Liquidity Coverage Ratio: Proposed Rule

Vol. 78

Friday,

No. 230

November 29, 2013

Part IV

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Part 50

Federal Reserve System

12 CFR Part 249

Federal Deposit Insurance Corporation

12 CFR Part 329

Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and

Monitoring; Proposed Rule

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Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 50

[Docket ID OCC–2013–0016]

RIN 1557 AD 74

FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Regulation WW; Docket No. R–1466]

RIN 7100 AE–03

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 329

RIN 3064–AE04

Liquidity Coverage Ratio: Liquidity

Risk Measurement, Standards, and

Monitoring

AGENCIES: Office of the Comptroller of

the Currency, Department of the

Treasury; Board of Governors of the

Federal Reserve System; and Federal

Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking

with request for public comment.

SUMMARY: The Office of the Comptroller

of the Currency (OCC), the Board of

Governors of the Federal Reserve

System (Board), and the Federal Deposit

Insurance Corporation (FDIC) are

requesting comment on a proposed rule

(proposed rule) that would implement a

quantitative liquidity requirement

consistent with the liquidity coverage

ratio standard established by the Basel

Committee on Banking Supervision. The

requirement is designed to promote the

short-term resilience of the liquidity risk

profile of internationally active banking

organizations, thereby improving the

banking sector’s ability to absorb shocks

arising from financial and economic

stress, as well as improvements in the

measurement and management of

liquidity risk

ard established by the Basel

Committee on Banking Supervision. The

requirement is designed to promote the

short-term resilience of the liquidity risk

profile of internationally active banking

organizations, thereby improving the

banking sector’s ability to absorb shocks

arising from financial and economic

stress, as well as improvements in the

measurement and management of

liquidity risk. The proposed rule would

apply to all internationally active

banking organizations, generally, bank

holding companies, certain savings and

loan holding companies, and depository

institutions with more than $250 billion

in total assets or more than $10 billion

in on-balance sheet foreign exposure,

and to their consolidated subsidiaries

that are depository institutions with $10

billion or more in total consolidated

assets. The proposed rule would also

apply to companies designated for

supervision by the Board by the

Financial Stability Oversight Council

under section 113 of the Dodd-Frank

Wall Street Reform and Consumer

Protection Act that do not have

significant insurance operations and to

their consolidated subsidiaries that are

depository institutions with $10 billion

or more in total consolidated assets. The

Board also is proposing on its own a

modified liquidity coverage ratio

standard that is based on a 21-calendar

day stress scenario rather than a 30

calendar-day stress scenario for bank

holding companies and savings and

loan holding companies without

significant insurance or commercial

operations that, in each case, have $50

billion or more in total consolidated

assets.

DATES: Comments on this notice of

proposed rulemaking must be received

by January 31, 2014.

ADDRESSES: Comments should be

directed to:

OCC: Because paper mail in the

Washington, DC area is subject to delay,

commenters are encouraged to submit

comments by the Federal eRulemaking

Portal or email, if possible

tions that, in each case, have $50

billion or more in total consolidated

assets.

DATES: Comments on this notice of

proposed rulemaking must be received

by January 31, 2014.

ADDRESSES: Comments should be

directed to:

OCC: Because paper mail in the

Washington, DC area is subject to delay,

commenters are encouraged to submit

comments by the Federal eRulemaking

Portal or email, if possible. Please use

the title ‘‘Liquidity Coverage Ratio:

Liquidity Risk Measurement, Standards,

and Monitoring’’ to facilitate the

organization and distribution of the

comments. You may submit comments

by any of the following methods:

• Federal eRulemaking Portal—

‘‘regulations.gov’’: Go to http://

www.regulations.gov. Enter ‘‘Docket ID

OCC–2013–0016’’ in the Search Box and

click ‘‘Search’’. Results can be filtered

using the filtering tools on the left side

of the screen. Click on ‘‘Comment Now’’

to submit public comments. Click on the

‘‘Help’’ tab on the Regulations.gov home

page to get information on using

Regulations.gov, including instructions

for submitting public comments.

• Email: regs.comments@

occ.treas.gov.

• Mail: Legislative and Regulatory

Activities Division, Office of the

Comptroller of the Currency, 400 7th

Street SW., Suite 3E–218, Mail Stop

9W–11, Washington, DC 20219.

• Hand Delivery/Courier: 400 7th

Street SW., Suite 3E–218, Mail Stop

9W–11, Washington, DC 20219.

• Fax: (571) 465–4326.

Instructions: You must include

‘‘OCC’’ as the agency name and ‘‘Docket

ID OCC–2013–0016’’ in your comment.

In general, OCC will enter all comments

received into the docket and publish

them on the Regulations.gov Web site

without change, including any business

or personal information that you

provide, such as name and address

information, email addresses, or phone

numbers. Comments received, including

attachments and other supporting

materials, are part of the public record

and subject to public disclosure

CC will enter all comments

received into the docket and publish

them on the Regulations.gov Web site

without change, including any business

or personal information that you

provide, such as name and address

information, email addresses, or phone

numbers. Comments received, including

attachments and other supporting

materials, are part of the public record

and subject to public disclosure. Do not

enclose any information in your

comment or supporting materials that

you consider confidential or

inappropriate for public disclosure.

You may review comments and other

related materials that pertain to this

rulemaking action by any of the

following methods:

• Viewing Comments Electronically:

Go to http://www.regulations.gov. Enter

‘‘Docket ID OCC–2013–0016’’ in the

Search box and click ‘‘Search’’.

Comments can be filtered by Agency

using the filtering tools on the left side

of the screen. Click on the ‘‘Help’’ tab

on the Regulations.gov home page to get

information on using Regulations.gov,

including instructions for viewing

public comments, viewing other

supporting and related materials, and

viewing the docket after the close of the

comment period.

• Viewing Comments Personally: You

may personally inspect and photocopy

comments at the OCC, 400 7th Street

SW., Washington, DC. For security

reasons, the OCC requires that visitors

make an appointment to inspect

comments. You may do so by calling

s for viewing

public comments, viewing other

supporting and related materials, and

viewing the docket after the close of the

comment period.

• Viewing Comments Personally: You

may personally inspect and photocopy

comments at the OCC, 400 7th Street

SW., Washington, DC. For security

reasons, the OCC requires that visitors

make an appointment to inspect

comments. You may do so by calling

(202) 649–6700. Upon arrival, visitors

will be required to present valid

government-issued photo identification

and to submit to security screening in

order to inspect and photocopy

comments.

• Docket: You may also view or

request available background

documents and project summaries using

the methods described above.

Board: You may submit comments,

identified by Docket No. R–1466, by any

of the following methods:

• Agency Web site: http://

www.federalreserve.gov. Follow the

instructions for submitting comments at

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm.

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Email: regs.comments@

federalreserve.gov. Include docket

number in the subject line of the

message.

• FAX: (202) 452–3819 or (202) 452–

3102.

• Mail: Robert deV. Frierson,

Secretary, Board of Governors of the

Federal Reserve System, 20th Street and

Constitution Avenue NW., Washington,

DC 20551.

All public comments are available

from the Board’s Web site at http://

www.federalreserve.gov/generalinfo/

foia/ProposedRegs.cfm as submitted,

unless modified for technical reasons.

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eet and

Constitution Avenue NW., Washington,

DC 20551.

All public comments are available

from the Board’s Web site at http://

www.federalreserve.gov/generalinfo/

foia/ProposedRegs.cfm as submitted,

unless modified for technical reasons.

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Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

1 The BCBS is a committee of banking supervisory

authorities that was established by the central bank

governors of the G10 countries in 1975. It currently

consists of senior representatives of bank

supervisory authorities and central banks from

Argentina, Australia, Belgium, Brazil, Canada,

China, France, Germany, Hong Kong SAR, India,

Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,

the Netherlands, Russia, Saudi Arabia, Singapore,

South Africa, Sweden, Switzerland, Turkey, the

United Kingdom, and the United States. Documents

issued by the BCBS are available through the Bank

for International Settlements Web site at http://

www.bis.org.

2 ‘‘Basel III: International framework for liquidity

risk measurement, standards and monitoring’’

(December 2010), available at http://www.bis.org/

publ/bcbs188.pdf (Basel III Liquidity Framework).

3 ‘‘Basel III: The Liquidity Coverage Ratio and

liquidity risk monitoring tools’’ (January 2013),

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

Accordingly, your comments will not be

edited to remove any identifying or

contact information. Public comments

may also be viewed electronically or in

paper form in Room MP–500 of the

Board’s Martin Building (20th and C

Street NW) between 9:00 a.m. and 5:00

p.m. on weekdays.

FDIC: You may submit comments by

any of the following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Agency Web site: http://

www.FDIC.gov/regulations/laws/

federal/propose.html

ronically or in

paper form in Room MP–500 of the

Board’s Martin Building (20th and C

Street NW) between 9:00 a.m. and 5:00

p.m. on weekdays.

FDIC: You may submit comments by

any of the following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Agency Web site: http://

www.FDIC.gov/regulations/laws/

federal/propose.html.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments/Legal

ESS, Federal Deposit Insurance

Corporation, 550 17th Street NW.,

Washington, DC 20429.

• Hand Delivered/Courier: The guard

station at the rear of the 550 17th Street

Building (located on F Street), on

business days between 7:00 a.m. and

5:00 p.m.

• Email: comments@FDIC.gov.

Instructions: Comments submitted

must include ‘‘FDIC’’ and ‘‘RIN 3064–

AE04.’’ Comments received will be

posted without change to http://

www.FDIC.gov/regulations/laws/

federal/propose.html, including any

personal information provided.

FOR FURTHER INFORMATION CONTACT:

OCC: Kerri Corn, Director, Credit and

Market Risk Division, (202) 649–6398;

Linda M. Jennings, National Bank

Examiner, (980) 387–0619; Patrick T.

Tierney, Special Counsel, or Tiffany

Eng, Law Clerk, Legislative and

Regulatory Activities Division, (202)

649–5490; or Adam S. Trost, Senior

Attorney, Securities and Corporate

Practices Division, (202) 649–5510

Office of the Comptroller of the

Currency, 400 7th Street SW.,

Washington, DC 20219.

Board: Anna Lee Hewko, Deputy

Associate Director, (202) 530–6260;

David Emmel, Manager, (202) 912–4612,

Credit, Market and Liquidity Risk

Policy; Ann McKeehan, Senior

Supervisory Financial Analyst, (202)

972–6903; Andrew Willis, Senior

Financial Analyst, (202) 912–4323,

Capital and Regulatory Policy; April C.

Snyder, Senior Counsel, (202) 452–

3099; or Dafina Stewart, Senior

Attorney, (202) 452–3876, Legal

Division, Board of Governors of the

Federal Reserve System, 20th and C

Streets NW., Washington, DC 20551

quidity Risk

Policy; Ann McKeehan, Senior

Supervisory Financial Analyst, (202)

972–6903; Andrew Willis, Senior

Financial Analyst, (202) 912–4323,

Capital and Regulatory Policy; April C.

Snyder, Senior Counsel, (202) 452–

3099; or Dafina Stewart, Senior

Attorney, (202) 452–3876, Legal

Division, Board of Governors of the

Federal Reserve System, 20th and C

Streets NW., Washington, DC 20551. For

the hearing impaired only,

Telecommunication Device for the Deaf

(TDD), (202) 263–4869.

FDIC: Kyle Hadley, Chief,

Examination Support Section, (202)

898–6532; Rebecca Berryman, Senior

Capital Markets Policy Specialist, (202)

898–6901; Eric Schatten, Capital

Markets Policy Analyst, (202) 898–7063,

Capital Markets Branch Division of Risk

Management Supervision, (202) 898–

6888; Gregory Feder, Counsel, (202)

898–8724; or Sue Dawley, Senior

Attorney, (202) 898–6509, Supervision

Branch, Legal Division, Federal Deposit

Insurance Corporation, 550 17th Street

NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. Summary of the Proposed Rule

B. Background

C. Overview of the Proposed Rule

II. Minimum Liquidity Coverage Ratio

A. High-Quality Liquid Assets

1. Liquidity Characteristics of HQLA

a. Risk Profile

b. Market-based Characteristics

c. Central Bank Eligibility

2. Qualifying Criteria for Categories of

HQLA

a. Level 1 Liquid Assets

b. Level 2A Liquid Assets

c. Level 2B Liquid Assets

3. Operational Requirements for HQLA

4. Generally Applicable Criteria for HQLA

a. Unencumbered

b. Client Pool Security

c. Treatment of HQLA held by U.S.

Consolidated Subsidiaries

e. Exclusion of Rehypothecated Assets

f. Exclusion of Assets Designated as

Operational

5. Calculation of the HQLA Amount

a. Calculation of Unadjusted Excess HQLA

Amount

b. Calculation of Adjusted Excess HQLA

Amount

c. Example HQLA Calculation

B. Total Net Cash Outflow

1. Determining the Maturity of Instruments

and Transactions

2. Cash Outflow Categories

a

.

Consolidated Subsidiaries

e. Exclusion of Rehypothecated Assets

f. Exclusion of Assets Designated as

Operational

5. Calculation of the HQLA Amount

a. Calculation of Unadjusted Excess HQLA

Amount

b. Calculation of Adjusted Excess HQLA

Amount

c. Example HQLA Calculation

B. Total Net Cash Outflow

1. Determining the Maturity of Instruments

and Transactions

2. Cash Outflow Categories

a. Unsecured Retail Funding Outflow

Amount

b. Structured Transaction Outflow Amount

c. Net Derivative Cash Outflow Amount

d. Mortgage Commitment Outflow Amount

e. Commitment Outflow Amount

f. Collateral Outflow Amount

g. Brokered Deposit Outflow Amount for

Retail Customers or Counterparties

h. Unsecured Wholesale Funding Outflow

Amount

i. Debt Security Outflow Amount

j. Secured Funding and Asset Exchange

Outflow Amount

k. Foreign Central Bank Borrowings

l. Other Contractual Outflow Amounts

m. Excluded Amounts for Intragroup

Transactions

3. Total Cash Inflow Amount

a. Items not included as inflows

b. Net Derivatives Cash Inflow Amount

c. Retail Cash Inflow Amount

d. Unsecured Wholesale Cash Inflow

Amount

e. Securities Cash Inflow Amount

f. Secured Lending and Asset Exchange

Cash Inflow Amount

III. Liquidity Coverage Ratio Shortfall

IV. Transition and Timing

V. Modified Liquidity Coverage Ratio

Applicable to Bank and Savings and

Loan Holding Companies

A. Overview and Applicability

B. High-Quality Liquid Assets

C. Total Net Cash Outflow

VI. Solicitation of Comments on Use of Plain

Language

VII. Regulatory Flexibility Act

VIII. Paperwork Reduction Act

IX. OCC Unfunded Mandates Reform Act of

1995 Determination

I. Introduction

A

n and Timing

V. Modified Liquidity Coverage Ratio

Applicable to Bank and Savings and

Loan Holding Companies

A. Overview and Applicability

B. High-Quality Liquid Assets

C. Total Net Cash Outflow

VI. Solicitation of Comments on Use of Plain

Language

VII. Regulatory Flexibility Act

VIII. Paperwork Reduction Act

IX. OCC Unfunded Mandates Reform Act of

1995 Determination

I. Introduction

A. Summary of the Proposed Rule

The Office of the Comptroller of the

Currency (OCC), the Board of Governors

of the Federal Reserve System (Board),

and the Federal Deposit Insurance

Corporation (FDIC) (collectively, the

agencies) are requesting comment on a

proposed rule (proposed rule) that

would implement a liquidity coverage

ratio requirement, consistent with the

international liquidity standards

published by the Basel Committee on

Banking Supervision (BCBS),1 for large,

internationally active banking

organizations, nonbank financial

companies designated by the Financial

Stability Oversight Council for Board

supervision that do not have substantial

insurance activities (covered nonbank

companies), and their consolidated

subsidiary depository institutions with

total assets greater than $10 billion. The

BCBS published the international

liquidity standards in December 2010 as

a part of the Basel III reform package 2

and revised the standards in January

2013 (as revised, the Basel III Revised

Liquidity Framework).3 The Board also

is proposing on its own to implement a

modified version of the liquidity

coverage ratio requirement as an

enhanced prudential standard for bank

holding companies and savings and

loan holding companies with at least

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rk).3 The Board also

is proposing on its own to implement a

modified version of the liquidity

coverage ratio requirement as an

enhanced prudential standard for bank

holding companies and savings and

loan holding companies with at least

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Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

4 See ‘‘Enhanced Prudential Standards and Early

Remediation Requirements for Covered

Companies,’’ 77 FR 594 (Jan. 5, 2010); ‘‘Enhanced

Prudential Standards and Early Remediation

Requirements for Foreign Banking Organizations

and Foreign Nonbank Financial Companies,’’ 77 FR

76628 (Dec. 28, 2012).

5 Principles for Sound Liquidity Risk

Management and Supervision (September 2008),

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

6 Basel III Liquidity Framework, supra note 2.

7 Basel III Revised Liquidity Framework, supra

note 3.

8 Key provisions of the 2010 LCR that were

updated by the BCBS in 2013 include expanding

the definition of high-quality liquid assets,

technical changes to the calculation of various

inflow and outflow rates, introducing a phase-in

period for implementation, and a variety of rules

text clarifications. See http://www.bis.org/press/

p130106b.pdf for a complete list of revisions to the

2010 LCR.

9 For instance, the Uniform Financial Rating

System adopted by the Federal Financial

Institutions Examination Council (FFIEC) requires

examiners to assign a supervisory rating that

assesses a banking organization’s liquidity position

and liquidity risk management.

10 75 FR 13656 (March 22, 2010).

11 See 12 U.S.C. 5365.

$50 billion in total consolidated assets

that are not internationally active and

do not have substantial insurance

activities. This modified approach is

described in section V of this preamble

C) requires

examiners to assign a supervisory rating that

assesses a banking organization’s liquidity position

and liquidity risk management.

10 75 FR 13656 (March 22, 2010).

11 See 12 U.S.C. 5365.

$50 billion in total consolidated assets

that are not internationally active and

do not have substantial insurance

activities. This modified approach is

described in section V of this preamble.

As described in more detail below,

the proposed rule would establish a

quantitative minimum liquidity

coverage ratio that builds upon the

liquidity coverage methodologies

traditionally used by banking

organizations to assess exposures to

contingent liquidity events. The

proposed rule would complement

existing supervisory guidance and the

more qualitative liquidity requirements

that the Board proposed, in consultation

with the OCC and the FDIC, pursuant to

section 165 of the Dodd-Frank Wall

Street Reform and Consumer Protection

Act of 2010 (Dodd-Frank Act) 4 and

would establish transition periods for

conformance with the new

requirements.

B. Background

The recent financial crisis

demonstrated significant weaknesses in

the liquidity positions of banking

organizations, many of which

experienced difficulty meeting their

obligations due to a breakdown of the

funding markets. As a result, many

governments and central banks across

the world provided unprecedented

levels of liquidity support to companies

in the financial sector in an effort to

sustain the global financial system. In

the United States, the Board and the

FDIC established various temporary

liquidity facilities to provide sources of

funding for a range of asset classes.

These events came in the wake of a

period characterized by ample liquidity

in the financial system

ded unprecedented

levels of liquidity support to companies

in the financial sector in an effort to

sustain the global financial system. In

the United States, the Board and the

FDIC established various temporary

liquidity facilities to provide sources of

funding for a range of asset classes.

These events came in the wake of a

period characterized by ample liquidity

in the financial system. The rapid

reversal in market conditions and the

declining availability of liquidity during

the financial crisis illustrated both the

speed with which liquidity can

evaporate and the potential for

protracted illiquidity during and

following these types of market events.

In addition, the recent financial crisis

highlighted the pervasive detrimental

effect of a liquidity crisis on the banking

sector, the financial system, and the

economy as a whole.

Banking organizations’ failure to

adequately address these challenges was

in part due to lapses in basic liquidity

risk management practices. Recognizing

the need for banking organizations to

improve their liquidity risk management

and to control their liquidity risk

exposures, the agencies worked with

regulators from foreign jurisdictions to

establish international liquidity

standards. These standards include the

principles based on supervisory

expectations for liquidity risk

management in the ‘‘Principles for

Sound Liquidity Management and

Supervision’’ (Basel Liquidity

Principles).5 In addition to these

principles, the BCBS established

quantitative standards for liquidity in

the ‘‘Basel III: International framework

for liquidity risk measurement,

standards and monitoring’’ 6 in

December 2010, which introduced a

liquidity coverage ratio (2010 LCR) and

a net stable funding ratio (NSFR), as

well as a set of liquidity monitoring

tools. These reforms were intended to

strengthen liquidity and promote a more

resilient financial sector by improving

the banking sector’s ability to absorb

shocks arising from financial and

economic stress

standards and monitoring’’ 6 in

December 2010, which introduced a

liquidity coverage ratio (2010 LCR) and

a net stable funding ratio (NSFR), as

well as a set of liquidity monitoring

tools. These reforms were intended to

strengthen liquidity and promote a more

resilient financial sector by improving

the banking sector’s ability to absorb

shocks arising from financial and

economic stress. Subsequently, in

January 2013, the BCBS issued ‘‘Basel

III: The Liquidity Coverage Ratio and

liquidity risk monitoring tools’’ (Basel

III LCR),7 which updated key

components of the 2010 LCR as part of

the Basel III liquidity framework.8 The

agencies acknowledge that there is

ongoing international study of the

interaction between the Basel III LCR

and central bank operations. The

agencies are working with the BCBS on

these matters and would consider

amending the proposal if the BCBS

proposes modifications to the Basel III

LCR.

The Basel III LCR establishes for the

first time an internationally harmonized

quantitative liquidity standard that has

the primary objective of promoting the

short-term resilience of the liquidity risk

profile of internationally active banking

organizations. The Basel III LCR is

designed to improve the banking

sector’s ability to absorb, without

reliance on government support, shocks

arising from financial and economic

stress, whatever the source, thus

reducing the risk of spillover from the

financial sector to the broader economy.

Beginning in January 2015, under the

Basel III LCR, internationally active

banking organizations would be

required to hold sufficient high-quality

liquid assets (HQLA) to meet their

obligations and other liquidity needs

that are forecasted to occur during a 30

calendar-day stress scenario. To meet

the Basel III LCR standard, the HQLA

must be unencumbered by liens and

other restrictions on transferability and

must be convertible into cash easily and

immediately in deep, active private

markets.

Current U.S

ld sufficient high-quality

liquid assets (HQLA) to meet their

obligations and other liquidity needs

that are forecasted to occur during a 30

calendar-day stress scenario. To meet

the Basel III LCR standard, the HQLA

must be unencumbered by liens and

other restrictions on transferability and

must be convertible into cash easily and

immediately in deep, active private

markets.

Current U.S. regulations do not

require banking organizations to meet a

quantitative liquidity standard. Rather,

the agencies evaluate a banking

organization’s methods for measuring,

monitoring, and managing liquidity risk

on a case-by-case basis in conjunction

with their supervisory processes.9 Since

the financial crisis, the agencies have

worked to establish a more rigorous

supervisory and regulatory framework

for U.S. banking organizations that

would incorporate and build upon the

BCBS standards. First, the agencies,

together with the National Credit Union

Administration and the Conference of

State Bank Supervisors, issued guidance

titled the ‘‘Interagency Policy Statement

on Funding and Liquidity Risk

Management’’ (Liquidity Risk Policy

Statement) in March 2010.10 The

Liquidity Risk Policy Statement

incorporates elements of the Basel

Liquidity Principles and is

supplemented by other liquidity risk

management principles previously

issued by the agencies. The Liquidity

Risk Policy Statement specifies

supervisory expectations for

fundamental liquidity risk management

practices, including a comprehensive

management process for identifying,

measuring, monitoring, and controlling

liquidity risk. The Liquidity Risk Policy

Statement also emphasizes the central

role of corporate governance, cash-flow

projections, stress testing, ample

liquidity resources, and formal

contingency funding plans as necessary

tools for effectively measuring and

managing liquidity risk

es, including a comprehensive

management process for identifying,

measuring, monitoring, and controlling

liquidity risk. The Liquidity Risk Policy

Statement also emphasizes the central

role of corporate governance, cash-flow

projections, stress testing, ample

liquidity resources, and formal

contingency funding plans as necessary

tools for effectively measuring and

managing liquidity risk.

Additionally, in 2012, pursuant to

section 165 of the Dodd-Frank Act,11 the

Board proposed enhanced liquidity

standards for large U.S. banking firms,

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Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

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

28, 2012).

13 See 12 U.S.C. 5365.

14 See 12 CFR part 3 (OCC), 12 CFR part 217

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

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

16 Pursuant to the International Banking Act

(IBA), 12 U.S.C. 3101 et seq., and OCC regulation,

12 CFR 28.13(a)(1), a Federal branch or agency

regulated and supervised by the OCC has the same

rights and responsibilities as a national bank

operating at the same location. Thus, as a general

matter, Federal branches and agencies are subject to

the same laws as national banks. The IBA and the

OCC regulation state, however, that this general

standard does not apply when the IBA or other

applicable law provides other specific standards for

Federal branches or agencies, or when the OCC

determines that the general standard should not

apply. This proposal would not apply to Federal

branches and agencies of foreign banks operating in

the United States. At this time, these entities have

assets that are substantially below the proposed

$250 billion asset threshold for applying the

proposed liquidity standard to an internationally

active banking organization

s, or when the OCC

determines that the general standard should not

apply. This proposal would not apply to Federal

branches and agencies of foreign banks operating in

the United States. At this time, these entities have

assets that are substantially below the proposed

$250 billion asset threshold for applying the

proposed liquidity standard to an internationally

active banking organization. As part of its

supervisory program for Federal branches and

agencies of foreign banks, the OCC reviews liquidity

risks and takes appropriate action to limit such

risks in those entities. In addition, the OCC is

monitoring other emerging initiatives in the U.S.

that may impact liquidity risk supervision of

Federal branches and agencies of foreign banks

before considering applying a liquidity coverage

ratio requirement to them.

17 Total consolidated assets for the purposes of

the proposed rule would be as reported on a

covered banking organization’s most recent year-

end Consolidated Reports of Condition and Income

or Consolidated Financial Statements for Bank

Holding Companies, Federal Reserve Form FR Y–

9C. Foreign exposure data would be calculated in

accordance with the Federal Financial Institution

Examination Council 009 Country Exposure Report.

certain foreign banking organizations,

and nonbank financial companies

designated by the Financial Stability

Oversight Council for Board

supervision.12 These enhanced liquidity

standards include corporate governance

provisions, senior management

responsibilities, independent review, a

requirement to hold highly liquidity

assets to cover stressed liquidity needs

based on internally developed stress

models, a contingency funding plan,

and specific limits on potential sources

of liquidity risk.13

The proposed rule would further

enhance the supervisory efforts

described above, which are aimed at

measuring and managing liquidity risk,

by implementing a minimum

quantitative liquidity requirement in the

form of a liquidity coverage ratio

uidity needs

based on internally developed stress

models, a contingency funding plan,

and specific limits on potential sources

of liquidity risk.13

The proposed rule would further

enhance the supervisory efforts

described above, which are aimed at

measuring and managing liquidity risk,

by implementing a minimum

quantitative liquidity requirement in the

form of a liquidity coverage ratio. This

quantitative requirement would focus

on short-term liquidity risks and would

benefit the financial system as a whole

by improving the ability of companies

subject to the proposal to absorb

potential market and liquidity shocks in

a severe stress scenario over a short

term. The agencies are proposing to

establish a minimum liquidity coverage

ratio that would be consistent with the

Basel III LCR, with some modifications

to reflect characteristics and risks of

specific aspects of the U.S. market and

U.S. regulatory framework, as described

in this preamble. For instance, in

recognition of the strong liquidity

positions many U.S. banking

organizations and other companies that

would be subject to the proposal have

achieved since the recent financial

crisis, the proposed rule includes

transition periods that are similar to, but

shorter than, those set forth in the Basel

III LCR. These proposed transition

periods are designed to give companies

subject to the proposal sufficient time to

adjust to the proposed rule while

minimizing any potential adverse

impact that implementation could have

on the U.S. banking system.

The agencies note that the BCBS is in

the process of reviewing the NSFR that

was included in the BCBS liquidity

framework when it was first published

in 2010

posed transition

periods are designed to give companies

subject to the proposal sufficient time to

adjust to the proposed rule while

minimizing any potential adverse

impact that implementation could have

on the U.S. banking system.

The agencies note that the BCBS is in

the process of reviewing the NSFR that

was included in the BCBS liquidity

framework when it was first published

in 2010. While the Basel III LCR is

focused on measuring liquidity

resilience over a short-term period of

severe stress, the NSFR is designed to

promote resilience over a one-year time

horizon by creating additional

incentives for banking organizations and

other financial companies that would be

subject to the standard to fund their

activities with more stable sources and

encouraging a sustainable maturity

structure of assets and liabilities.

Currently, the NSFR is in an

international observation period as the

agencies work with other BCBS

members and the banking industry to

gather data and study the impact of the

proposed NSFR standard on the banking

system. The agencies are carefully

considering what changes to the NSFR

they may recommend to the BCBS based

on the results of this assessment. The

agencies anticipate that they would

issue a proposed rulemaking

implementing the NSFR in advance of

its scheduled global implementation in

2018.

C. Overview of the Proposed Rule

The proposed rule would establish a

minimum liquidity coverage ratio

applicable to all internationally active

banking organizations, that is, banking

organizations with $250 billion or more

in total assets or $10 billion or more in

on-balance sheet foreign exposure, and

to consolidated subsidiary depository

institutions of internationally active

banking organizations with $10 billion

or more in total consolidated assets

(collectively, covered banking

organizations)

to all internationally active

banking organizations, that is, banking

organizations with $250 billion or more

in total assets or $10 billion or more in

on-balance sheet foreign exposure, and

to consolidated subsidiary depository

institutions of internationally active

banking organizations with $10 billion

or more in total consolidated assets

(collectively, covered banking

organizations). Thus, the rule would not

apply to institutions that have opted in

to the advanced approaches capital

rule; 14 the agencies are seeking

comment on whether to apply the rule

to opt-in banking organizations. The

proposed rule would also apply to

covered nonbank companies, and to

consolidated subsidiary depository

institutions of covered nonbank

companies with $10 billion or more in

total consolidated assets (together with

covered banking organizations and

covered nonbank companies, covered

companies). The proposed rule would

not apply to a bridge financial company

or a subsidiary of a bridge financial

company, a new depository institution

or a bridge depository institution, as

those terms are used in the resolution

context.15 The agencies believe that

requiring the FDIC to maintain a

minimum liquidity coverage ratio in

these entities would inappropriately

constrain the FDIC’s ability to resolve a

depository institution or its affiliated

companies in an orderly manner.16

The Board also is proposing on its

own to implement a modified version of

the liquidity coverage ratio as an

enhanced prudential standard for bank

holding companies and savings and

loan holding companies without

significant insurance or commercial

operations that, in each case, have $50

billion or more in total consolidated

assets, but are not covered companies

for the purposes of the proposed rule.17

The agencies are reserving the

authority to apply the proposed rule to

a company not meeting the asset

thresholds described above if it is

determined that the application of the

proposed liquidity coverage ratio woul

ce or commercial

operations that, in each case, have $50

billion or more in total consolidated

assets, but are not covered companies

for the purposes of the proposed rule.17

The agencies are reserving the

authority to apply the proposed rule to

a company not meeting the asset

thresholds described above if it is

determined that the application of the

proposed liquidity coverage ratio would

be appropriate in light of a company’s

asset size, level of complexity, risk

profile, scope of operations, affiliation

with foreign or domestic covered

companies, or risk to the financial

system. A covered company would

remain subject to the proposed rule

until its primary Federal supervisor

determines in writing that application of

the proposed rule to the company is not

appropriate in light of these same

factors. Moreover, nothing in the

proposed rule would limit the authority

of the agencies under any other

provision of law or regulation to take

supervisory or enforcement actions,

including actions to address unsafe or

unsound practices or conditions,

deficient liquidity levels, or violations

of law. The agencies also are reserving

the authority to require a covered

company to hold an amount of HQLA

greater than otherwise required under

the proposed rule, or to take any other

measure to improve the covered

company’s liquidity risk profile, if the

relevant agency determines that the

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quire a covered

company to hold an amount of HQLA

greater than otherwise required under

the proposed rule, or to take any other

measure to improve the covered

company’s liquidity risk profile, if the

relevant agency determines that the

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Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

covered company’s liquidity

requirements as calculated under the

proposed rule are not commensurate

with its liquidity risks. In making such

determinations, the agencies will apply

notice and response procedures as set

forth in their respective regulations.

The proposed liquidity coverage ratio

would require a covered company to

maintain an amount of HQLA meeting

the criteria set forth in the proposed rule

(the numerator of the ratio) that is no

less than 100 percent of its total net cash

outflows over a prospective 30 calendar-

day period, as calculated in accordance

with the proposed rule (the

denominator of the ratio). Under the

proposed rule, certain categories of

assets may qualify as HQLA if they are

unencumbered by liens and other

restrictions on transfer so that they can

be converted into cash quickly with

little to no loss in value. Access to

HQLA would enhance the ability of a

covered company to meet its liquidity

needs during an acute short-term

liquidity stress scenario. A covered

company’s total net cash outflow

amount would be determined by

applying outflow and inflow rates,

which reflect certain stressed

assumptions, against the balances of a

covered company’s funding sources,

obligations, and assets over a

prospective 30 calendar-day period

ability of a

covered company to meet its liquidity

needs during an acute short-term

liquidity stress scenario. A covered

company’s total net cash outflow

amount would be determined by

applying outflow and inflow rates,

which reflect certain stressed

assumptions, against the balances of a

covered company’s funding sources,

obligations, and assets over a

prospective 30 calendar-day period.

As further described below, the

measures of total cash outflow and total

cash inflow, and the outflow and inflow

rates used in their determination, are

meant to reflect aspects of the stress

events experienced during the recent

financial crisis. Consistent with the

Basel III LCR, these components of the

proposed rule take into account the

potential impact of idiosyncratic and

market-wide shocks, including those

that would result in: (1) A partial loss

of retail deposits and brokered deposits

for retail customers; (2) a partial loss of

unsecured wholesale funding capacity;

(3) a partial loss of secured, short-term

financing with certain collateral and

counterparties; (4) losses from

derivative positions and the collateral

supporting those positions; (5)

unscheduled draws on committed credit

and liquidity facilities that a covered

company has provided to its clients; (6)

the potential need for a covered

company to buy back debt or to honor

non-contractual obligations in order to

mitigate reputational and other risks;

and (7) other shocks which affect

outflows linked to structured financing

transactions, mortgages, central bank

borrowings, and customer short

positions.

As noted above, covered companies

generally would be required to

maintain, on a consolidated basis, a

liquidity coverage ratio equal to or

greater than 100 percent. However, the

agencies recognize that under certain

circumstances, it may be necessary for

a covered company’s liquidity coverage

ratio to briefly fall below 100 percent to

fund unanticipated liquidity needs

short

positions.

As noted above, covered companies

generally would be required to

maintain, on a consolidated basis, a

liquidity coverage ratio equal to or

greater than 100 percent. However, the

agencies recognize that under certain

circumstances, it may be necessary for

a covered company’s liquidity coverage

ratio to briefly fall below 100 percent to

fund unanticipated liquidity needs.

However, a liquidity coverage ratio

below 100 percent may also reflect a

significant deficiency in a covered

company’s management of liquidity

risk. Therefore, the proposed rule would

establish a framework for flexible

supervisory response when a covered

company’s liquidity coverage ratio falls

below 100 percent. Under the proposed

rule, a covered company would be

required to notify its primary Federal

supervisor on any business day that its

liquidity coverage ratio is less than 100

percent. In addition, if the liquidity

coverage ratio is below 100 percent for

three consecutive business days, a

covered company would be required to

submit to its primary Federal supervisor

a plan for remediation of the shortfall.

These procedures, which are described

in further detail in this preamble, are

intended to enable supervisors to

monitor and respond appropriately to

the unique circumstances that are giving

rise to a covered company’s liquidity

coverage ratio shortfall.

Consistent with the BCBS liquidity

framework, the proposed rule, once

finalized, would be effective as of

January 1, 2015, subject to a transition

period. Under the proposed rule’s

transition provisions, covered

companies would be required to comply

with a minimum liquidity coverage ratio

of 80 percent as of January 1, 2015.

From January 1, 2016, through

December 31, 2016, the minimum

liquidity coverage ratio would be 90

percent. Beginning on January 1, 2017

and thereafter, all covered companies

would be required to maintain a

liquidity coverage ratio of 100 percent

ransition provisions, covered

companies would be required to comply

with a minimum liquidity coverage ratio

of 80 percent as of January 1, 2015.

From January 1, 2016, through

December 31, 2016, the minimum

liquidity coverage ratio would be 90

percent. Beginning on January 1, 2017

and thereafter, all covered companies

would be required to maintain a

liquidity coverage ratio of 100 percent.

The proposed rule’s liquidity

coverage ratio is based on a

standardized supervisory stress

scenario. While the liquidity coverage

ratio would establish one scenario for

stress testing, supervisors expect

companies that would be subject to the

proposed rule to maintain robust stress

testing frameworks that incorporate

additional scenarios that are more

tailored to the risks within their firms.

Companies should use these additional

scenarios in conjunction with the

proposed rule’s liquidity coverage ratio

to appropriately determine their

liquidity buffers. The agencies note that

the liquidity coverage ratio is a

minimum requirement and

organizations that pose more systemic

risk to the U.S. banking system or whose

liquidity stress testing indicates a need

for higher liquidity buffers may need to

take additional steps beyond meeting

the minimum ratio in order to meet

supervisory expectations.

The BCBS liquidity framework also

establishes liquidity risk monitoring

mechanisms designed to strengthen and

promote global consistency in liquidity

risk supervision. These mechanisms

include information on contractual

maturity mismatch, concentration of

funding, available unencumbered assets,

liquidity coverage ratio reporting by

significant currency, and market-related

monitoring tools. At this time, the

agencies are not proposing to implement

these monitoring mechanisms as

regulatory standards or requirements

sistency in liquidity

risk supervision. These mechanisms

include information on contractual

maturity mismatch, concentration of

funding, available unencumbered assets,

liquidity coverage ratio reporting by

significant currency, and market-related

monitoring tools. At this time, the

agencies are not proposing to implement

these monitoring mechanisms as

regulatory standards or requirements.

However, the agencies intend to obtain

information from covered companies to

enable the monitoring of liquidity risk

exposure through reporting forms and

from information the agencies collect

through other supervisory processes.

The proposed rule would provide

enhanced information about the short-

term liquidity profile of a covered

company to managers and supervisors.

With this information, the covered

company’s management and supervisors

would be better able to assess the

company’s ability to meet its projected

liquidity needs during periods of

liquidity stress; take appropriate actions

to address liquidity needs; and, in

situations of failure, to implement an

orderly resolution of the covered

company. The agencies anticipate that

they will separately seek comment upon

proposed regulatory reporting

requirements and instructions

pertaining to a covered company’s

disclosure of the proposed rule’s

liquidity coverage ratio in a subsequent

notice.

The agencies request comment on all

aspects of the proposed rule, including

comment on the specific issues raised

throughout this preamble. The agencies

request that commenters provide

detailed qualitative or quantitative

analysis, as appropriate, as well as any

relevant data and impact analysis to

support their positions.

II. Minimum Liquidity Coverage Ratio

Under the proposed rule, a covered

company would be required to calculate

its liquidity coverage ratio as of a

particular date, which is defined in the

proposed rule as the calculation date

that commenters provide

detailed qualitative or quantitative

analysis, as appropriate, as well as any

relevant data and impact analysis to

support their positions.

II. Minimum Liquidity Coverage Ratio

Under the proposed rule, a covered

company would be required to calculate

its liquidity coverage ratio as of a

particular date, which is defined in the

proposed rule as the calculation date.

The proposed rule would require a

covered company to calculate its

liquidity coverage ratio daily as of a set

time selected by the covered company

prior to the effective date of the rule and

communicated in writing to its primary

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18 See infra section II.A.2.c.

19 Identification of companies with high potential

for wrong-way risk under the proposal is discussed

below in section II.A.2.

Federal supervisor. Subsequent to this

election, a covered company could only

change the time as of which it calculates

its liquidity coverage ratio daily with

the written approval of its Federal

supervisor.

A covered company would calculate

its liquidity coverage ratio by dividing

its amount of HQLA by total net cash

outflows, which would be equal to the

highest daily amount of cumulative net

cash outflows within the 30 calendar

days following a calculation date (30

calendar-day stress period). A covered

company would not be permitted to

double count items in this computation.

For example, if an asset is included as

a part of the stock of HQLA, such asset

may not also be counted as cash inflows

in the denominator.

The following discussion addresses

the proposed criteria for HQLA, which

are meant to reflect the characteristics

the agencies believe are associated with

the most liquid assets banking

organizations typically hold

le count items in this computation.

For example, if an asset is included as

a part of the stock of HQLA, such asset

may not also be counted as cash inflows

in the denominator.

The following discussion addresses

the proposed criteria for HQLA, which

are meant to reflect the characteristics

the agencies believe are associated with

the most liquid assets banking

organizations typically hold. The

discussion also explains how HQLA

would be calculated under the proposed

rule, including its constituent

components, and the proposed caps and

haircuts applied to those components.

Next, the discussion describes total

net cash outflows, the denominator of

the liquidity coverage ratio. This

discussion explains the items that

would be included in total cash

outflows and total cash inflows, as well

as rules for determining whether

instruments mature or transactions

occur within a 30 calendar-day stress

period for the purposes of the liquidity

coverage ratio’s calculation. The

discussion concludes by describing the

regulatory framework for supervisory

response if a covered company’s

liquidity coverage ratio falls below 100

percent.

1. What operational or other issues

arise from requiring the calculation of

the liquidity coverage ratio as of a set

time selected by a covered company

prior to the effective date of the rule?

What significant operational costs, such

as technological improvements, or other

operational difficulties, if any, may arise

from the requirement to calculate the

liquidity coverage ratio on a daily basis?

What alternatives to daily calculation

should the agencies consider and why?

2. The proposed rule would require a

covered company to calculate its HQLA

on a daily basis

te of the rule?

What significant operational costs, such

as technological improvements, or other

operational difficulties, if any, may arise

from the requirement to calculate the

liquidity coverage ratio on a daily basis?

What alternatives to daily calculation

should the agencies consider and why?

2. The proposed rule would require a

covered company to calculate its HQLA

on a daily basis. Should the agencies

impose any limits with regard to

covered companies’ ability to transfer

HQLA on an intraday basis between

entities? Why or why not? In particular,

what appropriate limits should the

agencies consider with regard to

intraday movements of HQLA between

domestic and foreign entities, including

foreign branches?

A. High-Quality Liquid Assets

The numerator of the proposed

liquidity coverage ratio would be

comprised of a covered company’s

HQLA, subject to the qualifying criteria

and compositional limitations described

below (HQLA amount). These proposed

criteria and limitations are meant to

ensure that a covered company’s HQLA

amount only includes assets with a high

potential to generate liquidity through

sale or secured borrowing during a

stress scenario.

Consistent with the Basel III LCR, the

agencies are proposing to divide HQLA

into three categories of assets: level 1,

level 2A and level 2B liquid assets.

Specifically and as described in greater

detail below, the agencies are proposing

that level 1 liquid assets, which are the

highest quality and most liquid assets,

be included in a covered company’s

HQLA amount without a limit. Level 2A

and 2B liquid assets have characteristics

that are associated with being relatively

stable and significant sources of

liquidity, but not to the same degree as

level 1 liquid assets. Accordingly, level

2A liquid assets would be subject to a

15 percent haircut and, when combined

with level 2B liquid assets, could not

exceed 40 percent of the total stock of

HQLA

nt without a limit. Level 2A

and 2B liquid assets have characteristics

that are associated with being relatively

stable and significant sources of

liquidity, but not to the same degree as

level 1 liquid assets. Accordingly, level

2A liquid assets would be subject to a

15 percent haircut and, when combined

with level 2B liquid assets, could not

exceed 40 percent of the total stock of

HQLA. Level 2B liquid assets, which are

associated with a lesser degree of

liquidity and more volatility than level

2A liquid assets, would be subject to a

50 percent haircut and could not exceed

15 percent of the total stock of HQLA.

These haircuts and caps are set forth in

section 21 of the proposed rule.

A covered company would include

assets in each HQLA category as

required by the proposed rule as of a

calculation date, irrespective of an

asset’s residual maturity. A description

of the methodology for calculating the

HQLA amount, including the caps on

level 2A and level 2B liquid assets and

the requirement to calculate adjusted

and unadjusted amounts of HQLA, is

described in section II.A.5 below.

1. Liquidity Characteristics of HQLA

Assets that would qualify as HQLA

should be easily and immediately

convertible into cash with little or no

loss of value during a period of liquidity

stress. In identifying the types of assets

that would qualify as HQLA, the

agencies considered the following

categories of liquidity characteristics,

which are generally consistent with

those of the Basel III LCR: (a) Risk

profile; (b) market-based characteristics;

and (c) central bank eligibility.

a. Risk Profile

Assets that are appropriate for

consideration as HQLA tend to be lower

risk. There are various forms of risk that

can be associated with an asset,

including liquidity risk, market risk,

credit risk, inflation risk, foreign

exchange risk, and the risk of

subordination in a bankruptcy or

insolvency

rofile; (b) market-based characteristics;

and (c) central bank eligibility.

a. Risk Profile

Assets that are appropriate for

consideration as HQLA tend to be lower

risk. There are various forms of risk that

can be associated with an asset,

including liquidity risk, market risk,

credit risk, inflation risk, foreign

exchange risk, and the risk of

subordination in a bankruptcy or

insolvency. Assets appropriate for

consideration as HQLA would be

expected to remain liquid across various

stress scenarios and should not

suddenly lose their liquidity upon the

occurrence of a certain type of risk.

Also, these assets generally experience

‘‘flight to quality’’ during a crisis,

wherein investors sell their other

holdings to buy more of these assets in

order to reduce the risk of loss and

increase the ability to monetize assets as

necessary to meet their own obligations.

Assets that may be highly liquid

under normal conditions but experience

wrong-way risk and could become less

liquid during a period of stress would

not be appropriate for consideration as

HQLA. For example, securities issued or

guaranteed by many companies in the

financial sector 18 have been more prone

to lose value and, as a result, become

less liquid and lose value in times of

liquidity stress due to the high

correlation between the health of these

companies and the health of the

financial markets generally. This

correlation was evident during the

recent financial crisis, as most debt

issued by such companies traded at

significant discounts for a prolonged

period. Because of this high potential

for wrong-way risk, consistent with the

Basel III LCR standard, the proposed

rule would exclude assets issued by

companies that are primary actors in the

financial sector from HQLA.19

b. Market-Based Characteristics

The agencies also have found that

assets appropriate for consideration as

HQLA generally exhibit characteristics

that are market-based in nature

ecause of this high potential

for wrong-way risk, consistent with the

Basel III LCR standard, the proposed

rule would exclude assets issued by

companies that are primary actors in the

financial sector from HQLA.19

b. Market-Based Characteristics

The agencies also have found that

assets appropriate for consideration as

HQLA generally exhibit characteristics

that are market-based in nature. First,

these assets tend to have active outright

sale or repurchase markets at all times

with significant diversity in market

participants as well as high volume.

This market-based liquidity

characteristic may be demonstrated by

historical evidence, including evidence

during recent periods of market

liquidity stress, of low bid-ask spreads,

high trading volumes, a large and

diverse number of market participants,

and other factors. Diversity of market

participants, on both the buy and sell

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20 12 U.S.C. 1850a(a)(4).

21 7 U.S.C. 1a(28) and (49).

22 15 U.S.C. 78c(a)(71).

23 12 U.S.C. 5462(4).

24 Under paragraph (8) of the proposed rule’s

definition of ‘‘regulated financial company,’’ the

following would not be considered regulated

financial companies: U.S. government-sponsored

enterprises; small business investment companies,

as defined in section 102 of the Small Business

Investment Act of 1958 (15 U.S.C. 661 et seq.);

entities designated as Community Development

Financial Institutions (CDFIs) under 12 U.S.C. 4701

et seq. and 12 CFR part 1805; and central banks, the

Bank for International Settlements, the International

Monetary Fund, or a multilateral development

bank.

25 See http://www.ffiec.gov/nicpubweb/nicweb/

nichome.aspx

tion 102 of the Small Business

Investment Act of 1958 (15 U.S.C. 661 et seq.);

entities designated as Community Development

Financial Institutions (CDFIs) under 12 U.S.C. 4701

et seq. and 12 CFR part 1805; and central banks, the

Bank for International Settlements, the International

Monetary Fund, or a multilateral development

bank.

25 See http://www.ffiec.gov/nicpubweb/nicweb/

nichome.aspx.

sides, is particularly important because

it tends to reduce market concentration

and is a key indicator that a market will

remain liquid. Also, the presence of

multiple committed market makers is

another sign that a market is liquid.

Second, assets that are appropriate for

consideration as HQLA generally tend

to have prices that do not incur sharp

price declines, even during times of

stress. Volatility of traded prices and

bid-ask spreads during normal times are

simple proxy measures of market

volatility; however, there should be

historical evidence of relative stability

of market terms (such as prices and

haircuts) and volumes during stressed

periods. To the extent that an asset

exhibits price or volume fluctuation

during times of stress, assets appropriate

for consideration as HQLA tend to

increase in value and experience a flight

to quality during such times, as

historically, the market moves into more

liquid assets in times of systemic crisis.

Third, assets that can serve as HQLA

tend to be easily and readily valued.

The agencies generally have found that

an asset’s liquidity is typically higher if

market participants agree on its

valuation. Assets with more

standardized, homogenous, and simple

structures tend to be more fungible,

thereby promoting liquidity. The pricing

formula of more liquid assets generally

is easy to calculate when it is based

upon sound assumptions and publicly

available inputs. Whether an asset is

listed on an active and developed

exchange can serve as a key indicator of

an asset’s price transparency and

liquidity.

c

standardized, homogenous, and simple

structures tend to be more fungible,

thereby promoting liquidity. The pricing

formula of more liquid assets generally

is easy to calculate when it is based

upon sound assumptions and publicly

available inputs. Whether an asset is

listed on an active and developed

exchange can serve as a key indicator of

an asset’s price transparency and

liquidity.

c. Central Bank Eligibility

Assets that a covered company can

pledge at a central bank as collateral for

intraday liquidity needs and overnight

liquidity facilities in a jurisdiction and

in a currency where the bank has access

to the central bank generally tend to be

liquid and, as such, are appropriate for

consideration as HQLA. In the past,

central banks have provided a backstop

to the supply of banking system

liquidity under conditions of severe

stress. Central bank eligibility should,

therefore, provide additional assurance

that assets could be used in acute

liquidity stress events without adversely

affecting the broader financial system

and economy. However, central bank

eligibility is not itself sufficient to

categorize an asset as HQLA; all of the

proposed rule’s requirements for HQLA

would need to be met if central bank

eligible assets are to qualify as HQLA.

3. What, if any, other characteristics

should be considered by the agencies in

analyzing the liquidity of an asset?

2. Qualifying Criteria for Categories of

HQLA

The characteristics of HQLA

discussed above are reflected in the

proposed rule’s qualifying criteria for

HQLA. The criteria, set forth in section

20 of the proposed rule, are designed to

identify assets that exhibit low risk and

limited price volatility, are traded in

high-volume, deep markets with

transparent pricing, and that are eligible

to be pledged at a central bank.

Consistent with these characteristics

and the BCBS LCR framework, the

proposed rule would establish general

criteria for all HQLA and specific

requirements for each category of

HQLA

e, are designed to

identify assets that exhibit low risk and

limited price volatility, are traded in

high-volume, deep markets with

transparent pricing, and that are eligible

to be pledged at a central bank.

Consistent with these characteristics

and the BCBS LCR framework, the

proposed rule would establish general

criteria for all HQLA and specific

requirements for each category of

HQLA. For example, most of the assets

in these categories would need to meet

the proposed rule’s definition of ‘‘liquid

and readily-marketable’’ in order to be

included in HQLA. Under the proposed

rule, an asset would be liquid and

readily-marketable if it is traded in an

active secondary market with more than

two committed market makers, a large

number of committed non-market maker

participants on both the buying and

selling sides of transactions, timely and

observable market prices, and high

trading volumes. The ‘‘liquid and

readily-marketable’’ requirement is

meant to ensure that assets included in

HQLA exhibit a level of liquidity that

would allow a covered company to

convert them into cash during times of

stress and, therefore, to meet its

obligations when other sources of

funding may be reduced or unavailable.

Timely and observable market prices

make it likely that a buyer could be

found and that a price could be obtained

within a short period of time such that

a covered company could convert the

assets to cash, as needed.

As noted above, assets that are

included in HQLA should not be issued

by financial sector entities since they

would then be correlated with covered

companies (or wrong-way risk assets). In

the proposed rule, financial sector

entities are defined as regulated

financial companies, investment

companies, non-regulated funds,

pension funds, investment advisers, or a

consolidated subsidiary of any of the

foregoing

that are

included in HQLA should not be issued

by financial sector entities since they

would then be correlated with covered

companies (or wrong-way risk assets). In

the proposed rule, financial sector

entities are defined as regulated

financial companies, investment

companies, non-regulated funds,

pension funds, investment advisers, or a

consolidated subsidiary of any of the

foregoing. HQLA also could not be

issued by any company (or any of its

consolidated subsidiaries) that an

agency has determined should be

treated the same for the purposes of this

proposed rule as a regulated financial

company, investment company, non-

regulated fund, pension fund, or

investment adviser, based on activities

similar in scope, nature, or operations to

those entities (identified company).

The term ‘‘regulated financial

company’’ under the proposal would

include bank holding companies and

savings and loan holding companies

(depository institution holding

companies); nonbank financial

companies supervised by the Board

under Title I of the Dodd-Frank Act;

depository institutions; foreign banks;

credit unions; industrial loan

companies, industrial banks, or other

similar institutions described in section

2 of the Bank Holding Company Act;

national banks, state member banks, or

state nonmember banks that are not

depository institutions; insurance

companies; securities holding

companies (as defined in section 618 of

the Dodd-Frank Act);20 broker-dealers or

dealers registered with the SEC; futures

commission merchants and swap

dealers, each as defined in the

Commodity Exchange Act;21 or security-

based swap dealers defined in section 3

of the Securities Exchange Act.22 It

would also include any designated

financial market utility, as defined in

section 803 of the Dodd-Frank Act.23

The definition also includes foreign

companies if they are supervised and

regulated in a manner similar to the

institutions listed above.24

In addition, a ‘‘regulated financial

company’’ would include a

based swap dealers defined in section 3

of the Securities Exchange Act.22 It

would also include any designated

financial market utility, as defined in

section 803 of the Dodd-Frank Act.23

The definition also includes foreign

companies if they are supervised and

regulated in a manner similar to the

institutions listed above.24

In addition, a ‘‘regulated financial

company’’ would include a company

that is included in the organization

chart of a depository institution holding

company on the Form FR Y–6, as listed

in the hierarchy report of the depository

institution holding company produced

by the National Information Center

(NIC) Web site, provided that the top

tier depository institution holding

company is subject to the proposed rule

(FR Y–6 companies).25

FR Y–6 companies are typically

controlled by the filing depository

institution holding company under the

Bank Holding Company Act. Although

many such companies are not

consolidated on the financial statements

of a depository institution holding

company, the links between the

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Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

26 15 U.S.C. 80a–1 et seq.

27 15 U.S.C. 80b–1 et seq.

28 See paragraph (7) of § __.3 of the proposed

rule’s definition of ‘‘regulated financial company.’’

29 See 12 U.S.C. 342.

companies are sufficiently significant

that the agencies believe it would be

appropriate to exclude securities issued

by FR Y–6 companies (and their

consolidated subsidiaries) from HQLA,

for the same policy reasons that other

regulated financial companies’

securities would be excluded from

HQLA under the proposal. The

organizational hierarchy chart produced

by the NIC Web site reflects (as updates

regularly occur) the FR Y–6 companies

a depository institution holding

company must report on the form

ued

by FR Y–6 companies (and their

consolidated subsidiaries) from HQLA,

for the same policy reasons that other

regulated financial companies’

securities would be excluded from

HQLA under the proposal. The

organizational hierarchy chart produced

by the NIC Web site reflects (as updates

regularly occur) the FR Y–6 companies

a depository institution holding

company must report on the form. The

agencies are proposing this method for

identifying these companies in order to

reduce burden associated with obtaining

the FR Y–6 organizational charts for all

depository institution holding

companies subject to the proposed rule,

because the charts are not uniformly

available by electronic means.

Under the proposal, investment

companies would include companies

registered with the SEC under the

Investment Company Act of 1940 26 and

investment advisers would include

companies registered with the SEC as

investment advisers under the

Investment Advisers Act of 1940,27 as

well as the foreign equivalent of such

companies. Non-regulated funds would

include hedge funds or private equity

funds whose investment advisers are

required to file SEC Form PF (Reporting

Form for Investment Advisers to Private

Funds and Certain Commodity Pool

Operators and Commodity Trading

Advisors), and any consolidated

subsidiary of such fund, other than a

small business investment company, as

defined in section 102 of the Small

Business Investment Act of 1958 (15

U.S.C. 661 et seq.). Pension funds would

be defined as employee benefit plans as

defined in ERISA and government

pension plans,28 as well as their foreign

equivalents. Securities issued by the

foregoing entities or their consolidated

subsidiaries would be excluded from

HQLA.

4

small business investment company, as

defined in section 102 of the Small

Business Investment Act of 1958 (15

U.S.C. 661 et seq.). Pension funds would

be defined as employee benefit plans as

defined in ERISA and government

pension plans,28 as well as their foreign

equivalents. Securities issued by the

foregoing entities or their consolidated

subsidiaries would be excluded from

HQLA.

4. What, if any, modifications should

the agencies consider to the definition of

‘‘regulated financial company’’? What,

if any, entities should be added to, or

removed from, the definition and why?

What operational difficulties may be

involved in identifying a ‘‘regulated

financial company,’’ including

companies a depository institution

holding company must report on the FR

Y–6 organizational chart (or in

identifying consolidated subsidiaries)?

How should those operational

difficulties be addressed? What

alternatives for identifying companies

reported on the FR Y–6 should be

considered, and what difficulties may be

associated with using the organizational

hierarchy chart produced by the NIC

Web site?

5. What, if any, modifications should

the agencies consider to the definition of

‘‘non-regulated funds’’? Should hedge

funds or private equity funds whose

managers are not required to file Form

PF be included in the definition? What

operational or other difficulties may

covered companies encounter in

identifying ‘‘non-regulated’’ funds and

their consolidated subsidiaries? What

other definitions would generally

capture hedge funds and private equity

funds in an appropriate and clear

manner? Provide detailed suggestions

and justifications.

6. What, if any, modifications should

the agencies consider to the definitions

of ‘‘investment company,’’ ‘‘pension

fund,’’ ‘‘investment adviser,’’ or

‘‘identified company’’? Should

investment companies or investment

advisers not required to register with the

SEC be included in the respective

definitions?

7

appropriate and clear

manner? Provide detailed suggestions

and justifications.

6. What, if any, modifications should

the agencies consider to the definitions

of ‘‘investment company,’’ ‘‘pension

fund,’’ ‘‘investment adviser,’’ or

‘‘identified company’’? Should

investment companies or investment

advisers not required to register with the

SEC be included in the respective

definitions?

7. What risk or operational issues

should the agencies consider regarding

the definitions and the exclusion of

securities issued by the companies

described above from HQLA, as well as

the higher outflow rates applied to such

companies, as described below?

8. What additional factors or

characteristics should the agencies

consider with respect to identifying

those companies whose securities

should be excluded from HQLA and

should be subject to the accompanying

higher outflow rates for such

companies, as discussed below?

9. How well does the proposed

definition of ‘‘liquid and readily-

marketable’’ meet the agencies’ goal of

identifying HQLA that could be

converted into cash in order to meet a

covered company’s liquidity needs

during times of stress? What other

characteristics, if any, of a traded

security and relevant markets should

the agencies consider? What other

approaches for capturing this liquidity

characteristic should the agencies

consider? Provide detailed description

of and justifications for any alternative

approaches.

a. Level 1 Liquid Assets

Under the proposed rule, a covered

company could include the full fair

value of level 1 liquid assets in its

HQLA amount. These assets have the

highest potential to generate liquidity

for a covered company during periods of

severe liquidity stress and thus would

be includable in a covered company’s

HQLA amount without limit

ations for any alternative

approaches.

a. Level 1 Liquid Assets

Under the proposed rule, a covered

company could include the full fair

value of level 1 liquid assets in its

HQLA amount. These assets have the

highest potential to generate liquidity

for a covered company during periods of

severe liquidity stress and thus would

be includable in a covered company’s

HQLA amount without limit. As

discussed in further detail in this

section, the proposed rule would

include the following assets in level 1

liquid assets: (1) Federal Reserve Bank

balances; (2) foreign withdrawable

reserves; (3) securities issued or

unconditionally guaranteed as to the

timely payment of principal and interest

by the U.S. Department of the Treasury;

(4) liquid and readily-marketable

securities issued or unconditionally

guaranteed as to the timely payment of

principal and interest by any other U.S.

government agency (provided that its

obligations are fully and explicitly

guaranteed by the full faith and credit

of the United States government); (5)

certain liquid and readily marketable

securities that are claims on, or claims

guaranteed by, a sovereign entity, a

central bank, the Bank for International

Settlements, the International Monetary

Fund, the European Central Bank and

European Community, or a multilateral

development bank; and (6) certain debt

securities issued by sovereign entities.

Reserve Bank Balances

Under the BCBS LCR framework,

‘‘central bank reserves’’ are included in

HQLA. In the United States, Federal

Reserve Banks are generally authorized

under the Federal Reserve Act to

maintain balances only for ‘‘depository

institutions’’ and for other limited types

of organizations.29 Pursuant to the

Federal Reserve Act, there are different

kinds of balances that depository

institutions may maintain at Federal

Reserve Banks, and they are maintained

in different kinds of Federal Reserve

Bank accounts

erve Banks are generally authorized

under the Federal Reserve Act to

maintain balances only for ‘‘depository

institutions’’ and for other limited types

of organizations.29 Pursuant to the

Federal Reserve Act, there are different

kinds of balances that depository

institutions may maintain at Federal

Reserve Banks, and they are maintained

in different kinds of Federal Reserve

Bank accounts. Balances that depository

institutions must maintain to satisfy a

reserve balance requirement must be

maintained in the depository

institution’s ‘‘master account’’ at a

Federal Reserve Bank or, if the

institution has designated a pass-

through correspondent, in the

correspondent’s master account. A

‘‘reserve balance requirement’’ is the

amount that a depository institution

must maintain in an account at a

Federal Reserve Bank in order to satisfy

that portion of the institution’s reserve

requirement that is not met with vault

cash. Balances in excess of those

required to be maintained to satisfy a

reserve balance requirement, known as

‘‘excess balances,’’ may be maintained

in a master account or in an ‘‘excess

balance account.’’ Finally, balances

maintained for a specified period of

time, known as ‘‘term deposits,’’ are

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Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

30 See § __.21(b)(1) of the proposed rule.

31 See 12 CFR part 3 (OCC), 12 CFR part 217

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

32 GSEs include the Federal Home Loan Mortgage

Corporation (FHLMC), the Federal National

Mortgage Association (FNMA), the Farm Credit

System, and the Federal Home Loan Bank System.

maintained in a term deposit account

offered by the Federal Reserve Banks

es

30 See § __.21(b)(1) of the proposed rule.

31 See 12 CFR part 3 (OCC), 12 CFR part 217

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

32 GSEs include the Federal Home Loan Mortgage

Corporation (FHLMC), the Federal National

Mortgage Association (FNMA), the Farm Credit

System, and the Federal Home Loan Bank System.

maintained in a term deposit account

offered by the Federal Reserve Banks.

The proposed rule therefore uses the

term ‘‘Reserve Bank balances’’ as the

relevant term to capture central bank

reserves in the United States.

Under the proposed rule, all balances

a depository institution maintains at a

Federal Reserve Bank (other than

balances that an institution maintains

on behalf of another institution, such as

balances it maintains on behalf of a

respondent or on behalf of an excess

balance account participant) would be

considered level 1 liquid assets, except

for certain term deposits as explained

immediately below.

Consistent with the concept of

‘‘central bank reserves’’ in the BCBS

LCR framework, the proposed rule

includes in its definition of ‘‘Reserve

Bank balances’’ only those term deposits

offered and maintained pursuant to

terms and conditions that (1) explicitly

and contractually permit such term

deposits to be withdrawn upon demand

prior to the expiration of the term, or

that (2) permit such term deposits to be

pledged as collateral for term or

automatically-renewing overnight

advances from a Federal Reserve Bank.

None of the term deposits offered under

the Federal Reserve’s Term Deposit

Facility as currently configured would

be included in ‘‘Reserve Bank balances’’

because all term deposits offered to date

by the Federal Reserve Banks are not

explicitly and contractually repayable

on notice. Similarly, all term deposits

offered to date may not serve as

collateral against which the depository

institutions can borrow from a Federal

Reserve Bank on a term or automatically

renewable basis

rently configured would

be included in ‘‘Reserve Bank balances’’

because all term deposits offered to date

by the Federal Reserve Banks are not

explicitly and contractually repayable

on notice. Similarly, all term deposits

offered to date may not serve as

collateral against which the depository

institutions can borrow from a Federal

Reserve Bank on a term or automatically

renewable basis. Federal Reserve term

deposits that are not included in

‘‘Reserve Bank balances’’ and, therefore,

would not be considered level 1 liquid

assets under the proposed rule could be

included in a covered company’s

inflows, if the terms of such deposits

expire within 30 days of the calculation

date.

Under the proposed rule, a covered

company’s reserve balance requirement

would be subtracted from its level 1

liquid asset amount, because a

depository institution generally satisfies

its reserve requirement by maintaining

vault cash or a balance in an account at

a Federal Reserve Bank.30

Foreign Withdrawable Reserves

The agencies are proposing that

reserves held by a covered company in

a foreign central bank that are not

subject to restrictions on use be

included in level 1 liquid assets. Similar

to Reserve Bank balances, foreign

withdrawable reserves should be able to

serve as a medium of exchange in the

currency of the country where they are

held.

United States Government Securities

The proposed rule would include in

level 1 liquid assets securities issued by,

or unconditionally guaranteed as to the

timely payment of principal and interest

by, the U.S Department of the Treasury.

Generally, these types of securities have

exhibited high levels of liquidity even

in times of extreme stress to the

financial system, and typically are the

securities that experience the most

‘‘flight to quality’’ when investors adjust

their holdings. Level 1 liquid assets

would also include securities issued by

any other U.S

principal and interest

by, the U.S Department of the Treasury.

Generally, these types of securities have

exhibited high levels of liquidity even

in times of extreme stress to the

financial system, and typically are the

securities that experience the most

‘‘flight to quality’’ when investors adjust

their holdings. Level 1 liquid assets

would also include securities issued by

any other U.S. government agency

whose obligations are fully and

explicitly guaranteed by the full faith

and credit of the U.S. government,

provided that they are liquid and

readily-marketable.

Certain Sovereign and Multilateral

Organization Securities

The proposed rule would include in

level 1 liquid assets securities that are

a claim on, or a claim guaranteed by, a

sovereign entity, a central bank, the

Bank for International Settlements, the

International Monetary Fund, the

European Central Bank and European

Community, or a multilateral

development bank, provided that such

securities meet the following three

requirements.

First, these securities must have been

assigned a zero percent risk weight

under the standardized approach for

risk-weighted assets of the agencies’

regulatory capital rules.31 Generally,

securities issued by sovereigns that are

assigned a zero percent risk weight have

shown resilient liquidity characteristics.

Second, the proposed rule would

require these securities to be liquid and

readily-marketable, as discussed above.

Third, these securities would be

required to be issued by an entity whose

obligations have a proven record as a

reliable source of liquidity in the

repurchase or sales markets during

stressed market conditions. A covered

company could demonstrate a historical

record that meets this criterion through

reference to historical market prices

during times of general liquidity stress,

such as the period of financial market

stress experienced from 2007 to 2008

y whose

obligations have a proven record as a

reliable source of liquidity in the

repurchase or sales markets during

stressed market conditions. A covered

company could demonstrate a historical

record that meets this criterion through

reference to historical market prices

during times of general liquidity stress,

such as the period of financial market

stress experienced from 2007 to 2008.

Covered companies should also look to

other periods of systemic and

idiosyncratic stress to see if the asset

under consideration has proven to be a

reliable source of liquidity. Fourth,

these securities could not be an

obligation of a regulated financial

company, non-regulated fund, pension

fund, investment adviser, or identified

company or any consolidated subsidiary

of such entities.

Certain Foreign Sovereign Debt

Securities

Debt securities issued by a foreign

sovereign entity that are not assigned a

zero percent risk weight under the

standardized approach for risk-weighted

assets of the agencies’ regulatory capital

rules may serve as level 1 liquid assets

if they are liquid and readily

marketable, the sovereign entity issues

such debt securities in its own currency,

and a covered company holds the debt

securities to meet its cash outflows in

the jurisdiction of the sovereign entity,

as calculated in the outflow section of

the proposed rule. These assets would

be appropriately included as level 1

liquid assets despite having a risk

weight greater than zero because a

sovereign often is able to meet

obligations in its own currency through

control of its monetary system, even

during fiscal challenges.

10

et its cash outflows in

the jurisdiction of the sovereign entity,

as calculated in the outflow section of

the proposed rule. These assets would

be appropriately included as level 1

liquid assets despite having a risk

weight greater than zero because a

sovereign often is able to meet

obligations in its own currency through

control of its monetary system, even

during fiscal challenges.

10. What, if any, alternative factors

should be considered in determining the

assets that qualify as level 1 liquid

assets? What, if any, additional assets

should qualify as level 1 liquid assets

based on the characteristics for HQLA

that the agencies discussed above?

Provide detailed justification based on

the liquidity characteristics of any such

assets, including historical data and

observations.

11. Are there any assets that would

qualify as level 1 liquid assets under the

proposed rule that should not qualify

based on their liquidity characteristics?

If so, which assets should not be

included and why? Provide detailed

justification based on the liquidity

characteristics of an asset in question,

including historical data and

observations.

b. Level 2A Liquid Assets

Under the proposed rule, level 2A

liquid assets would include certain

claims on, or claims guaranteed by a

U.S. government sponsored enterprise

(GSE) 32 and certain claims on, or claims

guaranteed by, a sovereign entity or a

multilateral development bank. Assets

would be required to be liquid and

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certain

claims on, or claims guaranteed by a

U.S. government sponsored enterprise

(GSE) 32 and certain claims on, or claims

guaranteed by, a sovereign entity or a

multilateral development bank. Assets

would be required to be liquid and

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Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

33 See 12 CFR part 3 (OCC), 12 CFR part 217

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

34 This would be demonstrated if the market price

of the security or equivalent securities of the issuer

declined by no more than 10 percent or the market

haircut demanded by counterparties to secured

funding or lending transactions that are

collateralized by such security or equivalent

securities of the issuer increased by no more than

10 percentage points during a 30 calendar-day

period of significant stress.

35 See id.

36 Id.

37 12 CFR 1.2(d).

readily-marketable, as described above,

to be considered level 2A liquid assets.

The agencies are aware that some

securities issued and guaranteed by U.S.

GSEs consistently trade in very large

volumes and generally have been highly

liquid, including during times of stress.

However, the U.S. GSEs remain

privately owned corporations, and their

obligations do not have the explicit

guarantee of the full faith and credit of

the United States. The agencies have

long held the view that obligations of

U.S. GSEs should not be accorded the

same treatment as obligations that carry

the explicit guarantee of the U.S.

government and under the agencies’

regulatory capital rules, have currently

and historically assigned a 20 percent

risk weight to their obligations and

guarantees, rather than the zero percent

risk weight assigned to securities

guaranteed by the full faith and credit

of the United States

hould not be accorded the

same treatment as obligations that carry

the explicit guarantee of the U.S.

government and under the agencies’

regulatory capital rules, have currently

and historically assigned a 20 percent

risk weight to their obligations and

guarantees, rather than the zero percent

risk weight assigned to securities

guaranteed by the full faith and credit

of the United States. Consistent with the

agencies’ regulatory capital rules, the

agencies are not assigning the most

favorable regulatory treatment to U.S.

GSEs’ issuances and guarantees under

the proposed rule and therefore are

assigning them to the level 2A liquid

asset category, so long as they are

investment grade consistent with the

OCC’s investment regulation (12 CFR

part 1) as of the calculation date.

Additionally, consistent with the

agencies’ regulatory capital rules’ higher

risk weight for the preferred stock of

U.S. GSEs, the agencies are proposing to

exclude such preferred stock from

HQLA.

Level 2A liquid assets also would

include claims on, or claims guaranteed

by a sovereign entity or a multilateral

development bank that: (1) is not

included in level 1 liquid assets; (2) is

assigned no higher than a 20 percent

risk weight under the standardized

approach for risk-weighted assets of the

agencies’ regulatory capital rules; 33 (3)

is issued by an entity whose obligations

have a proven record as a reliable source

of liquidity in repurchase or sales

markets during stressed market

conditions; and (4) is not an obligation

of a regulated financial company,

investment company, non-regulated

fund, pension fund, investment adviser,

identified company, or any consolidated

subsidiary of the foregoing

y capital rules; 33 (3)

is issued by an entity whose obligations

have a proven record as a reliable source

of liquidity in repurchase or sales

markets during stressed market

conditions; and (4) is not an obligation

of a regulated financial company,

investment company, non-regulated

fund, pension fund, investment adviser,

identified company, or any consolidated

subsidiary of the foregoing. A covered

company could demonstrate that a

claim on or claims guaranteed by a

sovereign entity or a multilateral

development bank that has issued

obligations have a proven record as a

reliable source of liquidity in

repurchase or sales markets during

stressed market conditions through

reference to historical market prices

during times of general liquidity

stress.34 Covered companies should

look to multiple periods of systemic and

idiosyncratic liquidity stress in

compiling such records.

The proposed rule likely would not

permit covered bonds and securities

issued by public sector entities, such as

a state, local authority, or other

government subdivision below the level

of a sovereign (including U.S. states and

municipalities) to qualify as HQLA at

this time. While these assets are

assigned a 20 percent risk weight under

the standardized approach for risk-

weighted assets in the agencies’

regulatory capital rules, the agencies

believe that, at this time, these assets are

not liquid and readily-marketable in

U.S. markets and thus do not exhibit the

liquidity characteristics necessary to be

included in HQLA under this proposed

rule. For example, securities issued by

public sector entities generally have low

average daily trading volumes. Covered

bonds, in particular, exhibit significant

risks regarding interconnectedness and

wrong-way risk among companies in the

financial sector such as regulated

financial companies, investment

companies, and non-regulated funds.

12

to be

included in HQLA under this proposed

rule. For example, securities issued by

public sector entities generally have low

average daily trading volumes. Covered

bonds, in particular, exhibit significant

risks regarding interconnectedness and

wrong-way risk among companies in the

financial sector such as regulated

financial companies, investment

companies, and non-regulated funds.

12. What other assets, if any, should

the agencies include in level 2A liquid

assets? How should such assets be

identified and what are the

characteristics of those assets that

would justify their inclusion in level 2A

liquid assets?

13. Are there any assets that would

qualify as level 2A liquid assets under

the proposed rule that should not

qualify based on their liquidity

characteristics? If so, which assets and

why? Provide a detailed justification

based on the liquidity characteristics of

the asset in question, including

historical data and observations.

14. What alternative treatment, if any,

should the agencies consider for

obligations of U.S. GSEs and why?

Provide justification and supporting

data.

c. Level 2B Liquid Assets

Under the proposed rule, level 2B

liquid assets would include certain

publicly traded corporate debt securities

and publicly traded shares of common

stock that are liquid and readily-

marketable, as discussed above. The

limitation of level 2B liquid assets to

those that are publicly traded is meant

to ensure a minimum level of liquidity,

as privately traded assets are less liquid

Assets

Under the proposed rule, level 2B

liquid assets would include certain

publicly traded corporate debt securities

and publicly traded shares of common

stock that are liquid and readily-

marketable, as discussed above. The

limitation of level 2B liquid assets to

those that are publicly traded is meant

to ensure a minimum level of liquidity,

as privately traded assets are less liquid.

Under the proposed rule, the definition

of ‘‘publicly traded’’ would be

consistent with the definition used in

the agencies’ regulatory capital rules

and would identify securities traded on

registered exchanges with liquid two-

way markets.35 A two-way market

would be defined as market where there

are independent bona fide offers to buy

and sell, so that a price reasonably

related to the last sales price or current

bona fide competitive bid and offer

quotations can be determined within

one day and settled at that price within

a relatively short time frame,

conforming to trade custom. This

definition is also consistent with the

definition in the agencies’ capital

rules 36 and is designed to identify

markets with transparent and readily

available pricing, which, for the reasons

discussed above, is fundamental to the

liquidity of an asset.

Publicly Traded Corporate Debt

Securities

Publicly traded corporate debt

securities would be considered level 2B

liquid assets under the proposed rule if

they meet three requirements (in

addition to being liquid and readily-

marketable). First, the securities would

be required to meet the definition of

‘‘investment grade’’ under 12 CFR part

1 as of a calculation date.37 This

standard would ensure that assets not

meeting the required credit quality

standard for bank investment would not

be included in HQLA. The agencies

believe that meeting this standard is

indicative of lower risk and, therefore,

higher liquidity for a corporate debt

security

ould

be required to meet the definition of

‘‘investment grade’’ under 12 CFR part

1 as of a calculation date.37 This

standard would ensure that assets not

meeting the required credit quality

standard for bank investment would not

be included in HQLA. The agencies

believe that meeting this standard is

indicative of lower risk and, therefore,

higher liquidity for a corporate debt

security. Second, the securities would

be required to have been issued by an

entity whose obligations have a proven

record as a reliable source of liquidity

in repurchase or sales markets during

stressed market conditions. A covered

company would be required to

demonstrate this record of liquidity

reliability and lower volatility during

times of stress by showing that the

market price of the publicly traded debt

securities or equivalent securities of the

issuer declined by no more than 20

percent or the market haircut demanded

by counterparties to secured lending

and secured funding transactions that

were collateralized by such debt

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38 12 U.S.C. 24(Seventh) (national banks); 12

U.S.C. 1464(c) (federal savings associations); 12

U.S.C. 1831a (state banks); 12 U.S.C. 1831e (state

savings associations).

39 See generally 12 CFR 1.7 (OCC); 12 U.S.C.

1843(c)(2) (Board); 12 CFR 362.1(b)(3) (FDIC).

securities or equivalent securities of the

issuer increased by no more than 20

percentage points during a 30 calendar-

day period of significant stress. As

discussed above, a covered company

could demonstrate a historical record

that meets this criterion through

reference to historical market prices of

the debt security during times of general

liquidity stress

12 CFR 362.1(b)(3) (FDIC).

securities or equivalent securities of the

issuer increased by no more than 20

percentage points during a 30 calendar-

day period of significant stress. As

discussed above, a covered company

could demonstrate a historical record

that meets this criterion through

reference to historical market prices of

the debt security during times of general

liquidity stress.

Finally, for the reasons discussed

above, the debt securities could not be

obligations of a regulated financial

company, investment company, non-

regulated fund, pension fund,

investment adviser, identified company,

or any consolidated subsidiary of the

foregoing.

Publicly Traded Shares of Common

Stock

Under the proposed rule, publicly

traded shares of common stock could be

included in a covered company’s level

2B liquid assets if the shares meet the

five requirements set forth below (in

addition to being liquid and readily-

marketable). Because of general

statutory prohibitions on holding equity

investments for their own account,38

depository institutions subject to the

proposed rule would not be able to

include common stock in their level 2B

liquid assets (including common stock

held pursuant to authority for debt

previously contracted, as discussed

further below). However, a depository

institution could include in its

consolidated level 2B liquid assets

common stock permissibly held by a

consolidated subsidiary, where the

investments meet the proposed level 2B

requirements for publicly traded shares

of common stock. Furthermore, a

depository institution could only

include in its level 2B assets the amount

of a consolidated subsidiary’s publicly

traded shares of common stock if it is

held to cover the net cash outflows for

the consolidated subsidiary

permissibly held by a

consolidated subsidiary, where the

investments meet the proposed level 2B

requirements for publicly traded shares

of common stock. Furthermore, a

depository institution could only

include in its level 2B assets the amount

of a consolidated subsidiary’s publicly

traded shares of common stock if it is

held to cover the net cash outflows for

the consolidated subsidiary. For

example, if Subsidiary A holds level 2B

publicly traded common stock of $100

in a legally permissible manner and has

outflows of $80, Subsidiary A could not

contribute more than $80 of its level 2B

publicly traded common stock to its

parent depository institution’s

consolidated level 2B assets.

Under the rule, to be considered a

level 2B liquid asset, the publicly traded

common stock would be required to be

included in either: (1) the Standard &

Poor’s 500 Index (S&P 500); (2) if the

stock is held in a non-U.S. jurisdiction

to meet liquidity risks in that

jurisdiction, an index that the covered

company’s supervisor in that

jurisdiction recognizes for purposes of

including the equities as level 2B liquid

assets under applicable regulatory

policy; or (3) any other index for which

the covered company can demonstrate

to the satisfaction of its primary federal

supervisor that the stock is as liquid and

readily-marketable as equities traded on

the S&P 500.

The agencies believe that being

included in a major stock index is an

important indicator of the liquidity of a

stock, because such stock tends to have

higher trading volumes and lower bid-

ask spreads during stressed market

conditions than those that are not listed.

The agencies identified the S&P 500 as

being appropriate for this purpose given

that it is considered a major index in the

United States and generally includes the

most liquid and actively traded stocks

indicator of the liquidity of a

stock, because such stock tends to have

higher trading volumes and lower bid-

ask spreads during stressed market

conditions than those that are not listed.

The agencies identified the S&P 500 as

being appropriate for this purpose given

that it is considered a major index in the

United States and generally includes the

most liquid and actively traded stocks.

Moreover, stocks that are included in

the S&P 500 are selected by a committee

that considers, among other

characteristics, the volume of trading

activity and length of time the stock has

been publicly traded.

Second, to be considered a level 2B

liquid asset, a covered company’s

publicly traded common stock would be

required to be issued in: (1) U.S. dollars;

or (2) the currency of a jurisdiction

where the covered company operates

and the stock offsets its net cash

outflows in that jurisdiction. This

requirement is meant to ensure that,

upon liquidation of the stock, the

currency received from the sale matches

the outflow currency.

Third, the common stock would be

required to have been issued by an

entity whose common stock has a

proven record as a reliable source of

liquidity in the repurchase or sales

markets during stressed market

conditions. Under the proposed rule, a

covered company would be required to

demonstrate this record of reliable

liquidity by showing that the market

price of the common stock or equivalent

securities of the issuer declined by no

more than 40 percent or that the market

haircut, as evidenced by observable

market prices, of secured funding or

lending transactions collateralized by

such common stock or equivalent

securities of the issuer increased by no

more than 40 percentage points during

a 30 calendar-day period of significant

stress. This limitation is meant to

account for the volatility inherent in

equities, which is a risk to the

preservation of liquidity value

evidenced by observable

market prices, of secured funding or

lending transactions collateralized by

such common stock or equivalent

securities of the issuer increased by no

more than 40 percentage points during

a 30 calendar-day period of significant

stress. This limitation is meant to

account for the volatility inherent in

equities, which is a risk to the

preservation of liquidity value. As

above, a covered company could

demonstrate this historical record

through reference to the historical

market prices of the common stock

during times of general liquidity stress.

Fourth, as with the other asset

categories of HQLA and for the same

reasons, common stock included in

level 2B liquid assets may not be issued

by a regulated financial company,

investment company, non-regulated

fund, pension fund, investment adviser,

identified company, or any consolidated

subsidiary of the foregoing. During the

recent financial crisis, the common

stock of such companies experienced

significant declines in value and the

agencies believe that such declines

indicate those assets would be less

likely to provide substantial liquidity

during future periods of stress and,

therefore, are not appropriate for

inclusion in a covered company’s stock

of HQLA.

Fifth, if held by a depository

institution, the publicly traded common

stock could not be acquired in

satisfaction of a debt previously

contracted (DPC). In general, publicly

traded common stock may be acquired

by a depository institution to prevent a

loss from a DPC. However, in order for

a depository institution to avail itself of

the authority to hold DPC assets, such

as by holding publicly traded common

stock, such assets typically must be

divested in a timely manner.39 The

agencies believe that depository

institutions should make a good faith

effort to dispose of DPC publicly traded

common stock as soon as commercially

reasonable, subject to the applicable

legal time limits for disposition

on to avail itself of

the authority to hold DPC assets, such

as by holding publicly traded common

stock, such assets typically must be

divested in a timely manner.39 The

agencies believe that depository

institutions should make a good faith

effort to dispose of DPC publicly traded

common stock as soon as commercially

reasonable, subject to the applicable

legal time limits for disposition. The

agencies are concerned that permitting

depository institutions to include DPC

publicly traded common stock in level

2B liquid assets may provide an

inappropriate incentive for depository

institutions to hold such assets beyond

a commercially reasonable period for

disposition. Therefore, the proposal

would prohibit depository institutions

from including DPC publicly traded

common stock in level 2B liquid assets.

15. What, if any, additional criteria

should the agencies consider in

determining the type of securities that

should qualify as level 2B liquid assets?

What alternatives to the S&P 500 should

be considered in determining the

liquidity of an equity security and why?

In addition to an investment grade

classification, what additional

characteristics denote the liquidity

quality of corporate debt that the

agencies would be legally permitted to

use in light of the Dodd-Frank Act

prohibition against agencies’ regulations

referencing credit ratings? The agencies

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tional

characteristics denote the liquidity

quality of corporate debt that the

agencies would be legally permitted to

use in light of the Dodd-Frank Act

prohibition against agencies’ regulations

referencing credit ratings? The agencies

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solicit detailed comment, with

supporting data, on the advantages and

disadvantages of the proposed

investment grade criteria as well as

recommended alternatives.

16. Are there any assets that would

qualify as level 2B liquid assets under

the proposed rule that should not

qualify based on their liquidity

characteristics? If so, which assets and

why? Provide a detailed justification

based on the liquidity characteristics of

the asset in question, including

historical data and observations.

17. What other criteria, if any, should

the agencies consider for establishing an

adequate historical record during times

of liquidity stress in order to meet the

relevant criteria under the proposed

rule? What operational burdens, if any,

are associated with this requirement?

What other standards, if any, should the

agencies consider to achieve the same

result?

18. Is the proposed treatment for

publicly traded common stock

appropriate? Why or why not? Are there

circumstances under which a depository

institution may permissibly hold

publicly traded common stock that the

agencies should not prohibit from being

included in level 2B liquid assets?

Please provide specific examples. Under

what circumstances, if any, should DPC

publicly traded common stock be

included in a depository institution’s

level 2B liquid assets and why? What

liquidity risks, if any, are introduced or

mitigated if DPC publicly traded

common stock are permitted in a

depository institution’s level 2B liquid

assets?

3

being

included in level 2B liquid assets?

Please provide specific examples. Under

what circumstances, if any, should DPC

publicly traded common stock be

included in a depository institution’s

level 2B liquid assets and why? What

liquidity risks, if any, are introduced or

mitigated if DPC publicly traded

common stock are permitted in a

depository institution’s level 2B liquid

assets?

3. Operational Requirements for HQLA

Under the proposed rule, an asset that

a covered company includes in its

HQLA would need to meet the

following operational requirements.

These operational requirements are

intended to better ensure that a covered

company’s HQLA can be liquidated in

times of stress. Several of these

requirements relate to the monetization

of an asset, by which the agencies mean

the receipt of funds from the outright

sale of an asset or from the transfer of

an asset pursuant to a repurchase

agreement.

First, a covered company would be

required to have the operational

capability to monetize the HQLA. This

capability would be demonstrated by:

(1) implementing and maintaining

appropriate procedures and systems to

monetize the asset at any time in

accordance with relevant standard

settlement periods and procedures; and

(2) periodically monetizing a sample of

HQLA that reasonably reflects the

composition of the covered company’s

total HQLA portfolio, including with

respect to asset type, maturity, and

counterparty characteristics. This

requirement is designed to ensure a

covered company’s access to the market,

the effectiveness of its processes for

monetization, and the availability of the

assets for monetization and to minimize

the risk of negative signaling during a

period of actual stress. The agencies

would monitor the procedures, systems,

and periodic sample liquidations

through their supervisory process

ics. This

requirement is designed to ensure a

covered company’s access to the market,

the effectiveness of its processes for

monetization, and the availability of the

assets for monetization and to minimize

the risk of negative signaling during a

period of actual stress. The agencies

would monitor the procedures, systems,

and periodic sample liquidations

through their supervisory process.

Second, a covered company would be

required to implement policies that

require all HQLA to be under the

control of the management function of

the covered company that is charged

with managing liquidity risk. To do so,

a covered company would be required

either to segregate the assets from other

assets, with the sole intent to use them

as a source of liquidity or to

demonstrate its ability to monetize the

assets and have the resulting funds

available to the risk management

function, without conflicting with

another business or risk management

strategy. Thus, if an HQLA were being

used to hedge a specific transaction,

such as holding an asset to hedge a call

option that the covered company had

written, it could not be included in the

HQLA amount because its sale would

conflict with another business or risk

management strategy. However, if

HQLA were being used as a general

macro hedge, such as interest rate risk

of the covered company’s portfolio, it

could still be included in the HQLA

amount. This requirement is intended to

ensure that a central function of a

covered company has the authority and

capability to liquidate HQLA to meet its

obligations in times of stress without

exposing the covered company to risks

associated with specific transactions

and structures that had been hedged.

There were instances at specific firms

during the recent financial crisis where

unencumbered assets of the firms were

not available to meet liquidity demands

because the firms’ treasuries were

restricted or did not have access to such

assets

igations in times of stress without

exposing the covered company to risks

associated with specific transactions

and structures that had been hedged.

There were instances at specific firms

during the recent financial crisis where

unencumbered assets of the firms were

not available to meet liquidity demands

because the firms’ treasuries were

restricted or did not have access to such

assets.

Third, a covered company would be

required to include in its total net cash

outflow amount the amount of cash

outflow that would result from the

termination of any specific transaction

hedging HQLA. The impact of the hedge

would be required to be included in the

outflow because if the covered company

were to liquidate the asset, it would be

required to close out the hedge to avoid

creating a risk exposure. This

requirement is not intended to apply to

general macro hedges such as holding

interest rate derivatives to adjust

internal duration or interest rate risk

measurements, but is intended to cover

specific hedges that would become risk

exposures if the asset were sold.

Fourth, a covered company would be

required to implement and maintain

policies and procedures that determine

the composition of the assets in its

HQLA amount on a daily basis by (1)

identifying where its HQLA is held by

legal entity, geographical location,

currency, custodial or bank account,

and other relevant identifying factors,

hat would become risk

exposures if the asset were sold.

Fourth, a covered company would be

required to implement and maintain

policies and procedures that determine

the composition of the assets in its

HQLA amount on a daily basis by (1)

identifying where its HQLA is held by

legal entity, geographical location,

currency, custodial or bank account,

and other relevant identifying factors,

(2) determining that the assets included

in a covered company’s HQLA amount

continue to qualify as HQLA, (3)

ensuring that the HQLA in the HQLA

amount are appropriately diversified by

asset type, counterparty, issuer,

currency, borrowing capacity or other

factors associated with the liquidity risk

of the assets, and (4) ensuring that the

amount and type of HQLA included in

a covered company’s HQLA amount that

is held in foreign jurisdictions is

appropriate with respect to the covered

company’s net cash outflows in foreign

jurisdictions.

The agencies also recognize that

significant international banking

activity occurs through non-U.S.

branches of legal entities organized in

the United States and that a foreign

branch’s activities may give rise to the

need to hold HQLA in the jurisdiction

where it is located. While the agencies

believe that holding HQLA in a

geographic location where it is needed

to meet liquidity needs such as those

envisioned by the LCR is appropriate,

they are concerned that other factors

such as taxes, re-hypothecation rights,

and legal and regulatory restrictions

may encourage certain companies to

hold a disproportionate amount of their

HQLA in locations outside the United

States where unforeseen impediments

may prevent timely repatriation of

liquidity during a crisis. Nonetheless,

establishing quantitative limits on the

amount of HQLA that can be held

abroad and still count towards a U.S.

domiciled legal entity’s LCR

requirement is complex and can be

overly restrictive in some cases

d a disproportionate amount of their

HQLA in locations outside the United

States where unforeseen impediments

may prevent timely repatriation of

liquidity during a crisis. Nonetheless,

establishing quantitative limits on the

amount of HQLA that can be held

abroad and still count towards a U.S.

domiciled legal entity’s LCR

requirement is complex and can be

overly restrictive in some cases.

Therefore, the agencies are proposing

to require a covered company to

establish policies to ensure that HQLA

maintained in locations is appropriate

with respect to where the net cash

outflows arise. By requiring that there

be a correlation between the HQLA

amount held outside of the United

States and the net cash outflows

attributable to non-U.S. operations, the

agencies intend to increase the

likelihood that HQLA is available to a

covered company and to avoid

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repatriation concerns from HQLA held

in another jurisdiction.

The agencies note that assets that

meet the criteria of HQLA and are held

by a covered company as either

‘‘available-for-sale’’ or ‘‘held-to-

maturity’’ can be included in HQLA,

regardless of such designation.

19. Are the proposed operational

criteria sufficiently clear to determine

whether an asset could be included in

the pool of HQLA? Why or why not? If

not, what requirements need

clarification?

20. What costs or other burdens would

be incurred as a result of the proposed

operational requirements? What

modifications should the agencies

consider to mitigate such costs or

burdens, while establishing appropriate

operational criteria for HQLA to ensure

its liquidity? Please provide detailed

explanations and justifications.

21

why not? If

not, what requirements need

clarification?

20. What costs or other burdens would

be incurred as a result of the proposed

operational requirements? What

modifications should the agencies

consider to mitigate such costs or

burdens, while establishing appropriate

operational criteria for HQLA to ensure

its liquidity? Please provide detailed

explanations and justifications.

21. Given that, absent the requirement

that a covered company develop and

maintain policies and procedures to

ensure sufficient HQLA is held

domestically, a covered company could

theoretically hold its entire HQLA in a

foreign branch located in a jurisdiction

that could impede its use to support

U.S. operations, should the proposed

rule be supplemented with quantitative

restrictions on the amount of HQLA that

can be held in foreign branches and

included in the liquidity coverage ratio

calculation? If so, how should the rule

require a correlation between the

geographic location of a covered

company’s HQLA and the location of

the outflows the HQLA is intended to

cover?

22. The agencies seek comment on all

aspects of the criteria for HQLA,

including issues of domestic and

international competitive equity, and

the adequacy of the proposed HQLA

criteria in meeting the agencies’ goal of

requiring a covered company to

maintain a buffer of liquid assets

sufficient to withstand a 30 calendar-

day stress period.

4. Generally Applicable Criteria for

HQLA

Under the proposed rule, assets

would be required to meet the following

generally applicable criteria to be

considered as HQLA.

a. Unencumbered

To be included in HQLA, an asset

would be required to be unencumbered

as defined under the proposed rule.

First, the asset would be required to be

free of legal, regulatory, contractual, or

other restrictions on the ability of a

covered company to monetize asset. The

agencies believe that, as a general

matter, HQLA should only include

assets that could be converted easily

into cash

ered

To be included in HQLA, an asset

would be required to be unencumbered

as defined under the proposed rule.

First, the asset would be required to be

free of legal, regulatory, contractual, or

other restrictions on the ability of a

covered company to monetize asset. The

agencies believe that, as a general

matter, HQLA should only include

assets that could be converted easily

into cash. Second, the asset could not be

pledged, explicitly or implicitly, to

secure or provide credit-enhancement to

any transaction, except that the asset

could be pledged to a central bank or a

U.S. GSE to secure potential borrowings

if credit secured by the asset has not

been extended to the covered company

or its consolidated subsidiaries. This

exception is meant to account for the

ability of central banks and U.S. GSEs

to lend against the posted HQLA or to

return the posted HQLA, in which case

a covered company could sell or engage

in a repurchase agreement with the

assets to receive cash. This exception is

also meant to permit collateral that is

covered by a blanket lien from a U.S.

GSE to be included in HQLA.

b. Client Pool Security

An asset included in HQLA could not

be a client pool security held in a

segregated account or cash received

from a repurchase agreement on client

pool securities held in a segregated

account. The proposed rule defines a

client pool security as one that is owned

by a customer of a covered company

and is not an asset of the organization,

regardless of the organization’s

hypothecation rights to the security.

Since client pool securities held in a

segregated account are not freely

available to meet all possible liquidity

needs, they should not count as a source

of liquidity.

c. Treatment of HQLA Held by U.S.

Consolidated Subsidiaries

Under the proposal, HQLA held in a

legal entity that is a U.S

asset of the organization,

regardless of the organization’s

hypothecation rights to the security.

Since client pool securities held in a

segregated account are not freely

available to meet all possible liquidity

needs, they should not count as a source

of liquidity.

c. Treatment of HQLA Held by U.S.

Consolidated Subsidiaries

Under the proposal, HQLA held in a

legal entity that is a U.S. consolidated

subsidiary of a covered company would

be included in HQLA subject to specific

limitations depending on whether the

subsidiary is subject to the proposed

rule and is therefore required to

calculate a liquidity coverage ratio

under the proposed rule.

If the consolidated subsidiary is

subject to a minimum liquidity coverage

ratio under the proposed rule, then a

covered company could include in its

HQLA amount the HQLA held in the

consolidated subsidiary in an amount

up to the consolidated subsidiary’s net

cash outflows calculated to meet its

liquidity coverage ratio requirement.

The covered company could also

include in its HQLA amount any

additional amount of HQLA the

monetized proceeds from which would

be available for transfer to the covered

company’s top-tier parent entity during

times of stress without statutory,

regulatory, contractual, or supervisory

restrictions. Regulatory restrictions

would include, for example, sections

23A and 23B of the Federal Reserve Act

(12 U.S.C. 371c and 12 U.S.C. 371c–1)

and Regulation W (12 CFR part 223).

Supervisory restrictions may include,

but would not be limited to,

enforcement actions, written

agreements, supervisory directives or

requests to a particular subsidiary that

would directly or indirectly restrict the

subsidiary’s ability to transfer the HQLA

to the parent covered company

of the Federal Reserve Act

(12 U.S.C. 371c and 12 U.S.C. 371c–1)

and Regulation W (12 CFR part 223).

Supervisory restrictions may include,

but would not be limited to,

enforcement actions, written

agreements, supervisory directives or

requests to a particular subsidiary that

would directly or indirectly restrict the

subsidiary’s ability to transfer the HQLA

to the parent covered company.

If the consolidated subsidiary is not

subject to a minimum liquidity coverage

ratio under section 10 of the proposed

rule, a covered company could include

in its HQLA amount the HQLA held in

the consolidated subsidiary in an

amount up to the net cash outflows of

the consolidated subsidiary that are

included in the covered company’s

calculation of its liquidity coverage

ratio, plus any additional amount of

HQLA held by the consolidated

subsidiary the monetized proceeds from

which would be available for transfer to

the covered company’s top tier parent

entity during times of stress without

statutory, regulatory, contractual, or

supervisory restrictions. This treatment

is consistent with the Basel III LCR and

ensures that assets in the pool of HQLA

can be freely monetized and the

proceeds can be freely transferred to a

covered company’s top-tier parent entity

in times of a liquidity stress.

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

Consolidated Subsidiaries

Consistent with the BCBS liquidity

framework, HQLA held by a non-U.S.

legal entity that is a consolidated

subsidiary of a covered company could

be included in a covered company’s

HQLA in an amount up to the net cash

outflows of the non-U.S. consolidated

subsidiary that are included in the

covered company’s net cash outflows,

plus any additional amount of HQLA

held by the non-U.S. consolidated

subsidiary that is available for transfer

to the covered company’s top-tier parent

entity during times of stress without

statutory, regulatory, contractual, or

supervisory restrictions

amount up to the net cash

outflows of the non-U.S. consolidated

subsidiary that are included in the

covered company’s net cash outflows,

plus any additional amount of HQLA

held by the non-U.S. consolidated

subsidiary that is available for transfer

to the covered company’s top-tier parent

entity during times of stress without

statutory, regulatory, contractual, or

supervisory restrictions. The proposal

would require covered companies with

foreign operations to identify the

location of HQLA and net cash outflows

and exclude any HQLA above net cash

outflows that is not freely available for

transfer due to statutory, regulatory,

contractual or supervisory restrictions.

Such transfer restrictions would include

liquidity coverage ratio requirements

greater than those that would be

established by the proposed rule,

counterparty exposure limits, and any

other regulatory, statutory, or

supervisory limitations. While the

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40 See Basel III Revised Liquidity Framework,

paragraphs 46–54 and Annex 1, supra note 3;

proposed rule § __.21(b).

agencies believe it is appropriate for a

covered company to hold HQLA in a

particular geographic location in order

to meet liquidity needs there, they do

not believe it is appropriate for a

covered company to hold a

disproportionate amount of HQLA in

locations outside the United States

given that unforeseen impediments may

prevent timely repatriation of liquidity

during a crisis. Therefore, under section

20(f) of the proposal, a covered

company would be generally expected

to maintain in the United States an

amount and type of HQLA that is

sufficient to meet its total net cash

outflow amount in the United States.

23

amount of HQLA in

locations outside the United States

given that unforeseen impediments may

prevent timely repatriation of liquidity

during a crisis. Therefore, under section

20(f) of the proposal, a covered

company would be generally expected

to maintain in the United States an

amount and type of HQLA that is

sufficient to meet its total net cash

outflow amount in the United States.

23. What effects may the provision in

section 20(f) that a covered company is

generally expected to maintain HQLA in

the United States sufficient to meet its

total net cash outflow amount in the

United States have on a company’s

management of HQLA? Should the

agencies be concerned about the

transferability of liquidity between

national jurisdictions during a time of

financial distress and, if so, would such

a requirement be sufficient to allay

these concerns? Would holding HQLA in

a foreign jurisdiction in an amount

beyond such jurisdiction’s estimated

outflow limit the operational capacity of

HQLA to meet liquidity needs in the

United States; conversely, would the

proposed general requirement

unnecessarily disrupt overall banking

operations? What changes, if any, to

section 20(f) should the agencies

consider to ensure that a covered

company has sufficient HQLA readily

available to meet its outflows in the

United States? Should the agencies

consider quantitative limits to ensure

that a covered company has sufficient

HQLA readily available in the United

States to meet its net outflows in the

United States and support its operations

during periods of stress? Why or why

not?

e. Exclusion of Rehypothecated Assets

Under the proposed rule, assets that a

covered company received under a

rehypothecation right where the

beneficial owner has a contractual right

to withdraw the asset without

remuneration at any time during a 30

calendar-day stress period would not be

included in HQLA under the proposed

rule

its operations

during periods of stress? Why or why

not?

e. Exclusion of Rehypothecated Assets

Under the proposed rule, assets that a

covered company received under a

rehypothecation right where the

beneficial owner has a contractual right

to withdraw the asset without

remuneration at any time during a 30

calendar-day stress period would not be

included in HQLA under the proposed

rule. This exclusion extends to assets

generated from another asset that was

received under such a rehypothecation

right. If the beneficial owner has such a

right and were to exercise it within a 30

calendar-day stress period, the asset

would not be available to support the

covered company’s liquidity position.

f. Exclusion of Assets Designated as

Operational

Assets included in a covered

company’s HQLA amount could not be

specifically designated to cover

operational costs. The agencies believe

that assets specifically designated to

cover costs such as wages or facility

maintenance generally would not be

available to cover liquidity needs that

arise during stressed market conditions.

24. The agencies seek comment on the

proposed rule’s description of an

unencumbered asset. What, if any,

additional criteria should be considered

in determining whether an asset is

unencumbered for purposes of

consideration as HQLA?

25. What difficulties or lack of clarity,

if any, may arise from the proposed

operational requirement that HQLA not

be a client pool security be held in a

segregated account? What, if any, terms

could the agencies consider to clarify

what securities are captured in this

provision? For example, what

characteristics should be included to

describe the types of accounts that

should cause client pool securities to be

excluded from HQLA treatment?

26. What, if any, modifications should

the agencies consider to the treatment of

HQLA held by consolidated U.S.

subsidiaries and why?

27. The agencies solicit comment on

the proposed method for including the

HQLA held at non-U.S

example, what

characteristics should be included to

describe the types of accounts that

should cause client pool securities to be

excluded from HQLA treatment?

26. What, if any, modifications should

the agencies consider to the treatment of

HQLA held by consolidated U.S.

subsidiaries and why?

27. The agencies solicit comment on

the proposed method for including the

HQLA held at non-U.S. consolidated

subsidiaries in a covered company’s

HQLA. Is it appropriate to include in

HQLA some amount of HQLA that is

held in non-U.S. consolidated

subsidiaries? If not, why not? Should the

proposed rule be supplemented with

quantitative restrictions on the amount

of HQLA that can be held in foreign

branches and subsidiaries for the

liquidity coverage ratio calculation of

the consolidated U.S. entity? If so, how

should the rule require a correlation

between the geographic locations of a

covered company’s HQLA and the

location of the outflows the HQLA is

intended to cover? What portion of

HQLA held by non-U.S. consolidated

subsidiaries is freely available for use in

connection with a covered company’s

U.S. operations during times of stress?

In determining the amount of HQLA

held at a non-U.S. consolidated

subsidiary that a covered company can

include in its HQLA, should a covered

company be required to take into

account any net cash outflows arising in

connection with transactions between a

non-U.S. entity and another affiliate?

What challenges, if any, of the proposed

methodology are not addressed? Please

suggest specific solutions.

5. Calculation of the HQLA Amount

Instructions for calculating the HQLA

amount, including the calculation of the

required haircuts and asset caps that the

agencies are proposing to apply to level

2 liquid assets, are set forth in section

21 of the proposed rule

nd another affiliate?

What challenges, if any, of the proposed

methodology are not addressed? Please

suggest specific solutions.

5. Calculation of the HQLA Amount

Instructions for calculating the HQLA

amount, including the calculation of the

required haircuts and asset caps that the

agencies are proposing to apply to level

2 liquid assets, are set forth in section

21 of the proposed rule. For the

purposes of calculating a covered

company’s HQLA amount, the value of

level 1, level 2A, and level 2B liquid

assets would be equal to the fair value

of the assets as determined under U.S.

Generally Accepted Accounting

Principles (GAAP), multiplied by the

appropriate haircut factor and taking in

consideration the unwinding of certain

transactions.

Consistent with the Basel III LCR, the

proposed rule would apply a 15 percent

haircut to level 2A liquid assets and a

50 percent haircut to level 2B liquid

assets.40 These haircuts are meant to

recognize that level 2 liquid assets

generally are less liquid, have larger

haircuts in the repurchase markets, and

have more volatile prices in the outright

sales markets. Also consistent with the

Basel III LCR, the proposed rule would

cap the amount of level 2 liquid assets

that could be included in the HQLA

amount. Specifically, level 2 liquid

assets could account for no more than

40 percent of the HQLA amount and

level 2B liquid assets could account for

no more than 15 percent of the HQLA

amount. These caps are meant to ensure

that these types of assets, which provide

less liquidity as compared to level 1

liquid assets, comprise a smaller portion

of a covered company’s total HQLA

amount such that the majority of the

HQLA amount is comprised of level 1

liquid assets

percent of the HQLA amount and

level 2B liquid assets could account for

no more than 15 percent of the HQLA

amount. These caps are meant to ensure

that these types of assets, which provide

less liquidity as compared to level 1

liquid assets, comprise a smaller portion

of a covered company’s total HQLA

amount such that the majority of the

HQLA amount is comprised of level 1

liquid assets.

As discussed in more detail in section

II.A.5.b of this preamble, the agencies

believe the proposed level 2 caps and

haircuts should be applied to a covered

company’s HQLA amount both before

and after certain transactions are

unwound, such as transactions where

HQLA will be exchanged for HQLA

within the next 30 calendar days in

order to ensure that the HQLA portfolio

is appropriately diversified. The

calculation of adjusted HQLA would

prevent a covered company from being

able to manipulate its HQLA portfolio

by engaging in transactions such as

certain repurchase or reverse repurchase

transactions because the HQLA amount,

including the caps and haircuts, would

be calculated both before and after

unwinding those transactions. Formulas

for calculating the HQLA amount are

provided in section 21 of the proposed

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41 See § __.21(d) of the proposed rule.

42 See § __. 21(e) of the proposed rule.

43 See § __.21(h) of the proposed rule.

44 See § __.21(i) of the proposed rule.

45 See § __.21(g) of the proposed rule.

rule

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41 See § __.21(d) of the proposed rule.

42 See § __. 21(e) of the proposed rule.

43 See § __.21(h) of the proposed rule.

44 See § __.21(i) of the proposed rule.

45 See § __.21(g) of the proposed rule.

rule. Under these provisions, the HQLA

amount would be the sum of the three

liquid asset category amounts after the

application of appropriate haircuts, less

the greater of the amount of HQLA that

exceeds the level 2 caps on the first day

of a calculation period (unadjusted

excess HQLA amount) or the amount of

HQLA that exceeds the level 2 caps at

the end of a 30 calendar-day stress

period after unwinding certain

transactions (adjusted excess HQLA

amount).

a. Calculation of Unadjusted Excess

HQLA Amount

The unadjusted excess HQLA amount

is the sum of the level 2 cap excess

amount and the level 2B cap excess

amount. The calculation of the

unadjusted excess HQLA amount

applies the 40 percent level 2 liquid

asset cap and the 15 percent level 2B

liquid asset cap at the start of a 30

calendar-day stressed period by

subtracting the amount of level 2 liquid

assets that are in excess of the limits.

The unadjusted HQLA excess amount

enforces the cap limits without

unwinding any transactions.

The method of calculating the level 2

cap excess amount and level 2B cap

excess amounts is set forth in sections

21(d) and (e) of the proposed rule,

respectively

t the start of a 30

calendar-day stressed period by

subtracting the amount of level 2 liquid

assets that are in excess of the limits.

The unadjusted HQLA excess amount

enforces the cap limits without

unwinding any transactions.

The method of calculating the level 2

cap excess amount and level 2B cap

excess amounts is set forth in sections

21(d) and (e) of the proposed rule,

respectively. Under those provisions,

the level 2 cap excess amount would be

calculated by taking the greater of: (1)

the level 2A liquid asset amount plus

the level 2B liquid asset amount that

exceeds 0.6667 (or 40/60, which is the

ratio of the allowable level 2 liquid

assets to the level 1 liquid assets) times

the level 1 liquid asset amount; or (2)

zero.41 The calculation of the level 2B

cap excess amount would be calculated

by taking the greater of: (1) the level 2B

liquid asset amount less the level 2 cap

excess amount and less 0.1765 (or 15/

85, which is the ratio of allowable level

2B liquid assets to the sum of level 1

and level 2A liquid assets) times the

sum of the level 1 and level 2A liquid

asset amount; or (2) zero.42 Subtracting

the level 2 cap excess amount from the

level 2B liquid asset amount when

applying the 15 percent level 2B cap is

appropriate because the level 2B liquid

assets should be excluded before the

level 2A liquid assets when applying

the 40 percent level 2 cap.

b. Calculation of Adjusted Excess HQLA

Amount

To determine its adjusted HQLA

excess amount, a covered company

must unwind all secured funding

transactions, secured lending

transactions, asset exchanges, and

collateralized derivatives transactions,

each as defined by the proposed rule,

that mature within a 30 calendar-day

stress period where HQLA is exchanged

the 40 percent level 2 cap.

b. Calculation of Adjusted Excess HQLA

Amount

To determine its adjusted HQLA

excess amount, a covered company

must unwind all secured funding

transactions, secured lending

transactions, asset exchanges, and

collateralized derivatives transactions,

each as defined by the proposed rule,

that mature within a 30 calendar-day

stress period where HQLA is exchanged.

The unwinding of these transactions

and the calculation of adjusted excess

HQLA amount is intended to prevent a

covered company from having a

substantial amount of transactions that

would create the appearance of a

significant level 1 liquid asset amount at

the beginning of a 30 calendar-day stress

period, but that would unwind by the

end of the 30 calendar-day stress period.

For example, absent the unwinding of

these transactions, a firm that has all

level 2 liquid assets could appear

compliant with the level 2 liquid asset

cap on a calculation date by borrowing

a level 1 liquid asset (such as cash or

Treasuries) secured by a level 2 liquid

asset overnight. While doing so would

lower the covered company’s amount of

level 2 liquid assets and increase its

amount of level 1 liquid assets, the

organization would have a

concentration of level 2 liquid assets

above the 40 percent cap after the

transaction is unwound. Therefore, the

calculation of the adjusted excess HQLA

amount and its subtraction from the

HQLA amount, if greater than

unadjusted excess HQLA amount,

would prevent covered companies from

avoiding the liquid asset cap

limitations.

The adjusted level 1 liquid asset

amount would be the fair value, as

determined under GAAP, of the level 1

liquid assets that are held by a covered

company upon the unwinding of any

secured funding transaction, secured

lending transaction, asset exchanges, or

collateralized derivatives transaction

that mature within a 30 calendar-day

stress period and that involves an

exchange of HQLA

.

The adjusted level 1 liquid asset

amount would be the fair value, as

determined under GAAP, of the level 1

liquid assets that are held by a covered

company upon the unwinding of any

secured funding transaction, secured

lending transaction, asset exchanges, or

collateralized derivatives transaction

that mature within a 30 calendar-day

stress period and that involves an

exchange of HQLA. Similarly, adjusted

level 2A and adjusted level 2B liquid

assets would only include those

transactions involving an exchange

HQLA. After unwinding all the

appropriate transactions, the asset

haircuts of 15 percent and 50 percent

would be applied to the level 2A and 2B

liquid assets, respectively.

The adjusted excess HQLA amount

calculated pursuant to section 21(g) of

the proposed rule would be comprised

of the adjusted level 2 cap excess

amount and adjusted level 2B cap

excess amount calculated pursuant to

sections 21(h) and 21(i) of the proposed

rule, respectively. These excess amounts

are calculated in order to maintain the

40 percent cap on level 2 liquid assets

and the 15 percent cap on level 2B

liquid assets after unwinding a covered

company’s secured funding

transactions, secured lending

transactions, asset exchanges, and

collateralized derivatives transactions.

The adjusted level 2 cap excess

amount would be calculated by taking

the greater of: (1) the adjusted level 2A

liquid asset amount plus the adjusted

level 2B liquid asset amount minus

0.6667 (or 40/60, which is the ratio of

the allowable level 2 liquid assets to

level 1 liquid assets) times the adjusted

level 1 liquid asset amount; or (2)

zero.43 The adjusted level 2B cap excess

amount would be calculated by taking

the greater of: (1) the adjusted 2B liquid

asset amount less the adjusted level 2

cap excess amount less 0.1765 (or 15/85,

which is the ratio of allowable level 2B

liquid assets to the sum of level 1 liquid

assets and level 2A liquid assets) times

the sum of the adjusted level 1 liquid

asset amount and

; or (2)

zero.43 The adjusted level 2B cap excess

amount would be calculated by taking

the greater of: (1) the adjusted 2B liquid

asset amount less the adjusted level 2

cap excess amount less 0.1765 (or 15/85,

which is the ratio of allowable level 2B

liquid assets to the sum of level 1 liquid

assets and level 2A liquid assets) times

the sum of the adjusted level 1 liquid

asset amount and the adjusted level 2A

liquid asset amount; or (2) zero.44 As

noted above, the adjusted excess HQLA

amount is the sum of the adjusted level

2 cap excess amount and the adjusted

level 2B cap excess amount.45 Also as

noted above, subtracting out the

adjusted level 2 cap excess amount from

the adjusted level 2B liquid asset

amount when applying the 15 percent

level 2B cap is appropriate because the

adjusted level 2B liquid assets should be

excluded before the adjusted level 2A

liquid assets when applying the 40

percent level 2 cap.

c. Example HQLA Calculation

The following is an example

calculation of the HQLA amount that

would be required under the proposed

rule. Note that the given liquid asset

amounts and adjusted liquid asset

amounts already reflect the level 2A and

2B haircuts.

Level 1 liquid asset amount: 15

Level 2A liquid asset amount: 25

Level 2B liquid asset amount: 140

Adjusted level 1 liquid asset amount:

120

Adjusted level 2A liquid asset amount:

50

Adjusted level 2B liquid asset amount:

10

Calculate unadjusted excess HQLA

amount (section 21(c))

Step 1: Calculate the level 2 cap

excess amount (section 21(d)):

Level 2 cap excess amount = Max (level

2A liquid asset amount + level 2B

liquid asset amount ¥0.6667*Level 1

liquid asset amount, 0)

= Max (25 + 140 ¥ 0.6667*15, 0)

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(c))

Step 1: Calculate the level 2 cap

excess amount (section 21(d)):

Level 2 cap excess amount = Max (level

2A liquid asset amount + level 2B

liquid asset amount ¥0.6667*Level 1

liquid asset amount, 0)

= Max (25 + 140 ¥ 0.6667*15, 0)

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46 See § __.30(b) of the proposed rule.

47 See § __.30(c) of the proposed rule.

48 See § __.30(d)(1) of the proposed rule.

49 See § __.30(d)(2) of the proposed rule.

= Max (165 ¥ 10.00, 0)

= Max (155.00, 0)

= 155.00

Step 2: Calculate the level 2B cap

excess amount (section 21(e)).

Level 2B cap excess amount = Max

(level 2B liquid asset amount ¥ level

2 cap excess amount ¥ 0.1765*(level

1 liquid asset amount + level 2 liquid

asset amount), 0)

= Max (140–155.00 ¥

0.1765*(15+25), 0)

= Max (¥15 ¥ 7.06, 0)

= Max (¥22.06, 0)

= 0

Step 3: Calculate the unadjusted

excess HQLA amount (section 21(c)).

Unadjusted excess HQLA amount =

Level 2 cap excess amount + Level 2B

cap excess amount

= 155.00 + 0

= 155

Calculate adjusted excess HQLA amount

(sections 21(g))

Step 1: Calculate the adjusted level 2

cap excess amount (section 21(h)).

Adjusted level 2 cap excess amount =

Max (adjusted level 2A liquid asset

amount + adjusted level 2B liquid

asset amount ¥ 0.6667*adjusted level

1 liquid asset amount, 0)

= Max (50 + 10 ¥ 0.6667*120, 0)

= Max (60¥80.00, 0)

= Max (¥20.00, 0)

= 0

Step 2: Calculate the adjusted level 2B

cap excess amount (section 21(i)).

Adjusted level 2B cap excess amount =

Max (adjusted level 2B liquid asset

amount¥adjusted level 2 cap excess

amount¥0.1765*(adjusted level 1

liquid asset amount + adjusted level

2 liquid asset amount, 0)

= Max (10¥0¥0.1765*(120+50), 0)

= Max (10¥30.00, 0)

= Max (¥20.00, 0)

= 0

Step 3: Calculate the adjusted excess

HQLA amount (section 21(g))

level 2B

cap excess amount (section 21(i)).

Adjusted level 2B cap excess amount =

Max (adjusted level 2B liquid asset

amount¥adjusted level 2 cap excess

amount¥0.1765*(adjusted level 1

liquid asset amount + adjusted level

2 liquid asset amount, 0)

= Max (10¥0¥0.1765*(120+50), 0)

= Max (10¥30.00, 0)

= Max (¥20.00, 0)

= 0

Step 3: Calculate the adjusted excess

HQLA amount (section 21(g)).

Adjusted excess HQLA amount =

adjusted level 2 cap excess amount +

adjusted level 2B cap excess amount

= 0 + 0

= 0

Determine the HQLA amount (section

21(a))

HQLA = Level 1 liquid asset amount +

level 2A liquid asset amount + level

2B liquid asset

amount¥Max(unadjusted excess

HQLA amount, adjusted excess HQLA

amount)

= 15 + 25 + 140¥Max (155, 0)

= 180¥155

= 25

B. Total Net Cash Outflow

To determine the liquidity coverage

ratio as of a calculation date, the

proposed rule would require a covered

company to calculate its total stressed

net cash outflow amount for each of the

30 calendar days following the

calculation date, thereby establishing

the dollar value that must be offset by

the HQLA amount.

Under section 30 of the proposed rule,

the total net cash outflow amount would

be the dollar amount on the day within

a 30 calendar-day stress period that has

the highest amount of net cumulative

cash outflows. The agencies believe that

using the largest daily calculation as the

denominator of the liquidity coverage

ratio (rather than using total cash

outflows over a 30 calendar-day stress

period, which is the method employed

by the Basel III LCR) is necessary

because it takes into account potential

maturity mismatches between a covered

company’s outflows and inflows, that is,

the risk that a covered company could

have a substantial amount of contractual

inflows late in a 30 calendar-day stress

period while also having substantial

outflows early in the same period. Such

mismatches could threaten the liquidity

of the organization

) is necessary

because it takes into account potential

maturity mismatches between a covered

company’s outflows and inflows, that is,

the risk that a covered company could

have a substantial amount of contractual

inflows late in a 30 calendar-day stress

period while also having substantial

outflows early in the same period. Such

mismatches could threaten the liquidity

of the organization. By requiring the

recognition of the highest net

cumulative outflow day of a particular

30 calendar-day stress period, the

agencies believe that the proposed

liquidity coverage ratio would better

capture a covered company’s liquidity

risk and help foster more sound

liquidity management.

To determine the denominator of the

liquidity coverage ratio as of a

calculation date, the proposed rule

would require a covered company to

calculate its total cumulative stressed

net cash outflows occurring on each of

the 30 calendar days following the

calculation date. Under section 30 of the

proposed rule, the total net cash outflow

amount for each of the next 30 calendar

days would be the sum of the

cumulative stressed outflow amounts

less the sum of the cumulative stressed

inflow amounts, with cumulative

stressed inflow amounts limited to 75

percent of cumulative stressed outflow

amounts. Stressed outflow and inflow

amounts would be calculated by

multiplying an outflow or inflow rate

(designed to reflect a stress scenario) to

each category of outflows and inflows

be the sum of the

cumulative stressed outflow amounts

less the sum of the cumulative stressed

inflow amounts, with cumulative

stressed inflow amounts limited to 75

percent of cumulative stressed outflow

amounts. Stressed outflow and inflow

amounts would be calculated by

multiplying an outflow or inflow rate

(designed to reflect a stress scenario) to

each category of outflows and inflows.

The cumulative stressed outflow

amount would be comprised of different

groupings of outflow categories,

including categories where the

instruments and transactions do not

have maturity dates 46 and categories

where the instruments mature and

transactions occur on or prior to a day

30 calendar days or less after the

calculation date.47 The cumulative

stressed inflow amount, which would

be deducted from the cumulative

stressed outflow amount, would equal

the lesser of (1) the sum of categories

where the inflows are grouped together

and categories where the instruments

mature and transactions occur on or

prior to that calendar day 48 and (2) 75

percent of the cumulative stressed

outflow amount for that calendar day.49

The largest of these total net cash

outflow amounts calculated for each of

the 30 calendar days after the

calculation date would be equal to the

amount of HQLA that a covered

company would be required to hold

under the proposed rule.

Consistent with the Basel III LCR and

as noted above, in calculating total net

cash outflow, cumulative cash inflows

would be capped at 75 percent of

aggregate cash outflows. This limit

would prevent a covered company from

relying exclusively on cash inflows

(which may not materialize in a period

of stress) to cover its liquidity needs

under the proposal’s stress scenario and

ensure that covered companies maintain

a minimum level of HQLA to meet

unexpected liquidity demands during

the 30 calendar-day period of liquidity

stress

ent of

aggregate cash outflows. This limit

would prevent a covered company from

relying exclusively on cash inflows

(which may not materialize in a period

of stress) to cover its liquidity needs

under the proposal’s stress scenario and

ensure that covered companies maintain

a minimum level of HQLA to meet

unexpected liquidity demands during

the 30 calendar-day period of liquidity

stress.

Table 1 illustrates the determination

of the total net cash outflow amount by

applying the daily outflow and inflow

calculations for a given 30 calendar-day

stress period. Using Table 1, a covered

company would, for each day, add (A)

cash outflows as calculated under

sections 32(a) through 32(g)(2) and cash

outflows as calculated under sections

32(g)(3) through 32(l) for instruments

and transactions that have no

contractual maturity date and (C)

cumulative cash outflows as calculated

under sections 32(g)(3) through 32(l) for

instruments or transactions that have a

contractual maturity date up to and

including the calculation date (the

cumulative sum of amounts in column

(B)) to arrive at (D) total cumulative cash

outflows. Next, a covered company

would subtract the lesser of (F)

cumulative cash inflows as calculated

under sections 33(b) through 33(f)

where the instruments or transactions

have a contractual maturity date up to

and including the calculation date (the

cumulative sum of amounts in column

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er of (F)

cumulative cash inflows as calculated

under sections 33(b) through 33(f)

where the instruments or transactions

have a contractual maturity date up to

and including the calculation date (the

cumulative sum of amounts in column

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71834

Federal Register / Vol. 78, No. 230 / Friday, November 29, 2013 / Proposed Rules

(E)) or (G) 75 percent of (D) total

cumulative cash outflows to determine

(H) the net cumulative cash outflow.

Based on the example provided below,

the peak outflow would occur on Day

18, resulting in a total net cash outflow

amount of 285.

TABLE 1—DETERMINATION OF PEAK NET CONTRACTUAL OUTFLOW DAY

Non-

maturity

cash out-

flows (con-

stant)

Contractual

cash out-

flows with

maturity

date up to

and includ-

ing the cal-

culation

date

Cumulative

contractual

cash out-

flows with

maturity

date up to

and includ-

ing the cal-

culation

date

Total

cumulative

cash out-

flows

Contractual

cash inflows

with

maturity

date up to

and includ-

ing the cal-

culation

date

Cumulative

contractual

cash inflows

with

maturity

date up to

and includ-

ing the cal-

culation

date

Maximum

inflows

permitted

due to 75%

inflow cap

Net

cumulative

cash outflow

A

B

C

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