U.S. Banking Agencies Announce “Super Equivalent” Basel III Liquidity Coverage Ratio Proposal

October 28, 2013

On October 24, 2013, the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (together, the “federal banking agencies”) released a notice of proposed rulemaking implementing quantitative liquidity requirements for large, internationally active banking organizations and their consolidated depository institution subsidiaries (the LCR).  Although consistent with the international liquidity coverage standards promulgated by the Basel Committee on Banking Supervision (Basel III LCR), the LCR is more stringent in certain regards, including with respect to applicable transition periods, and Federal Reserve Governor Daniel Tarullo has indicated that the LCR proposal should be viewed as “super equivalent” to the Basel III LCR.

In addition, the Federal Reserve contemporaneously proposed a modified version of the LCR proposal that would apply to bank holding companies (BHCs) and savings and loan holding companies (SLHCs) without significant insurance or commercial operations that have, in each case, $50 billion or more in total consolidated assets but are not covered by the LCR proposal.

The proposed rule contains 76 questions for comment, and the federal banking agencies encourage commenters to provide detailed qualitative and quantitative analyses to support their views.  Comments on the proposed LCR rules are due by January 31, 2014.

I.          LCR Applicability

The proposed LCR would apply to all “internationally active banking organizations,” Federal Reserve-regulated U.S. holding companies that have $250 billion or more in total consolidated assets or $10 billion or more in total consolidated on-balance sheet foreign exposure, and to their consolidated subsidiary depository institutions that have $10 billion or more in total consolidated assets.  In addition, the proposed LCR would apply to nonbank companies designated for supervision by the Financial Stability Oversight Council that do not have significant insurance operations, and their consolidated subsidiary depository institutions with $10 billion or more in total consolidated assets.  We refer to these entities as “covered companies” below.

The federal banking agencies reserve the right under the proposed rules to apply the LCR to other entities if “appropriate” in light of the company’s “asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered companies, or risk to the financial system.” Federal banking agencies also reserve the authority to require affected companies to hold certain designated highly liquid assets in excess of amounts required by the proposed rules, or to take other measures to improve a company’s liquidity profile.

The LCR would not apply to institutions that have opted in to the U.S. Basel III advanced approaches rule, bridge financial companies or their subsidiaries, a new depository institution or a bridge depository institution, as those terms are used in the resolution context, and branches and agencies of foreign banks operating in the United States.

II.        Minimum LCR Definition

The proposed LCR would require a covered company to maintain an amount of “high-quality liquid assets,” as defined in the proposal, that is not less than 100 percent of the covered company’s total net cash outflows over a prospective 30-calendar day period:

LCR =

high-quality liquid assets” (or HQLAs)

1.00

total net cash outflows” (highest daily amount of cumulative net cash outflows within 30 calendar days following a “calculation date”)

The LCR would be calculated daily beginning on the effective date of the proposal, at a set time selected by the covered company and communicated in writing to its primary federal banking supervisor.  This time could be changed subsequent to the election only on written supervisory approval.

Double counting of items would not be permitted in calculating the LCR:  if an asset were included as an HQLA in the numerator, it would not be permitted to be counted as part of cash inflows for purposes of calculating total net cash outflows in the denominator.

The federal banking agencies stated that the proposal’s measures of total cash outflow and total cash inflow, and the outflow and inflow rates used in their determination, were meant to reflect “aspects of the stress events experienced during the recent financial crisis” – shocks that would result in the partial loss of retail deposits, brokered deposits from retail customers, unsecured wholesale funding and secured short-term funding; losses from derivative positions; unscheduled draws on credit and liquidity facilities provided to clients; the potential need to buy back debt; and other shocks affecting outflows linked to structured financing transactions, mortgages, central bank borrowings, and customer short positions.

Although the LCR is based on a standardized supervisory stress scenario, the federal banking agencies noted that covered companies should maintain robust stress testing frameworks tailored to the risks within their firms, and that they should use such measures to determine liquidity buffers in excess of minimum LCR requirements.  Organizations “that pose more systemic risk to the U.S. banking system or whose liquidity stress testing indicates a need for higher liquidity buffers” may be required to take additional steps beyond meeting the minimum ratio in order to meet supervisory expectations.

III.       Compliance Dates

Like the Basel III LCR framework, the proposed LCR would become effective January 1, 2015, subject to a transition period.  This transition period, however, would be more accelerated than Basel III’s, which becomes fully effective on January 1, 2019.

Transition Period

Required LCR

January 1, 2015 – December 31, 2015 0.80
January 1, 2016 – December 31, 2016 0.90
January 1, 2017 and thereafter 1.00

IV.       The LCR Numerator: What Are High-Quality Liquid Assets (HQLAs)?

High-quality liquid assets (or HQLAs) generally consist of unencumbered assets free of transfer restrictions that are readily convertible into cash under periods of stress, or can generate sufficient liquidity through sale or secured borrowing.  When characterizing assets as HQLAs, the federal banking agencies applied liquidity characteristics consistent with those of the Basel III LCR, considering the assets’ risk profile, market-based characteristics, and central bank eligibility.

As a general matter, most HQLAs need to be “liquid and readily marketable,” which the proposed LCR defines as traded in an active secondary market with (1) more than two committed market makers; (2) a large number of buy-side and sell-side non-market maker participants; (3) observable and timely market prices; and (4) high trading volume. Covered companies would be required to perform a daily analysis of their proposed HQLAs.

Significantly, assets issued by certain financial sector entities do not constitute HQLAs under the proposed LCR, due to their having experienced “wrong way risk” during periods of stress.  These entities include “regulated financial companies” and “non-regulated funds” as defined under the proposed rules,[1],[2] investment companies, pension funds, investment advisors, and any similar entity identified by the federal banking agencies (“identified companies”), or consolidated subsidiaries of the foregoing.

A.  HQLA Asset Categories

The proposed rules divide HQLAs into three categories.  Assets in each category receive different haircuts under the LCR formula, with combined Level 2A and 2B liquid assets not to exceed 40% of total HQLAs, and Level 2B liquid assets not to exceed 15% of the total pool.

Level I HQLAs

  • Federal Reserve bank balances (including all balances of a depository institution maintained on its own behalf at a Federal Reserve bank but excluding certain term deposits and a covered company’s reserve balance requirement)
  • Foreign central bank withdrawable reserves
  • Securities issued by, or unconditionally guaranteed by, the U.S. Treasury
  • Liquid and readily marketable securities issued by, or unconditionally guaranteed by, U.S. government agencies whose obligations are fully and explicitly guaranteed by the full faith and credit of the U.S. government
  • Certain liquid and readily marketable securities guaranteed by sovereigns, central banks, the Bank for International Settlements, the IMF, the European Central Bank and European Community, or multilateral development banks, in each case subject to specified liquidity, risk weight and historical performance criteria under stress conditions
  • Certain liquid and readily marketable securities issued by foreign sovereign entities (to meet outflows in those jurisdictions)

Level 2A HQLAs (15% haircut)

  • Certain claims on or guaranteed by U.S. government sponsored enterprises (GSEs), and certain claims on or guaranteed by sovereign entities or a multilateral development bank that are not included in Level 1 and have a 20%, rather than 0%, risk weighting under standardized approaches[3]

Level 2B HQLAs (50% haircut)

  • Certain publicly traded liquid and readily marketable corporate debt and equity securities[4]

Covered bonds and securities issued by public sector entities, such as state, local, or other subdivisions below that of a sovereign, or U.S. municipalities or states, do not qualify as HQLAs, even though they otherwise are assigned a 20% risk waiting under standardized approaches.  Assets that meet the criteria above and the other requirements of the LCR Proposal qualify as HQLAs both if they are characterized as “available for sale” and “held to maturity.”

B.  HQLA Operational Requirements

Covered companies must also satisfy certain “operational requirements” designed to ensure efficient liquidation or monetization of their HQLAs in times of stress, including:

  • Operational capacity to monetize HQLAs, including appropriate procedures, systems and periodic “test” asset monetization to verify effectiveness;
  • Control by liquidity risk managers at the covered company designed to ensure that HQLA are not improperly allocated to specific transactions or are otherwise restricted from efficient monetization;
  • Knowledge of the cash outflows that would result from the unwinding of specific transactions hedging HQLAs;
  • Daily determination of HQLA asset composition, including by legal entity, geography, currency, and other appropriate and applicable characteristics; and
  • Maintenance of HQLAs in jurisdictions appropriate to where potential cash flows could arise.

C. Generally Applicable Criteria

In addition, the proposed LCR contains certain additional criteria for an asset is to be considered an HQLA, including:

  • HQLAs cannot be encumbered, as defined under the proposed rules, which generally means free of “legal, regulatory, contractual, or other restrictions” on monetization;[5]
  • HQLAs cannot be client pool securities in a segregated account, or cash from a secured funding transaction on a client pool security held in a segregated account;
  • Assets received by a covered company under a hypothecation right where the beneficial owner can withdraw the asset without remuneration at any time during a 30-day stress period will not count as HQLAs; and
  • Assets designated to cover operational costs, such as wages or facility maintenance, will not count as HQLAs.

D.  Treatment of Assets Held by Consolidated Subsidiaries

The proposed LCR also sets forth how HQLA assets held by consolidated subsidiaries should be treated, as follows:

Where is the HQLA asset held?

Treatment by parent covered company

U.S. consolidated subsidiary

If the U.S. subsidiary is subject to the LCR, the covered company may include in its HQLA amount the consolidated subsidiary’s HQLA in an amount up to the consolidated subsidiary’s net cash outflows calculated to meet its LCR, plus any additional amount of the consolidated subsidiary’s HQLA that can be monetized and transferred to the covered company in times of stress free of restrictions (including regulatory restrictions); or

If the U.S. subsidiary is not subject to the LCR, the covered company may include in its HQLA amount the consolidated subsidiary’s HQLA in an amount up to the net cash outflows of the consolidated subsidiary that are included in the covered company’s calculation of its LCR, plus any additional amount of the consolidated subsidiary’s HQLA that can be monetized and transferred to the covered company in times of stress free of restrictions (including regulatory restrictions).

Non-U.S. consolidated subsidiary[6]

The covered company may include in its HQLA amount the consolidated non-U.S. subsidiary’s HQLA in an amount up to the net cash outflows of the consolidated non-U.S. subsidiary that are included in the covered company’s calculation of its LCR, plus any additional amount of the consolidated non-U.S. subsidiary’s HQLA that can be monetized and transferred to the covered company in times of stress free of restrictions (including regulatory restrictions).

V.        The LCR Numerator: How to Calculate the HQLA Amount?

The numerator of the LCR can be summarized by the following formulae.  The proposed rules contemplate calculating HQLA both before and after unwinding certain “covered transactions” described in the table below.  This methodology is designed to prevent a covered company from characterizing HQLA as Level 1 over a 30-day stress calculation period when such assets could be exchanged for Level 2 assets within such period pursuant to the terms of the covered transaction.

HQLA Amount =

∑ {Level 1 liquid asset amount, (Level 2A liquid asset amount * 0.85), (Level 2B liquid asset amount*0.5)}[7]

max {unadjusted excess HQLA amount, adjusted excess HQLA amount}

 

Unadjusted excess HQLA amount = ∑ {Level 2 cap excess amount, Level 2B cap excess amount}

Level 2 cap excess amount = max {zero, Level 2A liquid asset amount + Level 2B liquid asset amount – 0.6667*Level 1 liquid asset amount} [8]

Level 2B cap excess amount = max {zero, Level 2B liquid asset amount – Level 2 cap excess amount – 0.1765*(Level 1 liquid asset amount + Level 2A liquid asset amount)} [9]

Adjusted HQLA excess amount is calculated after unwinding all secured funding transactions, secured lending transactions, asset exchanges, and collateralized derivatives transactions, each as defined under the proposed LCR rule, that mature within a 30-calendar day stress period and that involve an exchange of HQLA (collectively, “covered transactions”). 

Adjusted excess HQLA amount = ∑ {adjusted Level 2 cap excess amount, adjusted Level 2B cap excess amount}

Adjusted Level 2 cap excess amount = max {zero, adjusted Level 2A liquid asset amount + adjusted Level 2B liquid asset amount [10] – 0.6667*adjusted Level 1 liquid asset amount [11]}

Adjusted Level 2B cap excess amount = max {zero, adjusted Level 2B liquid asset amount – adjusted Level 2 cap excess amount – 0.1765*(adjusted Level 1 liquid asset amount + adjusted Level 2A liquid asset amount)}

VI.       The Denominator: Total Net Cash Outflow

The denominator of the LCR can be summarized by the following formulae.  See Appendix A for a more detailed presentation of the various components of the Total Net Cash Outflow Amount formula.

Total net cash outflow amount =

cumulative outflows – min {(0.75*cumulative outflows), cumulative inflow amounts where the instrument or transaction has a contractual maturity date up to and including the applicable calculation date}

Cumulative outflows amount =

∑ {Unsecured retail funding outflow amount, Structured transaction outflow amount, Net derivative cash outflow amount, Mortgage commitment outflow amount, Commitment outflow amount, Collateral outflow amount, Certain brokered deposit outflow amounts for retail customers or counterparties}

+

For instruments or transactions that have no maturity date,  ∑ {Certain brokered deposit outflow amounts for retail customers or counterparties, Unsecured wholesale funding outflow amount, Debt security outflow amount, Secured funding and asset exchange outflow amount, Foreign central banking borrowing outflow amount, Other contractual outflow amount}

+

For instruments or transactions that have a contractual maturity date up to and including the calculation date,  ∑ {Certain brokered deposit outflow amounts for retail customers or counterparties, Unsecured wholesale funding outflow amount, Debt security outflow amount, Secured funding and asset exchange outflow amount, Foreign central banking borrowing outflow amount, Other contractual outflow amount}

Excluded amounts for intragroup transactions

Cumulative inflows amount =

For instruments or transactions that have a contractual maturity date up to and including the calculation date, ∑ {Net derivative cash inflow amount, Retail cash inflow amount, Unsecured wholesale cash inflow amount, Securities cash inflow amount, Secured lending and asset exchange cash inflow amounts, Other cash inflow amounts}

  Excluded amounts for intragroup transactions and other items

VII.     Effect of LCR Shortfall

The liquidity coverage ratio is required to be equal to or greater than 1.00 at all times.  The proposed rules recognize, however, that the ratio may need to decline below 1.00 under certain circumstances, and a framework for “flexible supervisory response” is contemplated, consistent with the Basel III LCR.  On any business day when their LCR declines below 1.00, covered companies would be required to notify their primary federal regulator, and if such condition persists for three consecutive business days or if a supervisor has determined that the covered company is otherwise materially noncompliant with the proposed rule, a plan for remediation would need to be submitted.

Actions to be taken if a covered company’s LCR were to fall below 1.00 would be at the appropriate supervisor’s discretion, and could include supervisory or enforcement actions.  The federal banking agencies have requested feedback on whether a de minimis exception to the LCR shortfall is appropriate, such that reporting would not be required if the LCR returns to the required minimum within an applicable grace period.

VIII.    Modified Liquidity Coverage Ratio Applicable to Covered Depository Institution Holding Companies

Along with the LCR proposal,  the Federal Reserve proposed, pursuant to Section 165 of the Dodd-Frank Act, a modified version of the liquidity coverage ratio (MLCR) designed to account for the lesser systemic risk posed by institutions not subject to the LCR.  Differences between the MLCR and LCR are summarized below.

  LCR Modified LCR
Applicability “Internationally active banking organizations,” Federal Reserve-regulated U.S. holding companies with $250 billion or more in total consolidated assets or $10 billion or more in total consolidated on-balance sheet foreign exposure, as well as such entities’ consolidated depository institution subsidiaries with $10 billion or more in total consolidated assets.

Companies designated for supervision by the Financial Stability Oversight Council that do not have significant insurance operations, and their consolidated subsidiary depository institutions with $10 billion or more in total consolidated assets.

BHCs and SLHCs without significant insurance or commercial operations, in each case that have total consolidated assets of $50 billion or more, and that are not covered companies.
Stress scenario calculation period 30 calendar days 21 calendar days
HQLA calculation See under “IV.” And “V.” above Same as under “LCR,” except for 21 calendar day scenario.
Total Net Cash Flow  Calculation See under “VI.” and “Appendix A” Generally, 70% of LCR rates without contractual maturity date.  Outflows and inflows with contractual maturity date would be calculated assuming maturity within 21 days. No requirement to calculate peak maximum cumulative outflow day for total net cash outflows; instead, use difference between outflow and inflow amounts.

IX.       Conclusion

With the LCR proposal, the federal banking agencies have taken yet another step in the implementation of post-financial crisis measures to combat the effect of financial shocks on systemically significant institutions.  With all of its complexity, however, the LCR proposal does not indicate in any detail how it will mesh with other Dodd-Frank rulemakings, in particular the supplemental leverage ratio that has been proposed to apply to the largest systemically significant U.S. firms, and under which many of the HQLAs that are the basis for the LCR will carry capital charges greater than under risk-based measures.  As a result, Dodd-Frank prudential regulation continues to evolve as a lesson-by-lesson reaction to the Financial Crisis.  Given that Governor Tarullo mentioned the short-term wholesale funding markets in his opening statement at the Federal Reserve meeting adopting the LCR proposal, this approach is likely to continue for the foreseeable future.


Footnotes

  [1]  “Regulated financial companies” under the proposed rules include BHCs and SLHCs; nonbank financial companies supervised by the Federal Reserve; depository institutions; foreign banks; credit unions; industrial loan companies, industrial banks and other similar institutions; national banks, state member banks, and state nonmember banks that are not depository institutions; insurance companies; securities holding companies (as defined in Dodd-Frank); broker-dealers or dealers registered with the SEC; futures commission merchants and swap dealers; security-based swap dealers; designated financial market utilities, as defined in Dodd-Frank; and  foreign companies if they are similarly supervised and regulated compared to the foregoing.  In addition, a “regulated financial company” would include so-called “Form FR Y-6 companies,” or companies included in the organizational hierarchy report produced by the National Information Center (NIC) of depository institution holding companies subject to the LCR.

 [2]  Non-regulated funds would include hedge funds and private equity funds whose investment advisers are required to file SEC Form PF, and any consolidated subsidiary, other than a small business investment company.

   [3]  U.S. GSE issuances and guarantees must be investment-grade in accordance with the OCC’s investment securities regulation, and preferred stock of GSEs is excluded from the definition of HQLA.  Claims on or guaranteed by a sovereign entity or a multilateral development bank must be issued by entities with a proven record as a reliable liquidity source during stressed conditions.

   [4]  The definition of “publicly traded” is consistent with that currently in effect under applicable agency guidelines. Publicly traded debt securities would need to be investment-grade as defined under agency guidelines and would need to have been issued by an entity with a proven record of being a reliable source of liquidity during stressed market conditions.  Consistent with other aspects of the proposed rule, debt securities of regulated financial companies, investment companies, non-regulated funds, pension funds, investment advisors, identified companies, or any subsidiary of the foregoing, would be excluded from the definition of HQLA. Publicly traded shares of liquid and readily marketable common stock can only be included as HQLA under certain circumstances.  First, they must be included in a major stock index as defined in the in the proposed rule.  Second, the common stock must be issued in U.S. dollars or the currency of the jurisdiction where the covered company operates so the stock matches applicable cash outflows in that jurisdiction.  Third, the common stock would have to be issued by an entity with a proven and reliable record of acting as a source of liquidity.  Fourth, the common stock must not be issued by the proposal’s excluded financial entities.  Fifth, if held by a depository institution, the common stock cannot be acquired in satisfaction of debt previously contracted, in line with the federal banking agencies’ view that such equities should be disposed of as soon as commercially reasonable.

 [5]  The asset cannot be pledged to secure or provide credit enhancements, except to central banks or U.S. GSEs provided that credit secured by the asset has not been extended to the covered company or its consolidated subsidiaries.

 [6]  Covered companies are generally expected to maintain HQLA in United States sufficient to meet U.S. cash flows, and, therefore, would be required to identify the location of HQLA overseas and exclude any HQLA above net cash flows that are not freely available for transfer, which restrictions could include liquidity coverage ratio requirements greater than those that would be established by the U.S. LCR, counterparty exposure limits, and any other regulatory, statutory, or supervisory limitations. The proposing agencies have asked several questions regarding the proposed method for determining appropriate treatment of HQLA held by the non-U.S. subsidiary of a covered company, in particular whether holding HQLA in a foreign jurisdiction in amounts beyond such jurisdiction’s estimated outflow would limit the operational capacity of HQLA to meet liquidity needs in the United States, and whether appropriate limits should be placed on intraday movements of HQLA between domestic and foreign entities, including foreign branches.

 [7]  Not all high-quality assets are treated equally under the proposed rules, and, after determining the fair value of each asset under U.S. GAAP, are subject to varying haircuts.  Level 1 assets are considered the highest quality and most liquid, and count fully towards the LCR numerator. Level 2A and 2B assets, however, are subject to 15% and 50% haircuts consistent with Basel III, respectively, and cannot constitute more than 40% of HQLA, with Level 2B liquid assets not exceeding 15% of the total pool.

 [8]  0.6667 corresponds to 40/60, which is the ratio of the allowable Level 2 liquid assets to Level 1 liquid assets.

 [9]  0.1765 corresponds to 15/85, which is the ratio of allowable Level 2B liquid assets to the sum of Level 1 and Level 2A liquid assets.

 [10] Adjusted Level 2A and Adjusted Level 2B HQLA would only include those transactions involving exchange HQLA. After unwinding all the appropriate transactions, the 15% and 50% haircuts would be applied to the Level 2A and 2B HQLA, respectively.

  [11]  Adjusted Level 1 liquid assets amount would represent the GAAP fair value of Level 1 assets upon unwinding of any covered transaction.


Appendix A (Components of Total Net Cash Outflow Calculation)

Cumulative outflow amount as of a calculation date =

(1)     Unsecured retail funding outflow amount

∑ {3%  of all stable retail deposits, 10% of all other retail deposits, 100% of all funding from a retail customer or counterparty that is not a retail deposit or a brokered deposit provided by a retail customer or counterparty}

+

(2)     Structured transaction outflow amount

max {100% of all debt obligations of the issuing entity sponsored by the covered company that mature within 30 calendar days and all commitments made by such issuing entity to purchase assets within 30 calendar days; or maximum contractual amount of funding that covered company may be required to provide to the issuing entity within 30 calendar days through a funding agreement}

+

(3)     Net derivative cash outflow amount[1]

∑ {net derivative cash outflow for each counterparty if greater than zero}

Net derivative cash outflow for each counterparty = ∑ {payments and collateral that the covered company will make or deliver to a counterparty 30 calendar days or less} − ∑ {payments and collateral that the covered company will receive from the counterparty 30 calendar days or less, if the derivative transactions are subject to a qualifying master netting agreement}

+

(4)     Mortgage commitment outflow amount

{10% of contractual commitments for origination of retail mortgages that can be drawn upon 30 calendar days or less}

+

(5)     Commitment outflow amount

∑ {(1) 0% of the undrawn amount of committed credit and liquidity facilities extended by a depository institution to an affiliated depository institution that is subject to a minimum liquidity standard; (2) 5% of the undrawn amount of committed credit and liquidity facilities extended by the covered company to retail customers or counterparties, or 100% if extended to special purpose entities, excluding liquidity facilities extended to special purpose entities consolidated with the covered company, or 50% if extended to depository institutions, depository institution holding companies, and foreign banks, excluding commitments described in (1); (3) (A) 10% of undrawn amounts of all committed credit facilities and (B) 30% of the undrawn amount of all committed liquidity facilities extended by the covered company to a wholesale customer or counterparty that is not a regulated financial company, investment company, non-regulated fund, pension fund, investment adviser, or identified company, or to a consolidated subsidiary of any of the foregoing, each as defined under the rules; (4) (A) 40% of the undrawn amount of all committed credit facilities and (B) 100% of the undrawn amount of all committed liquidity facilities extended by the covered company to a regulated financial company, investment company, non-regulated fund, pension fund, investment adviser, or identified company, or to a consolidated subsidiary of any of the foregoing, excluding other commitments described in paragraph (1) or (2) with respect to depository institutions and their holding companies, and foreign banks;  (5) 100% of the undrawn amount of all other committed credit or liquidity facilities extended by the covered company.

The “undrawn amount” is: (i) for a committed credit facility, the entire undrawn amount of the facility that could be drawn upon within 30 calendar days, less the amount of Level 1 liquid assets and 85% of Level 2A liquid assets securing the facility; and (ii) for a committed liquidity facility, the entire undrawn amount of the facility that could be drawn upon within 30 calendar days less (A) the amount of Level 1 and Level 2A liquid assets securing the portion of the facility that could be drawn upon within 30 calendar days; and (B) that portion of the facility that supports obligations of the covered company’s customer that do not mature 30 calendar days or less from such calculation date.  If a facility has aspects of both a credit facility and a liquidity facility, it must be classified as a liquidity facility.

The amount of Level 1 liquid assets and Level 2A liquid assets securing a committed credit or liquidity facility is the GAAP fair value of Level 1 liquid assets and 85% of the GAAP fair value of Level 2A liquid assets that are required to be posted as collateral by the counterparty to secure the facility, provided that, as of the calculation date and for the 30 calendar days thereafter:  (i) the assets pledged meet the criteria for Level 1 liquid assets or Level 2A liquid assets; and (ii) the covered company has not included the assets in its HQLA amount.

+

(6)     Collateral outflow amount

∑ {(1) 100% of all additional amounts of collateral the covered company could be contractually required to post or to fund as a result of a change in its financial condition; (2) the absolute value of the largest 30-consecutive calendar day cumulative net mark-to-market collateral outflow or inflow resulting from derivative transactions realized during the preceding 24 months; (3) 20% of the GAAP fair value of any collateral posted to a counterparty that is not a Level 1 liquid asset; (4) 100% of the GAAP fair value of collateral that the covered company is contractually required to post to a counterparty and, as of such calculation date, has not yet posted; (5) 100% of the GAAP fair value of collateral that (i) the covered company may be required to return to a counterparty because the collateral posted exceeds the current collateral requirement of the counterparty; (ii) is not segregated from other assets; and (iii) is not already excluded from the covered company’s HQLA amount as a result of a beneficial owner’s withdrawal right in a rehypothecation transaction; (6) collateral substitutions (i) for collateral posted by a counterparty that the covered company includes in Level 1 HQLA, 0%, 15% or 50% of fair value of collateral posted, respectively, where the counterparty may replace the posted collateral with Level 1, Level 2A or 2B assets without the consent of the covered company (or 100% if the replacement collateral does not qualify as HQLA), (ii) for collateral posted by a counterparty that the covered company includes in Level 2A HQLA, 0% or 35% of fair value of collateral posted, respectively, where the counterparty may replace the posted collateral with Level 1 or Level 2A assets, or Level 2B assets, respectively, without the consent of the covered company (or 85% if the replacement collateral does not qualify as HQLA), and (iii) for collateral posted by a counterparty that the covered company includes in Level 2B HQLA, 0% of fair value of where the counterparty may replace the posted collateral with assets that qualify as HQLA without the consent of the covered company (or 50% if the replacement collateral does not qualify as HQLA}

+

(7)     Brokered deposit outflow amount for retail customers or counterparties

∑ {(1) 100% of brokered deposits not otherwise covered under (3) through (7) below that  mature 30 calendar days or less from the calculation date; (2) 10% of brokered deposits not otherwise covered under (3) through (7) below that mature later than 30 calendar days from the calculation date;

Covered companies must compute outflow amounts in categories 7(3) through (12) below for instruments and transactions that have no contractual maturity date and then again for instruments or transactions that have a contractual maturity date up to and including the calculation date [2]

(3) 10% of reciprocal brokered deposits where the entire amount is covered by deposit insurance; (4) 25% of reciprocal brokered deposits where less than the entire amount is covered by deposit insurance; (5) 10% of brokered sweep deposits that are deposited in accordance with a contract between the retail customer or counterparty and the covered company, consolidated subsidiary or certain affiliates where the entire amount of the deposits is covered by deposit insurance; (6) 25% of all brokered sweep deposits that are not deposited in accordance with a contract between the retail customer or counterparty and the covered company, consolidated subsidiary or certain affiliates and where the entire amount of the deposits is covered by deposit insurance; (7) 40% of all brokered sweep deposits where less than the entire amount of the deposit balance is covered by deposit insurance)

+

(8)     Unsecured wholesale funding outflow amount

∑ {(1) 20% of all unsecured wholesale funding (not including brokered deposits) where the entire amount is covered by deposit insurance and 40% of all such funding, where less than the entire amount is covered by deposit insurance or the funding is a brokered deposit, in each case where such unsecured wholesale funding is not an operational deposit and is not provided by a regulated financial company, investment company, non-regulated fund, pension fund, investment adviser, identified company, sovereign entity, U.S. government-sponsored enterprise, public sector entity, or multilateral development bank, or any consolidated subsidiary; (2) 100% of all unsecured wholesale funding that is not an operational deposit and is not included in (1), including funding provided by consolidated subsidiaries and certain affiliates; (3) 5% of all operational deposits, other than escrow accounts, where the entire deposit amount is covered by deposit insurance; (4) 25% of all operational deposits not included in paragraph (3); and (5) 100% of all unsecured wholesale funding that is not otherwise described}

+

(9)     Debt security outflow amount

∑ {3% of debt securities that are not structured securities and 5% of debt securities that are structured securities, in each case where debt securities are issued by the covered company and mature more than 30 calendar days after the calculation date and for which the covered company is the primary market maker}

+

(10) Secured funding and asset exchange outflow amount

∑ {(1) 0% of funds covered company must pay pursuant to secured funding transactions secured by Level 1 liquid assets, or 15% if secured by Level 2A liquid assets, or 50% if secured by Level 2B liquid assets, or 100% if not secured by HQLA; (2) 25% of funds pursuant to secured funding transactions with sovereign, multilateral development banks, or U.S. government-sponsored enterprises that are assigned a 20% risk-weight under applicable capital regulations, to the extent that funds are not secured by Level 1 or Level 2A liquid assets; (3) 50% of funds received from secured funding transactions that are customer short positions where the customer short positions are covered by other customers’ collateral that does not consist of HQLA}

+

∑ {(1) 0% of GAAP fair value of Level 1 liquid assets covered company must post to a counterparty pursuant to asset exchanges where the covered company will receive Level 1 liquid assets from the asset exchange counterparty, or 15% if a Level 2A asset, 50% if a Level 2B asset, or 100% if not HQLA; (2) 0% of GAAP fair value of Level 2A liquid assets covered company must post to a counterparty pursuant to asset exchanges where the covered company will receive Level 1 or 2A liquid assets from the asset exchange counterparty, or 35% if a Level 2B liquid asset, or 85% if not HQLA; (3) 0% of GAAP fair value of Level 2B liquid assets covered company must post to a counterparty pursuant to asset exchanges where the covered company will receive HQLA from the asset exchange counterparty, or 50% if not HQLA}

+

(11) Foreign central banking borrowing outflow amount

{in a foreign jurisdiction where covered company has borrowed from the jurisdiction’s central bank, the applicable outflow amount assigned to such borrowings under that jurisdiction’s minimum liquidity standard. If no such minimum liquidity standard has been specified, the foreign central bank borrowing outflow amount must be calculated under “(10) Secured funding and asset exchange outflow amount“}

+

(12) Other contractual outflow amount

{100% of funding or amounts payable to counterparties and not otherwise provided for}

(13) Excluded amounts for intragroup transactions

{amounts arising out of transactions between a covered company and its consolidated subsidiary; or between a consolidated subsidiary of the covered company and another consolidated subsidiary of the covered company}

 

Cumulative inflow amount where the instrument or transaction has a contractual maturity date up to and including the calculation date[3] =

(1)     Net derivative cash inflow amount[4]

 {opposite of amounts described under “Cumulative Outflow Amount —(3) Net derivative cash outflow amount“}

+

(2)     Retail cash inflow amount

{50% percent of all payments contractually payable to the covered company from retail customers or counterparties}

+

(3)     Unsecured wholesale cash inflow amount

 ∑ {(1) 100% of all payments contractually payable to the covered company from regulated financial companies, investment companies, non-regulated funds, pension funds, investment advisers, or identified companies, or from a consolidated subsidiary of any of the foregoing, or central banks; (2) 50% of all payments contractually payable to the covered company from wholesale customers or counterparties that are not described in (1), except central banks, provided that, with respect to revolving credit facilities, the amount of the existing loan is not included and the remaining undrawn balance is included in the outflow amount under “Commitment outflow amount” above}

+

(4)     Securities cash inflow amount

{100% of all contractual payments due to the covered company on securities it owns that are not HQLA}

+

(5)      Secured lending and asset exchange cash inflow amount

∑ {(1) 0% of funds covered company is due pursuant to secured funding transactions secured by Level 1 liquid assets if the assets are included in the covered company’s HQLA amount, or 15% or 50% if secured by Level 2A or Level 2B liquid assets, respectively, if the covered company is not using the collateral to cover any of its short positions and the Level 2A or Level 2B assets are included in the covered company’s HQLA amount, or 100% if not secured by HQLA and the covered company is not using the collateral to cover short positions, or 50% of all payments due pursuant to collateralized margin loans extended to customers if the loans are not secured by HQLA and the covered company is not using the collateral to cover any of its short positions} +

∑ {(1) 0% of GAAP fair value of Level 1 liquid assets covered company will receive from a counterparty pursuant to asset exchanges where the covered company must post Level 1 liquid assets, or 15% if a Level 2A asset, 50% if a Level 2B asset or 100% if not HQLA; (2) 0% of GAAP fair value of Level 2A liquid assets covered company will receive from a counterparty pursuant to asset exchanges where the covered company must post Level 1 or 2A liquid assets, or 35% if a Level 2B liquid asset, or 85% if not HQLA; (3) 0% of the GAAP fair value of Level 2B liquid assets covered company will receive from a counterparty pursuant to asset exchanges where the covered company must post HQLA, or 50% if not HQLA}

+

(6)     Other cash inflow amounts

{0% of cash inflow amounts not described above}

(7)     Excluded amounts for intragroup transactions

{amounts arising out of transactions between a covered company and its consolidated subsidiary; or between a consolidated subsidiary of the covered company and another consolidated subsidiary of the covered company}

(8)     Other items

∑ {(1) amounts covered company holds in operational deposits at other regulated financial companies; (2) amounts covered company expects or is entitled to receive within 30 calendar days or less from forward sales of mortgage loans and any derivatives that are mortgage commitments subject to (4) under “Cumulative outflow amount” above; (3) amount of any credit or liquidity facilities extended to the covered company; (4) amount of any asset included in HQLA amount and any amounts payable to the covered company with respect to those assets; (5) amounts payable to the covered company from an obligation that is a nonperforming asset as of the calculation date or that the covered company has reason to expect will become a nonperforming exposure 30 calendar days or less from the calculation date; and (6) amounts payable to the covered company on any exposure that has no contractual maturity date or that matures after 30 calendar days of the calculation date}


Appendix Notes 

  [1]   Does not apply to certain forward sales of mortgage loans and derivatives that are mortgage commitments.

  [2]   Asset or transaction maturity for cumulative outflow calculation purposes is assumed to occur on the earliest possible contractual maturity date or the earliest possible date the transaction could occur, taking into account any acceleration option as follows: (i) if an investor or funds provider has an option that would reduce the maturity, the covered company must assume that it will exercise the option at the earliest possible date; (ii) if a covered company has an option that would extend the maturity of an obligation it issued, the covered company must assume it will not exercise that option to extend the maturity; and (iii) if an option is subject to a contractually defined notice period, the covered company must determine the earliest possible contractual maturity date regardless of the notice period.

  [3] Asset or transaction maturity assumptions for cumulative inflow calculation purposes are the opposite of those described in footnote 2.

[4] Does not apply to certain forward sales of mortgage loans and derivatives that are mortgage commitments.


Gibson, Dunn & Crutcher’s Financial Institutions Practice Group lawyers are available to assist in addressing any questions you may have regarding these areas.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or the following:

Arthur Long – New York (212-351-2426, along@gibsondunn.com)
Chuck Muckenfuss Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)
Michael D. BoppWashington, D.C. (202-955-8256, mbopp@gibsondunn.com)
Nicolas H.R. Dumont – New York (212-351-3837, ndumont@gibsondunn.com)
Alex Acree – Washington, D.C. (202-887-3725, aacree@gibsondunn.com)
Colin Richard – Washington, D.C. (202-887-3732, crichard@gibsondunn.com

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