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Text

Vol. 79

Friday,

No. 197

October 10, 2014

Part III

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; Final Rule

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61440

Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 50

[Docket ID OCC–2013–0016]

RIN 1557–AD74

FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Regulation WW; Docket No. R–1466]

RIN 7100–AE03

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 329

RIN 3064–AE04

Liquidity Coverage Ratio: Liquidity

Risk Measurement Standards

AGENCY: Office of the Comptroller of the

Currency, Department of the Treasury;

Board of Governors of the Federal

Reserve System; and Federal Deposit

Insurance Corporation.

ACTION: Final rule.

SUMMARY: The Office of the Comptroller

of the Currency (OCC), the Board of

Governors of the Federal Reserve

System (Board), and the Federal Deposit

Insurance Corporation (FDIC) are

adopting a final rule that implements a

quantitative liquidity requirement

consistent with the liquidity coverage

ratio standard established by the Basel

Committee on Banking Supervision

(BCBS). The requirement is designed to

promote the short-term resilience of the

liquidity risk profile of large and

internationally active banking

organizations, thereby improving the

banking sector’s ability to absorb shocks

arising from financial and economic

stress, and to further improve the

measurement and management of

liquidity risk

d by the Basel

Committee on Banking Supervision

(BCBS). The requirement is designed to

promote the short-term resilience of the

liquidity risk profile of large and

internationally active banking

organizations, thereby improving the

banking sector’s ability to absorb shocks

arising from financial and economic

stress, and to further improve the

measurement and management of

liquidity risk. The final rule establishes

a quantitative minimum liquidity

coverage ratio that requires a company

subject to the rule to maintain an

amount of high-quality liquid assets (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 (the denominator of the

ratio). The final rule applies to large and

internationally active banking

organizations, generally, bank holding

companies, certain savings and loan

holding companies, and depository

institutions with $250 billion or more in

total assets or $10 billion or more 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

final rule focuses on these financial

institutions because of their complexity,

funding profiles, and potential risk to

the financial system. Therefore, the

agencies do not intend to apply the final

rule to community banks. In addition,

the Board is separately adopting a

modified minimum liquidity coverage

ratio requirement for bank holding

companies and savings and loan

holding companies without significant

insurance or commercial operations

that, in each case, have $50 billion or

other documentation will be placed into

OMB’s public docket files, once

approved. Also, these documents may

be requested from the agency clearance

officer, whose name appears below.

For further information contact the

Federal Reserve Board Acting Clearance

Officer, John Schmidt, Office of the

Chief Data Officer, Board of Governors

of the Federal Reserve System,

Washington, DC 20551, (202) 452–3829.

Telecommunications Device for the Deaf

(TDD) users may contact (202) 263–

4869, Board of Governors of the Federal

Reserve System, Washington, DC 20551.

FDIC: You may submit written

comments by any of the following

methods:

• Agency Web site: http://

www.fdic.gov/regulations/laws/federal/.

Follow the instructions for submitting

comments on the FDIC Web site.

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• E-Mail: Comments@FDIC.gov.

Include ‘‘Liquidity Coverage Ratio Final

Rule’’ on the subject line of the message.

• Mail: Gary A. Kuiper, Counsel,

Executive Secretary Section, NYA–5046,

Attention: Comments, FDIC, 550 17th

Street NW., Washington, DC 20429.

• Hand Delivery/Courier: The guard

station at the rear of the 550 17th Street

Building (located on F Street) on

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iper, Counsel,

Executive Secretary Section, NYA–5046,

Attention: Comments, FDIC, 550 17th

Street NW., Washington, DC 20429.

• Hand Delivery/Courier: The guard

station at the rear of the 550 17th Street

Building (located on F Street) on

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61441

Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

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. The OCC,

Board, and FDIC actively participate in BCBS and

its international efforts. Documents issued by the

BCBS are available through the Bank for

International Settlements Web site at http://

www.bis.org.

2 78 FR 71818 (November 29, 2013).

3 BCBS, ‘‘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).

4 BCBS, ‘‘Basel III: The Liquidity Coverage Ratio

and liquidity risk monitoring tools’’ (January 2013),

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

business days between 7:00 a.m. and

5:00 p.m.

• Public Inspection: All comments

received will be posted without change

to http://www.fdic.gov/regulations/laws/

federal/ including any personal

information provided

Liquidity

Framework).

4 BCBS, ‘‘Basel III: The Liquidity Coverage Ratio

and liquidity risk monitoring tools’’ (January 2013),

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

business days between 7:00 a.m. and

5:00 p.m.

• Public Inspection: All comments

received will be posted without change

to http://www.fdic.gov/regulations/laws/

federal/ including any personal

information provided.

For further information or to request a

copy of the collection please contact

Gary Kuiper, Counsel, (202) 898–3719,

Legal Division, Federal Deposit

Insurance Corporation, 550 17th Street

NW., Washington, DC 20429.

FOR FURTHER INFORMATION CONTACT:

OCC: Kerri Corn, Director, (202) 649–

6398, or James Weinberger, Technical

Expert, (202) 649–5213, Credit and

Market Risk Division; Linda M.

Jennings, National Bank Examiner, (980)

387–0619; Patrick T. Tierney, Assistant

Director, or Tiffany Eng, Attorney,

Legislative and Regulatory Activities

Division, (202) 649–5490, for persons

who are deaf or hard of hearing, TTY,

(202) 649–5597; or Tena Alexander,

Senior Counsel, or David Stankiewicz,

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: Constance Horsley, Assistant

Director, (202) 452–5239, David Emmel,

Manager, (202) 912–4612, Adam S.

Trost, Senior Supervisory Financial

Analyst, (202) 452–3814, or J. Kevin

Littler, Senior Supervisory Financial

Analyst, (202) 475–6677, Credit, Market

and Liquidity Risk Policy, Division of

Banking Supervision and Regulation;

April C. Snyder, Senior Counsel, (202)

452–3099, Dafina Stewart, Senior

Attorney, (202) 452–3876, Jahad Atieh,

Attorney, (202) 452–3900, 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

, Division of

Banking Supervision and Regulation;

April C. Snyder, Senior Counsel, (202)

452–3099, Dafina Stewart, Senior

Attorney, (202) 452–3876, Jahad Atieh,

Attorney, (202) 452–3900, 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; 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 Suzanne 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. Overview

A. Background and Summary of the

Proposed Rule

B. Summary of Comments on the Proposed

Rule and Significant Comment Themes

C. Overview of the Final Rule and

Significant Changes From the Proposal

D. Scope of Application of the Final Rule

1. Covered Companies

2. Covered Depository Institution

Subsidiaries

3. Companies that Become Subject to the

LCR Requirements

II. Minimum Liquidity Coverage Ratio

A. The LCR Calculation and Maintenance

Requirement

1. A Liquidity Coverage Requirement

2. The Liquidity Coverage Ratio Stress

Period

3. The Calculation Date, Daily Calculation

Requirement, and Comments on LCR

Reporting

B. High-Quality Liquid Assets

1. Liquidity Characteristics of HQLA

2. Qualifying Criteria for Categories of

HQLA

3. Requirements for Inclusion as Eligible

HQLA

4. Generally Applicable Criteria for Eligible

HQLA

5. Calculation of the HQLA Amount

C. Net Cash Outflows

1. The Total Net Cash Outflow Amount

2. Determining Maturity

3. Outflow Amounts

4. Inflow Amounts

III. Liquidity Coverage Ratio Shortfall

IV. Transition and Timing

V. Modified Liquidity Coverage Ratio

iteria for Categories of

HQLA

3. Requirements for Inclusion as Eligible

HQLA

4. Generally Applicable Criteria for Eligible

HQLA

5. Calculation of the HQLA Amount

C. Net Cash Outflows

1. The Total Net Cash Outflow Amount

2. Determining Maturity

3. Outflow Amounts

4. Inflow Amounts

III. Liquidity Coverage Ratio Shortfall

IV. Transition and Timing

V. Modified Liquidity Coverage Ratio

A. Threshold for Application of the

Modified Liquidity Coverage Ratio

Requirement.

B. 21 Calendar-Day Stress Period

C. Calculation Requirements and

Comments on Modified LCR Reporting

VI. Plain Language

VII. Regulatory Flexibility Act

VIII. Paperwork Reduction Act

IX. OCC Unfunded Mandates Reform Act of

1995 Determination

I. Overview

A. Background and Summary of the

Proposed Rule

On November 29, 2013, 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) invited

comment on a proposed rule (proposed

rule or proposal) to implement a

liquidity coverage ratio (LCR)

requirement that would be consistent

with the international liquidity

standards published by the Basel

Committee on Banking Supervision

(BCBS).1 The proposed rule would have

applied to nonbank financial companies

designated by the Financial Stability

Oversight Council (Council) for

supervision by the Board that do not

have substantial insurance activities

(covered nonbank companies), large,

internationally active banking

organizations, and their consolidated

subsidiary depository institutions with

total assets of $10 billion or more (each,

a covered company).2 The Board also

proposed to implement a modified

version of the liquidity coverage ratio

requirement (modified LCR) as an

enhanced prudential standard for bank

holding companies and savings and

loan holding companies with $50

billion or more in total consolidated

assets that are not internationally active

and do not have sub

total assets of $10 billion or more (each,

a covered company).2 The Board also

proposed to implement a modified

version of the liquidity coverage ratio

requirement (modified LCR) as an

enhanced prudential standard for bank

holding companies and savings and

loan holding companies with $50

billion or more in total consolidated

assets that are not internationally active

and do not have substantial insurance

activities (each, a modified LCR holding

company).

The BCBS published the international

liquidity standards in December 2010 as

a part of the Basel III reform package 3

and revised the standards in January

2013 (as revised, the Basel III Revised

Liquidity Framework).4 The agencies

are actively involved in the BCBS and

its international efforts, including the

development of the Basel III Revised

Liquidity Framework.

To devise the Basel III Revised

Liquidity Framework, the BCBS

gathered supervisory data from multiple

jurisdictions, including a substantial

amount of data related to U.S. financial

institutions, which was reflective of a

variety of time periods and types of

historical liquidity stresses. These

historical stresses included both

idiosyncratic and systemic stresses

across a range of financial institutions.

The BCBS determined the LCR

parameters based on a combination of

historical data analysis and supervisory

judgment.

The proposed rule would have

established a quantitative minimum

LCR requirement that builds upon the

liquidity coverage methodologies

traditionally used by banking

organizations to assess exposures to

contingent liquidity events. The

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The proposed rule would have

established a quantitative minimum

LCR requirement that builds upon the

liquidity coverage methodologies

traditionally used by banking

organizations to assess exposures to

contingent liquidity events. The

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

5 See Board, ‘‘Enhanced Prudential Standards for

Bank Holding Companies and Foreign Banking

Organizations,’’ 79 FR 17240 (March 27, 2014)

(Board’s Regulation YY); OCC, Board, FDIC, Office

of Thrift Supervision, and National Credit Union

Administration, ‘‘Interagency Policy Statement on

Funding and Liquidity Risk Management,’’ 75 FR

13656 (March 22, 2010) (Interagency Liquidity

Policy Statement).

6 See http://www.regulations.gov/index.jsp#

!docketDetail;D=OCC-2013-0016 (OCC); http://

www.fdic.gov/regulations/laws/federal/2013/2013_

liquidity_coverage_ae04.html (FDIC); http://www.

federalreserve.gov/newsevents/reform_systemic.htm

(Board).

7 79 FR 24528 (May 1, 2014).

8 76 FR 69334 (November 8, 2011).

proposed rule was designed to

complement existing supervisory

guidance and the requirements of the

Board’s Regulation YY (12 CFR part

252) on internal liquidity stress testing

and liquidity risk management that the

Board issued, 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).5 The proposed

rule also would have established

transition periods for conformance with

the requirements.

The proposed LCR would have

required a covered company to maintain

an amount of unencumbered high-

quality liquid assets (HQLA amount)

sufficient to meet its total stressed net

cash outflows over a prospective 30

calendar-day period, as calculated in

accordance with the proposed rule

The proposed

rule also would have established

transition periods for conformance with

the requirements.

The proposed LCR would have

required a covered company to maintain

an amount of unencumbered high-

quality liquid assets (HQLA amount)

sufficient to meet its total stressed net

cash outflows over a prospective 30

calendar-day period, as calculated in

accordance with the proposed rule. The

proposed rule outlined certain

categories of assets that would have

qualified as high-quality liquid assets

(HQLA) if they were unencumbered and

able to be monetized during a period of

stress. HQLA that are unencumbered

and controlled by a covered company’s

liquidity risk management function

would enhance the ability of a covered

company to meet its liquidity needs

during an acute short-term liquidity

stress scenario. A covered company

would have determined its total net

cash outflow amount by applying the

proposal’s outflow and inflow rates,

which reflected a standardized stress

scenario, to the covered company’s

funding sources, obligations, and assets

over a prospective 30 calendar-day

period. The net cash outflow amount for

modified LCR holding companies would

have reflected a 21 calendar-day period.

The proposed rule would have been

generally consistent with the Basel III

Revised Liquidity Framework; however,

there were instances where the agencies

believed supervisory or market

conditions unique to the United States

required the proposal to differ from the

Basel III standard.

B. Summary of Comments on the

Proposed Rule and Significant

Comment Themes

Each of the agencies received over 100

comments on the proposal from U.S.

and foreign firms, public officials

(including state and local government

officials and members of the U.S.

Congress), public interest groups,

private individuals, and other interested

parties. In addition, agency staffs held a

number of meetings with members of

the public and obtained supplementary

information from certain commenters

received over 100

comments on the proposal from U.S.

and foreign firms, public officials

(including state and local government

officials and members of the U.S.

Congress), public interest groups,

private individuals, and other interested

parties. In addition, agency staffs held a

number of meetings with members of

the public and obtained supplementary

information from certain commenters.

Summaries of these meetings are

available on the agencies’ public Web

sites.6

Although many commenters generally

supported the purpose of the proposed

rule to create a standardized minimum

liquidity requirement, most commenters

either expressed concern regarding the

proposal overall or criticized specific

aspects of the proposed rule. The

agencies received a number of

comments regarding the differences

between the proposed rule and the Basel

III Revised Liquidity Framework,

together with comments on the

interaction of this proposal with other

rulemakings issued by the agencies.

Comments about differences between

the proposed rule and the Basel III

standard were mixed. Some commenters

expressed support for the areas in which

the proposed rule was more stringent

than the Basel III Revised Liquidity

Framework and others stated that

having more conservative treatment for

assessing the LCR could disadvantage

the U.S. banking system. Commenters

questioned whether the proposal should

impose heightened standards compared

to the Basel III Revised Liquidity

Framework and requested that the final

rule’s calculation of the LCR conform to

the Basel III standard in order to

maintain consistency and comparability

internationally. A commenter noted that

the proposed rule would create a burden

for those institutions required to comply

with more than one liquidity standard

throughout their global operations.

Another commenter argued that the

proposed rule’s divergence from the

Basel III Revised Liquidity Framework

would make it more difficult to

harmonize with global standards

ency and comparability

internationally. A commenter noted that

the proposed rule would create a burden

for those institutions required to comply

with more than one liquidity standard

throughout their global operations.

Another commenter argued that the

proposed rule’s divergence from the

Basel III Revised Liquidity Framework

would make it more difficult to

harmonize with global standards.

Commenters also expressed concern

about the interaction between the

proposed rule and other proposed or

recently finalized rules that affect a

covered company’s LCR, such as the

agencies’ supplementary leverage ratio 7

and the Commodity Futures Trading

Commission’s liquidity requirements for

derivatives clearing organizations.8

Additionally, a few commenters

expressed concerns about the overall

impact of the requirements, citing the

impact of the standard on covered

companies’ costs, competitiveness, and

existing business practices, as well as

the impact upon non-financial

companies more broadly. As described

in more detail below, the agencies have

addressed these issues by reducing

burdens where appropriate, while

ensuring that the final rule serves the

purpose of promoting the safety and

soundness of covered companies. The

agencies found that certain comments

concerning the costs and benefits of the

proposed rule to be relevant to their

deliberations, and, on the basis of these

and other considerations, made the

changes discussed below.

The proposed rule would have

required covered companies to comply

with a minimum LCR of 80 percent

beginning on January 1, 2015, 90

percent beginning on January 1, 2016,

and 100 percent beginning on January 1,

2017, and thereafter. These transition

periods were similar to, but shorter

than, those set forth in the Basel III

Revised Liquidity Framework, and were

intended to preserve the strong liquidity

positions many U.S. banking

organizations have achieved since the

recent financial crisis

ning on January 1, 2015, 90

percent beginning on January 1, 2016,

and 100 percent beginning on January 1,

2017, and thereafter. These transition

periods were similar to, but shorter

than, those set forth in the Basel III

Revised Liquidity Framework, and were

intended to preserve the strong liquidity

positions many U.S. banking

organizations have achieved since the

recent financial crisis. The proposed

rule also would have required covered

companies to calculate their LCR daily,

beginning on January 1, 2015. A number

of commenters expressed concerns with

the proposed transition periods as well

as the operational difficulties of meeting

the proposed requirement for daily

calculation of the LCR. Additionally,

some commenters expressed concerns

regarding the scope of application of the

proposed rule, with regard to both the

application of the proposed rule to

covered nonbank companies and the

proposed rule’s delineation between

covered companies and modified LCR

holding companies.

Commenters generally expressed a

desire to see a wider range of asset

classes included as HQLA or to have

some asset classes and funding sources

treated as having greater liquidity than

proposed. The agencies received

comments that highlighted the

differences between the types of assets

included as HQLA under the U.S.

proposal and those that might be

included under the Basel III Revised

Liquidity Framework. For example, the

agencies proposed excluding some asset

classes from HQLA that may have

qualified under the Basel III Revised

Liquidity Framework given the

agencies’ concerns about their relative

lack of liquidity. Many of these

comments related to the exclusion in

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osed excluding some asset

classes from HQLA that may have

qualified under the Basel III Revised

Liquidity Framework given the

agencies’ concerns about their relative

lack of liquidity. Many of these

comments related to the exclusion in

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61443

Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

9 Like the proposed rule, the final rule does not

apply to institutions that have opted to use the

advanced approaches risk-based capital rule. See 12

CFR part 3 (OCC), 12 CFR part 217 (Board), and 12

CFR part 324 (FDIC).

10 12 CFR 252.153.

11 Total consolidated assets for the purposes of

the proposed rule would have been as reported on

a covered company’s most recent year-end

Consolidated Reports of Condition and Income or

Consolidated Financial Statements for Bank

Holding Companies, Federal Reserve Form FR Y–

9C. Foreign exposure data would be calculated in

accordance with the Federal Financial Institutions

Examination Council 009 Country Exposure Report.

The agencies have retained these standards in the

final rule as proposed.

12 During the transition period, for covered

companies, the agencies will consider a shortfall to

be a liquidity coverage ratio lower than 80 percent

in 2015 and lower than 90 percent in 2016.

13 During the period when a covered company is

required to calculate its LCR monthly, the covered

company must promptly consult with the

appropriate Federal banking agency to determine

whether a plan would be required if the covered

company’s LCR is below the minimum requirement

for any calculation date that is the last business day

of the calendar month.

the proposed rule of state and municipal

securities from HQLA

covered company is

required to calculate its LCR monthly, the covered

company must promptly consult with the

appropriate Federal banking agency to determine

whether a plan would be required if the covered

company’s LCR is below the minimum requirement

for any calculation date that is the last business day

of the calendar month.

the proposed rule of state and municipal

securities from HQLA. Commenters

expressed concern that the exclusion of

municipal securities from HQLA could

lead to higher funding costs for

municipalities, which could affect local

economies and infrastructure.

Likewise, the agencies’ proposed

method for determining a covered

company’s HQLA amount elicited many

comments. A number of these

comments focused on the treatment of

deposits from public sector entities that

are required by law to be secured by

eligible collateral and would have been

treated as secured funding transactions

under the proposed rule. Commenters

expressed concern that the treatment of

secured deposits in the calculation of a

covered company’s HQLA amount

would lead to distortions in the LCR

calculation and to reduced acceptance

of public deposits by covered

companies.

The proposed rule would have

required covered companies to hold an

amount of HQLA to meet their greatest

liquidity need within a prospective 30

calendar-day period rather than at the

end of that period. By requiring a

covered company to calculate its total

net cash outflow amount using its peak

cumulative net outflow day, the

proposal would have taken into account

potential maturity mismatches between

a covered company’s contractual

outflows and inflows during the 30

calendar-day period. The agencies

received many comments on the

methodology for calculating the peak

cumulative net cash outflow amount,

specifically in regard to the treatment of

non-maturity outflows

ng its peak

cumulative net outflow day, the

proposal would have taken into account

potential maturity mismatches between

a covered company’s contractual

outflows and inflows during the 30

calendar-day period. The agencies

received many comments on the

methodology for calculating the peak

cumulative net cash outflow amount,

specifically in regard to the treatment of

non-maturity outflows. Some

commenters felt that the approach had

merits because it captured potential

liquidity shortfalls within the 30

calendar-day period, whereas others

argued that that it was overly

conservative, unrealistic, and

inconsistent with the Basel III Revised

Liquidity Framework.

Generally, commenters expressed that

the outflow rates used to determine total

net cash outflows were too high with

respect to specific outflow categories.

Commenters also expressed concern

that specific outflow rates were applied

to overly narrow or overly broad

categories of exposures in certain cases.

Several commenters requested the

agencies to clarify whether the outflow

and inflow rates under the final rule are

designed to reflect an idiosyncratic

stress at a particular institution or

general market distress. The agencies

received a number of comments on the

criteria for determining whether a

deposit was an operational deposit and

on the definitions of certain related

terms. Commenters generally approved

of the potential categorization of certain

deposits as operational deposits but

expressed concern that other deposits

were excluded from the category.

Similarly, some commenters expressed

concern that the outflow rates assigned

to committed facilities extended to

special purpose entities (SPEs) did not

differentiate between different types of

SPEs.

Several commenters expressed

concern that the proposed modified LCR

would have required net cash outflows

to be calculated over a 21 calendar-day

stress period

e excluded from the category.

Similarly, some commenters expressed

concern that the outflow rates assigned

to committed facilities extended to

special purpose entities (SPEs) did not

differentiate between different types of

SPEs.

Several commenters expressed

concern that the proposed modified LCR

would have required net cash outflows

to be calculated over a 21 calendar-day

stress period. Commenters argued that

using a 21 calendar-day period would

create significant operational burden as

it is an atypical period that does not

align well with their existing systems

and processes. Commenters also

expressed concerns regarding the

transition periods and the daily

calculation requirement applicable to

modified LCR holding companies.

C. Overview of the Final Rule and

Significant Changes From the Proposal

Consistent with the proposed rule, the

final rule establishes a minimum LCR

requirement applicable, on a

consolidated basis, to large,

internationally active banking

organizations with $250 billion or more

in total consolidated assets or $10

billion or more in total on-balance sheet

foreign exposure, and to consolidated

subsidiary depository institutions of

these banking organizations with $10

billion or more in total consolidated

assets.9 Unlike the proposed rule,

however, the final rule will not apply to

covered nonbank companies or their

consolidated subsidiary depository

institutions. Instead, as discussed

further below in section I.D, the Board

will establish any LCR requirement for

such companies by order or rule. The

final rule does not apply to foreign

banking organizations or U.S

ore in total consolidated

assets.9 Unlike the proposed rule,

however, the final rule will not apply to

covered nonbank companies or their

consolidated subsidiary depository

institutions. Instead, as discussed

further below in section I.D, the Board

will establish any LCR requirement for

such companies by order or rule. The

final rule does not apply to foreign

banking organizations or U.S.

intermediate holding companies that are

required to be established under the

Board’s Regulation YY, other than those

companies that are otherwise covered

companies.10

As discussed in section V of this

Supplementary Information section, and

consistent with the proposal, the Board

also is separately adopting a modified

version of the LCR for bank holding

companies and savings and loan

holding companies without significant

insurance operations (or, in the case of

savings and loan holding companies,

also without significant 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 final rule.11

The final rule requires a covered

company to maintain an amount of

HQLA meeting the criteria set forth in

this final rule (the HQLA amount,

which is 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 (the denominator of

the ratio). The agencies recognize that,

under certain circumstances, it may be

necessary for a covered company’s LCR

to fall briefly below 100 percent to fund

unanticipated liquidity needs.12

However, a LCR below 100 percent may

also reflect a significant deficiency in a

covered company’s management of

liquidity risk. Therefore, consistent with

the proposed rule, the final rule

establishes a framework for a flexible

supervisory response when a covered

company’s LCR falls below 100 percent

company’s LCR

to fall briefly below 100 percent to fund

unanticipated liquidity needs.12

However, a LCR below 100 percent may

also reflect a significant deficiency in a

covered company’s management of

liquidity risk. Therefore, consistent with

the proposed rule, the final rule

establishes a framework for a flexible

supervisory response when a covered

company’s LCR falls below 100 percent.

Under the final rule, a covered company

must notify the appropriate Federal

banking agency on any business day

that its LCR is less than 100 percent. In

addition, if a covered company’s LCR is

below 100 percent for three consecutive

business days, the covered company

must submit to its appropriate Federal

banking agency a plan for remediation

of the shortfall.13 These procedures,

which are described in further detail in

section III of this Supplementary

Information section, are intended to

enable supervisors to monitor and

respond appropriately to the unique

circumstances that give rise to a covered

company’s LCR shortfall.

The agencies emphasize that the LCR

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

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

for higher liquidity reserves may need to

take additional steps beyond meeting

the minimum ratio in order to meet

supervisory expectations. The LCR will

complement existing supervisory

guidance and the more qualitative and

internal stress test requirements in the

Board’s Regulation YY

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

for higher liquidity reserves may need to

take additional steps beyond meeting

the minimum ratio in order to meet

supervisory expectations. The LCR will

complement existing supervisory

guidance and the more qualitative and

internal stress test requirements in the

Board’s Regulation YY.

Under the final rule, certain categories

of assets may qualify as eligible HQLA

and may contribute to the HQLA

amount if they are unencumbered by

liens and other restrictions on transfer

and can therefore be converted quickly

into cash without reasonably expecting

to incur losses in excess of the

applicable LCR haircuts during a stress

period. Consistent with the proposal,

the final rule establishes three categories

of HQLA: level 1 liquid assets, level 2A

liquid assets and level 2B liquid assets.

The fair value, as determined under U.S.

generally accepted accounting

principles (GAAP), of a covered

company’s level 2A liquid assets and

level 2B liquid assets are subject to

haircuts of 15 percent and 50 percent

respectively. The amount of level 2

liquid assets (that is, level 2A and level

2B liquid assets) may not comprise more

than 40 percent of the covered

company’s HQLA amount. The amount

of level 2B liquid assets may not

comprise more than 15 percent of the

covered company’s HQLA amount.

Certain adjustments have been made

to the final rule to address concerns

raised by a number of commenters with

respect to assets that would have

qualified as HQLA. With respect to the

inclusion of corporate debt securities as

HQLA, the agencies have removed the

requirement that corporate debt

securities have to be publicly traded on

a national securities exchange in order

to qualify for inclusion as HQLA.

Additionally, in response to requests by

several commenters, the agencies have

expanded the pool of publicly traded

common equity shares that may be

included as HQLA

inclusion of corporate debt securities as

HQLA, the agencies have removed the

requirement that corporate debt

securities have to be publicly traded on

a national securities exchange in order

to qualify for inclusion as HQLA.

Additionally, in response to requests by

several commenters, the agencies have

expanded the pool of publicly traded

common equity shares that may be

included as HQLA. Consistent with the

proposed rule, the final rule does not

include state and municipal securities

as HQLA. As discussed fully in section

II.B.2 of this Supplementary Information

section, the liquidity characteristics of

municipal securities range significantly

and many of these assets do not exhibit

the characteristics for inclusion as

HQLA. With respect to the calculation

of the HQLA amount and in response to

comments received, the agencies are

removing collateralized deposits, as

defined in the final rule, from the

calculation of amounts exceeding the

composition caps, as described in

section II.B.5, below.

A covered company’s total net cash

outflow amount is determined under the

final rule by applying outflow and

inflow rates, which reflect certain

standardized stressed assumptions,

against the balances of a covered

company’s funding sources, obligations,

transactions, and assets over a

prospective 30 calendar-day period.

Inflows that can be included to offset

outflows are limited to 75 percent of

outflows to ensure that covered

companies are maintaining sufficient

on-balance sheet liquidity and are not

overly reliant on inflows, which may

not materialize in a period of stress.

As further described in section II.C of

this Supplementary Information section

and discussed in the proposal, the

measure of net cash outflow and the

outflow and inflow rates used in its

determination are meant to reflect

aspects of historical stress events

including the recent financial crisis

uidity and are not

overly reliant on inflows, which may

not materialize in a period of stress.

As further described in section II.C of

this Supplementary Information section

and discussed in the proposal, the

measure of net cash outflow and the

outflow and inflow rates used in its

determination are meant to reflect

aspects of historical stress events

including the recent financial crisis.

Consistent with the Basel III Revised

Liquidity Framework and the agencies’

evaluation of relevant supervisory

information, these net outflow

components of the final rule take into

account the potential impact of

idiosyncratic and market-wide shocks,

including those that would result in: (1)

A partial loss of unsecured wholesale

funding capacity; (2) a partial loss of

secured, short-term financing with

certain collateral and counterparties; (3)

losses from derivative positions and the

collateral supporting those positions; (4)

unscheduled draws on committed credit

and liquidity facilities that a covered

company has provided to its customers;

(5) 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; (6)

a partial loss of retail deposits and

brokered deposits from retail customers;

and (7) other shocks that affect outflows

linked to structured financing

transactions, mortgages, central bank

borrowings, and customer short

positions.

The agencies revised certain elements

of the calculation of net cash outflows

in the final rule, which are also

described in section II.C below. The

methodology for determining the peak

cumulative net outflow has been

amended to address certain comments

relating to the treatment in the proposed

rule of non-maturity outflows. The

revised methodology focuses more

explicitly on the maturity mismatch of

contractual outflows and inflows as well

as overnight funding from financial

institutions

are also

described in section II.C below. The

methodology for determining the peak

cumulative net outflow has been

amended to address certain comments

relating to the treatment in the proposed

rule of non-maturity outflows. The

revised methodology focuses more

explicitly on the maturity mismatch of

contractual outflows and inflows as well

as overnight funding from financial

institutions.

The agencies have also changed the

definition of operational services and

the list of operational requirements. In

making these changes, the agencies have

addressed certain issues raised by

commenters relating to the types of

operational services that would be

covered by the rule and the requirement

to exclude certain deposits from being

classified as operational. Additionally,

the agencies have limited the outflow

rate that must be applied to maturing

secured funding transactions such that

the outflow rate should generally not be

greater than the outflow rate for an

unsecured funding transaction with the

same wholesale counterparty. The

agencies have also revised the outflow

rates for committed credit and liquidity

facilities to SPEs so that only SPEs that

rely on the market for funding receive

the 100 percent outflow rate. This

change should address commenters’

concerns about inappropriate outflow

rates for SPEs that are wholly funded by

long-term bank loans and similar

facilities and do not have the same

liquidity risk characteristics as those

that rely on the market for funding.

Consistent with the Basel III Revised

Liquidity Framework, the final rule is

effective as of January 1, 2015, subject

to the transition periods in the final

rule. Under the final rule, covered

companies will be required to maintain

a minimum LCR of 80 percent beginning

January 1, 2015. From January 1, 2016,

through December 31, 2016, the

minimum LCR would be 90 percent.

Beginning on January 1, 2017, and

thereafter, all covered companies would

be required to maintain an LCR of 100

percent

2015, subject

to the transition periods in the final

rule. Under the final rule, covered

companies will be required to maintain

a minimum LCR of 80 percent beginning

January 1, 2015. From January 1, 2016,

through December 31, 2016, the

minimum LCR would be 90 percent.

Beginning on January 1, 2017, and

thereafter, all covered companies would

be required to maintain an LCR of 100

percent. Transition periods are

described fully in section IV of this

Supplementary Information section.

The agencies made changes to the

final rule’s transition periods to address

commenters’ concerns that the proposed

transition periods would not have

provided covered companies enough

time to establish the required

infrastructure to ensure compliance

with the proposed rule’s requirements,

including the proposed daily

calculation requirement. These changes

reflect commenters’ concern regarding

the operational challenges of

implementing the daily calculation

requirement, while still requiring firms

to maintain sufficient HQLA to comply

with the rule. Although the agencies

will still require compliance with the

final rule starting January 1, 2015, the

agencies have delayed implementation

of the daily calculation requirement.

With respect to the daily calculation

requirements, covered companies that

are depository institution holding

companies with $700 billion or more in

total consolidated assets or $10 trillion

or more in assets under custody, and

any depository institution that is a

consolidated subsidiary of such

depository institution holding

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stitution holding

companies with $700 billion or more in

total consolidated assets or $10 trillion

or more in assets under custody, and

any depository institution that is a

consolidated subsidiary of such

depository institution holding

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

14 See e.g., OCC, Board, and FDIC, ‘‘Regulatory

Capital Rules: Regulatory Capital, Implementation

of Basel III, Capital Adequacy, Transition

Provisions, Prompt Corrective Action, Standardized

Approach for Risk-weighted Assets, Market

Discipline and Disclosure Requirements, Advanced

Approaches Risk-Based Capital Rule, and Market

Risk Capital Rule,’’ 78 FR 62018 (October 11, 2013).

companies that has total consolidated

assets equal to $10 billion or more, are

required to calculate their LCR on the

last business day of the calendar month

from January 1, 2015, to June 30, 2015,

and beginning on July 1, 2015, must

calculate their LCR on each business

day. All other covered companies are

required to calculate the LCR on the last

business day of the calendar month

from January 1, 2015, to June 30, 2016,

and beginning on July 1, 2016, and

thereafter, must calculate their LCR each

business day.

As detailed in section V of this

Supplementary Information section, in

response to comments, the Board is also

adjusting the transition periods and

calculation frequency requirements for

the modified LCR in the final rule.

Modified LCR holding companies will

not be subject to the final rule in 2015

and will calculate their LCR monthly

starting January 1, 2016

heir LCR each

business day.

As detailed in section V of this

Supplementary Information section, in

response to comments, the Board is also

adjusting the transition periods and

calculation frequency requirements for

the modified LCR in the final rule.

Modified LCR holding companies will

not be subject to the final rule in 2015

and will calculate their LCR monthly

starting January 1, 2016. Furthermore,

the Board is increasing the stress period

over which modified LCR net cash

outflows are to be calculated from 21

calendar days to 30 calendar days and

is amending the methodology required

to calculate total net cash outflows

under the modified LCR.

The Basel III Revised Liquidity

Framework also establishes liquidity

risk monitoring mechanisms to

strengthen and promote global

consistency in liquidity risk

supervision. These mechanisms include

information on contractual maturity

mismatch, concentration of funding,

available unencumbered assets, LCR

reporting by significant currency, and

market-related monitoring tools. At this

time, the agencies are not implementing

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

information the agencies collect through

other supervisory processes.

The final rule will provide enhanced

information about the short-term

liquidity profile of a covered company

to managers, supervisors, and market

participants. With this information, the

covered company’s management and

supervisors should 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, implement an

orderly resolution of the covered

company

to managers, supervisors, and market

participants. With this information, the

covered company’s management and

supervisors should 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, 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 final rule’s LCR in a

subsequent notice under the Paperwork

Reduction Act.

The final rule is consistent with the

Basel III Revised Liquidity Framework,

with some modifications to reflect the

unique characteristics and risks of the

U.S. market and U.S. regulatory

frameworks. The agencies believe that

these modifications support the goal of

enhancing the short-term liquidity

resiliency of covered companies and do

not unduly diminish the consistency of

the LCR on an international basis.

The agencies note that the BCBS is in

the process of reviewing the Net Stable

Funding Ratio (NSFR) that was included

in the Basel III Liquidity Framework

when it was first published in 2010. The

NSFR is a standard focused on a longer

time horizon that is intended to limit

overreliance on short-term wholesale

funding, to encourage better assessment

of funding risks across all on- and off-

balance sheet items, and to promote

funding stability. The agencies

anticipate a separate rulemaking

regarding the NSFR once the BCBS

adopts a final international version of

the NSFR.

D. Scope of Application of the Final

Rule

1. Covered Companies

Consistent with the Basel III Revised

Liquidity Framework, the proposed rule

would have established a minimum LCR

applicable to all U.S

off-

balance sheet items, and to promote

funding stability. The agencies

anticipate a separate rulemaking

regarding the NSFR once the BCBS

adopts a final international version of

the NSFR.

D. Scope of Application of the Final

Rule

1. Covered Companies

Consistent with the Basel III Revised

Liquidity Framework, the proposed rule

would have established a minimum LCR

applicable to all U.S. internationally

active banking organizations, and their

consolidated subsidiary depository

institutions with total consolidated

assets of $10 billion or more. In

implementing internationally agreed

upon standards in the United States,

such as the capital framework

developed by the BCBS, the agencies

have historically applied a consistent

threshold for determining whether a

U.S. banking organization should be

subject to such standards. The

threshold, generally banking

organizations with $250 billion or more

in total consolidated assets or $10

billion or more in total on-balance sheet

foreign exposure, is based on the size,

complexity, risk profile, and

interconnectedness of such

organizations.14

A number of commenters asserted

that the agencies’ definition of

internationally active would apply the

quantitative minimum liquidity

standard to an inappropriate set of

companies. Several commenters argued

that the internationally active

thresholds would capture several large

banking organizations even though the

business models, operations, and

funding profiles of these organizations

have some characteristics that are

similar to those bank holding companies

that would be subject to the modified

LCR proposed by the Board.

Commenters stated that it would be

more appropriate for all ‘‘regional

banks’’ to be subject to the modified

LCR as described under section V of the

Supplementary Information section to

the proposed rule

, and

funding profiles of these organizations

have some characteristics that are

similar to those bank holding companies

that would be subject to the modified

LCR proposed by the Board.

Commenters stated that it would be

more appropriate for all ‘‘regional

banks’’ to be subject to the modified

LCR as described under section V of the

Supplementary Information section to

the proposed rule. One commenter

requested that the agencies not apply

the standard based on the foreign

exposure threshold, but use a threshold

that takes into account changes in

industry structure, considerations of

competitive equality across

jurisdictions, and differences in capital

and liquidity regulation.

The Board also proposed to apply the

proposed rule to covered nonbank

companies as an enhanced liquidity

standard pursuant to its authority under

section 165 of the Dodd-Frank Act. The

Board believed those organizations

should maintain appropriate liquidity

commensurate with their contribution

to overall systemic risk in the United

States and believed the proposal

properly reflected such firms’ funding

profiles. One commenter stated that the

proposed rule would adversely impact

covered nonbank companies that own

banks to facilitate customer

transactions, and would create a

mismatch of regulations that will

hamper the ability of such businesses to

operate. This commenter further noted

that because of their different business

models, covered nonbank companies are

likely to engage in significantly less

deposit-taking than large bank holding

companies, which generally translates

into less access to one of a few sources

of level 1 liquid assets, Federal Reserve

Bank balances. The commenter

requested specific tailoring of the LCR

or a delay in the implementation of the

final rule for covered nonbank

companies

models, covered nonbank companies are

likely to engage in significantly less

deposit-taking than large bank holding

companies, which generally translates

into less access to one of a few sources

of level 1 liquid assets, Federal Reserve

Bank balances. The commenter

requested specific tailoring of the LCR

or a delay in the implementation of the

final rule for covered nonbank

companies.

One commenter noted that although

the proposed rule would have exempted

depository institution holding

companies with substantial insurance

operations and savings and loan holding

companies with substantial commercial

operations, it would not have exempted

depository holding companies with

significant retail securities brokerage

operations, which the commenter

argued also have liquidity risk profiles

that should not be covered by the

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

15 Id.

16 See 12 U.S.C. 1813(i); 5381(a)(3).

17 Pursuant to the International Banking Act

(IBA), 12 U.S.C. 3102(b), and OCC regulation, 12

CFR 28.13(a)(1), the operations of a Federal branch

or agency regulated and supervised by the OCC are

subject to 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 and regulations 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 or

regulations provide other specific standards for

liquidity requirements. Another

commenter suggested that the agencies

consider waiving the LCR requirement

for certain covered companies, subject

to satisfactory compliance with other

metrics such as capital ratios, stress

tests, or the NSFR

state, however, that this general standard does not

apply when the IBA or other applicable law or

regulations provide other specific standards for

liquidity requirements. Another

commenter suggested that the agencies

consider waiving the LCR requirement

for certain covered companies, subject

to satisfactory compliance with other

metrics such as capital ratios, stress

tests, or the NSFR.

The final rule seeks to calibrate the

net cash outflow requirement for a

covered company based on the

composition of the organization’s

balance sheet, off-balance sheet

commitments, business activities, and

funding profile. Sources of funding that

are considered less likely to be affected

at a time of a liquidity stress are

assigned significantly lower 30

calendar-day outflow rates. Conversely,

the types of funding that are historically

vulnerable to liquidity stress events are

assigned higher outflow rates.

Consistent with the Basel III Revised

Liquidity Framework, in the proposed

rule, the agencies expected that covered

companies with less complex balance

sheets and less risky funding profiles

would have lower net cash outflows and

would therefore require a lower amount

of HQLA to meet the proposed rule’s

minimum liquidity standard. For

example, under the proposed rule,

covered companies that rely to a greater

extent on retail deposits that are fully

covered by deposit insurance and less

on short-term unsecured wholesale

funding would have had a lower total

net cash outflow amount when

compared to a banking organization that

was heavily reliant on wholesale

funding.

Furthermore, systemic risks that

could impair the safety of covered

companies were also reflected in the

minimum requirement, including

provisions to address wrong-way risk,

shocks to asset prices, and other

industry-wide risks that materialized in

the 2007–2009 financial crisis

et cash outflow amount when

compared to a banking organization that

was heavily reliant on wholesale

funding.

Furthermore, systemic risks that

could impair the safety of covered

companies were also reflected in the

minimum requirement, including

provisions to address wrong-way risk,

shocks to asset prices, and other

industry-wide risks that materialized in

the 2007–2009 financial crisis. Under

the proposed rule, covered companies

that have greater interconnectedness to

financial counterparties and have

liquidity risks related to risky capital

market instruments may have larger net

cash outflows when compared to

covered companies that do not have

such dependencies. Large consolidated

banking organizations engage in a

diverse range of business activities and

have a liquidity risk profile

commensurate with the breadth of these

activities. The scope and volume of

these organizations’ financial

transactions lead to interconnectedness

between banking organizations and

between the banking sector and other

financial and non-financial market

participants.

The agencies believe that the

proposed scope of application

thresholds were properly calibrated to

capture companies with the most

significant liquidity risk profiles. The

agencies believe that covered depository

institution holding companies with total

consolidated assets of $250 billion or

more have a riskier liquidity profile

relative to smaller firms based on their

breadth of activities and

interconnectedness with the financial

sector. Likewise, the foreign exposure

threshold identifies firms with a

significant international presence,

which may also be subject to greater

liquidity risks for the same reasons. In

finalizing this rule, the agencies are

promoting the short-term liquidity

resiliency of institutions engaged in a

broad variety of activities, transactions,

and forms of financial

interconnectedness

ial

sector. Likewise, the foreign exposure

threshold identifies firms with a

significant international presence,

which may also be subject to greater

liquidity risks for the same reasons. In

finalizing this rule, the agencies are

promoting the short-term liquidity

resiliency of institutions engaged in a

broad variety of activities, transactions,

and forms of financial

interconnectedness. For the reasons

discussed above, the agencies believe

that the consistent scope of application

used across several regulations is

appropriate for the final rule.15

The agencies believe that providing a

waiver to covered companies that meet

alternate metrics would be contrary to

the express purpose of the proposed

rule to provide a standardized

quantitative liquidity metric for covered

companies. Moreover, with respect to

commenters’ requests to exclude certain

covered companies with large retail

securities brokerage and other non-

depository operations from the scope of

the final rule, the agencies believe that

such companies have heightened

liquidity risk profiles due to the range

and volume of financial transactions

entered into by such organizations and

that the LCR is appropriately calibrated

to reflect those business models.

The proposed rule exempted

depository institution holdings

companies and nonbank financial

companies designated by the Council

for Board supervision with large

insurance operations or savings and

loan holding companies with large

commercial operations, because their

business models differ significantly

from covered companies. The Board

recognizes that the companies

designated by the Council may have a

range of businesses, structures, and

activities, that the types of risks to

financial stability posed by nonbank

financial companies will likely vary,

and that the enhanced prudential

standards applicable to bank holding

companies may not be appropriate, in

whole or in part, for all nonbank

financial companies

The Board

recognizes that the companies

designated by the Council may have a

range of businesses, structures, and

activities, that the types of risks to

financial stability posed by nonbank

financial companies will likely vary,

and that the enhanced prudential

standards applicable to bank holding

companies may not be appropriate, in

whole or in part, for all nonbank

financial companies. Accordingly, the

Board is not applying the LCR

requirement to nonbank financial

companies supervised by the Board

through this rulemaking. Instead,

following designation of a nonbank

financial company for supervision by

the Board, the Board intends to assess

the business model, capital structure,

and risk profile of the designated

company to determine how the

proposed enhanced prudential

standards should apply, and if

appropriate, would tailor application of

the LCR by order or rule to that nonbank

financial company or to a category of

nonbank financial companies. The

Board will ensure that nonbank

financial companies receive notice and

opportunity to comment prior to

determination of the applicability of any

LCR requirement.

Upon the issuance of an order or rule

that causes a nonbank financial

company to become a covered nonbank

company subject to the LCR

requirement, any state nonmember bank

or state savings association with $10

billion or more in total consolidated

assets that is a consolidated subsidiary

of such covered nonbank company also

would be subject to the final rule

ility of any

LCR requirement.

Upon the issuance of an order or rule

that causes a nonbank financial

company to become a covered nonbank

company subject to the LCR

requirement, any state nonmember bank

or state savings association with $10

billion or more in total consolidated

assets that is a consolidated subsidiary

of such covered nonbank company also

would be subject to the final rule. When

a nonbank financial company parent of

a national bank or Federal savings

association becomes subject to the LCR

requirement by order or rule, the OCC

will apply its reservation of authority

under § __.1(b)(1)(iv) of the final rule,

including applying the notice and

response procedures described in § __

.1(b)(5) of the final rule, to determine if

application of the LCR requirement is

appropriate for the national bank or

Federal savings association in light of its

asset size, level of complexity, risk

profile, scope of operations, affiliation

with foreign or domestic covered

entities, or risk to the financial system.

As in the proposed rule, the final rule

does 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.16 The agencies

believe that requiring the FDIC to

maintain a minimum LCR at these

entities would inappropriately constrain

the FDIC’s ability to resolve a depository

institution or its affiliated companies in

an orderly manner.17

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text.16 The agencies

believe that requiring the FDIC to

maintain a minimum LCR at these

entities would inappropriately constrain

the FDIC’s ability to resolve a depository

institution or its affiliated companies in

an orderly manner.17

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61447

Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

Federal branches or agencies, or when the OCC

determines that the general standard should not

apply. This final rule 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.

18 12 U.S.C. 371c.

A company will remain subject to this

final rule until its appropriate Federal

banking agency determines in writing

that application of the rule to the

company is not appropriate. Moreover,

nothing in the final rule limits 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

ral

banking agency determines in writing

that application of the rule to the

company is not appropriate. Moreover,

nothing in the final rule limits 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.

As proposed, the agencies are

reserving the authority to apply the final

rule to a bank holding company, savings

and loan holding company, or

depository institution that does not

meet the asset thresholds described

above if it is determined that the

application of the LCR 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. The

agencies also are reserving the authority

to require a covered company to hold an

amount of HQLA greater than otherwise

required under the final rule, or to take

any other measure to improve the

covered company’s liquidity risk

profile, if the appropriate Federal

banking agency determines that the

covered company’s liquidity

requirements as calculated under the

final rule are not commensurate with its

liquidity risks. In making such

determinations, the agencies will apply

the notice and response procedures as

set forth in their respective regulations.

2. Covered Depository Institution

Subsidiaries

The proposed rule would have

applied the LCR requirements to

depository institutions that are the

consolidated subsidiaries of covered

companies and have $10 billion or more

in total consolidated assets. Several

commenters argued that the agencies

should not apply a separate LCR

requirement to subsidiary depository

institutions of covered companies.

Another commenter noted that foreign

banking organizations would be subject

to separate liquidity requirements for

the entire organization, for any U.S

bsidiaries of covered

companies and have $10 billion or more

in total consolidated assets. Several

commenters argued that the agencies

should not apply a separate LCR

requirement to subsidiary depository

institutions of covered companies.

Another commenter noted that foreign

banking organizations would be subject

to separate liquidity requirements for

the entire organization, for any U.S.

intermediate holding company that the

foreign banking organization would be

required to form under the Board’s

Regulation YY, and for depository

institution subsidiaries that would be

subject to the proposed rule, which, the

commenter asserted, could result in

unnecessarily duplicative holdings of

liquid assets within the organization. In

addition, several commenters argued

that the separate LCR requirement for

depository institution subsidiaries

would result in excess liquidity being

trapped at the covered subsidiaries,

especially if the final rule capped the

inflows from affiliated entities at 75

percent of their outflows. To alleviate

this burden, one commenter requested

that the final rule permit greater reliance

on support by the top-tier holding

company.

One commenter argued that excess

liquidity at the holding company should

be considered when calculating the LCR

for the subsidiary in order to recognize

the requirement that a bank holding

company serve as a source of strength

for its subsidiary depository

institutions

burden, one commenter requested

that the final rule permit greater reliance

on support by the top-tier holding

company.

One commenter argued that excess

liquidity at the holding company should

be considered when calculating the LCR

for the subsidiary in order to recognize

the requirement that a bank holding

company serve as a source of strength

for its subsidiary depository

institutions. The commenter also argued

that requiring subsidiary depository

institutions to calculate the LCR does

not recognize the relationship between

consolidated depository institutions that

are subsidiaries of the same holding

company and requested that the rule

permit a depository institution to count

any excess HQLA held by an affiliated

depository institution, consistent with

the sister bank exemption in section

23A of the Federal Reserve Act.18

One commenter argued that the rule

should not require less complex banking

organizations to calculate the LCR for

consolidated subsidiary depository

institutions with total consolidated

assets of $10 billion or more. Another

commenter expressed concern that

although subsidiary depository

institutions with total consolidated

assets between $1 billion and $10

billion would not be required to comply

with the requirements of the proposed

rule, agency examination staff would

pressure such subsidiary depository

institutions to conform to the

requirements of the final rule. A few

commenters requested that the agencies

clarify that these subsidiary depository

institutions would not be required by

agency examination staff to conform to

the rule.

In promoting short-term, asset-based

liquidity resiliency at covered

companies, the agencies are seeking to

limit the consequences of a potential

liquidity stress event on the covered

company and on the broader financial

system in a manner that does not rely

on potential government support

depository

institutions would not be required by

agency examination staff to conform to

the rule.

In promoting short-term, asset-based

liquidity resiliency at covered

companies, the agencies are seeking to

limit the consequences of a potential

liquidity stress event on the covered

company and on the broader financial

system in a manner that does not rely

on potential government support. Large

depository institution subsidiaries play

a significant role in a covered

company’s funding structure, and in the

operation of the payments system.

These large subsidiaries generally also

have access to deposit insurance

coverage. Accordingly, the agencies

believe that the application of the LCR

requirement to these large depository

institution subsidiaries is appropriate.

To reduce the potential systemic

impact of a liquidity stress event at such

large depository institution subsidiaries,

the agencies believe that such entities

should have a sufficient amount of

HQLA to meet their own net cash

outflows and should not be overly

reliant on inflows from their parents or

affiliates. Accordingly, the agencies do

not believe that the separate LCR

requirement for certain depository

institution subsidiaries is duplicative of

the requirement at the consolidated

holding company level, and the

agencies have adopted this provision of

the final rule as proposed.

The Board is not applying the

requirements of the final rule to foreign

banking organizations and intermediate

holding companies required to be

formed under the Board’s Regulation YY

that are not otherwise covered

companies at this time. The Board

anticipates implementing an LCR-based

standard through a future separate

rulemaking for the U.S. operations of

some or all foreign banking

organizations with $50 billion or more

in combined U.S. assets.

foreign

banking organizations and intermediate

holding companies required to be

formed under the Board’s Regulation YY

that are not otherwise covered

companies at this time. The Board

anticipates implementing an LCR-based

standard through a future separate

rulemaking for the U.S. operations of

some or all foreign banking

organizations with $50 billion or more

in combined U.S. assets.

3. Companies That Become Subject to

the LCR Requirements

The agencies have added § l.1(b)(2)

to address the final rule’s applicability

to companies that become subject to the

LCR requirements before and after

September 30, 2014. Companies that are

subject to the minimum liquidity

standard under § l.1(b)(1) as of

September 30, 2014 must comply with

the rule beginning January 1, 2015,

subject to the transition periods

provided in subpart F of the final rule.

A company that meets the thresholds for

applicability after September 30, 2014,

based on an applicable regulatory year-

end report under § l.1(b)(1)(i) through

(b)(1)(iii) must comply with the final

rule beginning on April 1 of the

following year.

The final rule provides newly covered

companies with a transition period for

the daily calculation requirement,

recognizing that a daily calculation

requirement could impose significant

operational and technology demands.

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llowing year.

The final rule provides newly covered

companies with a transition period for

the daily calculation requirement,

recognizing that a daily calculation

requirement could impose significant

operational and technology demands.

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61448

Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

19 Covered companies that are subject to the

Board’s Regulation YY are required to conduct

internal liquidity stress tests that include a

minimum of four periods over which the relevant

stressed projections extend: Overnight, 30-day, 90-

day, and one-year time horizons, and additional

time horizons as appropriate. 12 CFR 253.35

(domestic bank holding companies); (12 CFR

235.175 (foreign banking organizations).

Specifically, a newly covered company

must calculate its LCR monthly from

April 1 to December 1 of its first year

of compliance. Beginning on January 1

of the following year, the covered

company must calculate its LCR daily.

For example, a company that meets

the thresholds for applicability under

§ l.1(b)(1)(i) through (b)(1)(iii) based on

its regulatory report filed for fiscal year

2017 must comply with the final rule

requirements beginning on April 1,

2018. From April 1, 2018 to December

31, 2018, the final rule requires the

covered company to calculate its LCR

monthly. Beginning January 1, 2019,

and thereafter, the covered company

must calculate its LCR daily

plicability under

§ l.1(b)(1)(i) through (b)(1)(iii) based on

its regulatory report filed for fiscal year

2017 must comply with the final rule

requirements beginning on April 1,

2018. From April 1, 2018 to December

31, 2018, the final rule requires the

covered company to calculate its LCR

monthly. Beginning January 1, 2019,

and thereafter, the covered company

must calculate its LCR daily.

When a covered company becomes

subject to the final rule after September

30, 2014, as a result of an agency

determination under § l.1(b)(1)(iv) that

the LCR requirement is appropriate in

light of the covered company’s asset

size, level of complexity, risk profile,

scope of operations, affiliation with

foreign or domestic covered entities, or

risk to the financial system, the

company must comply with the final

rule requirements according to a

transition period specified by the

agency.

II. Minimum Liquidity Coverage Ratio

A. The LCR Calculation and

Maintenance Requirement

As described above, under the

proposed rule, a covered company

would have been required to maintain

an HQLA amount that was no less than

100 percent of its total net cash

outflows.

1. A Liquidity Coverage Requirement

One commenter argued that the

proposed rule’s requirements would

reduce incentives to maintain

diversified liquid asset portfolios and

other funding sources, which would

result in the loss of diversification in

banking organizations’ sources of

funding and liquid asset composition.

Another commenter asserted that

restoring and strengthening the

authorities of the Federal Reserve as the

lender of last resort would be a more

effective and efficient alternative to

bolstering a covered company’s

liquidity reserves. One commenter

stated that the LCR requirement would

introduce additional system

complexities without taking into

account the benefits of long-term

funding stability afforded by the NSFR

restoring and strengthening the

authorities of the Federal Reserve as the

lender of last resort would be a more

effective and efficient alternative to

bolstering a covered company’s

liquidity reserves. One commenter

stated that the LCR requirement would

introduce additional system

complexities without taking into

account the benefits of long-term

funding stability afforded by the NSFR.

The agencies believe that the most

recent financial crisis demonstrated that

large, internationally active banking

organizations were exposed to

substantial wholesale market funding

risks, as well as contingent liquidity

risks, that were not well mitigated by

the then-prevailing liquidity risk

management practices and liquidity

portfolio compositions. For a number of

large financial institutions, this led to

failure, bankruptcy, restructuring,

merger, or only maintaining operations

with financial support from the Federal

government. The agencies believe that

covered companies should not overly

rely on wholesale market funding that

may be elusive in a time of stress, not

rely on expectations of government

support, and not rely on asset classes

that have a significant liquidity discount

if sold during a period of stress. The

agencies do not believe that the final

rule’s minimum standard will constrain

the diversity of a covered company’s

funding sources or unduly restrict the

types of assets that a covered company

may hold for general liquidity risk

purposes. Covered companies are

expected to maintain appropriate levels

of liquidity without reliance on central

banks acting in the capacity of lenders

of last resort. With respect to the NSFR,

the agencies continue to engage in and

support the ongoing development of the

ratio as an international standard, and

anticipate the standard will be

implemented in the United States at the

appropriate time. In the meantime, the

agencies expect covered companies to

maintain appropriate stable structural

funding profiles

in the capacity of lenders

of last resort. With respect to the NSFR,

the agencies continue to engage in and

support the ongoing development of the

ratio as an international standard, and

anticipate the standard will be

implemented in the United States at the

appropriate time. In the meantime, the

agencies expect covered companies to

maintain appropriate stable structural

funding profiles.

For these reasons, the overall

structure of the LCR requirement is

being adopted as proposed. Under the

final rule, a covered company is

required to maintain an HQLA amount

that is no less than 100 percent of its

total net cash outflows over a

prospective 30 calendar-day period, in

accordance with the calculation

requirements for the HQLA amount and

total net cash outflows, as discussed

below.

2. The Liquidity Coverage Ratio Stress

Period

The proposed rule would have

required covered companies to calculate

the LCR based on a 30 calendar-day

stress period. Some commenters

requested that the liquidity coverage

ratio calculation instead be based on a

calendar-month stress period. Another

commenter noted that supervisors

should be attentive to the possibility

that excess liquidity demands can build

up just outside the 30 calendar-day

window.

Consistent with the Basel III Revised

Liquidity Framework, the final rule uses

a standardized 30 calendar-day stress

period. The LCR is intended to facilitate

comparisons across covered companies

and to provide consistent information

about historical trends. The agencies are

retaining the prospective 30 calendar-

day period because a calendar month

stress period is not compatible with the

daily calculation requirement, which

requires a forward-looking calculation

of liquidity stress for the 30 calendar

days following the calculation date, and

a 30 calendar-day stress period would

provide for an accurate historical

comparison

storical trends. The agencies are

retaining the prospective 30 calendar-

day period because a calendar month

stress period is not compatible with the

daily calculation requirement, which

requires a forward-looking calculation

of liquidity stress for the 30 calendar

days following the calculation date, and

a 30 calendar-day stress period would

provide for an accurate historical

comparison. Furthermore, while the

LCR would establish one scenario for

stress testing, the agencies expect

companies subject to the final rule to

maintain robust stress testing

frameworks that incorporate additional

scenarios that are more tailored to the

risks within their companies.19 The

agencies also expect covered companies

to appropriately monitor and manage

liquidity risk both within and beyond

the 30-day stress period. Accordingly,

the agencies are adopting this aspect of

the final rule as proposed.

3. The Calculation Date, Daily

Calculation Requirement, and

Comments on LCR Reporting

Under the proposed rule, a covered

company would have been required to

calculate its LCR on each business day

as of that date (the calculation date),

with the horizon for each calculation

ending 30 days from the calculation

date. The proposed rule would have

required a covered company to calculate

its LCR on each business day as of a set

time selected by the covered company

prior to the effective date of the rule and

communicated in writing to its

appropriate Federal banking agency.

The proposed rule did not include a

proposal to establish a reporting

requirement for the LCR. The agencies

anticipate separately seeking comment

on proposed regulatory reporting

requirements and instructions

pertaining to a covered company’s

disclosure of the final rule’s LCR in a

subsequent notice under the Paperwork

Reduction Act.

A number of commenters stated that

the daily calculation requirement

imposes significant operational burdens

on covered companies

ement for the LCR. The agencies

anticipate separately seeking comment

on proposed regulatory reporting

requirements and instructions

pertaining to a covered company’s

disclosure of the final rule’s LCR in a

subsequent notice under the Paperwork

Reduction Act.

A number of commenters stated that

the daily calculation requirement

imposes significant operational burdens

on covered companies. These include

costs associated with building and

testing new information technology

systems, developing governance and

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61449

Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

20 Board, ‘‘Agency Information Collection

Activities: Announcement of Board Approval

Under Delegated Authority and Submission to

OMB,’’ 79 FR 48158 (August 15, 2014).

internal control frameworks for the LCR,

and collecting and reviewing the

requisite data to comply with the

requirements of the proposed rule.

Commenters argued that developing

systems is challenging, expensive, and

time consuming for those organizations

that do not currently have such

reporting capabilities in place. For

example, one commenter said that

capturing the data to perform the LCR

calculation on a daily basis would

require banking organizations to

implement entirely new and custom

data systems and mechanics. Several

commenters expressed concerns

generally that the additional system

development costs would outweigh the

benefits from the LCR to supervisors.

In addition to the costs of developing

new systems, commenters also raised

concerns about the time frame between

the adoption of the final rule and the

effective date of the proposed rule and

indicated that there would be

insufficient time in which to develop

operational capabilities to comply with

the proposed rule

velopment costs would outweigh the

benefits from the LCR to supervisors.

In addition to the costs of developing

new systems, commenters also raised

concerns about the time frame between

the adoption of the final rule and the

effective date of the proposed rule and

indicated that there would be

insufficient time in which to develop

operational capabilities to comply with

the proposed rule. For instance, one

commenter argued that because the rule

was not yet final, there would not be

enough time to implement systems

before the January 1, 2015 compliance

date. Several commenters echoed a

similar concern and contended that the

burden associated with implementing

and testing systems for the daily

calculation is heightened by a short time

frame. Some of these commenters

requested a delay in the implementation

of the final rule to better develop

operational capabilities for compliance.

Several commenters argued that the

requirement to calculate the LCR daily

would require large changes to data

systems, processes, reporting, and

governance and were concerned that

their institutions would not have the

capability to perform accurately the

required calculations. In particular, the

commenters expressed concern with the

level of certainty required for such

calculation and its relation to their

disclosure obligations under securities

laws. Other commenters observed that

there are limits to the number of large

scale projects that covered companies

can implement at one time, and

building LCR reporting systems would

require significant resources.

Other commenters preferred a

monthly calculation given the

significant information technology costs

and short time frame until

implementation. Further, several

commenters stated that much of the data

necessary to calculate a daily LCR

currently is available only on systems

that report monthly, rather than daily

ime, and

building LCR reporting systems would

require significant resources.

Other commenters preferred a

monthly calculation given the

significant information technology costs

and short time frame until

implementation. Further, several

commenters stated that much of the data

necessary to calculate a daily LCR

currently is available only on systems

that report monthly, rather than daily.

These commenters also expressed

concern over developing the necessary

internal controls to ensure that the data

is sufficiently accurate. Several

commenters requested that the agencies

require certain ‘‘regional’’ banking

organizations that met the proposed

rule’s scope of applicability threshold,

but have not been identified as Global

Systemically Important Banks (G–SIBs)

by the Financial Stability Board, to

calculate the LCR on a monthly, rather

than daily, basis. Commenters argued

that the daily calculation for such

organizations is unnecessary and that

the monitoring of daily liquidity risk

management should be established

through the supervisory process. One

commenter argued that it may not be

necessary to perform detailed

calculations every business day during

periods of ample liquidity and

suggested that the agencies impose the

daily requirement only during periods

of stress.

Covered companies that would not be

subject to supervisory daily liquidity

reporting requirements under the

Board’s information collection and

Complex Institution Liquidity

Monitoring Report (FR 2052a) liquidity

reporting program 20 raised concerns

about the time needed to develop

systems to comply with a daily LCR

requirement. Those companies asserted

they should not be subject to a daily

calculation or, in the alternative, that

they should be provided with additional

time to develop operational capabilities

relative to those institutions submitting

the FR 2052a report

port (FR 2052a) liquidity

reporting program 20 raised concerns

about the time needed to develop

systems to comply with a daily LCR

requirement. Those companies asserted

they should not be subject to a daily

calculation or, in the alternative, that

they should be provided with additional

time to develop operational capabilities

relative to those institutions submitting

the FR 2052a report. A commenter

suggested that covered companies that

have not previously been subject to

bank or bank holding company liquidity

reporting requirements should be given

additional time to develop the necessary

systems. Another commenter requested

that the agencies clarify the mechanics

for calculating the LCR and reporting it

to regulators. Several commenters

requested that, if the final rule would

require daily calculation of the LCR, the

agencies establish a transition period for

firms to implement this calculation

methodology.

The agencies recognize that a daily

calculation requirement for a new

regulatory requirement imposes

significant operational and technology

demands upon covered companies.

However, the agencies continue to

believe the daily calculation

requirement is appropriate for covered

companies under the final rule. Covered

companies with $250 billion or more in

total consolidated assets or $10 billion

or more in total on-balance sheet foreign

exposures are large, complex

organizations with significant trading

and other activities. Moreover,

idiosyncratic or market driven liquidity

stress events have the potential to

become significant in a short period of

time even for covered companies that

have not been designated as G–SIBs by

the Financial Stability Board and that

have relatively less complex balance

sheets and more consistent funding

profiles than G–SIBs in the normal

course of business

and other activities. Moreover,

idiosyncratic or market driven liquidity

stress events have the potential to

become significant in a short period of

time even for covered companies that

have not been designated as G–SIBs by

the Financial Stability Board and that

have relatively less complex balance

sheets and more consistent funding

profiles than G–SIBs in the normal

course of business. In contrast to the

entities that would be subject to the

Board’s modified LCR requirement

discussed in section V of this

Supplementary Information section,

such organizations tend to have more

significant trading activities,

interconnectedness in the financial

system, and are a significant source of

credit to the areas of the United States

in which they operate. Supervisors

expect an organization that is a covered

company under this rule to have robust,

forward-looking liquidity risk

monitoring tools that enable the

organization to be responsive to

changing liquidity risks. These tools are

expected to be in place even during

periods when the organization considers

that it has ample liquidity, so that

emerging risks may be identified and

mitigated. The agencies also note that

during periods of stress, it may be

difficult for companies to implement a

daily reporting requirement if the

necessary technological systems have

not previously been established.

Therefore, the agencies continue to

believe the daily calculation

requirement is appropriate for covered

companies under the final rule.

However, the agencies recognize that

the calculation requirements under this

rule, including the daily calculation

requirement, may necessitate certain

enhancements to a covered company’s

liquidity risk data collection and

monitoring infrastructure. Accordingly,

the agencies have changed the proposed

rule to include certain transition periods

as described fully in section IV of this

Supplementary Information section

ze that

the calculation requirements under this

rule, including the daily calculation

requirement, may necessitate certain

enhancements to a covered company’s

liquidity risk data collection and

monitoring infrastructure. Accordingly,

the agencies have changed the proposed

rule to include certain transition periods

as described fully in section IV of this

Supplementary Information section.

With these revisions, the agencies

believe that the final rule achieves its

overall objective of promoting better

liquidity management and reducing

liquidity risk. To that end, the agencies

have sought to achieve a balance

between operational concerns and the

overall objectives of the LCR by

providing covered companies with

additional time to implement the daily

calculation requirement. Likewise, with

respect to the level of precision

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required, the agencies believe that the

transition period should provide

covered companies with an appropriate

time frame to upgrade systems, develop

controls, train employees, and enhance

other operational capabilities so that

covered companies will have the

requisite operational tools to effectively

implement a daily calculation

requirement.

With respect to reporting frequencies,

the agencies continue to anticipate that

they will separately seek comment on

proposed regulatory reporting

requirements and instructions for the

LCR in a subsequent notice.

B. High-Quality Liquid Assets

The agencies received a number of

comments on the criteria for HQLA and

the designation of the liquidity level for

various assets

requirement.

With respect to reporting frequencies,

the agencies continue to anticipate that

they will separately seek comment on

proposed regulatory reporting

requirements and instructions for the

LCR in a subsequent notice.

B. High-Quality Liquid Assets

The agencies received a number of

comments on the criteria for HQLA and

the designation of the liquidity level for

various assets. Under the proposed rule,

the numerator of the LCR would have

been a covered company’s HQLA

amount, which would have been the

HQLA held by the covered company

subject to the qualifying operational

control criteria and compositional

limitations. These proposed criteria and

limitations were meant to ensure that a

covered company’s HQLA amount

would include only assets with a high

potential to generate liquidity through

monetization (sale or secured

borrowing) during a stress scenario.

Consistent with the Basel III Revised

Liquidity Framework, the agencies

proposed classifying HQLA into three

categories of assets: Level 1, level 2A,

and level 2B liquid assets. Specifically,

the agencies proposed that level 1 liquid

assets, which are the highest quality and

most liquid assets, would have been

included in a covered company’s HQLA

amount without a limit and without

haircuts. 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, the proposed rule

would have subjected level 2A liquid

assets to a 15 percent haircut and, when

combined with level 2B liquid assets,

they could not have exceeded 40

percent of the total HQLA amount.

Level 2B liquid assets, which are

associated with a lesser degree of

liquidity and more volatility than level

2A liquid assets, would have been

subject to a 50 percent haircut and

could not have exceeded 15 percent of

the total HQLA amount. All other

classes of assets would not qualify as

HQLA

with level 2B liquid assets,

they could not have exceeded 40

percent of the total HQLA amount.

Level 2B liquid assets, which are

associated with a lesser degree of

liquidity and more volatility than level

2A liquid assets, would have been

subject to a 50 percent haircut and

could not have exceeded 15 percent of

the total HQLA amount. All other

classes of assets would not qualify as

HQLA.

Commenters expressed concerns

about several proposed criteria for

identifying the types of assets that

qualify as HQLA. Commenters also

suggested that the agencies designate

certain additional assets as HQLA and

change the categorization of certain

assets as level 1, level 2A, or level 2B

liquid assets. A commenter cautioned

that the proposed rule’s stricter

definition of HQLA compared to the

Basel III Revised Liquidity Framework

could lead to distortions in the market,

such as dramatically increased demand

for limited supplies of asset classes and

hoarding of HQLA by financial

institutions.

The final rule adopts the proposed

rule’s overall structure for the

classification of assets as HQLA and the

compositional limitations for certain

classes of HQLA in the HQLA amount.

As discussed more fully below, the

agencies considered the issues raised by

commenters and incorporated a number

of modifications in the final rule to

address commenters’ concerns.

1. Liquidity Characteristics of HQLA

Assets that qualify as HQLA should

be easily and immediately convertible

into cash with little or no expected loss

of value during a period of liquidity

stress. In identifying the types of assets

that would qualify as HQLA in the

proposed and final rules, the agencies

considered the following categories of

liquidity characteristics, which are

generally consistent with those of the

Basel III Revised Liquidity Framework:

be easily and immediately convertible

into cash with little or no expected loss

of value during a period of liquidity

stress. In identifying the types of assets

that would qualify as HQLA in the

proposed and final rules, the agencies

considered the following categories of

liquidity characteristics, which are

generally consistent with those of the

Basel III Revised Liquidity Framework:

(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 have

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.

Another characteristic of these assets is

that they generally experience ‘‘flight to

quality’’ during a crisis, which is where

investors sell their other holdings to buy

more of these assets in order to reduce

the risk of loss and thereby increase

their 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 that could become

less liquid during a period of stress

would not be appropriate for

consideration as HQLA. For example,

securities issued or guaranteed by many

companies in the financial sector have

been more prone to lose value when the

banking sector is experiencing stress

and become less liquid due to the high

correlation between the health of these

companies and the health of the

financial sector 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

cial sector have

been more prone to lose value when the

banking sector is experiencing stress

and become less liquid due to the high

correlation between the health of these

companies and the health of the

financial sector 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, and consistent with

the Basel III Revised Liquidity

Framework, the final rule excludes from

HQLA assets that are issued by

companies that are primary actors in the

financial sector. Identification of these

companies is discussed in section II.B.2,

below.

b. Market-Based Characteristics

The agencies also have found that

assets appropriate to be included as

HQLA generally exhibit certain market-

based characteristics. 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 trading

volume. This market-based liquidity

characteristic may be demonstrated by

historical evidence, including evidence

observed during recent periods of

market liquidity stress. Such assets

should demonstrate: Low bid-ask

spreads, high trading volumes, a large

and diverse number of market

participants, and other appropriate

factors. Diversity of market participants,

on both the buying and selling sides of

transactions, is particularly important

because it tends to reduce market

concentration and is a key indicator that

a market will remain liquid during

periods of stress. 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

declines, even during times of stress

ularly important

because it tends to reduce market

concentration and is a key indicator that

a market will remain liquid during

periods of stress. 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

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) as

well as trading 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 these periods of stress

because historically market participants

move into more liquid assets in times of

systemic crisis.

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21 A credit rating is one potential perspective on

credit risk that may be used by a covered company

in its assessment of the risk profile of a security.

However, covered companies should avoid over

reliance upon credit ratings in isolation. In

addition, the Dodd-Frank Act prohibits the

reference to or reliance on credit ratings in an

agency’s regulations. Public Law 111–203, section

939A, 124 Stat 1376 (2010).

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 can readily agree on

its valuation. Assets with more

standardized, homogenous, and simple

structures tend to be more fungible,

thereby promoting liquidity

. Public Law 111–203, section

939A, 124 Stat 1376 (2010).

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 can readily agree on

its valuation. Assets with more

standardized, homogenous, and simple

structures tend to be more fungible,

thereby promoting liquidity. The pricing

formula of more liquid assets generally

is easy to calculate when it is based

upon sound assumptions and publicly

available inputs. Whether an asset is

listed on an active and developed

exchange can serve as a key indicator of

an asset’s price transparency and

liquidity.

c. Central Bank Eligibility

Assets that a covered company can

pledge at a central bank as collateral for

intraday liquidity needs and overnight

liquidity facilities in a jurisdiction and

in a currency where the bank has access

to the central bank generally tend to be

liquid and, as such, are appropriate for

consideration as HQLA. In the past,

central banks have provided a backstop

to the supply of banking system

liquidity under conditions of severe

stress. Central bank eligibility should,

therefore, provide additional assurance

that assets could be used in acute

liquidity stress events without adversely

affecting the broader financial system

and economy. However, central bank

eligibility is not itself sufficient to

categorize an asset as HQLA; all of the

final rule’s requirements for HQLA must

be met if central bank eligible assets are

to qualify as HQLA.

d. Comments About Liquidity

Characteristics

In their proposal, the agencies

requested comments on whether the

agencies should consider other

characteristics in analyzing the liquidity

of an asset. Although several

commenters expressed concerns about

the agencies’ evaluation of the proposed

liquidity characteristics to designate

certain assets as HQLA, the agencies

received only a few comments on the set

of liquidity characteristics

n their proposal, the agencies

requested comments on whether the

agencies should consider other

characteristics in analyzing the liquidity

of an asset. Although several

commenters expressed concerns about

the agencies’ evaluation of the proposed

liquidity characteristics to designate

certain assets as HQLA, the agencies

received only a few comments on the set

of liquidity characteristics. One

commenter suggested that the agencies

evaluate secondary trading levels over

time, specifically for level 1 liquid

assets. The commenter also

recommended that the agencies

consider various factors to assess

security issuances, including the

absolute size of parent issuer holdings,

credit ratings, and average credit

spreads. Another commenter expressed

its belief that the inclusion of an asset

as HQLA should be determined based

on objective criteria for market liquidity

and creditworthiness.

In response to the commenter’s

concerns, the agencies agree that trading

volume is an important characteristic of

an asset’s liquidity. The agencies believe

that high trading volume across

dynamic market environments is one of

several factors that evidences market-

based characteristics of HQLA. The final

rule continues to consider trading

volume to assess the liquidity of an

asset.

In response to the commenter’s

suggestion for the final rule to include

factors such as credit ratings and

average credit spreads, the agencies

recognize that indicators of credit risk

include credit ratings and average credit

spreads. The risk profile of an asset also

includes many other types of risks. The

agencies note that the final rule

incorporates assessments of credit risk

in certain level 1 and level 2A liquid

assets criteria by referring to the risk

weights assigned to securities under the

agencies’ risk-based capital rules

gnize that indicators of credit risk

include credit ratings and average credit

spreads. The risk profile of an asset also

includes many other types of risks. The

agencies note that the final rule

incorporates assessments of credit risk

in certain level 1 and level 2A liquid

assets criteria by referring to the risk

weights assigned to securities under the

agencies’ risk-based capital rules. The

agencies are not including the

additional factors suggested by the

commenter because in some cases, it

would be legally impermissible, and

additionally, the agencies believe the

link to risk weights in the risk-based

capital rules for level 1 and level 2A

qualifying criteria sufficiently captures

credit risk factors for purposes of the

LCR.21

Finally, in response to one

commenter’s request that the agencies

incorporate objective criteria in the

liquidity characteristics of the final rule,

the agencies highlight that certain

objective criteria relating to price

decline scenarios are included as

qualifying criteria for level 2A and level

2B liquid assets, as discussed in section

II.B.2. The agencies believe that the

liquidity characteristics in the final rule,

combined with certain objective criteria

for specific categories of HQLA, provide

an appropriate basis for evaluating a

variety of asset classes for inclusion as

HQLA.

2. Qualifying Criteria for Categories of

HQLA

Based on the analysis of the liquidity

characteristics above, the proposed rule

would have included a number of

classes of assets meeting these

characteristics as HQLA. However,

within certain of the classes of assets

that the agencies proposed to include as

HQLA, the proposed rule would have

set forth a number of qualifying criteria

and specific requirements for a

particular asset to qualify as HQLA.

With certain modifications to address

commenters’ concerns regarding certain

classes of assets, discussed below, the

agencies are adopting these criteria and

requirements generally as proposed.

assets

that the agencies proposed to include as

HQLA, the proposed rule would have

set forth a number of qualifying criteria

and specific requirements for a

particular asset to qualify as HQLA.

With certain modifications to address

commenters’ concerns regarding certain

classes of assets, discussed below, the

agencies are adopting these criteria and

requirements generally as proposed.

a. The Liquid and Readily-Marketable

Standard

Most of the assets in the HQLA

categories would have been required to

meet the proposed rule’s definition of

‘‘liquid and readily-marketable’’ in

order to be included as HQLA. Under

the proposed rule, an asset would have

been 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 agencies proposed this

‘‘liquid and readily-marketable’’

requirement to ensure that assets

included as HQLA would 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.

Commenters raised several concerns

with the proposed rule’s definition of

‘‘liquid and readily-marketable.’’

Several commenters urged the agencies

to provide more detail on the liquid and

readily-marketable standard. One of

these commenters highlighted that the

definition included undefined terms

and suggested that the agencies either

provide specific securities or asset

classes or refer to instrument

characteristics similar to those listed in

the Board’s Regulation YY. One

commenter urged the agencies to pursue

a more quantitative approach to

identifying securities that would meet

the standard

ard. One of

these commenters highlighted that the

definition included undefined terms

and suggested that the agencies either

provide specific securities or asset

classes or refer to instrument

characteristics similar to those listed in

the Board’s Regulation YY. One

commenter urged the agencies to pursue

a more quantitative approach to

identifying securities that would meet

the standard. Another commenter noted

that the agencies did not provide

guidance on how to document that

HQLA meets the market-based

characteristics or the liquid and readily-

marketable standard. Separately,

another commenter suggested that the

liquid and readily-marketable standard

should account for indicators of

liquidity other than those related to the

secondary market. In particular, the

commenter highlighted that covered

companies can monetize securities

outside of the outright sales market

through repurchase transactions and

through posting securities as collateral

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22 See § __.20(b) and (c).

securing over-the-counter or exchange-

traded derivative transactions. Another

commenter interpreted the liquid and

readily-marketable standard to require a

security-by-security analysis

incorporating data on market makers

and market participants and trading

volumes to determine eligibility under

the criteria. The commenter contended

that such analysis could be burdensome

on covered companies with significant

trading operations. One commenter

requested that the agencies remove this

standard for all level 1 and level 2A

liquid assets

quire a

security-by-security analysis

incorporating data on market makers

and market participants and trading

volumes to determine eligibility under

the criteria. The commenter contended

that such analysis could be burdensome

on covered companies with significant

trading operations. One commenter

requested that the agencies remove this

standard for all level 1 and level 2A

liquid assets. Another stated that there

was a difference between the regulatory

text of the proposed rule and the

discussion in the Supplementary

Information section to the proposed

rule, which indicated that HQLA would

need to exhibit certain market-based

characteristics, such as no sharp price

declines, and standardized,

homogeneous, and simple securities

structures. The commenter stated that

these characteristics were not included

in the liquid and readily-marketable

standard and requested clarification on

how much the structure of a security

would be questioned by the supervisors

of a covered company.

After reviewing the comments, the

agencies have determined to retain the

proposed definition of ‘‘liquid and

readily-marketable’’ in the final rule.

The agencies believe that defining an

asset as 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 provides an

appropriate standard for determining

whether an asset can be readily sold in

times of stress. These elements of the

requirement are meant to ensure that

assets included as HQLA are traded in

deep, active markets to allow a covered

company to convert them into cash by

sale or repurchase transactions during

times of stress. In particular, the

agencies believe that an active

secondary market for an asset is an

indicator of the ease with which a

covered company may monetize that

asset

ese elements of the

requirement are meant to ensure that

assets included as HQLA are traded in

deep, active markets to allow a covered

company to convert them into cash by

sale or repurchase transactions during

times of stress. In particular, the

agencies believe that an active

secondary market for an asset is an

indicator of the ease with which a

covered company may monetize that

asset. In response to a commenter’s

concern that a covered company may

only monetize securities through

outright sales to meet the liquid and

readily-marketable standard, the

agencies are clarifying that a covered

company may monetize assets through

repurchase transactions in addition to

outright sales.

Although one commenter requested

that the final rule include specific

securities or instrument characteristics

to further define ‘‘liquid and readily-

marketable,’’ the agencies believe that

the specific types of securities set forth

in the categories of level 1, level 2A, and

level 2B liquid assets provide sufficient

detail of the types of securities and

instruments that may be liquid and

readily-marketable and may be

considered HQLA. In addition, the final

rule retains from the proposed rule

certain price decline scenarios to

identify certain level 2A and level 2B

liquid assets.22 The agencies believe that

price decline scenarios are appropriate

for certain types of assets included in

level 2A and 2B liquid assets to evaluate

the liquidity and market-based

characteristics of those assets. As the

criteria for these categories of HQLA

incorporate price decline scenarios, the

agencies do not believe it is necessary

to separately include price decline

scenarios as part of the liquid and

readily-marketable standard.

One commenter requested that the

agencies clarify the Supplementary

Information section discussion in the

proposed rule indicating that HQLA

should exhibit standardized,

homogeneous, and simple security

structures

orate price decline scenarios, the

agencies do not believe it is necessary

to separately include price decline

scenarios as part of the liquid and

readily-marketable standard.

One commenter requested that the

agencies clarify the Supplementary

Information section discussion in the

proposed rule indicating that HQLA

should exhibit standardized,

homogeneous, and simple security

structures. The agencies believe that the

criteria for HQLA set forth in § __.20 of

the final rule includes assets that meet

these criteria. The final rule continues

to require that certain HQLA categories

meet the final rule’s definition of liquid

and readily-marketable. The agencies

emphasize that securities with unique,

bespoke, or complex structures which

are difficult to value on a routine basis,

regardless of issuer or capital risk

weight, may not meet the liquid and

readily-marketable standard.

In response to a commenter’s concern

about the burden of a security-by-

security analysis to demonstrate that a

security qualifies as liquid and readily-

marketable, the agencies recognize that

certain companies may trade or hold a

significant number of different

securities. Although the exercise of

assessing unique securities for the

purpose of determining whether they

are liquid and readily-marketable may

involve operational burden, the agencies

believe this analysis and determination

is critical to ensuring that only

securities that will serve as a reliable

source of liquidity during times of stress

are included in a company’s HQLA. A

covered company may choose not to

determine whether a security is liquid

and readily-marketable for LCR

purposes if it determines that the cost of

performing the analysis exceeds the

benefit of including the security as

HQLA. Thus, the agencies decline to

remove the liquid and readily-

marketable standard for all level 1 and

level 2A liquid assets, as requested by

one commenter

HQLA. A

covered company may choose not to

determine whether a security is liquid

and readily-marketable for LCR

purposes if it determines that the cost of

performing the analysis exceeds the

benefit of including the security as

HQLA. Thus, the agencies decline to

remove the liquid and readily-

marketable standard for all level 1 and

level 2A liquid assets, as requested by

one commenter.

Furthermore, in response to requests

that the agencies clarify any

documentation requirements in

determining whether an asset is liquid

and readily-marketable, the agencies

expect that a covered company should

be able to demonstrate to its appropriate

Federal banking agency its security-by-

security analysis (which may include

time-series analyses about the specific

security or comparative analysis of

similar securities from the same issuer)

that HQLA held by the covered

company meets the liquid and readily-

marketable standard.

b. Financial Sector Entities

Consistent with the Basel III Revised

Liquidity Framework, the proposed rule

would have provided that assets that are

included as HQLA could not be issued

by a financial sector entity, because

these assets could exhibit similar risks

and correlation with covered companies

(wrong-way risk) during a liquidity

stress period. In the proposed rule,

financial sector entities would have

included regulated financial companies,

investment companies, non-regulated

funds, pension funds, investment

advisers, or a consolidated subsidiary of

any of the foregoing. In addition, under

the proposed rule, securities issued by

any company (or any of its consolidated

subsidiaries) that an agency has

determined should, for the purposes of

the proposed rule, be treated the same

as a regulated financial company,

investment company, non-regulated

fund, pension fund, or investment

adviser, based on its engagement in

activities similar in scope, nature, or

operations to those entities (identified

company) would not have been

included as HQLA

consolidated

subsidiaries) that an agency has

determined should, for the purposes of

the proposed rule, be treated the same

as a regulated financial company,

investment company, non-regulated

fund, pension fund, or investment

adviser, based on its engagement in

activities similar in scope, nature, or

operations to those entities (identified

company) would not have been

included as HQLA.

The term regulated financial company

under the proposed rule would have

included bank holding companies and

savings and loan holding companies

(depository institution holding

companies); nonbank financial

companies supervised by the Board;

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

(BHC Act); national banks, state member

banks, and state nonmember banks

(including those that are not depository

institutions); insurance companies;

securities holding companies (as

defined in section 618 of the Dodd-

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23 12 U.S.C. 1850a(a)(4).

24 7 U.S.C. 1a(28) and (49).

25 15 U.S.C. 78c(a)(71).

26 12 U.S.C. 5462(4).

27 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

ises; 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.

28 See National Information Center, A repository

of financial data and institution characteristics

collected by the Federal Reserve System, available

at http://www.ffiec.gov/nicpubweb/nicweb/

nichome.aspx.

29 The agencies note that the proposed rule would

have recognized that financial sector entities have

operational needs and deposits that are similar to

non-financial entities by treating the deposits of

financial sector entities that meet the operational

deposit criteria as operational deposits. The non-

operational deposits of a financial would have been

subject to a higher outflow rate than a non-financial

wholesale counterparty due to correlation of

liquidity risks between financial sector entities and

covered companies. The final rule retains each of

these provisions as discussed below under section

II.C.3.h.

Frank Act); 23 broker-dealers or dealers

registered with the Securities and

Exchange Commission (SEC); futures

commission merchants and swap

dealers, each as defined in the

Commodity Exchange Act; 24 or

security-based swap dealers defined in

section 3 of the Securities Exchange

Act.25 It would also have included any

designated financial market utility, as

defined in section 803 of the Dodd-

Frank Act.26 The proposed definition

would have also included foreign

companies that are supervised and

regulated in a manner similar to the

institutions listed above.27

In addition, the proposed definition of

regulated financial company would

have included a company that is

included in the organization chart of a

depository institution holding company

on the Form FR Y–6, as listed

dd-

Frank Act.26 The proposed definition

would have also included foreign

companies that are supervised and

regulated in a manner similar to the

institutions listed above.27

In addition, the proposed definition of

regulated financial company would

have included 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 was subject to the proposed

rule (FR Y–6 companies).28 FR Y–6

companies are typically controlled by

the filing depository institution holding

company under the BHC Act. Although

many of these companies may not be

consolidated on the financial statements

of a depository institution holding

company, the links between the

companies are sufficiently significant

that the agencies believed that it would

have been 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 have been

excluded from HQLA under the

proposal. The organizational hierarchy

chart produced by the NIC Web site

reflects (as updated regularly) the FR Y–

6 companies a depository institution

holding company must report on the

form. The agencies proposed 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.

Commenters suggested that the

proposed definition of ‘‘regulated

financial company’’ was overly broad

es proposed 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.

Commenters suggested that the

proposed definition of ‘‘regulated

financial company’’ was overly broad.

For example, one commenter stated that

for the purposes of deposit

classification, the definition of

‘‘financial institution’’ needs to be

limited to those entities that contribute

to the risk of interconnectedness to

ensure the accurate capture of the

underlying risk of the depositor, noting

that the NAICS codes for ‘‘Finance and

Insurance’’ and ‘‘Commercial Banking’’

include over 816,000 and 79,000

business, respectively. The commenter

stated that, depending on the definition,

certain financial institutions may have

operational needs and transactional

deposits that are more similar to a non-

financial institution.29

Overall, the agencies believe that the

overall scope of the proposed definition

of ‘‘regulated financial company’’

appropriately captured the types of the

companies whose assets could exhibit

similar risks and correlation with

covered companies during a liquidity

stress period. Although the number of

financial entities are large, due to the

prominence of the financial services

industry to the economy of the United

States, the agencies continue to believe

that the liquidity risks presented by

securities and obligations of such

companies would be difficult to

monetize during a period of significant

financial distress, as shown in the

recent financial crisis. Accordingly,

similar to the proposed rule, the final

rule will exclude the securities and

obligations of financial sector entities

from being HQLA

tes, the agencies continue to believe

that the liquidity risks presented by

securities and obligations of such

companies would be difficult to

monetize during a period of significant

financial distress, as shown in the

recent financial crisis. Accordingly,

similar to the proposed rule, the final

rule will exclude the securities and

obligations of financial sector entities

from being HQLA.

In addition to comments regarding the

scope of the entities that would have

been included under the proposed rule,

several commenters expressed concerns

regarding the specific inclusion of

certain entities.

i. Companies Listed on a Covered

Company’s FR Y–6

Commenters expressed concern about

the definition’s inclusion of any

company that is included in the

organizational chart of a covered

company as reported on the Form FR Y–

6 and reflected on the NIC Web site

within the definition of regulated

financial company. These commenters

contended that the FR Y–6 is an

expansive form that captures a

substantial range of activities and

investments of depository institution

holding companies, including

companies in which the covered

company has a minority, non-

controlling interest, as well as merchant

banking investments. Commenters

reasoned that merchant banking

investments may be non-financial

enterprises and may not contribute to

the ‘‘wrong-way risk’’ contemplated by

the agencies in defining regulated

financial company. The commenters

believed that such entities should not be

included as regulated financial

companies and requested that the final

rule’s definition of regulated financial

company not include all companies

reported by a covered company on the

Form FR Y–6.

The agencies recognize that there are

certain shortcomings in the scope of the

entities that are listed on a covered

company’s FR Y–6, including the

potential capture of non-financial,

passive merchant banking subsidiaries

companies and requested that the final

rule’s definition of regulated financial

company not include all companies

reported by a covered company on the

Form FR Y–6.

The agencies recognize that there are

certain shortcomings in the scope of the

entities that are listed on a covered

company’s FR Y–6, including the

potential capture of non-financial,

passive merchant banking subsidiaries.

The Board is actively considering

options to adjust the reporting

mechanism which may be used in

determining the population of regulated

financial companies. Moreover, because

entities listed on a covered company’s

FR Y–6 that are non-financial, merchant

banking investments or that do not meet

the definition of control under the BHC

Act are not currently separated from

other entities controlled by a covered

company, the agencies do not believe it

would be appropriate at this time to

provide a blanket exemption for

merchant banking or non-control

investments. The Board anticipates that

it will revise the reporting requirements

used for this purpose in the near future.

However, because any revisions to

reporting requirements would be subject

to public comment, for purposes of the

final rule, the agencies are finalizing the

definition of regulated financial

company as proposed. The agencies do

not believe that any change to the

definition of regulated financial

company would be appropriate without

subjecting such a revision to public

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es are finalizing the

definition of regulated financial

company as proposed. The agencies do

not believe that any change to the

definition of regulated financial

company would be appropriate without

subjecting such a revision to public

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

30 15 U.S.C. 80a–1 et seq.

31 15 U.S.C. 80b–1 et seq.

32 15 U.S.C. 661 et seq.

33 See Reporting Form for Investment Advisers to

Private Funds and Certain Commodity Pool

Operations and Commodity Trading Advisors

(Form PF), available at http://www.sec.gov/rules/

final/2011/ia-3308-formpf.pdf.

comment, together with other revisions

to the reporting requirements that

would be used to identify regulated

financial companies.

ii. Foreign Regulated Financial Entities

The definition of regulated financial

company under the proposed rule

would have included a non-U.S.-

domiciled company that is supervised

and regulated in a manner similar to the

other entities described in the

definition, including bank holding

companies. One commenter requested

that the agencies clarify that the

definition of regulated financial

company would not include non-U.S.

government-sponsored entities and

public sector entities. The commenter

argued that certain public sector entities

are not engaged in a full range of

banking activities, but are, however,

typically subject to prudential

regulation. Two commenters also

requested that the preamble to the final

rule explain how the ‘‘supervised and

regulated in a similar manner’’ standard

should be construed.

The final rule adopts this provision of

the rule as proposed. The agencies are

clarifying that, for purposes of the final

rule, a foreign company, including a

non-U.S. public sector entity, that is

similar in structure to a U.S

. Two commenters also

requested that the preamble to the final

rule explain how the ‘‘supervised and

regulated in a similar manner’’ standard

should be construed.

The final rule adopts this provision of

the rule as proposed. The agencies are

clarifying that, for purposes of the final

rule, a foreign company, including a

non-U.S. public sector entity, that is

similar in structure to a U.S. regulated

financial company (e.g., a foreign bank

or foreign insurance company) and that

is subject to prudential supervision and

regulation in a manner that is similar to

a U.S. regulated financial company

would be considered a regulated

financial company under the final rule.

In considering the similarity of the

supervision and regulation of a foreign

company, a covered company can

consider whether the non-U.S. activities

and operations of the company would

be subject to supervision and regulation

in the United States and whether such

activities are subject to supervision and

regulation abroad.

iii. Investment Companies and

Investment Advisers

Under the proposed rule, investment

companies would have included

companies registered with the SEC

under the Investment Company Act of

1940 30 and investment advisers would

have included companies registered

with the SEC as investment advisers

under the Investment Advisers Act of

1940,31 as well as the foreign equivalent

of such companies.

One commenter expressed concern

with the proposed rule’s treatment of

investment companies as financial

sector entities. The commenter argued

that if an investment company does not

invest in financial sector entities, the

value of its shares would not correlate

with covered companies

visers

under the Investment Advisers Act of

1940,31 as well as the foreign equivalent

of such companies.

One commenter expressed concern

with the proposed rule’s treatment of

investment companies as financial

sector entities. The commenter argued

that if an investment company does not

invest in financial sector entities, the

value of its shares would not correlate

with covered companies. The

commenter recommended that an

investment company’s HQLA eligibility

should be based on the investment

company’s investment policies, such

that if an investment company has a

policy of investing 80 percent of its

assets in HQLA or in securities and

obligations of non-financial sector

entities, its securities would be treated

as HQLA of the same level as the lowest

level HQLA permitted under the policy.

After considering the commenter’s

concerns, the agencies decline to adopt

the commenter’s recommendation in the

final rule. Similar to other entities in the

financial sector, investment companies

have been more prone to lose value and,

as a result, become less liquid in times

of liquidity stress regardless of the

investment company’s investment

policies or portfolio composition, due to

the potentially higher correlation

between the health of these companies

and the health of the financial markets

generally. The agencies believe that a

covered company can be exposed to the

interconnectedness of financial markets

through its investment in investment

companies. Thus, consistent with the

Basel III Revised Liquidity Framework,

the final rule would exclude assets

issued by companies that are primary

actors in the financial sector from

HQLA, including investment company

shares.

ets

generally. The agencies believe that a

covered company can be exposed to the

interconnectedness of financial markets

through its investment in investment

companies. Thus, consistent with the

Basel III Revised Liquidity Framework,

the final rule would exclude assets

issued by companies that are primary

actors in the financial sector from

HQLA, including investment company

shares.

iv. Non-Regulated Funds

Under the proposed rule, non-

regulated funds would have included

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 1958.32

Commenters expressed concerns

about the proposed definition of ‘‘non-

regulated fund.’’ One of these

commenters stated that the proposed

definition would have included the

undefined terms ‘‘hedge fund’’ and

‘‘private equity fund.’’ The commenter

also argued that the definition should

not include portfolio companies that are

consolidated subsidiaries of non-

regulated funds and those funds that

invest primarily in real estate and

related assets. The commenter suggested

that the definition exclude any fund that

does not issue redeemable securities

that provide investors with redemption

rights in the ordinary course and should

also exclude closed-end funds. The

commenter also stated that although the

definition requires a banking

organization to determine whether the

investment adviser of a fund is required

to file Form PF, this information on

whether a particular fund is the subject

of a Form PF is not publicly available

ecurities

that provide investors with redemption

rights in the ordinary course and should

also exclude closed-end funds. The

commenter also stated that although the

definition requires a banking

organization to determine whether the

investment adviser of a fund is required

to file Form PF, this information on

whether a particular fund is the subject

of a Form PF is not publicly available.

Generally, a manager of a ‘‘private

fund’’ that is required to register with

the SEC as an investment adviser and

manages more than $150 million in

private fund assets is required to file

SEC Form PF. Although the final rule

does not define hedge funds or private

equity funds, the agencies believe that

such terms are commonly understood in

the financial services industry and note

that the instructions to the SEC’s Form

PF provide a definition for private

equity funds and hedge funds that are

captured under the form.33 Therefore

the agencies believe that defining ‘‘non-

regulated fund’’ by referencing the

private equity and hedge funds whose

investment advisers are required to file

SEC Form PF adequately defines the

universe of hedge funds and private

equity funds captured under the final

rule.

In response to commenter concerns

that the definition of ‘‘non-regulated

fund’’ includes portfolio companies that

are consolidated subsidiaries of private

funds, the agencies have modified the

definition of ‘‘non-regulated fund.’’ The

agencies recognize that consolidated

subsidiaries of private funds may not

conduct financial activities, but would

have received treatment as financial

sector entities under the proposed rule.

Accordingly, the final rule’s definition

of ‘‘non-regulated fund’’ no longer

includes consolidated subsidiaries of

hedge funds and private equity funds

whose investment adviser is required to

file SEC Form PF

cognize that consolidated

subsidiaries of private funds may not

conduct financial activities, but would

have received treatment as financial

sector entities under the proposed rule.

Accordingly, the final rule’s definition

of ‘‘non-regulated fund’’ no longer

includes consolidated subsidiaries of

hedge funds and private equity funds

whose investment adviser is required to

file SEC Form PF.

With respect to the commenter’s

request to exclude any fund that does

not issue redeemable securities and

closed-end funds from the definition of

non-regulated fund, although investors

in these funds are unable to redeem

securities and may not appear to present

liquidity risk, the agencies believe these

obligations and securities do pose

similar liquidity risks and will behave

similarly to those of other financial

entities.

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations

34 Assets that meet the criteria of eligible HQLA

may be held by a covered company designated as

either ‘‘available-for-sale’’ or ‘‘held-to-maturity,’’

but must be included in the HQLA amount

calculation at fair value (as determined under

GAAP).

35 See 12 U.S.C. 342.

36 12 CFR part 204.

37 12 CFR 204.5(a)(1).

Finally, the agencies recognize that

Form PF filings are not publicly

disclosed. However, the agencies expect

that a covered company should

understand whether its customer is a

private equity fund or a hedge fund. The

agencies further expect that when

identifying HQLA a covered company

should undertake the necessary

diligence to confirm whether an

investment adviser to such fund, which

is typically the manager of the fund, is

required to file Form PF and meets the

final rule’s definition of ‘‘non-regulated

fund.’’

should

understand whether its customer is a

private equity fund or a hedge fund. The

agencies further expect that when

identifying HQLA a covered company

should undertake the necessary

diligence to confirm whether an

investment adviser to such fund, which

is typically the manager of the fund, is

required to file Form PF and meets the

final rule’s definition of ‘‘non-regulated

fund.’’

c. Level 1 Liquid Assets

Under the proposed rule, a covered

company could have included the full

fair value of level 1 liquid assets in its

HQLA amount.34 The proposed rule

would have recognized that these assets

have the highest potential to generate

liquidity for a covered company during

periods of severe liquidity stress and

thus would have been includable in a

covered company’s HQLA amount

without limit. The proposed rule would

have included the following assets as

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.

As discussed in more detail below, a

number of commenters suggested

including additional assets in the level

1 liquid asset category

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.

As discussed in more detail below, a

number of commenters suggested

including additional assets in the level

1 liquid asset category. After

considering the comments received, the

final rule includes the criteria for the

level 1 liquid asset category

substantially as proposed.

i. Reserve Bank Balances

Under the Basel III Revised Liquidity

Framework, ‘‘central bank reserves’’ are

included as 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.35

Pursuant to the Federal Reserve Act,

there are different kinds of balances that

depository institutions may maintain at

Federal Reserve Banks, and they are

maintained in different kinds of Federal

Reserve Bank accounts. Balances that

depository institutions must maintain to

satisfy a reserve balance requirement

must be maintained in the depository

institution’s ‘‘master account’’ at a

Federal Reserve Bank or, if the

institution has designated a pass-

through correspondent, in the

correspondent’s master account. A

‘‘reserve balance requirement’’ is the

amount that a depository institution

must maintain in an account at a

Federal Reserve Bank in order to satisfy

that portion of the institution’s reserve

requirement that is not met with vault

cash. Balances in excess of those

required to be maintained to satisfy a

reserve balance requirement, known as

‘‘excess balances,’’ may be maintained

in a master account or in an ‘‘excess

balance account.’’ Finally, balances

maintained for a specified period of

time, known as ‘‘term deposits,’’ are

maintained in a term deposit account

offered by the Federal Reserve Banks

t met with vault

cash. Balances in excess of those

required to be maintained to satisfy a

reserve balance requirement, known as

‘‘excess balances,’’ may be maintained

in a master account or in an ‘‘excess

balance account.’’ Finally, balances

maintained for a specified period of

time, known as ‘‘term deposits,’’ are

maintained in a term deposit account

offered by the Federal Reserve Banks.

The proposed rule used 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

have been considered level 1 liquid

assets, except for certain term deposits

as explained below.

Consistent with the concept of

‘‘central bank reserves’’ in the Basel III

Revised Liquidity Framework, the

proposed rule included 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. Regarding the first point,

term deposits offered under the Federal

Reserve’s Term Deposit Facility that

include an early withdrawal feature that

allows a depository institution to obtain

a return of funds prior to the deposit

maturity date, subject to an early

withdrawal penalty, would be included

in ‘‘Reserve Bank balances’’ because

such term deposits would be explicitly

and contractually repayable on notice

int,

term deposits offered under the Federal

Reserve’s Term Deposit Facility that

include an early withdrawal feature that

allows a depository institution to obtain

a return of funds prior to the deposit

maturity date, subject to an early

withdrawal penalty, would be included

in ‘‘Reserve Bank balances’’ because

such term deposits would be explicitly

and contractually repayable on notice.

The amount associated with a term

deposit that would be included as

‘‘Reserve Bank balances’’ is equal to the

amount that would be received upon

withdrawal of such a term deposit.

Those term deposits that do not include

this feature would not be included in

‘‘Reserve Bank balances.’’ The terms and

conditions for each term deposit

offering specify whether the term

deposits being offered include an early

withdrawal feature. Regarding the

second point, although term deposits

may be pledged as collateral for

discount window borrowing, the

Federal Reserve’s current discount

window lending programs do not

generally provide term or automatically-

renewing overnight advances.

Commenters suggested various assets

related to Reserve Bank balances to

include as level 1 liquid assets or to be

reflected in the level 1 liquid asset

amount. One commenter recommended

that the final rule include required

reserves in the level 1 liquid asset

amount, alleging that the proposed rule

circumvented Regulation D, which

allows covered companies to manage

their reserves over a 14-day period.36 A

few commenters argued that the final

rule should include vault cash, whether

held in branches or ATMs, as a level 1

liquid asset. The commenter argued that

the final rule should be consistent with

the Basel III Revised Liquidity

Framework, which recognizes the

intrinsic liquidity value of cash and

includes coins and banknotes as level 1

liquid assets

ir reserves over a 14-day period.36 A

few commenters argued that the final

rule should include vault cash, whether

held in branches or ATMs, as a level 1

liquid asset. The commenter argued that

the final rule should be consistent with

the Basel III Revised Liquidity

Framework, which recognizes the

intrinsic liquidity value of cash and

includes coins and banknotes as level 1

liquid assets. Commenters further

contended that vault cash, which can be

used to satisfy the bank’s reserve

requirement under Regulation D, is a

fundamental feature of daily liquidity

management for banks and should be

included as level 1 li

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