stability of a banking organization's funding profile, which would promote greater comparability of funding structures across banking organizations and improve transparency and market discipline through public disclosure requirements.

With respect to the other rules and guidance commenters cited as sufficiently addressing liquidity and funding risk, these elements of the agencies' regulatory framework do not directly address balance sheet funding risks for covered companies on a going-concern basis.

Cash flow projections, liquidity stress testing, and liquidity buffer requirements for certain covered holding companies under the Board's enhanced prudential standards rule complement the LCR rule by addressing cash flow risks with additional firm-specific granularity and across additional time horizons, including a one-year planning horizon. These requirements do not directly address balance sheet funding risks.

See

12 CFR 252.35 and 12 CFR 252.157.

The final rule reflects that regulatory capital elements and long-term debt required under the agencies' regulatory capital rule, the Board's GSIB capital surcharge rule, and the TLAC/LTD rule provide stable funding by virtue of the long-term or perpetual tenor of such regulatory capital elements and long-term debt. The Board's GSIB capital surcharge rule and the tailoring final rule include a measure of historic funding composition, weighted short-term wholesale funding, but this measure does not measure or directly address funding risk. The weighted short-term wholesale funding measure is based on a banking organization's average use of short-term funding sources over the prior year but does not reflect a banking organization's assets or the banking organization's use of longer-term funding sources.

Reliance on less-stable sources of funding may require a banking organization to repay or replace its funding more often and make it more exposed to sudden funding market disruptions. Potential loss of funding can restrict a banking organization's ability to support its assets and commitments over the long term, generating both safety and soundness and financial stability risks. The final rule is designed to mitigate such risks by directly increasing the funding resilience of subject banking organizations. The final rule mitigates risks to U.S. financial stability by improving the capacity of banking organizations to continue to support their assets and lending activities across a range of market conditions. A covered company that sufficiently aligns the stability of its funding sources with its funding needs based on the liquidity characteristics of its assets and commitments is better positioned to avoid asset fire sales and continue to function as a financial intermediary in the event of funding or asset market disruptions. As a result, a covered company will be better positioned to continue to operate and lend, which promotes more stable and consistent levels of financial intermediation in the U.S. economy across economic and market conditions.

As a standardized metric, the NSFR also promotes greater comparability across covered companies and foreign banks subject to substantially similar requirements in other jurisdictions and facilitates supervisory assessments of vulnerability. Through public disclosure requirements, the NSFR rule also promotes greater market discipline through enhanced transparency.

In these ways, a standardized long-term funding measure, such as the NSFR, is intended to work in tandem with internal models-based measures to provide a more robust and complete framework to monitor and manage funding and liquidity risks of covered companies.

Public disclosure requirements are not required for non-standardized measurements of liquidity risk required under the Board's enhanced prudential standards rule.

C. The NSFR's Conceptual Framework, Design, and Calibration

A number of commenters questioned the conceptual framework and design of the proposed rule, as well as its overall analytical basis and the calibrations of specific components. In particular, commenters argued that the agencies did not provide sufficient justification or data analysis to support the proposed calibration of the NSFR rule's relevant factors. Some commenters questioned whether the calibrations in the proposed rule reflected a one-year period of stress or whether the calibration was intended to reflect different “business-as-usual” conditions.

A number of commenters also argued that if the proposed rule was not calibrated based on the same stress assumptions as the LCR rule, the proposed rule should not incorporate elements and definitions from the LCR rule. Some commenters also requested that the agencies reconsider elements of the proposed rule that they believed to be more conservative than the LCR rule. In addition, several commenters argued that the proposed rule was focused on commercial banking and was therefore not sensitive enough to the different business models of covered companies, such as custody banks and banking organizations significantly involved in capital markets. Another commenter stated that the NSFR is a static measure and does not take into account actions a firm may take in the future to address funding risk. As addressed in sections VII.C and VII.D of this Supplementary Information section, the agencies also received a number of comments on the proposed values of ASF factors and RSF factors where the commenter's concern was predicated on the design of the NSFR. For example, commenters described the value of certain ASF factors as conservative based on the assumption that the values represented cash-flow amounts and commenters therefore made direct comparison to factors used in the LCR rule. In light of these comments, the agencies are clarifying in this Supplementary Information section the conceptual basis for the NSFR design under the final rule.

Certain commenters also expressed concerns about the descriptions by the BCBS of the Basel NSFR standard between 2009 and 2014 and the opportunities to comment on certain elements of the international standard. Commenters argued that the agencies should remove elements of the proposed rule or re-open the comment period because, in these commenters' view, the public was unable to comment on the inclusion of certain elements in the Basel NSFR standard.

1. Use of an Aggregate Balance Sheet Measure and Weightings

The NSFR's conceptual design builds on commonly used assessments of balance sheet funding.

The NSFR is a standardized measure of a banking organization's funding relative to its assets and commitments. Consistent with the Basel NSFR standard, the final

rule conceptually draws on supervisory and industry-developed funding risk management measures, with modifications to account for material funding risks and policy considerations.

Supervisors and industry stakeholders such as credit rating agencies and equity analysts routinely assess the funding profiles of banking organizations through comparisons of the compositions of the banking organization's assets and liabilities.

The NSFR's design as a ratio of weighted liabilities and regulatory capital to weighted assets and commitments is consistent with these approaches. Using a ratio measure is appropriate for measuring and addressing funding risks because it provides a holistic assessment of a banking organization's funding profile based on the aggregate composition of the banking organization's balance sheet and commitments rather than on individual assets or liabilities.

See supra

note 12.

For example, the final rule takes into account policy considerations such as externalities associated with an unstable funding structure that can affect the safety and soundness of other banking organizations and U.S. financial stability and an interest in maintaining financial intermediation of covered companies across economic and market conditions.

For example, supervisors and industry analysts compare compositions of assets and liabilities though the use of a loans-to-deposits ratio or by defining a measure of “noncore” funding dependency.

The final rule takes into account the differing risk characteristics of a covered company's various assets, liabilities, and certain off-balance sheet commitments and applies different weightings (ASF and RSF factors) to reflect these risk characteristics. Under the final rule, ASF and RSF factors are used to determine the numerator and denominator of the NSFR and reflect, respectively, the stability of funding, and the need for assets and commitments to be supported by such funding over a range of market conditions, each as assessed under the final rule. As described in sections VII.C and VII.D of this Supplementary Information section, the final rule uses broad categories of liabilities and assets to assess relative stability and funding needs, respectively. These weightings make the NSFR assessment risk sensitive by differentiating between types of assets and types of liabilities.

While the NSFR is a simplified and standardized metric, meeting the NSFR minimum requirement of 1.0 provides evidence that a covered company has, in aggregate, a sufficient amount of stable liabilities and regulatory capital to support over a one-year time horizon its aggregate assets and commitments based on the liquidity characteristics of such aggregate assets and commitments.

Given the size, complexity, scope of activities, and interconnectedness of covered companies, a covered company with an NSFR of less than 1.0 may face an increased likelihood of liquidity stress or of having to dispose of illiquid assets, and may be less well positioned to maintain its level of financial intermediation over various market conditions.

As described in section V.E.3 of this Supplementary Information section, the final rule applies an adjustment factor to the denominator of the ratio to reflect the risk profile of a covered company.

Commenters expressed concerns that application of RSF factors to specific assets has the effect of imposing a requirement on covered companies to issue additional long-dated liabilities to fund such assets. The final rule does not prescribe the method by which a covered company must meet its minimum requirement. Under the final rule, the NSFR requirement reflects the aggregate balance sheet of a covered company, and the final rule does not apply separate minimum funding requirements to individual assets, legal entities, or business lines represented on the balance sheet. For example, a covered company that has an NSFR of 1.0 and increases its holding of certain long-dated assets is not required to issue additional long-dated liabilities under the final rule but, rather, has discretion on how to continue to meet its minimum requirement, including by changing its overall asset composition.

2. Use of a Simplified and Standardized Point-in-Time Metric

Many commenters expressed concerns or suggestions that related to the level of granularity in the NSFR's conceptual design or that the NSFR was a point-in-time measure. For example, commenters suggested the NSFR include additional RSF and ASF factors tailored to specific products and activities.

Commenters similarly expressed concerns about the number of residual maturity categories used in the NSFR. A number of commenters criticized the design of the NSFR as a static metric arguing that the measurement of the funding risk of a covered company's aggregate balance sheet should consider actions that banking organizations may undertake in the future.

See

sections VII.C, VII.D and VII.E of this Supplementary Information section.

In response to these concerns, the agencies note that a broad comparison of the stability of a covered company's funding relative to the liquidity characteristics of its assets achieves the final rule's funding risk-mitigation objectives. To limit the burden on covered companies and to maximize the comparability of the metric between each covered company and other international banking organizations, the NSFR is designed as a simplified metric that uses a small number of categories of assets, exposures, liabilities, counterparty types, and residual maturity buckets to achieve its objective. While the balance sheets of large banking organizations reflect a complex variety of transactions and business activities, additional granularity could be burdensome to covered companies relative to the goals of the NSFR requirement. The NSFR was designed holistically and introducing additional granularity could require recalibration of certain other elements. For example, the incorporation of additional RSF factors may require other RSF factors to be adjusted upward, as they currently reflect an aggregate view of the level of stable funding required for the entire set of assets or off-balance sheet commitments in a given category. Additionally, to the extent possible, the metric utilizes the carrying values of assets and liabilities on a covered company's balance sheet under U.S. Generally Accepted Accounting Principles (GAAP) and limits the need for additional valuations.

In response to comments that the NSFR is not sensitive to the different business models of covered companies, the agencies note that the NSFR is designed to allow comparison across covered companies and other international firms, and to minimize differences in how liquidity characteristics of liabilities and assets are evaluated by covered companies. As a standardized metric, the final rule is constructed to ensure a sufficient amount of stable funding across all covered companies, regardless of their business models. The NSFR generally does not differentiate by a banking organization's business model, its lines of business, or the purpose for which individual assets or liabilities are held on its balance sheet. For example, the NSFR treats securities held on a covered company's balance sheet based on the securities' credit risk and market characteristics regardless of whether such securities are held as long-term investments, as hedging instruments, or as market making inventory. While the composition of banking organizations' balance sheets varies based on business models and the services provided to customers, the NSFR is not focused on

any particular business model (for example, commercial banking), as suggested by commenters.

Like most prudential requirements, the NSFR is a measure of a covered company's condition at a point in time and by design does not consider the broad variety of actions that management may take in the future. As a general principle, the agencies do not speculate about future transactions, contingencies, or potential managerial remediation steps that the covered company may take.

As noted above, the point-in-time NSFR complements forward-looking assessments of risk, such as a covered company's internal liquidity stress testing practices.

3. Use of a Time Horizon

Certain commenters questioned the NSFR's design in respect to its time horizon. While the NSFR measures a banking organization's balance sheet and commitments at a point in time, the assessment of adequate funding considers the stability of, and the need for, funding with reference to a general one-year time horizon and a range of market conditions. The measurement incorporates contractual maturities but generally does not reflect expectations about the year following the calculation date.

Rather, consistent with the Basel NSFR standard, the NSFR calibrations seek to reflect resilient credit intermediation to the real economy and general behaviors by banking organizations and their counterparties.

As described below, calculation date means any date on which a covered company calculates its NSFR.

See

section VI.A.1 of this Supplementary Information section.

The use of a time horizon for the assessment of funding imbalances is appropriate because the residual maturities of liabilities and assets of a covered company at the calculation date are, among other characteristics, indicative of the liabilities' stability and the assets' need for funding, respectively. For example, liabilities that are due to mature in the short term will generally provide less stability to a banking organization's balance sheet than longer-term liabilities. Similarly, certain short-dated assets maturing in less than one year should require a smaller portion of funding to be maintained over a one-year time horizon because banking organizations may allow such assets to mature without replacing them. The choice of a one-year time horizon is also consistent with traditional accounting and supervisory measures of short-term and long-term financial instruments and exposures.

4. Stress Perspectives and Using Elements From the LCR Rule

A number of commenters requested clarification on the extent to which the NSFR calibrations incorporated stress assumptions. Consistent with the complementary designs of the Basel LCR and NSFR standards, the final rule is designed differently from, and to be complementary to, the LCR rule. Unlike the LCR, which compares immediately available sources of cash to potential stressed cash outflows over a 30-calendar day period, the NSFR is not a cash-flow coverage metric, and ASF and RSF amounts are not cash-flow amounts. While ASF factors take into account the characteristics of liabilities that influence relative funding stability across a range of market conditions, the values of ASF factors do not represent liability outflow rates. Similarly, while RSF factors take into account the liquidity characteristics of assets that generally influence their need for funding over a one-year horizon, the values of RSF factors do not reflect the monetization value of assets. In response to comments that the values of factors used in the LCR rule imply that ASF or RSF factors were incorrectly calibrated, it is important to note that comparisons of the values of ASF or RSF factors under the final rule to the values of outflow and inflow rates used in the LCR rule are not indicative of the relative conservatism of the requirements under both rules.

See

sections VII.C and VII.D of this Supplementary Information section.

Further, the final rule is not designed to function as a one-year liquidity stress test, and therefore its ASF and RSF factors are not assigned based on, or intended to directly translate to, assumed cash inflows and outflows over a one-year period of stress. Rather, the final rule is intended to serve as a balance-sheet metric, and ASF and RSF factors reflect, respectively, the relative stability of funding and the need for funding based on the liquidity characteristics of assets and commitments, each across a range of economic and financial conditions.

Funding and liquidity characteristics of liabilities and assets under stress conditions are therefore relevant to, but not determinative of, ASF and RSF factors. As a result, ASF and RSF factor calibrations take into account potential effects of stress on the stability of funding and liquidity characteristics of assets and commitments, but are not calibrated to require a covered company to retain a buffer against a stress period of one year, as discussed in sections VII.C and VII.D of this Supplementary Information section.

The LCR rule compares cash-generating resources (

i.e.,

the HQLA amount) to cash needs (total net cash outflows) in a 30-day stress. The final rule compares sources of stable funding (ASF amount) to the need for stable funding (RSF amount), each calibrated over a 12-month horizon and across a range of market conditions.

Although the NSFR generally is not calibrated to the stress assumptions of the LCR rule, it nevertheless shares certain common elements and definitions with the complementary LCR where such consistency is helpful. The alignment of the final rule with the structure and design of the LCR rule, where appropriate, aims to improve efficiency and limit compliance costs to covered companies by allowing them more efficiently to implement the two requirements. In response to commenters' concerns that sharing definitions and elements with the LCR rule inappropriately incorporates stress assumptions into the NSFR requirement, the agencies note that many shared elements and defined terms are independent of stress assumptions.

Moreover, to the extent that the final rule incorporates definitions of the LCR rule, their usage in the final rule generally reflects assumptions that are specific to the final rule.

Finally, while the final rule is not calibrated based on a one-year stress, some considerations of conservatism are still relevant. For example, as discussed in section VII.B of this Supplementary Information section, the final rule generally applies the same assumptions for determining maturity as the LCR rule because conservative assumptions regarding the maturity of funding relative to the duration of asset holdings are appropriate for assessing the risks presented by mismatches in balance sheet funding.

For example, the definitions of “general obligation,” “affiliate,” and “company” do not incorporate an assumption of stress.

For example, the final rule applies the same ASF factor to certain forms of funding from a financial sector entity that mature in six months or less, regardless of whether such funding is in the form of a secured funding transaction or unsecured wholesale funding, whereas the LCR rule generally treats these categories of funding separately for purposes of determining applicable outflow amounts.

See

12 CFR 50.32(h) and (j) (OCC); 12 CFR 249.32(h) and (j) (Board); 12 CFR 329.32(h) and (j) (FDIC).

5. Analytical Basis of Factor Calibrations and Supervisory Considerations

Several commenters argued that the agencies did not sufficiently rely on empirical analysis to inform various portions of the proposed rule. Other commenters argued that the agencies

did not sufficiently disclose the quantitative data and analyses on which the agencies relied.

As explained in detail in sections VII.C and VII.D of this Supplementary Information section, the liabilities within an ASF factor category generally exhibit similar levels of funding stability and the assets within an RSF factor category generally exhibit similar liquidity characteristics. In addition, there is a sufficient number of ASF factor and RSF factor categories in the final rule to differentiate among the funding risks presented by the assets, commitments, and liabilities covered by the NSFR. The ASF and RSF factors as calibrated for these categories of liabilities and assets, and as applied under the Basel NSFR standard to similar categorizations, are generally appropriate for U.S. implementation.

However, as discussed below, the final rule departs from the Basel NSFR standard where doing so would support important domestic policy objectives. The agencies regularly review their regulatory framework, including liquidity requirements, to ensure it is functioning as intended and will continue to assess the NSFR's calibration under the final rule. A more specific discussion of the agencies' analysis is provided in sections VII.C and VII.D of this Supplementary Information section, which discuss the comments received on the calibration of ASF and RSF factors.

Supervisory experience is informed in part through confidential data obtained through the FR 2052a report.

Consistent with the proposed rule and as noted above, certain ASF and RSF factor assignments in the final rule take into account policy considerations relating to the safety and soundness of covered companies and U.S. financial stability.

For example, the assignment of a zero percent ASF factor to wholesale funding from financial sector entities that matures within six months generally reflects supervisory concerns related to the financial stability risks related to overreliance on this source of funding by large interconnected banking organizations. In calibrating the factors, the agencies also considered behavioral and operational factors that can affect funding stability or asset liquidity, such as reputational incentives that could cause a covered company to maintain lending to certain counterparties.

See

sections VII.C and VII.D of this Supplementary Information section.

See

section VII of this Supplementary Information section.

In response to commenters' assertion that the agencies failed to disclose quantitative data and analyses used to support the proposed rule, the agencies note that they disclosed in the proposed rule material that was available and reliable. In the instances in which the agencies cited data in support of the proposed rule, the agencies identified that data, acknowledged the shortcomings of the available data, and invited input from the public. In developing the final rule, the agencies have considered the comments received.

D. Adjusting Calibration for the U.S. Implementation of the NSFR

As noted above, the final rule is based on the general framework of the Basel NSFR standard. Some commenters argued that the agencies should not adopt the proposed rule, or should modify certain elements of the proposed rule, because the Basel NSFR standard is an internationally negotiated standard that was not properly tailored to reflect U.S. financial, legal, and market conditions. By contrast, a number of commenters argued that the final rule should be more consistent with the Basel NSFR standard, particularly with respect to elements that would be more stringent under the proposed rule than the Basel NSFR standard.

In developing the proposed and final rules, the agencies considered the Basel NSFR standard as well as financial, legal, market, and other considerations specific to the United States. Basing the final rule on the general framework of the Basel NSFR standard helps promote competitive equity with respect to covered companies and other large, internationally active banking organizations in other jurisdictions, facilitate regulatory consistency across jurisdictions, and ensure a minimum level of resiliency across the global financial system. Where appropriate, the final rule differs from the Basel NSFR standard to reflect specific characteristics of U.S. markets, practices of U.S. banking organizations and domestic policy objectives.

Notable divergences in the final rule from the Basel NSFR standard include the treatment of level 1 liquid asset securities, certain short-term secured lending transactions backed by level 1 liquid assets, variation margin in derivatives transactions, and non-deposit retail funding.

E. NSFR Scope and Minimum Requirement Under the Final Rule—Full and Reduced NSFR

1. Proposed Minimum Requirement and the Tailoring Final Rule

In the tailoring proposals, the agencies re-proposed the scope of application of the NSFR proposed rule. The tailoring proposals would have established four categories of requirements—Category I, II, III, and IV—that would have been used to tailor the application of the NSFR requirement based on the risk profile of a top-tier banking organization as measured by the risk-based indicators.

Covered companies subject to Category I and II requirements would have been subject to the full requirements of the proposed rule (full NSFR). Under Category III or Category IV, however, covered companies would have been subject to further tailored NSFR requirements based on the top-tier banking organization's level of weighted short-term wholesale funding. Specifically, a covered company that meets the criteria for Category III with $75 billion or more in average weighted short-term wholesale funding would have been subject to the full NSFR requirement. By contrast, banking organizations in Category III with less than $75 billion in average weighted short-term wholesale funding, or in Category IV with $50 billion or more in average weighted short-term wholesale funding, would have been required to comply with a reduced NSFR (reduced NSFR) requirement, calibrated at a level equivalent to between 85 and 70 percent of the full NSFR requirement.

Banking organizations in Category IV with less than $50 billion in weighted short-term wholesale funding would not have been subject to an NSFR requirement. In addition, a depository institution subsidiary of a covered company meeting the criteria of Category I, II, or III would have been required to comply with the NSFR requirement to which its parent covered company was subject if the depository institution subsidiary's total consolidated assets were $10 billion or greater. Depository institution subsidiaries with less than $10 billion in total consolidated assets, as well as depository institution subsidiaries of covered companies meeting the criteria of Category IV, would not have been required to comply with an NSFR requirement.

See

section III.B of this Supplementary Information section. In the tailoring proposals, the proposed scope of application for the NSFR was the same as that proposed for the LCR rule.

As noted above, the tailoring proposals would have removed the Board's modified LCR and modified NSFR requirement because the reduced LCR and reduced NSFR would be better designed for assessing liquidity and funding risks for banking organizations in Categories III and IV.

The tailoring final rule adopted these categories, with certain changes, for purposes of the LCR rule and the agencies' capital rule. Under the tailoring final rule, Category I requirements apply to U.S. global systemically important banks (GSIBs)

and any of their depository institution subsidiaries with $10 billion or more in consolidated assets. Category II requirements apply to top-tier banking organizations,

other than U.S. GSIBs, with $700 billion or more in consolidated assets or $75 billion or more in average cross-jurisdictional activity, and to their depository institution subsidiaries with $10 billion or more in consolidated assets. Category III requirements apply to top-tier banking organizations that have $250 billion or more in consolidated assets, or that have $100 billion or more in consolidated assets and also have $75 billion or more in (1) average nonbank assets, (2) average weighted short-term wholesale funding, or (3) average off-balance sheet exposure, that are not subject to Category I or II requirements. Category III requirements also apply to depository institution subsidiaries of these top-tier banking organizations, each with $10 billion or more in consolidated assets. Category IV requirements apply to top-tier depository institution holding companies or U.S. intermediate holding companies that in each case have $100 billion or more in consolidated assets and $50 billion or more in average weighted short-term wholesale funding that are not subject to Category I, II or III requirements.

See supra

note 19.

Under the tailoring final rule, covered companies in Category I and II, or in Category III with $75 billion or more in average weighted short-term wholesale funding are subject to the full requirements of the LCR rule. All other covered companies in Category III and covered companies in Category IV with $50 billion or more in average weighted short-term wholesale funding are subject to a reduced LCR requirement calibrated at 85 percent and 70 percent, respectively. The calibration approaches outlined in the tailoring proposals and tailoring final rule were designed to better align the regulatory requirements of banking organizations with their risk profiles, taking into account their size and complexity, as well as their potential impact on systemic risk.

The final rule adopts the risk-based category approach used in the tailoring final rule for purposes of applying the NSFR. The application of the NSFR requirements to specific entities based on their tailoring category is discussed further below.

2. Applicability of the Final Rule to U.S. Intermediate Holding Companies and Use of the Risk-Based Indicators

The tailoring proposals would have applied liquidity requirements to foreign banking organizations based on the risk profile of their combined U.S. operations. Specifically, the proposed NSFR requirements would have applied to a foreign banking organization based on the combined risk profile of its U.S. intermediate holding company and any U.S. branches or agencies, as measured by the risk-based indicators.

The tailoring proposals also sought comment on whether standardized liquidity requirements, such as the LCR and NSFR, should apply to the U.S. branches and agencies of a foreign banking organization to complement the internal liquidity stress testing standards that currently apply to these entities. As described in the tailoring final rule, the Board continues to consider whether to develop and propose for implementation a standardized liquidity requirement with respect to the U.S. branches and agencies of foreign banking organizations.

See

84 FR at 59257. Any such requirement would be subject to notice and comment as part of a separate rulemaking process.

Most commenters argued that the NSFR requirement should apply directly to a U.S. intermediate holding company of a foreign banking organization based on the U.S. intermediate holding company's risk profile. Some commenters further asserted that no NSFR requirement should be imposed on U.S. intermediate holding companies in view of the application of the NSFR under home country standards to the top-tier foreign parent. These commenters argued that the application of an NSFR requirement to U.S. intermediate holding companies is inconsistent with the principles of national treatment and equality of competitive opportunity because mid-tier U.S. bank holding companies of a similar size and risk profile would not be subject to an NSFR requirement but rather would be reflected in the NSFR applied at the top-tier consolidated U.S. parent. Other commenters argued that the liquidity requirements that apply to foreign banking organizations' U.S. operations, such as internal liquidity stress testing and liquidity risk management standards, and total loss-absorbing capacity (TLAC) instruments issued by U.S. intermediate holding companies make the application of the NSFR rule unnecessary for such companies. In addition, some commenters argued that U.S. intermediate holding companies should not be subject to the NSFR rule until after the agencies have conducted an impact analysis. By contrast, other commenters supported the proposed application of an NSFR requirement to a U.S. intermediate holding company based on the risk profile of the combined U.S. operations of the foreign banking organization.

A U.S. intermediate holding company poses risks in the United States similar to domestic banking organizations of a similar size and risk profile, even if the parent foreign banking organization is subject to an NSFR requirement in its home jurisdiction. The LCR rule, the Board's enhanced prudential standards rule, and the final rule apply to applicable U.S. banking organizations on a global consolidated basis and incorporate certain liquidity risks posed by mid-tier holding companies and their subsidiaries.

For this reason, such requirements do not apply directly to mid-tier holding companies on a standalone basis. Consistent with the LCR rule and the Board's enhanced prudential standards rule, the final rule applies to a U.S. intermediate holding company of a foreign banking organization because of the risks it presents to the U.S. financial system on a consolidated basis. However, the final rule does not apply liquidity or funding requirements to a subsidiary holding company of a U.S. intermediate holding company of a foreign banking organization. Further, for the reasons described in section V.A of this Supplementary Information section, the NSFR requirement is a complement to the LCR rule and other regulatory requirements for banking organizations that can present material risks to the U.S. financial system. In light of these concerns, the agencies are applying an NSFR requirement to U.S. intermediate holding companies.

The consolidated risks posed by U.S. banking organizations to the U.S. financial system also include risks derived from foreign-based branches and subsidiaries.

In addition, consistent with the scope of application of the LCR rule, the final rule applies the NSFR requirement to a U.S. intermediate holding company based on the risk profile of the U.S. intermediate holding company, rather than on the combined U.S. operations of the foreign banking organization.

Specifically, the final rule applies a full NSFR or reduced NSFR requirement to a U.S. intermediate holding company under the risk-based categories based on measures of the U.S. intermediate holding company's risk-based indicators. This approach helps to enhance the efficiency of NSFR requirements relative to the proposal, because stable funding requirements that apply to a U.S. intermediate holding company are based on the U.S.

intermediate holding company's risk profile.

See supra

note 18.

3. NSFR Minimum Requirements Under the Final Rule: Applicability and Calibration

A number of commenters argued that the re-proposed scope of applicability of the NSFR requirement was too stringent. Some commenters argued that smaller regional banking organizations should not be subject to the NSFR rule and that NSFR requirements for Category IV banking organizations should be eliminated. By contrast, other commenters argued that the tailoring proposals would tailor NSFR requirements in a way that would weaken the safety and soundness of large banking organizations and increase risks to U.S. financial stability. Some commenters argued that full NSFR requirements should apply to all covered companies until after the final rule has been effective for a sufficiently long period of time for the agencies to evaluate its efficacy. Other commenters advocated for further tailoring of the NSFR requirements.

For the reasons discussed below, the final rule generally retains the NSFR requirements described under the tailoring proposals. The final rule adopts a reduced NSFR requirement calibrated to 85 percent of the full NSFR requirement for Category III banking organizations with less than $75 billion in weighted short-term wholesale funding, and to 70 percent of the full NSFR requirement for Category IV banking organizations with $50 billion or more in weighted short-term wholesale funding.

Consistent with the tailoring proposals, depository institution subsidiaries with less than $10 billion in total consolidated assets would not be subject to an NSFR requirement. Moreover, no NSFR requirement applies at the subsidiary depository institution-level under Category IV.

Under the final rule, a banking organization applies the appropriate adjustment factor to its calculated RSF amount (required stable funding adjustment percentage), by multiplying its RSF amount by its required stable funding adjustment percentage. Banking organizations subject to the full NSFR requirement apply a 100 percent required stable funding adjustment percentage. Banking organizations subject to a reduced NSFR requirement apply an 85 or 70 percent required stable funding adjustment percentage.

a) NSFR Requirements Under Category I

Consistent with the scope of application of the LCR rule, the tailoring proposals would have applied full NSFR requirements to covered companies that meet the criteria for Category I. The agencies did not receive comments on the application of the NSFR requirement under Category I and are finalizing this aspect as proposed.

b) NSFR Requirements Under Category II

The tailoring proposals would have applied the full NSFR requirement to covered companies that meet the criteria for Category II. Some commenters argued that Category II should include a reduced NSFR requirement to reflect the lower risk profile of Category II banking organizations relative to those in Category I. Specifically, these commenters argued certain banking organizations in Category II present relatively lower stable funding risks than Category I banking organizations due to such banking organizations' concentration in custody activities and use of operational deposits.

Similar to U.S. GSIBs and their large depository institution subsidiaries, banking organizations that meet the criteria for Category II provide material levels of financial intermediation within the United States or internationally, and the NSFR helps to ensure that such banking organizations have appropriate funding to be in a position to sustain the necessary intermediation activities over a range of conditions. Additionally, the failure or distress of banking organizations that meet the criteria for Category II could impose significant costs on the U.S. financial system and economy. For example, any very large or global banking organization, including one that has a significant custody business, that is subject to asset fire sales resulting from funding disruptions is likely to transmit distress on a broader scale because of the greater volume of assets it may sell and the number of its counterparties across multiple jurisdictions. Similarly, a banking organization with significant international activity is more exposed to the risk of ring-fencing of funding resources by one or more jurisdictions. Ring-fencing may hamper the movement of funding, regardless of the level of custody business. More generally, the overall size of a banking organization's operations, material transactions in foreign jurisdictions, and the use of overseas funding sources add complexity to the management of the banking organization's funding profile. For these reasons, the agencies are adopting the proposal to apply the full NSFR requirement to Category II banking organizations.

c) NSFR Requirements Under Category III

As described above, the tailoring proposals would have differentiated NSFR requirements in Category III based on whether the level of average weighted short-term wholesale funding of a banking organization was at least $75 billion and sought comment on the calibration of the reduced NSFR requirement.

Some commenters argued that Category III banking organizations with less than $75 billion in average weighted short-term wholesale funding should not be subject to a reduced NSFR requirement. By contrast, many commenters expressed support for a reduced NSFR requirement under Category III, and generally recommended that such requirement be calibrated to 70 percent of the full NSFR requirement, consistent with the calibration of the Board's previously proposed modified NSFR requirement. In addition, several of these commenters argued that the reduced NSFR requirement should apply only to holding companies.

To improve the calibration of a banking organization's minimum ASF amount relative to its funding profile and its potential risk to U.S. financial stability, the final rule differentiates between banking organizations based on their category and their reliance on short-term wholesale funding. As discussed in the tailoring final rule, ongoing reliance on short-term, wholesale funding can make a banking organization more vulnerable to safety and soundness and financial stability risks. Accordingly, under the final rule, a banking organization subject to Category III standards with average weighted short-term wholesale funding of $75 billion or more is subject to the full NSFR requirement.

A banking organization subject to Category III standards with average weighted short-term wholesale funding of less than $75 billion is subject to a reduced NSFR requirement calibrated at 85 percent of the full NSFR requirement. An 85 percent calibration is appropriate for these banking organizations because they are less likely to contribute to a systemic event relative to similarly sized banking organizations that have a greater reliance on short-term wholesale funding and therefore, are more complex, and whose distress or failure is more likely to have greater systemic impact.

As a general matter, the alignment of the reduced NSFR with the Board's initially proposed modified NSFR

would not be appropriate because each of these requirements was designed to address different risk profiles. The Board designed the modified NSFR for smaller U.S. holding companies with less complex business models and more limited potential impact on U.S. financial stability compared to banking organizations that would be subject to the reduced NSFR requirement.

The Board's initially proposed modified NSFR applied to depository holding companies with between $50 billion and less than $250 billion in total assets whereas the tailoring proposal would have applied Category III requirements to banking organizations that either have $250 billion or more in total assets or have $100 billion or more in total assets as well as heightened levels of off-balance sheet exposure, nonbank assets, or weighted short-term wholesale funding.

d) NSFR Requirements Under Category IV

Under the tailoring proposals, a Category IV banking organization with average weighted short-term wholesale funding of $50 billion or more would have been required to comply with a reduced NSFR requirement of between 70 and 85 percent. However, the reduced NSFR requirement under Category IV would not have applied to standalone depository institutions or at the level of a subsidiary depository institution.

Some commenters argued that all banking organizations subject to Category IV should be subject to an NSFR requirement and that the requirement could be further modified or simplified for these organizations, as appropriate. In contrast, other commenters argued for the removal of any NSFR requirement for all banking organizations subject to Category IV.

For a banking organization with total consolidated assets of at least $100 billion and less than $250 billion, average weighted short-term wholesale funding of $50 billion or more demonstrates a material reliance on short-term, generally uninsured funding from more sophisticated counterparties, which can make a banking organization more vulnerable to large-scale funding runs, generating both safety and soundness and financial stability risks. Accordingly, such a banking organization is relatively more vulnerable to the funding stability risks addressed by the reduced NSFR requirement relative to similarly sized banking organizations that rely more heavily on stable funding such as retail deposits and have traditional balance sheet structures. The application of the NSFR requirement, albeit at a reduced level, is therefore appropriate for these banking organizations given their lower potential impact on systemic risk.

The final rule calibrates the minimum reduced NSFR requirement under Category IV at a level equivalent to 70 percent of the minimum level required under Category I and II. The difference between the 85 percent reduced NSFR calibration in Category III and the reduced 70 percent LCR calibration in Category IV reflects the differences in risk profiles of banking organizations subject to each respective requirement. The 70 percent calibration recognizes that these banking organizations are less complex and smaller than other banking organizations subject to more stringent requirements under the final rule and would likely have more modest systemic impact than larger, more complex banking organizations if they experienced funding disruptions. Banking organizations that are not subject to Category I, II or III requirements and that have average weighted short-term wholesale funding of less than $50 billion are not subject to an NSFR requirement under the final rule. Depository institution subsidiaries of banking organizations subject to Category IV requirements are not subject to an NSFR requirement.

4. Applicability to Depository Institution Subsidiaries

As described above, the tailoring proposals would have applied the same NSFR requirement to top-tier banking organizations subject to Category I, II, or III standards and to their subsidiary depository institutions with $10 billion or more in total consolidated assets.

Although a number of commenters generally supported the application of consistent requirements for U.S. depository institutions holding companies and their depository institution subsidiaries, many commenters requested that the agencies eliminate the application of the NSFR requirement to depository institutions that are consolidated subsidiaries of covered companies. These commenters stated that the NSFR rule should recognize that the holding company structure in the United States allows for banking organizations to manage liquidity across the broader corporate group and provides firms with flexibility regarding where liquidity is held within the corporate structure. These commenters also argued that an NSFR requirement for a consolidated depository institution is unnecessary in view of the supervisory monitoring and prudential limits applicable to the depository institution's funding structure, as well as the source of strength requirements that obligate the parent to remediate any funding deficiencies at a subsidiary depository institution. Alternatively, these commenters suggested that the agencies should rely on their supervisory authority to ensure stable funding for depository institutions. The commenters also requested that, if the agencies apply the NSFR requirement to depository institutions, an exemption should apply to depository institutions that comprise 85 percent or more of the assets of the consolidated organization. Commenters supporting such an approach stated that the costs of separately applying an NSFR at the subsidiary depository institution-level would outweigh any benefits.

The proposed treatment would have aligned with the agencies' longstanding policy of applying similar standards to holding companies and their depository institution subsidiaries. Large depository institution subsidiaries play a significant role in a banking organization's funding structure, and in the operation of the payments system. Such entities should have sufficient amounts of stable funding to meet their funding needs rather than be overly reliant on their parents or affiliates. In addition, these large subsidiaries generally have access to deposit insurance coverage and, as a result, application of standardized funding requirements would help to reduce the potential for losses to the FDIC's deposit insurance fund. Accordingly, the final rule maintains the application of an NSFR requirement to covered depository institution subsidiaries as proposed.

VI. Definitions

The proposed rule would have shared definitions with the LCR rule and would have been codified in the same part of the Code of Federal Regulations as the LCR rule for each of the agencies.

The proposed rule also would have revised certain of the existing definitions under the LCR rule and adopted new definitions for purposes of both the LCR and NSFR rules. The agencies received a number of comments regarding the proposed definitions.

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

One commenter argued that certain of the LCR rule's definitions are flawed and should not be used for purposes of the NSFR rule because they are the result of an internationally negotiated standard that was not properly calibrated to reflect U.S. market conditions or U.S. banking organizations' practices. As discussed in section V.C of this Supplementary Information section, to the extent that the final rule incorporates definitions

also used in the LCR rule, their usage in the final rule generally reflects assumptions specific to the final rule. The agencies also note that these common definitions include defined terms that are not included in the Basel LCR standard, but are specific to U.S. markets and banking organizations. For example, the definitions for certain types of brokered deposits and collateralized deposits are not included in the Basel LCR standard or the Basel NSFR standard. In addition, the final rule has tailored certain definitions, such as the definition of “operational deposit,” for the U.S. market. The use of common definitions across the regulatory framework, as appropriate, helps to minimize compliance costs, facilitate comparability across banking organizations, and reduce regulatory burden. Comments regarding specific defined terms are discussed below. For ease of convenience, the following discussion refers to § __.3 of the LCR rule, even though the definitions found in § __.3 will apply to both the LCR rule and final rule.

A. Revisions to Existing Definitions

The proposed rule would have amended the following definitions that were included in § __.3 of the LCR rule: “calculation date,” “collateralized deposits,” “committed,” “covered nonbank company,” “operational deposit,” “secured funding transaction,” “secured lending transaction,” and “unsecured wholesale funding.”

1. Revised Definitions for Which the Agencies Received no Comments

The proposed rule would have amended the existing definition of “calculation date,” “committed,” and “covered nonbank company” in § __.3 of the LCR rule. The agencies received no comments on the changes to these definitions and are adopting these revised definitions as proposed.

Calculation date.

The final rule amends to the definition of “calculation date” in § __.3 of the LCR rule to include any date on which a covered company calculates its NSFR for purposes of § __.100 of the final rule.

Committed.

The definition of “committed” in § __.3 of the LCR rule provides the criteria under which a credit facility or liquidity facility is considered committed for purposes of the LCR rule. To more clearly reflect the intended meaning of “committed,” the final rule, consistent with the proposed rule, amends the definition to state that a credit or liquidity facility is committed if it is not unconditionally cancelable under the terms of the facility. Consistent with the agencies' risk-based capital rule, the final rule defines “unconditionally cancelable” 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 permits a covered company to refuse to extend credit only 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 final rule. Conversely, a credit or liquidity facility that the covered company may cancel without cause would be considered unconditionally cancelable because the covered company may refuse to extend credit under the facility at any time, and therefore the facility would not be considered “committed.” For example, credit card lines that are cancelable without cause (to the extent permitted under applicable law), as is generally the case, are not considered committed under the amendment to the definition.

See

12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC).

Covered nonbank company.

Consistent with the proposed rule, the final rule revises the definition of “covered nonbank company” to clarify that if the Board requires a company designated by the Financial Stability Oversight Council (FSOC) for Board supervision to comply with the LCR rule or the final rule, it will do so through a rulemaking that is separate from the LCR rule and the final rule or by issuing an order.

2. Revised Definitions for Which the Agencies Received Comments

The agencies received comments on the following proposed amendments to existing definitions that are included in § __.3 of the LCR rule: “collateralized deposit,” “operational deposit,” “secured funding transaction,” “secured lending transaction,” and “unsecured wholesale funding.”

Collateralized Deposit.

The proposed rule would have amended the definition of “collateralized deposit” to include those deposits of a fiduciary account collateralized as required under state law, as applicable to state member and nonmember banks and state savings associations. In addition, the proposed rule would have amended the definition to include those deposits of a fiduciary account held at a covered company for which a depository institution affiliate of the covered company is a fiduciary and that the covered company has opted to collateralize pursuant to 12 CFR 9.10(c) (for national banks) or 12 CFR 150.310 (for federal savings associations).

The agencies received two comments regarding the definition of “collateralized deposit.” One commenter supported the proposed amendment to include fiduciary deposits collateralized as required under state law, as applicable to state member banks, state nonmember banks, and state savings associations. The other commenter requested that the agencies revise the definition to include secured sweep repurchase arrangements, which the commenter described as arrangements that allow a customer's balances to be temporarily “swept” out of a deposit account and into a secured non-deposit funding arrangement with the covered company. The commenter argued that secured sweep repurchase arrangements are distinct from other secured funding transactions, including wholesale funding offered by a broker-dealer, because they are typically tied to operational accounts and involve an automated sweep of corporate client funds into a secured sweep repurchase account, thus posing, in the commenter's view, less liquidity risk. The commenter argued that secured sweep repurchase arrangements are similar to secured deposit funding because the arrangements are offered as part of a broader business relationship between a covered company and a customer and, therefore, should not be subject to the unwind provisions in § __.21 of the LCR rule.

The final rule adopts the amended definition of “collateralized deposit” as proposed with an adjustment to expressly include deposits of a fiduciary account collateralized pursuant to state law requirements for which a covered company's depository institution affiliate is a fiduciary. The agencies defined “collateralized deposit” to identify a narrow set of secured funding transactions that should not be subject to the unwind provision in the LCR rule for a covered company when determining its HQLA amount.

The agencies excluded such deposits from the unwind provision based on their unique characteristics, including, among other things, that such deposits “are required to be collateralized under applicable law” and that “the banking relationship associated with collateralized deposit can be different in nature from shorter-term repurchase and

reverse repurchase agreements.”

The revised definition includes deposits of a fiduciary account collateralized pursuant to state law requirements or at the covered company's discretion pursuant to 12 CFR 9.10(c) (for national banks) or 12 CFR 150.310 (for federal savings associations) in order to provide consistent treatment to deposits that are subject to collateralization requirements or have been collateralized. Additionally, temporary secured sweep repurchase arrangements, including those offered part of a broader business relationship, that will mature in 30 calendar days or less of an LCR calculation date may affect a covered company's excess HQLA amount similar to other wholesale secured funding transactions conducted by a broker-dealer and do not qualify for the treatment afforded to collateralized deposits.

See

§ __.21 of the LCR rule. Certain secured funding transactions other than collateralized deposits are used in calculating adjusted liquid asset amounts for determining the adjusted excess HQLA amount under the LCR rule.

79 FR at 61473.

Operational Deposit.

The proposed rule would have amended 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 also would have amended this definition to clarify that only deposits can qualify. Further, 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-six-month maturity category and generally within the LCR rule's 30-calendar-day period. Further, 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-six-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 have remained the same.

The agencies received a number of comments regarding the proposed definition of “operational deposit.” Some commenters requested removal of the limitation that operational deposits cannot be provided by non-regulated funds. These commenters argued that a deposit placed at a covered company by a non-regulated fund for the provision of operational services would have similar liquidity risks as a deposit placed by a regulated fund for the same operational purposes.

One commenter argued that the exclusion of deposits placed by a non-regulated fund lacks a clear policy rationale and is unduly strict towards the custody bank business model. The commenter also argued that this exclusion is more stringent than the treatment of operational deposits in the Basel LCR standard. The commenter expressed concern that retaining this exclusion could undermine the current trend among non-regulated funds of separating the safekeeping and administration of their investment assets from their trading and financing activities. A commenter also asserted this exclusion is unnecessary because the risk associated with operational deposits from non-regulated funds is addressed sufficiently by the exclusion of deposits provided in connection with a covered company's provision of prime brokerage services.

See

§ __.4(b)(6) of the LCR rule; 79 FR at 61501. This section provides that operational deposits do not include deposits that are provided in connection with the covered company's provision of prime brokerage services, which include operational services provided to a non-regulated fund. Section __.3 of the LCR rule defines a “non-regulated fund” as any hedge fund or private equity fund whose investment adviser is required to file SEC Form PF (Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors), other than a small business investment company as defined in section 102 of the Small Business Investment Act of 1958 (15 U.S.C. 661

et seq.

One commenter argued that the definition of “operational deposit” should not be limited to deposits. The commenter suggested instead that the definition should be revised to include non-deposit unsecured wholesale funding that matures within the LCR rule's 30-day time horizon, in order to include arrangements that allow an operational customer's balances to be temporarily swept out of a deposit account into non-deposit products until such time as the funds are needed to meet operational demands. The commenter argued that excluding such arrangements from the definition of “operational deposit” could underrepresent the amount of a covered company's funding that is associated with the provision of operational services over the LCR rule's 30-day time horizon.

Operational deposit are deposits necessary for the covered company to provide operational services, as that term is defined in § __.3 of the LCR rule, to the wholesale customer or counterparty providing the deposit.

Among other things, the definition requires compliance with certain operational requirements of § __.4 of the LCR rule in order for a deposit to be recognized as an operational deposit (operational requirements).

See

79 FR at 61498.

The exclusion of deposits provided by non-regulated funds is appropriate because, in general, non-regulated funds tend to be sophisticated and are more likely than many other types of counterparties to engage in higher-risk trading strategies involving leverage, which may result in higher cash needs due to collateral calls and less stable deposit balances during certain market conditions. In comparison to non-financial wholesale counterparties or regulated financial sector entities, it is also more likely that operational activities at a non-regulated fund would be impacted by the performance of the fund's investment or trading activity that relies upon prime brokerage services, and thus it would be more difficult to separate its deposit balances that are necessary to maintain operational activities from its balances that support trading and investment activities that rely on prime brokerage services (even if these services are provided by different entities of a covered company). As a result, deposits from non-regulated funds may present heightened funding risk relative to deposits from other counterparties.

In addition, operational deposit balances swept out of a deposit account and into non-deposit products will not be eligible to be considered “operational deposits”. The LCR rule provides that in order to be recognized as an operational deposit, any excess amount not linked to operational services must be excluded.

See

§ __.4(b)(5) of the LCR rule.

As the preamble to the LCR rule noted, operational deposits are assigned a lower outflow rate under the LCR rule compared to other short-term wholesale funding due to the perceived stability arising from the relationship between a covered company and a depositor, the necessity of the deposit for the provision of operational services, and the switching costs associated with moving such deposits.

In contrast, excess funds, including funds that are swept into non-deposit products until funds are needed to meet operational demands, are not necessary for the provision of operational services and therefore do not exhibit these

characteristics.

Furthermore, the LCR rule excludes from operational deposits those deposits held in an account that is designed to incentivize customers to maintain excess funds in the account through increased revenue, reduction in fees, or other economic incentives.

Because the sweep arrangements described by the commenter are typically used to increase returns on deposits, the continued exclusion of these sweep arrangements from the definition of “operational deposit” is consistent with this treatment.

See

79 FR at 61497-502.

See

79 FR at 61500.

See

§ __.4(b)(4) of the LCR rule.

For these reasons, the final rule adopts the amended definition of “operational deposits” as proposed.

Secured Funding Transaction and Secured Lending Transaction.

The proposed rule would have revised the definitions of “secured funding transaction” and “secured lending transaction” to clarify that (i) the transactions must be secured by a lien on securities or loans, rather than secured by a lien on other assets; (ii) the definitions include only transactions with wholesale customers or counterparties, and (iii) securities issued or owned by a covered company do not constitute secured funding or lending transactions.

As noted in § __.3 of the LCR rule and the proposed rule, the definition of “secured funding transaction” also includes repurchase agreements and securities lending transactions, and the definition of “secured lending transaction” also includes reverse repurchase agreements and securities borrowing transactions, as these transactions result in the equivalent of a lien, securing the cash leg of the transaction, that gives the asset borrower priority over the asset in the event the covered company or the counterparty, as applicable, enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding.

One commenter recommended amending the definitions of “secured funding transaction” and “secured lending transaction” by replacing “securities” with “financial assets” in order to broaden the forms of collateral that may be used in transactions that meet the definitions. Specifically, the commenter argued that short-term debt, commercial paper, gold, and certain other assets should be permitted forms of collateral because they effectively reduce the risk associated with secured transactions. The same commenter also requested that the definition of “secured lending transaction” be expanded to include certain transactions with retail customers, and, in particular, open-maturity loans to retail customers collateralized by customer securities, such as a margin loan. The commenter asserted that a securities-based loan to a retail counterparty has similar characteristics to an open-maturity reverse repurchase agreement with a wholesale counterparty, including that the transaction is fully secured by the borrower's collateral, the lender has a legal right and operational ability to close out the loan upon default by the counterparty and sell the collateral to offset the lender's credit exposure, and the maturity of the loan extends each day that a notice of termination is not provided.

Under the LCR rule, the cash flows associated with secured funding and secured lending transactions take into account the relative liquidity of the cash and marketable collateral that will be exchanged at the maturity of the transaction and recognize that collateral in the form of HQLA securities tends to be the most liquid. By contrast, collateral that is not generally traded in liquid markets, including property, plant, and equipment, may provide limited liquidity value, particularly relative to the LCR rule's time horizon. While collateral that is not in the form of securities or loans may serve to mitigate credit risk, in the agencies' experience, the cash flows on lending secured by such collateral, including the likelihood of renewing the lending at maturity, depend to a greater degree on the characteristics of the counterparty rather than the collateral, thus making the liquidity risk associated with such arrangements more akin to that of unsecured lending. Accordingly, such lending transactions should not necessarily receive a 100 percent inflow rate under the LCR rule; rather, the inflow rate should depend on the characteristics of the borrower, which more accurately reflect the likelihood that a covered company will be able to realize inflows from or roll over some or all of the loan during a period of significant stress. In contrast to their contributions to total net cash outflows under the LCR rule, the contributions of secured loan assets and secured funding liabilities to the funding risk of a covered company's aggregate balance sheet generally depend on their maturities and counterparty characteristics and the final rule generally treats secured and unsecured wholesale transactions similarly.

In addition, while there is no defined term “securities” in the LCR rule, the agencies are clarifying that a funding transaction that is not a security, is conducted with a wholesale customer or counterparty, and is secured under applicable law by a lien on third-party short-term debt or commercial paper provided by a covered company would qualify as a secured funding transaction. Similarly, a lending transaction that is not a security, is conducted with a wholesale customer or counterparty, and is secured under applicable law by a lien on third-party short-term debt or commercial paper provided by the wholesale customer or counterparty would qualify as a secured lending transaction. However, secured funding and lending transactions where the collateral is in the form of gold or other commodities would not meet the definition of a secured funding transaction or secured lending transaction. These assets exhibit an increased volatility in market value and there are logistical factors associated with holding and liquidating these assets as compared to loans and securities.

The LCR rule for similar reasons does not include gold bullion as a level 1 liquid asset.

See

79 FR at 61456.

The final rule adopts the amended definitions of “secured funding transaction” and “secured lending transaction” as proposed. Under the final rule, the definitions of “secured funding transaction” and “secured lending transaction” include only transactions with wholesale customers or counterparties. Secured lending transactions do not include secured lending to a retail customer or counterparty, such as a retail margin loan. For purposes of the LCR rule generally, secured lending transactions categorize certain lending to a wholesale customer or counterparty where the expectation is that the transaction may mature in the near term with the covered company receiving cash from the counterparty and being required to return collateral to the counterparty.

In contrast, the treatment of retail exposures generally reflects the agencies' expectation that a covered company will need to maintain a portion of retail lending even during stress, regardless of collateralization.

As noted above, RSF factors assigned to unencumbered loans to retail and wholesale customers and counterparties under the final rule reflect their maturity and counterparty, rather than collateralization, and the RSF factors assigned to secured retail lending are the same as for secured lending to non-financial sector wholesale counterparties. As a result, the final rule, like the proposed rule, categorizes secured lending to a retail customer or counterparty separately from secured lending transactions with wholesale customers or counterparties for

purposes of assigning RSF factors under the NSFR requirement.

See

79 FR at 61513.

See

79 FR at 61512.

See

section VII.D of this Supplementary Information section.

Finally, under the final rule securities issued or owned by a covered company do not constitute secured funding or lending transactions. For example, asset-backed securities issued by a special purpose entity that a covered company consolidates on its balance sheet are not secured funding transactions. Similarly, securities owned by a covered company where contractual payments to the covered company are collateralized are not secured lending transactions.

Unsecured wholesale funding.

The proposed rule would have amended the definition of “unsecured wholesale funding” to mean a liability or general obligation of a covered company to a wholesale customer or counterparty that is not a secured funding transaction. The agencies received one comment regarding this proposed definition. The commenter asserted that, although “asset exchange” is separately defined in the LCR rule, an asset exchange could nonetheless fall under the definition of “unsecured wholesale funding” because it could be viewed as a liability or general obligation that is not a secured funding transaction if entered into with a wholesale customer or counterparty.

The final rule adopts the amended definition of “unsecured wholesale funding” as proposed with an adjustment to expressly exclude asset exchanges. Under the final rule, secured funding with a wholesale counterparty that does not meet the revised definition of “secured funding transaction” generally meets the definition of “unsecured wholesale funding.” However, consistent with the agencies' intent to provide a special framework for asset exchanges, the definitions of “unsecured wholesale funding” and “unsecured wholesale lending” in the final rule have been revised to exclude asset exchanges.

In addition to the unique treatment of asset exchanges in § __.102(c) of the final rule, asset exchanges are also subject to special treatment pursuant to § __.106(d). These treatments are discussed further in section VII.D.4 of this Supplementary Information section.

3. Other Definitions and Requirements for Which the Agencies Received Comments

Given that the definitions in the LCR rule would apply to the final rule, the proposed rule also requested comment as to whether any other existing definitions or terms should be amended. The agencies received several comments requesting revisions and clarifications to other definitions in the LCR rule that the agencies did not propose to amend.

Credit and liquidity facility.

One commenter requested that the agencies provide examples of a lending commitment that would qualify as a “credit facility” or “liquidity facility” under the rules. Section __.3 of the LCR rule defines “credit facility” to mean a legally binding agreement to extend funds if requested at a future date, including a general working capital facility such as a revolving credit facility for general corporate or working capital purposes.

Other examples of credit facilities may include a letter of credit, home equity line of credit, or any other legally binding agreement to extend funds if requested at a future date that is not included in the definition of “liquidity facility.”

A credit facility does not include a legally binding written agreement to extend funds at a future date to a counterparty made for the purpose of refinancing the debt of the counterparty when it is unable to obtain a primary or anticipated source of funding, which is included in the definition of “liquidity facility.”

Section __.3 of the LCR rule defines “liquidity facility” to mean a legally binding written agreement to extend funds at a future date to a counterparty that is made for the purpose of refinancing the debt of the counterparty when it is unable to obtain a primary or anticipated source of funding. The definition of “liquidity facility” further clarifies that it includes an agreement to provide liquidity support to asset-backed commercial paper by lending to, or purchasing assets from, any structure, program, or conduit in the event that funds are required to repay maturing asset-backed commercial paper.

Other examples of liquidity facilities include agreements related to non-asset backed commercial paper programs, secured financing transactions, securities investment vehicles, and conduits that, in each case, meet the requirements of the liquidity facility definition in § __.3 of the LCR rule. The LCR rule requires a facility that has characteristics of both credit and liquidity facilities to be classified as a liquidity facility.

A liquidity facility excludes facilities that are established solely for the purpose of general working capital, such as revolving credit facilities for general corporate or working capital purposes.

In addition, a commenter asked the agencies to clarify the treatment of (1) commercial paper backstop facilities where the customer has no commercial paper currently outstanding and (2) facilities that are expected to be cancelled without funding, such as an unfunded bridge lending facility in connection with a capital markets issuance. A commercial paper backstop facility may meet the definition of a liquidity facility because the purpose of the facility is to provide liquidity support in the future, if needed, regardless of whether the customer currently has any commercial paper outstanding or not. The determination of whether such a facility is “committed” likewise would not be impacted by the fact that the customer has no amount of commercial paper outstanding, but would depend on whether it was “unconditionally cancelable” as described above.

With respect to an unfunded bridge lending facility in connection with a capital markets issuance, the facility may be considered a credit facility if its sole purpose is to provide working capital to the issuer prior to the capital markets issuance. If, however, the unfunded bridge lending facility's purpose at least partially includes providing funds in the event that the issuer cannot otherwise refinance its outstanding liabilities prior to the capital market issuance, then the facility would likely meet the definition of a liquidity facility. Whether a facility meets the definition of a credit or liquidity facility at a calculation date is not influenced by expectations regarding its future cancellation. In addition, the determination of whether such a facility is “committed” at a calculation date depends on whether it was “unconditionally cancelable,” and would not be impacted by the likelihood of its cancellation.

The undrawn amount of the facility would be determined under § __.32(e)(2) of the LCR rule and § __.106(a)(2) of the final rule.

Retail customer or counterparty.

Section __.3 of the LCR rule defines “retail customer or counterparty” to include a living or testamentary trust that: (i) Is solely for the benefit of natural persons; (ii) does not have a corporate trustee; and (iii) terminates within 21 years and 10 months after the death of grantors or beneficiaries of the trust living on the effective date of the trust or within 25 years, if applicable under state law. One commenter suggested changing the definition of “retail customer or counterparty” to account for certain trusts, such as common trust arrangements with corporate trustees that the commenter viewed as akin to a natural person. The commenter suggested that a natural person's direct or indirect power to control a trust's investment is a better measure for assessing whether a trust should be treated for purposes of the LCR and NSFR rule as a retail customer or counterparty. The commenter suggested that a natural person's direct

or indirect power to control a trust's investment is a better measure for assessing whether a trust should be treated for purposes of the LCR and NSFR rules as a retail customer or counterparty.

The agencies expect that, as a class, living and testamentary trusts with corporate trustees are more likely to exhibit behavioral traits and sophistication comparable to those of a wholesale rather than retail customer or counterparty, even if a natural person has indirect authority over the trustee or complementary power to direct the trust's investment activity.

For example, despite the authority of a natural person to direct the trustee's investment, a corporate trustee would be more likely to act for the trust in the manner of a financial counterparty. The final rule does not include any change to the definition of “retail customer or counterparty.”

Subsequent to the proposal, the agencies issued in October 2017 frequently asked questions related to the LCR rule, including discussion of corporate trustees.

See https://www.federalreserve.gov/supervisionreg/topics/liquidity-coverage-ratio-faqs.htm.

Liquid and readily-marketable.

Under the LCR rule, certain assets must be liquid and readily-marketable in order to be included as HQLA by a covered company. This requirement is intended to ensure that assets included as HQLA exhibit a level of liquidity that would allow a covered company to convert them into cash during times of stress in order to meet its obligations when other sources of liquidity may be reduced or unavailable. Under the LCR rule, an asset is liquid and readily-marketable if it is traded in an active secondary market with more than two committed market makers, a large number of committed non-market maker participants on both the buying and selling sides of transactions, timely and observable market prices, and a high trading volume.

The agencies received several comments and requests for clarification on this definition. Several commenters suggested that the liquid and readily-marketable criteria are unduly difficult to satisfy. One commenter stated that banking organizations have had difficulty collecting the data necessary to demonstrate that securities meet these criteria, and that the cost of collecting data for certain securities that are widely accepted as being liquid and readily-marketable outweighs the benefits. Several commenters requested additional clarification concerning what is required by each of the elements of the liquid and readily-marketable standard. For example, commenters requested clarification for how to determine that a market maker is “committed,” that there is a “large” number of market participants, and that the trading volume for a security is “high.” Commenters expressed concern that relatively new types of securities and securities that are preferred by investors utilizing a “buy and hold” strategy, including securities of the highest credit quality that have strong demand at primary issuance, may not meet the criteria. Commenters also expressed concern that there appears to be no widely accepted or straightforward method for assessing these criteria.

Commenters also provided alternative methods to establish that a security is liquid and readily-marketable. Several commenters suggested that certain asset classes should be presumed to be liquid and readily-marketable without further analysis if they meet certain criteria. For example, commenters suggested that certain securities should be presumed to be liquid and readily-marketable, including (i) securities backed by the full faith and credit of the United States, including agency securities, (ii) debt issues of foreign sovereigns that meet certain risk weight and other criteria, and (iii) U.S. equities included in the Russell 1000 index. These commenters also suggested that securities presumed to be liquid and readily-marketable could be assessed annually or more frequently to ensure that they are liquid and readily-marketable. Another commenter suggested that a security should be deemed liquid and readily-marketable if a firm can demonstrate that the 30-day trading volume for the security exceeds the firm's holdings of that security, or that there has been a purchase in the market for each offer to sell the security. One commenter suggested that securities should be considered liquid and readily-marketable if other securities issued by the same issuer or guaranteed by the same credit protection provider have already been deemed liquid and readily-marketable.

The LCR rule's definition of “liquid and readily-marketable” is intended to complement other restrictions on the assets that can potentially be included in HQLA. Within the universe of possible HQLA, the criteria in the definition are not overly prescriptive given the divergence of trading frequency and practices. Suggestions to more narrowly define these criteria would be difficult to apply because of the different market structures for different asset classes. In response to commenters' requests for clarification, this Supplementary Information section describes the agencies' general expectations regarding how assets may satisfy the definition's criteria.

The agencies do not expect covered companies to conduct the liquid and readily-marketable analysis on a daily basis. However, the agencies expect that covered companies monitor the securities included as HQLA and conduct the analysis periodically, especially following a change in market conditions. Covered companies should be able to demonstrate that they have an appropriate process to regularly review that each security meets the liquid and readily-marketable requirements and that they do in fact perform this analysis.

The LCR rule defines “liquid and readily-marketable” to mean that a given security is traded in an active secondary market that satisfies four conditions. The first condition is that the active secondary market must have more than two committed market makers. The presence of committed market makers is an important characteristic of liquid securities markets, to ensure that trades within the market will be fulfilled on an ongoing basis. A covered company generally may treat a market maker as committed if the market maker has a history of trading the security in a substantial volume, particularly during times of stress. As with the other criteria necessary for a security to be liquid and readily-marketable, once the covered company makes an initial determination that a security has more than two committed market makers, a periodic review is adequate to confirm the continued presence of committed market makers. The second condition is that the active secondary market must have a large number of non-market maker participants acting as buyers and sellers of the security. The agencies generally will consider a security to satisfy this requirement if the majority of the trading volume for the security involves non-market maker participants. It also may be possible to satisfy this requirement for securities traded in secondary markets where most trades are between market makers if there are a large number of non-market maker participants. The third condition is that the active secondary market must have timely and observable market prices. The agencies generally expect that securities that trade regularly and at prices that are quoted daily can be considered to meet this requirement. The fourth condition is that the active secondary market must have a high trading volume. The analysis should take into account the depth of the market across a range of time periods.

Operational Requirements for HQLA.

One commenter suggested that the agencies eliminate the operational requirement that firms periodically monetize a sample of their HQLA held as eligible HQLA through an outright sale or pursuant to a repurchase (LCR monetization requirement). The commenter argued that if a security already satisfies the agencies' liquid and readily-marketable standard, then it is unnecessary to also sell the security to demonstrate its liquidity to determine that it is eligible HQLA. The commenter also suggested that the agencies accept proof that a security has been used to secure a loan from a Federal Home Loan Bank (FHLB) to satisfy the LCR monetization requirement. The LCR rule has separate definitions for “High-quality liquid assets” and “Eligible HQLA” for distinct purposes under the LCR rule. The agencies are retaining the LCR monetization requirement in order to ensure a covered company's continued access to funds providers and the effectiveness of its processes for monetization. While satisfaction of the liquid and readily-marketable criteria indicates that a covered company should be able to monetize a security, actual monetization confirms the security's marketability and confirms that the covered company maintains adequate processes for monetizing the security.

3. Other Definitions and Requirements for Which the Agencies Did Not Receive Comments

As noted above in section VI.A.3 of this Supplementary Information section, the proposed rule also requested comment as to whether any other existing definitions or terms in § __.3 of the LCR rule should be amended. Although the agencies did not receive specific requests to change the definition of “brokered deposit,” several commenters expressed concern that the FDIC's interpretation of “brokered deposit” is overly broad. The final rule amends certain of the definitions related to brokered deposits in § __.3 to improve clarity and consistency with the FDIC's brokered deposit framework.

The FDIC separately published a proposal in February 2020 to modernize its brokered deposit regulations, which would establish a new framework for analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits (FDIC brokered deposit proposal). Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions, 85 FR 7453 (February 10, 2020). In addition, in 2019 the FDIC published a final rule amending its brokered deposit regulations to conform with changes to section 29 of the Federal Deposit Insurance Act (FDI Act) made by section 202 of EGRRCPA related to reciprocal deposits.

See

Limited Exception for a Capped Amount of Reciprocal Deposits From Treatment as Brokered Deposits, 84 FR 1346, 1349 (February 4, 2019),

technical amendment at 84 FR 15095 (April 15, 2019).

Section __.3 previously defined a brokered deposit to mean any 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 of the Federal Deposit Insurance Act (12 U.S.C. 1831f(g)) (FDI Act) and includes a reciprocal brokered deposit and a brokered sweep deposit. The final rule amends this definition by adding a reference to the FDIC's regulations and eliminating the reference to reciprocal brokered deposits and brokered sweep deposits because not all reciprocal and sweep deposits are brokered deposits under section 29 of FDI Act and the FDIC's implementing regulations.

In 2019, the FDIC published a final rule implementing section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, Public Law 115-174, 132 Stat. 1296-1368 (2018), codified at 12 U.S.C. 1831f. 84 FR 1346 (February. 4, 2019). Section 202 amends section 29 of the FDI Act to except a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions. Additionally, a third party whose primary purpose is not the placement of funds with depository institutions is not a deposit broker, meaning deposits placed or facilitated by such a person are not brokered deposits.

For this reason, the final rule also renames “brokered sweep deposit” to “sweep deposit” and “reciprocal brokered deposit” to “brokered reciprocal deposit” wherever these terms appear. These clarifications are important in light of ongoing FDIC efforts to update the classification of brokered deposits. Under the final rule, the term “sweep deposit” includes deposits that are brokered deposits as well as deposits that are not brokered deposits. The term “reciprocal brokered deposits” only includes deposits that are classified as brokered deposits.

Pursuant to section 553(b)(B) of the APA, general notice and the opportunity for public comment are not required with respect to a rulemaking when an “agency for good cause finds (and incorporates the finding and a brief statement of reasons therefore in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” The changes to these definitions are only intended to clarify the scope of the definitions, not substantively alter the definitions or changes the applicable outflow or inflow amounts in the LCR rule. Because these changes are technical in nature and merely improve the clarity of these definitions in the LCR and NSFR rules, the agencies have determined that it is unnecessary to provide notice or the opportunity to comment prior to adopting these changes to these definitions related to brokered deposits.

B. New Definitions

The proposed rule would have added several new definitions: “carrying value,” “encumbered,” “NSFR regulatory capital element,” “NSFR liability,” and “QMNA netting set,” and “unsecured wholesale lending.”

1. New Definitions for Which the Agencies Received no Comments

The agencies received no comments on the proposed definitions of “carrying value,” “encumbered,” “NSFR regulatory capital element,” “NSFR liability,” and “QMNA netting set,” and the final rule adopts these definitions as proposed.

The final rule defines “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 GAAP. The final rule includes this definition because RSF and ASF factors generally are 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 final rule aims to ensure consistency in the application of the NSFR requirement across covered companies and limit operational compliance costs because covered companies already prepare financial reports in accordance with GAAP. This definition is consistent with the definition used in the agencies' regulatory capital rules.

See

12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC).

The final rule's definition of “encumbered” uses the criteria for an “unencumbered” asset found in § __.22(b) of the LCR rule. The definition does not include any substantive changes to the concept of encumbrance included in the LCR rule. The final rule uses this definition 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 final rule, which are discussed in sections VII.D of this Supplementary Information section.

Additionally, the final rule defines “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 rule, prior to the application of capital adjustments or deductions set forth in the agencies' risk-based capital rule.

This definition excludes 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 rule or that is being phased out of tier 1 or tier 2 capital pursuant to subpart G of the agencies' risk-based capital rule.

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

As a result, the final rule requires assets that are capital deductions (such as goodwill) to be included in the determination of required stable funding, as discussed in section VII.D of this Supplementary Information section.

See

12 CFR part 3 (OCC); 12 CFR part 217 (Board); 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); 12 CFR 324.20(d)(1)(iv) (FDIC);