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

9120

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 50

[Docket ID OCC–2014–0029]

RIN 1557–AD97

FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Regulation WW; Docket No. R–1537]

RIN 7100–AE 51

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 329

RIN 3064–AE 44

Net Stable Funding Ratio: Liquidity

Risk Measurement Standards and

Disclosure Requirements

AGENCY: Office of the Comptroller of the

Currency, Department of the Treasury;

Board of Governors of the Federal

Reserve System; and Federal Deposit

Insurance Corporation.

ACTION: Final rule.

SUMMARY: The Office of the Comptroller

of the Currency (OCC), the Board of

Governors of the Federal Reserve

System (Board), and the Federal Deposit

Insurance Corporation (FDIC)

(collectively, the agencies) are adopting

a final rule that implements a stable

funding requirement, known as the net

stable funding ratio (NSFR), for certain

large banking organizations. The final

rule establishes a quantitative metric,

the NSFR, to measure the stability of the

funding profile of certain large banking

organizations and requires these

banking organizations to maintain

minimum amounts of stable funding to

support their assets, commitments, and

derivatives exposures over a one-year

time horizon. The NSFR is designed to

reduce the likelihood that disruptions to

a banking organization’s regular sources

of funding will compromise its liquidity

position, promote effective liquidity risk

management, and support the ability of

banking organizations to provide

financial intermediation to businesses

and households across a range of market

conditions. The NSFR supports

financial stability by requiring banking

organizations to fund their activities

with stable sources of funding on an

ongoing basis, reducing the possibility

that funding shocks would substantially

increase distress at individual banking

organizations

nking organizations to provide

financial intermediation to businesses

and households across a range of market

conditions. The NSFR supports

financial stability by requiring banking

organizations to fund their activities

with stable sources of funding on an

ongoing basis, reducing the possibility

that funding shocks would substantially

increase distress at individual banking

organizations. The final rule applies to

certain large U.S. depository institution

holding companies, depository

institutions, and U.S. intermediate

holding companies of foreign banking

organizations, each with total

consolidated assets of $100 billion or

more, together with certain depository

institution subsidiaries (together,

covered companies). Under the final

rule, the NSFR requirement increases in

stringency based on risk-based measures

of the top-tier covered company. U.S.

depository institution holding

companies and U.S. intermediate

holding companies subject to the final

rule are required to publicly disclose

their NSFR and certain components of

their NSFR every second and fourth

calendar quarter for each of the two

immediately preceding calendar

quarters. The final rule also amends

certain definitions in the agencies’

liquidity coverage ratio rule that are also

applicable to the NSFR.

DATES: Effective Date: July 1, 2021.

FOR FURTHER INFORMATION CONTACT:

OCC: Christopher McBride, Director,

James Weinberger, Technical Expert, or

Ang Middleton, Bank Examiner (Risk

Specialist), (202) 649–6360, Treasury &

Market Risk Policy; Dave Toxie, Capital

Markets Lead Expert, (202) 649–6833;

Patrick T. Tierney, Assistant Director,

Henry Barkhausen, Counsel, or Daniel

Perez, Counsel, Chief Counsel’s Office,

uly 1, 2021.

FOR FURTHER INFORMATION CONTACT:

OCC: Christopher McBride, Director,

James Weinberger, Technical Expert, or

Ang Middleton, Bank Examiner (Risk

Specialist), (202) 649–6360, Treasury &

Market Risk Policy; Dave Toxie, Capital

Markets Lead Expert, (202) 649–6833;

Patrick T. Tierney, Assistant Director,

Henry Barkhausen, Counsel, or Daniel

Perez, Counsel, Chief Counsel’s Office,

(202) 649–5490; for persons who are

deaf or hard of hearing, TTY, (202) 649–

5597; Office of the Comptroller of the

Currency, 400 7th Street SW,

Washington, DC 20219.

Board: Juan Climent, Assistant

Director, (202) 872–7526, Kathryn

Ballintine, Manager, (202) 452–2555, J.

Kevin Littler, Lead Financial Institution

Policy Analyst, (202) 475–6677, Michael

Ofori-Kuragu, Senior Financial

Institution Policy Analyst II, (202) 475–

6623 or Christopher Powell, Senior

Financial Institution Policy Analyst II,

(202) 452–3442, Division of Supervision

and Regulation; Benjamin W.

McDonough, Associate General Counsel,

(202) 452–2036, Steve Bowne, Senior

Counsel, (202) 452–3900, Jason Shafer,

Senior Counsel, (202) 728–5811, Laura

Bain, Counsel, (202) 736–5546, or

Jeffery Zhang, Attorney, (202) 736–1968,

Legal Division, Board of Governors of

the Federal Reserve System, 20th and C

Streets NW, Washington, DC 20551. For

the hearing impaired only,

Telecommunication Device for the Deaf

(TDD), (202) 263–4869.

FDIC: Bobby R. Bean, Associate

Director, bbean@fdic.gov; Brian Cox,

Chief, Capital Markets Strategies

Section, brcox@fdic.gov; Eric Schatten,

Senior Policy Analyst, eschatten@

fdic.gov; Andrew Carayiannis, Senior

Policy Analyst, acarayiannis@fdic.gov;

Kyle McCormick, Capital Markets Policy

Analyst, kmccormick@fdic.gov; Capital

Markets Branch, Division of Risk

Management Supervision, (202) 898–

6888; Gregory S. Feder, Counsel,

gfeder@fdic.gov, Andrew B. Williams, II,

Counsel, and williams@fdic.gov, or

Suzanne J

; Eric Schatten,

Senior Policy Analyst, eschatten@

fdic.gov; Andrew Carayiannis, Senior

Policy Analyst, acarayiannis@fdic.gov;

Kyle McCormick, Capital Markets Policy

Analyst, kmccormick@fdic.gov; Capital

Markets Branch, Division of Risk

Management Supervision, (202) 898–

6888; Gregory S. Feder, Counsel,

gfeder@fdic.gov, Andrew B. Williams, II,

Counsel, and williams@fdic.gov, or

Suzanne J. Dawley, Counsel, sudawley@

fdic.gov, Supervision, Legislation &

Enforcement Branch, Legal Division,

Federal Deposit Insurance Corporation,

550 17th Street NW, Washington, DC

20429. For the hearing impaired only,

Telecommunication Device for the Deaf

(TDD), (800) 925–4618.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Background

III. Overview of the Proposed Rule and

Proposed Scope of Application

A. The Proposed Stable Funding

Requirement

B. Revised Scope of Application

IV. Summary of Comments and Overview of

Significant Changes to the Proposals

V. The Final Rule’s Purpose, Design, Scope

of Application, and Minimum

Requirements

A. Purpose of the Final Rule

B. Comments on the Need for the NSFR

Requirement

C. The NSFR’s Conceptual Framework,

Design, and Calibration

1. Use of an Aggregate Balance Sheet

Measure and Weightings

2. Use of a Simplified and Standardized

Point-in-Time Metric

3. Use of a Time Horizon

4. Stress Perspectives and Using Elements

From the LCR Rule

5. Analytical Basis of Factor Calibrations

and Supervisory Considerations

D. Adjusting Calibration for the U.S.

Implementation of the NSFR

E. NSFR Scope and Minimum Requirement

Under the Final Rule—Full and Reduced

NSFR

1. Proposed Minimum Requirement and

the Tailoring Final Rule

2. Applicability of the Final Rule to U.S.

Intermediate Holding Companies and

Use of the Risk-Based Indicators

3. NSFR Minimum Requirements Under

the Final Rule: Applicability and

Calibration

4. Applicability to Depository Institution

Subsidiaries

VI. Definitions

A. Revisions to Existing Definitions

1

—Full and Reduced

NSFR

1. Proposed Minimum Requirement and

the Tailoring Final Rule

2. Applicability of the Final Rule to U.S.

Intermediate Holding Companies and

Use of the Risk-Based Indicators

3. NSFR Minimum Requirements Under

the Final Rule: Applicability and

Calibration

4. Applicability to Depository Institution

Subsidiaries

VI. Definitions

A. Revisions to Existing Definitions

1. Revised Definitions for Which the

Agencies Received no Comments

2. Revised Definitions for Which the

Agencies Received Comments

3. Other Definitions and Requirements for

Which the Agencies Received Comments

4. Other Definitions and Requirements for

Which the Agencies Did Not Receive

Comments

B. New Definitions

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00002

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9121

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

1 See ‘‘Net Stable Funding Ratio: Liquidity Risk

Measurement Standards and Disclosure

Requirements,’’ 81 FR 35124 (June 1, 2016).

2 See Proposed Changes to Applicability

Thresholds for Regulatory Capital and Liquidity

Requirements, 83 FR 66024 (December 21, 2018)

(domestic tailoring proposal); Changes to

Applicability Thresholds for Regulatory Capital

Requirements for Certain U.S. Subsidiaries of

Foreign Banking Organizations and Application of

Liquidity Requirements to Foreign Banking

Organizations, Certain U.S. Depository Institution

Holding Companies, and Certain Depository

Institution Subsidiaries, 84 FR 24296 (May 24,

2019) (FBO tailoring proposal). The agencies

indicated that comments regarding the NSFR

proposed rule would be addressed in the context of

a final rule to adopt a NSFR requirement for large

U.S. banking organizations and foreign banking

organizations.

3 See further discussion of balance sheet funding

in section V.C below

nd Certain Depository

Institution Subsidiaries, 84 FR 24296 (May 24,

2019) (FBO tailoring proposal). The agencies

indicated that comments regarding the NSFR

proposed rule would be addressed in the context of

a final rule to adopt a NSFR requirement for large

U.S. banking organizations and foreign banking

organizations.

3 See further discussion of balance sheet funding

in section V.C below.

4 See Senior Supervisors Group, Risk

Management Lessons from the Global Banking

Crisis of 2008, (October 21, 2009), available at

https://www.newyorkfed.org/medialibrary/media/

newsevents/news/banking/2009/SSG_report.pdf.

1. New Definitions for Which the Agencies

Received no Comments

2. New Definitions for Which the Agencies

Received Comments

VII. NSFR Requirement Under the Final Rule

A. Rules of Construction

1. Balance-Sheet Values

2. Netting of Certain Transactions

3. Treatment of Securities Received in an

Asset Exchange by a Securities Lender

B. Determining Maturity

C. Available Stable Funding

1. Calculation of the ASF Amount

2. Characteristics for Assignment of ASF

Factors

3. Categories of ASF Factors

D. Required Stable Funding

1. Calculation of the RSF Amount

2. Characteristics for Assignment of RSF

Factors

3. Categories of RSF Factors for

Unencumbered Assets and Commitments

4. Treatment of Rehypothecated Off-

Balance Sheet Assets

E. Derivative Transactions

1. Scope of Derivatives Transactions

Subject to § ll.107 of the Final Rule

2. Current Net Value Component

3. Initial Margin Received by a Covered

Company

4. Customer Cleared Derivative

Transactions

5. Initial Margin Component

6. Future Value Component

7. Comments on the Effect on Capital

Markets and Commercial End Users

8. Derivatives RSF Amount Calculation

9. Derivatives RSF Amount Numerical

Example

F. NSFR Consolidation Limitations

G. Treatment of Certain Facilities

H. Interdependent Assets and Liabilities

VIII. Net Stable Funding Ratio Shortfall

IX. Disclosure Requirements

A

5. Initial Margin Component

6. Future Value Component

7. Comments on the Effect on Capital

Markets and Commercial End Users

8. Derivatives RSF Amount Calculation

9. Derivatives RSF Amount Numerical

Example

F. NSFR Consolidation Limitations

G. Treatment of Certain Facilities

H. Interdependent Assets and Liabilities

VIII. Net Stable Funding Ratio Shortfall

IX. Disclosure Requirements

A. NSFR Public Disclosure Requirements

B. Quantitative Disclosure Requirements

1. Disclosure of ASF Components

2. Disclosure of RSF Components

C. Qualitative Disclosure Requirements

D. Frequency and Timing of Disclosure

X. Impact Assessment

A. Impact on Funding

B. Costs and Benefits of an RSF Factor for

Level 1 HQLA, Both Held Outright and

as Collateral for Short-Term Lending

Transactions

C. Response to Comments

XI. Effective Dates and Transitions

A. Effective Dates

B. Transitions

1. Initial Transitions for Banking

Organizations That Become Subject to

NSFR Rule After the Effective Date

2. Transitions for Changes to an NSFR

Requirement

3. Reservation of Authority To Extend

Transitions

4. Cessation of Applicability

XII. Administrative Law Matters

A. Congressional Review Act

B. Plain Language

C. Regulatory Flexibility Act

D. Riegle Community Development and

Regulatory Improvement Act of 1994

E. Paperwork Reduction Act

F. OCC Unfunded Mandates Reform Act of

1995 Determination

I. Introduction

The Office of the Comptroller of the

Currency (OCC), the Board of Governors

of the Federal Reserve System (Board),

and the Federal Deposit Insurance

Corporation (FDIC) (collectively, the

agencies) are adopting in final form the

agencies’ 2016 proposal to implement a

net stable funding ratio (NSFR)

requirement (the proposed rule), with

certain adjustments.1 The agencies also

are finalizing two proposals released

subsequent to issuance of the proposed

rule to revise the criteria for

determining the scope of application of

the NSFR requirement (tailoring

proposals).2 The Board will issue a

se

ng in final form the

agencies’ 2016 proposal to implement a

net stable funding ratio (NSFR)

requirement (the proposed rule), with

certain adjustments.1 The agencies also

are finalizing two proposals released

subsequent to issuance of the proposed

rule to revise the criteria for

determining the scope of application of

the NSFR requirement (tailoring

proposals).2 The Board will issue a

separate proposal for notice and

comment to amend its information

collection under its Complex Institution

Liquidity Monitoring Report (FR 2052a)

to collect information and data related

to the requirements of the final rule.

The final rule establishes a

quantitative metric, the NSFR, to

measure the stability of the funding

profile of large U.S. banking

organizations, U.S. intermediate holding

companies of foreign banking

organizations, and their depository

institution subsidiaries with $10 billion

or more in total consolidated assets. The

final rule also requires these banking

organizations to maintain minimum

amounts of stable funding to support

their assets, commitments, and

derivatives exposures.3 By requiring

banking organizations to maintain a

stable funding profile, the final rule

reduces liquidity risk in the financial

sector and provides for a safer and more

resilient financial system.

Sections II and III of this

Supplementary Information section

provide background on the agencies’

proposed rule and the tailoring

proposals (together, the proposals).

Section IV provides an overview of

comments received on the proposals

and significant changes to the proposals

under this final rule. Section V

describes the final rule’s purpose,

design, scope of application, and

minimum requirements. The discussion

of the final rule in sections VI through

IX describes amendments to certain

applicable definitions, the calculation of

the NSFR, requirements imposed on a

banking organization that fails to meet

its minimum NSFR requirement, and

the public disclosure requirements for

U.S

Section V

describes the final rule’s purpose,

design, scope of application, and

minimum requirements. The discussion

of the final rule in sections VI through

IX describes amendments to certain

applicable definitions, the calculation of

the NSFR, requirements imposed on a

banking organization that fails to meet

its minimum NSFR requirement, and

the public disclosure requirements for

U.S. depository institution holding

companies and U.S. intermediate

holding companies subject to the final

rule. Sections X through XII describe the

agencies’ impact assessment, the

effective date and transitions under the

final rule, and certain administrative

matters.

II. Background

The 2007–2009 financial crisis

revealed significant weaknesses in

banking organizations’ liquidity risk

management and liquidity positions,

including how banking organizations

managed their liabilities to fund their

assets in light of the risks inherent in

their on-balance sheet assets and off-

balance sheet commitments.4 The 2007–

2009 financial crisis also revealed an

overreliance on short-term, less-stable

funding, and demonstrated the

vulnerability of large and

internationally active banking

organizations to funding shocks. For

example, weaknesses in funding

management at many banking

organizations made them vulnerable to

contractions in funding supply, and

they had difficulties renewing short-

term funding that they had used to

support longer term or illiquid assets.

As access to funding became limited

and asset prices fell, many banking

organizations faced an increased

possibility of default and failure. To

stabilize the global financial markets,

governments and central banks around

the world provided significant levels of

support to these institutions in the form

of liquidity facilities and capital

injections.

In response to the 2007–2009

financial crisis, the Basel Committee on

Banking Supervision (BCBS) established

two international liquidity standards

sibility of default and failure. To

stabilize the global financial markets,

governments and central banks around

the world provided significant levels of

support to these institutions in the form

of liquidity facilities and capital

injections.

In response to the 2007–2009

financial crisis, the Basel Committee on

Banking Supervision (BCBS) established

two international liquidity standards. In

January 2013, the BCBS established a

short-term liquidity metric, the liquidity

coverage ratio (LCR), to mitigate the

risks arising when banking

organizations face significantly

increased net cash outflows in a period

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00003

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9122

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

5 See ‘‘Basel III: The Liquidity Coverage Ratio and

liquidity risk monitoring tools’’ at https://

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

6 See ‘‘Basel III: the net stable funding ratio’’ at

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

relatedly published the net stable funding ratio

disclosure standards published by the BCBS in June

2015. See ‘‘Basel III: the net stable funding ratio’’

(October 2014), available at http://www.bis.org/

bcbs/publ/d295.pdf; ‘‘Net Stable Funding Ratio

disclosure standards’’ (June 2015), available at

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

7 12 CFR part 50 (OCC); 12 CFR part 249 (Board);

12 CFR part 329 (FDIC). See also ‘‘Liquidity

Coverage Ratio: Liquidity Risk Measurement

Standards,’’ 79 FR 61440 (October 10, 2014).

8 12 U.S.C. 5365.

9 See 12 CFR part 252. See also ‘‘Enhanced

Prudential Standards for Bank Holding Companies

and Foreign Banking Organizations,’’ 79 FR 17240

(March 27, 2014)

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

7 12 CFR part 50 (OCC); 12 CFR part 249 (Board);

12 CFR part 329 (FDIC). See also ‘‘Liquidity

Coverage Ratio: Liquidity Risk Measurement

Standards,’’ 79 FR 61440 (October 10, 2014).

8 12 U.S.C. 5365.

9 See 12 CFR part 252. See also ‘‘Enhanced

Prudential Standards for Bank Holding Companies

and Foreign Banking Organizations,’’ 79 FR 17240

(March 27, 2014). The Economic Growth,

Regulatory Relief, and Consumer Protection Act,

which became law on May 24, 2018, subsequently

raised the asset thresholds for applicability of

enhanced prudential standards under section 165 of

the Dodd-Frank Act. See Public Law 115–174, 132

Stat. 1296 (2018). The Board amended the scope of

application of these requirements in October 2019.

See 84 FR 59032, (November 1, 2019).

10 During the same period, the Board

implemented requirements designed to enhance the

capital positions and loss-absorbing capabilities for

global systemically important banking organizations

(GSIBs), which can also have the effect of

improving the funding profiles of these firms. The

Board adopted a risk-based capital surcharge for

GSIBs in the United States that is calculated based

on a bank holding company’s risk profile, including

its reliance on short-term wholesale funding (the

GSIB capital surcharge rule). See 12 CFR 217

subpart H. The Board also adopted a total loss-

absorbing capacity (TLAC) requirement and a long-

term debt requirement (LTD) requirement (the

TLAC/LTD rule) for U.S. GSIBs and the U.S.

operations of certain foreign GSIBs, which requires

these firms and operations to have sufficient

amounts of equity and eligible long-term debt to

improve their ability to absorb significant losses

and withstand financial stress and to improve their

resolvability in the event of failure or material

distress. See 12 CFR 252 subparts G and P.

11 See ‘‘Net Stable Funding Ratio: Liquidity Risk

Measurement Standards and Disclosure

Requirements,’’ 81 FR 35124 (June 1, 2016)

o have sufficient

amounts of equity and eligible long-term debt to

improve their ability to absorb significant losses

and withstand financial stress and to improve their

resolvability in the event of failure or material

distress. See 12 CFR 252 subparts G and P.

11 See ‘‘Net Stable Funding Ratio: Liquidity Risk

Measurement Standards and Disclosure

Requirements,’’ 81 FR 35124 (June 1, 2016).

12 The BCBS developed the Basel NSFR standard

as a longer-term balance sheet funding metric to

complement the Basel LCR standard’s short-term

liquidity stress metric. In developing the Basel

NSFR standard, the agencies and their international

counterparts in the BCBS considered a number of

possible funding metrics. For example, the BCBS

considered the traditional ‘‘cash capital’’ measure,

which compares the amount of a firm’s long-term

and stable sources of funding to the amount of the

firm’s illiquid assets. The BCBS found that this cash

capital measure failed to account for material

funding risks, such as those related to off-balance

sheet commitments and certain on-balance sheet

short-term funding and lending mismatches. The

Basel NSFR standard incorporates consideration of

these and other funding risks, as does this final

rule.

13 For certain depository institution holding

companies with $50 billion or more, but less than

$250 billion, in total consolidated assets and less

than $10 billion in on-balance sheet foreign

exposure, the Board separately proposed a modified

NSFR requirement.

14 Under the Board’s proposed modified NSFR

requirement, a depository institution holding

company subject to a modified NSFR would have

been required to maintain an NSFR of 1.0 but

would have calculated such ratio using a lower

minimum RSF amount in the denominator of the

ratio, equivalent to 70 percent of the holding

company’s RSF amount as calculated under the

agencies’ proposed rule

t.

14 Under the Board’s proposed modified NSFR

requirement, a depository institution holding

company subject to a modified NSFR would have

been required to maintain an NSFR of 1.0 but

would have calculated such ratio using a lower

minimum RSF amount in the denominator of the

ratio, equivalent to 70 percent of the holding

company’s RSF amount as calculated under the

agencies’ proposed rule.

15 Subsequent to the issuance of the proposed

rule, certain foreign banking organizations with

substantial operations in the United States were

required to form or designate U.S. intermediate

holding companies. The scope of application under

the proposed rule would have included certain U.S.

of stress (Basel LCR standard).5 As a

complement to the LCR, the BCBS in

October 2014 established the net stable

funding ratio standard (Basel NSFR

standard) to mitigate the risks presented

by banking organizations supporting

their assets with insufficiently stable

funding; the Basel NSFR standard

requires banking organizations to

maintain a stable funding profile over a

longer, one-year time horizon.6 The

agencies have been, and remain,

actively involved in the BCBS’

international efforts, including the

continued development and monitoring

of the BCBS’s framework for liquidity.

Following the 2007–2009 financial

crisis, the agencies implemented several

requirements designed to improve the

largest and most complex banking

organizations’ liquidity positions and

liquidity risk management practices. In

2014, the agencies adopted the LCR rule

to improve the banking sector’s

resiliency to a short-term liquidity stress

by requiring large U.S

’s framework for liquidity.

Following the 2007–2009 financial

crisis, the agencies implemented several

requirements designed to improve the

largest and most complex banking

organizations’ liquidity positions and

liquidity risk management practices. In

2014, the agencies adopted the LCR rule

to improve the banking sector’s

resiliency to a short-term liquidity stress

by requiring large U.S. banking

organizations to hold a minimum

amount of unencumbered high-quality

liquid assets (HQLA) that can be readily

converted into cash to meet projected

net cash outflows over a prospective 30

calendar-day stress period.7 In addition,

pursuant to section 165 of the Dodd-

Frank Wall Street Reform and Consumer

Protection Act 8 (Dodd-Frank Act) and

in consultation with the OCC and FDIC,

the Board adopted the enhanced

prudential standards rule, which

established general risk management,

liquidity risk management, and stress

testing requirements for certain bank

holding companies and foreign banking

organizations.9 These reforms in the

post-crisis regulatory framework did not

include a requirement that directly

addresses the relationship between a

banking organization’s funding profile

and its composition of assets and off-

balance commitments.10

III. Overview of the Proposed Rule and

Proposed Scope of Application

A. The Proposed Stable Funding

Requirement

In June 2016, the agencies invited

comment on a proposal to implement a

net stable funding requirement for the

U.S. banking organizations that were

subject to the LCR rule at that time.11

The proposed rule was generally

consistent with the Basel NSFR

standard, with adjustments to reflect the

characteristics of U.S. banking

organizations, markets, and other U.S

Stable Funding

Requirement

In June 2016, the agencies invited

comment on a proposal to implement a

net stable funding requirement for the

U.S. banking organizations that were

subject to the LCR rule at that time.11

The proposed rule was generally

consistent with the Basel NSFR

standard, with adjustments to reflect the

characteristics of U.S. banking

organizations, markets, and other U.S.

specific considerations.12

The proposed rule would have

required a banking organization to

maintain an amount of available stable

funding (ASF) equal to or greater than

the banking organization’s projected

minimum funding needs, or required

stable funding (RSF), over a one-year

time horizon.13 A banking

organization’s NSFR would have been

expressed as the ratio of its ASF amount

to its RSF amount, with a banking

organization required to maintain a

minimum NSFR of 1.0.14

Under the proposed rule, a banking

organization’s ASF amount would have

been calculated as the sum of the

carrying values of the banking

organization’s liabilities and regulatory

capital, each multiplied by a

standardized weighting (ASF factor)

ranging from zero to 100 percent to

reflect the relative stability of such

liabilities and capital over a one-year

time horizon. Similarly, a banking

organization’s minimum RSF amount

would have been calculated as (1) the

sum of the carrying values of its assets,

each multiplied by a standardized

weighting (RSF factor) ranging from zero

to 100 percent to reflect the relative

need for funding over a one-year time

horizon based on the liquidity

characteristics of the asset, plus (2) RSF

amounts based on the banking

organization’s committed facilities and

derivative exposures. The proposed rule

also would have included public

disclosure requirements for depository

institution holding companies subject to

the proposed rule.

B

100 percent to reflect the relative

need for funding over a one-year time

horizon based on the liquidity

characteristics of the asset, plus (2) RSF

amounts based on the banking

organization’s committed facilities and

derivative exposures. The proposed rule

also would have included public

disclosure requirements for depository

institution holding companies subject to

the proposed rule.

B. Revised Scope of Application

The proposed rule would have

applied to: (1) Bank holding companies,

savings and loan holding companies

without significant commercial or

insurance operations, and depository

institutions that, in each case, have $250

billion or more in total consolidated

assets or $10 billion or more in on-

balance sheet foreign exposure; and (2)

depository institutions with $10 billion

or more in total consolidated assets that

are consolidated subsidiaries of such

bank holding companies and savings

and loan holding companies. In

addition, the Board proposed a modified

NSFR requirement that would have

applied to certain depository institution

holding companies with total

consolidated assets of $50 billion or

more.15

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00004

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9123

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

bank holding company subsidiaries of foreign

banking organizations.

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

17 The tailoring proposals also would have

removed the LCR rule’s modified LCR requirement

that at the time applied to certain depository

institution holding companies with total

consolidated assets of $50 billion or more.

18 84 FR 59230 (November 1, 2019). In a change

from the tailoring proposals, the tailoring final rule

applied LCR requirements to a U.S

w 115–174, 132 Stat. 1296 (2018).

17 The tailoring proposals also would have

removed the LCR rule’s modified LCR requirement

that at the time applied to certain depository

institution holding companies with total

consolidated assets of $50 billion or more.

18 84 FR 59230 (November 1, 2019). In a change

from the tailoring proposals, the tailoring final rule

applied LCR requirements to a U.S. intermediate

holding company of a foreign banking organization

on the basis of risk-based indicators measured for

the U.S intermediate holding company and not the

foreign banking organization’s combined U.S.

operations.

19 A ‘‘top-tier banking organization’’ means the

top-tier bank holding company, U.S. intermediate

holding company, savings and loan holding

company, or depository institution domiciled in the

United States.

20 The tailoring final rule noted that comments

regarding the NSFR proposal would be addressed

in the context of any final rule to adopt a NSFR

requirement for large U.S. banking organizations

and U.S. intermediate holding companies. 84 FR at

59235.

21 Summaries of these meetings are available on

the agencies’ public websites. See https://

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

(OCC), https://www.federalreserve.gov/apps/foia/

ViewComments.aspx?doc_id=R%2D1537&doc_

ver=1 (Board), and https://www.fdic.gov/

regulations/laws/federal/2016/2016-net_stable-

funding-ratio-3064-ae44.html (FDIC).

22 The European Union (EU) implementation of

the NSFR requirement, effective 2021, includes

targeted adjustments from the Basel NSFR standard

in order to reflect EU specificities generally

consistent with the EU implementation of the Basel

LCR standard. The EU’s NSFR requirements also

include targeted adjustments to support sovereign

bond markets. See Regulation (EU) 2019/876 of the

European Parliament and the Council, May 20,

2019, available at https://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX%3A32019R0876 (EU

NSFR rule)

order to reflect EU specificities generally

consistent with the EU implementation of the Basel

LCR standard. The EU’s NSFR requirements also

include targeted adjustments to support sovereign

bond markets. See Regulation (EU) 2019/876 of the

European Parliament and the Council, May 20,

2019, available at https://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX%3A32019R0876 (EU

NSFR rule).

23 The agencies received a number of comments

that were not specifically responsive to the

proposed rule but more generally requested that the

agencies assess the combined costs of post-crisis

regulations on the availability of credit and the

economy.

Subsequent to the proposed rule, the

agencies published the tailoring

proposals to modify the application of

the LCR rule and the proposed rule

consistent with considerations and

factors set forth under section 165 of the

Dodd-Frank Act, as amended by the

Economic Growth, Regulatory Relief,

and Consumer Protection Act

(EGRRCPA).16 As part of the tailoring

proposals, the agencies proposed to

establish four risk-based categories for

determining applicability of

requirements under the LCR rule and

the proposed rule. The requirements

would have increased in stringency

based on measures of size, cross-

jurisdictional activity, weighted short-

term wholesale funding, nonbank assets,

and off-balance sheet exposures (risk-

based indicators). In addition, the

tailoring proposals would have removed

the Board’s proposed modified NSFR

requirement for certain depository

institution holding companies.17

In October 2019, the agencies adopted

a final rule (tailoring final rule) that

amended the scope of application of the

LCR rule so that it applies to certain

U.S. banking organizations and U.S

et exposures (risk-

based indicators). In addition, the

tailoring proposals would have removed

the Board’s proposed modified NSFR

requirement for certain depository

institution holding companies.17

In October 2019, the agencies adopted

a final rule (tailoring final rule) that

amended the scope of application of the

LCR rule so that it applies to certain

U.S. banking organizations and U.S.

intermediate holding companies of

foreign banking organizations, each with

$100 billion or more in total

consolidated assets, together with

certain of their depository institution

subsidiaries.18 The tailoring final rule

applies LCR requirements on the basis

of the four risk-based categories

determined by the risk profile of the

top-tier banking organization, including

a depository institution that is not a

subsidiary of a depository institution

holding company.19 The effective date

of the revisions to the LCR rule’s scope

was December 31, 2019.20

IV. Summary of Comments and

Overview of Significant Changes to the

Proposals

The agencies received approximately

30 comments on the proposed rule, as

well as approximately 20 comments

related to the NSFR rule in response to

the tailoring proposals. Commenters

included U.S. and foreign banking

organizations, trade groups, public

interest groups, and other interested

parties. Agency staff also met with some

commenters at their request to discuss

their comments on the proposed rule

and the tailoring proposals.21 Although

many commenters supported the goal of

improving funding stability, many

commenters expressed concern

regarding the overall proposal and

criticized specific aspects of the

proposed rule.

A number of commenters argued that

the proposed rule was unnecessary

because it would target risks already

addressed by existing regulations, such

as the LCR rule. Other commenters

expressed concern regarding the design

and calibration of the proposed rule

ng stability, many

commenters expressed concern

regarding the overall proposal and

criticized specific aspects of the

proposed rule.

A number of commenters argued that

the proposed rule was unnecessary

because it would target risks already

addressed by existing regulations, such

as the LCR rule. Other commenters

expressed concern regarding the design

and calibration of the proposed rule.

These commenters requested

clarification on the conceptual

underpinnings of the NSFR, requested

additional quantitative support for the

proposed ASF and RSF factors, and

argued that the proposed rule did not

satisfy Administrative Procedure Act

(APA) requirements because it provided

insufficient support for its design and

calibration. Some commenters criticized

the proposed rule as not being

appropriately tailored for

implementation in the United States

and argued that the proposed rule was

more stringent than the Basel NSFR

standard such that it could disadvantage

U.S. banking organizations relative to

their foreign competitors. Relatedly,

certain commenters requested that the

agencies conform the final rule to the

European Union’s implementation of

the Basel NSFR standard (EU NSFR

rule) in order to minimize potential

adverse effects on U.S. banking

organizations.22

Some commenters expressed concern

that the proposed rule could result in

increased costs to banking organizations

and the financial system that would

exceed the proposed rule’s benefits.23

Specifically, some commenters argued

that the proposed rule could increase

funding and compliance costs, which

could cause banking organizations to

withdraw from or reduce the scale of

certain business activities with low

margins, including certain capital

markets-related activities. According to

the commenters, this could have the

effect of tightening credit and increasing

borrowing costs for households and

businesses in the United States

d rule could increase

funding and compliance costs, which

could cause banking organizations to

withdraw from or reduce the scale of

certain business activities with low

margins, including certain capital

markets-related activities. According to

the commenters, this could have the

effect of tightening credit and increasing

borrowing costs for households and

businesses in the United States.

Commenters also argued that the

funding and compliance costs of the

proposed rule could increase financial

stability risk by shifting certain financial

intermediation activities from the

banking sector to less regulated

‘‘shadow banking’’ channels.

Commenters also expressed concern

that the proposed rule could have pro-

cyclical effects, for example, by

incentivizing banking organizations to

restrict lending to improve their NSFRs

during periods of stress.

Additionally, many commenters

requested changes to specific elements

of the proposed rule. For example,

commenters recommended the agencies

assign higher ASF factors for certain

liabilities, such as certain types of

deposits, and lower RSF factors for

certain categories of assets and

committed facilities. Some commenters

recommended changes to the proposed

rule’s treatment of derivatives,

particularly the treatment of variation

margin and the treatment of potential

valuation changes in a derivatives

portfolio. In addition, a number of

commenters requested that the agencies

modify the proposed rule to assign zero

percent RSF and ASF factors to certain

assets and liabilities commenters

viewed as interdependent such that the

specific, identifiable assets are funded

by the specific, identifiable liabilities of

an equal or similar tenor and, therefore,

present little or minimal funding risk.

Finally, some commenters requested

that the agencies delay implementation

of the NSFR requirement to allow

banking organizations additional time to

build internal reporting systems and

comply with disclosure requirements

e

specific, identifiable assets are funded

by the specific, identifiable liabilities of

an equal or similar tenor and, therefore,

present little or minimal funding risk.

Finally, some commenters requested

that the agencies delay implementation

of the NSFR requirement to allow

banking organizations additional time to

build internal reporting systems and

comply with disclosure requirements.

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00005

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9124

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

24 12 CFR 3.10(c)(4) (OCC); 12 CFR 217.10(c)(4)

(Board); 12 CFR 324.10(c)(4) (FDIC). In addition, the

final rule includes a new provision to exclude

assets received by a covered company as variation

margin under derivative transactions from the

treatment of rehypothecated assets that are off-

balance sheet assets in accordance with U.S.

generally accepted accounting principles (GAAP).

25 To conduct financial intermediation, banking

organizations obtain resources that are currently

surplus to the needs of certain parts of the economy

(funds providers) and lend them to other parts of

the economy that currently need those resources

(users of funds). Funds providers generally prefer

to supply their resources on a short-term basis with

easy access to their funds (liquid resources); for

example, household savings. Users of funds often

need these resources on a long-term basis and in

ways that make such resources difficult to convert

to cash (illiquid resources); for example, building

factories or capital for business growth. Maturity

and liquidity transformation refers to the process of

bridging the competing needs of funds providers

and users of funds.

26 ASF factors are described in section VII.C, RSF

factors are described in section VII.D, and the

derivatives RSF amount is described in section

VII.E of this Supplementary Information section

s); for example, building

factories or capital for business growth. Maturity

and liquidity transformation refers to the process of

bridging the competing needs of funds providers

and users of funds.

26 ASF factors are described in section VII.C, RSF

factors are described in section VII.D, and the

derivatives RSF amount is described in section

VII.E of this Supplementary Information section.

27 Commenters provided examples, including the

LCR rule; the Board’s enhanced prudential

standards rule; the TLAC/LTD rule; the GSIB

capital surcharge rule (which includes a measure of

weighted short-term wholesale funding), SLR rule,

and other capital requirements; single counterparty

credit limits; mandatory clearing requirements and

margin requirements for non-cleared swaps and

non-cleared security-based swaps; and Board and

FDIC supervisory guidance relating to liquidity in

connection with resolution planning.

The agencies received a number of

comments requesting the agencies

reconsider the proposed rule’s scope of

application. Specifically, many

commenters argued that the proposed

thresholds for application were arbitrary

and insufficiently risk-sensitive and

requested the agencies further tailor the

scope of the proposed rule. The agencies

also received a number of comments on

the appropriateness of the revised scope

of application in the tailoring proposals.

As discussed throughout this

Supplementary Information section, the

final rule retains the general design for

the NSFR calculation and calibrates

minimum requirements to the risk

profiles of banking organizations in a

manner consistent with the tailoring

final rule. However, the final rule

includes a number of modifications,

including:

• The final rule assigns a zero percent

RSF factor to unencumbered level 1

liquid asset securities and certain short-

term secured lending transactions

backed by level 1 liquid asset securities

(see section VII.D of this Supplementary

Information section)

izations in a

manner consistent with the tailoring

final rule. However, the final rule

includes a number of modifications,

including:

• The final rule assigns a zero percent

RSF factor to unencumbered level 1

liquid asset securities and certain short-

term secured lending transactions

backed by level 1 liquid asset securities

(see section VII.D of this Supplementary

Information section).

• The final rule provides more

favorable treatment for certain affiliate

sweep deposits and non-deposit retail

funding (see section VII.C of this

Supplementary Information section).

• The final rule permits cash

variation margin to be eligible to offset

a covered company’s current exposures

under its derivatives transactions even if

it does not meet all of the criteria in the

agencies’ supplementary leverage ratio

rule (SLR rule).24 In addition, variation

margin received in the form of

rehypothecatable level 1 liquid asset

securities also would be eligible to offset

a covered company’s current exposures

(see section VII.E of this Supplementary

Information section).

• The final rule reduces the amount

of a covered company’s gross

derivatives liabilities that will be

assigned a 100 percent RSF factor (see

section VII.E of this Supplementary

Information section).

V. The Final Rule’s Purpose, Design,

Scope of Application, and Minimum

Requirements

A. Purpose of the Final Rule

The NSFR is designed to address risks

that are inherent in the business of

banking. Banking organizations perform

maturity and liquidity transformation,25

which is an important financial

intermediation process that contributes

to efficient resource allocation and

credit creation. To conduct maturity and

liquidity transformation and meet the

long-term credit needs of businesses and

households, banking organizations also

must address the short-term liquidity

preferences of funds providers. These

transformation activities create a certain

inherent level of risk to banking

organizations, the U.S

s that contributes

to efficient resource allocation and

credit creation. To conduct maturity and

liquidity transformation and meet the

long-term credit needs of businesses and

households, banking organizations also

must address the short-term liquidity

preferences of funds providers. These

transformation activities create a certain

inherent level of risk to banking

organizations, the U.S. financial system,

and the broader economy caused by

banking organizations’ potential

overreliance on unstable funding

sources relative to the composition of

their balance sheets. Such overreliance

could potentially result in the failure of

banking organizations, disruptions to

asset prices, and reduction in the

provision of credit to households and

businesses.

A banking organization may mitigate

these risks by having funding sources

that are appropriately stable over time.

Because short-term funding generally

tends to be less expensive than longer-

term funding, banking organizations

have incentives to fund their longer-

term or less-liquid assets with less

stable, shorter-term liabilities. While

this approach may benefit short-term

earnings, it may lead to imbalances

between how a banking organization

chooses to fund its assets and the

funding it may need to maintain the

assets over time, as well as increases in

liquidity and funding risk arising from

potential customer and counterparty

runs and a more interconnected

financial sector. In turn, this creates a

funding risk for banking organizations,

the financial system, and the broader

economy. The final rule requires large

banking organizations to avoid

excessively funding long-term and less-

liquid assets with short-term or less-

reliable funding and thus reduces the

likelihood that disruptions in a banking

organization’s regular funding sources

would compromise its funding stability

and liquidity position

banking organizations,

the financial system, and the broader

economy. The final rule requires large

banking organizations to avoid

excessively funding long-term and less-

liquid assets with short-term or less-

reliable funding and thus reduces the

likelihood that disruptions in a banking

organization’s regular funding sources

would compromise its funding stability

and liquidity position.

The final rule establishes a minimum

NSFR requirement that is applicable on

a consolidated basis to certain top-tier

banking organizations with total

consolidated assets of $100 billion or

more, together with certain depository

institution subsidiaries (together,

covered companies). Consistent with the

proposed rule, the final rule requires a

covered company to calculate an NSFR

based on the ratio of its ASF amount to

its RSF amount and maintain an NSFR

equal to or greater than 1.0 on an

ongoing basis.26 In addition, the final

rule, like the proposed rule, includes

public disclosure requirements for U.S.

depository institution holding

companies and U.S. intermediate

holding companies of foreign banking

organizations that are subject to the final

rule.

B. Comments on the Need for the NSFR

Requirement

Banking organizations have improved

their liquidity risk management

practices and liquidity positions since

the 2007–2009 financial crisis,

including by holding larger liquidity

buffers, avoiding excessive reliance on

very short-term unstable wholesale

funding sources, and improving their

internal controls and governance

structures surrounding liquidity risk

management. The NSFR requirement

aims to preserve these improvements

and help position covered companies to

act as resilient financial intermediaries

through potential future periods of

instability

iquidity

buffers, avoiding excessive reliance on

very short-term unstable wholesale

funding sources, and improving their

internal controls and governance

structures surrounding liquidity risk

management. The NSFR requirement

aims to preserve these improvements

and help position covered companies to

act as resilient financial intermediaries

through potential future periods of

instability. The agencies received a

number of comments arguing that the

proposed rule is unnecessary because

other elements of the agencies’

regulatory framework already

sufficiently address liquidity and

funding risk at covered companies.27

Some commenters also argued that the

agencies should not apply an NSFR

requirement because many covered

companies have improved their current

funding profiles relative to the period

leading up to the 2007–2009 financial

crisis. By contrast, one commenter

supported the proposed rule, asserting

that it would be an important

complement to the LCR rule because it

would address funding stability and

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00006

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9125

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

28 Cash flow projections, liquidity stress testing,

and liquidity buffer requirements for certain

covered holding companies under the Board’s

enhanced prudential standards rule complement

the LCR rule by addressing cash flow risks with

additional firm-specific granularity and across

additional time horizons, including a one-year

planning horizon. These requirements do not

directly address balance sheet funding risks.

29 See 12 CFR 252.35 and 12 CFR 252.157

ffer requirements for certain

covered holding companies under the Board’s

enhanced prudential standards rule complement

the LCR rule by addressing cash flow risks with

additional firm-specific granularity and across

additional time horizons, including a one-year

planning horizon. These requirements do not

directly address balance sheet funding risks.

29 See 12 CFR 252.35 and 12 CFR 252.157.

30 The final rule reflects that regulatory capital

elements and long-term debt required under the

agencies’ regulatory capital rule, the Board’s GSIB

capital surcharge rule, and the TLAC/LTD rule

provide stable funding by virtue of the long-term or

perpetual tenor of such regulatory capital elements

and long-term debt. The Board’s GSIB capital

surcharge rule and the tailoring final rule include

a measure of historic funding composition,

weighted short-term wholesale funding, but this

measure does not measure or directly address

funding risk. The weighted short-term wholesale

funding measure is based on a banking

organization’s average use of short-term funding

sources over the prior year but does not reflect a

banking organization’s assets or the banking

organization’s use of longer-term funding sources.

31 Public disclosure requirements are not required

for non-standardized measurements of liquidity risk

required under the Board’s enhanced prudential

standards rule.

32 Certain commenters also expressed concerns

about the descriptions by the BCBS of the Basel

NSFR standard between 2009 and 2014 and the

opportunities to comment on certain elements of

the international standard. Commenters argued that

the agencies should remove elements of the

proposed rule or re-open the comment period

because, in these commenters’ view, the public was

unable to comment on the inclusion of certain

elements in the Basel NSFR standard.

33 See supra note 12.

maturity mismatch more broadly and

over a longer time horizon

s to comment on certain elements of

the international standard. Commenters argued that

the agencies should remove elements of the

proposed rule or re-open the comment period

because, in these commenters’ view, the public was

unable to comment on the inclusion of certain

elements in the Basel NSFR standard.

33 See supra note 12.

maturity mismatch more broadly and

over a longer time horizon.

The final rule is intended to

complement and reinforce other

elements of the agencies’ regulatory

framework that strengthen financial

sector resiliency by addressing risks that

are not directly addressed by the

agencies’ other regulatory measures. For

example, the NSFR rule provides an

important complement to the LCR rule,

which addresses the risk of increased

net cash outflows over a 30-calendar

day period of stress by requiring

banking organizations to hold HQLA

that can be readily converted to cash.

While addressing short-term cash-flow

related risks is a core component of a

banking organization’s liquidity risk

management, a banking organization

could comply with the LCR requirement

and still fund its long-term or illiquid

assets and commitments with short-term

liabilities not sufficiently stable to

preserve these assets over an extended

period.28 The final rule further

complements the LCR rule by mitigating

the risk of a banking organization

concentrating funding just outside the

LCR’s 30-day window

ment, a banking organization

could comply with the LCR requirement

and still fund its long-term or illiquid

assets and commitments with short-term

liabilities not sufficiently stable to

preserve these assets over an extended

period.28 The final rule further

complements the LCR rule by mitigating

the risk of a banking organization

concentrating funding just outside the

LCR’s 30-day window. The final rule

also complements requirements related

to firm-specific measures of funding risk

under the Board’s enhanced prudential

standards rule by providing a

standardized measure of the stability of

a banking organization’s funding profile,

which would promote greater

comparability of funding structures

across banking organizations and

improve transparency and market

discipline through public disclosure

requirements.29 With respect to the

other rules and guidance commenters

cited as sufficiently addressing liquidity

and funding risk, these elements of the

agencies’ regulatory framework do not

directly address balance sheet funding

risks for covered companies on a going-

concern basis. 30

Reliance on less-stable sources of

funding may require a banking

organization to repay or replace its

funding more often and make it more

exposed to sudden funding market

disruptions. Potential loss of funding

can restrict a banking organization’s

ability to support its assets and

commitments over the long term,

generating both safety and soundness

and financial stability risks. The final

rule is designed to mitigate such risks

by directly increasing the funding

resilience of subject banking

organizations. The final rule mitigates

risks to U.S. financial stability by

improving the capacity of banking

organizations to continue to support

their assets and lending activities across

a range of market conditions

oth safety and soundness

and financial stability risks. The final

rule is designed to mitigate such risks

by directly increasing the funding

resilience of subject banking

organizations. The final rule mitigates

risks to U.S. financial stability by

improving the capacity of banking

organizations to continue to support

their assets and lending activities across

a range of market conditions. A covered

company that sufficiently aligns the

stability of its funding sources with its

funding needs based on the liquidity

characteristics of its assets and

commitments is better positioned to

avoid asset fire sales and continue to

function as a financial intermediary in

the event of funding or asset market

disruptions. As a result, a covered

company will be better positioned to

continue to operate and lend, which

promotes more stable and consistent

levels of financial intermediation in the

U.S. economy across economic and

market conditions.

As a standardized metric, the NSFR

also promotes greater comparability

across covered companies and foreign

banks subject to substantially similar

requirements in other jurisdictions and

facilitates supervisory assessments of

vulnerability. Through public disclosure

requirements, the NSFR rule also

promotes greater market discipline

through enhanced transparency.31 In

these ways, a standardized long-term

funding measure, such as the NSFR, is

intended to work in tandem with

internal models-based measures to

provide a more robust and complete

framework to monitor and manage

funding and liquidity risks of covered

companies.

C. The NSFR’s Conceptual Framework,

Design, and Calibration

A number of commenters questioned

the conceptual framework and design of

the proposed rule, as well as its overall

analytical basis and the calibrations of

specific components. In particular,

commenters argued that the agencies

did not provide sufficient justification

or data analysis to support the proposed

calibration of the NSFR rule’s relevant

factors

mework,

Design, and Calibration

A number of commenters questioned

the conceptual framework and design of

the proposed rule, as well as its overall

analytical basis and the calibrations of

specific components. In particular,

commenters argued that the agencies

did not provide sufficient justification

or data analysis to support the proposed

calibration of the NSFR rule’s relevant

factors. Some commenters questioned

whether the calibrations in the proposed

rule reflected a one-year period of stress

or whether the calibration was intended

to reflect different ‘‘business-as-usual’’

conditions.32 A number of commenters

also argued that if the proposed rule was

not calibrated based on the same stress

assumptions as the LCR rule, the

proposed rule should not incorporate

elements and definitions from the LCR

rule. Some commenters also requested

that the agencies reconsider elements of

the proposed rule that they believed to

be more conservative than the LCR rule.

In addition, several commenters argued

that the proposed rule was focused on

commercial banking and was therefore

not sensitive enough to the different

business models of covered companies,

such as custody banks and banking

organizations significantly involved in

capital markets. Another commenter

stated that the NSFR is a static measure

and does not take into account actions

a firm may take in the future to address

funding risk. As addressed in sections

VII.C and VII.D of this Supplementary

Information section, the agencies also

received a number of comments on the

proposed values of ASF factors and RSF

factors where the commenter’s concern

was predicated on the design of the

NSFR. For example, commenters

described the value of certain ASF

factors as conservative based on the

assumption that the values represented

cash-flow amounts and commenters

therefore made direct comparison to

factors used in the LCR rule

received a number of comments on the

proposed values of ASF factors and RSF

factors where the commenter’s concern

was predicated on the design of the

NSFR. For example, commenters

described the value of certain ASF

factors as conservative based on the

assumption that the values represented

cash-flow amounts and commenters

therefore made direct comparison to

factors used in the LCR rule. In light of

these comments, the agencies are

clarifying in this Supplementary

Information section the conceptual basis

for the NSFR design under the final

rule.

1. Use of an Aggregate Balance Sheet

Measure and Weightings

The NSFR’s conceptual design builds

on commonly used assessments of

balance sheet funding.33 The NSFR is a

standardized measure of a banking

organization’s funding relative to its

assets and commitments. Consistent

with the Basel NSFR standard, the final

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00007

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9126

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

34 For example, the final rule takes into account

policy considerations such as externalities

associated with an unstable funding structure that

can affect the safety and soundness of other banking

organizations and U.S. financial stability and an

interest in maintaining financial intermediation of

covered companies across economic and market

conditions.

35 For example, supervisors and industry analysts

compare compositions of assets and liabilities

though the use of a loans-to-deposits ratio or by

defining a measure of ‘‘noncore’’ funding

dependency.

36 As described in section V.E.3 of this

Supplementary Information section, the final rule

applies an adjustment factor to the denominator of

the ratio to reflect the risk profile of a covered

company.

37 See sections VII.C, VII.D and VII.E of this

Supplementary Information section

ies

though the use of a loans-to-deposits ratio or by

defining a measure of ‘‘noncore’’ funding

dependency.

36 As described in section V.E.3 of this

Supplementary Information section, the final rule

applies an adjustment factor to the denominator of

the ratio to reflect the risk profile of a covered

company.

37 See sections VII.C, VII.D and VII.E of this

Supplementary Information section.

rule conceptually draws on supervisory

and industry-developed funding risk

management measures, with

modifications to account for material

funding risks and policy

considerations.34 Supervisors and

industry stakeholders such as credit

rating agencies and equity analysts

routinely assess the funding profiles of

banking organizations through

comparisons of the compositions of the

banking organization’s assets and

liabilities.35 The NSFR’s design as a

ratio of weighted liabilities and

regulatory capital to weighted assets and

commitments is consistent with these

approaches. Using a ratio measure is

appropriate for measuring and

addressing funding risks because it

provides a holistic assessment of a

banking organization’s funding profile

based on the aggregate composition of

the banking organization’s balance sheet

and commitments rather than on

individual assets or liabilities.

The final rule takes into account the

differing risk characteristics of a covered

company’s various assets, liabilities,

and certain off-balance sheet

commitments and applies different

weightings (ASF and RSF factors) to

reflect these risk characteristics. Under

the final rule, ASF and RSF factors are

used to determine the numerator and

denominator of the NSFR and reflect,

respectively, the stability of funding,

and the need for assets and

commitments to be supported by such

funding over a range of market

conditions, each as assessed under the

final rule

ies different

weightings (ASF and RSF factors) to

reflect these risk characteristics. Under

the final rule, ASF and RSF factors are

used to determine the numerator and

denominator of the NSFR and reflect,

respectively, the stability of funding,

and the need for assets and

commitments to be supported by such

funding over a range of market

conditions, each as assessed under the

final rule. As described in sections VII.C

and VII.D of this Supplementary

Information section, the final rule uses

broad categories of liabilities and assets

to assess relative stability and funding

needs, respectively. These weightings

make the NSFR assessment risk

sensitive by differentiating between

types of assets and types of liabilities.

While the NSFR is a simplified and

standardized metric, meeting the NSFR

minimum requirement of 1.0 provides

evidence that a covered company has, in

aggregate, a sufficient amount of stable

liabilities and regulatory capital to

support over a one-year time horizon its

aggregate assets and commitments based

on the liquidity characteristics of such

aggregate assets and commitments.36

Given the size, complexity, scope of

activities, and interconnectedness of

covered companies, a covered company

with an NSFR of less than 1.0 may face

an increased likelihood of liquidity

stress or of having to dispose of illiquid

assets, and may be less well positioned

to maintain its level of financial

intermediation over various market

conditions.

Commenters expressed concerns that

application of RSF factors to specific

assets has the effect of imposing a

requirement on covered companies to

issue additional long-dated liabilities to

fund such assets. The final rule does not

prescribe the method by which a

covered company must meet its

minimum requirement

intain its level of financial

intermediation over various market

conditions.

Commenters expressed concerns that

application of RSF factors to specific

assets has the effect of imposing a

requirement on covered companies to

issue additional long-dated liabilities to

fund such assets. The final rule does not

prescribe the method by which a

covered company must meet its

minimum requirement. Under the final

rule, the NSFR requirement reflects the

aggregate balance sheet of a covered

company, and the final rule does not

apply separate minimum funding

requirements to individual assets, legal

entities, or business lines represented

on the balance sheet. For example, a

covered company that has an NSFR of

1.0 and increases its holding of certain

long-dated assets is not required to issue

additional long-dated liabilities under

the final rule but, rather, has discretion

on how to continue to meet its

minimum requirement, including by

changing its overall asset composition.

2. Use of a Simplified and Standardized

Point-in-Time Metric

Many commenters expressed

concerns or suggestions that related to

the level of granularity in the NSFR’s

conceptual design or that the NSFR was

a point-in-time measure. For example,

commenters suggested the NSFR

include additional RSF and ASF factors

tailored to specific products and

activities.37 Commenters similarly

expressed concerns about the number of

residual maturity categories used in the

NSFR. A number of commenters

criticized the design of the NSFR as a

static metric arguing that the

measurement of the funding risk of a

covered company’s aggregate balance

sheet should consider actions that

banking organizations may undertake in

the future.

In response to these concerns, the

agencies note that a broad comparison

of the stability of a covered company’s

funding relative to the liquidity

characteristics of its assets achieves the

final rule’s funding risk-mitigation

objectives

ment of the funding risk of a

covered company’s aggregate balance

sheet should consider actions that

banking organizations may undertake in

the future.

In response to these concerns, the

agencies note that a broad comparison

of the stability of a covered company’s

funding relative to the liquidity

characteristics of its assets achieves the

final rule’s funding risk-mitigation

objectives. To limit the burden on

covered companies and to maximize the

comparability of the metric between

each covered company and other

international banking organizations, the

NSFR is designed as a simplified metric

that uses a small number of categories

of assets, exposures, liabilities,

counterparty types, and residual

maturity buckets to achieve its

objective. While the balance sheets of

large banking organizations reflect a

complex variety of transactions and

business activities, additional

granularity could be burdensome to

covered companies relative to the goals

of the NSFR requirement. The NSFR

was designed holistically and

introducing additional granularity could

require recalibration of certain other

elements. For example, the

incorporation of additional RSF factors

may require other RSF factors to be

adjusted upward, as they currently

reflect an aggregate view of the level of

stable funding required for the entire set

of assets or off-balance sheet

commitments in a given category.

Additionally, to the extent possible, the

metric utilizes the carrying values of

assets and liabilities on a covered

company’s balance sheet under U.S.

Generally Accepted Accounting

Principles (GAAP) and limits the need

for additional valuations.

In response to comments that the

NSFR is not sensitive to the different

business models of covered companies,

the agencies note that the NSFR is

designed to allow comparison across

covered companies and other

international firms, and to minimize

differences in how liquidity

characteristics of liabilities and assets

are evaluated by covered companies

s the need

for additional valuations.

In response to comments that the

NSFR is not sensitive to the different

business models of covered companies,

the agencies note that the NSFR is

designed to allow comparison across

covered companies and other

international firms, and to minimize

differences in how liquidity

characteristics of liabilities and assets

are evaluated by covered companies. As

a standardized metric, the final rule is

constructed to ensure a sufficient

amount of stable funding across all

covered companies, regardless of their

business models. The NSFR generally

does not differentiate by a banking

organization’s business model, its lines

of business, or the purpose for which

individual assets or liabilities are held

on its balance sheet. For example, the

NSFR treats securities held on a covered

company’s balance sheet based on the

securities’ credit risk and market

characteristics regardless of whether

such securities are held as long-term

investments, as hedging instruments, or

as market making inventory. While the

composition of banking organizations’

balance sheets varies based on business

models and the services provided to

customers, the NSFR is not focused on

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00008

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9127

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

38 As noted above, the point-in-time NSFR

complements forward-looking assessments of risk,

such as a covered company’s internal liquidity

stress testing practices.

39 As described below, calculation date means

any date on which a covered company calculates

its NSFR. See section VI.A.1 of this Supplementary

Information section.

40 See sections VII.C and VII.D of this

Supplementary Information section.

41 The LCR rule compares cash-generating

resources (i.e., the HQLA amount) to cash needs

(total net cash outflows) in a 30-day stress

esting practices.

39 As described below, calculation date means

any date on which a covered company calculates

its NSFR. See section VI.A.1 of this Supplementary

Information section.

40 See sections VII.C and VII.D of this

Supplementary Information section.

41 The LCR rule compares cash-generating

resources (i.e., the HQLA amount) to cash needs

(total net cash outflows) in a 30-day stress. The final

rule compares sources of stable funding (ASF

amount) to the need for stable funding (RSF

amount), each calibrated over a 12-month horizon

and across a range of market conditions.

42 For example, the definitions of ‘‘general

obligation,’’ ‘‘affiliate,’’ and ‘‘company’’ do not

incorporate an assumption of stress.

43 For example, the final rule applies the same

ASF factor to certain forms of funding from a

financial sector entity that mature in six months or

less, regardless of whether such funding is in the

form of a secured funding transaction or unsecured

wholesale funding, whereas the LCR rule generally

treats these categories of funding separately for

purposes of determining applicable outflow

amounts. See 12 CFR 50.32(h) and (j) (OCC); 12 CFR

249.32(h) and (j) (Board); 12 CFR 329.32(h) and (j)

(FDIC).

any particular business model (for

example, commercial banking), as

suggested by commenters.

Like most prudential requirements,

the NSFR is a measure of a covered

company’s condition at a point in time

and by design does not consider the

broad variety of actions that

management may take in the future. As

a general principle, the agencies do not

speculate about future transactions,

contingencies, or potential managerial

remediation steps that the covered

company may take.38

3. Use of a Time Horizon

Certain commenters questioned the

NSFR’s design in respect to its time

horizon

in time

and by design does not consider the

broad variety of actions that

management may take in the future. As

a general principle, the agencies do not

speculate about future transactions,

contingencies, or potential managerial

remediation steps that the covered

company may take.38

3. Use of a Time Horizon

Certain commenters questioned the

NSFR’s design in respect to its time

horizon. While the NSFR measures a

banking organization’s balance sheet

and commitments at a point in time, the

assessment of adequate funding

considers the stability of, and the need

for, funding with reference to a general

one-year time horizon and a range of

market conditions. The measurement

incorporates contractual maturities but

generally does not reflect expectations

about the year following the calculation

date.39 Rather, consistent with the Basel

NSFR standard, the NSFR calibrations

seek to reflect resilient credit

intermediation to the real economy and

general behaviors by banking

organizations and their counterparties.

The use of a time horizon for the

assessment of funding imbalances is

appropriate because the residual

maturities of liabilities and assets of a

covered company at the calculation date

are, among other characteristics,

indicative of the liabilities’ stability and

the assets’ need for funding,

respectively. For example, liabilities

that are due to mature in the short term

will generally provide less stability to a

banking organization’s balance sheet

than longer-term liabilities. Similarly,

certain short-dated assets maturing in

less than one year should require a

smaller portion of funding to be

maintained over a one-year time horizon

because banking organizations may

allow such assets to mature without

replacing them. The choice of a one-year

time horizon is also consistent with

traditional accounting and supervisory

measures of short-term and long-term

financial instruments and exposures.

4

ssets maturing in

less than one year should require a

smaller portion of funding to be

maintained over a one-year time horizon

because banking organizations may

allow such assets to mature without

replacing them. The choice of a one-year

time horizon is also consistent with

traditional accounting and supervisory

measures of short-term and long-term

financial instruments and exposures.

4. Stress Perspectives and Using

Elements From the LCR Rule

A number of commenters requested

clarification on the extent to which the

NSFR calibrations incorporated stress

assumptions. Consistent with the

complementary designs of the Basel

LCR and NSFR standards, the final rule

is designed differently from, and to be

complementary to, the LCR rule. Unlike

the LCR, which compares immediately

available sources of cash to potential

stressed cash outflows over a 30-

calendar day period, the NSFR is not a

cash-flow coverage metric, and ASF and

RSF amounts are not cash-flow

amounts. While ASF factors take into

account the characteristics of liabilities

that influence relative funding stability

across a range of market conditions, the

values of ASF factors do not represent

liability outflow rates. Similarly, while

RSF factors take into account the

liquidity characteristics of assets that

generally influence their need for

funding over a one-year horizon, the

values of RSF factors do not reflect the

monetization value of assets

abilities

that influence relative funding stability

across a range of market conditions, the

values of ASF factors do not represent

liability outflow rates. Similarly, while

RSF factors take into account the

liquidity characteristics of assets that

generally influence their need for

funding over a one-year horizon, the

values of RSF factors do not reflect the

monetization value of assets. In

response to comments that the values of

factors used in the LCR rule imply that

ASF or RSF factors were incorrectly

calibrated, it is important to note that

comparisons of the values of ASF or

RSF factors under the final rule to the

values of outflow and inflow rates used

in the LCR rule are not indicative of the

relative conservatism of the

requirements under both rules.40

Further, the final rule is not designed

to function as a one-year liquidity stress

test, and therefore its ASF and RSF

factors are not assigned based on, or

intended to directly translate to,

assumed cash inflows and outflows over

a one-year period of stress. Rather, the

final rule is intended to serve as a

balance-sheet metric, and ASF and RSF

factors reflect, respectively, the relative

stability of funding and the need for

funding based on the liquidity

characteristics of assets and

commitments, each across a range of

economic and financial conditions.41

Funding and liquidity characteristics of

liabilities and assets under stress

conditions are therefore relevant to, but

not determinative of, ASF and RSF

factors. As a result, ASF and RSF factor

calibrations take into account potential

effects of stress on the stability of

funding and liquidity characteristics of

assets and commitments, but are not

calibrated to require a covered company

to retain a buffer against a stress period

of one year, as discussed in sections

VII.C and VII.D of this Supplementary

Information section

f, ASF and RSF

factors. As a result, ASF and RSF factor

calibrations take into account potential

effects of stress on the stability of

funding and liquidity characteristics of

assets and commitments, but are not

calibrated to require a covered company

to retain a buffer against a stress period

of one year, as discussed in sections

VII.C and VII.D of this Supplementary

Information section.

Although the NSFR generally is not

calibrated to the stress assumptions of

the LCR rule, it nevertheless shares

certain common elements and

definitions with the complementary

LCR where such consistency is helpful.

The alignment of the final rule with the

structure and design of the LCR rule,

where appropriate, aims to improve

efficiency and limit compliance costs to

covered companies by allowing them

more efficiently to implement the two

requirements. In response to

commenters’ concerns that sharing

definitions and elements with the LCR

rule inappropriately incorporates stress

assumptions into the NSFR

requirement, the agencies note that

many shared elements and defined

terms are independent of stress

assumptions.42 Moreover, to the extent

that the final rule incorporates

definitions of the LCR rule, their usage

in the final rule generally reflects

assumptions that are specific to the final

rule.43 Finally, while the final rule is

not calibrated based on a one-year

stress, some considerations of

conservatism are still relevant. For

example, as discussed in section VII.B

of this Supplementary Information

section, the final rule generally applies

the same assumptions for determining

maturity as the LCR rule because

conservative assumptions regarding the

maturity of funding relative to the

duration of asset holdings are

appropriate for assessing the risks

presented by mismatches in balance

sheet funding.

5

vant. For

example, as discussed in section VII.B

of this Supplementary Information

section, the final rule generally applies

the same assumptions for determining

maturity as the LCR rule because

conservative assumptions regarding the

maturity of funding relative to the

duration of asset holdings are

appropriate for assessing the risks

presented by mismatches in balance

sheet funding.

5. Analytical Basis of Factor

Calibrations and Supervisory

Considerations

Several commenters argued that the

agencies did not sufficiently rely on

empirical analysis to inform various

portions of the proposed rule. Other

commenters argued that the agencies

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00009

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9128

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

44 Supervisory experience is informed in part

through confidential data obtained through the FR

2052a report.

45 See sections VII.C and VII.D of this

Supplementary Information section.

46 See section VII of this Supplementary

Information section.

47 Notable divergences in the final rule from the

Basel NSFR standard include the treatment of level

1 liquid asset securities, certain short-term secured

lending transactions backed by level 1 liquid assets,

variation margin in derivatives transactions, and

non-deposit retail funding.

48 See section III.B of this Supplementary

Information section. In the tailoring proposals, the

proposed scope of application for the NSFR was the

same as that proposed for the LCR rule.

49 As noted above, the tailoring proposals would

have removed the Board’s modified LCR and

modified NSFR requirement because the reduced

LCR and reduced NSFR would be better designed

for assessing liquidity and funding risks for banking

organizations in Categories III and IV.

did not sufficiently disclose the

quantitative data and analyses on which

the agencies relied

ed for the LCR rule.

49 As noted above, the tailoring proposals would

have removed the Board’s modified LCR and

modified NSFR requirement because the reduced

LCR and reduced NSFR would be better designed

for assessing liquidity and funding risks for banking

organizations in Categories III and IV.

did not sufficiently disclose the

quantitative data and analyses on which

the agencies relied.

As explained in detail in sections

VII.C and VII.D of this Supplementary

Information section, the liabilities

within an ASF factor category generally

exhibit similar levels of funding

stability and the assets within an RSF

factor category generally exhibit similar

liquidity characteristics. In addition,

there is a sufficient number of ASF

factor and RSF factor categories in the

final rule to differentiate among the

funding risks presented by the assets,

commitments, and liabilities covered by

the NSFR. The ASF and RSF factors as

calibrated for these categories of

liabilities and assets, and as applied

under the Basel NSFR standard to

similar categorizations, are generally

appropriate for U.S. implementation.44

However, as discussed below, the final

rule departs from the Basel NSFR

standard where doing so would support

important domestic policy objectives.

The agencies regularly review their

regulatory framework, including

liquidity requirements, to ensure it is

functioning as intended and will

continue to assess the NSFR’s

calibration under the final rule. A more

specific discussion of the agencies’

analysis is provided in sections VII.C

and VII.D of this Supplementary

Information section, which discuss the

comments received on the calibration of

ASF and RSF factors.

Consistent with the proposed rule and

as noted above, certain ASF and RSF

factor assignments in the final rule take

into account policy considerations

relating to the safety and soundness of

covered companies and U.S

’

analysis is provided in sections VII.C

and VII.D of this Supplementary

Information section, which discuss the

comments received on the calibration of

ASF and RSF factors.

Consistent with the proposed rule and

as noted above, certain ASF and RSF

factor assignments in the final rule take

into account policy considerations

relating to the safety and soundness of

covered companies and U.S. financial

stability.45 For example, the assignment

of a zero percent ASF factor to

wholesale funding from financial sector

entities that matures within six months

generally reflects supervisory concerns

related to the financial stability risks

related to overreliance on this source of

funding by large interconnected banking

organizations. In calibrating the factors,

the agencies also considered behavioral

and operational factors that can affect

funding stability or asset liquidity, such

as reputational incentives that could

cause a covered company to maintain

lending to certain counterparties.46

In response to commenters’ assertion

that the agencies failed to disclose

quantitative data and analyses used to

support the proposed rule, the agencies

note that they disclosed in the proposed

rule material that was available and

reliable. In the instances in which the

agencies cited data in support of the

proposed rule, the agencies identified

that data, acknowledged the

shortcomings of the available data, and

invited input from the public. In

developing the final rule, the agencies

have considered the comments received.

D. Adjusting Calibration for the U.S.

Implementation of the NSFR

As noted above, the final rule is based

on the general framework of the Basel

NSFR standard. Some commenters

argued that the agencies should not

adopt the proposed rule, or should

modify certain elements of the proposed

rule, because the Basel NSFR standard

is an internationally negotiated standard

that was not properly tailored to reflect

U.S. financial, legal, and market

conditions

FR

As noted above, the final rule is based

on the general framework of the Basel

NSFR standard. Some commenters

argued that the agencies should not

adopt the proposed rule, or should

modify certain elements of the proposed

rule, because the Basel NSFR standard

is an internationally negotiated standard

that was not properly tailored to reflect

U.S. financial, legal, and market

conditions. By contrast, a number of

commenters argued that the final rule

should be more consistent with the

Basel NSFR standard, particularly with

respect to elements that would be more

stringent under the proposed rule than

the Basel NSFR standard.

In developing the proposed and final

rules, the agencies considered the Basel

NSFR standard as well as financial,

legal, market, and other considerations

specific to the United States. Basing the

final rule on the general framework of

the Basel NSFR standard helps promote

competitive equity with respect to

covered companies and other large,

internationally active banking

organizations in other jurisdictions,

facilitate regulatory consistency across

jurisdictions, and ensure a minimum

level of resiliency across the global

financial system. Where appropriate, the

final rule differs from the Basel NSFR

standard to reflect specific

characteristics of U.S. markets, practices

of U.S. banking organizations and

domestic policy objectives.47

E. NSFR Scope and Minimum

Requirement Under the Final Rule—Full

and Reduced NSFR

1. Proposed Minimum Requirement and

the Tailoring Final Rule

In the tailoring proposals, the

agencies re-proposed the scope of

application of the NSFR proposed rule

l NSFR

standard to reflect specific

characteristics of U.S. markets, practices

of U.S. banking organizations and

domestic policy objectives.47

E. NSFR Scope and Minimum

Requirement Under the Final Rule—Full

and Reduced NSFR

1. Proposed Minimum Requirement and

the Tailoring Final Rule

In the tailoring proposals, the

agencies re-proposed the scope of

application of the NSFR proposed rule.

The tailoring proposals would have

established four categories of

requirements—Category I, II, III, and

IV—that would have been used to tailor

the application of the NSFR requirement

based on the risk profile of a top-tier

banking organization as measured by

the risk-based indicators.48 Covered

companies subject to Category I and II

requirements would have been subject

to the full requirements of the proposed

rule (full NSFR). Under Category III or

Category IV, however, covered

companies would have been subject to

further tailored NSFR requirements

based on the top-tier banking

organization’s level of weighted short-

term wholesale funding. Specifically, a

covered company that meets the criteria

for Category III with $75 billion or more

in average weighted short-term

wholesale funding would have been

subject to the full NSFR requirement. By

contrast, banking organizations in

Category III with less than $75 billion in

average weighted short-term wholesale

funding, or in Category IV with $50

billion or more in average weighted

short-term wholesale funding, would

have been required to comply with a

reduced NSFR (reduced NSFR)

requirement, calibrated at a level

equivalent to between 85 and 70 percent

of the full NSFR requirement.49 Banking

organizations in Category IV with less

than $50 billion in weighted short-term

wholesale funding would not have been

subject to an NSFR requirement

or more in average weighted

short-term wholesale funding, would

have been required to comply with a

reduced NSFR (reduced NSFR)

requirement, calibrated at a level

equivalent to between 85 and 70 percent

of the full NSFR requirement.49 Banking

organizations in Category IV with less

than $50 billion in weighted short-term

wholesale funding would not have been

subject to an NSFR requirement. In

addition, a depository institution

subsidiary of a covered company

meeting the criteria of Category I, II, or

III would have been required to comply

with the NSFR requirement to which its

parent covered company was subject if

the depository institution subsidiary’s

total consolidated assets were $10

billion or greater. Depository institution

subsidiaries with less than $10 billion

in total consolidated assets, as well as

depository institution subsidiaries of

covered companies meeting the criteria

of Category IV, would not have been

required to comply with an NSFR

requirement.

The tailoring final rule adopted these

categories, with certain changes, for

purposes of the LCR rule and the

agencies’ capital rule. Under the

tailoring final rule, Category I

requirements apply to U.S. global

systemically important banks (GSIBs)

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00010

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9129

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

50 See supra note 19.

51 The tailoring proposals also sought comment

on whether standardized liquidity requirements,

such as the LCR and NSFR, should apply to the U.S.

branches and agencies of a foreign banking

organization to complement the internal liquidity

stress testing standards that currently apply to these

entities. As described in the tailoring final rule, the

Board continues to consider whether to develop

and propose for implementation a standardized

liquidity requirement with respect to the U.S

such as the LCR and NSFR, should apply to the U.S.

branches and agencies of a foreign banking

organization to complement the internal liquidity

stress testing standards that currently apply to these

entities. As described in the tailoring final rule, the

Board continues to consider whether to develop

and propose for implementation a standardized

liquidity requirement with respect to the U.S.

branches and agencies of foreign banking

organizations. See 84 FR at 59257. Any such

requirement would be subject to notice and

comment as part of a separate rulemaking process.

52 The consolidated risks posed by U.S. banking

organizations to the U.S. financial system also

include risks derived from foreign-based branches

and subsidiaries.

53 See supra note 18.

and any of their depository institution

subsidiaries with $10 billion or more in

consolidated assets. Category II

requirements apply to top-tier banking

organizations,50 other than U.S. GSIBs,

with $700 billion or more in

consolidated assets or $75 billion or

more in average cross-jurisdictional

activity, and to their depository

institution subsidiaries with $10 billion

or more in consolidated assets. Category

III requirements apply to top-tier

banking organizations that have $250

billion or more in consolidated assets,

or that have $100 billion or more in

consolidated assets and also have $75

billion or more in (1) average nonbank

assets, (2) average weighted short-term

wholesale funding, or (3) average off-

balance sheet exposure, that are not

subject to Category I or II requirements.

Category III requirements also apply to

depository institution subsidiaries of

these top-tier banking organizations,

each with $10 billion or more in

consolidated assets. Category IV

requirements apply to top-tier

depository institution holding

companies or U.S

hort-term

wholesale funding, or (3) average off-

balance sheet exposure, that are not

subject to Category I or II requirements.

Category III requirements also apply to

depository institution subsidiaries of

these top-tier banking organizations,

each with $10 billion or more in

consolidated assets. Category IV

requirements apply to top-tier

depository institution holding

companies or U.S. intermediate holding

companies that in each case have $100

billion or more in consolidated assets

and $50 billion or more in average

weighted short-term wholesale funding

that are not subject to Category I, II or

III requirements.

Under the tailoring final rule, covered

companies in Category I and II, or in

Category III with $75 billion or more in

average weighted short-term wholesale

funding are subject to the full

requirements of the LCR rule. All other

covered companies in Category III and

covered companies in Category IV with

$50 billion or more in average weighted

short-term wholesale funding are

subject to a reduced LCR requirement

calibrated at 85 percent and 70 percent,

respectively. The calibration approaches

outlined in the tailoring proposals and

tailoring final rule were designed to

better align the regulatory requirements

of banking organizations with their risk

profiles, taking into account their size

and complexity, as well as their

potential impact on systemic risk.

The final rule adopts the risk-based

category approach used in the tailoring

final rule for purposes of applying the

NSFR. The application of the NSFR

requirements to specific entities based

on their tailoring category is discussed

further below.

2. Applicability of the Final Rule to U.S.

Intermediate Holding Companies and

Use of the Risk-Based Indicators

The tailoring proposals would have

applied liquidity requirements to

foreign banking organizations based on

the risk profile of their combined U.S.

operations

application of the NSFR

requirements to specific entities based

on their tailoring category is discussed

further below.

2. Applicability of the Final Rule to U.S.

Intermediate Holding Companies and

Use of the Risk-Based Indicators

The tailoring proposals would have

applied liquidity requirements to

foreign banking organizations based on

the risk profile of their combined U.S.

operations. Specifically, the proposed

NSFR requirements would have applied

to a foreign banking organization based

on the combined risk profile of its U.S.

intermediate holding company and any

U.S. branches or agencies, as measured

by the risk-based indicators.51

Most commenters argued that the

NSFR requirement should apply

directly to a U.S. intermediate holding

company of a foreign banking

organization based on the U.S.

intermediate holding company’s risk

profile. Some commenters further

asserted that no NSFR requirement

should be imposed on U.S. intermediate

holding companies in view of the

application of the NSFR under home

country standards to the top-tier foreign

parent. These commenters argued that

the application of an NSFR requirement

to U.S. intermediate holding companies

is inconsistent with the principles of

national treatment and equality of

competitive opportunity because mid-

tier U.S. bank holding companies of a

similar size and risk profile would not

be subject to an NSFR requirement but

rather would be reflected in the NSFR

applied at the top-tier consolidated U.S.

parent. Other commenters argued that

the liquidity requirements that apply to

foreign banking organizations’ U.S.

operations, such as internal liquidity

stress testing and liquidity risk

management standards, and total loss-

absorbing capacity (TLAC) instruments

issued by U.S. intermediate holding

companies make the application of the

NSFR rule unnecessary for such

companies. In addition, some

commenters argued that U.S

at

the liquidity requirements that apply to

foreign banking organizations’ U.S.

operations, such as internal liquidity

stress testing and liquidity risk

management standards, and total loss-

absorbing capacity (TLAC) instruments

issued by U.S. intermediate holding

companies make the application of the

NSFR rule unnecessary for such

companies. In addition, some

commenters argued that U.S.

intermediate holding companies should

not be subject to the NSFR rule until

after the agencies have conducted an

impact analysis. By contrast, other

commenters supported the proposed

application of an NSFR requirement to

a U.S. intermediate holding company

based on the risk profile of the

combined U.S. operations of the foreign

banking organization.

A U.S. intermediate holding company

poses risks in the United States similar

to domestic banking organizations of a

similar size and risk profile, even if the

parent foreign banking organization is

subject to an NSFR requirement in its

home jurisdiction. The LCR rule, the

Board’s enhanced prudential standards

rule, and the final rule apply to

applicable U.S. banking organizations

on a global consolidated basis and

incorporate certain liquidity risks posed

by mid-tier holding companies and their

subsidiaries.52 For this reason, such

requirements do not apply directly to

mid-tier holding companies on a

standalone basis. Consistent with the

LCR rule and the Board’s enhanced

prudential standards rule, the final rule

applies to a U.S. intermediate holding

company of a foreign banking

organization because of the risks it

presents to the U.S. financial system on

a consolidated basis. However, the final

rule does not apply liquidity or funding

requirements to a subsidiary holding

company of a U.S. intermediate holding

company of a foreign banking

organization

d

prudential standards rule, the final rule

applies to a U.S. intermediate holding

company of a foreign banking

organization because of the risks it

presents to the U.S. financial system on

a consolidated basis. However, the final

rule does not apply liquidity or funding

requirements to a subsidiary holding

company of a U.S. intermediate holding

company of a foreign banking

organization. Further, for the reasons

described in section V.A of this

Supplementary Information section, the

NSFR requirement is a complement to

the LCR rule and other regulatory

requirements for banking organizations

that can present material risks to the

U.S. financial system. In light of these

concerns, the agencies are applying an

NSFR requirement to U.S. intermediate

holding companies.

In addition, consistent with the scope

of application of the LCR rule, the final

rule applies the NSFR requirement to a

U.S. intermediate holding company

based on the risk profile of the U.S.

intermediate holding company, rather

than on the combined U.S. operations of

the foreign banking organization.53

Specifically, the final rule applies a full

NSFR or reduced NSFR requirement to

a U.S. intermediate holding company

under the risk-based categories based on

measures of the U.S. intermediate

holding company’s risk-based

indicators. This approach helps to

enhance the efficiency of NSFR

requirements relative to the proposal,

because stable funding requirements

that apply to a U.S. intermediate

holding company are based on the U.S.

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00011

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

ding company’s risk-based

indicators. This approach helps to

enhance the efficiency of NSFR

requirements relative to the proposal,

because stable funding requirements

that apply to a U.S. intermediate

holding company are based on the U.S.

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00011

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9130

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

54 Under the final rule, a banking organization

applies the appropriate adjustment factor to its

calculated RSF amount (required stable funding

adjustment percentage), by multiplying its RSF

amount by its required stable funding adjustment

percentage. Banking organizations subject to the full

NSFR requirement apply a 100 percent required

stable funding adjustment percentage. Banking

organizations subject to a reduced NSFR

requirement apply an 85 or 70 percent required

stable funding adjustment percentage.

intermediate holding company’s risk

profile.

3. NSFR Minimum Requirements Under

the Final Rule: Applicability and

Calibration

A number of commenters argued that

the re-proposed scope of applicability of

the NSFR requirement was too stringent.

Some commenters argued that smaller

regional banking organizations should

not be subject to the NSFR rule and that

NSFR requirements for Category IV

banking organizations should be

eliminated. By contrast, other

commenters argued that the tailoring

proposals would tailor NSFR

requirements in a way that would

weaken the safety and soundness of

large banking organizations and increase

risks to U.S. financial stability. Some

commenters argued that full NSFR

requirements should apply to all

covered companies until after the final

rule has been effective for a sufficiently

long period of time for the agencies to

evaluate its efficacy. Other commenters

advocated for further tailoring of the

NSFR requirements

safety and soundness of

large banking organizations and increase

risks to U.S. financial stability. Some

commenters argued that full NSFR

requirements should apply to all

covered companies until after the final

rule has been effective for a sufficiently

long period of time for the agencies to

evaluate its efficacy. Other commenters

advocated for further tailoring of the

NSFR requirements.

For the reasons discussed below, the

final rule generally retains the NSFR

requirements described under the

tailoring proposals. The final rule

adopts a reduced NSFR requirement

calibrated to 85 percent of the full NSFR

requirement for Category III banking

organizations with less than $75 billion

in weighted short-term wholesale

funding, and to 70 percent of the full

NSFR requirement for Category IV

banking organizations with $50 billion

or more in weighted short-term

wholesale funding.54 Consistent with

the tailoring proposals, depository

institution subsidiaries with less than

$10 billion in total consolidated assets

would not be subject to an NSFR

requirement. Moreover, no NSFR

requirement applies at the subsidiary

depository institution-level under

Category IV.

a) NSFR Requirements Under Category

I

Consistent with the scope of

application of the LCR rule, the tailoring

proposals would have applied full

NSFR requirements to covered

companies that meet the criteria for

Category I. The agencies did not receive

comments on the application of the

NSFR requirement under Category I and

are finalizing this aspect as proposed.

b) NSFR Requirements Under Category

II

The tailoring proposals would have

applied the full NSFR requirement to

covered companies that meet the criteria

for Category II. Some commenters

argued that Category II should include

a reduced NSFR requirement to reflect

the lower risk profile of Category II

banking organizations relative to those

in Category I

finalizing this aspect as proposed.

b) NSFR Requirements Under Category

II

The tailoring proposals would have

applied the full NSFR requirement to

covered companies that meet the criteria

for Category II. Some commenters

argued that Category II should include

a reduced NSFR requirement to reflect

the lower risk profile of Category II

banking organizations relative to those

in Category I. Specifically, these

commenters argued certain banking

organizations in Category II present

relatively lower stable funding risks

than Category I banking organizations

due to such banking organizations’

concentration in custody activities and

use of operational deposits.

Similar to U.S. GSIBs and their large

depository institution subsidiaries,

banking organizations that meet the

criteria for Category II provide material

levels of financial intermediation within

the United States or internationally, and

the NSFR helps to ensure that such

banking organizations have appropriate

funding to be in a position to sustain the

necessary intermediation activities over

a range of conditions. Additionally, the

failure or distress of banking

organizations that meet the criteria for

Category II could impose significant

costs on the U.S. financial system and

economy. For example, any very large or

global banking organization, including

one that has a significant custody

business, that is subject to asset fire

sales resulting from funding disruptions

is likely to transmit distress on a

broader scale because of the greater

volume of assets it may sell and the

number of its counterparties across

multiple jurisdictions. Similarly, a

banking organization with significant

international activity is more exposed to

the risk of ring-fencing of funding

resources by one or more jurisdictions.

Ring-fencing may hamper the movement

of funding, regardless of the level of

custody business

er scale because of the greater

volume of assets it may sell and the

number of its counterparties across

multiple jurisdictions. Similarly, a

banking organization with significant

international activity is more exposed to

the risk of ring-fencing of funding

resources by one or more jurisdictions.

Ring-fencing may hamper the movement

of funding, regardless of the level of

custody business. More generally, the

overall size of a banking organization’s

operations, material transactions in

foreign jurisdictions, and the use of

overseas funding sources add

complexity to the management of the

banking organization’s funding profile.

For these reasons, the agencies are

adopting the proposal to apply the full

NSFR requirement to Category II

banking organizations.

c) NSFR Requirements Under Category

III

As described above, the tailoring

proposals would have differentiated

NSFR requirements in Category III based

on whether the level of average

weighted short-term wholesale funding

of a banking organization was at least

$75 billion and sought comment on the

calibration of the reduced NSFR

requirement.

Some commenters argued that

Category III banking organizations with

less than $75 billion in average

weighted short-term wholesale funding

should not be subject to a reduced NSFR

requirement. By contrast, many

commenters expressed support for a

reduced NSFR requirement under

Category III, and generally

recommended that such requirement be

calibrated to 70 percent of the full NSFR

requirement, consistent with the

calibration of the Board’s previously

proposed modified NSFR requirement.

In addition, several of these commenters

argued that the reduced NSFR

requirement should apply only to

holding companies.

To improve the calibration of a

banking organization’s minimum ASF

amount relative to its funding profile

and its potential risk to U.S

percent of the full NSFR

requirement, consistent with the

calibration of the Board’s previously

proposed modified NSFR requirement.

In addition, several of these commenters

argued that the reduced NSFR

requirement should apply only to

holding companies.

To improve the calibration of a

banking organization’s minimum ASF

amount relative to its funding profile

and its potential risk to U.S. financial

stability, the final rule differentiates

between banking organizations based on

their category and their reliance on

short-term wholesale funding. As

discussed in the tailoring final rule,

ongoing reliance on short-term,

wholesale funding can make a banking

organization more vulnerable to safety

and soundness and financial stability

risks. Accordingly, under the final rule,

a banking organization subject to

Category III standards with average

weighted short-term wholesale funding

of $75 billion or more is subject to the

full NSFR requirement.

A banking organization subject to

Category III standards with average

weighted short-term wholesale funding

of less than $75 billion is subject to a

reduced NSFR requirement calibrated at

85 percent of the full NSFR

requirement. An 85 percent calibration

is appropriate for these banking

organizations because they are less

likely to contribute to a systemic event

relative to similarly sized banking

organizations that have a greater

reliance on short-term wholesale

funding and therefore, are more

complex, and whose distress or failure

is more likely to have greater systemic

impact.

As a general matter, the alignment of

the reduced NSFR with the Board’s

initially proposed modified NSFR

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00012

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

erm wholesale

funding and therefore, are more

complex, and whose distress or failure

is more likely to have greater systemic

impact.

As a general matter, the alignment of

the reduced NSFR with the Board’s

initially proposed modified NSFR

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00012

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9131

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

55 The Board’s initially proposed modified NSFR

applied to depository holding companies with

between $50 billion and less than $250 billion in

total assets whereas the tailoring proposal would

have applied Category III requirements to banking

organizations that either have $250 billion or more

in total assets or have $100 billion or more in total

assets as well as heightened levels of off-balance

sheet exposure, nonbank assets, or weighted short-

term wholesale funding.

56 12 CFR part 50 (OCC); 12 CFR part 249 (Board);

12 CFR part 329 (FDIC).

would not be appropriate because each

of these requirements was designed to

address different risk profiles. The

Board designed the modified NSFR for

smaller U.S. holding companies with

less complex business models and more

limited potential impact on U.S.

financial stability compared to banking

organizations that would be subject to

the reduced NSFR requirement.55

d) NSFR Requirements Under Category

IV

Under the tailoring proposals, a

Category IV banking organization with

average weighted short-term wholesale

funding of $50 billion or more would

have been required to comply with a

reduced NSFR requirement of between

70 and 85 percent. However, the

reduced NSFR requirement under

Category IV would not have applied to

standalone depository institutions or at

the level of a subsidiary depository

institution

proposals, a

Category IV banking organization with

average weighted short-term wholesale

funding of $50 billion or more would

have been required to comply with a

reduced NSFR requirement of between

70 and 85 percent. However, the

reduced NSFR requirement under

Category IV would not have applied to

standalone depository institutions or at

the level of a subsidiary depository

institution.

Some commenters argued that all

banking organizations subject to

Category IV should be subject to an

NSFR requirement and that the

requirement could be further modified

or simplified for these organizations, as

appropriate. In contrast, other

commenters argued for the removal of

any NSFR requirement for all banking

organizations subject to Category IV.

For a banking organization with total

consolidated assets of at least $100

billion and less than $250 billion,

average weighted short-term wholesale

funding of $50 billion or more

demonstrates a material reliance on

short-term, generally uninsured funding

from more sophisticated counterparties,

which can make a banking organization

more vulnerable to large-scale funding

runs, generating both safety and

soundness and financial stability risks.

Accordingly, such a banking

organization is relatively more

vulnerable to the funding stability risks

addressed by the reduced NSFR

requirement relative to similarly sized

banking organizations that rely more

heavily on stable funding such as retail

deposits and have traditional balance

sheet structures. The application of the

NSFR requirement, albeit at a reduced

level, is therefore appropriate for these

banking organizations given their lower

potential impact on systemic risk.

The final rule calibrates the minimum

reduced NSFR requirement under

Category IV at a level equivalent to 70

percent of the minimum level required

under Category I and II

ave traditional balance

sheet structures. The application of the

NSFR requirement, albeit at a reduced

level, is therefore appropriate for these

banking organizations given their lower

potential impact on systemic risk.

The final rule calibrates the minimum

reduced NSFR requirement under

Category IV at a level equivalent to 70

percent of the minimum level required

under Category I and II. The difference

between the 85 percent reduced NSFR

calibration in Category III and the

reduced 70 percent LCR calibration in

Category IV reflects the differences in

risk profiles of banking organizations

subject to each respective requirement.

The 70 percent calibration recognizes

that these banking organizations are less

complex and smaller than other banking

organizations subject to more stringent

requirements under the final rule and

would likely have more modest

systemic impact than larger, more

complex banking organizations if they

experienced funding disruptions.

Banking organizations that are not

subject to Category I, II or III

requirements and that have average

weighted short-term wholesale funding

of less than $50 billion are not subject

to an NSFR requirement under the final

rule. Depository institution subsidiaries

of banking organizations subject to

Category IV requirements are not subject

to an NSFR requirement.

4. Applicability to Depository

Institution Subsidiaries

As described above, the tailoring

proposals would have applied the same

NSFR requirement to top-tier banking

organizations subject to Category I, II, or

III standards and to their subsidiary

depository institutions with $10 billion

or more in total consolidated assets.

Although a number of commenters

generally supported the application of

consistent requirements for U.S

tion Subsidiaries

As described above, the tailoring

proposals would have applied the same

NSFR requirement to top-tier banking

organizations subject to Category I, II, or

III standards and to their subsidiary

depository institutions with $10 billion

or more in total consolidated assets.

Although a number of commenters

generally supported the application of

consistent requirements for U.S.

depository institutions holding

companies and their depository

institution subsidiaries, many

commenters requested that the agencies

eliminate the application of the NSFR

requirement to depository institutions

that are consolidated subsidiaries of

covered companies. These commenters

stated that the NSFR rule should

recognize that the holding company

structure in the United States allows for

banking organizations to manage

liquidity across the broader corporate

group and provides firms with

flexibility regarding where liquidity is

held within the corporate structure.

These commenters also argued that an

NSFR requirement for a consolidated

depository institution is unnecessary in

view of the supervisory monitoring and

prudential limits applicable to the

depository institution’s funding

structure, as well as the source of

strength requirements that obligate the

parent to remediate any funding

deficiencies at a subsidiary depository

institution. Alternatively, these

commenters suggested that the agencies

should rely on their supervisory

authority to ensure stable funding for

depository institutions. The commenters

also requested that, if the agencies apply

the NSFR requirement to depository

institutions, an exemption should apply

to depository institutions that comprise

85 percent or more of the assets of the

consolidated organization. Commenters

supporting such an approach stated that

the costs of separately applying an

NSFR at the subsidiary depository

institution-level would outweigh any

benefits

so requested that, if the agencies apply

the NSFR requirement to depository

institutions, an exemption should apply

to depository institutions that comprise

85 percent or more of the assets of the

consolidated organization. Commenters

supporting such an approach stated that

the costs of separately applying an

NSFR at the subsidiary depository

institution-level would outweigh any

benefits.

The proposed treatment would have

aligned with the agencies’ longstanding

policy of applying similar standards to

holding companies and their depository

institution subsidiaries. Large

depository institution subsidiaries play

a significant role in a banking

organization’s funding structure, and in

the operation of the payments system.

Such entities should have sufficient

amounts of stable funding to meet their

funding needs rather than be overly

reliant on their parents or affiliates. In

addition, these large subsidiaries

generally have access to deposit

insurance coverage and, as a result,

application of standardized funding

requirements would help to reduce the

potential for losses to the FDIC’s deposit

insurance fund. Accordingly, the final

rule maintains the application of an

NSFR requirement to covered

depository institution subsidiaries as

proposed.

VI. Definitions

The proposed rule would have shared

definitions with the LCR rule and would

have been codified in the same part of

the Code of Federal Regulations as the

LCR rule for each of the agencies.56 The

proposed rule also would have revised

certain of the existing definitions under

the LCR rule and adopted new

definitions for purposes of both the LCR

and NSFR rules. The agencies received

a number of comments regarding the

proposed definitions.

One commenter argued that certain of

the LCR rule’s definitions are flawed

and should not be used for purposes of

the NSFR rule because they are the

result of an internationally negotiated

standard that was not properly

calibrated to reflect U.S. market

conditions or U.S

rposes of both the LCR

and NSFR rules. The agencies received

a number of comments regarding the

proposed definitions.

One commenter argued that certain of

the LCR rule’s definitions are flawed

and should not be used for purposes of

the NSFR rule because they are the

result of an internationally negotiated

standard that was not properly

calibrated to reflect U.S. market

conditions or U.S. banking

organizations’ practices. As discussed in

section V.C of this Supplementary

Information section, to the extent that

the final rule incorporates definitions

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00013

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9132

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

57 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board);

12 CFR 324.2 (FDIC).

58 See § ll.21 of the LCR rule. Certain secured

funding transactions other than collateralized

deposits are used in calculating adjusted liquid

asset amounts for determining the adjusted excess

HQLA amount under the LCR rule.

also used in the LCR rule, their usage in

the final rule generally reflects

assumptions specific to the final rule.

The agencies also note that these

common definitions include defined

terms that are not included in the Basel

LCR standard, but are specific to U.S.

markets and banking organizations. For

example, the definitions for certain

types of brokered deposits and

collateralized deposits are not included

in the Basel LCR standard or the Basel

NSFR standard. In addition, the final

rule has tailored certain definitions,

such as the definition of ‘‘operational

deposit,’’ for the U.S. market. The use of

common definitions across the

regulatory framework, as appropriate,

helps to minimize compliance costs,

facilitate comparability across banking

organizations, and reduce regulatory

burden. Comments regarding specific

defined terms are discussed below

dition, the final

rule has tailored certain definitions,

such as the definition of ‘‘operational

deposit,’’ for the U.S. market. The use of

common definitions across the

regulatory framework, as appropriate,

helps to minimize compliance costs,

facilitate comparability across banking

organizations, and reduce regulatory

burden. Comments regarding specific

defined terms are discussed below. For

ease of convenience, the following

discussion refers to § ll.3 of the LCR

rule, even though the definitions found

in § ll.3 will apply to both the LCR

rule and final rule.

A. Revisions to Existing Definitions

The proposed rule would have

amended the following definitions that

were included in § ll.3 of the LCR

rule: ‘‘calculation date,’’ ‘‘collateralized

deposits,’’ ‘‘committed,’’ ‘‘covered

nonbank company,’’ ‘‘operational

deposit,’’ ‘‘secured funding

transaction,’’ ‘‘secured lending

transaction,’’ and ‘‘unsecured wholesale

funding.’’

1. Revised Definitions for Which the

Agencies Received no Comments

The proposed rule would have

amended the existing definition of

‘‘calculation date,’’ ‘‘committed,’’ and

‘‘covered nonbank company’’ in § ll.3

of the LCR rule. The agencies received

no comments on the changes to these

definitions and are adopting these

revised definitions as proposed.

Calculation date. The final rule

amends to the definition of ‘‘calculation

date’’ in § ll.3 of the LCR rule to

include any date on which a covered

company calculates its NSFR for

purposes of § ll.100 of the final rule.

Committed. The definition of

‘‘committed’’ in § ll.3 of the LCR rule

provides the criteria under which a

credit facility or liquidity facility is

considered committed for purposes of

the LCR rule. To more clearly reflect the

intended meaning of ‘‘committed,’’ the

final rule, consistent with the proposed

rule, amends the definition to state that

a credit or liquidity facility is

committed if it is not unconditionally

cancelable under the terms of the

facility

vides the criteria under which a

credit facility or liquidity facility is

considered committed for purposes of

the LCR rule. To more clearly reflect the

intended meaning of ‘‘committed,’’ the

final rule, consistent with the proposed

rule, amends the definition to state that

a credit or liquidity facility is

committed if it is not unconditionally

cancelable under the terms of the

facility. Consistent with the agencies’

risk-based capital rule, the final rule

defines ‘‘unconditionally cancelable’’ to

mean that a covered company may

refuse to extend credit under the facility

at any time, including without cause (to

the extent permitted under applicable

law).57 For example, a credit or liquidity

facility that permits a covered company

to refuse to extend credit only upon the

occurrence of a specified event (such as

a material adverse change) would not be

considered unconditionally cancelable,

and therefore the facility would be

considered ‘‘committed’’ under the final

rule. Conversely, a credit or liquidity

facility that the covered company may

cancel without cause would be

considered unconditionally cancelable

because the covered company may

refuse to extend credit under the facility

at any time, and therefore the facility

would not be considered ‘‘committed.’’

For example, credit card lines that are

cancelable without cause (to the extent

permitted under applicable law), as is

generally the case, are not considered

committed under the amendment to the

definition.

Covered nonbank company.

Consistent with the proposed rule, the

final rule revises the definition of

‘‘covered nonbank company’’ to clarify

that if the Board requires a company

designated by the Financial Stability

Oversight Council (FSOC) for Board

supervision to comply with the LCR

rule or the final rule, it will do so

through a rulemaking that is separate

from the LCR rule and the final rule or

by issuing an order.

2

t with the proposed rule, the

final rule revises the definition of

‘‘covered nonbank company’’ to clarify

that if the Board requires a company

designated by the Financial Stability

Oversight Council (FSOC) for Board

supervision to comply with the LCR

rule or the final rule, it will do so

through a rulemaking that is separate

from the LCR rule and the final rule or

by issuing an order.

2. Revised Definitions for Which the

Agencies Received Comments

The agencies received comments on

the following proposed amendments to

existing definitions that are included in

§ ll.3 of the LCR rule: ‘‘collateralized

deposit,’’ ‘‘operational deposit,’’

‘‘secured funding transaction,’’ ‘‘secured

lending transaction,’’ and ‘‘unsecured

wholesale funding.’’

Collateralized Deposit. The proposed

rule would have amended the definition

of ‘‘collateralized deposit’’ to include

those deposits of a fiduciary account

collateralized as required under state

law, as applicable to state member and

nonmember banks and state savings

associations. In addition, the proposed

rule would have amended the definition

to include those deposits of a fiduciary

account held at a covered company for

which a depository institution affiliate

of the covered company is a fiduciary

and that the covered company has opted

to collateralize pursuant to 12 CFR

9.10(c) (for national banks) or 12 CFR

150.310 (for federal savings

associations).

The agencies received two comments

regarding the definition of

‘‘collateralized deposit.’’ One

commenter supported the proposed

amendment to include fiduciary

deposits collateralized as required

under state law, as applicable to state

member banks, state nonmember banks,

and state savings associations

FR

9.10(c) (for national banks) or 12 CFR

150.310 (for federal savings

associations).

The agencies received two comments

regarding the definition of

‘‘collateralized deposit.’’ One

commenter supported the proposed

amendment to include fiduciary

deposits collateralized as required

under state law, as applicable to state

member banks, state nonmember banks,

and state savings associations. The other

commenter requested that the agencies

revise the definition to include secured

sweep repurchase arrangements, which

the commenter described as

arrangements that allow a customer’s

balances to be temporarily ‘‘swept’’ out

of a deposit account and into a secured

non-deposit funding arrangement with

the covered company. The commenter

argued that secured sweep repurchase

arrangements are distinct from other

secured funding transactions, including

wholesale funding offered by a broker-

dealer, because they are typically tied to

operational accounts and involve an

automated sweep of corporate client

funds into a secured sweep repurchase

account, thus posing, in the

commenter’s view, less liquidity risk.

The commenter argued that secured

sweep repurchase arrangements are

similar to secured deposit funding

because the arrangements are offered as

part of a broader business relationship

between a covered company and a

customer and, therefore, should not be

subject to the unwind provisions in

§ ll.21 of the LCR rule.

The final rule adopts the amended

definition of ‘‘collateralized deposit’’ as

proposed with an adjustment to

expressly include deposits of a fiduciary

account collateralized pursuant to state

law requirements for which a covered

company’s depository institution

affiliate is a fiduciary

a

customer and, therefore, should not be

subject to the unwind provisions in

§ ll.21 of the LCR rule.

The final rule adopts the amended

definition of ‘‘collateralized deposit’’ as

proposed with an adjustment to

expressly include deposits of a fiduciary

account collateralized pursuant to state

law requirements for which a covered

company’s depository institution

affiliate is a fiduciary. The agencies

defined ‘‘collateralized deposit’’ to

identify a narrow set of secured funding

transactions that should not be subject

to the unwind provision in the LCR rule

for a covered company when

determining its HQLA amount.58 The

agencies excluded such deposits from

the unwind provision based on their

unique characteristics, including,

among other things, that such deposits

‘‘are required to be collateralized under

applicable law’’ and that ‘‘the banking

relationship associated with

collateralized deposit can be different in

nature from shorter-term repurchase and

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00014

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9133

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

59 79 FR at 61473.

60 See § ll.4(b)(6) of the LCR rule; 79 FR at

61501. This section provides that operational

deposits do not include deposits that are provided

in connection with the covered company’s

provision of prime brokerage services, which

include operational services provided to a non-

regulated fund. Section ll.3 of the LCR rule

defines a ‘‘non-regulated fund’’ as any hedge fund

or private equity fund whose investment adviser is

required to file SEC Form PF (Reporting Form for

Investment Advisers to Private Funds and Certain

Commodity Pool Operators and Commodity

Trading Advisors), other than a small business

investment company as defined in section 102 of

the Small Business Investment Act of 1958 (15

U.S.C. 661 et seq.).

61 See 79 FR at 61498

’ as any hedge fund

or private equity fund whose investment adviser is

required to file SEC Form PF (Reporting Form for

Investment Advisers to Private Funds and Certain

Commodity Pool Operators and Commodity

Trading Advisors), other than a small business

investment company as defined in section 102 of

the Small Business Investment Act of 1958 (15

U.S.C. 661 et seq.).

61 See 79 FR at 61498.

62 See § ll.4(b)(5) of the LCR rule.

63 See 79 FR at 61497–502.

reverse repurchase agreements.’’ 59 The

revised definition includes deposits of a

fiduciary account collateralized

pursuant to state law requirements or at

the covered company’s discretion

pursuant to 12 CFR 9.10(c) (for national

banks) or 12 CFR 150.310 (for federal

savings associations) in order to provide

consistent treatment to deposits that are

subject to collateralization requirements

or have been collateralized.

Additionally, temporary secured sweep

repurchase arrangements, including

those offered part of a broader business

relationship, that will mature in 30

calendar days or less of an LCR

calculation date may affect a covered

company’s excess HQLA amount similar

to other wholesale secured funding

transactions conducted by a broker-

dealer and do not qualify for the

treatment afforded to collateralized

deposits.

Operational Deposit. The proposed

rule would have amended the definition

of ‘‘operational deposit’’ to include both

deposits received by the covered

company in connection with

operational services provided by the

covered company and deposits placed

by the covered company in connection

with operational services received by

the covered company. The proposed

rule also would have amended this

definition to clarify that only deposits

can qualify

ed the definition

of ‘‘operational deposit’’ to include both

deposits received by the covered

company in connection with

operational services provided by the

covered company and deposits placed

by the covered company in connection

with operational services received by

the covered company. The proposed

rule also would have amended this

definition to clarify that only deposits

can qualify. Further, because

operational deposits are limited to

accounts that facilitate short-term

transactional cash flows associated with

operational services, operational

deposits also should only have short-

term maturities, falling within the

proposed rule’s less-than-six-month

maturity category and generally within

the LCR rule’s 30-calendar-day period.

Further, because operational deposits

are limited to accounts that facilitate

short-term transactional cash flows

associated with operational services,

operational deposits also should only

have short-term maturities, falling

within the proposed rule’s less-than-six-

month maturity category and generally

within the LCR rule’s 30-calendar-day

period. Notwithstanding the proposed

revisions to this definition, the

treatment of operational deposits under

§§ ll.32 and ll.33 of the LCR rule

would have remained the same.

The agencies received a number of

comments regarding the proposed

definition of ‘‘operational deposit.’’

Some commenters requested removal of

the limitation that operational deposits

cannot be provided by non-regulated

funds. These commenters argued that a

deposit placed at a covered company by

a non-regulated fund for the provision

of operational services would have

similar liquidity risks as a deposit

placed by a regulated fund for the same

operational purposes.60 One commenter

argued that the exclusion of deposits

placed by a non-regulated fund lacks a

clear policy rationale and is unduly

strict towards the custody bank business

model

deposit placed at a covered company by

a non-regulated fund for the provision

of operational services would have

similar liquidity risks as a deposit

placed by a regulated fund for the same

operational purposes.60 One commenter

argued that the exclusion of deposits

placed by a non-regulated fund lacks a

clear policy rationale and is unduly

strict towards the custody bank business

model. The commenter also argued that

this exclusion is more stringent than the

treatment of operational deposits in the

Basel LCR standard. The commenter

expressed concern that retaining this

exclusion could undermine the current

trend among non-regulated funds of

separating the safekeeping and

administration of their investment

assets from their trading and financing

activities. A commenter also asserted

this exclusion is unnecessary because

the risk associated with operational

deposits from non-regulated funds is

addressed sufficiently by the exclusion

of deposits provided in connection with

a covered company’s provision of prime

brokerage services.

One commenter argued that the

definition of ‘‘operational deposit’’

should not be limited to deposits. The

commenter suggested instead that the

definition should be revised to include

non-deposit unsecured wholesale

funding that matures within the LCR

rule’s 30-day time horizon, in order to

include arrangements that allow an

operational customer’s balances to be

temporarily swept out of a deposit

account into non-deposit products until

such time as the funds are needed to

meet operational demands. The

commenter argued that excluding such

arrangements from the definition of

‘‘operational deposit’’ could

underrepresent the amount of a covered

company’s funding that is associated

with the provision of operational

services over the LCR rule’s 30-day time

horizon

ept out of a deposit

account into non-deposit products until

such time as the funds are needed to

meet operational demands. The

commenter argued that excluding such

arrangements from the definition of

‘‘operational deposit’’ could

underrepresent the amount of a covered

company’s funding that is associated

with the provision of operational

services over the LCR rule’s 30-day time

horizon.

Operational deposit are deposits

necessary for the covered company to

provide operational services, as that

term is defined in § ll.3 of the LCR

rule, to the wholesale customer or

counterparty providing the deposit.61

Among other things, the definition

requires compliance with certain

operational requirements of § ll.4 of

the LCR rule in order for a deposit to be

recognized as an operational deposit

(operational requirements).

The exclusion of deposits provided by

non-regulated funds is appropriate

because, in general, non-regulated funds

tend to be sophisticated and are more

likely than many other types of

counterparties to engage in higher-risk

trading strategies involving leverage,

which may result in higher cash needs

due to collateral calls and less stable

deposit balances during certain market

conditions. In comparison to non-

financial wholesale counterparties or

regulated financial sector entities, it is

also more likely that operational

activities at a non-regulated fund would

be impacted by the performance of the

fund’s investment or trading activity

that relies upon prime brokerage

services, and thus it would be more

difficult to separate its deposit balances

that are necessary to maintain

operational activities from its balances

that support trading and investment

activities that rely on prime brokerage

services (even if these services are

provided by different entities of a

covered company). As a result, deposits

from non-regulated funds may present

heightened funding risk relative to

deposits from other counterparties

its deposit balances

that are necessary to maintain

operational activities from its balances

that support trading and investment

activities that rely on prime brokerage

services (even if these services are

provided by different entities of a

covered company). As a result, deposits

from non-regulated funds may present

heightened funding risk relative to

deposits from other counterparties.

In addition, operational deposit

balances swept out of a deposit account

and into non-deposit products will not

be eligible to be considered ‘‘operational

deposits’’. The LCR rule provides that in

order to be recognized as an operational

deposit, any excess amount not linked

to operational services must be

excluded.62

As the preamble to the LCR rule

noted, operational deposits are assigned

a lower outflow rate under the LCR rule

compared to other short-term wholesale

funding due to the perceived stability

arising from the relationship between a

covered company and a depositor, the

necessity of the deposit for the

provision of operational services, and

the switching costs associated with

moving such deposits.63 In contrast,

excess funds, including funds that are

swept into non-deposit products until

funds are needed to meet operational

demands, are not necessary for the

provision of operational services and

therefore do not exhibit these

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00015

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

sits.63 In contrast,

excess funds, including funds that are

swept into non-deposit products until

funds are needed to meet operational

demands, are not necessary for the

provision of operational services and

therefore do not exhibit these

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00015

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9134

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

64 See 79 FR at 61500.

65 See § ll.4(b)(4) of the LCR rule.

66 As noted in § ll.3 of the LCR rule and the

proposed rule, the definition of ‘‘secured funding

transaction’’ also includes repurchase agreements

and securities lending transactions, and the

definition of ‘‘secured lending transaction’’ also

includes reverse repurchase agreements and

securities borrowing transactions, as these

transactions result in the equivalent of a lien,

securing the cash leg of the transaction, that gives

the asset borrower priority over the asset in the

event the covered company or the counterparty, as

applicable, enters into receivership, bankruptcy,

insolvency, liquidation, resolution, or similar

proceeding.

67 The LCR rule for similar reasons does not

include gold bullion as a level 1 liquid asset. See

79 FR at 61456.

68 See 79 FR at 61513.

69 See 79 FR at 61512.

characteristics.64 Furthermore, the LCR

rule excludes from operational deposits

those deposits held in an account that

is designed to incentivize customers to

maintain excess funds in the account

through increased revenue, reduction in

fees, or other economic incentives.65

Because the sweep arrangements

described by the commenter are

typically used to increase returns on

deposits, the continued exclusion of

these sweep arrangements from the

definition of ‘‘operational deposit’’ is

consistent with this treatment.

For these reasons, the final rule

adopts the amended definition of

‘‘operational deposits’’ as proposed

in

fees, or other economic incentives.65

Because the sweep arrangements

described by the commenter are

typically used to increase returns on

deposits, the continued exclusion of

these sweep arrangements from the

definition of ‘‘operational deposit’’ is

consistent with this treatment.

For these reasons, the final rule

adopts the amended definition of

‘‘operational deposits’’ as proposed.

Secured Funding Transaction and

Secured Lending Transaction. The

proposed rule would have revised the

definitions of ‘‘secured funding

transaction’’ and ‘‘secured lending

transaction’’ to clarify that (i) the

transactions must be secured by a lien

on securities or loans, rather than

secured by a lien on other assets; (ii) the

definitions include only transactions

with wholesale customers or

counterparties, and (iii) securities

issued or owned by a covered company

do not constitute secured funding or

lending transactions.66

One commenter recommended

amending the definitions of ‘‘secured

funding transaction’’ and ‘‘secured

lending transaction’’ by replacing

‘‘securities’’ with ‘‘financial assets’’ in

order to broaden the forms of collateral

that may be used in transactions that

meet the definitions. Specifically, the

commenter argued that short-term debt,

commercial paper, gold, and certain

other assets should be permitted forms

of collateral because they effectively

reduce the risk associated with secured

transactions. The same commenter also

requested that the definition of ‘‘secured

lending transaction’’ be expanded to

include certain transactions with retail

customers, and, in particular, open-

maturity loans to retail customers

collateralized by customer securities,

such as a margin loan

be permitted forms

of collateral because they effectively

reduce the risk associated with secured

transactions. The same commenter also

requested that the definition of ‘‘secured

lending transaction’’ be expanded to

include certain transactions with retail

customers, and, in particular, open-

maturity loans to retail customers

collateralized by customer securities,

such as a margin loan. The commenter

asserted that a securities-based loan to

a retail counterparty has similar

characteristics to an open-maturity

reverse repurchase agreement with a

wholesale counterparty, including that

the transaction is fully secured by the

borrower’s collateral, the lender has a

legal right and operational ability to

close out the loan upon default by the

counterparty and sell the collateral to

offset the lender’s credit exposure, and

the maturity of the loan extends each

day that a notice of termination is not

provided.

Under the LCR rule, the cash flows

associated with secured funding and

secured lending transactions take into

account the relative liquidity of the cash

and marketable collateral that will be

exchanged at the maturity of the

transaction and recognize that collateral

in the form of HQLA securities tends to

be the most liquid. By contrast,

collateral that is not generally traded in

liquid markets, including property,

plant, and equipment, may provide

limited liquidity value, particularly

relative to the LCR rule’s time horizon.

While collateral that is not in the form

of securities or loans may serve to

mitigate credit risk, in the agencies’

experience, the cash flows on lending

secured by such collateral, including the

likelihood of renewing the lending at

maturity, depend to a greater degree on

the characteristics of the counterparty

rather than the collateral, thus making

the liquidity risk associated with such

arrangements more akin to that of

unsecured lending

or loans may serve to

mitigate credit risk, in the agencies’

experience, the cash flows on lending

secured by such collateral, including the

likelihood of renewing the lending at

maturity, depend to a greater degree on

the characteristics of the counterparty

rather than the collateral, thus making

the liquidity risk associated with such

arrangements more akin to that of

unsecured lending. Accordingly, such

lending transactions should not

necessarily receive a 100 percent inflow

rate under the LCR rule; rather, the

inflow rate should depend on the

characteristics of the borrower, which

more accurately reflect the likelihood

that a covered company will be able to

realize inflows from or roll over some or

all of the loan during a period of

significant stress. In contrast to their

contributions to total net cash outflows

under the LCR rule, the contributions of

secured loan assets and secured funding

liabilities to the funding risk of a

covered company’s aggregate balance

sheet generally depend on their

maturities and counterparty

characteristics and the final rule

generally treats secured and unsecured

wholesale transactions similarly.

In addition, while there is no defined

term ‘‘securities’’ in the LCR rule, the

agencies are clarifying that a funding

transaction that is not a security, is

conducted with a wholesale customer or

counterparty, and is secured under

applicable law by a lien on third-party

short-term debt or commercial paper

provided by a covered company would

qualify as a secured funding transaction.

Similarly, a lending transaction that is

not a security, is conducted with a

wholesale customer or counterparty,

and is secured under applicable law by

a lien on third-party short-term debt or

commercial paper provided by the

wholesale customer or counterparty

would qualify as a secured lending

transaction

per

provided by a covered company would

qualify as a secured funding transaction.

Similarly, a lending transaction that is

not a security, is conducted with a

wholesale customer or counterparty,

and is secured under applicable law by

a lien on third-party short-term debt or

commercial paper provided by the

wholesale customer or counterparty

would qualify as a secured lending

transaction. However, secured funding

and lending transactions where the

collateral is in the form of gold or other

commodities would not meet the

definition of a secured funding

transaction or secured lending

transaction. These assets exhibit an

increased volatility in market value and

there are logistical factors associated

with holding and liquidating these

assets as compared to loans and

securities.67

The final rule adopts the amended

definitions of ‘‘secured funding

transaction’’ and ‘‘secured lending

transaction’’ as proposed. Under the

final rule, the definitions of ‘‘secured

funding transaction’’ and ‘‘secured

lending transaction’’ include only

transactions with wholesale customers

or counterparties. Secured lending

transactions do not include secured

lending to a retail customer or

counterparty, such as a retail margin

loan. For purposes of the LCR rule

generally, secured lending transactions

categorize certain lending to a wholesale

customer or counterparty where the

expectation is that the transaction may

mature in the near term with the

covered company receiving cash from

the counterparty and being required to

return collateral to the counterparty.68

In contrast, the treatment of retail

exposures generally reflects the

agencies’ expectation that a covered

company will need to maintain a

portion of retail lending even during

stress, regardless of collateralization.69

As noted above, RSF factors assigned to

unencumbered loans to retail and

wholesale customers and counterparties

under the final rule reflect their

maturity and counterparty, rather than

collateralization, and the R

es generally reflects the

agencies’ expectation that a covered

company will need to maintain a

portion of retail lending even during

stress, regardless of collateralization.69

As noted above, RSF factors assigned to

unencumbered loans to retail and

wholesale customers and counterparties

under the final rule reflect their

maturity and counterparty, rather than

collateralization, and the RSF factors

assigned to secured retail lending are

the same as for secured lending to non-

financial sector wholesale

counterparties. As a result, the final

rule, like the proposed rule, categorizes

secured lending to a retail customer or

counterparty separately from secured

lending transactions with wholesale

customers or counterparties for

VerDate Sep<11>2014

21:48 Feb 10, 2021

Jkt 253001

PO 00000

Frm 00016

Fmt 4701

Sfmt 4700

E:\FR\FM\11FER2.SGM

11FER2

khammond on DSKJM1Z7X2PROD with RULES2

9135

Federal Register / Vol. 86, No. 27 / Thursday, February 11, 2021 / Rules and Regulations

70 See section VII.D of this Supplementary

Information section.

71 In addition to the unique treatment of asset

exchanges in § ll.102(c) of the final rule, asset

exchanges are also subject to special treatment

pursuant to § ll.106(d). These treatments are

discussed further in section VII.D.4 of this

Supplementary Information section.

72 A credit facility does not include a legally

binding written agreement to extend funds at a

future date to a counterparty made for the purpose

of refinancing the debt of the counterparty when it

is unable to obtain a primary or anticipated source

of funding, which is included in the definition of

‘‘liquidity facility.’’

73 A liquidity facility excludes facilities that are

established solely for the purpose of general

working capital, such as revolving credit facilities

for general corporate or working capital purposes.

74 The undrawn amount of the facility would be

determined under § ll.32(e)(2) of the LCR rule

and § ll.106(a)(2) of the final rule

h is included in the definition of

‘‘liquidity facility.’’

73 A liquidity facility excludes facilities that are

established solely for the purpose of general

working capital, such as revolving credit facilities

for general corporate or working capital purposes.

74 The undrawn amount of the facility would be

determined under § ll.32(e)(2) of the LCR rule

and § ll.106(a)(2) of the final rule.

purposes of assigning RSF factors under

the NSFR requirement.70

Finally, under the final rule securities

issued or owned by a covered company

do not constitute secured funding or

lending transactions. For example,

asset-backed securities issued by a

special purpose entity that a covered

company consolidates on its balance

sheet are not secured funding

transactions. Similarly, securities

owned by a covered company where

contractual payments to the covered

company are collateralized are not

secured lending transactions.

Unsecured wholesale funding. The

proposed rule would have amended the

definition of ‘‘unsecured wholesale

funding’’ to mean a liability or general

obligation of a covered company to a

wholesale customer or counterparty that

is not a secured funding transaction.

The agencies received one comment

regarding this proposed definition. The

commenter asserted that, although

‘‘asset exchange’’ is separately defined

in the LCR rule, an asset exchange could

nonetheless fall under the definition of

‘‘unsecured wholesale funding’’ because

it could be viewed as a liability or

general obligation that is not a secured

funding transaction if entered into with

a wholesale customer or counterparty.

The final rule adopts the amended

definition of ‘‘unsecured wholesale

funding’’ as proposed with an

adjustment to expressly exclude asset

exchanges

uld

nonetheless fall under the definition of

‘‘unsecured wholesale funding’’ because

it could be viewed as a liability or

general obligation that is not a secured

funding transaction if entered into with

a wholesale customer or counterparty.

The final rule adopts the amended

definition of ‘‘unsecured wholesale

funding’’ as proposed with an

adjustment to expressly exclude asset

exchanges. Under the final rule, secured

funding with a wholesale counterparty

that does not meet the revised definition

of ‘‘secured funding transaction’’

generally meets the definition of

‘‘unsecured wholesale funding.’’

However, consistent with the agencies’

intent to provide a special framework

for asset exchanges, the definitions of

‘‘unsecured wholesale funding’’ and

‘‘unsecured wholesale lending’’ in the

final rule have been revised to exclude

asset exchanges.71

3. Other Definitions and Requirements

for Which the Agencies Received

Comments

Given that the definitions in the LCR

rule would apply to the final rule, the

proposed rule also requested comment

as to whether any other existing

definitions or terms should be amended.

The agencies received several comments

requesting revisions and clarifications to

other definitions in the LCR rule that

the agencies did not propose to amend.

Credit and liquidity facility. One

commenter requested that the agencies

provide examples of a lending

commitment that would qualify as a

‘‘credit facility’’ or ‘‘liquidity facility’’

under the rules

ns or terms should be amended.

The agencies received several comments

requesting revisions and clarifications to

other definitions in the LCR rule that

the agencies did not propose to amend.

Credit and liquidity facility. One

commenter requested that the agencies

provide examples of a lending

commitment that would qualify as a

‘‘credit facility’’ or ‘‘liquidity facility’’

under the rules. Section ll.3 of the

LCR rule defines ‘‘credit facility’’ to

mean a legally binding agreement to

extend funds if requested at a future

date, including a general working

capital facility such as a revolving credit

facility for general corporate or working

capital purposes.72 Other examples of

credit facilities may include a letter of

credit, home equity line of credit, or any

other legally binding agreement to

extend funds if requested at a future

date that is not included in the

definition of ‘‘liquidity facility.’’

Section ll.3 of the LCR rule defines

‘‘liquidity facility’’ to mean a legally

binding written agreement to extend

funds at a future date to a counterparty

that is made for the purpose of

refinancing the debt of the counterparty

when it is unable to obtain a primary or

anticipated source of funding. The

definition of ‘‘liquidity facility’’ further

clarifies that it includes an agreement to

provide liquidity support to asset-

backed commercial paper by lending to,

or purchasing assets from, any structure,

program, or conduit in the event that

funds are required to repay maturing

asset-backed commercial paper.73 Other

examples of liquidity facilities include

agreements related to non-asset backed

commercial paper programs, secured

financing transactions, securities

investment vehicles, and conduits that,

in each case, meet the requirements of

the liquidity facility definition in

§ ll.3 of the LCR rule. The LCR rule

requires a faci

This text is long and has been trimmed here. Open the source document for the complete record.