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Vol. 79

Friday,

No. 197

October 10, 2014

Part III

Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 50

Federal Reserve System
12 CFR Part 249

Federal Deposit Insurance Corporation

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12 CFR Part 329
Liquidity Coverage Ratio: Liquidity Risk Measurement Standards; Final Rule

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
their consolidated subsidiaries that are
depository institutions with $10 billion
or more in total consolidated assets. The
final rule focuses on these financial
institutions because of their complexity,
funding profiles, and potential risk to
the financial system. Therefore, the
agencies do not intend to apply the final
rule to community banks. In addition,
the Board is separately adopting a
modified minimum liquidity coverage
ratio requirement for bank holding
companies and savings and loan
holding companies without significant
insurance or commercial operations
that, in each case, have $50 billion or
more in total consolidated assets but
that are not internationally active. The
final rule is effective January 1, 2015,
with transition periods for compliance
with the requirements of the rule.

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 50
[Docket ID OCC–2013–0016]
RIN 1557–AD74

FEDERAL RESERVE SYSTEM
12 CFR Part 249
[Regulation WW; Docket No. R–1466]
RIN 7100–AE03

FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 329
RIN 3064–AE04

Effective Date: January 1, 2015.
Comments must be submitted on the
Paperwork Reduction Act burden
estimates only by December 9, 2014.

DATES:

Liquidity Coverage Ratio: Liquidity
Risk Measurement Standards
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.
AGENCY:

The Office of the Comptroller
of the Currency (OCC), the Board of
Governors of the Federal Reserve
System (Board), and the Federal Deposit
Insurance Corporation (FDIC) are
adopting a final rule that implements a
quantitative liquidity requirement
consistent with the liquidity coverage
ratio standard established by the Basel
Committee on Banking Supervision
(BCBS). The requirement is designed to
promote the short-term resilience of the
liquidity risk profile of large and
internationally active banking
organizations, thereby improving the
banking sector’s ability to absorb shocks
arising from financial and economic
stress, and to further improve the
measurement and management of
liquidity risk. The final rule establishes
a quantitative minimum liquidity
coverage ratio that requires a company
subject to the rule to maintain an
amount of high-quality liquid assets (the
numerator of the ratio) that is no less
than 100 percent of its total net cash
outflows over a prospective 30 calendarday period (the denominator of the
ratio). The final rule applies to large and
internationally active banking
organizations, generally, bank holding
companies, certain savings and loan
holding companies, and depository
institutions with $250 billion or more in
total assets or $10 billion or more in onbalance sheet foreign exposure and to

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SUMMARY:

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You may submit comments
on the Paperwork Reduction Act burden
estimates only. Comments should be
directed to:
OCC: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by
email if possible. Comments may be
sent to: Legislative and Regulatory
Activities Division, Office of the
Comptroller of the Currency, Attention:
1557–0323, 400 7th Street SW., Suite
3E–218, Mail Stop 9W–11, Washington,
DC 20219. In addition, comments may
be sent by fax to (571) 465–4326 or by
electronic mail to regs.comments@
occ.treas.gov. You may personally
inspect and photocopy comments at the
OCC, 400 7th Street SW., Washington,
DC 20219. For security reasons, the OCC
requires that visitors make an
appointment to inspect comments. You
may do so by calling (202) 649–6700.
Upon arrival, visitors will be required to
present valid government-issued photo
identification and to submit to security
screening in order to inspect and
photocopy comments.
For further information or to obtain a
copy of the collection please contact
Johnny Vilela or Mary H. Gottlieb, OCC
Clearance Officers, (202) 649–5490, for
persons who are hard of hearing, TTY,
(202) 649–5597, Legislative and
Regulatory Activities Division, Office of
the Comptroller of the Currency, 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
Board: You may submit comments,
identified by Docket R–1466, by any of
the following methods:

ADDRESSES:

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• Agency Web site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/apps/
foia/proposedregs.aspx.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-Mail: regs.comments@
federalreserve.gov.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Robert deV. Frierson,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551.
All public comments are available from
the Board’s Web site at http://www.
federalreserve.gov/generalinfo/foia/
proposedregs.aspx as submitted, unless
modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Street NW.) between 9:00 a.m. and 5:00
p.m. on weekdays.
A copy of the PRA OMB submission,
including any reporting forms and
instructions, supporting statement, and
other documentation will be placed into
OMB’s public docket files, once
approved. Also, these documents may
be requested from the agency clearance
officer, whose name appears below.
For further information contact the
Federal Reserve Board Acting Clearance
Officer, John Schmidt, Office of the
Chief Data Officer, Board of Governors
of the Federal Reserve System,
Washington, DC 20551, (202) 452–3829.
Telecommunications Device for the Deaf
(TDD) users may contact (202) 263–
4869, Board of Governors of the Federal
Reserve System, Washington, DC 20551.
FDIC: You may submit written
comments by any of the following
methods:
• Agency Web site: http://
www.fdic.gov/regulations/laws/federal/.
Follow the instructions for submitting
comments on the FDIC Web site.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-Mail: Comments@FDIC.gov.
Include ‘‘Liquidity Coverage Ratio Final
Rule’’ on the subject line of the message.
• Mail: Gary A. Kuiper, Counsel,
Executive Secretary Section, NYA–5046,
Attention: Comments, FDIC, 550 17th
Street NW., Washington, DC 20429.
• Hand Delivery/Courier: The guard
station at the rear of the 550 17th Street
Building (located on F Street) on

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
business days between 7:00 a.m. and
5:00 p.m.
• Public Inspection: All comments
received will be posted without change
to http://www.fdic.gov/regulations/laws/
federal/ including any personal
information provided.
For further information or to request a
copy of the collection please contact
Gary Kuiper, Counsel, (202) 898–3719,
Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
FOR FURTHER INFORMATION CONTACT:
OCC: Kerri Corn, Director, (202) 649–
6398, or James Weinberger, Technical
Expert, (202) 649–5213, Credit and
Market Risk Division; Linda M.
Jennings, National Bank Examiner, (980)
387–0619; Patrick T. Tierney, Assistant
Director, or Tiffany Eng, Attorney,
Legislative and Regulatory Activities
Division, (202) 649–5490, for persons
who are deaf or hard of hearing, TTY,
(202) 649–5597; or Tena Alexander,
Senior Counsel, or David Stankiewicz,
Senior Attorney, Securities and
Corporate Practices Division, (202) 649–
5510; Office of the Comptroller of the
Currency, 400 7th Street SW.,
Washington, DC 20219.
Board: Constance Horsley, Assistant
Director, (202) 452–5239, David Emmel,
Manager, (202) 912–4612, Adam S.
Trost, Senior Supervisory Financial
Analyst, (202) 452–3814, or J. Kevin
Littler, Senior Supervisory Financial
Analyst, (202) 475–6677, Credit, Market
and Liquidity Risk Policy, Division of
Banking Supervision and Regulation;
April C. Snyder, Senior Counsel, (202)
452–3099, Dafina Stewart, Senior
Attorney, (202) 452–3876, Jahad Atieh,
Attorney, (202) 452–3900, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551. For
the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Kyle Hadley, Chief,
Examination Support Section, (202)
898–6532; Eric Schatten, Capital
Markets Policy Analyst, (202) 898–7063,
Capital Markets Branch Division of Risk
Management Supervision, (202) 898–
6888; Gregory Feder, Counsel, (202)
898–8724, or Suzanne Dawley, Senior
Attorney, (202) 898–6509, Supervision
Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street
NW., Washington, DC, 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Overview
A. Background and Summary of the
Proposed Rule

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B. Summary of Comments on the Proposed
Rule and Significant Comment Themes
C. Overview of the Final Rule and
Significant Changes From the Proposal
D. Scope of Application of the Final Rule
1. Covered Companies
2. Covered Depository Institution
Subsidiaries
3. Companies that Become Subject to the
LCR Requirements
II. Minimum Liquidity Coverage Ratio
A. The LCR Calculation and Maintenance
Requirement
1. A Liquidity Coverage Requirement
2. The Liquidity Coverage Ratio Stress
Period
3. The Calculation Date, Daily Calculation
Requirement, and Comments on LCR
Reporting
B. High-Quality Liquid Assets
1. Liquidity Characteristics of HQLA
2. Qualifying Criteria for Categories of
HQLA
3. Requirements for Inclusion as Eligible
HQLA
4. Generally Applicable Criteria for Eligible
HQLA
5. Calculation of the HQLA Amount
C. Net Cash Outflows
1. The Total Net Cash Outflow Amount
2. Determining Maturity
3. Outflow Amounts
4. Inflow Amounts
III. Liquidity Coverage Ratio Shortfall
IV. Transition and Timing
V. Modified Liquidity Coverage Ratio
A. Threshold for Application of the
Modified Liquidity Coverage Ratio
Requirement.
B. 21 Calendar-Day Stress Period
C. Calculation Requirements and
Comments on Modified LCR Reporting
VI. Plain Language
VII. Regulatory Flexibility Act
VIII. Paperwork Reduction Act
IX. OCC Unfunded Mandates Reform Act of
1995 Determination

I. Overview
A. Background and Summary of the
Proposed Rule
On November 29, 2013, the Office of
the Comptroller of the Currency (OCC),
the Board of Governors of the Federal
Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC)
(collectively, the agencies) invited
comment on a proposed rule (proposed
rule or proposal) to implement a
liquidity coverage ratio (LCR)
requirement that would be consistent
with the international liquidity
standards published by the Basel
Committee on Banking Supervision
(BCBS).1 The proposed rule would have
1 The BCBS is a committee of banking supervisory
authorities that was established by the central bank
governors of the G10 countries in 1975. It currently
consists of senior representatives of bank
supervisory authorities and central banks from
Argentina, Australia, Belgium, Brazil, Canada,
China, France, Germany, Hong Kong SAR, India,
Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,

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applied to nonbank financial companies
designated by the Financial Stability
Oversight Council (Council) for
supervision by the Board that do not
have substantial insurance activities
(covered nonbank companies), large,
internationally active banking
organizations, and their consolidated
subsidiary depository institutions with
total assets of $10 billion or more (each,
a covered company).2 The Board also
proposed to implement a modified
version of the liquidity coverage ratio
requirement (modified LCR) as an
enhanced prudential standard for bank
holding companies and savings and
loan holding companies with $50
billion or more in total consolidated
assets that are not internationally active
and do not have substantial insurance
activities (each, a modified LCR holding
company).
The BCBS published the international
liquidity standards in December 2010 as
a part of the Basel III reform package 3
and revised the standards in January
2013 (as revised, the Basel III Revised
Liquidity Framework).4 The agencies
are actively involved in the BCBS and
its international efforts, including the
development of the Basel III Revised
Liquidity Framework.
To devise the Basel III Revised
Liquidity Framework, the BCBS
gathered supervisory data from multiple
jurisdictions, including a substantial
amount of data related to U.S. financial
institutions, which was reflective of a
variety of time periods and types of
historical liquidity stresses. These
historical stresses included both
idiosyncratic and systemic stresses
across a range of financial institutions.
The BCBS determined the LCR
parameters based on a combination of
historical data analysis and supervisory
judgment.
The proposed rule would have
established a quantitative minimum
LCR requirement that builds upon the
liquidity coverage methodologies
traditionally used by banking
organizations to assess exposures to
contingent liquidity events. The
the Netherlands, Russia, Saudi Arabia, Singapore,
South Africa, Sweden, Switzerland, Turkey, the
United Kingdom, and the United States. The OCC,
Board, and FDIC actively participate in BCBS and
its international efforts. Documents issued by the
BCBS are available through the Bank for
International Settlements Web site at http://
www.bis.org.
2 78 FR 71818 (November 29, 2013).
3 BCBS, ‘‘Basel III: International framework for
liquidity risk measurement, standards and
monitoring’’ (December 2010), available at http://
www.bis.org/publ/bcbs188.pdf (Basel III Liquidity
Framework).
4 BCBS, ‘‘Basel III: The Liquidity Coverage Ratio
and liquidity risk monitoring tools’’ (January 2013),
available at http://www.bis.org/publ/bcbs238.htm.

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proposed rule was designed to
complement existing supervisory
guidance and the requirements of the
Board’s Regulation YY (12 CFR part
252) on internal liquidity stress testing
and liquidity risk management that the
Board issued, in consultation with the
OCC and the FDIC, pursuant to section
165 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of
2010 (Dodd-Frank Act).5 The proposed
rule also would have established
transition periods for conformance with
the requirements.
The proposed LCR would have
required a covered company to maintain
an amount of unencumbered highquality liquid assets (HQLA amount)
sufficient to meet its total stressed net
cash outflows over a prospective 30
calendar-day period, as calculated in
accordance with the proposed rule. The
proposed rule outlined certain
categories of assets that would have
qualified as high-quality liquid assets
(HQLA) if they were unencumbered and
able to be monetized during a period of
stress. HQLA that are unencumbered
and controlled by a covered company’s
liquidity risk management function
would enhance the ability of a covered
company to meet its liquidity needs
during an acute short-term liquidity
stress scenario. A covered company
would have determined its total net
cash outflow amount by applying the
proposal’s outflow and inflow rates,
which reflected a standardized stress
scenario, to the covered company’s
funding sources, obligations, and assets
over a prospective 30 calendar-day
period. The net cash outflow amount for
modified LCR holding companies would
have reflected a 21 calendar-day period.
The proposed rule would have been
generally consistent with the Basel III
Revised Liquidity Framework; however,
there were instances where the agencies
believed supervisory or market
conditions unique to the United States
required the proposal to differ from the
Basel III standard.
B. Summary of Comments on the
Proposed Rule and Significant
Comment Themes

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Each of the agencies received over 100
comments on the proposal from U.S.
and foreign firms, public officials
(including state and local government
5 See Board, ‘‘Enhanced Prudential Standards for
Bank Holding Companies and Foreign Banking
Organizations,’’ 79 FR 17240 (March 27, 2014)
(Board’s Regulation YY); OCC, Board, FDIC, Office
of Thrift Supervision, and National Credit Union
Administration, ‘‘Interagency Policy Statement on
Funding and Liquidity Risk Management,’’ 75 FR
13656 (March 22, 2010) (Interagency Liquidity
Policy Statement).

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officials and members of the U.S.
Congress), public interest groups,
private individuals, and other interested
parties. In addition, agency staffs held a
number of meetings with members of
the public and obtained supplementary
information from certain commenters.
Summaries of these meetings are
available on the agencies’ public Web
sites.6
Although many commenters generally
supported the purpose of the proposed
rule to create a standardized minimum
liquidity requirement, most commenters
either expressed concern regarding the
proposal overall or criticized specific
aspects of the proposed rule. The
agencies received a number of
comments regarding the differences
between the proposed rule and the Basel
III Revised Liquidity Framework,
together with comments on the
interaction of this proposal with other
rulemakings issued by the agencies.
Comments about differences between
the proposed rule and the Basel III
standard were mixed. Some commenters
expressed support for the areas in which
the proposed rule was more stringent
than the Basel III Revised Liquidity
Framework and others stated that
having more conservative treatment for
assessing the LCR could disadvantage
the U.S. banking system. Commenters
questioned whether the proposal should
impose heightened standards compared
to the Basel III Revised Liquidity
Framework and requested that the final
rule’s calculation of the LCR conform to
the Basel III standard in order to
maintain consistency and comparability
internationally. A commenter noted that
the proposed rule would create a burden
for those institutions required to comply
with more than one liquidity standard
throughout their global operations.
Another commenter argued that the
proposed rule’s divergence from the
Basel III Revised Liquidity Framework
would make it more difficult to
harmonize with global standards.
Commenters also expressed concern
about the interaction between the
proposed rule and other proposed or
recently finalized rules that affect a
covered company’s LCR, such as the
agencies’ supplementary leverage ratio 7
and the Commodity Futures Trading
Commission’s liquidity requirements for
derivatives clearing organizations.8
6 See http://www.regulations.gov/index.jsp#
!docketDetail;D=OCC-2013-0016 (OCC); http://
www.fdic.gov/regulations/laws/federal/2013/2013_
liquidity_coverage_ae04.html (FDIC); http://www.
federalreserve.gov/newsevents/reform_systemic.htm
(Board).
7 79 FR 24528 (May 1, 2014).
8 76 FR 69334 (November 8, 2011).

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Additionally, a few commenters
expressed concerns about the overall
impact of the requirements, citing the
impact of the standard on covered
companies’ costs, competitiveness, and
existing business practices, as well as
the impact upon non-financial
companies more broadly. As described
in more detail below, the agencies have
addressed these issues by reducing
burdens where appropriate, while
ensuring that the final rule serves the
purpose of promoting the safety and
soundness of covered companies. The
agencies found that certain comments
concerning the costs and benefits of the
proposed rule to be relevant to their
deliberations, and, on the basis of these
and other considerations, made the
changes discussed below.
The proposed rule would have
required covered companies to comply
with a minimum LCR of 80 percent
beginning on January 1, 2015, 90
percent beginning on January 1, 2016,
and 100 percent beginning on January 1,
2017, and thereafter. These transition
periods were similar to, but shorter
than, those set forth in the Basel III
Revised Liquidity Framework, and were
intended to preserve the strong liquidity
positions many U.S. banking
organizations have achieved since the
recent financial crisis. The proposed
rule also would have required covered
companies to calculate their LCR daily,
beginning on January 1, 2015. A number
of commenters expressed concerns with
the proposed transition periods as well
as the operational difficulties of meeting
the proposed requirement for daily
calculation of the LCR. Additionally,
some commenters expressed concerns
regarding the scope of application of the
proposed rule, with regard to both the
application of the proposed rule to
covered nonbank companies and the
proposed rule’s delineation between
covered companies and modified LCR
holding companies.
Commenters generally expressed a
desire to see a wider range of asset
classes included as HQLA or to have
some asset classes and funding sources
treated as having greater liquidity than
proposed. The agencies received
comments that highlighted the
differences between the types of assets
included as HQLA under the U.S.
proposal and those that might be
included under the Basel III Revised
Liquidity Framework. For example, the
agencies proposed excluding some asset
classes from HQLA that may have
qualified under the Basel III Revised
Liquidity Framework given the
agencies’ concerns about their relative
lack of liquidity. Many of these
comments related to the exclusion in

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the proposed rule of state and municipal
securities from HQLA. Commenters
expressed concern that the exclusion of
municipal securities from HQLA could
lead to higher funding costs for
municipalities, which could affect local
economies and infrastructure.
Likewise, the agencies’ proposed
method for determining a covered
company’s HQLA amount elicited many
comments. A number of these
comments focused on the treatment of
deposits from public sector entities that
are required by law to be secured by
eligible collateral and would have been
treated as secured funding transactions
under the proposed rule. Commenters
expressed concern that the treatment of
secured deposits in the calculation of a
covered company’s HQLA amount
would lead to distortions in the LCR
calculation and to reduced acceptance
of public deposits by covered
companies.
The proposed rule would have
required covered companies to hold an
amount of HQLA to meet their greatest
liquidity need within a prospective 30
calendar-day period rather than at the
end of that period. By requiring a
covered company to calculate its total
net cash outflow amount using its peak
cumulative net outflow day, the
proposal would have taken into account
potential maturity mismatches between
a covered company’s contractual
outflows and inflows during the 30
calendar-day period. The agencies
received many comments on the
methodology for calculating the peak
cumulative net cash outflow amount,
specifically in regard to the treatment of
non-maturity outflows. Some
commenters felt that the approach had
merits because it captured potential
liquidity shortfalls within the 30
calendar-day period, whereas others
argued that that it was overly
conservative, unrealistic, and
inconsistent with the Basel III Revised
Liquidity Framework.
Generally, commenters expressed that
the outflow rates used to determine total
net cash outflows were too high with
respect to specific outflow categories.
Commenters also expressed concern
that specific outflow rates were applied
to overly narrow or overly broad
categories of exposures in certain cases.
Several commenters requested the
agencies to clarify whether the outflow
and inflow rates under the final rule are
designed to reflect an idiosyncratic
stress at a particular institution or
general market distress. The agencies
received a number of comments on the
criteria for determining whether a
deposit was an operational deposit and
on the definitions of certain related

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terms. Commenters generally approved
of the potential categorization of certain
deposits as operational deposits but
expressed concern that other deposits
were excluded from the category.
Similarly, some commenters expressed
concern that the outflow rates assigned
to committed facilities extended to
special purpose entities (SPEs) did not
differentiate between different types of
SPEs.
Several commenters expressed
concern that the proposed modified LCR
would have required net cash outflows
to be calculated over a 21 calendar-day
stress period. Commenters argued that
using a 21 calendar-day period would
create significant operational burden as
it is an atypical period that does not
align well with their existing systems
and processes. Commenters also
expressed concerns regarding the
transition periods and the daily
calculation requirement applicable to
modified LCR holding companies.
C. Overview of the Final Rule and
Significant Changes From the Proposal
Consistent with the proposed rule, the
final rule establishes a minimum LCR
requirement applicable, on a
consolidated basis, to large,
internationally active banking
organizations with $250 billion or more
in total consolidated assets or $10
billion or more in total on-balance sheet
foreign exposure, and to consolidated
subsidiary depository institutions of
these banking organizations with $10
billion or more in total consolidated
assets.9 Unlike the proposed rule,
however, the final rule will not apply to
covered nonbank companies or their
consolidated subsidiary depository
institutions. Instead, as discussed
further below in section I.D, the Board
will establish any LCR requirement for
such companies by order or rule. The
final rule does not apply to foreign
banking organizations or U.S.
intermediate holding companies that are
required to be established under the
Board’s Regulation YY, other than those
companies that are otherwise covered
companies.10
As discussed in section V of this
Supplementary Information section, and
consistent with the proposal, the Board
also is separately adopting a modified
version of the LCR for bank holding
companies and savings and loan
holding companies without significant
insurance operations (or, in the case of
9 Like the proposed rule, the final rule does not
apply to institutions that have opted to use the
advanced approaches risk-based capital rule. See 12
CFR part 3 (OCC), 12 CFR part 217 (Board), and 12
CFR part 324 (FDIC).
10 12 CFR 252.153.

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savings and loan holding companies,
also without significant commercial
operations) that, in each case, have $50
billion or more in total consolidated
assets, but are not covered companies
for the purposes of the final rule.11
The final rule requires a covered
company to maintain an amount of
HQLA meeting the criteria set forth in
this final rule (the HQLA amount,
which is the numerator of the ratio) that
is no less than 100 percent of its total
net cash outflows over a prospective 30
calendar-day period (the denominator of
the ratio). The agencies recognize that,
under certain circumstances, it may be
necessary for a covered company’s LCR
to fall briefly below 100 percent to fund
unanticipated liquidity needs.12
However, a LCR below 100 percent may
also reflect a significant deficiency in a
covered company’s management of
liquidity risk. Therefore, consistent with
the proposed rule, the final rule
establishes a framework for a flexible
supervisory response when a covered
company’s LCR falls below 100 percent.
Under the final rule, a covered company
must notify the appropriate Federal
banking agency on any business day
that its LCR is less than 100 percent. In
addition, if a covered company’s LCR is
below 100 percent for three consecutive
business days, the covered company
must submit to its appropriate Federal
banking agency a plan for remediation
of the shortfall.13 These procedures,
which are described in further detail in
section III of this Supplementary
Information section, are intended to
enable supervisors to monitor and
respond appropriately to the unique
circumstances that give rise to a covered
company’s LCR shortfall.
The agencies emphasize that the LCR
is a minimum requirement and
organizations that pose more systemic
risk to the U.S. banking system or whose
liquidity stress testing indicates a need
11 Total consolidated assets for the purposes of
the proposed rule would have been as reported on
a covered company’s most recent year-end
Consolidated Reports of Condition and Income or
Consolidated Financial Statements for Bank
Holding Companies, Federal Reserve Form FR Y–
9C. Foreign exposure data would be calculated in
accordance with the Federal Financial Institutions
Examination Council 009 Country Exposure Report.
The agencies have retained these standards in the
final rule as proposed.
12 During the transition period, for covered
companies, the agencies will consider a shortfall to
be a liquidity coverage ratio lower than 80 percent
in 2015 and lower than 90 percent in 2016.
13 During the period when a covered company is
required to calculate its LCR monthly, the covered
company must promptly consult with the
appropriate Federal banking agency to determine
whether a plan would be required if the covered
company’s LCR is below the minimum requirement
for any calculation date that is the last business day
of the calendar month.

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for higher liquidity reserves may need to
take additional steps beyond meeting
the minimum ratio in order to meet
supervisory expectations. The LCR will
complement existing supervisory
guidance and the more qualitative and
internal stress test requirements in the
Board’s Regulation YY.
Under the final rule, certain categories
of assets may qualify as eligible HQLA
and may contribute to the HQLA
amount if they are unencumbered by
liens and other restrictions on transfer
and can therefore be converted quickly
into cash without reasonably expecting
to incur losses in excess of the
applicable LCR haircuts during a stress
period. Consistent with the proposal,
the final rule establishes three categories
of HQLA: level 1 liquid assets, level 2A
liquid assets and level 2B liquid assets.
The fair value, as determined under U.S.
generally accepted accounting
principles (GAAP), of a covered
company’s level 2A liquid assets and
level 2B liquid assets are subject to
haircuts of 15 percent and 50 percent
respectively. The amount of level 2
liquid assets (that is, level 2A and level
2B liquid assets) may not comprise more
than 40 percent of the covered
company’s HQLA amount. The amount
of level 2B liquid assets may not
comprise more than 15 percent of the
covered company’s HQLA amount.
Certain adjustments have been made
to the final rule to address concerns
raised by a number of commenters with
respect to assets that would have
qualified as HQLA. With respect to the
inclusion of corporate debt securities as
HQLA, the agencies have removed the
requirement that corporate debt
securities have to be publicly traded on
a national securities exchange in order
to qualify for inclusion as HQLA.
Additionally, in response to requests by
several commenters, the agencies have
expanded the pool of publicly traded
common equity shares that may be
included as HQLA. Consistent with the
proposed rule, the final rule does not
include state and municipal securities
as HQLA. As discussed fully in section
II.B.2 of this Supplementary Information
section, the liquidity characteristics of
municipal securities range significantly
and many of these assets do not exhibit
the characteristics for inclusion as
HQLA. With respect to the calculation
of the HQLA amount and in response to
comments received, the agencies are
removing collateralized deposits, as
defined in the final rule, from the
calculation of amounts exceeding the
composition caps, as described in
section II.B.5, below.
A covered company’s total net cash
outflow amount is determined under the

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final rule by applying outflow and
inflow rates, which reflect certain
standardized stressed assumptions,
against the balances of a covered
company’s funding sources, obligations,
transactions, and assets over a
prospective 30 calendar-day period.
Inflows that can be included to offset
outflows are limited to 75 percent of
outflows to ensure that covered
companies are maintaining sufficient
on-balance sheet liquidity and are not
overly reliant on inflows, which may
not materialize in a period of stress.
As further described in section II.C of
this Supplementary Information section
and discussed in the proposal, the
measure of net cash outflow and the
outflow and inflow rates used in its
determination are meant to reflect
aspects of historical stress events
including the recent financial crisis.
Consistent with the Basel III Revised
Liquidity Framework and the agencies’
evaluation of relevant supervisory
information, these net outflow
components of the final rule take into
account the potential impact of
idiosyncratic and market-wide shocks,
including those that would result in: (1)
A partial loss of unsecured wholesale
funding capacity; (2) a partial loss of
secured, short-term financing with
certain collateral and counterparties; (3)
losses from derivative positions and the
collateral supporting those positions; (4)
unscheduled draws on committed credit
and liquidity facilities that a covered
company has provided to its customers;
(5) the potential need for a covered
company to buy back debt or to honor
non-contractual obligations in order to
mitigate reputational and other risks; (6)
a partial loss of retail deposits and
brokered deposits from retail customers;
and (7) other shocks that affect outflows
linked to structured financing
transactions, mortgages, central bank
borrowings, and customer short
positions.
The agencies revised certain elements
of the calculation of net cash outflows
in the final rule, which are also
described in section II.C below. The
methodology for determining the peak
cumulative net outflow has been
amended to address certain comments
relating to the treatment in the proposed
rule of non-maturity outflows. The
revised methodology focuses more
explicitly on the maturity mismatch of
contractual outflows and inflows as well
as overnight funding from financial
institutions.
The agencies have also changed the
definition of operational services and
the list of operational requirements. In
making these changes, the agencies have
addressed certain issues raised by

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commenters relating to the types of
operational services that would be
covered by the rule and the requirement
to exclude certain deposits from being
classified as operational. Additionally,
the agencies have limited the outflow
rate that must be applied to maturing
secured funding transactions such that
the outflow rate should generally not be
greater than the outflow rate for an
unsecured funding transaction with the
same wholesale counterparty. The
agencies have also revised the outflow
rates for committed credit and liquidity
facilities to SPEs so that only SPEs that
rely on the market for funding receive
the 100 percent outflow rate. This
change should address commenters’
concerns about inappropriate outflow
rates for SPEs that are wholly funded by
long-term bank loans and similar
facilities and do not have the same
liquidity risk characteristics as those
that rely on the market for funding.
Consistent with the Basel III Revised
Liquidity Framework, the final rule is
effective as of January 1, 2015, subject
to the transition periods in the final
rule. Under the final rule, covered
companies will be required to maintain
a minimum LCR of 80 percent beginning
January 1, 2015. From January 1, 2016,
through December 31, 2016, the
minimum LCR would be 90 percent.
Beginning on January 1, 2017, and
thereafter, all covered companies would
be required to maintain an LCR of 100
percent. Transition periods are
described fully in section IV of this
Supplementary Information section.
The agencies made changes to the
final rule’s transition periods to address
commenters’ concerns that the proposed
transition periods would not have
provided covered companies enough
time to establish the required
infrastructure to ensure compliance
with the proposed rule’s requirements,
including the proposed daily
calculation requirement. These changes
reflect commenters’ concern regarding
the operational challenges of
implementing the daily calculation
requirement, while still requiring firms
to maintain sufficient HQLA to comply
with the rule. Although the agencies
will still require compliance with the
final rule starting January 1, 2015, the
agencies have delayed implementation
of the daily calculation requirement.
With respect to the daily calculation
requirements, covered companies that
are depository institution holding
companies with $700 billion or more in
total consolidated assets or $10 trillion
or more in assets under custody, and
any depository institution that is a
consolidated subsidiary of such
depository institution holding

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
companies that has total consolidated
assets equal to $10 billion or more, are
required to calculate their LCR on the
last business day of the calendar month
from January 1, 2015, to June 30, 2015,
and beginning on July 1, 2015, must
calculate their LCR on each business
day. All other covered companies are
required to calculate the LCR on the last
business day of the calendar month
from January 1, 2015, to June 30, 2016,
and beginning on July 1, 2016, and
thereafter, must calculate their LCR each
business day.
As detailed in section V of this
Supplementary Information section, in
response to comments, the Board is also
adjusting the transition periods and
calculation frequency requirements for
the modified LCR in the final rule.
Modified LCR holding companies will
not be subject to the final rule in 2015
and will calculate their LCR monthly
starting January 1, 2016. Furthermore,
the Board is increasing the stress period
over which modified LCR net cash
outflows are to be calculated from 21
calendar days to 30 calendar days and
is amending the methodology required
to calculate total net cash outflows
under the modified LCR.
The Basel III Revised Liquidity
Framework also establishes liquidity
risk monitoring mechanisms to
strengthen and promote global
consistency in liquidity risk
supervision. These mechanisms include
information on contractual maturity
mismatch, concentration of funding,
available unencumbered assets, LCR
reporting by significant currency, and
market-related monitoring tools. At this
time, the agencies are not implementing
these monitoring mechanisms as
regulatory standards or requirements.
However, the agencies intend to obtain
information from covered companies to
enable the monitoring of liquidity risk
exposure through reporting forms and
information the agencies collect through
other supervisory processes.
The final rule will provide enhanced
information about the short-term
liquidity profile of a covered company
to managers, supervisors, and market
participants. With this information, the
covered company’s management and
supervisors should be better able to
assess the company’s ability to meet its
projected liquidity needs during periods
of liquidity stress; take appropriate
actions to address liquidity needs; and,
in situations of failure, implement an
orderly resolution of the covered
company. The agencies anticipate that
they will separately seek comment upon
proposed regulatory reporting
requirements and instructions
pertaining to a covered company’s

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disclosure of the final rule’s LCR in a
subsequent notice under the Paperwork
Reduction Act.
The final rule is consistent with the
Basel III Revised Liquidity Framework,
with some modifications to reflect the
unique characteristics and risks of the
U.S. market and U.S. regulatory
frameworks. The agencies believe that
these modifications support the goal of
enhancing the short-term liquidity
resiliency of covered companies and do
not unduly diminish the consistency of
the LCR on an international basis.
The agencies note that the BCBS is in
the process of reviewing the Net Stable
Funding Ratio (NSFR) that was included
in the Basel III Liquidity Framework
when it was first published in 2010. The
NSFR is a standard focused on a longer
time horizon that is intended to limit
overreliance on short-term wholesale
funding, to encourage better assessment
of funding risks across all on- and offbalance sheet items, and to promote
funding stability. The agencies
anticipate a separate rulemaking
regarding the NSFR once the BCBS
adopts a final international version of
the NSFR.
D. Scope of Application of the Final
Rule
1. Covered Companies
Consistent with the Basel III Revised
Liquidity Framework, the proposed rule
would have established a minimum LCR
applicable to all U.S. internationally
active banking organizations, and their
consolidated subsidiary depository
institutions with total consolidated
assets of $10 billion or more. In
implementing internationally agreed
upon standards in the United States,
such as the capital framework
developed by the BCBS, the agencies
have historically applied a consistent
threshold for determining whether a
U.S. banking organization should be
subject to such standards. The
threshold, generally banking
organizations with $250 billion or more
in total consolidated assets or $10
billion or more in total on-balance sheet
foreign exposure, is based on the size,
complexity, risk profile, and
interconnectedness of such
organizations.14
A number of commenters asserted
that the agencies’ definition of
internationally active would apply the
14 See e.g., OCC, Board, and FDIC, ‘‘Regulatory
Capital Rules: Regulatory Capital, Implementation
of Basel III, Capital Adequacy, Transition
Provisions, Prompt Corrective Action, Standardized
Approach for Risk-weighted Assets, Market
Discipline and Disclosure Requirements, Advanced
Approaches Risk-Based Capital Rule, and Market
Risk Capital Rule,’’ 78 FR 62018 (October 11, 2013).

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61445

quantitative minimum liquidity
standard to an inappropriate set of
companies. Several commenters argued
that the internationally active
thresholds would capture several large
banking organizations even though the
business models, operations, and
funding profiles of these organizations
have some characteristics that are
similar to those bank holding companies
that would be subject to the modified
LCR proposed by the Board.
Commenters stated that it would be
more appropriate for all ‘‘regional
banks’’ to be subject to the modified
LCR as described under section V of the
Supplementary Information section to
the proposed rule. One commenter
requested that the agencies not apply
the standard based on the foreign
exposure threshold, but use a threshold
that takes into account changes in
industry structure, considerations of
competitive equality across
jurisdictions, and differences in capital
and liquidity regulation.
The Board also proposed to apply the
proposed rule to covered nonbank
companies as an enhanced liquidity
standard pursuant to its authority under
section 165 of the Dodd-Frank Act. The
Board believed those organizations
should maintain appropriate liquidity
commensurate with their contribution
to overall systemic risk in the United
States and believed the proposal
properly reflected such firms’ funding
profiles. One commenter stated that the
proposed rule would adversely impact
covered nonbank companies that own
banks to facilitate customer
transactions, and would create a
mismatch of regulations that will
hamper the ability of such businesses to
operate. This commenter further noted
that because of their different business
models, covered nonbank companies are
likely to engage in significantly less
deposit-taking than large bank holding
companies, which generally translates
into less access to one of a few sources
of level 1 liquid assets, Federal Reserve
Bank balances. The commenter
requested specific tailoring of the LCR
or a delay in the implementation of the
final rule for covered nonbank
companies.
One commenter noted that although
the proposed rule would have exempted
depository institution holding
companies with substantial insurance
operations and savings and loan holding
companies with substantial commercial
operations, it would not have exempted
depository holding companies with
significant retail securities brokerage
operations, which the commenter
argued also have liquidity risk profiles
that should not be covered by the

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liquidity requirements. Another
commenter suggested that the agencies
consider waiving the LCR requirement
for certain covered companies, subject
to satisfactory compliance with other
metrics such as capital ratios, stress
tests, or the NSFR.
The final rule seeks to calibrate the
net cash outflow requirement for a
covered company based on the
composition of the organization’s
balance sheet, off-balance sheet
commitments, business activities, and
funding profile. Sources of funding that
are considered less likely to be affected
at a time of a liquidity stress are
assigned significantly lower 30
calendar-day outflow rates. Conversely,
the types of funding that are historically
vulnerable to liquidity stress events are
assigned higher outflow rates.
Consistent with the Basel III Revised
Liquidity Framework, in the proposed
rule, the agencies expected that covered
companies with less complex balance
sheets and less risky funding profiles
would have lower net cash outflows and
would therefore require a lower amount
of HQLA to meet the proposed rule’s
minimum liquidity standard. For
example, under the proposed rule,
covered companies that rely to a greater
extent on retail deposits that are fully
covered by deposit insurance and less
on short-term unsecured wholesale
funding would have had a lower total
net cash outflow amount when
compared to a banking organization that
was heavily reliant on wholesale
funding.
Furthermore, systemic risks that
could impair the safety of covered
companies were also reflected in the
minimum requirement, including
provisions to address wrong-way risk,
shocks to asset prices, and other
industry-wide risks that materialized in
the 2007–2009 financial crisis. Under
the proposed rule, covered companies
that have greater interconnectedness to
financial counterparties and have
liquidity risks related to risky capital
market instruments may have larger net
cash outflows when compared to
covered companies that do not have
such dependencies. Large consolidated
banking organizations engage in a
diverse range of business activities and
have a liquidity risk profile
commensurate with the breadth of these
activities. The scope and volume of
these organizations’ financial
transactions lead to interconnectedness
between banking organizations and
between the banking sector and other
financial and non-financial market
participants.
The agencies believe that the
proposed scope of application

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thresholds were properly calibrated to
capture companies with the most
significant liquidity risk profiles. The
agencies believe that covered depository
institution holding companies with total
consolidated assets of $250 billion or
more have a riskier liquidity profile
relative to smaller firms based on their
breadth of activities and
interconnectedness with the financial
sector. Likewise, the foreign exposure
threshold identifies firms with a
significant international presence,
which may also be subject to greater
liquidity risks for the same reasons. In
finalizing this rule, the agencies are
promoting the short-term liquidity
resiliency of institutions engaged in a
broad variety of activities, transactions,
and forms of financial
interconnectedness. For the reasons
discussed above, the agencies believe
that the consistent scope of application
used across several regulations is
appropriate for the final rule.15
The agencies believe that providing a
waiver to covered companies that meet
alternate metrics would be contrary to
the express purpose of the proposed
rule to provide a standardized
quantitative liquidity metric for covered
companies. Moreover, with respect to
commenters’ requests to exclude certain
covered companies with large retail
securities brokerage and other nondepository operations from the scope of
the final rule, the agencies believe that
such companies have heightened
liquidity risk profiles due to the range
and volume of financial transactions
entered into by such organizations and
that the LCR is appropriately calibrated
to reflect those business models.
The proposed rule exempted
depository institution holdings
companies and nonbank financial
companies designated by the Council
for Board supervision with large
insurance operations or savings and
loan holding companies with large
commercial operations, because their
business models differ significantly
from covered companies. The Board
recognizes that the companies
designated by the Council may have a
range of businesses, structures, and
activities, that the types of risks to
financial stability posed by nonbank
financial companies will likely vary,
and that the enhanced prudential
standards applicable to bank holding
companies may not be appropriate, in
whole or in part, for all nonbank
financial companies. Accordingly, the
Board is not applying the LCR
requirement to nonbank financial
companies supervised by the Board
15 Id.

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through this rulemaking. Instead,
following designation of a nonbank
financial company for supervision by
the Board, the Board intends to assess
the business model, capital structure,
and risk profile of the designated
company to determine how the
proposed enhanced prudential
standards should apply, and if
appropriate, would tailor application of
the LCR by order or rule to that nonbank
financial company or to a category of
nonbank financial companies. The
Board will ensure that nonbank
financial companies receive notice and
opportunity to comment prior to
determination of the applicability of any
LCR requirement.
Upon the issuance of an order or rule
that causes a nonbank financial
company to become a covered nonbank
company subject to the LCR
requirement, any state nonmember bank
or state savings association with $10
billion or more in total consolidated
assets that is a consolidated subsidiary
of such covered nonbank company also
would be subject to the final rule. When
a nonbank financial company parent of
a national bank or Federal savings
association becomes subject to the LCR
requirement by order or rule, the OCC
will apply its reservation of authority
under § __.1(b)(1)(iv) of the final rule,
including applying the notice and
response procedures described in § __
.1(b)(5) of the final rule, to determine if
application of the LCR requirement is
appropriate for the national bank or
Federal savings association in light of its
asset size, level of complexity, risk
profile, scope of operations, affiliation
with foreign or domestic covered
entities, or risk to the financial system.
As in the proposed rule, the final rule
does not apply to a bridge financial
company or a subsidiary of a bridge
financial company, a new depository
institution or a bridge depository
institution, as those terms are used in
the resolution context.16 The agencies
believe that requiring the FDIC to
maintain a minimum LCR at these
entities would inappropriately constrain
the FDIC’s ability to resolve a depository
institution or its affiliated companies in
an orderly manner.17
16 See

12 U.S.C. 1813(i); 5381(a)(3).
to the International Banking Act
(IBA), 12 U.S.C. 3102(b), and OCC regulation, 12
CFR 28.13(a)(1), the operations of a Federal branch
or agency regulated and supervised by the OCC are
subject to the same rights and responsibilities as a
national bank operating at the same location. Thus,
as a general matter, Federal branches and agencies
are subject to the same laws and regulations as
national banks. The IBA and the OCC regulation
state, however, that this general standard does not
apply when the IBA or other applicable law or
regulations provide other specific standards for
17 Pursuant

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A company will remain subject to this
final rule until its appropriate Federal
banking agency determines in writing
that application of the rule to the
company is not appropriate. Moreover,
nothing in the final rule limits the
authority of the agencies under any
other provision of law or regulation to
take supervisory or enforcement actions,
including actions to address unsafe or
unsound practices or conditions,
deficient liquidity levels, or violations
of law.
As proposed, the agencies are
reserving the authority to apply the final
rule to a bank holding company, savings
and loan holding company, or
depository institution that does not
meet the asset thresholds described
above if it is determined that the
application of the LCR would be
appropriate in light of a company’s asset
size, level of complexity, risk profile,
scope of operations, affiliation with
foreign or domestic covered companies,
or risk to the financial system. The
agencies also are reserving the authority
to require a covered company to hold an
amount of HQLA greater than otherwise
required under the final rule, or to take
any other measure to improve the
covered company’s liquidity risk
profile, if the appropriate Federal
banking agency determines that the
covered company’s liquidity
requirements as calculated under the
final rule are not commensurate with its
liquidity risks. In making such
determinations, the agencies will apply
the notice and response procedures as
set forth in their respective regulations.

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2. Covered Depository Institution
Subsidiaries
The proposed rule would have
applied the LCR requirements to
depository institutions that are the
consolidated subsidiaries of covered
companies and have $10 billion or more
in total consolidated assets. Several
commenters argued that the agencies
should not apply a separate LCR
requirement to subsidiary depository
institutions of covered companies.
Another commenter noted that foreign
banking organizations would be subject
to separate liquidity requirements for
Federal branches or agencies, or when the OCC
determines that the general standard should not
apply. This final rule would not apply to Federal
branches and agencies of foreign banks operating in
the United States. At this time, these entities have
assets that are substantially below the proposed
$250 billion asset threshold for applying the
proposed liquidity standard to an internationally
active banking organization. As part of its
supervisory program for Federal branches and
agencies of foreign banks, the OCC reviews liquidity
risks and takes appropriate action to limit such
risks in those entities.

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the entire organization, for any U.S.
intermediate holding company that the
foreign banking organization would be
required to form under the Board’s
Regulation YY, and for depository
institution subsidiaries that would be
subject to the proposed rule, which, the
commenter asserted, could result in
unnecessarily duplicative holdings of
liquid assets within the organization. In
addition, several commenters argued
that the separate LCR requirement for
depository institution subsidiaries
would result in excess liquidity being
trapped at the covered subsidiaries,
especially if the final rule capped the
inflows from affiliated entities at 75
percent of their outflows. To alleviate
this burden, one commenter requested
that the final rule permit greater reliance
on support by the top-tier holding
company.
One commenter argued that excess
liquidity at the holding company should
be considered when calculating the LCR
for the subsidiary in order to recognize
the requirement that a bank holding
company serve as a source of strength
for its subsidiary depository
institutions. The commenter also argued
that requiring subsidiary depository
institutions to calculate the LCR does
not recognize the relationship between
consolidated depository institutions that
are subsidiaries of the same holding
company and requested that the rule
permit a depository institution to count
any excess HQLA held by an affiliated
depository institution, consistent with
the sister bank exemption in section
23A of the Federal Reserve Act.18
One commenter argued that the rule
should not require less complex banking
organizations to calculate the LCR for
consolidated subsidiary depository
institutions with total consolidated
assets of $10 billion or more. Another
commenter expressed concern that
although subsidiary depository
institutions with total consolidated
assets between $1 billion and $10
billion would not be required to comply
with the requirements of the proposed
rule, agency examination staff would
pressure such subsidiary depository
institutions to conform to the
requirements of the final rule. A few
commenters requested that the agencies
clarify that these subsidiary depository
institutions would not be required by
agency examination staff to conform to
the rule.
In promoting short-term, asset-based
liquidity resiliency at covered
companies, the agencies are seeking to
limit the consequences of a potential
liquidity stress event on the covered
18 12

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company and on the broader financial
system in a manner that does not rely
on potential government support. Large
depository institution subsidiaries play
a significant role in a covered
company’s funding structure, and in the
operation of the payments system.
These large subsidiaries generally also
have access to deposit insurance
coverage. Accordingly, the agencies
believe that the application of the LCR
requirement to these large depository
institution subsidiaries is appropriate.
To reduce the potential systemic
impact of a liquidity stress event at such
large depository institution subsidiaries,
the agencies believe that such entities
should have a sufficient amount of
HQLA to meet their own net cash
outflows and should not be overly
reliant on inflows from their parents or
affiliates. Accordingly, the agencies do
not believe that the separate LCR
requirement for certain depository
institution subsidiaries is duplicative of
the requirement at the consolidated
holding company level, and the
agencies have adopted this provision of
the final rule as proposed.
The Board is not applying the
requirements of the final rule to foreign
banking organizations and intermediate
holding companies required to be
formed under the Board’s Regulation YY
that are not otherwise covered
companies at this time. The Board
anticipates implementing an LCR-based
standard through a future separate
rulemaking for the U.S. operations of
some or all foreign banking
organizations with $50 billion or more
in combined U.S. assets.
3. Companies That Become Subject to
the LCR Requirements
The agencies have added § l.1(b)(2)
to address the final rule’s applicability
to companies that become subject to the
LCR requirements before and after
September 30, 2014. Companies that are
subject to the minimum liquidity
standard under § l.1(b)(1) as of
September 30, 2014 must comply with
the rule beginning January 1, 2015,
subject to the transition periods
provided in subpart F of the final rule.
A company that meets the thresholds for
applicability after September 30, 2014,
based on an applicable regulatory yearend report under § l.1(b)(1)(i) through
(b)(1)(iii) must comply with the final
rule beginning on April 1 of the
following year.
The final rule provides newly covered
companies with a transition period for
the daily calculation requirement,
recognizing that a daily calculation
requirement could impose significant
operational and technology demands.

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Specifically, a newly covered company
must calculate its LCR monthly from
April 1 to December 1 of its first year
of compliance. Beginning on January 1
of the following year, the covered
company must calculate its LCR daily.
For example, a company that meets
the thresholds for applicability under
§ l.1(b)(1)(i) through (b)(1)(iii) based on
its regulatory report filed for fiscal year
2017 must comply with the final rule
requirements beginning on April 1,
2018. From April 1, 2018 to December
31, 2018, the final rule requires the
covered company to calculate its LCR
monthly. Beginning January 1, 2019,
and thereafter, the covered company
must calculate its LCR daily.
When a covered company becomes
subject to the final rule after September
30, 2014, as a result of an agency
determination under § l.1(b)(1)(iv) that
the LCR requirement is appropriate in
light of the covered company’s asset
size, level of complexity, risk profile,
scope of operations, affiliation with
foreign or domestic covered entities, or
risk to the financial system, the
company must comply with the final
rule requirements according to a
transition period specified by the
agency.
II. Minimum Liquidity Coverage Ratio
A. The LCR Calculation and
Maintenance Requirement
As described above, under the
proposed rule, a covered company
would have been required to maintain
an HQLA amount that was no less than
100 percent of its total net cash
outflows.

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1. A Liquidity Coverage Requirement
One commenter argued that the
proposed rule’s requirements would
reduce incentives to maintain
diversified liquid asset portfolios and
other funding sources, which would
result in the loss of diversification in
banking organizations’ sources of
funding and liquid asset composition.
Another commenter asserted that
restoring and strengthening the
authorities of the Federal Reserve as the
lender of last resort would be a more
effective and efficient alternative to
bolstering a covered company’s
liquidity reserves. One commenter
stated that the LCR requirement would
introduce additional system
complexities without taking into
account the benefits of long-term
funding stability afforded by the NSFR.
The agencies believe that the most
recent financial crisis demonstrated that
large, internationally active banking
organizations were exposed to

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substantial wholesale market funding
risks, as well as contingent liquidity
risks, that were not well mitigated by
the then-prevailing liquidity risk
management practices and liquidity
portfolio compositions. For a number of
large financial institutions, this led to
failure, bankruptcy, restructuring,
merger, or only maintaining operations
with financial support from the Federal
government. The agencies believe that
covered companies should not overly
rely on wholesale market funding that
may be elusive in a time of stress, not
rely on expectations of government
support, and not rely on asset classes
that have a significant liquidity discount
if sold during a period of stress. The
agencies do not believe that the final
rule’s minimum standard will constrain
the diversity of a covered company’s
funding sources or unduly restrict the
types of assets that a covered company
may hold for general liquidity risk
purposes. Covered companies are
expected to maintain appropriate levels
of liquidity without reliance on central
banks acting in the capacity of lenders
of last resort. With respect to the NSFR,
the agencies continue to engage in and
support the ongoing development of the
ratio as an international standard, and
anticipate the standard will be
implemented in the United States at the
appropriate time. In the meantime, the
agencies expect covered companies to
maintain appropriate stable structural
funding profiles.
For these reasons, the overall
structure of the LCR requirement is
being adopted as proposed. Under the
final rule, a covered company is
required to maintain an HQLA amount
that is no less than 100 percent of its
total net cash outflows over a
prospective 30 calendar-day period, in
accordance with the calculation
requirements for the HQLA amount and
total net cash outflows, as discussed
below.
2. The Liquidity Coverage Ratio Stress
Period
The proposed rule would have
required covered companies to calculate
the LCR based on a 30 calendar-day
stress period. Some commenters
requested that the liquidity coverage
ratio calculation instead be based on a
calendar-month stress period. Another
commenter noted that supervisors
should be attentive to the possibility
that excess liquidity demands can build
up just outside the 30 calendar-day
window.
Consistent with the Basel III Revised
Liquidity Framework, the final rule uses
a standardized 30 calendar-day stress
period. The LCR is intended to facilitate

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comparisons across covered companies
and to provide consistent information
about historical trends. The agencies are
retaining the prospective 30 calendarday period because a calendar month
stress period is not compatible with the
daily calculation requirement, which
requires a forward-looking calculation
of liquidity stress for the 30 calendar
days following the calculation date, and
a 30 calendar-day stress period would
provide for an accurate historical
comparison. Furthermore, while the
LCR would establish one scenario for
stress testing, the agencies expect
companies subject to the final rule to
maintain robust stress testing
frameworks that incorporate additional
scenarios that are more tailored to the
risks within their companies.19 The
agencies also expect covered companies
to appropriately monitor and manage
liquidity risk both within and beyond
the 30-day stress period. Accordingly,
the agencies are adopting this aspect of
the final rule as proposed.
3. The Calculation Date, Daily
Calculation Requirement, and
Comments on LCR Reporting
Under the proposed rule, a covered
company would have been required to
calculate its LCR on each business day
as of that date (the calculation date),
with the horizon for each calculation
ending 30 days from the calculation
date. The proposed rule would have
required a covered company to calculate
its LCR on each business day as of a set
time selected by the covered company
prior to the effective date of the rule and
communicated in writing to its
appropriate Federal banking agency.
The proposed rule did not include a
proposal to establish a reporting
requirement for the LCR. The agencies
anticipate separately seeking comment
on proposed regulatory reporting
requirements and instructions
pertaining to a covered company’s
disclosure of the final rule’s LCR in a
subsequent notice under the Paperwork
Reduction Act.
A number of commenters stated that
the daily calculation requirement
imposes significant operational burdens
on covered companies. These include
costs associated with building and
testing new information technology
systems, developing governance and
19 Covered companies that are subject to the
Board’s Regulation YY are required to conduct
internal liquidity stress tests that include a
minimum of four periods over which the relevant
stressed projections extend: Overnight, 30-day, 90day, and one-year time horizons, and additional
time horizons as appropriate. 12 CFR 253.35
(domestic bank holding companies); (12 CFR
235.175 (foreign banking organizations).

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
internal control frameworks for the LCR,
and collecting and reviewing the
requisite data to comply with the
requirements of the proposed rule.
Commenters argued that developing
systems is challenging, expensive, and
time consuming for those organizations
that do not currently have such
reporting capabilities in place. For
example, one commenter said that
capturing the data to perform the LCR
calculation on a daily basis would
require banking organizations to
implement entirely new and custom
data systems and mechanics. Several
commenters expressed concerns
generally that the additional system
development costs would outweigh the
benefits from the LCR to supervisors.
In addition to the costs of developing
new systems, commenters also raised
concerns about the time frame between
the adoption of the final rule and the
effective date of the proposed rule and
indicated that there would be
insufficient time in which to develop
operational capabilities to comply with
the proposed rule. For instance, one
commenter argued that because the rule
was not yet final, there would not be
enough time to implement systems
before the January 1, 2015 compliance
date. Several commenters echoed a
similar concern and contended that the
burden associated with implementing
and testing systems for the daily
calculation is heightened by a short time
frame. Some of these commenters
requested a delay in the implementation
of the final rule to better develop
operational capabilities for compliance.
Several commenters argued that the
requirement to calculate the LCR daily
would require large changes to data
systems, processes, reporting, and
governance and were concerned that
their institutions would not have the
capability to perform accurately the
required calculations. In particular, the
commenters expressed concern with the
level of certainty required for such
calculation and its relation to their
disclosure obligations under securities
laws. Other commenters observed that
there are limits to the number of large
scale projects that covered companies
can implement at one time, and
building LCR reporting systems would
require significant resources.
Other commenters preferred a
monthly calculation given the
significant information technology costs
and short time frame until
implementation. Further, several
commenters stated that much of the data
necessary to calculate a daily LCR
currently is available only on systems
that report monthly, rather than daily.
These commenters also expressed

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concern over developing the necessary
internal controls to ensure that the data
is sufficiently accurate. Several
commenters requested that the agencies
require certain ‘‘regional’’ banking
organizations that met the proposed
rule’s scope of applicability threshold,
but have not been identified as Global
Systemically Important Banks (G–SIBs)
by the Financial Stability Board, to
calculate the LCR on a monthly, rather
than daily, basis. Commenters argued
that the daily calculation for such
organizations is unnecessary and that
the monitoring of daily liquidity risk
management should be established
through the supervisory process. One
commenter argued that it may not be
necessary to perform detailed
calculations every business day during
periods of ample liquidity and
suggested that the agencies impose the
daily requirement only during periods
of stress.
Covered companies that would not be
subject to supervisory daily liquidity
reporting requirements under the
Board’s information collection and
Complex Institution Liquidity
Monitoring Report (FR 2052a) liquidity
reporting program 20 raised concerns
about the time needed to develop
systems to comply with a daily LCR
requirement. Those companies asserted
they should not be subject to a daily
calculation or, in the alternative, that
they should be provided with additional
time to develop operational capabilities
relative to those institutions submitting
the FR 2052a report. A commenter
suggested that covered companies that
have not previously been subject to
bank or bank holding company liquidity
reporting requirements should be given
additional time to develop the necessary
systems. Another commenter requested
that the agencies clarify the mechanics
for calculating the LCR and reporting it
to regulators. Several commenters
requested that, if the final rule would
require daily calculation of the LCR, the
agencies establish a transition period for
firms to implement this calculation
methodology.
The agencies recognize that a daily
calculation requirement for a new
regulatory requirement imposes
significant operational and technology
demands upon covered companies.
However, the agencies continue to
believe the daily calculation
requirement is appropriate for covered
companies under the final rule. Covered
companies with $250 billion or more in
20 Board, ‘‘Agency Information Collection
Activities: Announcement of Board Approval
Under Delegated Authority and Submission to
OMB,’’ 79 FR 48158 (August 15, 2014).

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61449

total consolidated assets or $10 billion
or more in total on-balance sheet foreign
exposures are large, complex
organizations with significant trading
and other activities. Moreover,
idiosyncratic or market driven liquidity
stress events have the potential to
become significant in a short period of
time even for covered companies that
have not been designated as G–SIBs by
the Financial Stability Board and that
have relatively less complex balance
sheets and more consistent funding
profiles than G–SIBs in the normal
course of business. In contrast to the
entities that would be subject to the
Board’s modified LCR requirement
discussed in section V of this
Supplementary Information section,
such organizations tend to have more
significant trading activities,
interconnectedness in the financial
system, and are a significant source of
credit to the areas of the United States
in which they operate. Supervisors
expect an organization that is a covered
company under this rule to have robust,
forward-looking liquidity risk
monitoring tools that enable the
organization to be responsive to
changing liquidity risks. These tools are
expected to be in place even during
periods when the organization considers
that it has ample liquidity, so that
emerging risks may be identified and
mitigated. The agencies also note that
during periods of stress, it may be
difficult for companies to implement a
daily reporting requirement if the
necessary technological systems have
not previously been established.
Therefore, the agencies continue to
believe the daily calculation
requirement is appropriate for covered
companies under the final rule.
However, the agencies recognize that
the calculation requirements under this
rule, including the daily calculation
requirement, may necessitate certain
enhancements to a covered company’s
liquidity risk data collection and
monitoring infrastructure. Accordingly,
the agencies have changed the proposed
rule to include certain transition periods
as described fully in section IV of this
Supplementary Information section.
With these revisions, the agencies
believe that the final rule achieves its
overall objective of promoting better
liquidity management and reducing
liquidity risk. To that end, the agencies
have sought to achieve a balance
between operational concerns and the
overall objectives of the LCR by
providing covered companies with
additional time to implement the daily
calculation requirement. Likewise, with
respect to the level of precision

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required, the agencies believe that the
transition period should provide
covered companies with an appropriate
time frame to upgrade systems, develop
controls, train employees, and enhance
other operational capabilities so that
covered companies will have the
requisite operational tools to effectively
implement a daily calculation
requirement.
With respect to reporting frequencies,
the agencies continue to anticipate that
they will separately seek comment on
proposed regulatory reporting
requirements and instructions for the
LCR in a subsequent notice.
B. High-Quality Liquid Assets
The agencies received a number of
comments on the criteria for HQLA and
the designation of the liquidity level for
various assets. Under the proposed rule,
the numerator of the LCR would have
been a covered company’s HQLA
amount, which would have been the
HQLA held by the covered company
subject to the qualifying operational
control criteria and compositional
limitations. These proposed criteria and
limitations were meant to ensure that a
covered company’s HQLA amount
would include only assets with a high
potential to generate liquidity through
monetization (sale or secured
borrowing) during a stress scenario.
Consistent with the Basel III Revised
Liquidity Framework, the agencies
proposed classifying HQLA into three
categories of assets: Level 1, level 2A,
and level 2B liquid assets. Specifically,
the agencies proposed that level 1 liquid
assets, which are the highest quality and
most liquid assets, would have been
included in a covered company’s HQLA
amount without a limit and without
haircuts. Level 2A and 2B liquid assets
have characteristics that are associated
with being relatively stable and
significant sources of liquidity, but not
to the same degree as level 1 liquid
assets. Accordingly, the proposed rule
would have subjected level 2A liquid
assets to a 15 percent haircut and, when
combined with level 2B liquid assets,
they could not have exceeded 40
percent of the total HQLA amount.
Level 2B liquid assets, which are
associated with a lesser degree of
liquidity and more volatility than level
2A liquid assets, would have been
subject to a 50 percent haircut and
could not have exceeded 15 percent of
the total HQLA amount. All other
classes of assets would not qualify as
HQLA.
Commenters expressed concerns
about several proposed criteria for
identifying the types of assets that
qualify as HQLA. Commenters also

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suggested that the agencies designate
certain additional assets as HQLA and
change the categorization of certain
assets as level 1, level 2A, or level 2B
liquid assets. A commenter cautioned
that the proposed rule’s stricter
definition of HQLA compared to the
Basel III Revised Liquidity Framework
could lead to distortions in the market,
such as dramatically increased demand
for limited supplies of asset classes and
hoarding of HQLA by financial
institutions.
The final rule adopts the proposed
rule’s overall structure for the
classification of assets as HQLA and the
compositional limitations for certain
classes of HQLA in the HQLA amount.
As discussed more fully below, the
agencies considered the issues raised by
commenters and incorporated a number
of modifications in the final rule to
address commenters’ concerns.
1. Liquidity Characteristics of HQLA
Assets that qualify as HQLA should
be easily and immediately convertible
into cash with little or no expected loss
of value during a period of liquidity
stress. In identifying the types of assets
that would qualify as HQLA in the
proposed and final rules, the agencies
considered the following categories of
liquidity characteristics, which are
generally consistent with those of the
Basel III Revised Liquidity Framework:
(a) Risk profile; (b) market-based
characteristics; and (c) central bank
eligibility.
a. Risk Profile
Assets that are appropriate for
consideration as HQLA tend to have
lower risk. There are various forms of
risk that can be associated with an asset,
including liquidity risk, market risk,
credit risk, inflation risk, foreign
exchange risk, and the risk of
subordination in a bankruptcy or
insolvency. Assets appropriate for
consideration as HQLA would be
expected to remain liquid across various
stress scenarios and should not
suddenly lose their liquidity upon the
occurrence of a certain type of risk.
Another characteristic of these assets is
that they generally experience ‘‘flight to
quality’’ during a crisis, which is where
investors sell their other holdings to buy
more of these assets in order to reduce
the risk of loss and thereby increase
their ability to monetize assets as
necessary to meet their own obligations.
Assets that may be highly liquid
under normal conditions but experience
wrong-way risk and that could become
less liquid during a period of stress
would not be appropriate for
consideration as HQLA. For example,

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securities issued or guaranteed by many
companies in the financial sector have
been more prone to lose value when the
banking sector is experiencing stress
and become less liquid due to the high
correlation between the health of these
companies and the health of the
financial sector generally. This
correlation was evident during the
recent financial crisis as most debt
issued by such companies traded at
significant discounts for a prolonged
period. Because of this high potential
for wrong-way risk, and consistent with
the Basel III Revised Liquidity
Framework, the final rule excludes from
HQLA assets that are issued by
companies that are primary actors in the
financial sector. Identification of these
companies is discussed in section II.B.2,
below.
b. Market-Based Characteristics
The agencies also have found that
assets appropriate to be included as
HQLA generally exhibit certain marketbased characteristics. First, these assets
tend to have active outright sale or
repurchase markets at all times with
significant diversity in market
participants, as well as high trading
volume. This market-based liquidity
characteristic may be demonstrated by
historical evidence, including evidence
observed during recent periods of
market liquidity stress. Such assets
should demonstrate: Low bid-ask
spreads, high trading volumes, a large
and diverse number of market
participants, and other appropriate
factors. Diversity of market participants,
on both the buying and selling sides of
transactions, is particularly important
because it tends to reduce market
concentration and is a key indicator that
a market will remain liquid during
periods of stress. The presence of
multiple committed market makers is
another sign that a market is liquid.
Second, assets that are appropriate for
consideration as HQLA generally tend
to have prices that do not incur sharp
declines, even during times of stress.
Volatility of traded prices and bid-ask
spreads during normal times are simple
proxy measures of market volatility;
however, there should be historical
evidence of relative stability of market
terms (such as prices and haircuts) as
well as trading volumes during stressed
periods. To the extent that an asset
exhibits price or volume fluctuation
during times of stress, assets appropriate
for consideration as HQLA tend to
increase in value and experience a flight
to quality during these periods of stress
because historically market participants
move into more liquid assets in times of
systemic crisis.

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Third, assets that can serve as HQLA
tend to be easily and readily valued.
The agencies generally have found that
an asset’s liquidity is typically higher if
market participants can readily agree on
its valuation. Assets with more
standardized, homogenous, and simple
structures tend to be more fungible,
thereby promoting liquidity. The pricing
formula of more liquid assets generally
is easy to calculate when it is based
upon sound assumptions and publicly
available inputs. Whether an asset is
listed on an active and developed
exchange can serve as a key indicator of
an asset’s price transparency and
liquidity.

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c. Central Bank Eligibility
Assets that a covered company can
pledge at a central bank as collateral for
intraday liquidity needs and overnight
liquidity facilities in a jurisdiction and
in a currency where the bank has access
to the central bank generally tend to be
liquid and, as such, are appropriate for
consideration as HQLA. In the past,
central banks have provided a backstop
to the supply of banking system
liquidity under conditions of severe
stress. Central bank eligibility should,
therefore, provide additional assurance
that assets could be used in acute
liquidity stress events without adversely
affecting the broader financial system
and economy. However, central bank
eligibility is not itself sufficient to
categorize an asset as HQLA; all of the
final rule’s requirements for HQLA must
be met if central bank eligible assets are
to qualify as HQLA.
d. Comments About Liquidity
Characteristics
In their proposal, the agencies
requested comments on whether the
agencies should consider other
characteristics in analyzing the liquidity
of an asset. Although several
commenters expressed concerns about
the agencies’ evaluation of the proposed
liquidity characteristics to designate
certain assets as HQLA, the agencies
received only a few comments on the set
of liquidity characteristics. One
commenter suggested that the agencies
evaluate secondary trading levels over
time, specifically for level 1 liquid
assets. The commenter also
recommended that the agencies
consider various factors to assess
security issuances, including the
absolute size of parent issuer holdings,
credit ratings, and average credit
spreads. Another commenter expressed
its belief that the inclusion of an asset
as HQLA should be determined based
on objective criteria for market liquidity
and creditworthiness.

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In response to the commenter’s
concerns, the agencies agree that trading
volume is an important characteristic of
an asset’s liquidity. The agencies believe
that high trading volume across
dynamic market environments is one of
several factors that evidences marketbased characteristics of HQLA. The final
rule continues to consider trading
volume to assess the liquidity of an
asset.
In response to the commenter’s
suggestion for the final rule to include
factors such as credit ratings and
average credit spreads, the agencies
recognize that indicators of credit risk
include credit ratings and average credit
spreads. The risk profile of an asset also
includes many other types of risks. The
agencies note that the final rule
incorporates assessments of credit risk
in certain level 1 and level 2A liquid
assets criteria by referring to the risk
weights assigned to securities under the
agencies’ risk-based capital rules. The
agencies are not including the
additional factors suggested by the
commenter because in some cases, it
would be legally impermissible, and
additionally, the agencies believe the
link to risk weights in the risk-based
capital rules for level 1 and level 2A
qualifying criteria sufficiently captures
credit risk factors for purposes of the
LCR.21
Finally, in response to one
commenter’s request that the agencies
incorporate objective criteria in the
liquidity characteristics of the final rule,
the agencies highlight that certain
objective criteria relating to price
decline scenarios are included as
qualifying criteria for level 2A and level
2B liquid assets, as discussed in section
II.B.2. The agencies believe that the
liquidity characteristics in the final rule,
combined with certain objective criteria
for specific categories of HQLA, provide
an appropriate basis for evaluating a
variety of asset classes for inclusion as
HQLA.
2. Qualifying Criteria for Categories of
HQLA
Based on the analysis of the liquidity
characteristics above, the proposed rule
would have included a number of
classes of assets meeting these
characteristics as HQLA. However,
within certain of the classes of assets
21 A credit rating is one potential perspective on
credit risk that may be used by a covered company
in its assessment of the risk profile of a security.
However, covered companies should avoid over
reliance upon credit ratings in isolation. In
addition, the Dodd-Frank Act prohibits the
reference to or reliance on credit ratings in an
agency’s regulations. Public Law 111–203, section
939A, 124 Stat 1376 (2010).

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61451

that the agencies proposed to include as
HQLA, the proposed rule would have
set forth a number of qualifying criteria
and specific requirements for a
particular asset to qualify as HQLA.
With certain modifications to address
commenters’ concerns regarding certain
classes of assets, discussed below, the
agencies are adopting these criteria and
requirements generally as proposed.
a. The Liquid and Readily-Marketable
Standard
Most of the assets in the HQLA
categories would have been required to
meet the proposed rule’s definition of
‘‘liquid and readily-marketable’’ in
order to be included as HQLA. Under
the proposed rule, an asset would have
been liquid and readily-marketable if it
is traded in an active secondary market
with more than two committed market
makers, a large number of committed
non-market maker participants on both
the buying and selling sides of
transactions, timely and observable
market prices, and high trading
volumes. The agencies proposed this
‘‘liquid and readily-marketable’’
requirement to ensure that assets
included as HQLA would exhibit a level
of liquidity that would allow a covered
company to convert them into cash
during times of stress and, therefore, to
meet its obligations when other sources
of funding may be reduced or
unavailable.
Commenters raised several concerns
with the proposed rule’s definition of
‘‘liquid and readily-marketable.’’
Several commenters urged the agencies
to provide more detail on the liquid and
readily-marketable standard. One of
these commenters highlighted that the
definition included undefined terms
and suggested that the agencies either
provide specific securities or asset
classes or refer to instrument
characteristics similar to those listed in
the Board’s Regulation YY. One
commenter urged the agencies to pursue
a more quantitative approach to
identifying securities that would meet
the standard. Another commenter noted
that the agencies did not provide
guidance on how to document that
HQLA meets the market-based
characteristics or the liquid and readilymarketable standard. Separately,
another commenter suggested that the
liquid and readily-marketable standard
should account for indicators of
liquidity other than those related to the
secondary market. In particular, the
commenter highlighted that covered
companies can monetize securities
outside of the outright sales market
through repurchase transactions and
through posting securities as collateral

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securing over-the-counter or exchangetraded derivative transactions. Another
commenter interpreted the liquid and
readily-marketable standard to require a
security-by-security analysis
incorporating data on market makers
and market participants and trading
volumes to determine eligibility under
the criteria. The commenter contended
that such analysis could be burdensome
on covered companies with significant
trading operations. One commenter
requested that the agencies remove this
standard for all level 1 and level 2A
liquid assets. Another stated that there
was a difference between the regulatory
text of the proposed rule and the
discussion in the Supplementary
Information section to the proposed
rule, which indicated that HQLA would
need to exhibit certain market-based
characteristics, such as no sharp price
declines, and standardized,
homogeneous, and simple securities
structures. The commenter stated that
these characteristics were not included
in the liquid and readily-marketable
standard and requested clarification on
how much the structure of a security
would be questioned by the supervisors
of a covered company.
After reviewing the comments, the
agencies have determined to retain the
proposed definition of ‘‘liquid and
readily-marketable’’ in the final rule.
The agencies believe that defining an
asset as liquid and readily-marketable if
it is traded in an active secondary
market with more than two committed
market makers, a large number of
committed non-market maker
participants on both the buying and
selling sides of transactions, timely and
observable market prices, and high
trading volumes provides an
appropriate standard for determining
whether an asset can be readily sold in
times of stress. These elements of the
requirement are meant to ensure that
assets included as HQLA are traded in
deep, active markets to allow a covered
company to convert them into cash by
sale or repurchase transactions during
times of stress. In particular, the
agencies believe that an active
secondary market for an asset is an
indicator of the ease with which a
covered company may monetize that
asset. In response to a commenter’s
concern that a covered company may
only monetize securities through
outright sales to meet the liquid and
readily-marketable standard, the
agencies are clarifying that a covered
company may monetize assets through
repurchase transactions in addition to
outright sales.
Although one commenter requested
that the final rule include specific

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securities or instrument characteristics
to further define ‘‘liquid and readilymarketable,’’ the agencies believe that
the specific types of securities set forth
in the categories of level 1, level 2A, and
level 2B liquid assets provide sufficient
detail of the types of securities and
instruments that may be liquid and
readily-marketable and may be
considered HQLA. In addition, the final
rule retains from the proposed rule
certain price decline scenarios to
identify certain level 2A and level 2B
liquid assets.22 The agencies believe that
price decline scenarios are appropriate
for certain types of assets included in
level 2A and 2B liquid assets to evaluate
the liquidity and market-based
characteristics of those assets. As the
criteria for these categories of HQLA
incorporate price decline scenarios, the
agencies do not believe it is necessary
to separately include price decline
scenarios as part of the liquid and
readily-marketable standard.
One commenter requested that the
agencies clarify the Supplementary
Information section discussion in the
proposed rule indicating that HQLA
should exhibit standardized,
homogeneous, and simple security
structures. The agencies believe that the
criteria for HQLA set forth in § __.20 of
the final rule includes assets that meet
these criteria. The final rule continues
to require that certain HQLA categories
meet the final rule’s definition of liquid
and readily-marketable. The agencies
emphasize that securities with unique,
bespoke, or complex structures which
are difficult to value on a routine basis,
regardless of issuer or capital risk
weight, may not meet the liquid and
readily-marketable standard.
In response to a commenter’s concern
about the burden of a security-bysecurity analysis to demonstrate that a
security qualifies as liquid and readilymarketable, the agencies recognize that
certain companies may trade or hold a
significant number of different
securities. Although the exercise of
assessing unique securities for the
purpose of determining whether they
are liquid and readily-marketable may
involve operational burden, the agencies
believe this analysis and determination
is critical to ensuring that only
securities that will serve as a reliable
source of liquidity during times of stress
are included in a company’s HQLA. A
covered company may choose not to
determine whether a security is liquid
and readily-marketable for LCR
purposes if it determines that the cost of
performing the analysis exceeds the
benefit of including the security as
22 See

PO 00000

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Frm 00014

Fmt 4701

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HQLA. Thus, the agencies decline to
remove the liquid and readilymarketable standard for all level 1 and
level 2A liquid assets, as requested by
one commenter.
Furthermore, in response to requests
that the agencies clarify any
documentation requirements in
determining whether an asset is liquid
and readily-marketable, the agencies
expect that a covered company should
be able to demonstrate to its appropriate
Federal banking agency its security-bysecurity analysis (which may include
time-series analyses about the specific
security or comparative analysis of
similar securities from the same issuer)
that HQLA held by the covered
company meets the liquid and readilymarketable standard.
b. Financial Sector Entities
Consistent with the Basel III Revised
Liquidity Framework, the proposed rule
would have provided that assets that are
included as HQLA could not be issued
by a financial sector entity, because
these assets could exhibit similar risks
and correlation with covered companies
(wrong-way risk) during a liquidity
stress period. In the proposed rule,
financial sector entities would have
included regulated financial companies,
investment companies, non-regulated
funds, pension funds, investment
advisers, or a consolidated subsidiary of
any of the foregoing. In addition, under
the proposed rule, securities issued by
any company (or any of its consolidated
subsidiaries) that an agency has
determined should, for the purposes of
the proposed rule, be treated the same
as a regulated financial company,
investment company, non-regulated
fund, pension fund, or investment
adviser, based on its engagement in
activities similar in scope, nature, or
operations to those entities (identified
company) would not have been
included as HQLA.
The term regulated financial company
under the proposed rule would have
included bank holding companies and
savings and loan holding companies
(depository institution holding
companies); nonbank financial
companies supervised by the Board;
depository institutions; foreign banks;
credit unions; industrial loan
companies, industrial banks, or other
similar institutions described in section
2 of the Bank Holding Company Act
(BHC Act); national banks, state member
banks, and state nonmember banks
(including those that are not depository
institutions); insurance companies;
securities holding companies (as
defined in section 618 of the Dodd-

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Frank Act); 23 broker-dealers or dealers
registered with the Securities and
Exchange Commission (SEC); futures
commission merchants and swap
dealers, each as defined in the
Commodity Exchange Act; 24 or
security-based swap dealers defined in
section 3 of the Securities Exchange
Act.25 It would also have included any
designated financial market utility, as
defined in section 803 of the DoddFrank Act.26 The proposed definition
would have also included foreign
companies that are supervised and
regulated in a manner similar to the
institutions listed above.27
In addition, the proposed definition of
regulated financial company would
have included a company that is
included in the organization chart of a
depository institution holding company
on the Form FR Y–6, as listed in the
hierarchy report of the depository
institution holding company produced
by the National Information Center
(NIC) Web site, provided that the toptier depository institution holding
company was subject to the proposed
rule (FR Y–6 companies).28 FR Y–6
companies are typically controlled by
the filing depository institution holding
company under the BHC Act. Although
many of these companies may not be
consolidated on the financial statements
of a depository institution holding
company, the links between the
companies are sufficiently significant
that the agencies believed that it would
have been appropriate to exclude
securities issued by FR Y–6 companies
(and their consolidated subsidiaries)
from HQLA, for the same policy reasons
that other regulated financial
companies’ securities would have been
excluded from HQLA under the
proposal. The organizational hierarchy
chart produced by the NIC Web site
reflects (as updated regularly) the FR Y–
6 companies a depository institution
23 12

U.S.C. 1850a(a)(4).
U.S.C. 1a(28) and (49).
25 15 U.S.C. 78c(a)(71).
26 12 U.S.C. 5462(4).
27 Under paragraph (8) of the proposed rule’s
definition of ‘‘regulated financial company,’’ the
following would not be considered regulated
financial companies: U.S. government-sponsored
enterprises; small business investment companies,
as defined in section 102 of the Small Business
Investment Act of 1958 (15 U.S.C. 661 et seq.);
entities designated as Community Development
Financial Institutions (CDFIs) under 12 U.S.C. 4701
et seq. and 12 CFR part 1805; and central banks, the
Bank for International Settlements, the International
Monetary Fund, or a multilateral development
bank.
28 See National Information Center, A repository
of financial data and institution characteristics
collected by the Federal Reserve System, available
at http://www.ffiec.gov/nicpubweb/nicweb/
nichome.aspx.

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24 7

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holding company must report on the
form. The agencies proposed this
method for identifying these companies
in order to reduce burden associated
with obtaining the FR Y–6
organizational charts for all depository
institution holding companies subject to
the proposed rule, because the charts
are not uniformly available by electronic
means.
Commenters suggested that the
proposed definition of ‘‘regulated
financial company’’ was overly broad.
For example, one commenter stated that
for the purposes of deposit
classification, the definition of
‘‘financial institution’’ needs to be
limited to those entities that contribute
to the risk of interconnectedness to
ensure the accurate capture of the
underlying risk of the depositor, noting
that the NAICS codes for ‘‘Finance and
Insurance’’ and ‘‘Commercial Banking’’
include over 816,000 and 79,000
business, respectively. The commenter
stated that, depending on the definition,
certain financial institutions may have
operational needs and transactional
deposits that are more similar to a nonfinancial institution.29
Overall, the agencies believe that the
overall scope of the proposed definition
of ‘‘regulated financial company’’
appropriately captured the types of the
companies whose assets could exhibit
similar risks and correlation with
covered companies during a liquidity
stress period. Although the number of
financial entities are large, due to the
prominence of the financial services
industry to the economy of the United
States, the agencies continue to believe
that the liquidity risks presented by
securities and obligations of such
companies would be difficult to
monetize during a period of significant
financial distress, as shown in the
recent financial crisis. Accordingly,
similar to the proposed rule, the final
rule will exclude the securities and
obligations of financial sector entities
from being HQLA.
In addition to comments regarding the
scope of the entities that would have
been included under the proposed rule,
several commenters expressed concerns
29 The agencies note that the proposed rule would
have recognized that financial sector entities have
operational needs and deposits that are similar to
non-financial entities by treating the deposits of
financial sector entities that meet the operational
deposit criteria as operational deposits. The nonoperational deposits of a financial would have been
subject to a higher outflow rate than a non-financial
wholesale counterparty due to correlation of
liquidity risks between financial sector entities and
covered companies. The final rule retains each of
these provisions as discussed below under section
II.C.3.h.

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61453

regarding the specific inclusion of
certain entities.
i. Companies Listed on a Covered
Company’s FR Y–6
Commenters expressed concern about
the definition’s inclusion of any
company that is included in the
organizational chart of a covered
company as reported on the Form FR Y–
6 and reflected on the NIC Web site
within the definition of regulated
financial company. These commenters
contended that the FR Y–6 is an
expansive form that captures a
substantial range of activities and
investments of depository institution
holding companies, including
companies in which the covered
company has a minority, noncontrolling interest, as well as merchant
banking investments. Commenters
reasoned that merchant banking
investments may be non-financial
enterprises and may not contribute to
the ‘‘wrong-way risk’’ contemplated by
the agencies in defining regulated
financial company. The commenters
believed that such entities should not be
included as regulated financial
companies and requested that the final
rule’s definition of regulated financial
company not include all companies
reported by a covered company on the
Form FR Y–6.
The agencies recognize that there are
certain shortcomings in the scope of the
entities that are listed on a covered
company’s FR Y–6, including the
potential capture of non-financial,
passive merchant banking subsidiaries.
The Board is actively considering
options to adjust the reporting
mechanism which may be used in
determining the population of regulated
financial companies. Moreover, because
entities listed on a covered company’s
FR Y–6 that are non-financial, merchant
banking investments or that do not meet
the definition of control under the BHC
Act are not currently separated from
other entities controlled by a covered
company, the agencies do not believe it
would be appropriate at this time to
provide a blanket exemption for
merchant banking or non-control
investments. The Board anticipates that
it will revise the reporting requirements
used for this purpose in the near future.
However, because any revisions to
reporting requirements would be subject
to public comment, for purposes of the
final rule, the agencies are finalizing the
definition of regulated financial
company as proposed. The agencies do
not believe that any change to the
definition of regulated financial
company would be appropriate without
subjecting such a revision to public

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comment, together with other revisions
to the reporting requirements that
would be used to identify regulated
financial companies.

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ii. Foreign Regulated Financial Entities
The definition of regulated financial
company under the proposed rule
would have included a non-U.S.domiciled company that is supervised
and regulated in a manner similar to the
other entities described in the
definition, including bank holding
companies. One commenter requested
that the agencies clarify that the
definition of regulated financial
company would not include non-U.S.
government-sponsored entities and
public sector entities. The commenter
argued that certain public sector entities
are not engaged in a full range of
banking activities, but are, however,
typically subject to prudential
regulation. Two commenters also
requested that the preamble to the final
rule explain how the ‘‘supervised and
regulated in a similar manner’’ standard
should be construed.
The final rule adopts this provision of
the rule as proposed. The agencies are
clarifying that, for purposes of the final
rule, a foreign company, including a
non-U.S. public sector entity, that is
similar in structure to a U.S. regulated
financial company (e.g., a foreign bank
or foreign insurance company) and that
is subject to prudential supervision and
regulation in a manner that is similar to
a U.S. regulated financial company
would be considered a regulated
financial company under the final rule.
In considering the similarity of the
supervision and regulation of a foreign
company, a covered company can
consider whether the non-U.S. activities
and operations of the company would
be subject to supervision and regulation
in the United States and whether such
activities are subject to supervision and
regulation abroad.
iii. Investment Companies and
Investment Advisers
Under the proposed rule, investment
companies would have included
companies registered with the SEC
under the Investment Company Act of
1940 30 and investment advisers would
have included companies registered
with the SEC as investment advisers
under the Investment Advisers Act of
1940,31 as well as the foreign equivalent
of such companies.
One commenter expressed concern
with the proposed rule’s treatment of
investment companies as financial
30 15
31 15

U.S.C. 80a–1 et seq.
U.S.C. 80b–1 et seq.

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sector entities. The commenter argued
that if an investment company does not
invest in financial sector entities, the
value of its shares would not correlate
with covered companies. The
commenter recommended that an
investment company’s HQLA eligibility
should be based on the investment
company’s investment policies, such
that if an investment company has a
policy of investing 80 percent of its
assets in HQLA or in securities and
obligations of non-financial sector
entities, its securities would be treated
as HQLA of the same level as the lowest
level HQLA permitted under the policy.
After considering the commenter’s
concerns, the agencies decline to adopt
the commenter’s recommendation in the
final rule. Similar to other entities in the
financial sector, investment companies
have been more prone to lose value and,
as a result, become less liquid in times
of liquidity stress regardless of the
investment company’s investment
policies or portfolio composition, due to
the potentially higher correlation
between the health of these companies
and the health of the financial markets
generally. The agencies believe that a
covered company can be exposed to the
interconnectedness of financial markets
through its investment in investment
companies. Thus, consistent with the
Basel III Revised Liquidity Framework,
the final rule would exclude assets
issued by companies that are primary
actors in the financial sector from
HQLA, including investment company
shares.
iv. Non-Regulated Funds
Under the proposed rule, nonregulated funds would have included
hedge funds or private equity funds
whose investment advisers are required
to file SEC Form PF (Reporting Form for
Investment Advisers to Private Funds
and Certain Commodity Pool Operators
and Commodity Trading Advisors), and
any consolidated subsidiary of such
fund, other than a small business
investment company, as defined in
section 102 of the Small Business
Investment Act of 1958.32
Commenters expressed concerns
about the proposed definition of ‘‘nonregulated fund.’’ One of these
commenters stated that the proposed
definition would have included the
undefined terms ‘‘hedge fund’’ and
‘‘private equity fund.’’ The commenter
also argued that the definition should
not include portfolio companies that are
consolidated subsidiaries of nonregulated funds and those funds that
invest primarily in real estate and
32 15

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related assets. The commenter suggested
that the definition exclude any fund that
does not issue redeemable securities
that provide investors with redemption
rights in the ordinary course and should
also exclude closed-end funds. The
commenter also stated that although the
definition requires a banking
organization to determine whether the
investment adviser of a fund is required
to file Form PF, this information on
whether a particular fund is the subject
of a Form PF is not publicly available.
Generally, a manager of a ‘‘private
fund’’ that is required to register with
the SEC as an investment adviser and
manages more than $150 million in
private fund assets is required to file
SEC Form PF. Although the final rule
does not define hedge funds or private
equity funds, the agencies believe that
such terms are commonly understood in
the financial services industry and note
that the instructions to the SEC’s Form
PF provide a definition for private
equity funds and hedge funds that are
captured under the form.33 Therefore
the agencies believe that defining ‘‘nonregulated fund’’ by referencing the
private equity and hedge funds whose
investment advisers are required to file
SEC Form PF adequately defines the
universe of hedge funds and private
equity funds captured under the final
rule.
In response to commenter concerns
that the definition of ‘‘non-regulated
fund’’ includes portfolio companies that
are consolidated subsidiaries of private
funds, the agencies have modified the
definition of ‘‘non-regulated fund.’’ The
agencies recognize that consolidated
subsidiaries of private funds may not
conduct financial activities, but would
have received treatment as financial
sector entities under the proposed rule.
Accordingly, the final rule’s definition
of ‘‘non-regulated fund’’ no longer
includes consolidated subsidiaries of
hedge funds and private equity funds
whose investment adviser is required to
file SEC Form PF.
With respect to the commenter’s
request to exclude any fund that does
not issue redeemable securities and
closed-end funds from the definition of
non-regulated fund, although investors
in these funds are unable to redeem
securities and may not appear to present
liquidity risk, the agencies believe these
obligations and securities do pose
similar liquidity risks and will behave
similarly to those of other financial
entities.
33 See Reporting Form for Investment Advisers to
Private Funds and Certain Commodity Pool
Operations and Commodity Trading Advisors
(Form PF), available at http://www.sec.gov/rules/
final/2011/ia-3308-formpf.pdf.

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Finally, the agencies recognize that
Form PF filings are not publicly
disclosed. However, the agencies expect
that a covered company should
understand whether its customer is a
private equity fund or a hedge fund. The
agencies further expect that when
identifying HQLA a covered company
should undertake the necessary
diligence to confirm whether an
investment adviser to such fund, which
is typically the manager of the fund, is
required to file Form PF and meets the
final rule’s definition of ‘‘non-regulated
fund.’’

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c. Level 1 Liquid Assets
Under the proposed rule, a covered
company could have included the full
fair value of level 1 liquid assets in its
HQLA amount.34 The proposed rule
would have recognized that these assets
have the highest potential to generate
liquidity for a covered company during
periods of severe liquidity stress and
thus would have been includable in a
covered company’s HQLA amount
without limit. The proposed rule would
have included the following assets as
level 1 liquid assets: (1) Federal Reserve
Bank balances; (2) foreign withdrawable
reserves; (3) securities issued or
unconditionally guaranteed as to the
timely payment of principal and interest
by the U.S. Department of the Treasury;
(4) liquid and readily-marketable
securities issued or unconditionally
guaranteed as to the timely payment of
principal and interest by any other U.S.
government agency (provided that its
obligations are fully and explicitly
guaranteed by the full faith and credit
of the United States government); (5)
certain liquid and readily-marketable
securities that are claims on, or claims
guaranteed by, a sovereign entity, a
central bank, the Bank for International
Settlements, the International Monetary
Fund, the European Central Bank and
European Community, or a multilateral
development bank; and (6) certain debt
securities issued by sovereign entities.
As discussed in more detail below, a
number of commenters suggested
including additional assets in the level
1 liquid asset category. After
considering the comments received, the
final rule includes the criteria for the
level 1 liquid asset category
substantially as proposed.
34 Assets that meet the criteria of eligible HQLA
may be held by a covered company designated as
either ‘‘available-for-sale’’ or ‘‘held-to-maturity,’’
but must be included in the HQLA amount
calculation at fair value (as determined under
GAAP).

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i. Reserve Bank Balances
Under the Basel III Revised Liquidity
Framework, ‘‘central bank reserves’’ are
included as HQLA. In the United States,
Federal Reserve Banks are generally
authorized under the Federal Reserve
Act to maintain balances only for
‘‘depository institutions’’ and for other
limited types of organizations.35
Pursuant to the Federal Reserve Act,
there are different kinds of balances that
depository institutions may maintain at
Federal Reserve Banks, and they are
maintained in different kinds of Federal
Reserve Bank accounts. Balances that
depository institutions must maintain to
satisfy a reserve balance requirement
must be maintained in the depository
institution’s ‘‘master account’’ at a
Federal Reserve Bank or, if the
institution has designated a passthrough correspondent, in the
correspondent’s master account. A
‘‘reserve balance requirement’’ is the
amount that a depository institution
must maintain in an account at a
Federal Reserve Bank in order to satisfy
that portion of the institution’s reserve
requirement that is not met with vault
cash. Balances in excess of those
required to be maintained to satisfy a
reserve balance requirement, known as
‘‘excess balances,’’ may be maintained
in a master account or in an ‘‘excess
balance account.’’ Finally, balances
maintained for a specified period of
time, known as ‘‘term deposits,’’ are
maintained in a term deposit account
offered by the Federal Reserve Banks.
The proposed rule used the term
‘‘Reserve Bank balances’’ as the relevant
term to capture central bank reserves in
the United States.
Under the proposed rule, all balances
a depository institution maintains at a
Federal Reserve Bank (other than
balances that an institution maintains
on behalf of another institution, such as
balances it maintains on behalf of a
respondent or on behalf of an excess
balance account participant) would
have been considered level 1 liquid
assets, except for certain term deposits
as explained below.
Consistent with the concept of
‘‘central bank reserves’’ in the Basel III
Revised Liquidity Framework, the
proposed rule included in its definition
of ‘‘Reserve Bank balances’’ only those
term deposits offered and maintained
pursuant to terms and conditions that:
(1) Explicitly and contractually permit
such term deposits to be withdrawn
upon demand prior to the expiration of
the term; or that (2) permit such term
deposits to be pledged as collateral for

term or automatically-renewing
overnight advances from a Federal
Reserve Bank. Regarding the first point,
term deposits offered under the Federal
Reserve’s Term Deposit Facility that
include an early withdrawal feature that
allows a depository institution to obtain
a return of funds prior to the deposit
maturity date, subject to an early
withdrawal penalty, would be included
in ‘‘Reserve Bank balances’’ because
such term deposits would be explicitly
and contractually repayable on notice.
The amount associated with a term
deposit that would be included as
‘‘Reserve Bank balances’’ is equal to the
amount that would be received upon
withdrawal of such a term deposit.
Those term deposits that do not include
this feature would not be included in
‘‘Reserve Bank balances.’’ The terms and
conditions for each term deposit
offering specify whether the term
deposits being offered include an early
withdrawal feature. Regarding the
second point, although term deposits
may be pledged as collateral for
discount window borrowing, the
Federal Reserve’s current discount
window lending programs do not
generally provide term or automaticallyrenewing overnight advances.
Commenters suggested various assets
related to Reserve Bank balances to
include as level 1 liquid assets or to be
reflected in the level 1 liquid asset
amount. One commenter recommended
that the final rule include required
reserves in the level 1 liquid asset
amount, alleging that the proposed rule
circumvented Regulation D, which
allows covered companies to manage
their reserves over a 14-day period.36 A
few commenters argued that the final
rule should include vault cash, whether
held in branches or ATMs, as a level 1
liquid asset. The commenter argued that
the final rule should be consistent with
the Basel III Revised Liquidity
Framework, which recognizes the
intrinsic liquidity value of cash and
includes coins and banknotes as level 1
liquid assets. Commenters further
contended that vault cash, which can be
used to satisfy the bank’s reserve
requirement under Regulation D, is a
fundamental feature of daily liquidity
management for banks and should be
included as level 1 liquid assets.37 One
commenter requested confirmation
whether gold bullion meets the
definition of level 1 liquid assets,
arguing that it is low risk, highly liquid,
has an active outright sale market, high
trading volumes, a diverse number of
36 12

35 See

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market participants, and has historically
been a flight-to-quality asset.
After considering the comments, the
agencies are adopting the proposed
criteria in the final rule with respect to
central bank reserves. The agencies are
not adopting a commenter’s suggestion
to include required reserves in the level
1 liquid asset amount because the assets
held to satisfy required reserves,
whether vault cash or balances
maintained at a Federal Reserve Bank,
are required for the covered company to
manage reserves over the maintenance
period pursuant to Regulation D and the
agencies do not believe that the assets
held to satisfy a covered company’s
required reserves would entirely be
available for use during a liquidity
stress event due to the reserve
requirements.38
The final rule does not include cash,
whether held in branches or ATMs, in
level 1 liquid assets, as such cash may
be necessary to meet daily business
transactions and due to logistical
concerns associated with ensuring that
the cash can be immediately used to
meet the covered company’s outflows.
However, as noted in section II.B.5 of
this Supplementary Information section,
the final rule does modify the
calculation of the HQLA amount. Under
the proposed rule, the level 1 liquid
asset amount would have equaled the
fair value of all level 1 liquid assets held
by the covered company as of the
calculation date, less required reserves
under section 204.4 of Regulation D (12
CFR 204.4). Under the final rule,
agencies have clarified that the amount
to be deducted from the fair value of
eligible level 1 assets is the covered
company’s reserve balance requirement
under section 204.5 of Regulation D (12
CFR 204.5). A reserve balance
requirement is the amount that a
depository institution must maintain in
an account at a Federal Reserve Bank in
order to satisfy that portion of the
institution’s reserve requirement that is
not met with vault cash.
The agencies also decline to adopt a
commenter’s suggestion to include gold
bullion as a level 1 liquid asset given
the concerns about the volatility in
market value of the asset and the
logistical factors associated with
holding and liquidating the asset.
ii. Foreign Withdrawable Reserves
The agencies proposed that reserves
held by a covered company in a foreign
central bank that are not subject to
restrictions on use (foreign
withdrawable reserves) would have
been included as level 1 liquid assets.
38 12

CFR 204.5(b)(1).

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Similar to Reserve Bank balances,
foreign withdrawable reserves should be
able to serve as a medium of exchange
in the currency of the country where
they are held. The agencies received no
comments on the definition of foreign
withdrawable reserves. The final rule
includes foreign withdrawable reserves
as level 1 liquid assets as proposed.
iii. United States Government Securities
The proposed rule would have
included as level 1 liquid assets
securities issued by, or unconditionally
guaranteed as to the timely payment of
principal and interest by, the U.S.
Department of the Treasury. Generally,
these types of securities exhibited high
levels of liquidity even in times of
extreme stress to the financial system,
and typically are the securities that
experience the most flight to quality
when investors adjust their holdings.
Level 1 liquid assets would have also
included securities issued by any other
U.S. government agency whose
obligations are fully and explicitly
guaranteed by the full faith and credit
of the U.S. government, provided that
they are liquid and readily-marketable.
One commenter suggested that the
agencies’ inclusion in level 1 liquid
assets of only agency securities that are
fully and explicitly guaranteed by the
full faith and credit of the U.S.
government was too narrow and this
would increase the demand for
Government National Mortgage
Association (GNMA) securities by large
banking organizations, resulting in
increased market pricing for such
securities that would impact the
profitability of investments at smaller
banking organizations. The agencies
believe that securities that are issued by,
or unconditionally guaranteed as to the
timely payment of principal and interest
by, a U.S. government agency whose
obligations are fully and explicitly
guaranteed by the full faith and credit
of the U.S. government have credit and
liquidity risk that is comparable to
securities issued by the U.S. Treasury.
Thus, due to the inherent low risk of
such securities and obligations, the
agencies believe that it is appropriate to
classify such securities as level 1 liquid
assets. The agencies believe that any
increased holdings of such securities by
covered companies should not result in
significant price increases for the
securities due to the requirement of the
final rule that each covered company
ensure that it maintains policies and
procedures that ensure the appropriate
diversification of its HQLA by asset
type, counterparty, issuer, and other
factors. The final rule adopts this
provision as proposed and continues to

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include U.S. government securities as
level 1 liquid assets.
iv. Certain Sovereign and Multilateral
Organization Securities
The proposed rule would have
included as level 1 liquid assets
securities that are a claim on, or a claim
unconditionally guaranteed by, a
sovereign entity, a central bank, the
Bank for International Settlements, the
International Monetary Fund, the
European Central Bank and European
Community, or a multilateral
development bank, provided that such
securities met the following four
requirements.
First, these securities must have been
assigned a zero percent risk weight
under the standardized approach for
risk-weighted assets of the agencies’
risk-based capital rules.39 Generally,
securities issued by sovereigns that are
assigned a zero percent risk weight have
shown resilient liquidity characteristics.
Second, the proposed rule would have
required these securities to be liquid
and readily-marketable, as discussed
above. Third, these securities would
have been required to have been issued
by an entity whose obligations have a
proven record as a reliable source of
liquidity in the repurchase or sales
markets during stressed market
conditions. A covered company could
have demonstrated a historical record
that met this criterion through reference
to historical market prices during times
of stress, such as the period of financial
market stress experienced from 2007 to
2009. Covered companies should also
have looked to other periods of systemic
and idiosyncratic stress to see if the
asset under consideration has proven to
be a reliable source of liquidity. Fourth,
these securities could not be an
obligation of a regulated financial
company, non-regulated fund, pension
fund, investment adviser, or identified
company or any consolidated subsidiary
of such entities.
One commenter expressed concern
about the inclusion of all sovereign
obligations that qualify for a zero
percent risk weight as level 1 liquid
assets. The commenter argued that a
broad range of sovereign debt may
receive a zero percent risk weight under
the Basel III capital accord and may
include sovereign entities whose
commitments pose credit, liquidity, or
exchange rate risk, and suggested that
the agencies include a minimum
sovereign rating classification.
The agencies considered the
commenter’s concerns, but are adopting
39 See 12 CFR part 3 (OCC), 12 CFR part 217
(Federal Reserve), and 12 CFR part 324 (FDIC).

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the criteria for sovereign obligations to
be included as level 1 liquid assets as
proposed. The agencies believe that
sovereign obligations that continue to
qualify for a zero percent risk weight
have shown resilient liquidity
characteristics. The agencies believe
that the risk weight assigned to
sovereign obligations under the
agencies’ risk-based capital rules is an
appropriate standard and decline to
require a minimum sovereign rating
classification. The agencies continue to
retain the proposed criteria for
determining whether sovereign and
multilateral organization securities
qualify as level 1 liquid assets under the
final rule such as requiring them to be
liquid and readily-marketable.40 The
agencies believe that these criteria limit
the concerns raised by the commenter
that capital risk weight alone is
insufficient to preclude all illiquid
foreign debt issuances. Consistent with
the inclusion of level 1 liquid assets as
HQLA, the agencies believe that
qualifying sovereign securities should
continue to be includable in a covered
company’s HQLA amount without limit.

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v. Certain Foreign Sovereign Debt
Securities
Under the proposed rule, debt
securities issued by a foreign sovereign
entity that are not assigned a zero
percent risk weight under the
standardized approach for risk-weighted
assets of the agencies’ risk-based capital
rules could have served as level 1 liquid
assets if they were liquid and readilymarketable, the sovereign entity issued
such debt securities in its own currency,
and a covered company held the debt
securities to meet its cash outflows in
the jurisdiction of the sovereign entity,
as calculated in the outflow section of
the proposed rule. These assets would
have been appropriately included as
level 1 liquid assets despite having a
risk weight greater than zero because a
sovereign often is able to meet
obligations in its own currency through
control of its monetary system, even
during fiscal challenges. The agencies
received no significant comments on
this section of the proposed rule and so
the final rule adopts this standard as
proposed.
vi. Level 1 Liquid Assets at a Foreign
Parent
Several commenters requested that
the agencies permit a covered company
that is a U.S. subsidiary of a foreign
company subject to the LCR in another
country to treat assets that are permitted
40 The agencies note that an asset’s ability to
qualify under this criterion may change over time.

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to be included as level 1 liquid assets
under the laws of that country as level
1 liquid assets for purposes of the final
rule. After considering the commenters’
request, the agencies decline to adopt
the commenter’s request. The agencies
believe that assets should exhibit the
liquidity characteristics required in the
final rule, which have been calibrated
for the outflows of U.S. covered
companies, to be included as level 1
liquid assets for purposes of the U.S.
LCR requirement. The agencies intend
to ensure that the requirements for level
1 liquid assets are consistent for all
covered companies, regardless of the
ownership of an individual covered
company. As noted above, the agencies
have included certain foreign sovereign
obligations as level 1 liquid assets and
believe that these asset classes
appropriately reflect the outflows of
U.S. covered companies.
vii. Deposits by Covered Nonbank
Companies in Third-Party Commercial
Banks
One commenter requested that the
agencies permit covered nonbank
companies to include as level 1 liquid
assets, subject to a haircut, overnight
deposits in third-party commercial
banks or holding companies that are
subject to the final rule or a foreign
equivalent standard, so long as the
deposits are not concentrated in any one
affiliated group of banks. After
considering the commenter’s request,
the agencies have decided not to adopt
the suggestion and believe all covered
companies have several investment
options to fulfill their HQLA
requirement. The agencies recognize
that covered nonbank companies do not
have access to certain services available
to banking entities and may place
significant deposits with third-party
banking organizations. Such deposits do
not meet the agencies’ criteria for level
1 liquid assets because during a
liquidity stress event many commercial
banks may exhibit the same liquidity
stress correlation and wrong-way risk
discussed above in relation to excluded
financial sector entity securities.
However, the agencies note that
amounts in these deposits may qualify
as an inflow, with a 100 percent inflow
rate, to offset outflows, depending upon
their operational nature.
viii. Liquidity Up-Front Fee
The proposed rule briefly noted there
has been ongoing work on the Basel III
LCR and central bank operations. The
BCBS announced on January 12, 2014,
an amendment to the Basel III Revised
Liquidity Framework that included
allowing capacity from restricted

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61457

committed liquidity facilities of central
banks as HQLA. One commenter stated
that any concerns expressed by the
banking industry regarding the
availability of liquid assets could be
addressed by permitting financial
institutions to pay the Federal Reserve
an up-front fee for a committed liquidity
line.
The agencies are considering the
merits of including central bank
restricted committed facility capacity as
HQLA for purposes of the U.S. LCR
requirement and may propose at a
future date to include such capacity as
HQLA.
d. Level 2A Liquid Assets
Under the proposed rule, level 2A
liquid assets would have included
certain obligations issued or guaranteed
by a U.S. government sponsored
enterprise (GSE) 41 and certain
obligations issued or guaranteed by a
sovereign entity or a multilateral
development bank. Assets in these
categories would have been required to
be liquid and readily-marketable, as
described above, to be considered level
2A liquid assets. The agencies received
a number of comments on the treatment
of GSE securities under the proposed
rule. After reviewing the comments
received, for the reasons discussed
below, the agencies are adopting the
proposed criteria for level 2A liquid
assets in the final rule.
i. U.S. GSE Securities
Commenters suggested a variety of
approaches to change the final rule’s
treatment of U.S. GSE securities. Under
the proposed rule, U.S. GSE securities
are classified as level 2A liquid assets,
which are subject to a 15 percent haircut
and, when combined with level 2B
liquid assets, have a 40 percent
maximum composition limit in the
HQLA amount, as discussed in section
II.B.5 of this Supplementary Information
section.
Several commenters requested that
the agencies designate debt securities
issued and guaranteed by a U.S. GSEs as
level 1 liquid assets in the final rule.
Commenters also stated that the 15
percent haircut for such obligations was
too high. A few commenters
recommended that the agencies remove
the 40 percent composition cap on level
2 liquid assets for U.S. GSE securities if
the final rule does not include U.S. GSE
securities as level 1 liquid assets. Other
commenters suggested that the agencies
41 GSEs currently include the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal
National Mortgage Association (FNMA), the Farm
Credit System, and the Federal Home Loan Bank
(FHLB) System.

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remove the ‘‘liquid and readilymarketable’’ requirement for the
inclusion of U.S. GSE securities as level
2A liquid assets because the securities
clearly meet these requirements. One
commenter suggested a graduated cap
approach, whereby U.S. GSE securities
in excess of the 40 percent composition
limit in the HQLA amount would be
subject to a haircut that would increase
as the proportion of U.S. GSE securities
to total HQLA increases.
To support their request, commenters
made various observations about the
liquidity characteristics of U.S. GSE
securities. Many commenters
highlighted that the market for U.S. GSE
securities is one of the deepest and most
liquid in the world, with over $4 trillion
in GSE mortgage backed securities
(MBS) outstanding and a daily trading
volume in GSE MBS that averages
almost $230 billion. In particular, some
commenters argued that MBS issued by
FNMA and FHLMC are among the
highest quality and most liquid assets.
A number of commenters mentioned
that U.S. GSE securities comprise a
significant amount of the liquidity
portfolios of banking organizations
because they are recognized by the
market as trading in deep and liquid
markets. Commenters also contended
that GSE securities, like U.S. Treasury
securities, have the highest potential to
generate liquidity for a covered
company during periods of severe
liquidity stress. For example, one
commenter pointed out that during the
2007–2009 financial crisis, demand for
FHLB consolidated obligations
increased during the dramatic flight-toquality event.
Commenters also urged the agencies
to consider the potential adverse impact
of classifying GSE securities as level 2A
liquid assets. These commenters argued
that the level 2A liquid asset
designation would discourage banking
organizations from investing in the
securities and would therefore decrease
liquidity in the secondary mortgage
market. A commenter asserted that the
40 percent cap on level 2A and level 2B
liquid assets would result in U.S.
banking industry positions being
concentrated in the U.S. Treasury and
U.S. agency markets, rather than being
more broadly diversified across those
markets and the GSE market. Another
commenter suggested that the agencies
assess the impact to the value of U.S.
GSE securities should banking
organizations liquidate their holdings,
which could in turn increase mortgage
funding costs and decrease the
availability of credit for mortgages.
Some commenters argued that other
agency guidance and rules consider or

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imply that U.S. GSE securities are
highly liquid. For example, one
commenter stated that the agencies have
provided previous guidance
encouraging institutions to hold an
amount of high-quality liquid assets and
cited securities issued by U.S. GSEs as
an example of such assets and urged the
agencies to explain any deviation from
this guidance.42 Another commenter
raised the issue that the Board’s thenproposed enhanced liquidity standards
under section 165 of the Dodd-Frank
Act classified U.S. GSE securities as
‘‘fully liquid.’’ 43
Commenters also urged the agencies
to consider the fact that certain U.S.
GSEs currently operate under the
conservatorship of the Federal Housing
Finance Agency (FHFA) and receive
capital support from the U.S. Treasury.
These commenters argued that GSE
securities should receive level 1 liquid
asset designation while the U.S. GSEs
receive support from the U.S.
government because the obligations are
effectively guaranteed by the full faith
and credit of the U.S. government. One
commenter suggested that, while the
U.S. GSEs are in conservatorship, the
agencies permit these securities to
receive a 10 percent risk weight under
the capital rules and permit them to be
in level 1 liquid assets.
Finally, commenters compared the
treatment of U.S. GSE securities as level
2A liquid assets under the proposed
rule to the classification of securities
issued by certain multilateral
development banks, such as the
International Bank for Reconstruction
and Development, the Inter-American
Development Bank, the International
Finance Corporation, the German
Development Bank, the European
Investment Bank, the German
Agriculture Bank, and the Asian
Development Bank as level 1 liquid
assets. Commenters argued that the size
and liquidity of the markets for these
securities is much less than the size and
liquidity of the market for U.S. GSE
securities.
The agencies recognize that some
securities issued and guaranteed by U.S.
GSEs consistently trade in very large
volumes and generally have been highly
liquid, including during times of stress,
as indicated by commenters. The
agencies also recognize that certain U.S.
GSEs currently operate under the
conservatorship of FHFA and receive
capital support from the U.S. Treasury.
However, the obligations of the U.S.
GSEs are currently effectively, but not
explicitly, guaranteed by the full faith
42 See
43 See

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and credit of the United States. Under
the agencies’ risk-based capital rules,
the obligations and guarantees of U.S.
GSEs—including those operating under
conservatorship of FHFA—continue to
be assigned a 20 percent risk weight,
rather than the zero percent risk weight
assigned to securities explicitly
guaranteed by the full faith and credit
of the United States. The agencies have
long held the view that obligations of
U.S. GSEs should not be accorded the
same treatment as obligations that carry
the explicit, unconditional guarantee of
the U.S. government and that are
assigned a zero percent risk weight.
Moreover, the agencies feel that the
events related to the 2007–2009
financial stress that required these
entities to be placed under
conservatorship do not support
temporarily improving GSE securities’
HQLA status.
Consistent with the agencies’ riskbased capital rules, the agencies are not
assigning the most favorable regulatory
treatment to securities issued and
guaranteed by U.S. GSEs under the final
rule, even while certain GSEs
temporarily operate under the
conservatorship of FHFA. The final rule
assigns GSE securities to the level 2A
liquid asset category, as long as they are
investment grade consistent with the
OCC’s investment securities regulation
(12 CFR part 1) as of the calculation date
and are liquid and readily-marketable.
Additionally, consistent with the
agencies’ risk-based capital rules’ higher
risk weight for the preferred stock of
U.S. GSEs, the final rule excludes such
preferred stock from HQLA.
The agencies are aware that certain
previous agency guidance and rules
recognize the liquid nature of U.S. GSE
securities; 44 however, the guidance and
rules do not specifically address the
types of diversification requirements
that are being required by the final
rule’s inclusion of different levels of
HQLA. The final rule continues to
recognize U.S. GSE securities as highly
liquid instruments that trade in deep
and active markets by including them as
a level 2A liquid asset.
In response to commenters’
suggestions to remove the 40 percent
composition cap, or apply a graduated
cap to U.S. GSE securities included as
level 2A liquid assets, the agencies
believe that the proposed 40 percent cap
(when combined with level 2B liquid
assets) should continue to apply to all
level 2A liquid assets, including U.S.
GSE securities. In this regard,
commenters also expressed concerns
44 See, e.g., Interagency Liquidity Policy
Statement.

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that the cap on level 2A liquid assets
would result in concentrated positions
in U.S. Treasury and agency markets.
The agencies continue to believe that
the 40 percent composition cap is
appropriate to ensure that level 2 liquid
assets comprise a smaller portion of a
covered company’s total HQLA amount,
such that the majority of the HQLA
amount is comprised of level 1 liquid
assets, which are the assets that have
consistently demonstrated the most
liquidity during periods of market
distress. The designation of certain
assets as level 2A liquid assets indicates
that the assets have characteristics that
are associated with being relatively
stable and significant sources of
liquidity, but not to the same degree as
level 1 liquid assets. The agencies
believe that the level 2 liquid asset cap
appropriately prevents concentrations of
less liquid assets and ensures a
sufficient stock of the most liquid assets
to meet stressed outflows during a
period of significant market distress. As
a result, level 2A liquid assets, when
combined with level 2B liquid assets,
cannot exceed 40 percent of the HQLA
amount under the final rule.
Commenters expressed concerns that
the proposed designation of U.S. GSE
securities as level 2A liquid assets
would result in broad market
consequences, including decreased
liquidity in the secondary mortgage
market, increased mortgage funding
costs, and impact to the fair value of
U.S. GSE securities. The agencies do not
believe the treatment of U.S. GSE
securities will have broad market
consequences as the largest market
participants generally have already
adjusted their funding profile and assets
in anticipation of the LCR requirement
with little impact on the overall market.
Furthermore, the agencies highlight that
the final rule does not prohibit covered
companies from investing in U.S. GSE
securities and instead continues to
allow covered companies to participate
fully in U.S. GSE securities markets.
ii. Certain Sovereign and Multilateral
Organization Securities
The proposed rule also would have
included as a level 2A liquid asset a
claim on, or a claim guaranteed by, a
sovereign entity or a multilateral
development bank that was: (1) Not
included in level 1 liquid assets; (2)
assigned no higher than a 20 percent
risk weight under the standardized
approach for risk-weighted assets of the
agencies’ risk-based capital rules; 45 (3)
issued by an entity whose obligations
45 See 12 CFR part 3 (OCC), 12 CFR part 217
(Board), and 12 CFR part 324 (FDIC).

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have a proven record as a reliable source
of liquidity in repurchase or sales
markets during stressed market
conditions; and (4) not an obligation of
a regulated financial company,
investment company, non-regulated
fund, pension fund, investment adviser,
identified company, or any consolidated
subsidiary of the foregoing. A covered
company would have been required to
demonstrate that a claim on or claims
guaranteed by a sovereign entity or a
multilateral development bank had a
proven record as a reliable source of
liquidity in repurchase or sales markets
during stressed market conditions
through reference to historical market
prices during times of stress.46 Covered
companies should have looked to
multiple periods of systemic and
idiosyncratic liquidity stress in
compiling such records. The agencies
did not receive any comments on the
proposed treatment of sovereign and
multilateral organization securities that
would have qualified as level 2A liquid
assets under the proposed criteria. Thus,
the final rule classifies them as level 2A
liquid assets as proposed.
e. Level 2B Liquid Assets
Under the proposed rule, level 2B
liquid assets would have included
certain publicly traded corporate debt
securities and publicly traded shares of
common stock that are liquid and
readily-marketable. The limitation of
level 2B liquid assets to those that are
publicly traded was meant to ensure a
minimum level of liquidity, as privately
traded assets are typically less liquid.
Under the proposed rule, the definition
of ‘‘publicly traded’’ would have been
consistent with the definition used in
the agencies’ regulatory capital rules
and would identify securities traded on
registered exchanges with liquid twoway markets. A two-way market would
have been defined as a market where
there are independent bona fide offers to
buy and sell, so that a price reasonably
related to the last sales price or current
bona fide competitive bid and offer
quotations can be determined within
one day and settled at that price within
a relatively short time frame,
conforming to trade custom. This
definition was designed to identify
markets with transparent and readily
available pricing, which, for the reasons
46 This would be demonstrated if the market price
of the security or equivalent securities of the issuer
declined by no more than 10 percent or the market
haircut demanded by counterparties to secured
funding or lending transactions that are
collateralized by such security or equivalent
securities of the issuer increased by no more than
10 percentage points during a 30 calendar-day
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discussed above, is fundamental to the
liquidity of an asset.
The agencies received comments
requesting clarification on the types of
publicly traded corporate debt securities
that may be included in level 2B liquid
assets. Several commenters also
suggested that the agencies broaden the
scope of publicly traded corporate debt
securities and publicly traded shares of
common stock to be included in level
2B liquid assets. After considering
commenters’ concerns, the agencies
adopted several modifications to the
final rule’s criteria for level 2B liquid
assets, as discussed below.
i. Corporate Debt Securities
Publicly traded corporate debt
securities would have been considered
level 2B liquid assets under the
proposed rule if they met three
requirements (in addition to being
liquid and readily-marketable). First, the
securities would have been required to
meet the definition of ‘‘investment
grade’’ under 12 CFR part 1 as of the
calculation date.47 This standard would
ensure that assets that did not meet the
required credit quality standard for bank
investment would not have been
included in HQLA. The agencies
believed that meeting this standard is
indicative of lower overall risk and,
therefore, higher liquidity for a
corporate debt security. Second, the
securities would have been required to
be issued by an entity whose obligations
have a proven record as a reliable source
of liquidity in repurchase or sales
markets during stressed market
conditions. A covered company could
have demonstrated this record of
liquidity reliability and lower volatility
during times of stress by showing that
the market price of the publicly traded
debt securities or equivalent securities
of the issuer declined by no more than
20 percent during a 30 calendar-day
period of significant stress, or that the
market haircut demanded by
counterparties to secured lending and
secured funding transactions that were
collateralized by such debt securities or
equivalent securities of the issuer
increased by no more than 20
percentage points during a 30 calendarday period of significant stress. As
discussed above, a covered company
could demonstrate a historical record
that meets this criterion through
reference to historical market prices and
available funding haircuts of the debt
security during times of stress. Third,
the proposed rule also provided that the
debt securities could not be obligations
of a regulated financial company,
47 12

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investment company, non-regulated
fund, pension fund, investment adviser,
identified company, or any consolidated
subsidiary of the foregoing.
The proposed rule would have
defined ‘‘publicly traded’’ consistent
with the definition used in the agencies’
regulatory capital rules and would have
identified securities traded on registered
exchanges with liquid two-way markets.
Commenters stated that the proposed
rule’s definition of ‘‘publicly traded’’
would exclude a substantial portion of
corporate debt securities because they
were not traded on a public market or
exchange. Commenters pointed out that
unlike equity securities, corporate debt
securities are not generally listed on a
national securities exchange. Instead,
corporate debt securities are generally
traded in active, liquid secondary
markets. Commenters argued that
applying the ‘‘publicly traded’’
requirement to corporate debt securities
would severely limit the universe of
corporate debt securities that could be
included as level 2B liquid assets.
To address concerns that the
‘‘publicly traded’’ requirement is overly
restrictive for corporate debt securities,
some commenters suggested that the
final rule include non-publicly traded
debt if the issuer’s equity is publicly
traded. These commenters noted that
unlisted debt securities of public
companies are actively traded in liquid
markets.
After considering the comments
received, the agencies have decided to
remove the ‘‘publicly traded’’
requirement for corporate debt
securities to be included as level 2B
liquid assets. The agencies acknowledge
that corporate debt securities are
frequently traded in over-the-counter
secondary markets and are less
frequently listed and regularly traded on
national securities exchanges, as
required by the ‘‘publicly traded’’
definition. Thus, the ‘‘publicly traded’’
requirement would have unduly
narrowed the scope of corporate debt
securities that can be designated as level
2B liquid assets.
The final rule continues to impose
certain other requirements that the
agencies proposed on level 2B corporate
debt securities. First, the final rule
continues to require that the securities
meet the liquid and readily-marketable
standard to be included in level 2B
assets. Second, the final rule also
continues to require that the securities
meet the definition of ‘‘investment
grade’’ under 12 CFR part 1 as of a
calculation date.48 Third, the securities
are required to be issued by an entity
48 12

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whose obligations have a proven record
as a reliable source of liquidity in
repurchase or sales markets during
stressed market conditions. The covered
company must demonstrate that the
market price of the securities or
equivalent securities of the issuer
declined by no more than 20 percent or
the market haircut demanded by
counterparties to secured lending and
secured funding transactions that were
collateralized by such debt securities or
equivalent securities of the issuer
increased by no more than 20
percentage points during a 30 calendarday period of significant stress, or that
the market haircut demanded by
counterparties to secured lending and
secured funding transactions that were
collateralized by such debt securities or
equivalent securities of the issuer
increased by no more than 20
percentage points during a 30 calendarday period of significant stress. Lastly,
the final rule provides that the debt
securities may not be obligations of a
regulated financial company,
investment company, non-regulated
fund, pension fund, investment adviser,
identified company, or any consolidated
subsidiary of the foregoing.
ii. Publicly Traded Shares of Common
Stock
Under the proposed rule, publicly
traded shares of common stock could
have been included as level 2B liquid
assets if the shares met the five
requirements set forth below (in
addition to being liquid and readilymarketable).
First, to be considered a level 2B
liquid asset under the proposed rule,
publicly traded common stock would
have been required to be included in: (1)
The Standard & Poor’s 500 Index (S&P
500); (2) if the stock is held in a nonU.S. jurisdiction to meet liquidity risks
in that jurisdiction, an index that the
covered company’s supervisor in that
jurisdiction recognizes for purposes of
including the equities as level 2B liquid
assets under applicable regulatory
policy; or (3) any other index for which
the covered company can demonstrate
to the satisfaction of its appropriate
Federal banking agency that the equity
in such index is as liquid and readilymarketable as equities traded on the
S&P 500.
As discussed in the Supplementary
Information section to the proposed
rule, the agencies believed that listing of
a common stock in a major stock index
is an important indicator of the liquidity
of the stock, because such stock tends to
have higher trading volumes and lower
bid-ask spreads during stressed market
conditions than those that are not listed.

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The agencies identified the S&P 500 as
being appropriate for this purpose given
that it is considered a major index in the
United States and generally includes the
most liquid and actively traded stocks.
Second, to be considered a level 2B
liquid asset, the publicly traded
common stock would have been
required to have been issued in: (1) U.S.
dollars; or (2) the currency of a
jurisdiction where the covered company
operated and the stock offset its net cash
outflows in that jurisdiction. This
requirement was meant to ensure that,
upon liquidation of the stock, the
currency received from the sale would
match the outflow currency.
Third, the common stock would have
been required to have been issued by an
entity whose common stock has a
proven record as a reliable source of
liquidity in the repurchase or sales
markets during stressed market
conditions. Under the proposed rule, a
covered company could have
demonstrated this record of reliable
liquidity by showing that the market
price of the common stock or equivalent
securities of the issuer declined by no
more than 40 percent during a 30
calendar-day period of significant stress,
or that the market haircut, as evidenced
by observable market prices, of secured
funding or lending transactions
collateralized by such common stock or
equivalent securities of the issuer
increased by no more than 40
percentage points during a 30 calendarday period of significant stress. This
requirement was intended to exclude
volatile equities from inclusion as level
2B liquid assets, which is a risk to the
preservation of liquidity value. As
discussed above, a covered company
could have demonstrated this historical
record through reference to the
historical market prices of the common
stock during times of stress.
Fourth, as with the other asset
categories of HQLA and for the same
reasons, common stock included in
level 2B liquid assets may not have been
issued by a regulated financial
company, investment company, nonregulated fund, pension fund,
investment adviser, identified company,
or any consolidated subsidiary of the
foregoing. During the recent financial
crisis, the common stock of such
companies experienced significant
declines in value correlated to other
financial institutions and the agencies
believe that such declines indicate those
assets would be less likely to provide
substantial liquidity during future
periods of stress in the banking system
and, therefore, are not appropriate for
inclusion in a covered company’s
HQLA.

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Fifth, if held by a depository
institution, the publicly traded common
stock could not have been acquired in
satisfaction of a debt previously
contracted (DPC). Because of general
statutory prohibitions on holding equity
investments for their own account,49
depository institutions subject to the
proposed rule would not be able to
include common stock as level 2B
liquid assets. In general, publicly traded
common stock may be acquired by a
depository institution to prevent a loss
from a DPC. However, in order for a
depository institution to avail itself of
the authority to hold DPC assets, such
as by holding publicly traded common
stock, such assets typically must be
divested in a timely manner.50 The
agencies believe that depository
institutions should make a good faith
effort to dispose of DPC publicly traded
common stock as soon as commercially
reasonable, subject to the applicable
legal time limits for disposition. The
agencies are concerned that permitting
depository institutions to include DPC
publicly traded common stock in level
2B liquid assets may provide an
inappropriate incentive for depository
institutions to hold such assets beyond
a commercially reasonable period for
disposition. Therefore, the proposal
would have prohibited depository
institutions from including DPC
publicly traded common stock as level
2B liquid assets.
Finally, under the proposed rule, a
depository institution could have
eligible publicly traded common stock
permissibly held by a consolidated
subsidiary as level 2B liquid assets if the
assets were held to cover the net cash
outflows for the consolidated
subsidiary. For example, if Subsidiary A
holds level 2B publicly traded common
stock of $200 in a legally permissible
manner and has net outflows of $80, the
parent depository institution could not
count more than $80 of Subsidiary A’s
level 2B publicly traded common stock
in the parent depository institution’s
consolidated level 2B liquid assets after
the 50 percent haircut discussed below.
The agencies received several
comments on the criteria for publicly
traded equity securities to be included
in level 2B liquid assets. Some
commenters suggested that the agencies
broaden the scope of eligible equity
securities beyond those included in the
S&P 500. One of these commenters
stated that the proposed rule favors a
49 12 U.S.C. 24 (Seventh) (national banks); 12
U.S.C. 1464(c) (federal savings associations); 12
U.S.C. 1831a (state banks); 12 U.S.C. 1831e (state
savings associations).
50 See generally 12 CFR 1.7 (OCC); 12 U.S.C.
1843(c)(2) (Board); 12 CFR 362.1(b)(3) (FDIC).

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small group of equity issuers included
in the S&P 500, which could lead to
market distortions and unforeseeable
consequences. Several commenters
suggested that the agencies consider
other major stock indices for the level
2B liquid asset criteria. For U.S.
equities, a few commenters
recommended that the final rule include
equities that comprise the Russell 3000
index. Another commenter suggested
the Russell 1000 index. These
commenters provided analysis of the
volatility and trading volumes of stocks
within these indices showing the
comparability of the most and least
liquid securities in these indices with
the S&P 500.
In addition, although the proposed
rule would have provided that common
equities in any other index for which
the covered company can demonstrate
to the satisfaction of the agencies that
the index is as liquid and readilymarketable as the S&P 500 may be
included in level 2B liquid assets,
commenters argued that identifying
specific indices in the final rule would
allow covered companies to avoid
waiting for agency approval of indices
and promote certainty for banking
organizations structuring secured
financing transactions. Accordingly,
some commenters suggested that the
final rule designate all equities included
in major equity indices in G–20
jurisdictions as level 2B liquid assets
under the final rule. Finally, other
commenters argued that exchange
traded funds (ETFs) based on the
indices included as HQLA should be
included, because the ETFs add
incremental liquidity on top of that seen
in the market for the underlying
equities.
After considering commenters’
concerns and the liquidity
characteristics of the indices
commenters proposed to be included as
HQLA, the agencies have determined to
adjust the scope of U.S. equities that
may be included as level 2B liquid
assets. Specifically, the final rule
includes common equity securities of
companies included in the Russell 1000
index in the criteria for level 2B liquid
assets in place of the companies
included in the S&P 500. The proposed
rule identified the S&P 500 as being
appropriate for this purpose, given that
it is considered a major index in the
United States and generally includes the
most liquid and actively traded stocks.
The agencies have determined that the
Russell 1000 index would be a more
appropriate index after considering
comments evidencing the similarities in
trading volumes, volatilities, and price
movements of the two indices.

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Moreover, stocks that are included in
the Russell 1000 index are selected
based on predetermined criteria,
whereas a committee evaluates and
selects stocks for inclusion in the S&P
500. The agencies believe that the
systematic selection of stocks for
inclusion in the Russell 1000 index,
combined with the liquidity
characteristics of stocks included in the
index, support replacing the S&P 500
index with the Russell 1000 index in the
criteria for level 2B liquid assets.
As mentioned above, some
commenters recommended including
equities in the Russell 3000 index in
level 2B liquid assets. The agencies
evaluated the Russell 3000 index and
were concerned that it includes a wider
universe of stocks and captures the
equities of certain smaller U.S.
companies by market capitalization. As
a result, equities in the Russell 3000
index exhibit a greater range of liquidity
characteristics and include equities that
demonstrate less favorable trading
volumes, volatilities, and price changes.
Thus, the agencies believe that the
Russell 1000 index, which includes a
broader set of stocks than the S&P 500,
provides an appropriate universe of
stocks that may be eligible as level 2B
liquid assets.
The agencies emphasize, however,
that equities included in the Russell
1000 index must also meet certain other
requirements to be level 2B liquid
assets, which the final rule adopts as
proposed. Thus, to be considered a level
2B liquid asset, an equity included in
the Russell 1000 index must meet other
requirements provided in the final rule,
such as meeting the liquid and readilymarketable standard and being issued
by an entity whose shares have a proven
record as a reliable source of liquidity
in the sales or repurchase market during
a stressed scenario.
In response to commenters’ requests
for the final rule to identify other
indices that include equities that may be
designated as level 2B liquid assets, the
agencies have determined that the final
rule should no longer include the
provision to allow a covered company
to demonstrate that the equity securities
included in another index should be
eligible for level 2B liquid assets
because the final rule includes the
significantly broader Russell 1000
index. In addition, the agencies are
unaware of another existing index the
components of which would be
appropriate for inclusion as level 2B
liquid assets.
The final rule does not include ETFs
that are based on the indices as level 2B
liquid assets. The agencies believe that
the liquidity characteristics of ETFs are

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not identical to the liquidity
characteristics of the underlying index
or the individual components of the
fund. Rather, ETFs have their own risk
profiles, trading volumes, and marketbased characteristics separate from the
underlying index. Accordingly, the final
rule does not include ETFs as level 2B
liquid assets.
The proposed rule would have
required publicly traded common stocks
to have been issued in: (1) U.S. dollars;
or (2) the currency of a jurisdiction
where the covered company operated
and the stock offset its net cash outflows
in that jurisdiction in order to be
considered a level 2B liquid asset. The
final rule adopts the provision as
proposed. The agencies clarify that the
provision’s second requirement limits a
covered company to including as level
2B liquid assets equities issued in the
currency of a jurisdiction where the
covered company operates. For
example, a covered company may hold
a stock issued in Japanese yen as a level
2B liquid asset only if: (1) The covered
company operates in Japan, and (2) the
stock is available to support the covered
company’s yen denominated net cash
outflows in Japan.

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iii. Assets Securing a Transaction
Lastly, one commenter suggested that
there are narrow situations where the
agencies should expand level 2B liquid
asset recognition for purposes of the
LCR denominator, even when those
assets are not recognized as HQLA in
the LCR numerator. Specifically, the
commenter requested that the agencies
include additional classes of assets as
level 2B liquid assets solely for the
purposes of determining the applicable
outflow and inflow rates for transactions
secured by the asset. The commenter
argued that failure to do so would result
in anomalous LCR results even with
otherwise reliable secured lending
transactions. After considering the
commenters’ suggestion, the agencies
believe that assets should be designated
consistently as HQLA for purposes of
calculating both the LCR numerator and
denominator. In determining HQLA
designation, the agencies considered the
liquidity characteristics of assets to
ensure that a covered company’s HQLA
amount only includes assets with a high
potential to generate liquidity during a
stress scenario. The agencies believe
that such an approach is appropriate for
determining the designation of assets as
HQLA for all aspects of the LCR
calculation, including the determination
of outflow and inflow rates for
transactions secured by the asset.

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f. Assets Recommended for HQLA
Designation
A number of commenters requested
that the agencies consider designating
additional assets as HQLA. In particular,
commenters suggested including as
HQLA municipal securities, assetbacked securities (ABS), state and local
authority housing bonds backed by
Federal Housing Association and
Department of Veterans Affairs
guarantees, covered bonds, private label
MBS, and investment company shares.
Several commenters also argued that
permissible collateral pledged to FHLBs,
FHLB letters of credit, and unused
borrowing commitments from FHLBs
should be considered as HQLA. The
agencies considered commenters’
requests and have declined to designate
additional assets as HQLA for the
reasons discussed below.
i. Municipal Securities
Many commenters urged the agencies
to include municipal securities as
HQLA, noting that the Basel III Revised
Liquidity Framework would include
them in its definition of HQLA.
Commenters raised a number of policy
justifications to support the inclusion of
investment grade municipal securities
as HQLA, either as level 2A or level 2B
liquid assets, including assertions that
municipal securities exhibit liquidity
characteristics consistent with HQLA
status and that the exclusion of
municipal securities from HQLA could
lead to higher funding costs for
municipalities, which could affect local
economies and infrastructure.
Several commenters contended that
U.S. municipal securities should satisfy
the proposed rule’s qualifying criteria
for HQLA. Many of these commenters
argued that municipal bonds meet the
liquid and readily-marketable
requirement of HQLA because they
exhibited limited price volatility
particularly during the recent financial
crisis, high trading volumes, and deep
and stable secured funding markets.
Commenters also focused on the high
credit quality and low historical default
rates of these securities. Furthermore,
commenters asserted that the risk and
liquidity profiles of municipal securities
were comparable, if not superior, to the
profiles of other types of assets the
agencies proposed for inclusion as
HQLA, such as corporate bonds,
equities, certain foreign sovereign
obligations, and certain securities of
GSEs. A number of commenters
expressed concerns that the proposed
rule would have included certain
sovereign securities for countries that
have smaller GDPs than some U.S. states

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as HQLA while excluding obligations of
U.S. states and local governments. Some
of these commenters argued that the
credit ratings of certain states compare
favorably with those of countries whose
obligations could be included as level 1
or level 2A liquid assets. Commenters
also contended that municipal securities
perform well and experience increased
demand during times of stress. Several
commenters asserted that banking
organizations could liquidate large
holdings of municipal securities with
minimal market or price disruption
during a crisis scenario.
Many commenters asserted that
municipal securities have active
markets with high trading volumes, a
large number of registered brokerdealers who make markets in the
municipal securities, and significant
diversity in market participants. These
commenters maintained that certain
large issuers of municipal securities
markets have regular and active trading.
In particular, commenters argued that
municipal securities are actively traded
by a number of nonbank financial sector
entities and retail customers and have a
low degree of interconnectedness with
banking organizations. A few
commenters acknowledged that the
municipal bond market includes
numerous, diverse issuers and that
certain individual municipal securities
may have low trading volumes.
However, these commenters argued that
the securities typically trade on a per
issuer basis rather than a per security
basis and urged the agencies to evaluate
the municipal security market as a
whole when assessing their liquidity
characteristics for HQLA status.
Several commenters asserted that
many municipal securities exhibit the
HQLA characteristics of being easily
and readily valued. Some of these
commenters highlighted that although
municipal securities are not traded on
an exchange, most of them can be
readily valued on a daily basis from a
variety of pricing services. Certain
commenters highlighted that municipal
securities are eligible collateral for loans
at the Federal Reserve discount
window.
Many commenters focused on the
potential consequences of excluding
municipal securities from HQLA.
Commenters asserted that their
exclusion would discourage banking
organizations from purchasing the
securities. Consequently, state and local
entities would face increased funding
costs for infrastructure and essential
public services. Commenters stated that
municipal securities are a vital source of
credit for local communities, and the
proposed rule’s exclusion of the

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
securities from HQLA would have
limited a source of funding for local
economies. Some commenters stated
that the proposed rule’s treatment of
municipal securities would have led
states and municipalities to pass on
increased funding costs for
infrastructure and essential public
services to local businesses and the
general public in the form of increased
taxes.
Several commenters asserted that
although municipal securities are not
typically used as collateral for
repurchase agreements, they are
rehypothecated by tender options
bonds, which did not see significant
haircuts or price changes during the
recent financial crisis.
Commenters also compared the
proposed rule’s treatment of municipal
securities to the standards of other
jurisdictions. A few of these
commenters noted that the proposed
rule’s exclusion of municipal securities
was inconsistent with the Basel III
Revised Liquidity Framework, which
potentially recognizes securities issued
by state and municipal governments
that qualify for 20 percent risk
weighting under the Basel capital
standards as level 2A assets. One
commenter noted that the European
Bank Authority has recommended
including certain bonds issued by
European local government institutions
as HQLA.
Some commenters noted that
encouraging covered companies to
invest in municipal securities would
compel covered companies to diversify
their holdings of HQLA with securities
that have a varied investor base.
Commenters pointed out that the
financial sector is underexposed to the
municipal securities market and
asserted that this diversification would
improve the liquidity risk profiles of
banking organizations.
Finally, several commenters argued
that the agencies could limit municipal
securities included as HQLA through a
number of criteria including: (1) Only
those securities that would be
‘‘investment grade’’ under 12 CFR part
1 as of a calculation date; (2) only those
securities that have a 20 percent riskweighting under the agencies risk-based
capital rules; or (3) a separate 25 percent
composition cap on municipal
securities included in a covered
company’s HQLA amount.
Under the final rule, securities issued
by public sector entities, such as a state,
local authority, or other government
subdivision below the level of a
sovereign (including U.S. states and
municipalities) do not qualify as HQLA.
The goal of the LCR is to ensure that

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covered companies are able to meet
their short-term liquidity needs during
times of stress. Inability to meet those
liquidity needs proved to be a
significant cause of the failure or near
failure of several large financial firms
during the recent financial crisis. To
ensure adequate liquidity, the final rule
only includes as HQLA securities that
can be easily and immediately
convertible into cash with little or no
loss of value during a period of stress,
either by sale or through a repurchase
transaction.
With respect to municipal securities,
the agencies have observed that the
liquidity characteristics of municipal
securities range significantly, and
overall, many municipal securities are
not ‘‘liquid and readily-marketable’’ in
U.S. markets as defined in § __.3 of the
final rule. For instance, many securities
issued by public sector entities exhibit
low average daily trading volumes and
have generally demonstrated less
favorable price changes and volatility
characteristics. In addition, the agencies
have found that the funding of many
municipal securities is very limited in
the repurchase market, which indicates
that the securities may not be able to be
quickly converted into cash during a
period of stress. Generally, the agencies
believe that covered companies would
be limited in their ability to rapidly
monetize many municipal securities in
the event of a severe systemic liquidity
stress scenario.
Several commenters pointed to other
characteristics, such as credit quality,
default rates, and central bank
eligibility, in urging the agencies to
include municipal securities as HQLA.
As discussed, the final rule considers
certain liquidity characteristics,
including risk profile, market-based
characteristics, and central bank
eligibility to identify types of assets that
would qualify as HQLA. Although the
agencies consider the credit risk and
central bank eligibility associated with
an asset in determining HQLA
eligibility, the agencies also consider
other characteristics, such as trading
volumes, price characteristics, and the
presence of active sales or repurchase
markets for the securities at all times.
After considering the relevant
characteristics taken together, the
agencies believe that many municipal
securities do not demonstrate the
requisite liquidity characteristics to
qualify as HQLA under the final rule.
Some commenters questioned the
basis for excluding municipal securities
from HQLA when the agencies proposed
to include corporate bonds, equities,
and securities of sovereign countries
that have recently experienced financial

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difficulties. The agencies note that
although the credit risk of a security
may be an important aspect for
determining the liquidity of a class of
assets, the agencies also believe that
trading volumes and the presence of
deep, active sale or repurchase markets
for an asset class are important aspects
of any potential class of HQLA. As
discussed above, the agencies have
determined that the liquidity
characteristics of other assets, such as
corporate bonds, equities, and certain
sovereign securities, meet the
requirements for HQLA eligibility
because of their trading volumes and the
presence of deep, active sale or
repurchase markets for those assets. For
many municipal securities, the agencies
have not found that the markets and
trading volume is as deep and active on
an ongoing basis such that there is a
high level of confidence that a banking
organization could quickly convert
these municipal securities into cash
during a severe liquidity stress event.
The agencies observe that the final
rule’s treatment of municipal securities
is consistent with the treatment of other
assets that also, as a class, significantly
vary in trading volume and lack access
to deep and active repurchase markets
and therefore do not qualify as HQLA,
such as covered bonds and ABS.
Commenters also compared the
proposed rule’s treatment of municipal
securities to the potential standards of
other jurisdictions and the Basel III
Revised Liquidity Framework, which
contemplate that certain securities
issued by public sector entities such as
states and municipalities may be
included as HQLA. However, for the
reasons discussed above, the agencies
believe that many municipal securities
are not liquid and readily-marketable in
U.S. markets and thus do not exhibit the
liquidity characteristics necessary to be
included as HQLA under the final rule.
In response to commenters’ suggested
criteria for including certain municipal
securities as HQLA, although some
commenters noted that pricing services
can offer daily values for certain
municipal securities, the agencies
recognize that financial data from
municipal issuers can be inconsistent
and vary in timing. The agencies believe
that challenges in data availability can
impact the ability of covered companies
and supervisors to determine the
eligibility of certain municipal
securities based on suggested sets of
criteria. Furthermore, generally, the
agencies have concluded that the
criteria suggested by commenters would
lead to inclusion of municipal securities
that exhibit a range of liquidity
characteristics, including those with

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less favorable characteristics that are not
compatible with HQLA eligibility and
that would not be a sufficiently reliable
source of liquidity for a banking
organization during a period of stress.
Finally, as discussed above,
commenters expressed concerns about
the market impact of excluding
municipal securities from HQLA. A few
commenters also stated that encouraging
covered companies to invest in
municipal securities would help
diversify the covered companies’
holdings. The agencies highlight that
the final rule does not prohibit covered
companies from investing in municipal
securities and diversifying their
investment portfolios. The agencies are
aware that covered companies continue
to actively invest in municipal
securities, evidenced by covered
companies’ increased holdings of
municipal securities since the financial
crisis, for reasons unrelated to liquidity
risk management practices. Under the
final rule, covered companies may
continue to participate fully in
municipal security markets. The
agencies continue to believe that
municipal securities can be appropriate
investments for covered companies and
expect the banking sector to continue to
participate in this market. Many covered
companies did not include municipal
securities in their holdings of liquid
assets for contingent liquidity stress
purposes prior to the LCR, yet
continued to invest in municipal
securities for yield, credit quality, and
other factors; therefore, the agencies do
not believe the final rule will have a
significant impact on overall demand
for municipal securities.
ii. ABS, Covered Bonds, Private Label
MBS, and Mortgage Loans
A number of commenters
recommended that the agencies
designate certain securitization
exposures, specifically certain high
credit quality ABS, covered bonds, and
private label MBS (commercial,
multifamily, and residential real estate),
as level 2B liquid assets. Commenters
asserted that banking organizations are
key investors in these securitization
products that serve as important longterm financing instruments supporting
the economy. These commenters
warned that failure to include these
securities as HQLA could adversely
impact the private U.S. mortgage
market.
Some commenters suggested that the
final rule include ‘‘high-quality’’ ABS as
level 2B liquid assets. For example, one
commenter suggested that the final rule
include a set of criteria to identify highquality ABS having liquidity

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characteristics similar to those of
corporate debt securities that are
included as level 2B liquid assets, so
that the ABS meeting those criteria
could also be included as level 2B
liquid assets. In support of that
recommendation, some commenters
asserted that certain publicly traded
ABS exhibited similar historical
performance to investment grade
publicly traded corporate debt
securities, even during the recent
financial crisis. Some commenters
asserted that excluding ABS from HQLA
could undermine investment in the ABS
market and increase the cost of
securitization financing available to
customers of banking organizations. A
commenter requested that the final rule
include investment grade senior
unsubordinated ABS collateralized or
otherwise backed solely by loans
originated under the Federal Family
Education Loan Program as level 2A
liquid assets.
Some commenters recommended that
the agencies include covered bonds as
level 2B liquid assets. Commenters
argued that the proposed rule’s
exclusion of covered bonds from HQLA
deviated from the Basel III Revised
Liquidity Framework’s designation of
certain high credit quality covered
bonds as level 2A liquid assets with a
15 percent haircut. One commenter
suggested a set of criteria to identify
high credit quality covered bonds that
could be included as level 2B liquid
assets.51 The commenter suggested that
the agencies consider including covered
bonds that meet the criteria and have a
proven track record as a reliable source
of liquidity in a stressed market
environment as level 2B liquid assets.
Another commenter noted that the risk
characteristics of covered bonds are
fundamentally different from other
securitizations and highlighted that the
liquidity of covered bonds in Europe
during recent crises was not
significantly impaired. One commenter
acknowledged that the U.S. covered
bond market is not highly developed,
but supported including covered bonds
as HQLA to encourage development of
the market.
Some commenters suggested that the
final rule include private label MBS as
51 Specifically, the commenter suggested that a
covered bond should qualify as a level 2B liquid
asset if the security: (1) Is registered under the
Securities Act of 1933 or exempt under the SEC’s
Rule 144A; (2) is senior debt that is issued by a
regulated, unaffiliated financial institution located
in an Organization for Economic Co-Operation and
Development country; (3) grants the holders the
right to sell the covered asset pool upon default and
that the sale could not be stayed or delayed due to
the insolvency of the issuer; and (4) meets the other
criteria required for a level 2B liquid asset.

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level 2B liquid assets. A few
commenters argued that the proposed
rule’s exclusion of private label MBS
from HQLA deviated from the Basel III
Revised Liquidity Framework, which
includes certain high credit quality
private label residential MBS (RMBS) as
level 2B liquid assets with a 25 percent
haircut, and suggested that the agencies
follow the Basel standard. One of these
commenters suggested that the agencies
adopt a set of criteria to identify high
credit quality RMBS that could be
considered level 2B liquid assets that is
similar to the criteria the agencies
proposed to adopt for corporate debt
securities that would have been level 2B
liquid assets under the proposed rule.
The commenter recommended that the
eligible RMBS would qualify for level
2B treatment to the extent that the
RMBS could be shown to have a proven
track record as a reliable source of
liquidity during stressed market
environments as demonstrated by: (i)
The market price of the RMBS or
equivalent securities of the sponsor
declining by no more than 20 percent
during a 30 calendar-day period of
significant stress, or (ii) the market
haircut demanded by counterparties to
secured lending and secured funding
transactions that are collateralized by
the RMBS or equivalent securities of the
sponsor declining no more than 20
percentage points during a 30-calendar
day period of significant stress.
A few commenters stated that in the
agencies’ proposed rule on credit risk
retention, the agencies have proposed to
exempt from risk retention certain
RMBS backed by ‘‘qualified mortgages’’
as defined under the Truth in Lending
Act in part because of their credit
characteristics and requested that the
agencies consider including RMBS
backed by ‘‘qualified mortgages’’ as
HQLA.52 Some commenters asserted
that failing to include RMBS as HQLA
could negatively impact the residential
mortgage market by impeding the return
of private capital. Commenters also
requested that mortgage loans be
included as HQLA, arguing that the
failure to do so could have unintended
consequences for the mortgage market.
After considering the comments, the
agencies have determined not to include
ABS, covered bonds, private label MBS
and mortgage loans as level 2B liquid
assets. The agencies are aware that
specific issuances of ABS, RMBS, or
covered bonds may exhibit some
liquidity characteristics that are similar
52 See OCC, Board, FDIC, FHFA, SEC, U.S.
Department of Housing and Urban Development,
‘‘Credit Risk Retention,’’ 78 FR 57989 (September
20, 2013).

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to those of assets included as HQLA.
However, the agencies continue to
believe that ABS, covered bonds, private
label MBS, and mortgage loans do not
meet the liquid and readily-marketable
standard in U.S. markets, and thus do
not exhibit the liquidity characteristics
necessary to be included as HQLA
under the final rule. Evidence from the
2007–2009 financial crisis and the
period following indicates that the
market demand for a variety of
securitization issuances can decline
rapidly during a period of stress, and
that such demand may not rapidly
recover. ABS may be dependent on a
diverse range of underlying asset
classes, each of which may be impacted
in a period of significant stress.
Furthermore, the bespoke characteristics
of securitization structures may be
tailored to a limited range of investors.
The ability to monetize securitization
issuances and whole loans through or in
the repurchase market may be limited in
a period of stress.
Moreover, although certain ABS
issuances, such as ABS backed by loans
under the Federal Family Education
Loan Program and RMBS backed solely
by securitized ‘‘qualified mortgages’’ or
mortgages guaranteed by the Federal
Housing Authority or the Department of
Veterans Affairs, may have lower credit
risk, the liquidity risk profile of such
securities, including the inability to
monetize the issuance during a period
of stress, would not warrant treatment
as HQLA. The agencies note that ABS
and RMBS issuances have substantially
lower trading volumes than MBS that
are guaranteed by U.S. GSEs and
demand for such securities has
decreased, as shown by the substantial
decline in the number of issuances since
the recent financial crisis. The agencies
note that the inclusion of RMBS under
the Basel III Revised Liquidity
Framework was limited to those
securitizations where the underlying
mortgages were full recourse loans,
which is not permissible in a number of
states, and therefore would complicate
any inclusion of RMBS as HQLA in the
United States.
Likewise, with respect to mortgage
loans, including qualified mortgage
loans or those guaranteed by the Federal
Housing Authority or the Department of
Veterans Affairs, the agencies note that
due to legal requirements for transfer
and the lack of use of mortgages as
collateral for repurchase agreements,
such loans cannot typically be rapidly
monetized during a period of financial
stress, prohibiting their classification as
HQLA. Moreover, although such assets
can be pledged to the FHLB, the
agencies do not believe that the FHLB

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should represent the sole method of
rapid monetization for any class of
assets included as HQLA, as discussed
further below.
As one commenter mentioned, the
U.S. market for covered bonds is not
highly developed, with few issuances.
The agencies do not believe that it is
appropriate for the agencies to use the
LCR as the mechanism for encouraging
or developing the liquidity of an asset
class. Rather, the LCR is designed to
ensure that covered institutions have
sufficient liquid assets that already have
been proven sources of liquidity in the
event of a liquidity crisis. Furthermore,
the agencies observe that covered bonds,
which are typically issued by
companies in the financial sector,
exhibit significant risks regarding
interconnectedness and wrong-way risk
among companies in the financial
sector.
Several commenters highlighted that
excluding RMBS and covered bonds
from HQLA could cause a detrimental
impact on the U.S. residential mortgage
market. The agencies recognize the
importance of capital funding to the
U.S. residential mortgage markets and
highlight that the final rule does not
prohibit covered companies from
continuing to invest in ABS, covered
bonds, and private label MBS, and does
not restrict a covered company from
making mortgage loans or loans
underlying ABS and covered bonds. As
discussed above, the agencies do not
expect, and have not observed, that
banking organizations base their
investment decisions solely on
regulatory considerations and do not
anticipate that exclusion of these assets
from HQLA will significantly deter
investment in these assets.
iii. Investment Company Shares
A few commenters requested that the
agencies consider including certain
investment company shares, such as
shares of mutual funds and money
market funds (MMFs), as HQLA.
Commenters argued that investment
companies should not be treated as
financial sector entities for purposes of
determining whether shares of the
investment company may be included
as HQLA. As discussed above, the
proposed rule would have excluded
securities issued by a financial sector
entity from HQLA to avoid the potential
for wrong-way risk. Commenters
suggested that the agencies look through
to the investments of the fund to
determine HQLA eligibility. In
particular, a commenter requested
clarification that mutual funds such as
open-end GNMA funds should be
considered level 1 liquid assets, because

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61465

the underlying assets are zero percent
risk weighted GNMA securities.
Specifically for MMFs, one
commenter highlighted that the SEC
introduced enhanced liquidity
requirements for MMFs in 2010. The
commenter contended that the new
regulations have sufficiently improved
the stability of MMFs to justify their
inclusion in HQLA. The commenter also
suggested that the agencies include
certain high-quality MMFs, such as
government MMFs and tax-exempt
funds, as HQLA.
After considering these comments, the
agencies have determined not to include
shares of investment companies,
including mutual funds and MMFs, as
HQLA. The agencies recognize that
certain underlying investments of the
investment companies may include
high-quality assets. However, similar to
securities issued by many companies in
the financial sector, shares of
investment companies have been prone
to lose value and become less liquid
during periods of severe market stress or
an idiosyncratic event involving the
fund’s sponsor. As recognized by some
commenters, certain shares in MMFs
exhibited liquidity stress during the
recent financial crisis. Further, the
recently finalized SEC rules regarding
money markets may impose some
barriers on investors’ ability to
withdraw all of their funds during a
stress.53 Therefore, the agencies do not
believe that shares of investment
companies demonstrate the liquidity
characteristics necessary to be included
as HQLA.
iv. FHLB Collateral and Commitments
Certain commenters urged the
agencies to consider including collateral
pledged to FHLBs and unused
borrowing capacity from FHLBs as
HQLA. One commenter supported the
agencies’ proposal to treat as
unencumbered those HQLA currently
pledged to a U.S. GSE that are subject
to a blanket, but not asset-specific, lien,
where potential credit secured by the
HQLA is not currently extended.
However, the commenter requested that
the agencies also consider including any
assets that are pledged to FHLBs in
support of FHLB advance availability as
HQLA, rather than only those assets that
are currently specified as level 1, level
2A, and level 2B liquid assets. The
commenter contended that FHLBeligible collateral is highly liquid
because it can be readily converted into
cash advances from a FHLB. Separately,
53 See SEC, ‘‘Money Market Fund Reform;
Amendments to Form PF,’’ 79 FR 47736 (August 14,
2014).

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a few commenters recommended that
the agencies include FHLB
collateralized advance availability,
FHLB letters of credit, or FHLB
borrowing capacity as HQLA. The
commenters emphasized that depository
institutions have the ability to access
liquidity from FHLBs even during times
of stress and therefore argued that FHLB
capacity would be a reliable source of
liquidity during a crisis.
The agencies have considered the
commenters’ suggestions and have
determined not to include as HQLA
collateral pledged to FHLBs that are not
otherwise HQLA under the proposed
rule, FHLB letters of credit, or FHLB
collateralized advance availability. In
determining the types of assets that
would qualify as HQLA, the agencies
considered certain liquidity
characteristics that are reflected in the
criteria in § __.20 of the final rule, as
discussed above. The agencies have
determined that assets, including those
that are considered permissible
collateral for FHLB advances, must meet
the criteria set forth in § __.20 of the
final rule to qualify as HQLA, including
low bid-ask spreads, high trading
volumes, a large and diverse number of
market participants, and other
appropriate factors. As discussed above,
although certain collateral, such as
mortgages, may be accepted by the
FHLB, a covered company may not be
able to rapidly liquidate a portfolio of
such assets other than as collateral for
the extension of credit by the FHLB. The
agencies do not believe that it would be
appropriate to rely on the extension of
credit by the FHLB as the sole method
of monetization during a period of
market distress.
Separately, the agencies believe that
FHLB collateralized advance availability
and FHLB letters of credit should not be
included as HQLA. The LCR is designed
to encourage the holding of liquid assets
that may be immediately and reliably
converted to cash in times of liquidity
stress as borrowing capacity may be
constrained, particularly borrowing
capacity tied to lower quality assets.
The agencies observe that reliance on
market borrowing capacity has proved
problematic in the past for many
covered companies during periods of
severe market stress. Accordingly, the
LCR is designed to ensure that
companies hold sufficient assets to
cover outflows during a period of
market distress. Thus the final rule
would not include such borrowing
capacity as HQLA.
v. Including Other Securities
One commenter requested that the
agencies adopt in the final rule

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provisions from the Board’s Regulation
YY’s liquidity risk-management
requirements that permit covered
institutions to hold certain ‘‘highly
liquid assets’’ for purposes of its
liquidity stress tests under that rule.
Unlike the proposed rule, the Board’s
Regulation YY includes certain
government securities, cash, and any
other assets that the bank holding
company demonstrates to the Board are
highly liquid. Specifically, the
commenter requested that the agencies
incorporate each of the criteria set forth
in Regulation YY for assets that are
demonstrated to be ‘‘highly liquid’’ and
to also permit assets that meet such
criteria to qualify as HQLA in the final
rule.
The proposed rule and Regulation YY
were designed to complement one
another. Whereas the Regulation YY’s
internal liquidity stress-test
requirements provide a view of an
individual firm under multiple
scenarios, and include assumptions
tailored to the idiosyncratic aspects of
the company’s liquidity profile, the
standardized measure of liquidity
adequacy under the proposed rule
would have facilitated a transparent
assessment of covered companies’
liquidity positions under a standard
stress scenario and comparison across
covered companies. Due to the tailoring
of the liquidity stress assumptions
under Regulation YY to the risk profile
of the company, Regulation YY
provided companies discretion to
determine whether an asset would be
liquid under a particular scenario.
Although the criteria set forth in
Regulation YY share broad themes with
the final rule’s requirements for
determining HQLA, the agencies believe
that the final rule’s standardized asset
requirements are appropriate for
determining the assets that would be
easily and immediately convertible to
cash with little or no loss of value
during a period of liquidity stress and
are designed to provide for
comparability across covered companies
due to the standardized outflow
assumptions. Thus, the final rule does
not incorporate specific criteria from
Regulation YY.
3. Requirements for Inclusion as Eligible
HQLA
For HQLA to be eligible to be
included in the HQLA amount (LCR
numerator), the proposed rule would
have required level 1 liquid assets, level
2A liquid assets and level 2B liquid
assets to meet all the operational
requirements and generally applicable
criteria set forth in § l.20(d) and (e) of
the proposed rule. Because certain

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assets may have met the high-quality
liquid asset criteria set forth in § l
.20(a)–(c) of the proposed rule, but may
not have met the operational or
generally applicable criteria
requirements (and thus not be eligible to
be included in the calculation of the
HQLA amount), the agencies are adding
a new construct in the final rule
(eligible HQLA). The purpose of this
addition is to more clearly draw a
distinction between those assets that are
HQLA under § l.20 (a)–(c) of the final
rule and eligible HQLA which also meet
the operational, generally applicable
criteria, and maintenance of U.S.
eligible requirements which have been
adopted in § l.22 of the final rule. In
other words, only eligible HQLA
meeting all the necessary requirements
set forth in § l.22 are to be included in
the calculation steps to determine the
HQLA amount. For the purpose of
consistency and ease of reference, this
Supplementary Information section also
uses this distinction between HQLA and
eligible HQLA when referring to the
requirements that the proposed rule
would have implemented.
The final rule continues to permit a
covered company to include assets in
each HQLA category as of a calculation
date without regard to the asset’s
residual maturity. For all HQLA, the
residual maturity of the asset will be
reflected in the asset’s fair value and
should not have an effect on the covered
company’s ability to monetize the asset.
a. Operational Requirements
Under the proposed rule, an asset that
a covered company could have included
in its HQLA amount would have needed
to meet a set of operational
requirements. These operational
requirements were intended to better
ensure that a covered company’s eligible
HQLA can be liquidated in times of
stress. Several of these requirements
related to the monetization of an asset,
meaning the receipt of funds from the
outright sale of an asset or from the
transfer of an asset pursuant to a
repurchase agreement. A number of
commenters requested clarification on
the operational requirements. The final
rule retains the proposed operational
requirements and clarifies certain
aspects of the requirements as discussed
below.
i. Operational Capability To Monetize
HQLA
The proposed rule would have
required a covered company to have the
operational capability to monetize the
HQLA held as eligible HQLA. This
capability would have been
demonstrated by: (1) Implementing and

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maintaining appropriate procedures and
systems to monetize the asset at any
time in accordance with relevant
standard settlement periods and
procedures; and (2) periodically
monetizing a sample of eligible HQLA
that reasonably reflects the composition
of the covered company’s total eligible
HQLA portfolio, including with respect
to asset type, maturity, and counterparty
characteristics. This requirement was
designed to ensure a covered company’s
access to the market, the effectiveness of
its processes for monetization, the
availability of the assets for
monetization, and to minimize the risk
of negative signaling during a period of
actual stress. The agencies would have
monitored such procedures, systems,
and periodic sample liquidations
through their supervisory process.
One commenter requested that the
agencies clarify that a covered company
may demonstrate its operational
capacity to monetize HQLA through its
ordinary business activities. The
commenter claimed that requiring
monetization solely to demonstrate
access to the market for purposes of the
rule could lead the covered company to
incur a profit and loss for a transaction
that lacks a business purpose. A
separate commenter questioned whether
actual sales of assets were required to
meet the requirement that a covered
company have the operational capacity
to monetize HQLA.
Commenters requested that the
agencies include additional methods of
monetization. One commenter argued
that monetization of an asset should
include transfer of the asset in exchange
for cash in the settlement of an
overnight reverse repurchase agreement.
The commenter clarified that the
counterparty of the overnight reverse
repurchase agreement could be a
Federal Reserve Bank or another entity
that provides the reliable monetization
of assets held under the reverse
repurchase agreement. The commenter
contended that such assets should be
eligible HQLA even when they do not
meet all other requirements related to
the monetization of the asset.
After considering commenters’
concerns, the agencies are retaining the
proposed requirement that a covered
company demonstrate its operational
capacity to monetize HQLA by
periodically monetizing a sample of the
assets either through an outright sale or
pursuant to a repurchase agreement.
The agencies expect actual sales or
repurchase agreements to occur for a
covered company to demonstrate
periodic monetization. Furthermore, as
requested by commenters and as
discussed above, the agencies clarify

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that monetization includes receiving
funds pursuant to a repurchase
agreement. To the extent that a covered
company monetizes certain assets, such
as U.S. Treasury securities, on a regular,
frequent basis through business-as-usual
activities, the company may rely on
evidence of sales during the ordinary
course of business and repurchase
transactions of those assets to
demonstrate its operational capability to
monetize them. However, the agencies
are aware that a company may monetize
certain assets on a sporadic or less
frequent basis due to the nature of the
assets or business. The agencies expect
that in order to meet the operational
capability requirement for eligible
HQLA, the covered company monetize
those types of assets through specific
steps that go beyond ordinary business
activities. In particular, to meet the
requirement, the agencies expect a
covered company to more thoroughly
demonstrate the periodic monetization
of assets that exhibit less favorable
liquidity characteristics than other
HQLA.
Under the proposed and final rules,
reverse repurchase agreements subject
to a legally binding agreement at the
calculation date are secured lending
transactions and these transactions do
not count as HQLA. The assets that are
provided to the covered company by
some overnight reverse repurchase
agreements may potentially meet the
operational requirements for eligible
HQLA described in the rule. The
agencies do not believe that the
presence of the overnight reverse
repurchase agreement and the
anticipated exchange of the assets for
cash is sufficient in itself to meet the
monetization standard, as for
operational or business reasons such
transactions may be required to be
rolled over on an ongoing basis. The
agencies are clarifying that in order to
meet this monetization standard,
covered companies must show that they
are not rolling over the overnight
reverse repurchase agreement
indefinitely and must hold or use the
cash received from the maturing
transaction for a sustained period; or the
covered company must periodically
monetize the underlying asset through
outright sale or transfer pursuant to a
repurchase agreement.
Another commenter expressed
concern that the requirement to
periodically monetize HQLA conflicted
with a previous interagency policy
statement on liquidity risk management
that provided that ‘‘affirmative testing
. . . may be impractical.’’ 54 This
54 See

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61467

statement in the 2010 Interagency
Liquidity Policy Statement referred to a
banking organization’s required
contingency funding plan (CFP) that set
forth strategies for addressing liquidity
shortfalls in emergency scenarios. The
policy statement acknowledged that
while affirmative testing of certain
components of the CFP may be
impractical, ‘‘institutions should be sure
to test operational components of the
CFP.’’ Therefore, the proposed rule’s
requirement that a covered company
demonstrate its operational capability to
monetize assets did not conflict with the
previous interagency policy statement.
ii. HQLA Under the Control of the
Liquidity Management Function
Under the proposed rule, a covered
company would have been required to
implement policies that required all
eligible HQLA to be under the control
of the management function of the
covered company that is charged with
managing liquidity risk. To do so, a
covered company would have been
required either to segregate the HQLA
from other assets, with the sole intent to
use them as a source of liquidity, or to
demonstrate its ability to monetize the
HQLA and have the resulting funds
available to the risk management
function, without conflicting with
another business or risk management
strategy. Thus, if an HQLA had been
used to hedge a specific transaction,
such as holding an asset to hedge a call
option that the covered company had
written, it could not have been included
in the covered company’s eligible HQLA
if the sale of the asset or its use in a
repurchase transaction would have
conflicted with another business or risk
management strategy. If the use of the
asset in the repurchase transaction
would not have conflicted with the
hedge, the HQLA may have been
eligible under the proposed rule. If
HQLA had been used as a general macro
hedge, such as interest rate risk of the
covered company’s portfolio, it could
still have been included as eligible
HQLA. This requirement was intended
to ensure that a central function of a
covered company had the authority and
capability to liquidate eligible HQLA to
meet its obligations in times of stress
without exposing the covered company
to risks associated with specific
transactions and structures that had
been hedged. There were instances
during the recent financial crisis where
unencumbered assets of some firms
were not available to meet liquidity
demands because the firms’ treasuries
did not have access to such assets.
A few commenters requested that the
agencies clarify the requirement for

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segregating assets. One commenter
questioned whether an electronic flag
was adequate to demonstrate
segregation or whether separate
accounts are required. Another
commenter requested clarification on
whether segregated assets could be
placed in multiple consolidated
subsidiaries. The agencies continue to
believe that a covered company may
demonstrate that the eligible HQLA is
under the control of the liquidity risk
management function by segregating the
HQLA with the sole intent to use the
HQLA as a source of liquidity. Although
the agencies have not adopted a
preferred method of showing such
segregations, a covered company should
be able to demonstrate that the
segregated assets are under the control
of the management function charged
with managing liquidity risk at the
covered company. The agencies expect
a covered company to be able to
demonstrate that the chosen form of
segregation facilitates the liquidity
management function’s use of the assets
for liquidity purposes.

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iii. Termination of Transaction Hedging
HQLA
The proposed rule would have
required a covered company to have
included in its total net cash outflow
amount the amount of cash outflow that
would have resulted from the
termination of any specific transaction
hedging eligible HQLA. The proposal
would have required a covered
company to include the impact of the
hedge in the outflow because if the
covered company were to liquidate the
asset, it would be required to close out
the hedge to avoid creating a risk
exposure. This requirement was not
intended to apply to general macro
hedges such as holding interest rate
derivatives to adjust internal duration or
interest rate risk measurements, but was
intended to cover specific hedges that
would become risk exposures if the
asset were sold. The agencies did not
receive comments on this operational
requirement. However, the agencies are
clarifying that, consistent with the Basel
III Revised Liquidity Framework, the
amount of the outflow resulting from
the termination of the hedging
transaction should be deducted from the
fair value of the applicable eligible
HQLA instead of being included as an
outflow in the LCR denominator.
Section l.22(a)(3) of the final rule has
been amended to clarify this
requirement.

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iv. Policies and Procedures To
Determine Eligible HQLA Composition
Under the proposed rule, a covered
company would have been required to
implement and maintain policies and
procedures that determined the
composition of the assets held as
eligible HQLA on a daily basis by: (1)
Identifying where its eligible HQLA
were held by legal entity, geographical
location, currency, custodial or bank
account, and other relevant identifying
factors; (2) determining that the assets
included as eligible HQLA continued to
qualify as eligible HQLA; and (3)
ensuring that the HQLA held by a
covered company as eligible HQLA are
appropriately diversified by asset type,
counterparty, issuer, currency,
borrowing capacity or other factors
associated with the liquidity risk of the
assets.
The agencies also recognized that
significant international banking
activity occurs through non-U.S.
branches of legal entities organized in
the United States and that a foreign
branch’s activities may give rise to the
need to hold eligible HQLA in the
jurisdiction where it is located. While
the agencies believed that holding
HQLA in a geographic location where it
is needed to meet liquidity needs such
as those envisioned by the LCR was
appropriate, they were concerned that
other factors such as taxes,
rehypothecation rights, and legal and
regulatory restrictions may encourage
certain companies to hold a
disproportionate amount of their
eligible HQLA in locations outside the
United States where unforeseen
impediments may prevent timely
repatriation of HQLA during a liquidity
crisis. Nonetheless, establishing
quantitative limits on the amount of
eligible HQLA that can be held abroad
and still count towards a U.S. domiciled
legal entity’s LCR requirement is
complex and may be overly restrictive
in some cases. Therefore, the agencies
proposed to require a covered company
to establish policies to ensure that
eligible HQLA maintained in foreign
locations was appropriate with respect
to where the net cash outflows could
arise. By requiring that there be a
correlation between the eligible HQLA
held outside of the United States and
the net cash outflows attributable to
non-U.S. operations, the agencies
intended to increase the likelihood that
eligible HQLA would be available to a
covered company in the United States
and to avoid repatriation concerns from
eligible HQLA held in another
jurisdiction.

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Commenters did not express
significant concerns about the
requirement to implement and maintain
policies and procedures to determine
the composition of the assets in eligible
HQLA.
The agencies incorporated two
clarifying changes in the final rule.
Although the proposed rule would have
required a covered company to have
policies and procedures to determine its
eligible HQLA composition on a daily
basis, the final rule clarifies that the
requirement applies on each calculation
date. The agencies incorporated the
modification to clarify that the
requirement applies on each date a
covered company calculates its LCR,
subject to the transition provisions in
subpart F of the final rule. The agencies
also emphasized in § l.22(a)(5) of the
final rule that the methodology a
covered company uses to determine the
eligibility of its HQLA must be
documented and must be applied
consistently. For example, a covered
company cannot make inconsistent
determinations in terms of eligible
HQLA requirements for HQLA with the
same operational characteristics, either
across different assets or across time.
Additionally, a covered company
cannot treat the same asset as eligible
HQLA for one part of the final rule,
while not treating it as eligible HQLA
for another part of the final rule.
4. Generally Applicable Criteria for
Eligible HQLA
Under the proposed rule, assets
would have been required to meet the
following generally applicable criteria to
be considered as eligible HQLA.
a. Unencumbered
The proposed rule required that an
asset be unencumbered in order for it to
be included as eligible HQLA. First, the
asset would have been required to be
free of legal, regulatory, contractual, or
other restrictions on the ability of a
covered company to monetize the asset.
The agencies believed that, as a general
matter, eligible HQLA should only
include assets that could be converted
easily into cash. Second, the asset could
not have been pledged, explicitly or
implicitly, to secure or provide creditenhancement to any transaction, except
that the asset could be pledged to a
central bank or a U.S. GSE to secure
potential borrowings if credit secured by
the asset has not been extended to the
covered company or its consolidated
subsidiaries. This exception was meant
to account for the ability of central
banks and U.S. GSEs to lend against the
posted HQLA or to return the posted
HQLA, in which case a covered

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
company could sell or engage in a
repurchase agreement with the assets to
receive cash. This exception was also
meant to permit collateral that is
covered by a blanket (rather than assetspecific) lien from a U.S. GSE to be
included as eligible HQLA.
The final rule includes a clarifying
change to the proposed requirement.
The final rule adopts the proposed
exception that an asset may be
considered unencumbered if the asset is
pledged to a central bank or a U.S. GSE
to secure potential borrowings and
credit secured by the asset has not been
extended to the covered company or its
consolidated subsidiaries. Under the
final rule, the agencies clarify that the
assets may also be considered
unencumbered if the pledge of these
assets is not required to support access
to the payment services of a central
bank. In certain circumstances, a central
bank may have the ability to encumber
the pledged assets to avoid losses that
may occur when a troubled institution
fails to fulfill its payments. The agencies
are concerned that such a scenario is
more likely to occur during a period of
market stress. Thus, the agencies believe
that assets pledged by a covered
company to access a central bank’s
payment services are considered
encumbered. This provision of the final
rule would apply only to assets that a
covered company is required to pledge
to receive access to the payment
services of a central bank, and would
not encompass assets that are
voluntarily pledged by a covered
company to support additional services
that may be offered by the central bank,
such as overdraft capability.
One commenter expressed concerns
that segregated funds held by a covered
company pursuant to SEC’s customer
protection rule 15c3–3 (Rule 15c3–3)
would be considered encumbered
assets. The commenter noted that Rule
15c3–3 is an SEC rule requiring the
segregation of customer assets and
places limits on the broker-dealer’s use
of customer funds. After reviewing the
commenter’s concerns, the agencies
believe that funds held in a Rule 15c3–
3 segregated account should be
considered encumbered assets. Rule
15c3–3 requires a covered company to
set aside assets in a segregated account
to ensure that broker-dealers have
sufficient assets to meet the needs of
their customers. Accordingly, the assets
in Rule 15c3–3 segregated accounts are
not freely available to the covered
company to meet its liquidity needs and
are not considered unencumbered for
purposes of the final rule. However,
while these accounts are excluded from
eligible HQLA, the agencies are

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including treatment of an inflow
amount with respect to certain amounts
related to broker-dealer segregated
accounts as detailed in § l.33(g) of the
final rule.
Some commenters noted that the
subsidiaries of some covered companies
are subject to the SEC’s proposed rules
to implement liquidity requirements on
broker-dealers and security-based swap
dealers that use the alternative net
capital computation methodology. The
SEC’s proposed rule would be a
potential regulatory restriction on the
transfer of HQLA and the commenter
expressed concern that the proposed
rule would lead to broad
disqualification of the HQLA of SECregulated entities. The agencies believe
it is appropriate that in cases where
legal restrictions exist that do not allow
the transfer of HQLA between entities,
that only HQLA that is equal to the
amount of the net outflows of that legal
entity should be included in the
consolidated LCR, as discussed further
below in section II.B.4.c and II.B.4.d.
However, the agencies clarify that in
cases where such restrictions would
result in an amount of HQLA subject to
restrictions on transfer that is less than
the amount of net outflows as calculated
under the final rule for the legal entity,
the covered company may include all of
the HQLA of the legal entity subject to
the restriction in its consolidated LCR
HQLA amount, assuming that the HQLA
meets the operational requirements
specified above, as well as other
requirements in the final rule.
One commenter requested that the
agencies clarify that securities acquired
through reverse repurchase agreements
that have not been rehypothecated and
are legally and contractually available
for a covered company’s use are
unencumbered for purposes of the rule.
Two commenters requested that the
agencies clarify that all borrowed assets
are legally and contractually available
for the covered company’s use. The
agencies clarify that borrowed
securities, including those that are
acquired through reverse repurchase
agreements, that have not been
rehypothecated may be considered
unencumbered if the covered company
has rehypothecation rights with respect
to the securities and the securities are
free of legal, regulatory, contractual, or
other restrictions on the ability of the
covered company to monetize them and
have not been pledged to secure or
provide credit-enhancement to any
transaction, with certain exceptions.
The agencies highlight that HQLA,
including assets received through
reverse repurchase agreements and
other borrowed assets, must meet all

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requirements set forth in § l.22 of the
final rule to qualify as eligible HQLA.
b. Segregated Client Pool Securities
Under the proposed rule, an asset
included as eligible HQLA could not
have been a client pool security held in
a segregated account or cash received
from a repurchase agreement on client
pool securities held in a segregated
account. The proposed rule defined a
client pool security as one that is owned
by a customer of a covered company
and is not an asset of the organization,
regardless of the organization’s
hypothecation rights to the security.
Because client pool securities held in a
segregated account are not freely
available to meet all possible liquidity
needs of the covered company, they
should not count as a source of
liquidity.
Commenters did not raise significant
concerns on the exclusion of assets in
client pool securities from HQLA. The
agencies have therefore largely adopted
the proposed requirement in the final
rule.
c. Treatment of HQLA Held by U.S.
Consolidated Subsidiaries
Under the proposal, HQLA held in a
legal entity that is a U.S. consolidated
subsidiary of a covered company would
have been included as eligible HQLA
subject to specific limitations depending
on whether the subsidiary was subject
to the proposed rule and was therefore
required to calculate a LCR under the
proposed rule.
If the consolidated subsidiary was
subject to a minimum LCR under the
proposed rule, then a covered company
could have included eligible HQLA held
in the consolidated subsidiary in an
amount up to the consolidated
subsidiary’s net cash outflows, as
calculated to meet its LCR requirement.
The covered company could also have
included in its HQLA amount any
additional amount of HQLA if the
monetized proceeds from that HQLA
would be available for transfer to the
top-tier covered company during times
of stress without statutory, regulatory,
contractual, or supervisory restrictions.
Regulatory restrictions would include,
for example, sections 23A and 23B of
the Federal Reserve Act 55 and
Regulation W.56 Supervisory restrictions
may include, but would not be limited
to, enforcement actions, written
agreements, supervisory directives or
requests to a particular subsidiary that
would directly or indirectly restrict the
55 12
56 12

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subsidiary’s ability to transfer the HQLA
to the parent covered company.
If the consolidated subsidiary was not
subject to a minimum LCR under § l.10
of the proposed rule, a covered
company could have included the
HQLA held in the consolidated
subsidiary in an amount up to the net
cash outflows of the consolidated
subsidiary that would have been
included in the covered company’s
calculation of its LCR, plus any
additional amount of HQLA held by the
consolidated subsidiary the monetized
proceeds from which would be available
for transfer to the top-tier covered
company during times of stress without
statutory, regulatory, contractual, or
supervisory restrictions.
Section l.22(b)(3) of the final rule
adopts the treatment of HQLA held by
U.S. consolidated subsidiaries as
proposed. This treatment is consistent
with the Basel III Revised Liquidity
Framework and ensures that assets in
the pool of eligible HQLA can be freely
monetized and the proceeds can be
freely transferred to a covered company
in times of a liquidity stress. In response
to a commenter’s request for
clarification, the agencies clarify that a
covered company is required only to
apply the statutory, regulatory,
contractual, or supervisory restrictions
that are in effect as of the calculation
date.
d. Treatment of HQLA Held by Non-U.S.
Consolidated Subsidiaries
Consistent with the Basel III Revised
Liquidity Framework, the proposed rule
provided that a covered company could
have included eligible HQLA held by a
non-U.S. legal entity that is a
consolidated subsidiary of the covered
company in an amount up to: (1) The
net cash outflows of the non-U.S.
consolidated subsidiary that are
included in the covered company’s net
cash outflows, plus (2) any additional
amount of HQLA held by the non-U.S.
consolidated subsidiary that is available
for transfer to the top-tier covered
company during times of stress without
statutory, regulatory, contractual, or
supervisory restrictions. The proposed
rule would have required covered
companies with foreign operations to
identify the location of HQLA and net
cash outflows in foreign jurisdictions
and exclude any HQLA above the
amount of net cash outflows for those
jurisdictions that is not freely available
for transfer due to statutory, regulatory,
contractual or supervisory restrictions.
Such transfer restrictions would have
included LCR requirements greater than
those that would be established by the
proposed rule, counterparty exposure

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limits, and any other regulatory,
statutory, or supervisory limitations.
One commenter supported the
proposed rule’s approach to permitting
a covered company to include as
eligible HQLA a certain level of HQLA
of its non-U.S. consolidated subsidiary.
One commenter argued that the final
rule should permit a covered company
to include as eligible HQLA assets held
in a non-U.S. consolidated subsidiary
that qualify as HQLA in the host
jurisdiction of that subsidiary. The
commenter contended that jurisdictions
adopting the Basel III Revised Liquidity
Framework would consider certain
assets as HQLA depending on the
liquidity characteristics of the assets in
the market of the relevant jurisdiction.
This approach, the commenter noted, is
also consistent with the
recommendation of the European
Banking Authority for the treatment of
HQLA in jurisdictions outside of the
Eurozone.
Another commenter requested that
the agencies acknowledge that HQLA
held in foreign entities that are not
subject to prudential regulation or
capital requirements are less likely to
present repatriation issues.
After reviewing commenters’
concerns, the agencies have determined
to adopt the proposed liquidity
requirements for non-U.S. consolidated
subsidiaries without change. The
agencies have declined to adopt a
commenter’s suggestion that the final
rule permit a covered company’s
eligible HQLA to include the HQLA of
its non-U.S. consolidated subsidiaries as
defined in the host jurisdiction of the
subsidiary. The agencies recognize that
jurisdictions will likely vary in their
adoption of the Basel III Revised
Liquidity Framework. However, the
final rule was designed to implement
the LCR standard as appropriate for the
United States and its markets, and, for
the purposes of the LCR in the United
States, only those assets that meet the
liquidity characteristics and criteria of
the final rule can be included as HQLA.
The agencies decline to differentiate
between foreign entities that are subject
to prudential regulation or capital
requirements and those that are not for
purposes of determining whether HQLA
is more or less subject to risk of
restriction on transfer from those
jurisdictions. The agencies believe that
generally HQLA held in foreign entities
may encounter challenges during a
severe period of stress that prevent the
timely repatriation of assets.
Furthermore, the agencies do not
believe it would be appropriate to
provide favorable regulatory treatment
for assets held in a jurisdiction where

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there is less, rather than more, explicit
prudential regulation.
e. Maintenance of Eligible HQLA in the
United States
The agencies believe it is appropriate
for a covered company to hold eligible
HQLA in a particular geographic
location in order to meet local liquidity
needs there. However, they do not
believe it is appropriate for a covered
company to hold a disproportionate
amount of eligible HQLA in locations
outside the United States, given that
unforeseen impediments may prevent
timely repatriation of liquidity during a
crisis. Therefore, under the proposal, a
covered company would have been
generally expected to maintain in the
United States an amount and type of
eligible HQLA that is sufficient to meet
its total net cash outflow amount in the
United States.
A commenter requested that the
agencies confirm that that the general
expectation that a covered company
maintain in the United States an amount
and type of HQLA that is sufficient to
meet its total net cash outflow amount
in the United States would be
monitored through a supervisory
approach.
The final rule maintains the
requirement that a covered company is
generally expected to maintain as
eligible HQLA an amount and type of
eligible HQLA in the United States that
is sufficient to meet its total net cash
outflow amount in the United States. In
response to the commenter’s request for
clarification, the agencies expect to
monitor this requirement through the
supervisory process.
f. Exclusion of Certain Rehypothecated
Assets
Under the proposed rule, assets that a
covered company received under a
rehypothecation right where the
beneficial owner has a contractual right
to withdraw the asset without
remuneration at any time during a 30
calendar-day stress period would not
have been included in HQLA. This
exclusion extended to assets generated
from another asset that was received
under such a rehypothecation right. If
the beneficial owner had such a right
and were to exercise it within a 30
calendar-day stress period, the asset
would not be available to support the
covered company’s liquidity position.
The agencies have included a
clarifying change to the proposed
requirement in the final rule. The final
rule provides that any asset which a
covered company received with
rehypothecation rights would not be
considered eligible HQLA if the

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counterparty that provided the asset, or
the beneficial owner, has a contractual
right to withdraw the asset without
paying non-de minimis remuneration at
any time during the 30 calendar days
following the calculation date.
g. Exclusion of Assets Designated To
Cover Operational Costs
In the proposed rule, assets
specifically designated to cover
operational costs could not be included
as eligible HQLA. The agencies believe
that assets specifically designated to
cover costs such as wages or facility
maintenance generally would not be
available to cover liquidity needs that
arise during stressed market conditions.
The agencies did not receive comment
on this provision and are adopting the
proposed requirement in § l.22(b)(6) of
the final rule without change. The
treatment of outflows for operational
costs are discussed in section II.C.3.l of
this Supplementary Information section.

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5. Calculation of the HQLA Amount
Instructions for calculating the HQLA
amount, including the calculation of the
required haircuts and caps for level 2
liquid assets, were set forth in § __.21 of
the proposed rule. The agencies
received several comments relating to
the calculation of the HQLA amount,
particularly relating to the calculations
of the adjusted level 1, adjusted level
2A, and adjusted level 2B liquid asset
amounts that are used to calculate the
adjusted excess HQLA amount and that
incorporate the unwind of certain
secured transactions as described below.
After considering the comments, the
agencies adopted the HQLA amount
calculation instructions largely as
proposed, with two modifications to the
treatment of collateralized deposits and
reserve balance requirements. The final
rule sets forth instructions for
calculating the HQLA amount in § l.21.
Under the final rule, the HQLA
amount equals the sum of the level 1,
level 2A and level 2B liquid asset
amounts, less the greater of the
unadjusted excess HQLA amount or the
adjusted excess HQLA amount, as
described below.
a. Calculation of Liquid Asset Amounts
For the purposes of calculating a
covered company’s HQLA amount
under the proposed rule, each of the
level 1 liquid asset amount, the level 2A
liquid asset amount, and the level 2B
liquid asset amount would have been
calculated using the fair value of the
eligible level 1 liquid assets, level 2A
liquid assets, or level 2B liquid assets,
respectively, as determined under
GAAP, multiplied by the appropriate

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haircut factor prescribed for each level
of HQLA.
Under the proposed rule, the level 1
liquid asset amount would have equaled
the fair value of all level 1 liquid assets
held by the covered company as of the
calculation date, less required reserves
under section 204.4 of Regulation D (12
CFR 204.4). Consistent with the Basel III
Revised Liquidity Framework, and as
discussed in section II.B.2 of this
Supplementary Information section, the
proposed rule would have applied a 15
percent haircut to level 2A liquid assets
and a 50 percent haircut to level 2B
liquid assets. These haircuts were meant
to recognize that level 2 liquid assets
generally are less liquid, have larger
haircuts in the repurchase markets, and
may have more volatile prices in the
outright sales markets, particularly in
times of stress. Thus, the level 2A liquid
asset amount would have equaled 85
percent of the fair value of the level 2A
liquid assets held by the covered
company as eligible HQLA, and the
level 2B liquid asset amount would
have equaled 50 percent of the fair value
of the level 2B liquid assets held by the
covered company as eligible HQLA.
The agencies are adopting under
§ l.21(b) of the final rule the
calculation of the level 1, level 2A and
level 2B liquid asset amounts largely as
proposed, with one clarification. In the
calculation of the level 1 liquid asset
amount, the agencies have clarified that
the amount to be deducted from the fair
value of all eligible level 1 liquid assets
is the covered company’s reserve
balance requirement under section
204.5 of Regulation D (12 CFR 204.5),
not its entire reserve requirement.
Therefore, under the final rule, the level
1 liquid asset amount equals the fair
value of all level 1 liquid assets that are
in the covered company’s eligible HQLA
as of the calculation date, less the
covered company’s reserve balance
requirement under section 204.5 of
Regulation D (12 CFR 204.5). Similarly,
the level 2A liquid asset amount equals
85 percent of the fair value of all level
2A liquid assets, and the level 2B liquid
asset amount equals 50 percent of the
fair value of all level 2B liquid assets,
that are held by the covered company as
of the calculation date that are eligible
HQLA. All assets that are eligible HQLA
at the calculation date are therefore to
be included in these three liquid asset
amounts.
b. Calculation of Unadjusted Excess
HQLA Amount
Consistent with the Basel III Revised
Liquidity Framework, the proposed rule
would have capped the amount of level
2 liquid assets that could be included in

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the HQLA amount. Specifically, level 2
liquid assets could account for no more
than 40 percent of the HQLA amount
and level 2B liquid assets could account
for no more than 15 percent of the
HQLA amount. Under § l.21 of the
proposed rule, if the amounts of level 2
liquid assets or level 2B liquid assets
had exceeded their respective caps, the
excess amounts as calculated under the
proposed rule would have been
deducted from the sum of the level 1
liquid asset, level 2A liquid asset, and
level 2B liquid asset amounts. The level
2 caps were meant to ensure that level
2 liquid assets, which may provide less
liquidity as compared to level 1 liquid
assets, comprise a smaller portion of a
covered company’s total HQLA amount
such that the majority of the HQLA
amount is composed of level 1 liquid
assets.
The unadjusted excess HQLA amount,
under the proposed rule, equaled the
sum of the level 2 cap excess amount
and the level 2B cap excess amount. The
calculation of the unadjusted excess
HQLA amount applied the 40 percent
level 2 liquid asset cap and the 15
percent level 2B liquid asset cap at the
calculation date by subtracting from the
sum of the level 1, level 2A and level
2B liquid asset amounts, the amount of
level 2 liquid assets that is in excess of
the limits. The unadjusted HQLA excess
amount would have enforced the cap
limits at the calculation date without
unwinding any transactions.
The methods of calculating the level
2 cap excess amount and level 2B cap
excess amounts were set forth in
§ l.21(d) and (e) of the proposed rule,
respectively. Under those provisions,
the level 2 cap excess amount would
have been calculated by taking the
greater of: (1) The level 2A liquid asset
amount plus the level 2B liquid asset
amount that exceeds 0.6667 (or 40/60,
which is the ratio of the maximum
allowable level 2 liquid assets to the
level 1 liquid assets) times the level 1
liquid asset amount; or (2) zero. The
calculation of the level 2B cap excess
amount would have been calculated by
taking the greater of: (1) The level 2B
liquid asset amount less the level 2 cap
excess amount and less 0.1765 (or
15/85, which is the maximum ratio of
allowable level 2B liquid assets to the
sum of level 1 and level 2A liquid
assets) times the sum of the level 1 and
level 2A liquid asset amount; or (2) zero.
Subtracting the level 2 cap excess
amount from the level 2B liquid asset
amount when applying the 15 percent
level 2B cap is appropriate because the
level 2B liquid assets should be
excluded before the level 2A liquid

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assets when applying the 40 percent
level 2 cap.
Several commenters requested that
the agencies modify the level 2 and
level 2B liquid assets caps, arguing that
the agencies have not provided any
analysis on the appropriateness of the
caps. In particular, these commenters
argued that the caps could cause
banking organizations to ‘‘hoard’’ level
1 liquid assets, reducing the liquidity
and volume of level 2A and level 2B
liquid assets.
The agencies continue to believe that
the majority of a covered company’s
HQLA amount should consist of the
highest quality liquid assets, namely,
level 1 liquid assets. In establishing the
requirement that the level 1 liquid asset
amount should represent at least 60
percent of the HQLA amount, the
agencies are seeking to ensure that a
covered company will be able to rapidly
meet its liquidity needs in a period of
stress. The agencies recognize that
covered companies may make
investment decisions pertaining to
individual assets within HQLA
categories and the agencies believe that
there is adequate availability of level 1
liquid assets. In choosing the assets that
would have qualified as level 1 liquid
assets under the proposed rule, the
agencies considered whether there
would be adequate availability of such
assets during a stress period, to ensure
the appropriateness of the asset’s
designation as the highest quality asset
under the proposed rule. Further, given
the liquidity characteristics of the asset
classes included in level 2B liquid
assets, the agencies continue to believe
that these assets should constitute no
more than 15 percent of a covered
company’s HQLA amount. Therefore the
final rule adopts the unadjusted
calculations as proposed in
§ l.21(c)–(e).
c. Calculation of Adjusted Excess HQLA
Amount
The agencies believed that the
proposed level 2 caps and haircuts
should apply to the covered company’s
HQLA amount both before and after the
unwinding of certain types of secured
transactions where eligible HQLA is
exchanged for eligible HQLA in the next
30 calendar days, in order to ensure that
the HQLA amount is appropriately
diversified and not the subject of
manipulation. The proposed calculation
of the adjusted excess HQLA amount on
this basis sought to prevent a covered
company from being able to manipulate
its eligible HQLA by engaging in
transactions such as certain repurchase
or reverse repurchase transactions
because the HQLA amount, including

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the caps and haircuts, would be
calculated both before and after
unwinding those transactions.
Under the proposed rule, to determine
its adjusted HQLA excess amount, a
covered company would have been
required to unwind all secured funding
transactions, secured lending
transactions, asset exchanges, and
collateralized derivatives transactions,
as defined by the proposed rule, in
which eligible HQLA, including cash,
were exchanged and that would have
matured within 30 calendar days of the
calculation date. The unwinding of
these transactions and the calculation of
the adjusted excess HQLA amount was
intended to prevent a covered company
from having a substantial amount of
transactions that would have created the
appearance of a significant level 1 liquid
asset amount at the beginning of a 30
calendar-day stress period, but that
would have matured by the end of the
30 calendar-day stress period. For
example, absent the unwinding of these
transactions, a covered company that
held only level 2 liquid assets could
have appeared to be compliant with the
level 2 liquid asset composition cap at
the calculation date by borrowing on an
overnight term a level 1 liquid asset
(such as cash or U.S. Treasuries)
secured by level 2 liquid assets. While
doing so would have lowered the
covered company’s amount of level 2
liquid assets and increased its amount
of level 1 liquid assets, the covered
company would have had a
concentration of level 2 liquid assets
above the 40 percent cap after the
transaction was unwound. Therefore,
the calculation of the adjusted excess
HQLA amount and, if greater than
unadjusted excess HQLA amount, its
subtraction from the sum of the level 1,
level 2A, and level 2B liquid asset
amounts, would have prevented a
covered company from avoiding the
level 2 liquid asset cap limitations.
In order to calculate the adjusted
excess HQLA amount, the proposed rule
would have required a covered
company, for this purpose only, to
calculate adjusted level 1, level 2A, and
level 2B liquid asset amounts. The
adjusted level 1 liquid asset amount
would have been the fair value, as
determined under GAAP, of the level 1
liquid assets that are held by a covered
company upon the unwinding of any
secured funding transaction, secured
lending transaction, asset exchanges, or
collateralized derivatives transaction
that matures within a 30 calendar-day
period and that involves an exchange of
eligible HQLA, or cash. Similarly, the
adjusted level 2A and adjusted level 2B
liquid asset amounts would only have

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included the unwinding of those
transactions involving an exchange of
eligible HQLA or cash. After unwinding
all the appropriate transactions, the
asset haircuts of 15 percent and 50
percent would have been applied to the
level 2A and 2B liquid assets,
respectively.
The adjusted excess HQLA amount
calculated pursuant to § l.21(g) of the
proposed rule would have been
comprised of the adjusted level 2 cap
excess amount and adjusted level 2B
cap excess amount calculated pursuant
to § l.21(h) and § l.21(i) of the
proposed rule, respectively.
The adjusted level 2 cap excess
amount would have been calculated by
taking the greater of: (1) The adjusted
level 2A liquid asset amount plus the
adjusted level 2B liquid asset amount
minus 0.6667 (or 40/60, which is the
maximum ratio of allowable level 2
liquid assets to level 1 liquid assets)
times the adjusted level 1 liquid asset
amount; or (2) zero. The adjusted level
2B cap excess amount would be
calculated by taking the greater of: (1)
The adjusted level 2B liquid asset
amount less the adjusted level 2 cap
excess amount less 0.1765 (or 15/85,
which is the maximum ratio of
allowable level 2B liquid assets to the
sum of level 1 liquid assets and level 2A
liquid assets) times the sum of the
adjusted level 1 liquid asset amount and
the adjusted level 2A liquid asset
amount; or (2) zero. The adjusted excess
HQLA amount would have been the
sum of the adjusted level 2 cap excess
amount and the adjusted level 2B cap
excess amount.
One commenter requested that the
agencies remove the unwind
requirement from the rule because of the
operational complexity required to
calculate the covered institution’s
HQLA both before and after the unwind.
Another commenter asked whether the
agencies have considered permitting
covered companies to calculate the
value of their HQLA under the
International Financial Reporting
Standards method of accounting rather
than GAAP.
The agencies believe that it is crucial
for a covered company to assess the
composition of its HQLA amount both
on an unadjusted basis and on a basis
adjusted for certain transactions that
directly impact the composition of
eligible HQLA. The agencies believe
that these calculations are justified in
order to ensure an HQLA amount of
adequate quality of composition and
diversification and to ensure that
covered companies actually have the
ability to monetize such assets during a
stress period. The agencies do not

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believe that it would be appropriate to
use alternative methods of accounting
beyond GAAP in determining the HQLA
amount. The agencies note that for
regulatory reporting purposes, generally,
a covered company must report data
using GAAP. It would likely increase
burden on covered companies that
typically apply GAAP, which includes
the vast majority of covered companies,
to use another method of accounting to
calculate HQLA. In addition, to permit
certain covered companies to use an
alternate method of accounting would
reduce the comparability of the
information across covered companies.
As noted above, the LCR is intended to
be a standardized liquidity metric,
designed to promote a consistent and
comparable view of the liquidity of
covered companies. The agencies are
finalizing the adjusted excess HQLA
amount calculation with two
amendments to the proposed rule. First,
the agencies are clarifying that, in a
manner similar to the calculation of the
level 1 liquid asset amount, the adjusted
level 1 liquid asset amount (used solely
for the purpose of calculating the
adjusted excess HQLA amount) must
include the deduction of the covered
company’s reserve balance requirement
under section 204.5 of Regulation D (12
CFR 204.5). Second, the agencies are
exempting certain secured funding
transactions from inclusion in the
unwind as described below.
d. Unwind Treatment of Collateralized
Deposits

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A number of commenters pointed out
that certain deposits are legally required
to be collateralized. For instance,
deposits placed by states and
municipalities, known as preferred
deposits, are often required to be
collateralized under state law.
Commenters further pointed out that in
some instances, deposits are required to
be collateralized by specific collateral
which would not have been HQLA
under the proposed rule. Additionally,
federal law requires certain corporate
trust deposits to be collateralized.57
Several commenters highlighted that
these types of collateralized deposits
would have been treated as secured
funding transactions under the
proposed rule, requiring a covered
company to unwind these deposit
57 Pursuant to OCC regulations, a national bank or
federal savings association may place funds for
which the bank is a fiduciary on deposit in the bank
(such deposits are often referred to as ‘‘selfdeposits’’). The regulations require that the bank set
aside collateral to secure self-deposits to the extent
they are not insured by the FDIC. See 12 CFR
9.10(b) (national banks); 12 CFR 150.300–50.320
(federal savings associations).

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relationships when determining the
adjusted excess HQLA amount.
Commenters argued that the unwind
treatment effectively leads covered
companies to exclude from their HQLA
amounts both the cash from the
deposits, which would be eligible
HQLA, and also any collateral pledged
to secure the deposit.
Several commenters pointed out that
the agencies proposed the unwind
treatment of secured transactions to
ensure that banking organizations do
not manipulate their HQLA amounts
through repurchase and reverse
repurchase transactions. These
commenters contended that covered
companies would not use preferred
deposits and collateralized corporate
trust deposits to inflate their HQLA
amounts because of the long-term nature
of the banking relationships.
Commenters expressed the opinion that
collateralized deposits represent stable,
relationship-based deposits and are
generally placed in connection with
certain operational services provided by
the bank. These commenters maintained
that collateralized deposits are very
different in nature from other secured
funding transactions, such as
repurchase agreements where
collateralization is a function of the
transaction between counterparties,
rather than imposed by a third party,
and should not raise the concerns the
agencies were seeking to address with
the unwind calculation relating to the
manipulation of the HQLA amount.
Commenters urged the agencies to
exclude collateralized deposits from the
requirement to unwind secured funding
transactions for the purposes of
determining a covered company’s
adjusted excess HQLA amount. These
commenters contended that the
proposed unwind treatment of
municipal fund deposits would have a
major impact, limiting the choice of
banks from which state and municipal
treasurers could obtain treasury
management and other banking services.
Certain commenters asserted that the
proposed rule would lead banks to
accept limited municipal fund deposits,
thereby increasing the costs to
municipalities who rely on earning
credits generated by deposits to pay for
banking services. Commenters also were
concerned that applying the unwind
mechanism to preferred public sector
deposits would discourage banks from
accepting these deposits because of the
potential negative impact on their LCR
calculations. This in turn could raise the
cost of capital for municipalities and
undermine public policy goals of
infrastructure maintenance and
development. These commenters stated

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that banking organizations likely would
have to limit the amount of preferred
deposits and collateralized corporate
trust deposits they accept, further
reducing the interest paid on preferred
deposits and corporate trust deposits, or
eliminating earnings credits extended to
state and municipal depositors.
Furthermore, as preferred deposits may
be collateralized with municipal
securities, commenters contended that
banks’ decreased appetite for accepting
municipal fund deposits would also
lead to reduced investments in
municipal securities.
Finally, several commenters requested
that, if the agencies do not exclude
collateralized deposits from the secured
transaction unwind, that the agencies
should apply a maximum outflow for
such deposits that (for example, 15 or 25
percent), irrespective of the collateral
being used to secure the deposit.
In response to commenters’ concerns,
the final rule does not require a covered
company to unwind certain secured
funding transactions that are
collateralized deposits. As several
commenters noted, the proposed
unwind methodology was intended to
prevent a covered company from
manipulating the composition of its
HQLA amount by engaging in
transactions such as repurchase or
reverse repurchase agreements that
could ultimately unwind within the 30
calendar-day stress period. The agencies
are aware that certain preferred deposits
and corporate trust deposits are required
to be collateralized under applicable
law and agree with commenters that the
longer-term, deposit banking
relationships associated with preferred
deposits and collateralized corporate
trust deposits can be different in nature
from shorter-term repurchase and
reverse repurchase agreements. After
considering commenters’ concerns, the
agencies believe that certain
collateralized deposits do not raise the
concerns the agencies were seeking to
address with the unwind calculation.
The agencies believe that a covered
company would be unlikely to pursue
these collateralized deposit
relationships for the purposes of
manipulating the composition of their
HQLA amounts. Therefore, the final rule
does not require a covered company to
unwind secured funding transactions
that are collateralized deposits as
defined in the final rule when
determining its adjusted excess HQLA
amount. The agencies highlight that
these deposits continue to be subject to
an outflow assumption, as addressed in
section II.C.3.j.(ii) of this Supplementary
Information section.

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In the final rule, the agencies
included a definition for collateralized
deposits in order to implement the
exclusion of these specific types of
transactions from the unwind
calculation and to identify the
transactions as potentially eligible for
certain outflow rates. The final rule
defines collateralized deposits as either:
(1) A deposit of a public sector entity
held at the covered company that is
secured under applicable law by a lien
on assets owned by the covered
company and that gives the depositor,
as holder of the lien, priority over the
assets in the event the covered company
enters into receivership, bankruptcy,
insolvency, liquidation, resolution, or
similar proceeding, or (2) a deposit of a
fiduciary account held at the covered
company for which the covered
company is a fiduciary and sets aside
assets owned by the covered company
as security under 12 CFR 9.10 (national
banks) or 12 CFR 150.300 through
150.320 (Federal savings associations)
and that gives the depositor priority
over the assets in the event the covered
company enters into receivership,
bankruptcy, insolvency, liquidation,
resolution, or similar proceeding.
e. Unwind Treatment of Transactions
Involving Eligible HQLA
One commenter requested that the
agencies clarify that only transactions
that are conducted by or for the benefit
of the liquidity management function
receive unwind treatment when a
covered company calculates its adjusted
excess HQLA amount. The commenter
expressed the view that the proposed
rule did not limit the unwind
methodology to only transactions
involving the eligible HQLA that were
under the control of the liquidity
management function for purposes of
§ l.20(d)(2) in the proposed rule. This
commenter urged that transactions
undertaken outside of the liquidity
management function would be
reflected in the calculation of net cash
outflows and should not be
incorporated in the HQLA amount
calculation. Moreover, the commenter
contended that excluding secured
funding transactions that are not under
the liquidity management function is
consistent with the agencies’ intent to
capture only those transactions that a
covered company may use to
manipulate its HQLA amount. Lastly,
the commenter noted that the Basel III
Revised Liquidity Framework only
applied the unwind methodology to
transactions that met operational
requirements.
In response to the commenter’s
request, the agencies are clarifying that

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a covered company should apply the
unwind treatment to secured funding
transactions (other than secured funding
transactions that are collateralized
deposits), secured lending transactions,
asset exchanges and collateralized
derivatives where the maturity of the
transaction within 30 calendar days of
the calculation date will involve the
covered company providing an asset
that is eligible HQLA or cash and the
counterparty providing an asset that
will be eligible HQLA or cash. Eligible
HQLA meet the operational
requirements set forth in § l.22 of the
final rule, including the requirement
that the eligible HQLA are under the
control of the liquidity management
function. Consistent with the Basel III
Revised Liquidity Framework, the
agencies believe that a covered company
should not be required to unwind
transactions involving assets that do not
meet or will not meet these operational
requirements when calculating its
adjusted excess HQLA amount. A
covered company should, however,
consider all such transactions in
determining its net cash outflow amount
under the final rule.
Consistent with the Basel III Revised
Liquidity Framework and § l.32(j)(1) of
the final rule, secured funding
transactions maturing within 30
calendar days of the calculation date
that involve the exchange of eligible
HQLA are those where the HQLA
securing the secured funding
transaction would otherwise qualify as
eligible HQLA if they were not already
securing the particular transaction in
question.
Similarly, and consistent with § l
.33(f)(1) of the final rule, secured
lending transactions that involve the
exchange of eligible HQLA are those
where the assets securing the secured
lending transaction are: (1) Eligible
HQLA at the calculation date, or (2)
would be eligible HQLA at the
calculation date if they had not been
reused to secure a secured funding
transaction, or delivered in an asset
exchange, maturing within 30 calendar
days of the calculation date and which
is also being unwound in determining
the adjusted level 1, adjusted level 2A,
and adjusted level 2B liquid asset
amounts.
Consistent with § l.32(j)(3) and § l
.33(f)(2) of the final rule, asset exchange
transactions involving the exchange of
eligible HQLA are those where the
covered company will, at the maturity
of the asset exchange transaction within
30 calendar days of the calculation date:
(1) Receive assets from the asset
exchange counterparty that will be
eligible HQLA upon receipt, and (2) the

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assets that the covered company must
post to the counterparty are either: (a)
eligible HQLA at the calculation date, or
(b) would be eligible HQLA at the
calculation date if they were not already
securing a secured funding transaction,
or delivered in an asset exchange, that
will mature within 30 calendar days of
the calculation date and which is also
being unwound in determining the
adjusted level 1, adjusted level 2A, and
adjusted level 2B liquid asset amounts.
f. Example HQLA Calculation
The following is an example
calculation of the HQLA amount that
would be required under the final rule.
Note that the given liquid asset amounts
and adjusted liquid asset amounts
already reflect the level 2A and 2B
haircuts.
(a) Calculate the liquid asset amounts (§ l
.21(b))
The following values are given:
Fair value of all level 1 liquid assets that are
eligible HQLA: 17
Covered company’s reserve balance
requirement: 2
Level 1 liquid asset amount (§ l.21(b)(1)): 15
Level 2A liquid asset amount: 25
Level 2B liquid asset amount: 140
Sum of level 1, level 2A, and level 2B liquid
asset amounts: 180
(b) Calculate unadjusted excess HQLA
amount (§ l.21(c))
Step 1: Calculate the level 2 cap excess
amount (§ l.21(d)):
Level 2 cap excess amount = Max (level 2A
liquid asset amount + level 2B liquid asset
amount—0.6667*level 1 liquid asset
amount, 0)
= Max (25 + 140¥0.6667*15, 0)
= Max (165—10.00, 0)
= Max (155.00, 0)
= 155.00
Step 2: Calculate the level 2B cap excess
amount (§ l.21(e)).
Level 2B cap excess amount = Max (level 2B
liquid asset amount—level 2 cap excess
amount—0.1765*(level 1 liquid asset
amount + level 2A liquid asset amount), 0)
= Max (140¥155.00—0.1765*(15+25), 0)
= Max (¥15—7.06, 0)
= Max (¥22.06, 0)
=0
Step 3: Calculate the unadjusted excess
HQLA amount (§ l.21(c)).
Unadjusted excess HQLA amount = Level 2
cap excess amount + Level 2B cap excess
amount
= 155.00 + 0
= 155
(c) Calculate the adjusted liquid asset
amounts, based upon the unwind of certain
transactions involving the exchange of
eligible HQLA or cash (§ l.21(f)).
The following values are given:
Adjusted level 1 liquid asset amount: 120
Adjusted level 2A liquid asset amount: 50
Adjusted level 2B liquid asset amount: 10
(d) Calculate adjusted excess HQLA
amount (§ l.21(g)).

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Step 1: Calculate the adjusted level 2 cap
excess amount (§ l.21(h)).
Adjusted level 2 cap excess amount = Max
(adjusted level 2A liquid asset amount +
adjusted level 2B liquid asset amount—
0.6667*adjusted level 1 liquid asset
amount, 0)
= Max (50 + 10—0.6667*120, 0)
= Max (60—80.00, 0)
= Max (¥20.00, 0)
=0
Step 2: Calculate the adjusted level 2B cap
excess amount (§ l.21(i)).
Adjusted level 2B cap excess amount = Max
(adjusted level 2B liquid asset amount—
adjusted level 2 cap excess amount—
0.1765*(adjusted level 1 liquid asset
amount + adjusted level 2A liquid asset
amount, 0)
= Max (10—0—0.1765*(120+50), 0)
= Max (10—30.00, 0)
= Max (¥20.00, 0)
=0
Step 3: Calculate the adjusted excess
HQLA amount (§ l.21(g)).
Adjusted excess HQLA amount = adjusted
level 2 cap excess amount + adjusted level
2B cap excess amount
=0+0
=0
(e) Determine the HQLA amount (§ l
.21(a)).
HQLA Amount = Level 1 liquid asset amount
+ level 2A liquid asset amount + level 2B
liquid asset amount—Max (unadjusted
excess HQLA amount, adjusted excess
HQLA amount)
= 15 + 25 + 140—Max (155, 0)
= 180—155
= 25

C. Net Cash Outflows
Subpart D of the proposed rule
established the total net cash outflows
(the denominator of the LCR), which
sets the minimum dollar amount that is
required to be offset by a covered
company’s HQLA amount. As set forth
in the proposed rule, a covered
company would have first determined
outflow and inflow amounts by
applying a standardized set of outflow
and inflow rates to various asset and
liability balances, together with offbalance-sheet commitments, as
specified in §§ l.32 and 33 of the
proposed rule. These outflow and
inflow rates reflected key aspects of
liquidity stress events including those
experienced during the most recent
financial crises. To identify when
outflow and inflow amounts occur
within the 30 calendar-day period
following the calculation date, a covered
company would have been required to
employ a set of maturity assumptions,
as set forth in § l.31 of the proposed
rule. A covered company would have
then calculated the largest daily
difference between cumulative inflow
amounts and cumulative outflow

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amounts over a period of 30 calendar
days following a calculation date (the
peak day approach) to arrive at its total
net cash outflows.
The agencies received comments
requesting modification to the
calculation of net cash outflows and to
the maturity assumptions set forth in
the proposed rule. In addition,
commenters argued that some of the
proposed outflow and inflow rates
should be adjusted. To address
commenters’ concerns, the agencies are
modifying the net outflow calculation
by including an add-on, as well as
modifying the provisions on
determining maturity. With respect to
outflow and inflow rates, the agencies
are generally finalizing the rule as
proposed with few changes.
1. The Total Net Cash Outflow Amount
Under the proposed rule, the total net
cash outflow amount would have
equaled the largest daily difference
between cumulative inflow and
cumulative outflow amounts, as
calculated over the 30 calendar days
following a calculation date. For
purposes of this calculation, outflows
addressed in § l.32(a) through § l
.32(g)(2) of the proposed rule that did
not have a contractual maturity date
would have been assumed to occur on
the first day of the 30 calendar-day
period. These outflow amounts
included those for unsecured retail
funding, structured transactions, net
derivatives, mortgage commitments,
commitments, collateral, and certain
brokered deposits. Also, the proposed
rule treated transactions in § l.32(g)(3)
through § l.32(l) as maturing on their
contractual maturity date or on the first
day of the 30 calendar-day period, if
such transaction did not have a
contractual maturity date. These
transactions included certain brokered
deposits, unsecured wholesale funding,
debt securities, secured funding and
asset exchanges, foreign central bank
borrowings, and other contractual and
excluded transactions. Inflows, which
would have been netted against
outflows on a daily basis, included
derivatives, retail cash, unsecured
wholesale funding, securities, secured
lending and asset exchanges, and other
inflows. Inflows from transactions
without a stated maturity date would
have been excluded under the proposed
rule based on the assumption that the
inflows from such non-maturity
transactions would occur after the 30
calendar-day period. Allowable inflow
amounts were capped at 75 percent of
aggregate cash outflows.
The proposed rule set the
denominator of the LCR as the largest

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daily net cumulative cash outflow
amount within the following 30
calendar-day period rather than using
total net cash outflows over a 30
calendar-day period, which is the
method employed by the Basel III
Revised Liquidity Framework. The
agencies elected to employ this peak
day approach to take into account
potential maturity mismatches between
a covered company’s outflows and
inflows during the 30 calendar-day
period; that is, the risk that a covered
company could have a substantial
amount of contractual inflows that
occur late in a 30 calendar-day period
while also having substantial outflows
that occur early in the same period.
Such mismatches have the potential to
threaten the liquidity position of the
organization during a time of stress and
would not be apparent under the Basel
III Revised Liquidity Framework
denominator calculation. By requiring
the recognition of the largest net
cumulative outflow day within the 30
calendar-day period, the proposed rule
aimed to more effectively capture a
covered company’s liquidity risk and
foster more sound liquidity
management.
As noted above, cumulative cash
inflows would have been capped at 75
percent of aggregate cash outflows in the
calculation of total net cash outflows.
This limit would have prevented a
covered company from relying
exclusively on cash inflows, which may
not materialize in a period of stress, to
cover its liquidity needs and ensure that
covered companies maintain a
minimum HQLA amount to meet
unexpected liquidity demands during
the 30 calendar-day period.
Comments related to the method of
calculation of the total net cash outflow
amount in § l.30 of the proposed rule
focused around two general concerns:
the peak day approach calculation and
the 75 percent inflow cap.
a. Peak Day Approach
Commenters expressed mixed views
on the requirement to calculate the total
net cash outflow amount using the
largest daily difference between
cumulative cash outflows and inflows.
Some commenters recognized the
concerns of the agencies in addressing
the risk that a banking organization may
not have sufficient liquidity to meet all
its obligations throughout the 30
calendar-day period. One commenter
supported the approach, noting the
importance of measuring a covered
company’s ability to withstand the
largest liquidity demands within a 30
calendar-day period. However, several
commenters expressed concern that the

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approach deviated too far from the Basel
III Revised Liquidity Framework and
was unrealistic or impractical in
assuming that cash flows without
contractual maturity dates would occur
on the first day of a 30 calendar-day
period, thereby effectively rendering a
30-day liquidity standard a one-day
standard. Some of these commenters
suggested that the agencies adopt a
different treatment for non-maturity
outflows, such as assuming that the
outflows occur consistently throughout
the month, i.e., a straight-line approach,
or more rapidly at the beginning of the
month, i.e., a front-loaded approach.
Further, a number of commenters
asserted that the peak day approach
created operational complexities and
requested that the agencies perform
additional diligence before
implementing this requirement in the
final rule.
Many commenters argued that the
peak day approach was a significant
departure from the Basel III Revised
Liquidity Framework that could have
international competitive repercussions,
as U.S. covered companies could be
required to hold more HQLA than their
foreign counterparts. Several
commenters indicated that requirements
to determine net cash outflows using the
‘‘worst day’’ over the 30 calendar-day
period was not contemplated in the
Basel III Revised Liquidity Framework,
and thus should not be incorporated
into the final rule. Other commenters
were concerned about the international
challenges that could result from a
divergence and argued that the peak day
approach should first be implemented
internationally to provide a greater
acceptance and understanding of the
requirement. A few commenters
requested that the agencies conduct a
quantitative study and analysis to form
the basis of any net cash outflow
calculation that addresses maturity
mismatches.
Commenters indicated that
assumptions underlying the net
cumulative peak day approach were
unrealistic, involved significant
operational challenges, and could cause
unintended consequences. Commenters
argued that deposits with indeterminate
maturities, including operational
deposits, could not all be drawn on the
first day of a stress scenario because a
banking organization does not have the
necessary operational capability to
fulfill such outflow requests. Several
commenters had specific concerns
relating to retail deposits being drawn
on the first day of a 30 calendar-day
period, arguing that such an assumption
materially overstates a banking
organization’s liquidity needs in the

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early portion of a 30 calendar-day
period. Another commenter stated that
the largest U.S. banking organizations
did not experience a 100 percent runoff
on any single day for any class of
deposits during the most recent
financial crisis and that such a runoff
would be impossible because
withdrawals of that magnitude could
not be processed by the U.S. Automated
Clearing House system. Commenters
further argued that certain assumptions
were unrealistic by stating that no
market would even be deep enough to
absorb the volume of HQLA monetized
to meet the assumed outflows. Another
commenter argued that the proposed
rule could reduce banking
organizations’ provision of non-deposit,
non-maturity funding, such as floating
rate demand notes, due to the higher
outflow assumption and the accelerated
maturity assumption.
The agencies are addressing
commenters’ concerns by modifying the
proposed net cumulative peak day
approach. First, as in the proposed rule,
a covered company would calculate its
outflow and inflow amounts by
applying the final rule’s standardized
set of outflow and inflow rates to
various asset and liability balances,
together with off-balance-sheet
commitments. However, unlike the
proposed rule and in response to
commenters’ concerns, the modified
calculation does not assume that all
transactions and instruments that do not
have a contractual maturity date have an
outflow amount on the first day of the
30 calendar-day period. Instead, the
calculation would use an add-on
approach that would substantively
achieve the proposal’s goal of
addressing potential maturity
mismatches between a covered
company’s outflows and inflows.
The add-on approach involves two
steps. First, cash outflows and inflows
over the 30 calendar-day period are
aggregated and netted against one
another, with the aggregated inflows
capped at 75 percent of the aggregated
outflows. This first step is similar to the
method for calculating net cash
outflows in the Basel III Revised
Liquidity Framework. The second step
calculates the add-on, which requires a
covered company to identify the largest
single-day maturity mismatch within
the 30 calendar-day period by
calculating the daily difference in
cumulative outflows and inflows that
have set maturity dates, as specified by
§ l.31 of the final rule, within the 30
calendar-day period. The day with the
largest difference reflects the net
cumulative peak day. The covered
company then calculates the difference

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between that peak day amount and the
net cumulative outflow amount on the
last day of the 30 calendar-day period
for those same outflow and inflow
categories that have maturity dates
within the 30 calendar-day period. This
difference equals the add-on.
In calculating the add-on, both the net
cumulative peak day amount and the
net cumulative outflow amount on the
last day of the 30 calendar-day period
cannot be less than zero. The categories
of inflows and outflows included in the
add-on calculation comprise those
categories that are the most likely to
expose covered companies to maturity
mismatches within the 30 calendar-day
period, such as repurchase agreements
and reverse repurchase agreements with
financial sector entities, whereas
outflows such as non-maturity retail
deposits are not a part of the add-on
calculation. The final rule clarifies that
the only non-maturity outflows
included in the calculation of the addon are those that are determined to have
a maturity date of the day after the
calculation date, pursuant to § l
.31(a)(4) as described below.
The amounts calculated in steps one
and two are then added together to
determine the total net cash outflow.
This approach ensures that the final rule
avoids potential unintended
consequences by eliminating the
proposed rule’s assumption that all nonmaturity outflows occur on the first day
of a 30 calendar-day period while still
achieving the underlying goal of
recognizing maturity mismatches. The
agencies recognize that the revised
approach involves calculations and
operational complexity not
contemplated by the Basel III Revised
Liquidity Framework and could
potentially require some covered
companies to hold more HQLA than
under the Basel III Revised Liquidity
Framework. However, the agencies have
concluded that the liquidity risks posed
by maturity mismatches are significant
and must be addressed to ensure that
the LCR in the U.S. will be a sufficiently
rigorous measure of a covered
company’s liquidity resiliency.
Table 1 illustrates the final rule’s
determination of the total net cash
outflow amount using the add-on
approach. Using Table 1, which is
populated with similar values as the
corresponding table in the proposed
rule, a covered company would
implement the first step of the add-on
approach by aggregating the cash
outflow amounts in columns (A) and
(B), as calculated under § l.32, and
subtract from that aggregated amount
the lesser of 75 percent of that
aggregated amount and the aggregated

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
cash inflow amounts in columns (D) and
(E), as calculated under § l.33. The
second step of the add-on approach
calculates the add-on. The covered
company would cumulate the cash
outflows determined under § l.32(g),
(h)(1), (h)(2), (h)(5), (j), (k), and (l)
(column C) and cash inflows
determined under § l.33(c), (d), (e), and

(f) (column F) that have maturity dates
pursuant to § l.31 for each day within
the 30 calendar-day period. The covered
company would then determine (G), the
net cumulative cash outflows, by
subtracting column (F) from column (C)
for each day. The net cumulative peak
day amount would be the largest value
of column (G). The greater of that peak

61477

value and zero less the greater of the day
30 value of column (G) and zero is the
add-on. To determine the total net cash
outflow amount, the covered company
would add the aggregated net cash
outflow amount calculated in the first
step and the add-on.

TABLE 1—DETERMINATION OF TOTAL NET CASH OUTFLOW USING THE ADD-ON APPROACH

Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day

Non-maturity
outflows and
outflows that have
a maturity date
pursuant to
section 31, but
not under sections
32(g), (h)(1),
(h)(2), (h)(5), (j),
(k), (l)

Outflows
determined
under sections
32(g), (h)(1),
(h)(2), (h)(5), (j),
(k), and (l) that
have a maturity
date pursuant to
section 31

Cumulative
outflows
determined
under sections
32(g), (h)(1),
(h)(2), (h)(5), (j),
(k), and (l) that
have a maturity
date pursuant to
section 31

Inflows that have
a maturity date
pursuant to
section 31, but not
under sections
33(c), (d), (e),
and (f)

Inflows
determined
under sections
33(c), (d), (e), and
(f) that have a
maturity date
pursuant to
section 31

Cumulative inflows
determined
pursuant to
sections 33(c),
(d), (e), and (f)
that have a
maturity date
pursuant to
section 31

Net cumulative
maturity
outflows

A

B

C

D

E

F

G

1 ...................
2 ...................
3 ...................
4 ...................
5 ...................
6 ...................
7 ...................
8 ...................
9 ...................
10 .................
11 .................
12 .................
13 .................
14 .................
15 .................
16 .................
17 .................
18 .................
19 .................
20 .................
21 .................
22 .................
23 .................
24 .................
25 .................
26 .................
27 .................
28 .................
29 .................
30 .................

..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................

100
20
10
15
20
0
0
10
15
25
35
10
0
0
5
15
5
10
15
0
0
20
20
5
40
8
0
0
5
2

100
120
130
145
165
165
165
175
190
215
250
260
260
260
265
280
285
295
310
310
310
330
350
355
395
403
403
403
408
410

..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................
..............................

90
5
5
20
15
0
0
8
7
20
5
15
0
0
5
5
5
5
20
0
0
45
40
20
5
125
0
0
10
5

90
95
100
120
135
135
135
143
150
170
175
190
190
190
195
200
205
210
230
230
230
275
315
335
340
465
465
465
475
480

10
25
30
25
30
30
30
32
40
45
75
70
70
70
70
80
80
85
80
80
80
55
35
20
55
¥62
¥62
¥62
¥67
¥70

Total .............

300

410

..............................

100

480

..............................

..............................

Total Net Cash Outflows = Aggregated Outflows ¥ MIN (.75*Aggregated Outflows,Aggregated Inflows) + Add-On.
= 300 + 410¥MIN (100 + 480, .75 * (300 + 410)) + (MAX (0,85) ¥ MAX(0,¥70)).
= 710 ¥ 532.5 + (85 ¥ 0).
= 262.5.

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b. Inflow Cap
Under the proposed rule, a covered
company’s total cash inflow amount
would have been capped at 75 percent
of its total cash outflows. This was
designed to ensure that covered
companies would hold a minimum
HQLA amount equal to at least 25
percent of total cash outflows. The
agencies received a number of
comments on this provision of the
proposed rule, including requests for
modifications to the cap. However, for
the reasons discussed below, the
agencies are adopting this provision of

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the rule largely as proposed, except for
a modification relating to the netting of
certain foreign currency derivative
transactions.
One commenter noted that while
there is a recognizable policy rationale
for the 75 percent inflow cap,
application of the rule in all
circumstances may result in
unwarranted or unintended outcomes.
Some commenters suggested application
of the inflow cap to individual types of
inflows rather than as a restriction on
the entire LCR denominator. For
instance, one commenter recommended

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that the agencies make a distinction
between contractual and contingent
inflows, and only apply the inflow cap
to the latter category. The commenter
also noted that the application of the
cap could cause asymmetric treatment
of certain categories of transactions that
may be perceived as being linked in the
normal course of business. For example,
the commenter suggested that the inflow
leg of a foreign exchange swap
transaction should not be subject to the
75 percent inflow cap. Rather, the full
amount of the inflow leg should be
counted and netted against the

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

corresponding outflow leg in the net
derivative outflow amount (under
§ l.32(c) of the proposed rule). Other
commenters requested that loans of
securities to cover customer short
positions be exempt from the 75 percent
inflow cap in the final rule where the
covered company obtains the security
through a repurchase agreement because
all related transactions would unwind
simultaneously and net out.
Commenters opined that the application
of the proposed rule’s inflow cap would
result in a net liquidity outflow across
the secured transactions despite the
transactions’ symmetry and result in an
overestimation of net outflows, instead
of full recognition of secured lending
inflows where the banking organization
has the contractual right and practical
ability to terminate the loan and receive
cash back from a counterparty in
response to a change in offsetting
customer positions.
Other commenters indicated that the
release of previously segregated funds
held to comply with Rule 15c3–3
should not be subject to the 75 percent
inflow cap, but should be given full
inflow credit.58 Another commenter
noted that certain covered nonbank
companies cannot deposit excess cash
in Federal Reserve Banks, and instead
tend to deposit such funds in thirdparty commercial banks. This
commenter recommended that the
inflows from such deposits should not
be subject to the 75 percent cap. Several
commenters requested that the agencies
eliminate the application of inflow caps
for covered subsidiaries of covered
companies in the calculation of the
subsidiaries’ own LCR.
The agencies continue to believe the
total inflow cap is a key requirement of
the LCR calculation because it ensures
covered companies hold a minimum
HQLA amount equal to 25 percent of
total cash outflows that will be available
during a stress period. The agencies
believe it is critical for firms to maintain
on-balance sheet assets to meet outflows
and not be overly reliant on inflows that
may not materialize in a stress scenario.
The agencies decline to significantly
modify this provision to relax the cap
on inflows because, without it, a
covered company may be holding an
amount of HQLA that is not
commensurate with the risks of its
funding structure under stress
conditions. Reducing the inflow cap and
allowing covered companies to rely
more heavily on inflows to offset
outflows likely would increase the
interconnectedness of the financial
system, as a substantial amount of
58 17

CFR 240.15c3–3.

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inflows are from other financial
institutions. Consequently, the agencies
are retaining the limitation of inflows at
75 percent of total cash outflows in the
final rule. No inflow cap will apply to
the calculation of the maturity
mismatch add-on.
Notwithstanding the agencies’ general
view regarding the inflow cap, the
agencies have made a change to the
proposed rule in response to the
comments received. Certain foreign
currency exchange derivative cash flows
are to be treated on a net basis and have
therefore effectively been removed from
the gross inflow cap calculation. This
change is described in more detail in
section II.C.3.c of this Supplementary
Information section.
2. Determining Maturity
Section l.31 of the proposed rule
would have required a covered
company to identify the maturity date or
date of occurrence of a transaction that
is the most conservative when
calculating inflow and outflow amounts;
that is, the earliest possible date for
outflows and the latest possible date for
inflows. In addition, under § l.30 of the
proposed rule, a covered company’s
total net outflow amount as of a
calculation date would have included
outflow amounts for certain instruments
that do not have contractual maturity
dates and outflows and inflows that
mature prior to or on a day 30 calendar
days or less after the calculation date.
Section l.33 of the proposed rule
would have expressly excluded
instruments with no maturity date from
a covered company’s total inflow
amount.
The proposed rule described how
covered companies would have
determined whether certain instruments
mature or transactions occur within the
30 calendar-day period when
calculating outflows and inflows. The
proposed rule also would have required
covered companies to take the most
conservative approach when
determining maturity with respect to
any options, either explicit or
embedded, that would have modified
maturity dates and with respect to any
notice periods. If such an option existed
for an outflow instrument or
transaction, the proposed rule would
have directed a covered company to
assume that the option would be
exercised at the earliest possible date. If
such an option existed for an inflow
instrument or transaction, the proposed
rule would have required covered
companies to assume that the option
would be exercised at the latest possible
date. In addition, the proposed rule
would have provided that if an option

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to adjust the maturity date of an
instrument is subject to a notice period,
a covered company would have been
required to either disregard or take into
account the notice period, depending
upon whether the instrument was an
outflow or inflow instrument and
whether the notice requirement
belonged to the covered company or its
counterparty.
Many commenters expressed concern
that the proposed requirements for
determining maturity with respect to
options may conflict with the legal
agreements underlying those
transactions. One commenter argued
that the proposed rule would have
assumed that covered companies would
disregard customer contractual 30-day
notice periods. The commenter
requested that commitment outflows
that are subject to a mandatory notice
period of more than 30 days not be
subject to an outflow amount because
the notice period practically prevents an
outflow and therefore the notice period
should be recognized. Other
commenters requested clarification as to
whether an acceleration provision that
may be exercised in the event of a
default or other remote contingencies,
such as the right to call certain funding
facilities, would count as an option for
the purposes of determining maturity.
Another commenter argued that the
proposed requirements for determining
maturity should have taken into account
the timing of a redemption period and
whether or not the period had lapsed.
Commenters also objected to the
application of the ‘‘nearest possible
date’’ assumption to commitment
outflows supporting debt maturing
within a 30 calendar-day period because
it would assume that such commitment
outflows would occur on the first day of
a 30 calendar-day period rather than the
debt instrument’s actual maturity date.
Several commenters indicated that the
assumptions underlying the
requirements in § l.31 of the proposed
rule were counterintuitive and not
consistent with economic behavior. For
instance, one commenter argued that
requiring a covered company to assume
that options are always exercised would
imply that the covered company must
always disadvantage itself in a stress
scenario. Another commenter observed
that no market expectation exists for a
covered company to exercise a call
option on long-term debt in a stressed
environment and such behavior was not
evident in the recent financial crisis,
and therefore should not be an
assumption of the final rule.
Several commenters requested that
the agencies clarify the treatment of
legal notice periods for obligations such

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
as wholesale deposit agreements or
revolving credit facilities. Another
commenter argued that in times of
stress, certain customers with nonmaturity obligations, including retail or
operational deposits, engage in ‘‘flight to
quality behavior,’’ making it unlikely
that all such customers would liquidate
their positions simultaneously. Other
commenters recognized that while
covered companies might make certain
disadvantageous decisions to benefit
retail customer relations, they and their
wholesale counterparties should be
assumed to act rationally with respect to
exercising options, and should be
assumed to abide by their contractual
obligations.
Commenters expressed concern that
the maturity assumptions employed in
the proposed rule overstated near-term
liquidity risk. Several commenters
argued that the maturity assumptions of
the proposed rule would require that
certain maturity deposits, including
brokered time deposits, be treated as
non-maturity deposits because the
customer was provided an
accommodation to allow for early
withdrawal. These commenters
requested that the agencies undertake an
empirical analysis of the maturity
assumptions for such instruments.
Another commenter argued that the
combination of a peak cumulative net
cash outflow or ‘‘worst day’’
denominator requirement with the
maturity assumptions were unrealistic
and would have overstated a banking
organization’s liquidity risk. Several
commenters requested clarification that
a covered company would not be
required to assume to have exercised
call options or rights to redeem its own
debt on wholesale funding instruments
and long-term debt issued by the
covered company.
The agencies have considered the
comments and have modified the
provisions on determining maturity in
the final rule to ensure that all option
types are addressed. The modifications
result in a more accurate reflection of
likely market behavior during a time of
liquidity stress, based on comments and
the agencies’ observations. The
provisions in the final rule for
determining maturity remain
conservative. The final rule contains the
following maturity assumptions for
options: (a) For an investor or funds
provider holding an option to reduce
the maturity of a transaction subject to
§ __.32, assume the option will be
exercised; (b) for an investor or funds
provider holding an option to extend
the maturity of a transaction subject to
§ l.32, assume the option will not be
exercised; (c) for a covered company

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holding an option to reduce the
maturity of a transaction subject to
§ l.32, assume the option will be
exercised; (d) for a covered company
holding an option to extend the
maturity of a transaction subject to
§ l.32, assume the option will not be
exercised; (e) for a borrower holding an
option to extend the maturity of a
transaction subject to § l.33, assume
the option will be exercised; (f) for a
borrower holding an option to reduce
the maturity of a transaction subject to
§ l.33, assume the option will not be
exercised; (g) for a covered company
holding an option to reduce the
maturity of a transaction subject to
§ l.33, assume the option will not be
exercised; and (h) for a covered
company holding an option to extend
the maturity of a transaction subject to
§ l.33, assume the option will be
exercised.
The final rule makes an exception for
longer-term callable bonds and treats
the original maturity of the instrument
as the maturity for purposes of the LCR.
The final rule provides that when a
bond issued by a covered company has
an original maturity greater than one
year and the call option held by the
covered company does not go into effect
until at least six months after the
issuance, the original maturity of the
bond will determine the maturity for
purposes of the LCR. The agencies have
adjusted this provision in the final rule
because they have concluded that
covered companies would not likely be
susceptible during a period of liquidity
stress to significant market pressure to
exercise these call options. Similarly,
the agencies are amending the maturity
provisions of the final rule so that a
covered company does not have to
presume acceleration of the maturity of
its obligation where the covered
company holds an option permitting it
to repurchase its obligation from a
sovereign entity, U.S. GSE, or public
sector entity. In those circumstances,
the maturity of the obligation under the
final rule will be the original maturity
of the obligation. This change reflects
the fact that, for example, the agencies
believe there is less reputational
pressure to exercise an option to redeem
FHLB advances early.
Another of the final rule’s
modifications of the proposed maturity
determination requirements clarifies
how a covered company should address
certain outflows and inflows that do not
have maturity dates, as these were not
explicitly addressed in the proposed
rule. Under the proposed rule, all nonmaturity inflows would have been
excluded from the LCR. Under the final
rule, transactions, except for operational

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61479

deposits, subject to § l.32(h)(2), (h)(5),
(j), or (k), or § l.33(d) or (f) that do not
have maturity dates will be considered
to have a maturity date on the first
calendar day after the calculation date.
This change will primarily affect certain
transactions with financial sector
entities. The maturity of these
transactions is often referred to as
‘‘open.’’ The agencies believe these
transactions are similar to overnight
deposits from financial institutions and
for purposes of the LCR, are treating
them the same. Therefore, for these
types of ‘‘open’’ transactions with
financial sector entities and other
transactions subject to § l.32(h)(2),
(h)(5), (j), or (k), or § l.33(d) or (f) that
do not have maturity dates and are not
operational deposits, the final rule
provides that for purposes of the LCR,
the maturity date will be the first
calendar day after the calculation date.
An additional change in the final rule
for determining maturity pertains to
matched secured lending transactions or
asset exchanges with a contractual
maturity of 30 days or less that generate
an inflow to the covered company in the
form of collateral (inflow-generating
asset exchange) and the company then
uses the received collateral in a secured
funding transaction or asset exchange
with a contractual maturity of 30 days
or less that results in an outflow from
the covered company in the form of
collateral (outflow-generating asset
exchange) (see section II.C.4.f below). In
the final rule, the maturity date of
secured lending transactions or inflowgenerating asset exchanges will be the
later of the contractual maturity date of
the secured lending transaction or
inflow-generating asset exchange and
the maturity date of the secured funding
transaction or outflow-generating asset
exchange for which the received
collateral was used. This treatment is a
clarifying change consistent with the
intent of the proposed rule, which was
to prevent a covered company from
recognizing inflows resulting from
secured lending transactions or asset
exchanges earlier in the 30 calendar-day
period than outflows resulting from
secured funding transactions or asset
exchanges, even though the collateral
needed to cover the maturing secured
lending transaction or asset exchange
will not be available until the related
outflow occurs.
The final rule also adds to the
maturity provisions of the proposed rule
a clarification that any inflow amount
available under § l.33(g) will be
deemed to occur on the day on which
the covered company or its consolidated
subsidiary calculates the release of
assets under statutory or regulatory

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

requirements for the protection of
customer trading assets, such as Rule
15c3–3, consistent with the covered
company’s or consolidated subsidiary’s
past practice with respect to such
calculation. Under the final rule, this
inflow will be assumed to occur on the
date of the next regular calculation.
Therefore if, for example, a brokerdealer performs this calculation on a
daily basis, the inflow would occur on
the first day of the 30 calendar-day
period, but if a broker-dealer typically
performs the calculation on a weekly
basis, the inflow would occur on the
date of the next regularly scheduled
calculation. This maturity
determination provision is necessary
because of the inclusion of the related
inflow under § l.33(g) of the final rule,
which was added in response to
comments received by the agencies, as
discussed below in section II.C.4.g.
Several commenters requested that
the agencies clarify that time deposits
that can be withdrawn at any time
(subject to the forfeiture of interest)
would be subject to the earliest possible
maturity date assumption under the
proposal, while deposits that cannot be
withdrawn (but for death or
incompetence) would be assumed to
mature on the applicable maturity date.
The agencies are clarifying that, for
purposes of the final rule, deposits that
can only be withdrawn in the event of
death or incompetence are assumed to
mature on the applicable maturity date,
and deposits that can be withdrawn
following notice or the forfeiture of
interest are subject to the rule’s
assumptions for non-maturity
transactions.
Though not resulting in a change in
the final rule, the agencies are clarifying
that remote contingencies in funding
contracts that allow acceleration, such
as withdrawal rights arising solely upon
death or incompetence or material
adverse condition clauses, are not
considered options for determining
maturity. The agencies did not change
the treatment of notice periods in the
final rule as commenters requested
because reputational considerations
may drive a covered company’s
behavior with regard to notice periods.
Further, these reputational
considerations exist for all types of
counterparties, including wholesale and
not just retail, and regardless of whether
there are contractual provisions favoring
the covered company. Regarding
commenters’ arguments that the
proposed requirements for determining
maturity do not reflect a likely flight to
quality during a period of liquidity
stress, the agencies believe that such
behavior cannot be relied upon and may

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not occur for all institutions, so the
conservative assumptions in the
proposed and final rule with respect to
maturity are appropriate. The agencies
understand that the requirements for
determining maturity may not comport
with the stated requirements for call
options in some legal agreements, but
believe that the conservative
assumptions in the final rule ensure a
more accurate assessment of a covered
company’s liquidity resiliency through
the LCR. Similarly, the agencies believe
that taking a more conservative view of
likely behavior during a liquidity stress
event is critical to achieving this goal.
With respect to commenters’ request
that the agencies provide data for the
maturity assumptions in the final rule,
the agencies note that during the recent
financial crisis, many options were
exercised in a manner that was
disadvantageous to the banking
organization or financial institution to
protect its market reputation.
3. Outflow Amounts
The proposed rule set forth outflow
categories for calculating cash outflows
and their respective outflow rates, each
as described below. The outflow rates
were designed to reflect the 30 calendarday stress scenario that formed the basis
of the proposed rule, and included
outflow assumptions for the following
categories: (a) Unsecured retail funding;
(b) structured transactions; (c) net
derivatives; (d) mortgage commitments;
(e) commitments; (f) collateral; (g)
brokered deposits for retail customers or
counterparties; (h) unsecured wholesale
funding; (i) debt securities; (j) secured
funding; (k) foreign central bank
borrowing; (l) other contractual
outflows; and (m) excluded amounts for
intragroup transactions. The agencies
proposed outflow rates for each
category, ranging from zero percent to
100 percent, in a manner generally
consistent with the Basel III Revised
Liquidity Framework. Under the
proposed rule, the outstanding balance
of each category of funding or obligation
that matured within 30 calendar days of
the calculation date (under the maturity
assumptions described above in section
II.C.2) would have been multiplied by
these outflow rates to arrive at the
applicable outflow amount.
a. Retail Funding Outflow Amount
The proposed rule defined retail
customers or counterparties to include
individuals and certain small
businesses. Under the proposal, a small
business would have qualified as a retail
customer or counterparty if its
transactions had liquidity risks similar
to those of individuals and were

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managed by a covered company in a
manner comparable to the management
of transactions of individuals. In
addition, to qualify as a small business,
the proposed rule would have required
that the total aggregate funding raised
from the small business be less than
$1.5 million. If an entity provides $1.5
million or more in total funding, has
liquidity risks that are not similar to
individuals, or the covered company
manages the customer like a corporate
customer rather than an individual
customer, the entity would have been a
wholesale customer under the proposed
rule.
The proposed rule included in the
category of unsecured retail funding
retail deposits (other than brokered
deposits) that are not secured under
applicable law by a lien on specifically
designated assets owned by the covered
company and that are provided by a
retail customer or counterparty. The
proposed rule divided unsecured retail
funding into subcategories of: (i) Stable
retail deposits, (ii) other retail deposits,
and (iii) funding from a retail customer
or counterparty that is not a retail
deposit or a brokered deposit provided
by a retail customer or counterparty,
each of which would have been subject
to the outflow rates set forth in § l
.32(a) of the proposed rule, as explained
below. Outflow rates would have been
applied to the balance of each
unsecured retail funding outflow
category regardless of maturity date.
i. Stable Retail Deposits
The proposed rule defined a stable
retail deposit as a retail deposit, the
entire amount of which is covered by
deposit insurance, and either: (1) Held
in a transactional account by the
depositor, or (2) where the depositor has
another established relationship with a
covered company, such that withdrawal
of the deposit would be unlikely.59
Under the proposed rule, the
established relationship could have
been another deposit account, a loan,
bill payment services, or any other
service or product provided to the
depositor, provided that the banking
organization demonstrates to the
satisfaction of its appropriate Federal
banking agency that the relationship
would make withdrawal of the deposit
highly unlikely during a liquidity stress
event. The proposed rule assigned stable
retail deposit balances an outflow rate of
3 percent.
59 For purposes of the proposed rule, ‘‘deposit
insurance’’ was defined to mean deposit insurance
provided by the FDIC and did not include other
deposit insurance schemes.

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ii. Other Retail Deposits
The proposed rule categorized all
deposits from retail customers that are
not stable retail deposits, as described
above, as other retail deposits.
Supervisory data supported a higher
outflow rate for deposits that are
partially FDIC-insured as compared to
entirely FDIC-insured. The agencies
proposed an outflow rate of 10 percent
for those retail deposits that are not
entirely covered by deposit insurance or
that otherwise do not meet the proposed
criteria for a stable retail deposit.
iii. Other Unsecured Retail Funding
Under the proposed rule, the other
unsecured retail funding category
included funding provided by retail
customers or counterparties that is not
a retail deposit or a retail brokered
deposit and received an outflow rate of
100 percent. This outflow category was
intended to capture all other types of
retail funding that were not stable retail
deposits or other retail deposits, as
defined by the proposal.

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iv. Comments on Retail Funding
Outflows
Comments related to the unsecured
retail funding outflow category
addressed applicable definitions, the
types of transactions that would qualify
as retail funding, the treatment of retail
maturities, requirements related to
deposit insurance, applicable outflow
rates, and requests for additional
information from the agencies.
Several commenters requested a
broadening of the definition of retail
customer or counterparty to include
additional entities and to exclude
certain transactions from the other
unsecured retail funding category. For
example, two commenters argued that
the proposed $1.5 million limit on
aggregate funding, which would apply
to small businesses in the retail
customer or counterparty definition,
should be raised to $5 million, which
would be consistent with annual
receipts criteria used by the U.S. Small
Business Administration’s definition for
small business. Other commenters
requested a broadening of the retail
funding category to include certain
trusts and other personal fiduciary
accounts, such as personal and
charitable trusts, estates, certain
payments to minors, and guardianships
formed by retail customers, because
they exhibit characteristics of retail
funding. Another commenter argued
that revocable trusts should qualify as
retail funding because such trusts have
risk characteristics similar to that of
individuals, in that the grantor keeps

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control of the assets and has the option
to terminate the trust at any point in the
future.
One commenter stated that a 3
percent outflow rate in cases where the
entire deposit is covered by deposit
insurance was appropriately low, but
that a 10 percent outflow rate did not
sufficiently reflect the stability of
deposits partially covered by deposit
insurance. Another commenter
requested zero outflows relating to
prepaid cards issued by nonbank money
transmitter subsidiaries because they are
functionally regulated by individual
states and are subject to collateral
requirements similar to those for
secured transactions. This commenter
indicated that certain non-deposit,
prepaid retail products covered by FDIC
insurance that is deemed to ‘‘passthrough’’ the holder of the account to
the owner of the funds should merit an
outflow rate significantly less than 100
percent, as these products are similar to
retail deposits and have exhibited
stability throughout economic cycles,
including during the recent financial
crisis.
Some commenters also requested that
the definition of deposit insurance be
expanded beyond FDIC insurance to
include foreign deposit insurance
programs where (i) insurance is
prefunded by levies on the institutions
that hold insured deposits; (ii) the
insurance is backed by the full faith and
credit of the national government; (iii)
the obligations of the national
government are assigned a zero percent
risk weight under the agencies’ riskbased capital rules; and (iv) depositors
have access to their funds within a
reasonable time frame. The commenters
also requested that the outflow rate
assigned to partially-insured deposits
reflect the benefit of partial insurance,
rather than treating the entire deposit as
uninsured. This would lead to treatment
of the portion of a deposit that is below
the $250,000 FDIC insurance limit as a
stable retail deposit subject to a 3
percent outflow, and any excess balance
as a less stable retail deposit subject to
the 10 percent outflow rate.
Finally, some commenters requested
the agencies share the empirical data
that was the basis for the proposed
rule’s retail funding outflow
requirements. Specifically, commenters
requested information regarding the
stability of insured deposits, partially
insured deposits, term deposits, and
deposits without a contractual term
during the recent financial crisis.
v. Final Rule
In considering the comments on retail
funding outflows, the agencies continue

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to believe that the outflow rates
applicable to stable deposits and other
retail deposits, 3 percent and 10
percent, respectively, are appropriate
based on supervisory data and for the
reasons outlined in the proposed rule
and, accordingly, have retained those
outflow rates in the final rule.60 The
agencies used substantial supervisory
data, including data reflecting the recent
financial crisis, to inform the outflow
rates. This data indicated that
depositors withdrawing funds usually
withdraw the entire amount, and not
just the amount that is not covered by
FDIC insurance. As a result, the
agencies are retaining the treatment of
partially insured retail deposits.
In response to comments received
about other retail funding, the agencies
have reconsidered the 100 percent
outflow rate in § l.32(a)(3) of the
proposed rule. In the final rule, the
agencies have lowered the outflow rate
to 20 percent for deposits placed at the
covered company by a third party on
behalf of a retail customer or
counterparty that are not brokered
deposits, where the retail customer or
counterparty owns the account and
where the entire amount is covered by
deposit insurance. In addition, partially
insured deposits placed at the covered
company by a third party on behalf of
a retail customer or counterparty that
are not brokered deposits and where the
retail customer or counterparty owns
the account receive a 40 percent outflow
rate under the final rule. The 20 percent
and 40 percent outflow rates are
designed to be consistent with the final
rule’s treatment of wholesale deposits,
which the agencies believe have similar
liquidity risk as deposits placed on
behalf of a retail customer or
counterparty. Finally, all other funding
from a retail customer or counterparty
that is not a retail deposit, a brokered
deposit provided by a retail customer or
counterparty, or a debt instrument
issued by the covered company that is
owned by a retail customer or
counterparty, which includes items
such as unsecured prepaid cards,
receives a 40 percent outflow rate. The
agencies believe these changes better
reflect the liquidity risks of categories of
unsecured retail funding that have
liquidity characteristics that more
closely align with certain types of thirdparty funding in § l.32(g) of the
proposed rule.
Additionally, the final rule clarifies
that the outflow rates for retail funding
apply to all retail funding, regardless of
whether that funding is unsecured or
secured. This reflects the nature of retail
60 78

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funding, which is less likely to involve
a secured transaction, and the relatively
low outflow rates already assigned to
the funding.
The agencies decline to revise most of
the definitions and key terms employed
in the retail funding section of the
proposed rule. With respect to the
commenters’ request to raise the limit
on aggregate funding that applies to
small businesses, the annual receipts
criteria within the U.S. Small Business
Administration’s definition for small
business would include businesses that
are large and sophisticated and should
not be treated similarly to retail
customers or counterparties in terms of
liquidity risks. The agencies therefore
continue to believe that $1.5 million is
the appropriate limit. The agencies
considered whether foreign deposit
insurance systems should be given the
same treatment as FDIC deposit
insurance in the final rule. The agencies
believe there would be operational
difficulties in evaluating a foreign
deposit insurance system for the
purposes of a U.S. regulatory
requirement. For the reasons discussed
in the preamble to the proposed rule,
the agencies are recognizing only FDIC
deposit insurance in defining stable
retail deposits.61
However, the agencies have
concluded that certain trusts pose
liquidity risks substantially similar to
those posed by individuals, and the
agencies are modifying the final rule to
clarify that living or testamentary trusts
that have been established for the
benefit of natural persons, that do not
have a corporate trustee, and that
terminate within 21 years and 10
months after the death of grantors or
beneficiaries of the trust living on the
effective date of the trust or within 25
years (in states that have a rule against
perpetuities) can be treated as retail
customers or counterparties. The
agencies believe that these trusts are
‘‘alter egos’’ of the grantor and thus
should be treated the same as an
individual for purposes of the LCR. If
the trustee is a corporate trustee that is
an investment adviser, whether or not
required to register as an investment
adviser under the Investment Advisers
Act of 1940 (15 U.S.C. 80b–1, et seq.),
however, the trust will be treated as a
financial sector entity.
Apart from the changes to the final
rule discussed above, the agencies have
finalized the rule as proposed with
regard to retail funding and believe that
the changes incorporated appropriately
capture the key liquidity characteristics
of the retail funding market.
61 78

FR 71836.

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b. Structured Transaction Outflow
Amount
The proposed rule’s structured
transaction outflow amount, set forth in
§ l.32(b) of the proposed rule, would
have captured obligations and
exposures associated with structured
transactions sponsored by a covered
company, without regard to whether the
structured transaction vehicle that is the
issuing entity is consolidated on the
covered company’s balance sheet. The
proposed rule assigned as an outflow
rate for each structured transaction
sponsored by the covered company the
greater of: (1) 100 Percent of the amount
of all debt obligations of the issuing
entity that mature 30 days or less from
a calculation date and all commitments
made by the issuing entity to purchase
assets within 30 calendar days or less
from the calculation date, and (2) the
maximum contractual amount of
funding the covered company may be
required to provide to the issuing entity
30 calendar days or less from such
calculation date through a liquidity
facility, a return or repurchase of assets
from the issuing entity, or other funding
agreement. The agencies proposed the
100 percent outflow rate because such
transactions, including potential
obligations arising out of commitments
to an issuing entity, whether issued
directly or sponsored by covered
companies, caused severe liquidity
demands at covered companies during
times of stress as observed during the
recent financial crisis.
Comments regarding § l.32(b) of the
proposed rule focused on specific
structured transactions (such as bank
customer securitization credit facilities
and those vehicles where a banking
organization securitizes its own assets)
and requested clarification around
which types of transactions should be
treated as a structured transaction under
§ l.32(b) and which transactions
should be treated as facilities under
§ l.32(e)(1)(vi) of the proposed rule. A
commenter noted that the agencies did
not draw a distinction between a
structured transaction vehicle that is
consolidated on the covered company’s
balance sheet and transactions that are
sponsored, but not owned by the
covered company. The commenter
argued that the proposed rule would
impact all private label MBS that are
sponsored by a covered company by
assigning a 100 percent outflow rate to
the obligations of the issuing entity that
mature in 30 calendar days or less.
Moreover, the commenter also requested
clarification as to whether variable
interest entity (VIE) liabilities relating to
SPEs that are to be included in the net

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cash outflow of a covered company can
be offset with cash flows from the assets
in the SPE even if they are not
consolidated on the covered bank’s
balance sheet.
Some commenters also indicated that
those securitizations that meet the
definition of ‘‘traditional securitization’’
in the agencies’ regulatory capital rules,
where the sponsor securitizes its own
assets, should be exempt from the
outflow amount in § l.32(b), so long as
the covered company does not extend
credit or liquidity support. These
commenters relied on the fact that the
issuing entity would have no legal
obligation to make a payment on a
security as a result of a shortfall of cash
from underlying assets, irrespective of
whether the covered company is
required to consolidate the issuing
entity onto its balance sheet to justify
the exemption request.
Several commenters also expressed
concern regarding the proposed rule’s
assumption of a significant cash outflow
on the first day of the 30 calendar-day
period (without a corresponding inflow
that would be assumed to occur at a
later date) and that the proposed rule
did not include a clear explanation for
this assumption. Commenters requested
that the outflow be deemed to occur on
the scheduled maturity date of the debt.
Several commenters also expressed
concern that potential double counting
of outflow amounts could occur in that
transactions captured under
§ l.32(e)(1)(vi) of the proposed rule
could also be subject to § l.32(b)
without further clarification.
The agencies continue to believe the
100 percent outflow rate applicable to
structured transactions sponsored by a
covered company is generally reflective
of the liquidity risks of such
transactions. Structured transactions
can be a source of unexpected funding
requirements during a liquidity crisis, as
demonstrated by the experience of
various financial firms during the recent
financial crisis. This outflow rate is also
generally consistent with the outflow for
commitments made to financial
counterparties and SPEs that issue
commercial paper and other securities,
as provided in § l.32(e) of the final rule
and discussed below.
The agencies recognize that banking
regulations may prohibit some covered
companies from providing certain forms
of support to funds that are sponsored
by covered companies.62 However, the
62 See, e.g., OCC, Board, FDIC, and SEC,
‘‘Prohibitions and Restrictions on Proprietary
Trading and Certain Interests in, and Certain
Relationships With, Hedge Funds and Private
Equity Funds,’’ 79 FR 5536, 5790 (January 31,
2014); OCC, Board, and FDIC, ‘‘Interagency Policy

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
100 percent outflow rate recognizes that
covered companies may still provide
significant support to structured
transactions that they sponsor while
complying with regulatory requirements
that prohibit certain forms of support.
To address the commenters’ concern
regarding potential double counting of
outflow amounts, the final rule excludes
from the outflows in § l.32(e)(1)(vii)
through (viii) those commitments
described in the structured transaction
outflow amount section. Although the
structured transaction outflow amount
and the commitment outflow amount
sections (§ l.32(b) and § l.32(e),
respectively) are similar in that both
apply outflow rates to commitments
made to an SPE, the structured
transaction outflow amount also
includes outflows beyond contractual
commitments because a sponsor may
provide support despite the absence of
such a commitment.
The agencies are making a clarifying
change in the final rule by applying the
structured transaction outflow amount
provision only to issuing entities that
are not consolidated with the covered
company. If the issuing entity is
consolidated with the covered company,
then the commitments from the covered
company to that entity would be
excluded under § l.32(m) as intragroup
transactions. However, even though the
commitments would be excluded, any
outflows and inflows of the issuing
entity would be included in the covered
company’s outflow and inflows because
they are consolidated.
The agencies did not define the term
‘‘sponsor’’ in the proposed rule and are
not defining it in the final rule because
the agencies believe that the term is
generally understood within the
marketplace. Furthermore, the agencies
intend § l.32(b) to apply to all covered
companies that would have explicit or
implicit obligations to support a
structured transaction of an issuing
entity that is not consolidated by the
covered company during a period of
liquidity stress. Generally, the agencies
consider covered companies to be
sponsors when they have significant
control or influence over the
structuring, organization, or operation of
a structured transaction.
The agencies agree with commenters’
concern that the maturity assumptions
in the proposed rule would cause
structured transaction payments to fall
on the first day of the 30 calendar-day
period and that this treatment would
on Banks/Thrifts Providing Financial Support to
Funds Advised by the Banking Organization or its
Affiliates,’’ OCC Bulletin 2004–2, Federal Reserve
Supervisory Letter 04–1, FDIC FIL–1–2004 (January
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not be appropriate. The changes to the
peak day approach described above in
section II.C.1 of this Supplementary
Information section would result in
structured transaction payments not
being assumed to occur on the first day
of a 30 calendar-day window because
they are not included in the calculation
of the add-on. Instead, these
commitments would be assumed to
occur on the transaction’s scheduled
maturity date. Finally, the agencies
believe that the definitions and key
terms employed in this section of the
proposed rule accurately capture the
key characteristics related to structured
transactions sponsored by a covered
company and decline to provide a
different treatment for the funding of
VIE liabilities that are part of a
structured securitization, structured
securitizations involving SPEs,
structured securitization credit facilities
to finance the receivables owned by a
corporate entity, or where the sponsor
securitizes its own assets. Likewise,
private label MBS that meet the
definition of a structured transaction
will be subject to this provision because
of the liquidity risks incumbent in such
transactions. Accordingly, the agencies
are adopting as final this provision of
the rule as proposed with the clarifying
change regarding consolidated issuing
entities.
c. Net Derivative Outflow Amount
The proposed rule would have
defined a covered company’s net
derivative cash outflow amount as the
sum of the payments and collateral that
a covered company would make or
deliver to each counterparty under
derivative transactions, less the sum of
payments and collateral due from each
counterparty, if subject to a valid
qualifying master netting agreement.63
This calculation would have
incorporated the amounts due to and
from counterparties under the
applicable transactions within 30
calendar days of a calculation date.
Netting would have been permissible at
the highest level permitted by a covered
company’s contracts with a
counterparty and could not include
63 Under the proposal, a ‘‘qualifying master
netting agreement’’ was defined as a legally binding
agreement that gives the covered company
contractual rights to terminate, accelerate, and close
out transactions upon the event of default and
liquidate collateral or use it to set off its obligation.
The agreement also could not be subject to a stay
under bankruptcy or similar proceeding and the
covered company would be required to meet certain
operational requirements with respect to the
agreement, as set forth in section 4 of the proposed
rule. This is the same definition as under the
agencies’ regulatory capital rules. See 12 CFR part
3 (OCC); 12 CFR part 217 (Board); 12 CFR part 324
(FDIC).

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offsetting inflows where a covered
company is already including assets in
its HQLA that the counterparty has
posted to support those inflows. If the
derivative transactions were not subject
to a qualifying master netting
agreement, then the derivative cash
outflows for that counterparty would be
included in the net derivative cash
outflow amount and the derivative cash
inflows for that counterparty would be
included in the net derivative cash
inflow amount, without any netting and
subject to the proposed rule’s cap on
total inflows. Under the proposed rule,
the net derivative cash outflow amount
would have been calculated in
accordance with existing valuation
methodologies and expected contractual
derivatives cash flows. In the event that
the net derivative cash outflow for a
particular counterparty was less than
zero, such amount would have been
required to be included in a covered
company’s net derivative cash inflow
amount for that counterparty.
A covered company’s net derivative
cash outflow amount would not have
included amounts arising in connection
with forward sales of mortgage loans or
any derivatives that are mortgage
commitments subject to § l.32(d) of the
proposed rule. However, net derivative
cash outflows would have included
outflows related to derivatives that
hedge interest rate risk associated with
mortgage loans and commitments.
Many commenters were concerned
that the treatment of derivative
transactions created an asymmetric
treatment for certain offsetting
derivative transactions (such as foreign
exchange swaps) because covered
companies would be required to
compute the cash flows on a gross basis
with a cash outflow and a cash inflow
subject to the 75 percent inflow cap as
described above, even if in practice the
settlement occurred on a net basis.
Accordingly, these commenters
proposed that foreign exchange
transactions that are part of the same
swap should be treated as a single
transaction on a net basis.
For the reasons discussed in the
proposal, the agencies continue to
believe the 100 percent outflow rate
applicable to net derivative outflows is
reflective of the liquidity risks of these
transactions and therefore are retaining
this outflow rate in the final rule. The
agencies are, however, making a
significant change to how this outflow
rate is applied to foreign currency
exchange derivative transactions to
address concerns raised by commenters.
Specifically, foreign currency
exchange derivative transactions that
meet certain criteria can be netted under

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the provisions of § l.32(c)(2) of the
final rule. Cash flows arising from
foreign currency exchange derivative
transactions that involve a full exchange
of contractual cash principal amounts in
different currencies between a covered
company and a counterparty within the
same business day may be reflected in
the net derivative cash outflow amount
for that counterparty as a net amount,
regardless of whether those transactions
are covered by a qualifying master
netting agreement. Thus, the inflow leg
of a foreign currency exchange
derivative transaction in effect is not
subject to the 75 percent inflow cap as
long as it settles on the same date as the
corresponding outflow payment of that
derivative transaction.64
d. Mortgage Commitment
The proposed rule would have
required a covered company to apply an
outflow rate of 10 percent for all
commitments for mortgages primarily
secured by a first or subsequent lien on
a one-to-four family property that can be
drawn upon within 30 calendar days of
a calculation date.
One commenter was concerned about
the treatment of VIE liabilities (and
particularly non-consolidated VIEs).
Specifically, this commenter requested
that MBS VIE liabilities be excluded
from the outflow calculation or if
included, that these outflow amounts be
netted against the estimated cash
inflows from linked assets in the
securitization trust, even if those assets
are not on the company’s balance sheet.
Additionally, the commenter requested
that mortgage commitment outflows be
netted against sales from projected tobe-announced inflows. Further, the
commenter requested clarification
regarding cash outflows for commercial
and multifamily loans and whether
outflows for partially funded loans
would be limited to the amount of the
loan that is scheduled to be funded
during the 30 calendar-day period or the
entire unfunded amount of the loan.
The agencies are adopting the
mortgage commitment outflow rates of
the proposed rule, with the following
clarifications that address concerns
raised by commenters. For the reasons
discussed in the proposal, the agencies
continue to believe that the 10 percent
outflow rate applicable to mortgage
commitments reflects the liquidity risks
of these transactions and have adopted
this outflow rate in the final rule. In
response to the comment regarding the
64 This treatment is consistent with the
Frequently Asked Questions on Basel III’s January
2013 Liquidity Coverage Ratio framework (April
2014), available at http://www.bis.org/publ/
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netting of mortgage commitment
amounts against certain transactions,
such as VIE liabilities, the forward sale
of projected to-be-announced mortgage
inflows, and GSE standby facilities, the
agencies are clarifying that such inflows
may not be netted against the overall
mortgage commitment amount. The
agencies believe that in a crisis, such
inflows may not fully materialize, and
thus do not believe that such inflows
should be allowed under the final rule
or netted against the mortgage
commitment outflow amount.
Also, the agencies are confirming that
the outflow amount for mortgage
commitments is based upon the amount
the covered company has contractually
committed for its own originations of
retail mortgages that can be drawn upon
30 calendar days or less from the
calculation date and not the entire
unfunded amount of commitments that
cannot be drawn within 30 calendar
days.
e. Commitments Outflow Amount
The commitment category of outflows
under the proposed rule would have
included the undrawn portion of
committed credit and liquidity facilities
provided by a covered company to its
customers and counterparties that could
have been drawn down within 30
calendar days of the calculation date.
The proposed rule would have defined
a liquidity facility as a legally binding
agreement to extend funds at a future
date to a counterparty that is made
expressly for the purpose of refinancing
the debt of the counterparty when it is
unable to obtain a primary or
anticipated source of funding. A
liquidity facility also would have
included 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.
Liquidity facilities would have excluded
general working capital facilities, such
as revolving credit facilities for general
corporate or working capital purposes.
Facilities that have aspects of both
credit and liquidity facilities would
have been deemed to be liquidity
facilities for the purposes of the
proposed rule. An SPE would have been
defined as a company organized for a
specific purpose, the activities of which
are significantly limited to those
appropriate to accomplish a specific
purpose, and the structure of which is
intended to isolate the credit risk of the
SPE.
The proposed rule would have
defined a credit facility as a legally

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binding agreement to extend funds upon
request at a future date, including a
general working capital facility such as
a revolving credit facility for general
corporate or working capital purposes.
Under the proposed rule, a credit
facility would not have included a
facility extended expressly for the
purpose of refinancing the debt of a
counterparty that is otherwise unable to
meet its obligations in the ordinary
course of business. Under the proposed
rule, a liquidity or credit facility would
have been considered committed when
the terms governing the facility
prohibited a covered company from
refusing to extend credit or funding
under the facility, except where certain
conditions specified by the terms of the
facility—other than customary notice,
administrative conditions, or changes in
financial condition of the borrower—
had been met. The undrawn amount for
a committed credit or liquidity facility
would have been the entire undrawn
amount of the facility that could have
been drawn upon within 30 calendar
days of the calculation date under the
governing agreement, less the fair value
of level 1 liquid assets or 85 percent of
the fair value of level 2A liquid assets,
if any, that secured the facility. In the
case of a liquidity facility, the undrawn
amount would not have included the
portion of the facility that supports
customer obligations that mature more
than 30 calendar days after the
calculation date. A covered company’s
proportionate ownership share of a
syndicated credit facility would have
been included in the appropriate
category of wholesale credit
commitments.
Section __.32(e) of the proposed rule
would have assigned various outflow
amounts to commitments that are based
on the counterparty type and facility
type. First, in contrast to the outflow
rates applied to other commitments,
those commitments between affiliated
depository institutions that are subject
to the proposed rule would have
received an outflow rate of zero percent
because the agencies expect that such
institutions would hold sufficient
liquidity to meet their obligations and
would not need to rely on committed
facilities. In all other cases, the outflow
rates assigned to committed facilities
were meant to reflect the characteristics
of each class of customers or
counterparties under a stress scenario,
as well as the reputational and legal
risks that covered companies face if they
were to try to restructure a commitment
during a crisis to avoid drawdowns by
customers.
An outflow rate of 5 percent was
proposed for retail facilities because

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individuals and small businesses would
likely have a lesser need for committed
credit and liquidity facilities in a stress
scenario when compared to institutional
or wholesale customers (that is, the
correlation between draws on such
facilities and the stress scenario of the
LCR is considered to be lower). An
outflow rate of 10 percent was proposed
for credit facilities and 30 percent for
liquidity facilities to entities that are not
financial sector entities based on their
typically longer-term funding structures
and lower correlation of drawing down
the commitment during times of stress.
The proposed rule would have assigned
a 50 percent outflow rate to credit and
liquidity facilities committed to
depository institutions, depository
institution holding companies, and
foreign banks (other than commitments
between affiliated depository
institutions). Commitments to all other
regulated financial companies,
investment companies, non-regulated
funds, pension funds, investment
advisers, or identified companies (or to
a consolidated subsidiary of any of the
foregoing) would have been assigned a
40 percent outflow rate for credit
facilities and 100 percent for liquidity
facilities. The agencies proposed a 100
percent outflow rate for a covered
company’s credit and liquidity facility
commitments to SPEs given SPEs’
sensitivity to emergency cash and
backstop needs in a short-term stress
environment, such as those experienced
during the recent financial crisis.
The agencies also proposed that the
amount of level 1 or level 2A liquid
assets securing the undrawn portion of
a commitment would have reduced the
outflow associated with the
commitment if certain conditions were
met. The amount of level 1 or level 2A
liquid assets securing a committed
credit or liquidity facility would have
been the fair value (as determined under
GAAP) of all level 1 liquid assets and 85
percent of the fair value (as determined
under GAAP) of level 2A liquid assets
posted or required to be posted upon
funding of the commitment as collateral
to secure the facility, provided that: (1)
The pledged assets had met the criteria
for HQLA as set forth in § __.20 of the
proposed rule during the applicable 30
calendar-day period; and (2) the covered
company had not included the assets in
its HQLA amount as calculated under
subpart C of the proposed rule during
the applicable 30 calendar-day period.
The comments on § __.32(e) were
generally focused on: (i) SPEs; (ii) dual
use facilities; and (iii) other concerns
such as calibration of the outflow rates.
At a high level, commenters asserted
that the treatment for SPEs was overly

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harsh, that the approach for financing
vehicles that employed both credit and
liquidity facilities should conform to the
Basel III Revised Liquidity Framework,
and that a host of specific entities, such
as central counterparties (CCPs) and
financial market utilities, deserved
unique treatments.
i. Special Purpose Entities Comments
Overall, commenters asserted that the
agencies had defined SPEs too broadly
for purposes of § __.32(e) of the
proposed rule, and argued that a 100
percent outflow rate was too high,
recommending instead a ‘‘look-through’’
approach depending on the type of
counterparty that sponsors or owns the
SPE; for example, whether the
counterparty is an operating company
that develops or manages real estate, a
securitization facility that functions as a
financing vehicle, a CCP, a Tender
Option Bond (TOB) issuer, a fund
subject to the Investment Company Act
of 1940 (40 Act Fund), or a commercial
paper facility. Commenters argued that
funding provided through an SPE
should receive the outflow specified in
§ __.32(e) for the ‘‘underlying’’
counterparty rather than the 100 percent
outflow rate applied to SPEs. A few
commenters also requested that the
agencies distinguish between those
SPEs intended to be captured by § __
.32(e)(vi) of the proposed rule that were
a source of liquidity stress in the last
financial crisis and those SPEs that a
borrower uses to finance, through a
securitization credit facility, the
receivables owned by a corporate entity
(a so-called ‘‘bank customer
securitization credit facility’’). These
commenters proposed the agencies look
through to the sponsor or owner of the
SPE and set the outflow rates for the
undrawn amounts based on the sponsor
at: 50 percent for depository
institutions, depository institution
holding companies, or foreign banks; 40
percent for regulated financial
companies, investment companies, nonregulated funds, pension funds,
investment advisers, or identified
companies; and 10 percent for other
wholesale customers. Commenters
proposed specific criteria to define bank
customer securitization credit facilities,
which provided guidelines related to
the sponsor, financing, customers,
underlying exposures, and other
particular aspects of this type of SPE.
These commenters also stated that
failure to implement their suggestion
and retention of the proposed rule’s
treatment of SPEs would reduce the
provision of credit in the U.S. economy
by restricting access to securitized lines
of credit, a major source of funding.

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Other commenters requested that the
look-through approach be applied to the
undrawn amount of credit commitments
of any bank customer securitization
credit facility irrespective of whether it
is funded by the bank or through an
asset-backed commercial paper conduit
facility that is set up by the sponsoring
borrower for the sole purpose of
purchasing and holding financial assets,
because these facilities function as a
substitute or complement to traditional
revolving credit facilities. These
commenters argued that such
securitizations act as a ‘‘credit
enhancement’’ by allowing the borrower
to borrow against a pool of bankruptcy
remote assets. Further, these
commenters argued that such borrowing
structures left lenders less exposed to
counterparty credit risk than a
traditional revolving facility because the
amount drawn on such facilities in a
stressed environment would be wholly
limited by a borrowing base derived
from the underlying eligible financial
assets.
Commenters argued that certain SPEs,
such as SPEs established to hold
specific real estate assets, have a similar
risk profile to conventional commercial
real estate borrowers and therefore
should receive a lower outflow rate.
Commenters argued that these SPE
structures are passive, with all decisions
made by the operating company parent,
rather than the SPE itself. They further
argued that this structure enhances the
ability to finance a real estate project
because the lender receives greater
comfort that the primary asset will be
shielded from many events that might
prevent the lender from foreclosing on
its loan and that the punitive treatment
in the proposed rule will hamper this
type of financing. Some commenters
requested that SPEs that own and
operate commercial and multi-family
real estate be assigned a much lower
outflow rate or no outflow rate.
Moreover, commenters further argued
that commitments to SPEs established to
ring-fence the liabilities of a real estate
development project do not merit a 100
percent outflow rate because in practice,
the drawdowns (in crises and in normal
times) could only amount to a modest
portion of the overall unfunded
commitment over a 30 calendar-day
period due to contractual milestones
reflected in the loan documentation
(e.g., obtaining permits, completing a
certain percentage of the project, selling
or renting a certain percentage of units,
or that a certain stage of the real estate
development project has been
completed). These commenters
requested that the agencies limit the

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undrawn amount of such facilities to the
amount that could legally be withdrawn
during the next 30 calendar days.
Another commenter expressed
concern over the outflow rate applied to
TOBs, stating that TOBs did not draw
on liquidity facilities during the recent
crisis because they rely on the
remarketing process for the liquidity
needed to satisfy TOB holders
exercising the tender option. The
commenter argued that the outflow rate
should be lower for TOBs because such
programs are significantly overcollateralized, and a liquidation of
underlying bonds would cover liquidity
needed to satisfy TOB investors, even in
an environment when bond prices are
falling. The commenter requested that
the outflow rate be set at a maximum of
30 percent. Another commenter
expressed concern that the proposed
rule assigned unduly high outflow rates
to mutual funds and their foreign
equivalents, which are subject to
statutory limitations on borrowed funds,
and suggested that the outflow rate for
non-financial sector companies (10
percent and 30 percent for committed
credit and liquidity facilities,
respectively) would be more appropriate
for such funds.

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ii. Dual Use Facilities Comments
Some commenters were concerned
about key terms and definitions
referenced in § __.32(e) of the proposed
rule. For example, one commenter
requested clarity regarding how to treat
certain commercial paper backup
facilities arguing that it was unclear
how the proposed rule should be
applied because most commercial paper
backup facilities (that is, liquidity
facilities) can also serve other general
corporate purposes (akin to credit
facilities). Commenters requested that
multipurpose commitment facilities
(which have aspects of both liquidity
and credit facilities) should not
automatically default to a liquidity
facility and argued for employing the
treatment of the Basel III Revised
Liquidity Framework, which sets a
portion of the undrawn amount of a
commitment as a committed credit
facility. Another commenter requested
that the outflow rate for commitment
outflows be applied to the borrowing
base (rather than the commitment
amount) where a covered company
would not as a practical matter fund the
full amount of the commitment beyond
the amount of collateral that is available
in the LCR’s 30-day measurement
period.

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iii. Other Commitment Outflows
Comments
Commenters also expressed concern
that the treatment of commitment
outflows in the proposed rule could
have adverse effects on the U.S.
economy by reducing the provision of
credit to businesses. In particular,
commenters stated that the proposed
rule’s 10 percent outflow rate for
undrawn, committed credit facilities,
regardless of borrower rating, was far
higher than necessary and would
negatively impact a covered company’s
LCR due to the underlying size of the
commitments. According to these
commenters, this outflow rate could
have a ‘‘far-reaching’’ impact on a
covered company’s ability to lend to
small and medium enterprises.
Accordingly, the commenters requested
a zero percent outflow assumption for
commitments to highly rated
companies.
Some commenters requested that a
number of other specific commitment
facilities receive a lower outflow rate
than provided in § __.32(e) of the
proposed rule. For instance, one
commenter noted that 40 Act Funds and
their foreign equivalents have aspects
that limit liquidity risks such as tenor,
asset quality, diversification minimums
and repayment provisions. Accordingly,
the commenter argued, such
commitments should be assigned a 10
percent outflow rate. One commenter
requested that the outflow rate assigned
to commitments used for the issuance of
commercial paper be raised in light of
the fact that commercial paper was a
significant liquidity strain during the
most recent crisis. The same commenter
suggested that the outflow rate for
liquidity facilities used to support the
issuance of certain types of securities,
such as auction rate securities, should
be raised to 100 percent due to the
drawdown rates of such facilities
observed during the crisis.
A few commenters requested that
commitments provided to CCPs should
be treated in the same manner as
commitments to regulated financial
companies due to the requirement that
CCPs comply with the principles for
financial market infrastructures, which
require CCPs to establish and maintain
sufficient liquidity resources.65 Two
commenters requested that committed
facilities offered by covered companies
to CCPs be separately categorized with
65 See Committee on Payment and Settlement
Systems and Technical Committee of the
International Organization of Securities
Commissions, Principles for financial market
infrastructures (April 2012), available at http://
www.bis.org/publ/cpss101a.pdf.

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an outflow rate below the proposed rate
of 100 percent due to their low
historical drawdown rates and the
Dodd-Frank Act’s express clearing
mandate, requiring that certain
transactions be cleared through a CCP.66
One commenter noted that the Basel III
leverage ratio provides a specific
delineation of commitments to CCPs
and credit conversion factors and
indicated that these reflect the
operational realities of these
commitments and requested the
agencies to make a similar delineation
in the LCR. This commenter also
proposed to define credit facility as ‘‘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 and a qualified central
counterparty facility for general
operational purposes such as managing
a clearing member unwind or disruption
of services by a depository or payment
system. Credit facilities do not include
facilities extended expressly for the
purpose of refinancing the debt of a
counterparty that is otherwise unable to
meet its obligations in the ordinary
course of business (including through
its usual sources of funding or other
anticipated sources of funding).’’
One commenter requested that the
agencies conduct an empirical analysis
of historic drawdown rates to calibrate
drawdown assumptions. Another
commenter requested that the agencies,
at a minimum, clarify that commitments
to financial market utilities that have
not been designated by the Council as
systemically important ‘‘be treated no
worse than commitments to ‘regulated
financial companies’ for purposes of
LCR outflow assumptions.’’
In addition, one commenter claimed
that bonds backed by letters of credit
cannot be properly valued for purposes
of the 30 calendar-day period because
the process of drawing upon such a
letter of credit usually requires notice of
30 days or more. The commenter
requested that only the value of the debt
maturing within the 30-day window be
included in the outflow estimate.
v. Final Rule
The agencies are clarifying the
definition of liquidity facility in the
final rule by eliminating the
requirement that the liquidity facility be
made ‘‘expressly’’ for the purpose of
refinancing debt. The definition in the
final rule is intended to include
66 Pursuant to sections 723(a)(3) and 763(a) of the
Dodd-Frank Act, certain swaps must be cleared
through a CCP. 7 U.S.C. 2(h), 15 U.S.C. 78c-3.

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commitments that are being used to
refinance debt, regardless of whether
there is an express contractual clause.
This change captures the intent of the
proposed rule by focusing on the
function of the commitment.
The agencies are clarifying the
treatment of letters of credit issued by
a covered company. To the extent a
letter of credit meets the definition of
credit facility or liquidity facility, it will
be treated as such. Thus, a covered
company will have to review letters of
credit to determine whether they should
be treated as commitments in the LCR.
The agencies are also clarifying the
differences among the types of
commitments that are covered by § __
.32(b), (d), and (e) of the proposed rule,
which are consistent with the final rule.
Section __.32(b) relates to a covered
company’s commitments to structured
transactions that the covered company
itself has sponsored. These
commitments may take the form of
committed liquidity facilities, but may
also take the form of less formal
support. In the final rule, § __.32(b)
commitments have been expressly
carved out of § __.32(e)(vii) and (viii).
Section __.32(d) relates only to a
covered company’s commitments to
originate retail mortgage loans. All other
outflow amounts related to committed
credit and liquidity facilities are subject
to the provisions in § __.32(e) of the
final rule.
In response to the aforementioned
comments about commitment outflows
amounts, the agencies have adopted
changes in the final rule to the outflow
amounts for commitments to SPEs
(§ __.32(e)(1)) and the treatment for
assessing the undrawn amount of a
credit or liquidity facility (§ __.32(e)(2)).
The agencies agree with commenters
that not all SPEs are exposed to the
highest degree of liquidity risk. To that
end, the agencies are clarifying that
certain SPEs can be treated with an
approach similar to the treatment for the
other referenced commitments in § __
.32(e)(1). Under the final rule, the
agencies have limited the application of
the 100 percent outflow rate to
committed credit and liquidity facilities
to SPEs that issue or have issued
securities or commercial paper to
finance their purchases or operations.
These SPEs are highly susceptible to
stressed market conditions during
which they may be unable to refinance
their maturing securities and
commercial paper. As such, under the
final rule:
• For SPEs that do not issue securities
or commercial paper:
Æ The outflow amount for a
committed credit facility extended by

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the covered company to such SPE that
is a consolidated subsidiary of a
wholesale customer or counterparty that
is not a financial sector entity is 10
percent of the undrawn amount;
Æ The outflow amount for a
committed liquidity facility extended by
the covered company to such SPE that
is a consolidated subsidiary of a
wholesale customer or counterparty that
is not a financial sector entity is 30
percent of the undrawn amount;
Æ The outflow amount for a
committed credit facility extended by
the covered company to such SPE that
is a consolidated subsidiary of a
financial sector entity is 40 percent of
the undrawn amount; and
Æ The outflow amount for a
committed liquidity facility extended by
the covered company to an SPE that is
a consolidated subsidiary of a financial
sector entity is 100 percent of the
undrawn amount.
• The outflow amount for either a
committed credit or liquidity facility
extended by the covered company to an
SPE that issues or has issued
commercial paper or securities, other
than equity securities issued to a
company of which the SPE is a
consolidated subsidiary, to finance its
purchases or operations is 100 percent
of the undrawn amount.
The agencies agree with commenters
that SPEs that are formed to manage and
invest in real estate should not all be
treated with a 100 percent outflow rate,
provided that such SPEs do not issue
securities or commercial paper. Instead,
the agencies are employing the ‘‘look
through’’ approach as described above.
For example, under the final rule,
funding provided to a non-financial
sector entity for real estate activities via
a committed credit facility to an SPE
would receive a 10 percent outflow rate,
and funding provided to a financial
sector entity for real estate activities via
a committed liquidity facility to an SPE
would receive a 100 percent outflow
rate.
The agencies also agree that the
assessment of the undrawn amount for
committed liquidity facilities should be
narrowed to only include commitments
that support obligations that mature in
the 30 calendar-day period following
the calculation date; however, pursuant
to § __.31, notice periods for draws on
commitments are not recognized. The
agencies are thus clarifying that, if the
underlying commitment’s contractual
terms are so limiting, the amount
supporting obligations with maturities
greater than 30 days would not be
considered undrawn because they
would not be available to be drawn
within the 30 calendar-day period

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following the calculation date. In
addition, if the underlying
commitment’s contractual terms do not
permit withdrawal but for the
occurrence of a contractual milestone
that cannot occur within 30-calendar
days, such amounts would not be
included in the undrawn amount of the
facility. Thus, with respect to undrawn
amounts for all facilities, the agencies
are clarifying in the final rule that the
undrawn amount would only include
the portion of the facility that a
counterparty could contractually
withdraw within the 30 calendar-day
period following the calculation date.
The agencies have not included
§ __.32(e)(2)(ii)(B) of the proposed rule
in the final rule. This provision that the
undrawn amount of a committed facility
is less that portion of the facility that
supports obligations of a covered
company’s customer that do not mature
30 calendar days or less from such
calculation date, and further provided
that if facilities have aspects of both
credit and liquidity facilities, the facility
must be classified as a liquidity facility.
First, the principle in the first clause of
the deleted language is duplicative of
the rule text set forth in § __.32(e)(2)(ii)
of the final rule and therefore not only
unnecessary but potentially confusing.
Second, the second sentence of the
deleted language has been included in
the final rule’s definition of liquidity
facility, rather than in the section on
outflows, where the agencies think it is
more appropriate and will be easier for
readers to find. Accordingly, the
agencies have streamlined the text in
the final rule.
The agencies are retaining the
approach for those financing vehicles
that employ both credit and liquidity
facilities and treating those entities as
liquidity facilities. The agencies believe
it would be problematic to assess which
portion of the assets securing the facility
are meant to serve the liquidity facility
and which portion of the assets are
meant to serve the credit facility. At the
same time, this treatment provides the
agencies with a conservative approach
for assessing dual purpose facilities. The
agencies are also clarifying that facilities
that may provide liquidity support to
asset-backed commercial paper by
lending to, or purchasing assets from,
any structure, program, or conduit
should be treated as a liquidity facility
and not be treated as a credit facility.
The agencies disagree with
commenters’ recommendation that 40
Act Funds and their foreign equivalents
be treated with an outflow rate
equivalent to unsecured retail funding
because the nature of the counterparty
and the corresponding liquidity risks

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are more akin to the liquidity risks of
financial sector entities. Thus, the
agencies decline to apply a unique rate
for this category of commitments. The
agencies also decline to create special
exceptions for commitments related to
TOBs, mutual funds, and other
commitments to investment companies,
because similar to other SPEs that issue,
or have issued, securities or commercial
paper, such entities have liquidity risks
that are commensurate with a financial
sector entity and their draws on
commitments likely will be highly
correlated with stress in the financial
sector.
The agencies are not providing special
treatment for CCPs or certain financial
market utilities. The agencies believe it
is critical for covered companies to
maintain appropriate HQLA to support
commitments that may necessitate the
provision of liquidity in a crisis and
believe that to be the case with respect
to commitments to CCPs and certain
financial market utilities. Further, the
agencies understand that commitments
to these entities generally require HQLA
to be posted and because the
commitment outflow amount is reduced
by the amount of Level 1 and 2A HQLA
required to support the commitment,
the agencies have determined that
special treatment for CCPs or certain
financial market utilities is not
necessary.

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f. Collateral Outflow Amount
The proposed rule would have
required a covered company to
recognize outflows related to changes in
collateral positions that could arise
during a period of financial stress. Such
changes could include being required to
post additional or higher quality
collateral as a result of a change in
derivative collateral values or in
underlying derivative values, having to
return excess collateral, or accepting
lower quality collateral as a substitute
for already-posted collateral, all of
which could have a significant impact
upon a covered company’s liquidity
profile.
Various requirements of proposed
§ l.32(f) were of concern to certain
commenters who generally believed that
the provisions relating to changes in
financial condition, potential collateral
valuation changes, collateral
substitution, and derivative collateral
change required clarification or did not
accurately reflect liquidity risks around
the posting of collateral for derivative
transactions. The following describes
the subcategories of collateral outflows
discussed in the preamble to the
proposed rule.

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i. Changes in Financial Condition
The proposed rule would have
required a covered company to include
in its collateral outflow amount 100
percent of all additional amounts that
the covered company would have
needed to post or fund as additional
collateral under a contract as a result of
a change in its own financial condition.
A covered company would have
calculated this outflow amount by
evaluating the terms of such contracts
and calculating any incremental
additional collateral or higher quality
collateral that would have been required
to be posted as a result of triggering
clauses tied to a change in the covered
company’s financial condition. If
multiple methods of meeting the
requirement for additional collateral
were available (for example, providing
more collateral of the same type or
replacing existing collateral with higher
quality collateral) the covered company
was permitted to use the lower
calculated outflow amount in its
calculation.
Some commenters requested
additional clarification regarding the
requirements of § __.32(f)(1) of the
proposed rule. One commenter
requested that the agencies clarify that
they do not view the existence of a
material adverse change (MAC) clause
in a contract as a provision that would
be expected to impact the calculation of
collateral outflows because these
clauses by themselves do not
necessarily trigger additional collateral,
but require subjective analysis to
determine whether they have been
triggered. Another commenter noted
that the Basel III Revised Liquidity
Framework provides for credit ratings
downgrades of up to three notches and
requested clarity as to how to calculate
the collateral outflow amount given the
absence of an explicit downgrade
threshold in the proposed rule. The
same commenter urged the agencies to
employ a standard approach (as
opposed to allowing banking
organizations to choose the lower
outflow amount) in cases where
multiple methods are available.
The agencies are clarifying in the final
rule that when calculating the collateral
outflow amount, a covered company
should review all contract clauses
related to transactions that could
contractually require the posting or
funding of collateral as a result of a
change in the covered company’s
financial condition, including
downgrade triggers, but not including
general MAC clauses, which is
consistent with the intent of the
proposed rule. The agencies also are

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clarifying that covered companies
should count all amounts of collateral in
the collateral outflow amount that could
be posted in accordance with the terms
and conditions of the downgrade trigger
clauses found in all applicable legal
agreements. Covered companies should
not look solely to credit ratings to
determine collateral outflows from
changes in financial condition, but the
agencies note that collateral
requirements based on credit rating
changes constitute collateral
requirements based on changes in
financial condition under the final rule.
The final rule continues to allow a
covered company to choose the method
for posting collateral that results in the
lowest outflow amount, as the agencies
believe a covered company will likely
post collateral in the most economically
advantageous way that it can. The
agencies are finalizing the provision
addressing changes in financial
condition collateral outflow as
proposed.
ii. Derivative Collateral Potential
Valuation Changes
The proposed rule would have
applied a 20 percent outflow rate to the
fair value of any assets posted as
collateral that were not level 1 liquid
assets, in recognition that a covered
company could be required to post
additional collateral as the market price
of the posted collateral fell. The
agencies did not propose to apply
outflow rates to level 1 liquid assets that
are posted as collateral, as these are not
expected to face substantial mark-tomarket losses in times of stress.
Commenters requested that the
agencies change and clarify certain
requirements in § l.32(f)(2) of the
proposed rule. For instance, one
commenter requested that the agencies
revise § l.32(f)(2) to base outflow rates
on a net calculation on a security-bysecurity basis (for non-level 1 liquid
assets) and only to include collateral
posted on a net basis, not the pre-netting
gross amount. Commenters also
requested that, consistent with the Basel
III Revised Liquidity Framework, the
agencies clarify that § l.32(f)(2) only
applies to collateral securing derivative
transactions and not to collateral
pledged for the secured funding
transactions contemplated in § l.32(j)
of the proposed rule. Another
commenter requested that the agencies
impose a 20 percent outflow rate for
collateral value changes due to market
stress.
The agencies have reviewed
comments about potential valuation
changes in § l.32(f)(2) of the proposed
rule and are generally finalizing this

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
section of the rule as proposed.
However, the agencies are clarifying in
the final rule that, when determining
the outflow amount for the potential
valuation change of collateral, only
collateral securing derivative
transactions should be assessed, and not
collateral supporting other transactions,
such as that securing secured funding
transactions under § l.32(j) of the
proposed rule. Also, consistent with
other derivative netting provisions
employed in the proposal, the agencies
are clarifying that covered companies
can apply the rate to netted collateral,
not the pre-netted gross amount, but
only if the collateral can be netted under
the same qualifying master netting
agreement.
iii. Excess Collateral Outflow Amount
The proposed rule would have
applied an outflow rate of 100 percent
to the fair value of collateral posted by
counterparties that exceeds the current
collateral requirement in a governing
contract. Under the proposed rule, this
category would have included
unsegregated excess collateral that a
covered company may have been
required to return to a counterparty
based on the terms of a derivative or
other financial agreement and which is
not already excluded from the covered
company’s eligible HQLA.
There were no substantive comments
received by the agencies regarding
§ l.32(f)(3) of the proposed rule. For
the same reasons outlined in the
proposed rule, the agencies are
finalizing the excess collateral outflow
requirements substantially as proposed.
iv. Contractually-Required Collateral
Outflow

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The proposed rule would have
imposed a 100 percent outflow rate
upon the fair value of collateral that a
covered company was contractually
obligated to post, but had not yet
posted. Where a covered company has
not yet posted such collateral, the
agencies believe that, in stressed market
conditions, a covered company’s
counterparties may demand all
contractually required collateral.
There were no substantive comments
about § l.32(f)(4) of the proposed rule.
For the same reasons outlined in the

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proposed rule, the agencies are
finalizing the contractually-required
collateral outflow requirements
substantially as proposed.
v. Collateral Substitution
The proposed rule’s collateral
substitution outflow amount would
have equaled the difference between the
post-haircut fair value of eligible HQLA
collateral posted by a counterparty to a
covered company and the post-haircut
fair value of lower quality eligible
HQLA collateral, or non-HQLA
collateral, a counterparty could
substitute under an applicable contract.
Thus, if a covered company had
received as collateral a level 1 liquid
asset that counted towards its level 1
liquid asset amount, and the
counterparty could have substituted it
with an eligible level 2A liquid asset
collateral, the proposed rule imposed an
outflow rate of 15 percent, which
resulted from applying the standardized
haircut value of the level 2A liquid
assets. Similarly, if a covered company
had received as collateral a level 1
liquid asset that counted towards its
level 1 liquid asset amount and under
an agreement the collateral could have
been substituted with assets that are not
HQLA, a covered company would have
been required to include in its outflow
amount 100 percent of the collateral’s
market value. The proposed rule
provided outflow rates for all
permutations of collateral substitution.
One commenter stated that § l
.32(f)(5) of the proposed rule was
excessively conservative because it did
not take into account that a
counterparty’s right to substitute nonHQLA collateral is generally subject to
an increase in a market haircut designed
to mitigate the liquidity risk associated
with the substitution. The commenter
further stated that such substitutions are
infrequent, and the requirement
introduces an asymmetry by ignoring
the reuse of the substituted collateral
which could be posted to another
counterparty. Accordingly, the
commenter argued that collateral
substitution outflows occur infrequently
and do not warrant inclusion in the
proposed rule.
The agencies are finalizing this
section of the rule substantially as

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61489

proposed. The agencies recognize that
collateral related to transactions is
subject to market haircuts. However, the
standardized haircuts provided in the
proposed rule permit the agencies to
design a generally consistent standard
that addresses certain potential risks
that covered companies may face under
a stressed environment. The agencies
are clarifying that § l.32(f)(5) only
applies to collateral that a counterparty
has posted to the covered company as
of the calculation date, and does not
apply to collateral a covered company
has posted to a counterparty, nor to any
collateral that the covered company
could repost to a counterparty after a
collateral substitution has taken place.
vi. Potential Derivative Valuation
Change
The proposed rule would have
required a covered company to use a
two-year look-back approach in
calculating its market valuation change
outflow amounts for derivative
positions. Under the proposed rule, the
derivative collateral outflow amount
would have equaled the absolute value
of the largest consecutive 30 calendarday cumulative net mark-to-market
collateral outflow or inflow resulting
from derivative transactions realized
during the preceding 24 months.
One commenter indicated that the
two-year look-back approach of
.32(f)(6) of the proposed rule was not a
forward-looking estimate of potential
collateral flows in a period of market
stress, and that historic collateral
outflows may be more indicative of
closing out positions rather than
liquidity strains. The same commenter
requested that the agencies provide an
alternative forward-looking approach
that would replace the requirement of
the proposed rule. Another commenter
expressed concern that § l.32(f)(6) did
not take into account current
conventions regarding margin
requirements that greatly reduce a
covered company’s exposure to
derivative valuation changes, thereby
making the proposed rule an onerous
data exercise without an obvious
benefit. Further, according to this
commenter, there would be operational
challenges as banking organizations
have not previously retained this data.

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While the agencies recognize the
operational challenges raised by
commenters, the agencies are finalizing
this section of the rule largely as
proposed because of the important
liquidity risk it addresses. When a
covered company becomes subject to
the LCR, it should have relevant records
related to derivatives to compute this
amount. To the extent that the covered
company’s data is not complete, it
should be able to closely estimate its
potential derivative valuation change.
Once subject to the LCR, the agencies
expect that a covered company will
collect data to make a precise
calculation in the future. The agencies
recognize that the calculation is not
forward-looking and may not be entirely
indicative of the covered company’s

derivative portfolio at the time of the
calculation date, but the historical
experience of the covered company with
its derivatives portfolio should be a
reasonable proxy for potential derivative
valuation changes. Additionally, while
the margin requirements in recent
regulatory proposals may provide
certain protections in derivatives
transactions, this rule specifically
addresses the risk of the potential future
liquidity stress from derivative
valuation changes. One clarifying
change has been made to highlight that
the look-back should only include
collateral that is exchanged based on the
actual valuation changes of derivative
transactions (generally referred to as
variation margin), and not collateral
exchanged based on the initiation or

close out of derivative transactions
(generally referred to as initial margin).
Table 2 below illustrates how a
covered company should calculate this
collateral outflow amount. Note that
Table 2 only presents a single 30-day
period within a prior two-year
calculation window. A covered
company is required to repeat this
calculation for each calendar day within
every two-year calculation window, and
then determine the maximum absolute
value of the net cumulative collateral
change, which would be equal to the
largest 30-consecutive calendar day
cumulative net mark-to-market
collateral outflow or inflow realized
during the preceding 24 months
resulting from derivative transactions
valuation changes.

TABLE 2—POTENTIAL DERIVATIVE VALUATION CHANGE OUTFLOW AMOUNT

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Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day
Day

Mark-tomarket
collateral
inflows due to
derivative
transaction
valuation
changes

Mark-tomarket
collateral
outflows due
to derivative
transaction
valuation
changes

Net mark-tomarket
collateral
change due
to derivative
transaction
valuation
changes (A)–
(B)

Cumulative net
mark-tomarket
collateral
change due to
derivative
transaction
valuation
changes

Absolute value
of cumulative
net collateral
change due to
derivative
transaction
valuation
changes

A

B

C

D

E

1 ....................................................................................
2 ....................................................................................
3 ....................................................................................
4 ....................................................................................
5 ....................................................................................
6 ....................................................................................
7 ....................................................................................
8 ....................................................................................
9 ....................................................................................
10 ..................................................................................
11 ..................................................................................
12 ..................................................................................
13 ..................................................................................
14 ..................................................................................
15 ..................................................................................
16 ..................................................................................
17 ..................................................................................
18 ..................................................................................
19 ..................................................................................
20 ..................................................................................
21 ..................................................................................
22 ..................................................................................
23 ..................................................................................
24 ..................................................................................
25 ..................................................................................
26 ..................................................................................
27 ..................................................................................
28 ..................................................................................
29 ..................................................................................
30 ..................................................................................

g. Brokered Deposit Outflow Amount for
Retail Customers and Counterparties
The proposed rule provided several
outflow rates for retail brokered deposits
held by covered companies. The
proposed rule defined a brokered

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72
78
35
18
77
9
53
81
66
56
7
62
96
54
73
11
65
87
1
96
3
95
18
48
18
86
51
48
40
52

deposit as any deposit held at the
covered company that is obtained,
directly or indirectly, from or through
the mediation or assistance of a deposit
broker, as that term is defined in section
29(g) of the Federal Deposit Insurance

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¥6
78
¥50
¥12
18
¥44
29
¥11
64
¥2
¥25
52
6
¥29
28
¥51
10
32
¥42
¥3
¥86
46
¥72
¥6
¥82
12
¥14
29
¥34
20

78
0
85
30
59
53
24
92
2
58
32
10
90
83
45
62
55
55
43
99
89
49
90
54
100
74
65
19
74
32

¥6
72
22
10
28
¥16
13
2
66
64
39
91
97
68
96
45
55
87
45
42
¥44
2
¥70
¥76
¥158
¥146
¥160
¥131
¥165
¥145

6
72
22
10
28
16
13
2
66
64
39
91
97
68
96
45
55
87
45
42
44
2
70
76
158
146
160
131
165
145

Act (FDI Act).67 The agencies’ proposed
outflow rates for brokered deposits from
retail customers or counterparties was
based on the type of account, whether
67 12

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deposit insurance was in place, and the
maturity date of the deposit agreement.
Outflow rates for retail brokered
deposits were further subdivided into
reciprocal brokered deposits, brokered
sweep deposits, and all other brokered
deposits. The agencies received several
comments arguing that: (i) The proposed
outflow rates for each category of
brokered deposits were too high; (ii) the
applicable definitions and key terms
lacked clarity and precision; and (iii)
the proposed rule would have a number
of unintended consequences, including
potentially disrupting an important,
stable funding source for many banking
organizations.
The agencies are adopting many
aspects of the proposed rule, with
revisions to certain elements in
response to commenters and to better
reflect the liquidity risks of brokered
funding, as described in this section.
The agencies continue to believe that
brokered deposits have the potential to
exhibit greater volatility than funding
from stable retail deposits, even in cases
where the deposits are fully or partially
insured, and thus believe that higher
outflow rates, relative to some other
retail funding, are appropriate. Brokered
deposits are more easily moved from
one institution to another, as customers
search for higher interest rates.
Additionally, brokered deposits can be
subject to both regulatory limitations
and limitations imposed by the
facilitating deposit broker when an
institution’s financial condition
deteriorates, and these limitations can
become especially problematic during
periods of economic stress when a
banking organization may be unable to
renew such deposits.
i. Retail Brokered Deposit Outflow Rates
Several commenters contended that
the outflow rates for all categories of
retail brokered deposits were too high,
that they were inconsistent with the
liquidity risks posed by these
transactions, and that they should be
lowered. Commenters argued that the
liquidity characteristics of most
brokered deposits warranted outflow
rates consistent with the unsecured
retail outflow rates specified in
§ l.32(a) of the proposed rule (for
example, 3 percent for fully insured
retail deposits and 10 percent for all
other retail deposits).
As noted in the preamble to the
proposed rule, the agencies consider
brokered deposits for retail customers or
counterparties to be a more volatile form
of funding than stable retail deposits,
even if deposit insurance coverage is
present, because of the structure of the
attendant third-party relationship and

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the potential instability of such deposits
during a liquidity stress event. The
agencies also are concerned that
statutory restrictions on certain
brokered deposits make this form of
funding less stable than other deposit
types under certain stress scenarios.
Specifically, a covered company that
becomes less than ‘‘well capitalized’’ is
subject to restrictions on accepting
deposits through a deposit broker.
Additionally, the agencies disagree with
commenters’ views that brokered
deposits are as low risk as other
unsecured retail deposits. During the
recent crisis, the FDIC found that: (i)
Failed and failing banking organizations
were more likely to have brokered
deposits than other banking
organizations; (ii) replacing core
deposits with brokered deposit funding
tended to raise a banking organization’s
default probability, and (iii) banking
organizations relying on brokered
deposits were more costly to resolve.68
Because banking organizations that rely
heavily on brokered deposits have been
shown to engage in relatively higherrisk lending than institutions with more
core deposits, banking organizations
that rely heavily on brokered deposits
are more likely to experience significant
losses during stress conditions, which,
in turn, may cause these banking
organizations’ capital levels to fall and,
in turn, restrict their ability to replace
brokered deposits that run off or mature.
The agencies continue to have the
concerns noted above and are finalizing
the treatment of retail brokered deposits
largely as proposed. However, in
response to commenters, the final rule
modifies the treatment of certain nonmaturity brokered deposits in retail
transactional accounts to provide for a
lower outflow rate, as described below.
(a). Non-Maturity Brokered Deposits in
Transactional Accounts
Under the proposed rule, brokered
deposits that mature within 30 calendar
days of a calculation date that are not
reciprocal deposits or brokered sweep
deposits would have been subject to a
100 percent outflow rate. Several
commenters argued this outflow rate
was unrealistic and would disrupt a
valuable source of funding. In
particular, commenters argued that
certain non-maturity brokered checking
and transactional account deposits, such
as affinity group deposits, are as stable
68 See Federal Deposit Insurance Corporation,
‘‘Study on Core Deposits and Brokered Deposits,’’
Submitted to Congress pursuant to the Dodd-Frank
Wall Street Reform and Consumer Protection Act
(FDIC Brokered Deposit Study), at pages 34–45
(2011), available at http://www.fdic.gov/regulations/
reform/coredeposit-study.pdf.

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61491

as traditional retail deposits and should
not be subject to the proposed rule’s 100
percent outflow rate. According to the
commenters, in many instances these
deposits involve direct relationships
between the banking organization and
the retail customer with little continued
involvement of the deposit broker.
Likewise, commenters stressed that the
LCR generally provides for lower
treatment of retail-related outflows, and
argued that this 100 percent outflow
assumption is higher than the 40
percent outflow assumption for
wholesale brokered deposits.
To address these commenters’
concerns about the outflow rate applied
to such deposits, the agencies are
providing separate outflow rates for
non-maturity brokered deposits in
transactional accounts. Under the final
rule, retail brokered deposits held in a
transactional account with no
contractual maturity date receive a 20
percent outflow rate if the entire amount
is covered by deposit insurance and a 40
percent outflow rate if less than the
entire amount is covered by deposit
insurance. This outflow rate covers
brokered deposits that are in traditional
retail banking accounts and are used by
the customers for their transactional
needs, and would include non-maturity
affinity group referral deposits and
third-party marketer deposits where the
deposit is held in a transactional
account with the bank. The agencies
believe these deposits have lower
liquidity risk than other types of
brokered deposits, but nevertheless
warrant higher outflow treatment than
the unsecured retail deposits in § l
.32(a) due to the presence of third-party
intermediation by the deposit broker,
which may result in higher outflows
during periods of stress. The outflow
rates under the final rule are intended
to be consistent with the outflow rates
for unaffiliated brokered sweep
deposits, discussed below, and the
agencies’ treatment of professionally
managed deposits that do not qualify as
brokered deposits, discussed above
under section II.C.3.a.
(b). Other Brokered Deposits
As noted above, under the proposed
rule, all other brokered deposits would
have been defined to include those
brokered deposits that are not reciprocal
brokered deposits or are not part of a
brokered sweep arrangement. These
deposits were subject to an outflow rate
of 10 percent for deposits maturing
more than 30 calendar days from the
calculation date or 100 percent for
deposits maturing within 30 calendar
days of the calculation date. With
respect to other brokered deposits

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maturing within 30 calendar days of the
calculation date, commenters argued
that the 100 percent outflow rate for
such deposits was unnecessarily high
due to the rollover rates banking
organizations observed for such
deposits. In addition, one commenter
argued that the agencies’ treatment of
deposits entirely covered by deposit
insurance was inconsistent because a
brokered sweep deposit that is not
entirely insured is subject to a 40
percent outflow rate while an entirely
insured brokered time deposit is subject
to a 100 percent outflow rate if it
matures within the 30-day period. The
commenter suggested that all deposits
that are fully insured (retail or
wholesale) should receive the same
treatment for the purposes of the LCR.
Several commenters requested
clarification regarding the treatment of
retail brokered deposits that allow for
early withdrawal upon the payment of
a financial penalty, such as a certain
amount of accrued interest.
As discussed in the proposal, the
agencies believe the 100 percent outflow
rate is appropriate for other brokered
deposits maturing within the 30
calendar-day period because under
stress, there is a greater probability that
counterparties will not renew and that
covered companies will not be able to
renew brokered deposits due to
associated regulatory restrictions.
Therefore, the agencies believe covered
companies should not rely on the
renewal or rollover of such funding as
a source of liquidity during a stress
period. Accordingly, other than the
changes for non-maturity brokered
deposits in transactional accounts
discussed above, the agencies are
adopting this provision of the rule as
proposed. The agencies are clarifying
that, under the final rule, all retail
brokered deposits, regardless of
contractual provisions for withdrawal,
are subject to the outflow rates provided
in the proposed rule, including the 10
percent outflow rate for brokered
deposits maturing more than 30
calendar-days after the calculation date.
In addition, several commenters
suggested that the 10 percent outflow
rate for other brokered deposits
maturing outside the 30 calendar-day
period was unnecessarily conservative,
and urged the agencies to recognize the
contractual terms in retail brokered
deposit agreements that restrict early
withdrawal. Several commenters
requested clarification regarding the
treatment of retail brokered deposits
that allow for early withdrawal upon the
payment of a financial penalty, such as
a certain amount of accrued interest. A
commenter requested that the agencies

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provide a rationale for diverging from
the Basel III Revised Liquidity
Framework, which applies a zero
percent outflow rate to deposits that
have a stated contractual maturity date
longer than 30 days. Although many
agreements for brokered deposits with
contractual maturity provide for limited
contractual withdrawal rights, as with
non-brokered term retail deposits, the
agencies believe that covered companies
may agree to waive such contractual
maturity dates for retail deposits. The
agencies believe a brokered deposit
should not obtain more favorable
treatment than a non-brokered deposit
because the relationship between the
brokered deposit customer and the
covered company is not as strong as the
relationship between a direct retail
customer and the covered company, as
a brokered deposit interposes a third
party. Accordingly, the agencies are
adopting this provision of the rule as
proposed.
(c). Brokered Sweep Deposits
Brokered sweep deposits involve
securities firms or investment
companies that ‘‘sweep’’ or transfer idle
customer funds into deposit accounts at
one or more depository institutions.
Under the proposed rule, such deposits
would have been defined as those that
are held at the covered company by a
customer or counterparty through a
contractual feature that automatically
transfers funds to the covered company
from another regulated financial
company at the close of each business
day. The definition of ‘‘brokered sweep
deposit’’ under the proposed rule would
have covered all deposits under such
arrangements, regardless of whether the
deposit qualified as a brokered deposit
under the FDI Act.
The proposed rule would have
assigned these deposits progressively
higher outflow rates depending on
deposit insurance coverage and the
affiliation between the bank and the
broker sweeping the deposits. Under the
proposed rule, brokered sweep deposits
that are entirely covered by deposit
insurance, and that are deposited in
accordance with a contract between a
retail customer or counterparty and a
covered company, a covered company’s
consolidated subsidiary, or a company
that is a consolidated subsidiary of the
same top-tier company (affiliated
brokered sweep deposits), would have
been assigned a 10 percent outflow rate.
Brokered sweep deposits that are
entirely covered by deposit insurance
but that do not originate with a covered
company, a covered company’s
consolidated subsidiary, or a company
that is a consolidated subsidiary of the

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same top-tier company of a covered
company (unaffiliated brokered sweep
deposits), would have been assigned a
25 percent outflow rate. All brokered
sweep deposits that are not entirely
covered by deposit insurance, regardless
of the affiliation between the bank and
the broker, would have been assigned a
40 percent outflow rate because they
have been observed to be more volatile
during stressful periods, as customers
seek alternative investment vehicles or
use those funds for other purposes. The
agencies received a number of
comments on the outflow rates for
brokered sweep deposits. However, for
the reasons discussed below and in the
proposal, other than changing the level
of affiliation required for the 10 percent
affiliated brokered sweep deposit
outflow rate to apply, the agencies are
adopting in the final rule the proposed
rule’s treatment of brokered sweep
deposits with respect to outflow
amounts.
Several commenters maintained that
the outflow rates applied to fullyinsured brokered deposits (10 percent
for reciprocal and affiliated brokered
sweep deposits, and 25 percent for nonaffiliated brokered sweep deposits)
should be lowered to be more consistent
with the fully insured rate of 3 percent
to unsecured stable retail deposits.
Similarly, commenters asserted that the
outflow rates applicable to partially
insured brokered deposits (25 percent
for reciprocal brokered deposits and 40
percent for brokered sweep deposits)
were too high and should be lowered to
be more closely aligned with the
corresponding outflow rate for lessstable unsecured retail deposits (10
percent). The agencies believe that the
outflow rates for brokered sweep
deposits as set forth in the proposed
rule are appropriate in light of the
additional liquidity risk arising as a
result of deposit intermediation. In
addition, in contrast to retail deposit
accounts which are typically composed
of funds used by the depositor for
transactional purposes (for example,
checking accounts), brokered sweep
accounts are composed of deposits that
are used for the purchase or sale of
securities. During a period of significant
market volatility and distress, customers
may be more likely to purchase or sell
securities and withdraw funds from
such accounts. Moreover, the agencies
believe that customers would be more
likely to withdraw funds from their
ancillary accounts, such as the brokered
sweep accounts, prior to depleting
resources in accounts used for day-today transactions. Accordingly, the

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agencies are adopting in the final rule
the relevant outflow rates as proposed.
Several commenters requested that
the agencies not distinguish between
affiliate and non-affiliate relationships
in applying outflow rates to brokered
sweep deposits. In particular,
commenters argued that unaffiliated
sweep arrangements operated by a
program operator, where the customer
controls the selection of the banking
organizations in which deposits may be
placed, have far lower outflow rates due
to the limited intermediation of the
program operator. According to these
commenters, the program operator is
required to place deposits in accordance
with levels set forth in the contractual
agreements with the banking
organizations and broker-dealers, and in
many cases, is required to reduce
overall volatility in the deposits to
amounts below the outflow rates in the
proposed rule. Commenters requested a
lower outflow rate for unaffiliated
brokered sweep deposits that are subject
to a contractual non-volatility
requirement or a contractual
arrangement that obligates a deposit
broker to maintain a minimum amount
with the depository institution. In
addition, these commenters requested
that the agencies recognize the impact of
a depository institution’s contracts with
broker-dealers and treat outflows more
favorably if that depository institution
would contractually receive funds
ahead of other institutions. One
commenter requested that the agencies
require that affiliated brokered sweep
deposits be subject to agreements
providing for substantial termination
and withdrawal penalties to minimize
accelerated client-driven withdrawal.
Finally, one commenter stated that data
from its own proprietary program shows
that fully insured, unaffiliated brokered
sweep deposits and fully insured,
reciprocal brokered deposits are stickier
than would be implied by the outflow
rates assigned in the proposed rule. The
commenter argued that customers could
be deprived access to these insured
sweep deposit programs if banking
organizations reduce or eliminate their
use of these deposits as a funding source
because of application of a higher
outflow rate to them. The commenter
further stated that a substantial portion
of these funds, which currently flow to
these banking organizations, would be
diverted to money market mutual funds
or other investments outside the
banking system were they subject to a
higher outflow rate.
The agencies believe that affiliated
brokered sweep deposits are more
reflective of an overall relationship with
the underlying retail customer, while

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non-affiliated sweep deposits are more
reflective of a relationship associated
with wholesale operational deposits.
Affiliated brokered sweep deposits
generally exhibit a stability profile
associated with retail customers,
because the affiliated sweep providers
generally have established relationships
with the retail customer that in many
circumstances include multiple
products with both the covered
company and the affiliated brokerdealer. Affiliated brokered sweep
deposit relationships are usually
developed over time. Additionally, the
agencies believe that because such
deposits are swept by an affiliated
company, the affiliated company would
be incented to minimize harm to any
affiliated depository institution.
In contrast, depository institutions in
unaffiliated brokered sweep deposit
programs have relationships only with a
third-party intermediary, rather than
with retail customers. Balances in an
unaffiliated brokered sweep accounts
are purchased and can fluctuate
significantly depending on the type of
contractual relationship the banking
organization has with the unaffiliated
broker. Additionally, the introduction of
the third-party intermediary adds
volatility to the deposit relationship in
times of stress, as it is possible the thirdparty intermediary will move entire
balances away from the bank. With
respect to contractual requirements for
the amount to be swept, although such
requirements may add additional
stability during normal market
conditions, the agencies believe that
during a period of significant market
distress and volatility, deposit brokers
may be unable to abide by such
commitments as market transaction
volumes rise.
One commenter requested
clarification regarding the treatment of
the agreement between the bank and a
deposit broker relating to minimum
balances over a period longer than 30
days, and whether such agreements
cause brokered sweep deposits to be
treated as deposits maturing greater than
30 days because of the aggregate balance
requirement. The agencies are clarifying
that such provisions do not alter the
contractual maturity of the underlying
deposit, which are typically nonmaturity or overnight deposits, and do
not cause such deposits to become
deposits that mature more than 30
calendar days from a calculation date.
Accordingly, other than the change to
the level of affiliation required under
the affiliated sweep deposit outflow
rate, discussed below, the agencies are
adopting this provision of the final rule
as proposed.

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(d). Reciprocal Brokered Deposits
The proposed rule would have
applied a 10 percent outflow rate to all
reciprocal brokered deposits at a
covered company that are entirely
covered by deposit insurance. Any
reciprocal brokered deposits not entirely
covered by deposit insurance received
an outflow rate of 25 percent. A
reciprocal brokered deposit was defined
in the proposed rule as a brokered
deposit that a covered company receives
through a deposit placement network on
a reciprocal basis such that for any
deposit received, the covered company
(as agent for the depositor) places the
same amount with other depository
institutions through the network and
each member of the network sets the
interest rate to be paid on the entire
amount of funds it places with other
network members. Reciprocal brokered
deposits generally have been observed
to be more stable than certain other
brokered deposits because each
institution within the deposit placement
network typically has an established
relationship with the retail customer or
counterparty that is making the initial
over-the-insurance-limit deposit that
necessitates distributing the deposit
through the network.
Several commenters contended that
the outflow rate applied to fully-insured
reciprocal deposits (10 percent) should
be lowered to be more consistent with
the fully insured rate of 3 percent to
unsecured stable retail deposits, and
that the rate for partially insured
reciprocal deposits (25 percent) should
be lowered to more closely align with
the outflow rate for less-stable
unsecured retail deposits (10 percent).
The agencies continue to believe that
reciprocal deposits, like other brokered
deposits, present elevated liquidity
risks. During periods of material
financial distress or an idiosyncratic
event involving a particular institution,
depositors or program operators may
terminate their relationships with a
banking organization, resulting in a
significant loss of funding. Accordingly,
the agencies have adopted in the final
rule the proposed definition and
outflow rates for reciprocal brokered
deposits.
(e). Empirical Data
Several commenters requested that
the agencies provide data or an
empirical analysis to support the
proposed outflow rates for reciprocal
and other brokered deposits. Many
commenters concurred with the FDIC
Brokered Deposit Study’s conclusion
that comprehensive, industry-wide data
for different types of brokered deposits

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is not available. As one commenter
noted, while banking organizations are
required to report their total brokered
deposits on the Consolidated Report of
Condition and Income (Call Report),
there is no breakdown by type of
deposit account, specific maturity of
CDs, or interest rates. Thus, the
commenter stated that banking
organizations currently do not report the
information necessary for a
comprehensive examination of the
brokered deposit market and its
component parts. Some commenters
submitted data to show that the
proposed brokered deposit outflow rates
were too conservative.
The agencies believe a conservative
approach to setting brokered deposit
outflow rates for the purposes of the
LCR is appropriate in light of limited
available data, the findings of the FDIC
Brokered Deposit Study showing that
increased reliance on brokered deposit
rates is correlated with higher overall
risk, and the strong incentives thirdparty brokers have to provide the
highest possible returns for their clients
by seeking accounts paying the highest
interest rates. Moreover, the agencies
believe the assumptions and provisions
of § __.32(g) are consistent with the
available sources of information,
including the FDIC Brokered Deposit
Study, guidelines provided in the Basel
III Revised Liquidity Framework, and
supervisory information reviewed by
the agencies. Based on the information
available to the agencies, the agencies
continue to believe that brokered
deposits represent a more volatile
source of funding than typical retail
deposits, thus warranting the outflow
rates that were proposed.

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(f). Other Comments
One commenter suggested that the
agencies allow covered companies to
use internal models to determine
outflow rates instead of using the
proposed rule’s standardized outflow
rates. While the internal stress-testing
requirements of certain covered
companies under the Board’s Regulation
YY 69 permit firms to use internallydeveloped models for liquidity stress
testing, the LCR is a standardized metric
that provides for comparability across
all institutions subject to the rule.
Accordingly, the agencies are not
adopting provisions in the final rule that
would allow covered companies to
determine outflow rates using their
internal models as an alternative to the
standardized outflow rates outlined in
the final rule.
69 See

12 CFR part 252.

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ii. Definitions and Key Terms
In connection with the treatment of
brokered deposits, several commenters
requested that key definitions and terms
in the proposed rule be modified or
updated to reflect a number of key
characteristics. Specifically,
commenters requested that the agencies
modify the definitions of brokered
deposit and consolidated subsidiary and
requested that the agencies clarify the
meaning of fully insured deposits, passthrough insurance, penalties for
withdrawal, and a number of other
terms.
(a). Definition of Brokered Deposit
A commenter expressed concern that
the proposed rule incorporated the
definition of brokered deposit from the
FDI Act and the FDIC’s regulations,
which the commenter stated were
developed many years ago for a different
purpose and at a time when views of
liquidity risks were different. Another
commenter requested clarification
whether the Board and the OCC would
be interpreting the FDI Act’s brokered
deposit definitions for purposes of the
LCR and whether the FDIC’s prior
interpretations remained binding. Two
commenters stated that the FDI Act’s
definition of brokered deposit and the
FDIC’s interpretations would cover
arrangements that would generally be
considered retail stable deposits such as
deposits placed by employees of
affiliates of a bank. Finally, one
commenter requested additional clarity
regarding what type of deposits (those
from affinity groups, affiliates or third
parties) would count as other brokered
deposits for purposes of § __.32(g)(1)
and § __.32(g)(2) of the proposed rule.
The definition of brokered deposit is
adopted as proposed because it
continues to sufficiently capture the
types of funding with increased
liquidity risk that the LCR is designed
to capture, including deposits provided
by: (a) Persons engaged in the business
of placing deposits, or facilitating the
placement of deposits, of third parties
with insured depository institutions or
the business of placing deposits with
insured depository institutions for the
purpose of selling interests in those
deposits to third parties; and (b) an
agent or trustee who establishes a
deposit account to facilitate a business
arrangement with an insured depository
institution to use the proceeds of the
account to fund a prearranged loan. As
noted by a commenter, this would
include the placement or facilitation of
the placement of deposits by an
employee of an affiliate of a bank. The
agencies believe that such

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intermediation by nonbank employees,
like intermediation by third-parties,
could result in greater liquidity risks.
In response to the comment about
what types of transactions would be
captured under § __.32(g)(1) and
§ __.32(g)(2) of the proposed rule, the
agencies are clarifying that these
provisions include all brokered deposits
that are not reciprocal brokered
deposits, brokered sweep deposits, or,
under the new provision included in the
final rule as discussed above, nonmaturity brokered deposits that are in
transaction accounts, which would
include transactional accounts with no
maturity date that are placed through
certain marketers, affinity groups, and
Internet deposit broker entities.
Finally, the agencies are clarifying
that the FDIC’s longstanding guidance
and interpretations will remain in effect.
The FDIC will remain the Federal
banking agency primarily responsible
for matters of interpretation relating to
section 29(g) of the FDI Act, and will
continue to work closely with the Board
and OCC to ensure consistent
application of the LCR to covered
companies.
(b). Definition of ‘‘Consolidated
Subsidiary’’
One commenter requested that the
agencies change the definition of
‘‘consolidated subsidiary’’ for purposes
of the affiliated brokered sweep deposit
outflow rate so that subsidiaries that are
controlled under the BHC Act or
affiliates that are under common control
under the BHC Act are subject to the
lower outflow rate rather than solely
subsidiaries and affiliates that are
consolidated under GAAP. This
commenter argued that the BHC Act
affiliate relationship is well recognized
in the U.S. bank regulatory scheme,
notably Federal Reserve Act sections
23A and 23B, as implemented by the
Board’s Regulation W, and further noted
that the commenter had structured its
brokered sweep deposit arrangement
with its affiliate to comply with these
regulatory restrictions.
The agencies have concluded that it
would be consistent with the purposes
of the LCR to extend the scope of
affiliated brokered sweep arrangements
under the final rule to include
relationships between affiliates that are
‘‘controlled’’ under the BHC Act. Such
affiliates would be subject to all the
requirements of the BHC Act, sections
23A and 23B of the Federal Reserve Act,
and the Board’s Regulation W, and thus
such deposits are indistinguishable from
those where the subsidiary or affiliated
is consolidated. Accordingly, the
agencies have modified the provision of

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the rule relating to affiliated sweep
arrangements such that any fully
insured brokered sweep deposits that
are deposited in accordance with a
contract between the retail customer or
counterparty and the bank, a controlled
subsidiary of the bank, or a company
that is a controlled subsidiary of the
same top-tier company of which the
bank is a controlled subsidiary are
subject to a 10 percent outflow rate,
while brokered sweep deposits not
subject to such an agreement are subject
to a 25 percent outflow rate.

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(c). ‘‘Fully Covered by Insurance’’
One commenter raised the concern
that it would be difficult to distinguish
between fully insured and partially
insured or uninsured deposits because,
in the case of brokered sweep deposits,
the covered company would not
necessarily know the identity of the
depositor and because recordkeeping
would be done by the deposit provider
and would be provided to the covered
company only in the event of a bank
failure. Another commenter requested
that the agencies assess the cost for
determining whether deposits are fully
insured, particularly those deposits that
receive pass-through insurance, and
requested that the agencies clarify the
level of certainty a covered company is
required to have prior have in
determining whether a deposit is below
the deposit insurance threshold.
The agencies believe that a covered
company should be able to identify the
applicable treatment for all of its
deposits under the proposed rule by
obtaining the applicable information
through the deposit provider,
irrespective of a bank failure. The
agencies note that banking organizations
are expected to have adequate policies
and procedures in place for determining
whether deposits are above the
applicable FDIC-insurance limits.
Therefore, the agencies are adopting this
provision as proposed.
(d). Pass-Through Insurance
Commenters raised the issue of the
proposed rule’s treatment of brokered
deposits that are held in custody for a
depositor by a conduit financial entity,
such as a trust corporation, where the
depositor, but not the custodial entity,
is eligible for deposit insurance on a
pass-through basis. Commenters noted
that the proposed rule only looks to the
identity of the custodial entity, but
ignores the pass-through insurance to
which such deposit accounts are
subject. These commenters asserted that
such brokered deposits should be
treated as fully-insured retail deposits
under the LCR.

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The agencies are clarifying that the
final rule does not alter the treatment of
pass-through insurance for deposits,
such that deposits owned by a principal
or principals and deposited into one or
more deposit accounts in the name of an
agent, custodian or nominee, shall be
insured to the same extent as if
deposited in the name of the
principal(s) if certain requirements are
satisfied.70 Under FDIC regulations, to
qualify for pass-through insurance, the
account records of a covered company
must disclose the agency relationship
among the parties. Second, the
identities and interests of the actual
owners must be ascertainable either
from the account records of the covered
company or records maintained by the
agent or other party. Third, the agency
or custodial relationship must be
genuine.71
With respect to brokered deposits
held by a fiduciary or an agent on behalf
of a retail customer or counterparty, the
agencies are clarifying that under the
final rule, such deposits would be
subject, as applicable, to the outflow
rate of non-maturity brokered deposits
in a transactional account, reciprocal
deposits, brokered sweep deposits, or
any other type of brokered deposits.
With respect to deposits that are held
by a fiduciary, but do not qualify as
brokered deposits under certain
exceptions to the FDIC’s brokered
deposit regulations, the agencies have
added § __.32(a)(3) and § __.32(a)(4) to
reflect that a trustee or similar third
party may deposit funds at a covered
company as trustee for the benefit of
retail customers or counterparties.
These provisions complement the newly
added provisions for non-maturity
brokered deposits in a transactional
account. In those cases, where the
criteria of § __.32(a)(3) and § __.32(a)(4)
are satisfied, a covered company may
look through to the retail customer or
counterparty and apply the 20 percent
outflow rate to deposits that are fully
covered by deposit insurance and the 40
percent outflow rate where less than the
entire amount of the deposit is covered
by deposit insurance.
(e). Penalties Versus Contractual
Restrictions for Withdrawal
Similar to the Basel III Revised
Liquidity Framework, commenters
requested that the agencies differentiate
between brokered deposits that are
subject to withdrawal penalties (such as
the loss of accrued interest), and those
brokered deposits where no contractual
70 12

CFR 330.7.

71 Id.

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right exists to withdraw the deposit or
such rights are strictly limited.
As noted above, the agencies have
clarified for purposes of the final rule
that deposits that can only be
withdrawn in the event of death or
incompetence are assumed to mature on
the applicable maturity date, and
deposits that can be withdrawn
following notice or the forfeiture of
interest are subject to the rule’s
assumptions for non-maturity
transactions. The agencies decline to
treat the assessment of deposit penalties
the same as contractual prohibitions to
withdrawal, but for the occurrence of a
remote contingency, because the
assessment of the liquidity
characteristics of such fees, and whether
they deter withdrawal, would be
difficult to undertake and could have
unintended consequences for retail
customers. Additionally, while typical
agreements for brokered deposits that
mature in more than 30 calendar days
provide for more limited contractual
withdrawal rights, the agencies decline
to provide more favorable treatment for
these deposits relative to similar retail
deposits. Therefore, the agencies are
adopting this provision of the rule as
proposed.
(f). Additional Brokered Deposit
Categories
One commenter requested that the
agencies establish categories for
additional types of brokered deposits,
namely brokered checking accounts,
brokered savings accounts, and deposits
referred by affinity groups, affiliates, or
third party marketers.
The agencies did not attempt to
specifically identify every type of retail
brokered deposit in the proposed rule.
As discussed above, the agencies have
included an additional category of
outflows for non-maturity brokered
deposits in transactional accounts. The
agencies believe that all other types of
brokered deposits are appropriately
captured in § __.32(g)(1) of the final
rule.
iii. Deposit Market Consequences
Several commenters asserted that the
proposed requirements of § __.32(g)
could adversely impact the brokered
deposit markets, preclude covered
companies from obtaining key sources
of funding, affect investor perceptions
about the risks of brokered deposits, and
allocate funds away from the banking
system as a result of elevated brokered
deposit outflow rates, among other
unintended consequences. One
commenter suggested that the proposed
rule would harm retail investing by
broker-dealer clients, who would be

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faced with elevated costs without any
additional consumer protection benefit,
and requested that the final rule exempt
depository institution holding
companies with substantial retail
brokerage activities. Another commenter
suggested that the proposed treatment
for reciprocal deposits could impact
community banks not subject to the LCR
by distorting the market standards and
pricing for these types of deposits. One
commenter suggested that the proposal’s
treatment of brokered sweep deposits
would cause the cost of such products
to increase, leading investors to seek
products outside of the banking sector,
such as money market mutual funds, at
a greater cost to financial stability.
Another commenter suggested that
applying the existing definition of
brokered deposit in FDIC regulations
would have unintended consequences,
such as having employees who are
primarily compensated by commissions
versus salary being considered deposit
brokers. One commenter stated that the
FDI Act’s treatment of brokered deposits
at well-capitalized institutions, which
allows for those institutions to accept
brokered deposits without limit,
warrants the same outflow rate as
applicable to stable retail deposits. The
commenter stated that the proposed rule
appears to stigmatize brokered deposits
and requested that the FDIC clarify its
liquidity guidance. One commenter
argued that the uniqueness of deposit
insurance (for example, the relatively
high insurance coverage, pass-through
insurance, quick and orderly resolution
of failed banks) should result in lower
outflow rates for insured brokered
deposits. This commenter stated that
brokered deposits qualifying for full
pass-through insurance should be
subject to the same outflow rate as fully
insured stable retail deposits. Finally,
one commenter stated that the
distinction between affiliated and
unaffiliated brokered sweep deposits
would create an unfair disadvantage for
small broker-dealers and commercial
banks without affiliated broker-dealers,
which will face relatively higher pricing
to place their swept deposits.
Despite the changes that the retail
brokered deposit market will likely need
to undertake in response to the
application of the LCR, the agencies
believe that the provisions and
assumptions underlying § __.32(g) of the
proposed rule are consistent with the
potential risks posed by retail brokered
deposits.72 As noted above, the agencies
continue to believe that brokered
deposits have the potential to exhibit
volatility, are more easily moved from
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FR 71840.

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one institution to another, and can be
risky to rely upon as a source of
liquidity on account of regulatory
limitations. In sum, the agencies believe
that the standard set forth in § __.32(g)
will serve to strengthen the overall
financial system as well as the retail
brokered deposit market.
h. Unsecured Wholesale Funding
Outflow Amount
The proposed rule included three
general categories of unsecured
wholesale funding: (i) Unsecured
wholesale funding transactions; (ii)
operational deposits; and (iii) other
unsecured wholesale funding which
would, among other things, encompass
funding from a financial company. The
proposed rule defined each of these
categories of funding instruments as
being unsecured under applicable law
by a lien on specifically designated
assets. Under the proposed rule,
unsecured wholesale funding
instruments typically would have
included: Wholesale deposits; 73 federal
funds purchased; unsecured advances
from a public sector entity, sovereign
entity, or U.S. GSE; unsecured notes;
bonds, or other unsecured debt
securities issued by a covered company
(unless sold exclusively in retail
markets to retail customers or
counterparties), brokered deposits from
non-retail customers, and any other
transactions where an on-balance sheet
unsecured credit obligation has been
contracted.
i. Non-Financial Wholesale
Counterparties and Financial Sector
Entities
The agencies proposed to assign three
separate outflow rates to nonoperational unsecured wholesale
funding, reflecting the stability of these
obligations based on deposit insurance
and the nature of the counterparty.
Under the proposed rule, unsecured
wholesale funding provided by an entity
that is not a financial sector entity
generally would have been subject to an
outflow rate of 20 percent where the
entire amount is covered by deposit
insurance. Deposits that are less than
fully covered by deposit insurance, or
where the funding is a brokered deposit
from a non-retail customer, would have
been assigned a 40 percent outflow rate.
However, the proposed rule would have
required all unsecured wholesale
funding provided by financial sector
entities, including funding provided by
a consolidated subsidiary or affiliate of
73 Certain small business deposits are included
within unsecured retail funding. See section
II.C.3.a. supra.

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the covered company, be subject to an
outflow rate of 100 percent. This higher
outflow rate is associated with the
elevated refinancing or roll-over risk in
a stressed situation and the agencies’
concerns regarding the
interconnectedness of financial
institutions.
Two commenters suggested that
wholesale reciprocal brokered deposits
are as stable as retail reciprocal brokered
deposits, and should be subject to the
same outflow rates. These commenters
stated that the impact of insurance
coverage should be reflected in the case
of wholesale brokered deposits
(including wholesale reciprocal
deposits) by assigning such deposits the
same outflow rates that apply to nonbrokered deposits; that is, 20 percent if
fully-insured and 40 percent if not fullyinsured.
One commenter argued that the
proposed rule defines the term
wholesale deposits broadly and
improperly categorizes deposits placed
by pension funds on behalf of a retail
counterparty as wholesale deposits
placed by a financial sector entity. The
commenter argued that under FDIC
regulations, deposit accounts held by
employee benefit plans are insured on a
pass-through basis to the benefit of plan
beneficiaries and in many plans, a
beneficiary can direct the investment of
the funds, which merits retail treatment
for such funds rather than wholesale
treatment.
In addition, several commenters
disagreed with the agencies’ proposed
outflow rate for unsecured wholesale
funding provided by financial sector
entities. One commenter recognized the
agencies’ concern regarding the
interconnectivity of financial
institutions, but cautioned against
potential increased costs for
correspondent banking and other
services and for holding financial
institution deposits for banks required
to comply with the LCR. A commenter
argued that the proposed rule’s 100
percent outflow rate for wholesale
deposits by financial sector entities
effectively eliminates any incentive for
a banking organization to take such
deposits and that they would therefore
cease doing so. The commenter further
argued that this would severely disrupt
the availability of correspondent deposit
options for depository institutions.
Another commenter suggested the
agencies reconsider the 100 percent
outflow rate that would apply to
correspondent banking deposits in
excess of amounts required for
operational services, suggesting that the
40 percent outflow rate applicable to
non-financial unsecured wholesale

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corporate deposits would be more
appropriate. Another commenter
suggested treating correspondent
banking relationships as operational and
argued that assigning a 25 percent
outflow rate to such deposits would
help support the provision of
correspondent banking services to client
banks, thereby ensuring the ability of
client banks to continue to service the
cash management needs of
organizations that drive the real
economy. The commenter asked that the
agencies take an activity-based approach
to the classification of correspondent
banking outflows, such that outflows
generated by correspondent transactions
with underlying commercial operations
relating to banks and their customers
would be classified as operational
because they behave in a similar fashion
to those of corporate operational
relationship accounts. One commenter
requested that all corporate trust
deposits receive a 25 percent outflow
rate regardless of whether the deposit
qualified as an operational deposit.
Another commenter requested that
the agencies re-examine the treatment of
funding provided by a subsidiary of a
covered company and: (i) Not treat as an
outflow funding provided by a
subsidiary of the covered company; (ii)
not treat as an inflow amounts owed to
the covered company by a subsidiary;
and (iii) not treat as an outflow or an
inflow funding provided by one
consolidated subsidiary of the covered
company to another consolidated
subsidiary.
For the reasons discussed in the
proposal, the agencies continue to
believe the proposed outflow rates
assigned to unsecured wholesale
funding are appropriate. As evidenced
in the recent financial crisis, funding
from wholesale counterparties, which
are generally more sophisticated than
retail counterparties, presents far greater
liquidity risk to covered companies
during a stress period. With respect to
wholesale brokered deposits (including
wholesale reciprocal brokered deposits),
the agencies continue to believe that the
40 percent outflow rate for all such
deposits (regardless of insurance) is
appropriate given the intermediation or
matchmaking by the deposit broker. The
100 percent outflow rate applicable to
other unsecured wholesale funding
provided by financial sector entities
mirrors the treatment for unsecured
wholesale cash inflows contractually
payable to the covered company from
financial sector entities. The agencies
note, however, that § __.32(a)(3) and
§ __.32(a)(4) have been added to the
final rule to address the commenter’s
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deposits where the beneficiary can
direct the investment of the funds. Such
non-brokered deposits placed by a third
party on behalf of a retail customer or
counterparty may be treated as retail
funding, as discussed above. In
addition, as discussed above, to the
extent such deposits placed by a
pension fund meet the definition of
retail brokered deposit, such deposits
would be eligible for the retail brokered
deposit outflow rates under § __.32(g) of
the final rule.
With respect to funding provided by
an affiliate of a covered company, to
address commenters’ concerns, the
agencies are clarifying in the final rule
that the 100 percent outflow rate for
unsecured wholesale funding applies
only to funding from a company that is
a consolidated subsidiary of the same
top-tier company of which the covered
company is a consolidated subsidiary.
This outflow rate does not apply to
funding from a consolidated subsidiary
of the covered company, which is
entirely excluded from the LCR
calculation in the final rule under
§ __.32(m), as discussed below. The
agencies also have added paragraph
(h)(2)(ii) to the final rule to clarify that
debt instruments issued by a covered
company that mature within a 30
calendar-day period, whether owned by
a wholesale or retail customer or
counterparty, will receive a 100 percent
outflow rate.
The final rule is adopting the 100
percent outflow rate for unsecured
wholesale funding provided by financial
sector entities as proposed. The agencies
continue to believe that the liquidity
risk profile of financial sector entities
are significantly different from that of
traditional corporate entities. Based on
the agencies’ supervisory experience,
during a period of material financial
distress, financial sector entities tend to
withdraw large amounts of funding from
the financial system to meet their
obligations. The agencies believe the
outflow rates properly reflect the
liquidity risk present in the types of
products offered to financial sector
entities. The agencies also are adopting
in the final rule the 20 percent and 40
percent outflow rates for non-financial
sector unsecured wholesale funding, as
proposed.
ii. Operational Services and Operational
Deposit
The proposed rule would have
recognized that some covered
companies provide services, such as
those related to clearing, custody, and
cash management, that increase the
likelihood that their customers will
maintain certain deposit balances with

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the covered company. These services
would have been defined in the
proposed rule as operational services
and a deposit required for each of their
provision was termed an operational
deposit. The proposed rule would have
applied a 5 percent outflow rate to an
operational deposit fully covered by
deposit insurance (other than an escrow
deposit) and a 25 percent outflow rate
to an operational deposit not fully
covered by deposit insurance.
The agencies received a number of
comments regarding: (1) The proposed
rule’s definition of operational deposit
and operational services; (2) the
operational criteria required to be met
for a covered company to treat a
particular deposit as an operational
deposit; and (3) the proposed rule’s
outflow rates for operational deposits. In
response to the comments received, the
agencies have made certain
modifications to these requirements, as
discussed below.
Although many commenters
appreciated the agencies’ recognition of
the provision of key services by many
covered companies in the form of lower
outflow rates for operational deposits,
two commenters suggested that a model
that segregates operational deposits
from other deposits is inconsistent with
how covered companies and their
customers structure their banking
operations. One commenter suggested
that application of this model could
lead to unnecessary confusion and
could push excess depository balances
into shadow banking. Another
commenter argued that the proposed
rule’s broad definition of operational
deposit could result in a lack of
consistent application among covered
companies, as they would reflect their
own clients and product mixes in
applying the definition. One commenter
called for a simplified definition that
could be applied uniformly across the
industry, stating that it would be
preferable to have a slightly higher
outflow rate in exchange for such
simplicity.
For the reasons discussed in the
proposal and below, the agencies
continue to believe that the underlying
structure of the proposal’s approach to
defining an operational deposit, which
is consistent with the Basel III Revised
Liquidity Framework, is appropriate. As
noted by commenters, many customers
place deposits with covered companies
as a result of their provision of key
services, such as payroll processing and
cash management. Because such
deposits are tied to the provision of
specific services to the customer, these
deposits present less liquidity risk
during a stress period. The agencies

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have made some changes to the
definition of operational deposit, but
have retained the definition’s structure
as proposed because it unambiguously
aligns a particular operational deposit
with an operational service, thereby
providing a standardized method for
identifying operational deposits.
Accordingly, the agencies are adopting
in the final rule the structure for
defining operational deposit as
proposed with the modifications
discussed below.
(a). Definition of ‘‘Operational Deposit’’
The proposed rule would have
defined an operational deposit as
unsecured wholesale funding that is
required to be in place for a covered
company to provide operational services
as an independent third-party
intermediary to the wholesale customer
or counterparty providing the unsecured
wholesale funding.
Many commenters indicated that an
operational deposit should be one that
is ‘‘necessary’’ rather than ‘‘required’’
for the banking organization to provide
in light of the operational services
enumerated in the proposed rule, which
would better align with industry
practice. The commenters stated that
using ‘‘necessary’’ would make clear
that such deposits are functionally
necessary as opposed to contractually
required. Commenters also requested
that the agencies recognize that certain
operational services may be provided by
a covered company not only as an
independent third-party intermediary,
but also as an agent or administrator.
Finally, several commenters requested
that certain collateralized deposits that
otherwise meet the eligibility criteria for
treatment as an operational deposit,
such as preferred public sector deposits
or corporate trust deposits, be subject to
the outflow rates applicable to
operational deposits.
In response to commenters’ concerns,
the agencies have revised the definition
of operational deposit to state that the
deposit is ‘‘necessary’’ for the provision
of operational services rather than
‘‘required.’’ The term ‘‘required’’
implied that the deposit was a
contractual requirement as opposed to
incidental to the provision of the
operational services, and may have
inadvertently limited the definition’s
application. The agencies also have
added ‘‘agent’’ and ‘‘administrator’’ as
capacities in which a covered company
may provide operational services that
give rise to a need for an operational
deposit, as there are circumstances,
such as the provision of custody
services, where a covered company acts
as an agent or administrator, rather than

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merely as an independent third-party
intermediary. Finally, the agencies have
clarified in the final rule that secured
funding transactions that are
collateralized deposits, as defined under
the final rule, are eligible for the
operational deposit outflow rates if the
deposits otherwise meet the final rule’s
criteria. However, as discussed in
section II.C.3.j. below, such deposits
would still be considered secured
funding transactions and could be
subject to lower outflow rates if the
deposits are secured by level 1 liquid
assets or level 2A liquid assets.
(b). Definition of ‘‘Operational Services’’
The proposed rule would have
included eleven categories of
operational services provided by
covered companies that would
correspond to an operational deposit.
Consistent with the Basel III Revised
Liquidity Framework, the operational
services would have included: (1)
Payment remittance; (2) payroll
administration and control over the
disbursement of funds; (3) transmission,
reconciliation, and confirmation of
payment orders; (4) daylight overdraft;
(5) determination of intra-day and final
settlement positions; (6) settlement of
securities transactions; (7) transfer of
recurring contractual payments; (8)
client subscriptions and redemptions;
(9) scheduled distribution of client
funds; (10) escrow, funds transfer, stock
transfer, and agency services, including
payment and settlement services,
payment of fees, taxes, and other
expenses; and (11) collection and
aggregation of funds.
Several commenters argued that the
list of operational services should be
expanded to include trustee services,
the administration of investment assets,
collateral management services,
settlement of foreign exchange
transactions, and corporate trust
services. Other commenters requested
that the agencies specifically include a
number of operational services that are
specific to the business of custody
banks. One commenter requested that
the final rule recognize that a covered
company may provide these services as
a trustee. One commenter suggested that
the rule define operational services as
those normal and customary operational
services performed by a covered
company, and use the rule’s enumerated
services as illustrative examples.
Commenters also recommended that
operational deposits include all deposits
obtained under correspondent banking
relationships. Another commenter
requested that the final rule better align
the criteria for operational services with
the Basel III Revised Liquidity

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Framework to avoid excluding a
substantial amount of deposits that are
truly operational in nature.
After consideration, to address
commenters’ requests that services
relating to the business of custody banks
be included, the agencies have added a
new subparagraph 2 to the definition of
operational services to include the
administration of payments and cash
flows related to the safekeeping of
investment assets, not including the
purchase or sale of assets. This is
intended to encompass certain collateral
management payment processing
provided by covered companies. Such
operational services solely involve the
movement of money, and not the
transfer of collateral, and are limited to
cash flows, and not the investment,
purchase, or sale of assets. Moreover,
the agencies wish to make clear that this
prong of the operational services
definition does not encompass any
activity that would constitute prime
brokerage services, as any deposit
provided in connection with the
provision of prime brokerage services by
a covered company could not be treated
as an operational deposit, as discussed
in more detail below.
The agencies also have added ‘‘capital
distributions’’ to the now renumbered
subparagraph 8 of the operational
services definition. This addition was
necessary to clarify the intention of the
agencies to include such payments as an
operational service along with recurring
contractual payments when performed
as part of cash management, clearing, or
custody services.
The agencies believe the final rule
appropriately addresses the concerns of
commenters while also treating as
operational services those services that
are truly operational in nature. Defining
operational services as the customary
operational services performed by a
covered company, as suggested by one
commenter, would have been overly
broad and could have led to wide
variations in the treatment of
operational services across covered
companies. Moreover, it is not necessary
to add the entire suite of corporate trust
services to the list of enumerated
defined operational services in order to
include those aspects of such business
lines that have the inherent or essential
qualities of operational services. The
existing twelve categories of services,
when performed as part of cash
management, clearing, or custody
services, will adequately capture those
corporate trust services that should be
captured by the operational service
definition. With respect to
correspondent banking and foreign
exchange settlement activity, neither of

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those services in isolation enhance the
stability of the funding to warrant a
lower outflow rate; however, to the
extent that operational services are
utilized by customers engaged in those
activities, associated deposits may be
included as operational deposits. With
respect to the remaining operational
services identified in the proposed rule,
the agencies have adopted the final rule
as proposed.

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(c). Operational Requirements for
Recognition of Operational Deposits
In addition to stipulating that the
deposit be required for the provision of
operational service by the covered
company to the customer, the proposed
rule would have required that an
operational deposit meet eight
qualifying criteria, each described
below. The agencies received a number
of comments on these operational
criteria, and have made certain
modifications to these criteria in their
adoption of the final rule.
(d). Deposit Held Pursuant to Agreement
and Subject to Termination or
Switching Costs
Section l.4(b)(1) of the proposed rule
would have required that an operational
deposit be held pursuant to a legally
binding written agreement, the
termination of which was subject to a
minimum 30 calendar-day notice period
or significant termination costs to have
been borne by the customer providing
the deposit if a majority of the deposit
balance was withdrawn from the
operational deposit prior to the end of
a 30 calendar-day notice period.
Many commenters stated that
operational deposits are typically held
in demand deposit accounts with no
notice or termination restrictions.
Instead, the associated operational
services are provided pursuant to a
written contract that contains the
relevant termination and notice
provisions. Commenters requested that
the final rule require that the
operational services, not the operational
deposits, be subject to a legally binding
written agreement. In addition, several
commenters suggested that the agencies
recognize, in addition to termination
costs such as fees or withdrawal
penalties, switching costs that would be
borne by a customer transitioning
operational services from one covered
company to another and could inhibit
the transfer of operational services to
another provider.
In response to the comments, the
agencies have revised § l.4(b)(1) of the
final rule to require that the operational
services, rather than the operational
deposit, be provided pursuant to a

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written agreement. Additionally, the
agencies have revised § l.4(b)(1) to
reflect that, in addition to or in lieu of
termination costs set forth in the written
agreement covering the operational
services, the final rule’s criterion would
be satisfied if a customer bears
significant switching costs to obtain
operational services from another
provider. Switching costs include costs
external to the contract for operational
services, such as the significant
information technology, administrative,
and legal service costs that would be
incurred in connection with the transfer
of operational services to a new service
provider. Switching costs, however,
would not include the routine costs of
moving an account from one financial
institution to another, such as notifying
counterparties of new account numbers
or setting up recurring transactions.
Rather, the favorable treatment for
operational deposits under the final rule
is premised on strong incentives for a
customer to keep its deposits with the
covered company.
(e). Lack of Significant Volatility in
Average Deposit Balance
Section l.4(b)(2) of the proposed rule
would have required that an operational
deposit not have significant volatility in
its average balance. The agencies
proposed this requirement with the
intent to exclude surges in balances in
excess of levels that customers have
historically held to facilitate operational
services.
Commenters found the proposed
requirement in § __.4(b)(2) confusing.
One commenter questioned how the
concept of ‘‘average balance’’ could be
reconciled with ‘‘significant volatility,’’
as averaging would in practice subsume
the variability. Several commenters
observed that an operational deposit
account, by definition, would
experience volatility, as cash flows into
and out of such an account over the
course of a 30 calendar-day period.
Commenters expressed concern that the
‘‘significant volatility’’ language could
disqualify deposits based on these
normal variations in deposit balances.
Commenters suggested that the
agencies’ concerns regarding excess
funds would be better addressed
through the provisions of § __.4(b)(6),
and that § __.4(b)(2) should be deleted.
To address these concerns, the
agencies have eliminated significant
volatility as a standalone criterion for
qualification as an operational deposit
in the final rule, but have incorporated
consideration of volatility into the
methodology that a covered company
must adopt for identifying excess
balances, as discussed below. Covered

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companies are still expected to assess
whether there are operational reasons
for any notable shifts in the average
balances that occur over time.
(f). Deposit Must Be Held in Operational
Account
In § __.4(b)(3) of the proposed rule,
the agencies proposed that an
operational deposit be held in an
account designated as an operational
account. Two commenters expressed the
view that this provision was too
restrictive because cash management
practices allow customers to transfer
funds across their entire banking
relationship between sweep accounts,
interest bearing accounts, investment
accounts, and zero balance accounts.
These commenters argued that a
customer’s funds need not be
maintained in a transactional account
specified as an operational account so
long as the funds are liquid and
available for operational use without
penalty when needed.
After consideration of the comments,
the agencies have retained the
requirement in the final rule. The
agencies believe this requirement allows
covered companies to clearly identify
the deposits that are eligible for
operational deposit’s lower outflow rate,
and to prevent the intermingling of
operational deposits with other
deposits. Accordingly, under the final
rule, an operational deposit must be
held in an account designated as an
operational account, which can be one
or more linked accounts. Such an
account need not take a specific form,
but must be designated as an
operational account for a specific
customer so that it can be considered in
identifying excess balances required
under § __.4(b)(5) of the final rule and
discussed further below.
(g). Primary Purpose of Obtaining
Operational Services
Section __.4(b)(4) of the proposed rule
would have required that an operational
deposit be held by a customer at a
covered company for the primary
purpose of obtaining operational
services from the covered company.
Commenters suggested that the best way
to address the relationship between the
operational deposits and operational
services would be to disqualify deposit
balances that are in excess of amounts
necessary to perform operational
services; that is, through § __.4(b)(6) of
the proposed rule. Accordingly, these
commenters requested the deletion of
this requirement from the final rule.
Alternatively, one commenter suggested
that the agencies use the language from
paragraph 94 of the Basel III Revised

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Liquidity Framework and allow a
deposit to be treated only as an
operational deposit to the extent that the
customer depends on the covered
company to perform the associated
operational services.
After considering the comments, the
agencies have adopted this requirement
of the proposed rule without change.
Based on their supervisory experience,
the agencies understand that covered
companies already review various
characteristics, such as customer type,
business line, product, and service,
when classifying deposits as
operational. The agencies expect that
covered companies would review these
same characteristics to categorize the
primary purpose of the deposit in order
to satisfy this provision of the rule.
(h). Prohibition of Economic Incentives
To Maintain Excess Funds
Section l.4(b)(5) of the proposed rule
would have required that an operational
deposit account not be designed to
incent customers to maintain excess
funds therein through increased
revenue, reduction in fees, or other
economic incentives. Commenters
remarked that a common feature of most
operational deposit accounts, the
earnings credit rate (ECR), would seem
to violate this criterion and, therefore,
disqualify many deposits from being
treated as operational.74 Commenters
suggested that the ECR increases the
strength of the relationship between a
covered company and a customer, as it
encourages the customer to continue to
obtain operational services from the
covered company. This, in turn, results
in more stable operational deposit
levels. Several commenters requested
that the agencies remove this proposed
criterion on the grounds that it
essentially aims to limit excess
balances, and this is already addressed
in the proposed rule’s § l.4(b)(6).
The agencies believe this criterion
better ensures that a deposit is truly
necessary for an operational service, and
is not the result of an ancillary
economic incentive. For that reason, the
agencies are retaining this criterion in
the final rule. However, the agencies are
clarifying that some economic
incentives, such as an ECR to offset
expenses related to operational services,
are acceptable, so long as they do not
incent the maintenance of excess
deposits. If an ECR or other economic
74 An ECR is a rate used by certain banking
organizations in noninterest bearing accounts to
reduce the amount of fees a customer would be
required to pay for bank services. The ECR would
be applied to the entire balance of the account, and
thus, a larger balance would provide for a greater
reduction in fees.

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incentive causes a customer to maintain
deposit balances in excess of the
amount necessary to serve the
customer’s operational needs, then
those excess balances would not qualify
as operational deposits.
(i). Exclusion of ‘‘Excess’’ Amounts
Section l.4(b)(6) of the proposed rule
would have required that a covered
company demonstrate that an
operational deposit is empirically
linked to an operational service and that
the covered company has a
methodology for identifying any
deposits in excess of the amount
necessary to provide the operational
services, the amount of which would be
excluded from the operational deposit
amount. Commenters generally
supported this criterion but requested
clarification as to whether covered
companies would be allowed to
calculate excess balances on an
aggregate basis rather than on a depositby-deposit or account-by-account basis.
Commenters argued that absent such
clarification, assessing operational
deposits at an unnecessarily granular
level would be overly burdensome for
covered companies and supervisors.
One commenter expressed concern that
the proposed rule would have required
covered companies to develop models
for determining the excess amount and
requested that the agencies provide
clear criteria for determining excess
deposits. One commenter suggested,
however, that allowing each banking
organization to have its own
methodology could lead to protracted
negotiation with local supervisors and
inconsistent implementation.
Commenters also expressed concerns
regarding the identification of excess
deposits in connection with particular
operational services, such as cash
management and corporate trust
services and argued that the agencies
should exempt such deposits from the
excess operational deposit methodology.
The agencies believe it would be
inappropriate to give excess operational
deposit amounts the same favorable
treatment as deposits that are truly
necessary for operational purposes, as
doing so could lead to regulatory
arbitrage or distort the amount of
unsecured wholesale cash outflows in
the LCR calculation. Further,
operational deposits are afforded a
lower outflow rate due to their
perceived stability arising from the
nature of the relationship between a
customer and covered company and the
operational services provided, as well as
factors, such as the switching costs
associated with moving such deposits,
as discussed above. In contrast, excess

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deposits are not necessary for the
provision of operational services and
therefore do not exhibit these
characteristics.
The agencies are of the view that there
is no single methodology for identifying
excess deposits that will work for every
covered company, as there is a range of
operational deposit products offered
and covered company data systems
processing those products. Aggregation
may be undertaken on a customer basis,
a service basis, or both, but in all
instances, a covered company’s analysis
of operational deposits must be
conducted at a sufficiently granular
level to adequately assess the risk of
withdrawal in an idiosyncratic stress.
The agencies expect covered companies
to be able to provide supporting
documentation that justifies the
assumptions behind any aggregated
calculations of excess deposits and
expect that the higher (that is, the
further from the individual account or
customer) the level of aggregation, the
more conservative the assumptions
related to excess deposit amounts will
be. A covered company’s methodology
must also take into account the
volatility of the average deposit balance
to ensure the proper identification of
excess balances. Moreover, the agencies
believe that it is inappropriate to
exempt deposits received in connection
with particular operational services
from the requirement to identify excess
balances because all excess balances
may exhibit greater volatility than those
that are necessary for the provision of
operational services by a covered
company. Accordingly, the agencies are
adopting this provision of the rule as
proposed, with a modification to
explicitly require a covered company to
take into account the volatility of the
average operational deposit balance
when designing its methodology for
identifying excess deposit amounts.
(j). Exclusion of Deposits Relating to
Prime Brokerage Services
Section l.4(b)(7) of the proposed rule
would have excluded deposits provided
in connection with the covered
company’s provision of prime brokerage
services from the operational deposit
outflow rates.75 The agencies defined
prime brokerage services as the
provision of operational services to an
investment company, non-regulated
fund, or investment adviser. The
agencies defined prime brokerage in this
manner to cover the primary recipients
of prime brokerage services.
Many commenters disagreed with the
agencies’ approach in the proposed rule,
75 Basel

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stating that defining prime brokerage
services in terms of customer type
resulted in an operational deposit
exclusion that was too broad, and
several argued that it would likely
exclude a broad range of operational
deposits from custody banks, which
provide safekeeping and asset
administration services to investment
companies that are wholly unrelated to
prime brokerage services, as well as
clearly operational services such as
employee compensation payroll services
for a mutual fund complex. Several
commenters suggested that rather than
focus on the type of client, the final rule
should focus on the specific prime
brokerage services to be excluded from
the definition of operational services.
One commenter argued that this
proposed alternative treatment would be
beneficial in that, consistent with the
Basel III Revised Liquidity Framework,
it would not exclude stable deposits
related to operational servicing
relationships with mutual funds and
their foreign equivalents. Commenters
noted that while many prime brokerage
services overlap with core operational
services such as cash management,
clearing, or custody, prime brokerage
services differ from those services in
that a prime broker generally facilitates
the clearing, settling, and carrying of
client trades that are executed by an
executing broker. A second
distinguishing feature of prime
brokerage services identified by these
commenters is the provision of
financing (for example, margin lending)
by the prime broker to facilitate the
investment strategies of the client.
According to commenters, these
financing agreements require the client
to authorize the prime broker to
rehypothecate client assets pledged to
secure margin lending, as contrasted
with investment company assets held by
a custodian for safe-keeping, which by
law must be segregated.76
With respect to the exclusion of nonregulated funds, one commenter
requested that the rule be revised to
instead apply a higher outflow rate to
the types of non-regulated funds that are
likely to withdraw deposits in a period
of stress. The commenter further
suggested that closed-end funds that do
not issue redeemable securities be
excluded from the definition of nonregulated funds, as well as a
consolidated subsidiary of a nonregulated fund.77 Another commenter
argued that investment companies, such
76 15

U.S.C. 80a–17(f).
77 With respect to commenters’ requests regarding
non-regulated funds, the agencies have addressed
these comments in section II.B.2.b.iv above.

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as U.S. mutual funds and their foreign
equivalents, should not be included in
this category because they do not use
prime brokerage services in their
ordinary business operations.
The agencies have concluded that the
proposed rule’s approach of defining
prime brokerage services by
counterparty could have been overly
broad in application, potentially
excluding many types of truly
operational services from the proposed
rule’s preferential treatment of
operational deposits. Therefore, in
response to concerns raised by
commenters, the agencies have defined
prime brokerage services in the final
rule using the key aspects of the prime
brokerage relationship. In addition to
the execution, clearing and settling of
transactions, the agencies believe it is
the financing services and the retention
of rehypothecation rights by the prime
broker that distinguish prime brokerage
from other operational services. This
financing and rehypothecation aspect of
prime brokerage services merits
exclusion from operational services, as
highly-levered customers and the reuse
of assets can expose covered companies
to significant liquidity risk. Under the
final rule, prime brokerage services are
those services offered by a covered
company whereby the covered company
executes, clears, settles, and finances
transactions entered into by a customer
with the covered company or a thirdparty entity on behalf of the customer
(such as an executing broker). The
covered company must also have a right
to use or rehypothecate assets provided
to the covered company by the
customer, including in connection with
the extension of margin lending or other
financing to the customer. The final rule
clarifies that prime brokerage services
would include operational services
provided to a non-regulated fund. The
final rule explicitly states that prime
brokerage services include those
provided to non-regulated funds
because of the higher liquidity risks
posed by the provision of these services
to hedge and private equity funds. The
agencies believe these changes capture
the intent of the proposed rule, in that
deposits that are less stable do not
qualify as operational deposits under
the final rule. Accordingly, all deposits
of a non-regulated fund will not be
eligible for treatment as an operational
deposit, regardless of the provision of
operational services by the covered
company.
(k). Exclusion of Certain Correspondent
Banking Activities
Section l.4(b)(8) of the proposed rule
would have excluded from the

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definition of operational deposits a
subset of correspondent banking
arrangements pursuant to which a
covered company (as correspondent)
holds deposits owned by another
depository institution (as respondent)
and the respondent temporarily places
excess funds in an overnight deposit
with the covered company. The
agencies specifically excluded these
deposits from treatment as an
operational deposit under the proposed
rule because, although they may meet
some of the requirements applicable to
operational deposits, they historically
have exhibited instability during
stressed liquidity events. In doing so,
the agencies did not intend to exclude
all banking arrangements with
correspondents, only those specifically
described in § l.4(b)(8) of the proposed
rule.
Several commenters argued that the
agencies’ proposed exclusion is broader
than that in the Basel III Revised
Liquidity Framework and requested that
the agencies clarify that the exclusion
for deposits provided in connection
with correspondent banking services is
limited to the settlement of foreign
currency transactions. In addition,
several commenters argued that this
exclusion would exclude all deposits
under correspondent banking
relationships from application of the
operational deposit outflow rate.
The agencies continue to believe that
excess funds from a depository
institution placed in an overnight
deposit account are not stable, and have
retained the exclusion of them from
operational deposits. However, the
agencies have modified the final rule to
remove the phrase ‘‘correspondent
banking’’ from the proposed provision
in § l.4(b)(8) to address commenters’
concerns that the exclusion applies to
all correspondent banking
arrangements.
The proposed rule would have
allowed correspondent banking deposits
that meet all operational requirements
to be included as operational deposits;
however, deposits arising from
correspondent banking relationships
that were not operational in nature
would not have been categorized as
operational. The proposal would not
have excluded from operational
deposits those correspondent banking
arrangements under which a
correspondent bank held deposits
owned by respondent banks and
provided payment and other services in
order to settle foreign currency
transactions. The final rule provides for
the same treatment.

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(l). Operational Deposit Outflow Rates
As noted above, the proposed rule
would have applied a 5 percent outflow
rate to operational deposits fully
covered by deposit insurance (other
than escrow deposits) and a 25 percent
outflow rate to operational deposits not
fully covered by deposit insurance and
all escrow deposits. One commenter
argued that operational deposits are
unlikely to run off during a 30 calendarday period because customers likely
would not terminate the attendant
operational services, which are
provided via legal contracts with notice
and termination provisions, and thus
requested that the agencies adopt lower
outflow rates for such deposits. The
commenter further argued that certain
operational services, such as investment
company custody services, are
mandated by law, and providers of
operational services generally have a
diverse customer base. Other
commenters argued that operational
deposits should be subject to lower
outflow rates on the basis of evidence
indicating that such deposit amounts
tend to increase during times of stress.
A commenter provided data to justify
lowering the 25 percent outflow rate for
operational deposits where less than the
entire amount of the deposit is covered
by deposit insurance, requesting that the
treatment of operational deposits be
consistent with the Basel III Revised
Liquidity Framework. Commenters also
argued for the inclusion of both fully
insured accounts and the insured
portions of accounts that are over the
FDIC insurance limits in the 5 percent
outflow category of operational
deposits. Throughout the final rule, the
agencies are drawing a distinction
between fully insured deposits on the
one hand and less than fully insured
deposits on the other, because, as
discussed above, based on the agencies’
supervisory experience, the entire
balance of partially insured deposits
behave more like uninsured deposits,
with customers withdrawing the entire
deposit amount, including amounts
below the deposit insurance limit. Thus,
the agencies have adopted this
provision of the rule as proposed.
The agencies recognize the stable
nature of operational deposits, which is
reflected in the proposed and final
rule’s 5 percent outflow rate for fully
insured operational deposits. However,
the agencies continue to believe that
deposits that are not fully covered by
insurance will experience higher
outflow rates in a macroeconomic stress
scenario as covered companies’
counterparties will likely find
themselves subject to the same stress,

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thereby reducing their operational
deposit balances as their business slows.
While operational deposits are more
stable than non-operational funding, the
agencies believe that in the event of
idiosyncratic stress, counterparties
likely would reduce the amount of their
operational deposits. Accordingly, all
other unsecured operational deposits
are assigned a 25 percent outflow rate in
the final rule, as in the proposed rule.
One commenter criticized the
agencies’ decision not to assign fully
insured escrow deposits a 5 percent
outflow rate that other fully insured
operational deposits would have
received, arguing that deposits in
mortgage escrow accounts are no more
likely to be withdrawn in a period of
financial stress than any other
operational deposits at the same bank
from the same depositor.
The agencies believe that, although
escrow deposits are operational, it is
their nature that there will be outflows
based on the occurrence of a specified
event, regardless of the amount of
deposit insurance coverage. Thus,
during a period of overall
macroeconomic distress, the amount of
operational escrow deposits would
shrink as business slowed, regardless of
deposit insurance. Further, the agencies
believe that given the general volatility
of escrow deposits, affording them a 3
or 10 percent outflow rate would not
properly reflect the lack of funding
stability in these deposits. The 25
percent outflow rate appropriately
reflects the outflow risk of escrow
deposits, and has therefore been
adopted in the final rule as proposed.
iii. Other Unsecured Wholesale Funding
The proposed rule would have
assigned an outflow rate of 100 percent
to all other unsecured wholesale
funding. This category was designed to
capture all other funding not given a
specific outflow rate elsewhere in the
proposed rule, including funding
provided to a financial sector entity as
described above. The agencies have
adopted this category in the final rule as
proposed.
i. Debt Security Outflow Amount
The agencies proposed that where a
covered company is the primary market
maker for its own debt securities, the
outflow rate for such funding would
equal 3 percent for all debt securities
that are not structured securities that
mature outside of a 30 calendar-day
period and 5 percent for all debt
securities that are structured debt
securities that mature outside of a 30
calendar-day period. This outflow
amount was proposed in addition to any

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debt security-related outflow amounts
maturing within a 30 calendar-day
period that must have been included in
net cash outflows. Based on historical
experience, including the recent
financial crisis during which
institutions went to significant lengths
to ensure the liquidity of their debt
securities, the agencies proposed what
they considered to be relatively low
outflow rates for a covered company’s
own debt securities. The proposed rule
differentiated between structured and
non-structured debt on the basis of data
from stressed institutions indicating the
likelihood that structured debt requires
more liquidity support. In such cases, a
covered company may be called upon to
provide liquidity to the market by
purchasing its debt securities without
having an offsetting sale through which
it can readily recoup the cash outflow.
A few commenters suggested that
these proposed outflow rates were too
high, arguing that the actual volume of
any repurchases made by a banking
organization may be lower than the
proposed outflow rates because
investors may not be willing to have the
banking organization repurchase the
debt securities during a stress scenario
at a price which would result in the
investor recognizing a significant loss. A
commenter suggested that covered
companies be allowed to set their own
outflow rates, reflecting the fact that
different covered companies might take
different approaches to addressing
franchise or reputational risk. This
commenter argued that, in any event,
while outflow rates of 3 and 5 percent
seem low, once one takes into account
the amount of securities that a covered
company may have outstanding, a
materially significant outflow amount is
possible, which the commenter found
unreasonable. Two other commenters
requested clarification regarding how
the debt security outflow amount would
work in practice. A commenter argued
that the scope of debt securities subject
to this section should be modified to
apply an outflow rate only to the senior
unsecured debt of the covered company
in which it is the primary market maker.
The commenter also argued that to the
extent that a covered company’s offering
documents disclose that it is not
obligated to provide liquidity for such
securities, the securities should not be
subject to a predetermined outflow rate.
Another commenter argued that the
proposed rule’s provision of cash
outflow rates for primary market makers
would likely discourage covered
companies from supporting their own or
other covered companies’ debt
securities and asked that the agencies
clarify the definition and the intent of

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this provision. After considering the
comments received on this section of
the proposed rule, the agencies are
finalizing § l.32(i) as proposed with
one minor change. Recognizing that a
limited number of covered companies
are primary market makers for their own
debt securities, the agencies have
clarified that the debt security buyback
outflow will be triggered when either a
covered company or its consolidated
subsidiary is the primary market maker
for debt securities issued by the covered
company.
The agencies are adopting the outflow
rates as proposed for several reasons.
First, one purpose of the LCR is to
implement a standardized quantitative
liquidity stress measure and this, in
turn, counsels toward not allowing
covered companies discretion in
determining outflow rates. Second,
these outflow rates are not intended to
measure the cost to a covered company
of addressing franchise or reputational
risk through participation in the market.
Rather, as the primary market maker for
a security, the market expects that the
covered company or its consolidated
subsidiary will continue to purchase the
securities, especially if they issued the
securities. Thus, the 3 percent and 5
percent rates are reasonable. Third, with
regard to investors not being willing to
repurchase securities at a given price,
the price will be the then-market price,
which reflects the outflow the market
maker will have if it is required to
purchase securities from a counterparty
that it cannot then re-sell. That reduced
price is reflected in the outflow rate.
Historical experience in past bear
markets and the recent financial crisis
shows that market makers will continue
to make markets in most debt issuances,
particularly when such market makers
or their consolidated subsidiaries are
the issuers of a particular security.
The agencies further believe that these
outflow rates are appropriate to address
the potential future support a covered
company will provide with regard to its
primary market making role for its own
debt, and would not directly discourage
any such support. In addition, the
outflow rates only apply to debt
securities issued by a covered company
or its consolidated subsidiary. It would
not apply to a covered company’s efforts
to provide secondary market liquidity to
the securities of other banking
organizations.
Moreover, a covered company would
not be required to calculate this outflow
amount unless it or its consolidated
subsidiary is the primary market maker
for its own debt securities. While the
final rule does not define the term
market maker, the agencies generally

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expect that if a covered company or its
consolidated subsidiary routinely stands
ready to purchase and sell its debt
securities and is willing and available to
quote, purchase and sell, or otherwise to
enter into long and short positions in its
debt securities, in commercially
reasonable amounts and throughout
market cycles on a basis appropriate for
the liquidity, maturity, and depth of the
market for such debt securities, that it
is a market maker for those debt
securities. The market will know who
the primary market makers are for a
particular security, and a covered
company should know if it is the
primary market maker for a particular
security.
j. Secured Funding Transactions and
Asset Exchange Outflow Amounts
i. Definitions and Outflow Rates
The proposed rule would have
defined a secured funding transaction as
a transaction giving rise to a cash
obligation of a covered company that is
secured under applicable law by a lien
on specifically designated assets owned
by the covered company that gives the
counterparty, as holder of the lien,
priority over the assets in the case of
bankruptcy, insolvency, liquidation, or
resolution. As defined, secured funding
transactions would have included
repurchase transactions, FHLB
advances, secured deposits, loans of
collateral to effect customer short
positions, and other secured wholesale
funding arrangements with Federal
Reserve Banks, regulated financial
companies, non-regulated funds, or
other counterparties.
Under the proposed rule, secured
funding transactions maturing within 30
calendar days of the calculation date
would have given rise to cash outflows
during the stress period. This outflow
risk, together with the potential for
additional outflows in the form of
collateral calls to support a given level
of secured funding transactions, was
reflected in the proposed secured
funding transaction outflow rates. The
agencies believed that rather than
applying an outflow rate based on the
nature of the funding provider, the
proposed rule should generally apply an
outflow rate based on the quality and
liquidity of the collateral securing the
funding. For secured funding
transactions, the quality of the assets
securing the transaction is a significant
factor in determining the likelihood that
a covered company will be able to roll
over the transaction at maturity with a
range of market participants and
maintain the associated funding over
time. In the proposed rule, secured

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funding outflow rates would have
progressively increased depending upon
whether the secured funding transaction
was secured by level 1 liquid assets,
level 2A liquid assets, level 2B liquid
assets, or by assets that were not HQLA.
These outflow rates were proposed as
zero percent, 15 percent, 50 percent and
100 percent, respectively. Additionally,
the proposed rule would have applied a
25 percent outflow rate to secured
funding transactions with sovereigns,
multilateral development banks, or U.S.
GSEs that are assigned a risk weight of
20 percent under the agencies’ riskbased capital rules, to the extent such
transactions were secured by assets
other than level 1 or level 2A liquid
assets. Under the proposed rule, loans of
collateral to facilitate customer short
positions were secured funding
transactions, subject to outflow rates
generally as described above for other
types of secured funding transactions.
Secured funding transactions in the
form of customer short positions give
rise to liquidity risk because the
customer may abruptly close its
positions, removing funding from the
covered company. Further, customers
may remove their entire relationship
with the covered company, causing the
firm to lose the funding associated with
the short position. In the particular case
where customer short positions were
covered by other customers’ collateral
that does not consist of HQLA, the
proposed rule would have applied an
outflow rate of 50 percent, rather than
the generally applicable 100 percent
outflow rate for other secured funding
transactions secured by assets that are
not HQLA. The 50 percent outflow rate
reflected the agencies’ recognition of
there being some interrelatedness
between such customer short positions
and other customer long positions
within the covered company, and that
customers in aggregate may not be able
to close all short positions without also
significantly reducing leverage. In the
case of customers moving their
relationships, closing short positions
would also be associated with moving
long positions for which the covered
company may have been providing
funding in the form of margin loans.
The 50 percent outflow rate for these
customer short positions was designed
to recognize potential symmetry with
the inflows generated from margin loans
secured by assets that are not HQLA, to
which the proposed rule applied an
inflow rate of 50 percent, and that are
described in section II.C.4.f. of this
Supplementary Information section.
The agencies proposed to treat
borrowings from Federal Reserve Banks
the same as other secured funding

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transactions because these borrowings
are not automatically rolled over, and a
Federal Reserve Bank may choose not to
renew the borrowing. Therefore, the
agencies believed an outflow rate based
on the quality and liquidity of the
collateral posted was most appropriate
for such transactions. The agencies
noted in the proposed rule that should
the Federal Reserve Banks offer
alternative facilities with different terms
than the current primary credit facility,
or modify the terms of the primary
credit facility, outflow rates for the LCR
may be modified.
In addition to secured funding
transactions, which relate solely to a
secured cash obligation, an asset
exchange would have been defined
under the proposed rule as a transaction
that requires the counterparties to
exchange non-cash assets. Asset
exchanges can give rise to a change in
a covered company’s liquidity, such as
where the covered company is obligated
to provide higher-quality assets in
return for less liquid, lower-quality
assets. The proposal would have
reflected this risk through the proposed
asset exchange outflow rates, which
would have been based on the HQLA
levels of the assets exchanged and
would have progressively increased as
the assets to be relinquished by a
covered company increased in quality
relative to those to be received from the
asset exchange counterparty.
§ l.32(j)(2) of the proposed rule set
forth the outflow rates for various asset
exchanges.
In general, commenters’ concerns
with the outflow rates for secured
funding transactions pertained to
perceptions of the relative liquidity of
various asset classes and whether
particular types of assets should have
been classified as HQLA in the
proposed rule, as described in section
II.B above. For example, one commenter
argued that a transaction secured by
government MMFs should receive the
same outflow rate as a transaction that
is secured by level 1 liquid assets and,
similarly, a transaction secured by other
types of MMFs should have the same
outflow rate as a transaction secured by
level 2A liquid assets because MMFs
have high credit quality and are liquid.
Some commenters noted that, under the
proposed rule, level 2B liquid assets
that are common equity securities were
limited to shares in the S&P 500 index,
common shares recognized by local
regulatory authorities in other
jurisdictions, and, potentially, shares in
other indices. These commenters
requested that the agencies consider a
narrow expansion of this asset category
for the purposes of secured funding

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outflow rates (and secured lending
inflow rates). These commenters also
argued that all major indices in G–20
jurisdictions should qualify as level 2B
liquid assets for the purposes of secured
funding transaction cash flows.
Other commenters recommended
applying an outflow rate that would
ensure that secured funding transactions
secured by assets that are not HQLA
would not have an outflow rate that was
greater than the outflow rate applied to
an unsecured funding transaction with
the same counterparty in order to avoid
inconsistency. One commenter
requested that the agencies limit the
definition of secured funding
transaction to only include repurchase
agreements.
With respect to the definition of a
secured funding transaction, the
agencies continue to believe that the
principle liquidity characteristics of an
asset which were considered when
determining the inclusion of an asset as
HQLA also are applicable to the
determination of the outflow rates for
any transactions that are secured by
those assets and that the definition of
such transactions should include more
than repurchase agreements.
Accordingly, the agencies are adopting
the definition of secured funding
transaction largely as proposed, with a
clarification that the definition of
secured funding transaction only
includes transactions that are subject to
a legally binding agreement as of the
calculation date. In addition and as
described above under section II.C.3.a,
the agencies have opted to treat secured
retail transactions under § l.32(a) of the
final rule. Accordingly, the secured
funding transaction and asset exchange
outflow rates under § l.32(j) of the final
rule would apply only to transactions
with a wholesale counterparty.
Consistent with the proposed rule, the
final rule’s outflow rates for secured
funding transactions that mature within
30 calendar days of the calculation date
are based upon the HQLA categorization
of the assets securing the transaction
and are generally as proposed (see Table
3a). Consistent with this treatment and
as discussed in section II.B above,
MMFs do not meet the definition of
HQLA under the final rule and a
secured funding transaction that is
secured by an MMF generally will
receive the 100 percent outflow rate
associated with collateral that is not
HQLA. Further, the agencies believe it
would be inappropriate to establish an
exception to this principle, whereby, for
example, secured funding transactions
secured by non-U.S. equity securities
that are not level 2B liquid assets would
be subject to the outflow rate applicable

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to level 2B liquid asset collateral. As
discussed above in section II.B.2.f, the
agencies believe that assets that are not
HQLA may not remain liquid during a
stress scenario. Accordingly, any
secured funding transaction maturing in
less than 30 calendar days that is
secured by assets that are not HQLA
may not roll over or could be subject to
substantial haircuts. Thus, secured
funding transactions that are secured by
assets that are not HQLA under the final
rule receive the outflow rate appropriate
for this type of collateral and the
relevant counterparty.
Although a covered company may
have the option of reallocating the
composition of the collateral that is
securing a portfolio of transactions at a
future date, the outflow rates for a
secured funding transaction or asset
exchange is based on the collateral
securing the transaction as of the
calculation date.
The agencies agree with certain
commenters that, as a general matter,
the outflow rate for a secured funding
transaction should not be greater than
that applicable to an equivalent
wholesale unsecured funding
transaction (that is not an operational
deposit) from the same counterparty.
Under § l.32(j)(2) of the final rule, in
instances where the outflow rate
applicable to a secured funding
transaction (conducted with a
counterparty that is not a retail
customer or counterparty) would exceed
that of an equivalent wholesale
unsecured funding transaction (that is
not an operational deposit) with the
same counterparty, the covered
company may apply the lower outflow
rate to the transaction.78 The reduced
outflow rate would not, however, be
applicable if the secured funding
transaction was secured by collateral
that was received by the covered
company under a secured lending
transaction or asset exchange.
Additionally, the reduced outflow
would still be considered a secured
funding transaction outflow amount
under § l.32(j) of the final rule for the
purposes of reporting and determining
the applicable maturity date (see Table
3a). Furthermore and as discussed
below, for collateralized deposits as
defined in the final rule, the outflow
rate applicable to part or all of the
78 The agencies note that, for counterparties that
are financial sector entities, the applicable nonoperational deposit unsecured wholesale funding
outflow rate would be 100 percent under
§ l.32(h)(5) of the final rule. Thus, for such
counterparties, the secured funding transaction
outflow rates would be equivalent or higher
depending on the collateral securing the
transaction.

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secured funding transaction amount
may potentially be the outflow rate
applicable to a wholesale operational
deposit from the same counterparty, for
the portion of the deposit that meets the
remaining criteria for classification as
an operational deposit.
Under the final rule, the treatment of
asset exchange outflows is adopted
generally as proposed (see Table 3b).
However, the agencies are clarifying that
in the case where a covered company
will not have the required collateral to
deliver to the counterparty upon the
maturity of an asset exchange, the
covered company should assume it will
be required to make a cash purchase of
the necessary security prior to the
maturity of the asset exchange.
Accordingly, and consistent with the
Basel III Revised Liquidity Framework,
the covered company should include in
its outflow amount an outflow for the
purchase of the security. As reflected in
§ l.32(j)(3)(x)–(xiii) of the final rule and
in Table 3b, below, under these
provisions, the outflow rate would be
the fair value of the asset that the
covered company would be required to
purchase in the open market minus the
value of the collateral that the covered
company would receive on the
settlement of the asset exchange, which
is determined by the rule’s haircuts for
HQLA and non-HQLA.
The agencies are clarifying that assets
collateralizing secured funding
transactions as of a calculation date are
encumbered and therefore cannot be
considered as eligible HQLA at the
calculation date. However, because
outflow rates are applied to the cash
obligations of a covered company under
secured funding transactions subject to
a legally binding agreement as of a
calculation date, these outflow rates do
not depend on whether the collateral
securing the transactions at the
calculation date was or was not eligible
HQLA prior to the calculation date.
The agencies recognize that certain
assets that are collateralizing a secured
funding transaction (or a derivative
liability or other obligation) as of a
calculation date, and certain assets that
have been delivered to a counterparty in
an asset exchange, may be
rehypothecated collateral that was made
available to the covered company from
a secured lending, asset exchange, or
other transaction. As described in
section II.C.2 above, the maturity date of
any such secured lending transaction or
asset exchange determined under
§ l.31 of the final rule cannot be earlier
than the maturity date of the secured
funding transaction or asset exchange
for which the collateral has been reused.
Furthermore, the agencies recognize that

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the remaining term of secured lending
transactions, asset exchanges or other
transactions that are secured by
rehypothecated assets may extend
beyond 30 calendar days from a
calculation date, meaning that the
covered company will have a
continuing obligation to return
collateral at a future date. The inflow
rates that are to be applied to secured
lending transactions and asset
exchanges where received collateral has
been reused to secure other transactions
are described in section II.C.4 below.
In addition to comments broadly
relating to definitions and outflow rates
for secured funding transactions,
commenters raised specific concerns
regarding the treatment of collateralized
municipal and other deposits as secured
funding transactions, the outflow rates
associated with certain prime brokerage
transactions, and the treatment of FHLB
secured funding.
ii. Collateralized Deposits
Under the proposed rule, all secured
deposits would have been treated as
secured funding transactions. Some
commenters objected to the proposed
rule’s inclusion of collateralized public
sector deposits as secured funding
transactions on the grounds that such
deposits are relationship-based, were
more stable during the recent financial
crisis, and are typically secured by a
more stable portfolio of collateral than
the collateral that secures secured
funding transactions such as repurchase
agreements. Commenters argued that
during the recent financial crisis, state
and local governments that placed
deposits secured by municipal
securities with banking organizations
did not withdraw such funds due to
concern over the quality of the collateral
underlying their deposits. These
commenters further argued that it is
often the case that the collateral used to
secure a government’s deposits can be
that government’s own bonds.
As discussed in section II.B.5 of this
Supplementary Information section,
commenters argued that collateralized
public sector deposits, which are
required by law to be collateralized with
high-quality assets, should not be
treated like short-term, secured funding
transactions, because collateralized
public sector deposits are not the type
of transactions susceptible to the risk of
manipulation that commenters believed
was the focus of the proposed rule.
Commenters further argued that this
classification would lead to unnecessary
distortions that could increase the cost
of these deposits for bank customers.
Commenters also contended that
during a period of financial market

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distress, it is not plausible that a state
or local government could withdraw a
lower amount of unsecured deposits
than secured public sector deposits, as
contemplated by the outflow rates
assigned to the applicable unsecured
wholesale funding and secured funding
categories.79 Many commenters also
argued that applying a higher outflow
rate to collateralized municipal deposits
versus unsecured municipal deposits
could discourage banking organizations
from accepting collateralized public
sector deposits. Thus, several
commenters requested that if
collateralized public sector deposits are
categorized as secured funding
transactions in the final rule, the
agencies should assign a lower outflow
rate to these deposits. These
commenters suggested that the agencies
provide the same treatment for
collateralized deposits as they do for
unsecured deposits and take into
consideration the historical behavior of
the depositor to determine the
appropriate outflow rate. Other
commenters pointed out that the
unsecured deposits of municipalities
would have been subject to outflow
rates in the range of 20 percent to 40
percent under the proposed rule, in
contrast to the more stringent outflow
rates applicable to secured funding
transactions backed by lower quality
collateral.80 Additionally, some
commenters stated that the secured
funding transaction outflow rates that
would have applied to collateralized
public sector deposits under the
proposed rule would have diverged
from the Basel III Revised Liquidity
Framework. These commenters argued
that the Basel standard assigned a 25
percent outflow rate for secured funding
transactions with public sector entities
that have a risk-weight of 20 percent
under the Basel capital standards.
Likewise, one commenter recommended
assigning collateralized public sector
deposits an outflow rate of no more than
15 percent because, according to the
commenter, bank Call Report data
suggests that, even during the recent
financial crisis, the peak secured
municipal deposit outflow rates
generally did not exceed approximately
15 percent. Another commenter also
recommended that the agencies adopt a
79 Under the proposed rule, secured funding
transactions that are secured by collateral that is not
HQLA, would have received a 100 percent outflow
rate while unsecured non-operational wholesale
funding that is not fully covered by deposit
insurance would have received an outflow rate of
40 percent.
80 However, other commenters also argued that
the outflow rate for unsecured deposits of 40
percent under the proposed rule was unduly
punitive.

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30 percent maximum outflow rate
assumption for deposits collateralized
by municipal securities. Finally, other
commenters requested clarification as to
whether collateralized public sector
deposits that otherwise meet the criteria
for operational deposits would be
eligible for the operational deposit
outflow rates.
Further, because municipal securities
would not have been included as HQLA
under the proposed rule, commenters
were concerned that in certain cases a
banking organization could be required
to hold HQLA equal to the deposits that
a public entity had placed with the
banking organization in addition to the
collateral specified to be held against
the deposit as a matter of state law in
order to meet the outflow rates that the
proposed rule would have assumed. A
commenter proposed that the outflow
rate for a collateralized deposit should
only be applied to the deposit amount
less the value of collateral posted by the
covered company. A few commenters
inquired as to whether preferred
deposits secured by FHLB letters of
credit would be assigned the same 15
percent outflow rate as secured funding
transactions secured with U.S. GSE
obligations or if those that satisfy the
operational deposit criteria would
receive an outflow rate no higher than
25 percent.81
Many commenters requested the
exclusion of collateralized public sector
deposits from the secured transaction
unwind mechanism used to determine
adjusted liquid assets amounts as
addressed in section II.B.5.d above.
In addition to comments relating to
public sector deposits, the agencies
received a number of comments relating
to corporate trust deposits. Commenters
argued that funds in corporate trust
accounts are very stable due to the
specialized nature of the banking
relationship and constraints imposed by
governing documents. Moreover, due to
the specialized nature of indentured
trustee and agency engagements
associated with corporate trust deposits,
withdrawal and disbursements of funds
may be strictly limited. However,
certain corporate trust deposits would
have met the definition of secured
funding transactions under the
proposed rule. Consistent with other
comments received relating to secured
funding transactions in general,
commenters were concerned that the
outflow rate applicable to a
collateralized corporate trust deposit
may be higher than that applied to an
81 As discussed above under section II.B.2.f.iv,
FHLB letters of credit would not qualify as HQLA
under the final rule.

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unsecured deposit from the same
depositor. Other commenters requested
clarification as to whether collateralized
corporate trust deposits that otherwise
met the criteria for operational deposits
would be eligible for the operational
deposit outflow rate. One commenter
requested that collateralized corporate
trust deposits be excluded from the LCR
requirements entirely. A few
commenters requested that
collateralized corporate trust deposits be
excluded from the unwind mechanism
used to determine the adjusted excess
HQLA amount as addressed in section
II.B.5.d above.
The agencies recognize the particular
characteristics of collateralized public
sector and certain collateralized
corporate trust deposits. The agencies
acknowledge that a covered company’s
collateralized public sector deposits
may, in part, be related to longer-term
relationships with its counterparties,
established through a public bidding
process that is specific to the
counterparties’ requirements. The
agencies also recognize that certain
corporate trust deposits are required by
federal law to be collateralized.82 Such
deposits are governed by complex
governing documents, such as trust
indentures, that may limit the
customer’s discretion to withdraw, pay,
or disburse funds. The agencies further
acknowledge that there may be
relationship characteristics that
influence the availability, volume, and
potential stability of collateralized
public sector and corporate trust
deposits placed at covered companies.
However, given the collateral
requirements and potential collateral
flows associated with such deposits,
whether required by law or otherwise,
the agencies continue to believe that the
liquidity risk of collateralized public
sector deposits, collateralized corporate
trust deposits, and all other secured
deposits is appropriately addressed
through their treatment as secured
funding transactions where the deposits
meet the definition of such transactions.
Under the final rule, the outflow rate
assigned to all secured deposits,
including collateralized public sector
and corporate trust deposits, with a
maturity as determined under § l.31 of
the final rule of 30 calendar days or less
will be principally based on the quality
of the collateral used to secure the
deposits. The outflow rate applicable to
all secured deposits meeting the
definition of a secured funding
transaction that are secured by level 1
liquid assets will be zero percent, while
82 12

CFR 9.10 (national banks) and 12 CFR
150.300–150.320 (Federal savings associations).

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the outflow rate for deposits secured by
level 2A liquid assets will be 15 percent.
As described above for secured funding
transactions in general, the agencies are
amending the final rule so that the
outflow rate applicable to a secured
deposit is not greater than the
equivalent outflow rate for an unsecured
deposit from the same counterparty.
The agencies believe this amendment
addresses a number of the concerns
expressed by commenters with respect
to collateralized deposits. For example,
while public sector deposits secured by
level 2A liquid assets would be assigned
a 15 percent outflow rate, similar
deposits secured by FHLB letters of
credit (which are not HQLA under the
final rule) may receive the 40 percent
outflow rate applicable to unsecured
deposits from a wholesale counterparty
that is not a financial sector entity
(versus a 100 percent outflow rate). The
agencies believe the application of
outflow rates in this manner is
appropriate and that a further reduced
outflow rate specific to public sector
deposits would not be appropriate.
Additionally, because the secured
funding transaction outflow rates are
derived from the quality and liquidity
profile of the collateral securing the
deposit in a manner which is consistent
with the liquidity value of that collateral
if it were held unencumbered by the
covered company, the agencies do not
believe that it is appropriate to net the
amount of the deposit by the collateral
posted by the covered company.
Furthermore, specifically and solely
in the case of a secured funding
transaction that meets the definition of
a collateralized deposit under the final
rule, a covered company may assess
whether such a collateralized deposit
meets the criteria for an operational
deposit under § l.4 of the final rule.83
If such collateralized deposits meet the
criteria for an operational deposit, the
covered company may determine the
amount of the collateralized deposit that
would receive the 25 percent outflow
rate applicable to an unsecured
operational deposit that is not fully
covered by deposit insurance (see Table
3a). Any portion of the collateralized
deposit that is not an operational
deposit under the covered company’s
excess operational deposit amount
methodology will receive the outflow
rate applicable to a wholesale unsecured
non-operational deposit from the same
counterparty. With respect to the
requests by commenters to apply the 25
percent outflow rate to all collateralized
83 All other secured deposits would not be
eligible for the operational deposit outflow rates
under the final rule.

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public sector deposits that are secured
by level 2B liquid assets or non-HQLA,
the agencies believe that deposits not
meeting the criteria for operational
deposits would be less stable during a
period of market stress due to the lack
of an operational relationship tying the
funds to the service provided by the
covered company. Accordingly, the
agencies have not made secured funding
transactions with public sector entities
eligible for the 25 percent outflow rate
applicable to secured funding
transactions with sovereign entities,
multilateral development banks, and
U.S. GSEs subject to a 20 percent riskweight under the agencies’ risk-based
capital rules.
iii. Prime Brokerage Secured Funding
Transactions Outflows
The agencies received several
comments regarding the outflow
treatment of secured funding
transactions in the context of prime
brokerage activities. As described above,
in general under the proposed rule
secured funding transactions, including
certain loans of collateral to cover
customer short positions, that are
secured by assets that are not HQLA
would have required an outflow rate of
100 percent. However, certain secured
funding transactions that are customer
short positions of collateral that do not
consist of HQLA and are covered by
another customer’s collateral would
have received a 50 percent outflow rate.
As explained above, the 50 percent
outflow rate reflected the agencies’
recognition of some interrelatedness
between such customer short positions
and other customer long positions
within the covered company, and the
fact that customers in aggregate may not
be able to close all short positions
without also significantly de-leveraging,
or in the case of moving their
relationship, also moving the long
positions for which the covered
company may have been providing
funding in the form of margin loans.
Commenters argued that this section of
the proposed rule did not address a
covered company’s internal process for
deciding how to source collateral to
cover short positions, such as the
process for choosing between utilizing
inventory securities, external
borrowings, or using other customers’
collateral. Commenters argued that
when customer short positions are
covered by inventory securities, these
securities are frequently held as hedges
to other customer positions. These
commenters indicated that the source of
the collateral covering the customer
short position is irrelevant, and
recommended applying a 50 percent

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outflow rate to all customer shorts that
are covered by any collateral that is not
HQLA, irrespective of the source, and
also to customer short positions that are
covered by other methods, such as
hedges to customer swaps and securities
specifically obtained by a prime broker
to cover the customer short positions.
These commenters argued that this
treatment would better capture risk
management practices that rely on
symmetrical treatment of customer long
and short positions. These commenters
also argued that applying this approach
to closing customer short positions
would reflect customers’ offsetting
reduction in leverage irrespective of the
source of collateral and would capture
the risks related to internal coverage of
short positions. One commenter
suggested that the funding risk created
by internalization, where collateral is
provided by and utilized for various
secured transactions within the covered
company without being externally
sourced, is more accurately assessed by
measuring customer and CUSIP
concentrations, rather than looking at
the asset class or the type of long-short
pair because more concentrated
ownership impacts the risk of
internalization providing stable funding.
Consistent with the Basel III Revised
Liquidity Framework, the final rule
prescribes the outflow amount for each
secured funding transaction
individually, while taking into account
the potential dependency of certain
secured transactions upon the source of
the collateral securing the transaction.
Cash obligations of a covered company
to a counterparty that are generated
through loans of collateral to cover a
customer short position pose liquidity
risks that are similar to other secured
funding transactions as described above.
For this reason, the agencies believe that
funding from a customer short position
should be treated as a secured funding
transaction, and that the outflow
associated with this funding should, in
general, be consistent with all other
forms of secured funding transactions.
In the case where a covered company
has received funding from, for example,
the cash proceeds of a customer’s short
sale of an asset that is not HQLA, the
closing out of the short position by the
customer at its discretion may lead to
the covered company being required to
relinquish cash in return for the receipt
of the borrowed asset. In general, the
outflow rate applicable to an individual
secured funding transaction secured by
assets that are not HQLA is 100 percent
under the final rule. The agencies
believe that it would be inappropriate to
apply an outflow rate of 50 percent to

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61507

all customer short positions covered by
assets that are not HQLA, irrespective of
the source of the collateral. While the
standardized framework of the final rule
is not designed to reflect the individual
collateral allocation or risk management
practices of covered companies, the
agencies expect that covered companies
will have in place liquidity risk
management practices commensurate
with the complexity of their prime
brokerage business activities, including
collateral tracking, collateral
concentration monitoring, and potential
exposure resulting from the exercise of
customer options to withdraw funding.
The outflow rate applicable to
customer short positions that are
covered by other customers’ collateral
that does not consist of HQLA is
specifically intended to parallel the
inflow rate applicable to secured
lending transactions that are margin
loans secured by assets that are not
HQLA under § l.33(f)(1)(vii) of the
final rule.84 This 50 percent outflow rate
reflects the agencies’ recognition of
some correlation between such
customer short positions and other
customer long positions within a
covered company, and the fact that
customers in aggregate may not be able
to close all short positions without also
significantly de-leveraging, or in the
case of moving their relationship, also
moving the long positions for which the
covered company may have been
providing funding in the form of margin
loans. In contrast, if a customer short
position is covered by the covered
company’s long positions of assets that
are not HQLA, the outflow rate assigned
to the customer short position would be
that applicable to other secured funding
transactions under the final rule.
Furthermore, the agencies recognize
that prime brokerage activities may
entail significant rehypothecation of
assets to secure certain secured funding
transactions. The agencies emphasize
the treatment for determining the
maturity of such transactions under
§ l.31 of the final rule and the inflows
rates applicable to secured lending
transactions and assets exchanges under
§ l.33(f) of the final rule.
iv. Federal Home Loan Bank Secured
Funding Transactions
Under the proposed rule, secured
funding transactions with sovereign
entities, multilateral development
banks, and U.S. GSEs that are assigned
a 20 percent risk weight under the
agencies’ risk-based capital rules and
84 Margin loans that are secured by assets that are
not HQLA are assigned an inflow rate of 50 percent
under the final rule.

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that are not secured by level 1 or level
2A liquid assets would have received a
25 percent outflow rate. Several
commenters requested clarification as to
whether this 25 percent proposed
outflow rate would have applied to all
secured FHLB advances or only those
secured by level 2B liquid assets. Some
commenters stated that if the agencies
intended to apply the 25 percent
outflow rate only to advances secured
by level 2B liquid assets, it would
significantly increase the cost of FHLB
advances to member institutions
because such advances are typically
secured by mortgages or mortgagerelated securities that are not HQLA.
Commenters recommended reducing the
outflow rate applicable to FHLB
advances to 3 percent, the outflow rate
for stable retail deposits. Other
commenters requested confirmation that
FHLB advances are subject to a
maximum outflow rate of 25 percent
and posited that involuntary outflow
rates for FHLB advances have
approached zero historically. The
agencies were also asked to clarify
whether FHLB guarantees, including
letters of credit that secure public sector

deposits, would be subject to the same
outflow rate as FHLB advances.
The agencies are aware of the
important contribution made by the
FHLB system in providing funding to
banking organizations and of the general
collateral used to support FHLB
borrowings. The agencies are clarifying
that, under the final rule, the
preferential 25 percent outflow rate
applicable to secured funding
transactions with certain sovereigns,
multilateral development banks and
U.S. GSEs applies to secured funding
transactions that are secured by either
level 2B liquid assets or assets that are
not HQLA and that mature within 30
calendar days of a calculation date.
FHLB advances that mature more than
30 calendar days from a calculation date
are excluded from net cash outflows.
Given the broad range of collateral
accepted by FHLBs and the possibility
of collateral quality deterioration or
increased collateral haircuts, the
agencies do not believe that a lower
outflow rate for FHLB advances, such as
the 3 percent outflow rate proposed by
a commenter, would be appropriate.
The agencies recognize that FHLB
advances may be secured by diverse

pools of collateral, and that this
collateral may potentially include
HQLA. Under § l.22(b)(1)(ii) of the
final rule, HQLA that is pledged to a
central bank or U.S. GSE to secure
borrowing capacity but is not securing
existing borrowings may be treated as
unencumbered for the purposes of
identifying eligible HQLA. The agencies
acknowledge that in cases where
advances and undrawn FHLB capacity
are secured by a pool of collateral,
covered companies may wish to
exercise the flexibility of designating
which collateral pledged to a FHLB is
securing currently outstanding
borrowings and also designating which
subset of such collateral is securing
those advances maturing within 30
calendar days of a calculation date. The
agencies believe allowing covered
companies this flexibility is appropriate,
but emphasize that no asset may be
double counted as eligible HQLA and as
securing a borrowing as of a calculation
date.
Tables 3a and 3b summarize the
secured funding transaction and asset
exchange outflow rates under the final
rule.

TABLE 3a—SECURED FUNDING TRANSACTION OUTFLOW RATES
Categories for maturing secured funding transactions

Secured funding outflow rate

Secured by level 1 liquid assets .....................................................................................................
Secured by level 2A liquid assets ...................................................................................................
Transactions with sovereigns, multilateral development banks and U.S. GSEs subject to a 20%
risk weight not secured by level 1 or level 2A liquid assets.
Secured by level 2B liquid assets ...................................................................................................
Customer short positions covered by other customers’ collateral that is not HQLA ......................
Secured by assets that are not HQLA, except as above ...............................................................
If the outflow rate listed above is greater than that for a wholesale unsecured transaction (that
is not an operational deposit) with the same wholesale counterparty.
For collateralized deposits where the secured funding transaction outflow rate listed above is
greater than that for a wholesale unsecured transaction with the same wholesale
counterparty.

0%.
15%.
25%.
50%.
50%.
100%.
Apply to the secured funding transaction
amount the wholesale unsecured non-operational outflow rate for that counterparty.
Apply to each portion of the secured funding
transaction amount the wholesale unsecured
outflow rate applicable to that portion, for
that counterparty, including amounts that
may be operational deposits or excess operational deposit amounts.

TABLE 3b—ASSET EXCHANGE OUTFLOW RATES
Covered company must deliver at maturity

Covered company will receive at maturity

Asset exchange
outflow rate

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Where a covered company has the asset that it will be required to deliver at the maturity of an asset exchange or where the asset has been reused in a transaction that will mature no later than the maturity date of the asset exchange such that the asset required to be delivered will
be available at the maturity date, and where the:
Level
Level
Level
Level
Level
Level
Level
Level
Level

1 liquid assets .................................................................
1 liquid assets .................................................................
1 liquid assets .................................................................
1 liquid assets .................................................................
2A liquid assets ...............................................................
2A liquid assets ...............................................................
2A liquid assets ...............................................................
2B liquid assets ...............................................................
2B liquid assets ...............................................................

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Level 1 liquid assets ................................................................
Level 2A liquid assets ..............................................................
Level 2B liquid assets ..............................................................
Assets that are not HQLA ........................................................
Level 2A liquid assets ..............................................................
Level 2B liquid assets ..............................................................
Assets that are not HQLA ........................................................
Level 2B liquid assets ..............................................................
Assets that are not HQLA ........................................................

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0%
15%
50%
100%
0%
35%
85%
0%
50%

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61509

TABLE 3b—ASSET EXCHANGE OUTFLOW RATES—Continued
Covered company must deliver at maturity

Covered company will receive at maturity

Asset exchange
outflow rate

Where a covered company does not have the asset that it will be required to deliver at the maturity of an asset exchange and where the asset
has not been reused in a transaction that will mature no later than the maturity date of the asset exchange, and where the:
Level 1, 2A, 2B liquid assets, or assets that are not HQLA ....

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k. Foreign Central Bank Borrowings
Outflow Amount
The agencies recognize central banks’
lending terms and expectations differ by
jurisdiction. Accordingly, for a covered
company’s borrowings from a particular
foreign jurisdiction’s central bank, the
proposed rule would have assigned an
outflow rate equal to the outflow rate
that such jurisdiction has established for
central bank borrowings under a
minimum liquidity standard. The
proposed rule would have provided
further that if such an outflow rate has
not been established in a foreign
jurisdiction, the outflow rate for such
borrowings would be treated as secured
funding pursuant to § l.32(j) of the
proposed rule.
The agencies received no comments
on this section and have adopted
proposed § l.32(k) without change in
the final rule.
l. Other Contractual Outflow Amounts
The proposed rule would have
applied a 100 percent outflow rate to
amounts payable within 30 calendar
days of a calculation date under
applicable contracts that are not
otherwise specified in the proposed
rule. Some commenters argued that the
100 percent outflow rate would have
applied to some contractual expenses
payable within 30 calendar days of a
calculation date, such as operating costs
and salaries that are operational
expenses and should be excluded from
outflows. One commenter also argued
that the proposed rule’s treatment of
such expenses was not consistent with
the examples of ‘‘other outflows’’
illustrated in Paragraph 141 of the Basel
III Revised Liquidity Framework, which
includes outflows to cover unsecured
collateral borrowings, uncovered short
positions, dividends or contractual
interest payments and specifically
excludes from this category operating
costs. The commenter requested that the
final rule be consistent with the Basel III
Revised Liquidity Framework. Further,
one commenter argued that including
contractual expenses that are
operational in nature would result in

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Level 1 liquid assets ................................................................
Level 2A liquid assets ..............................................................
Level 2B liquid assets ..............................................................
Assets that are not HQLA ........................................................

such expenses being included as
outflows, yet the inflows from nonfinancial revenues would be excluded.
Therefore, this commenter argued, the
final rule should exclude operational
costs from outflows and exclude from
inflows non-financial revenues that are
not enumerated in § l.33(b)–(f) of the
proposed rule and excluded under
§ l.33(g) of the proposed rule (other
cash inflows). One commenter
requested clarification that there was no
outflow rate associated with trade
finance instruments and letters of credit
with performance requirements under
the proposed rule. Another commenter
asked for clarification of the treatment
of contingent trade finance obligations
under the final rule. Another
commenter asked for guidance on the
treatment of projected cash outflows for
certain contingency funding obligations
such as variable rate demand notes,
stable value funds, and other similarly
structured products, noting that while
the proposed rule did not provide
outflow rates for these categories, the
Basel III Liquidity Framework provided
for national discretion when
determining rates for such products.
The agencies are clarifying that the
final rule excludes from outflows
operational costs, because the agencies
believe that assets specifically
designated to cover costs, such as
wages, rents, or facility maintenance,
generally would not be available to
cover liquidity needs that arise during
stressed market conditions.
The final rule does not provide a
specific outflow rate for trade finance
obligations that are subject to the
movement of goods or the provision of
services. This would include
documentary trade letters of credit;
documentary and clean collection;
import and export bills; and guarantees
directly related to trade finance
obligations, such as shipping
guarantees. Instead, a covered company
should calculate outflow amounts for
lending commitments, such as direct
import or export financing for nonfinancial firms, in accordance with
§ l.32(e) of the final rule.

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0%
15%
50%
100%

Under the final rule, variable rate
demand note amounts payable within
30 calendar days of a calculation date
will be treated as a committed liquidity
facility to a financial sector entity and
will receive a 100 percent outflow rate
pursuant to § l.32(e)(1)(vii) of the final
rule. The agencies believe that this
treatment is appropriate because such
payments would likely be made by a
covered company to support amounts
coming due within 30 calendar days of
a calculation date. With respect to an
implicit agreement to guarantee a
covered company’s sponsored product,
covered companies may be prohibited
from doing so under § l.13 of the BHC
Act, and such support has long been
discouraged by the agencies.85 If,
however, a covered company’s
guarantee is in the form of a guaranteed
investment contract (GIC) or a synthetic
GIC (commonly referred to as a
wrapper), then it will be treated as a
commitment to a financial sector entity
or SPE as appropriate under
§ l.32(e)(1)(vii) or (viii) of the final
rule.
m. Excluded Amounts for Intragroup
Transactions
The proposed rule would have
excluded from a covered company’s
outflows and inflows all transactions
between the covered company and a
consolidated subsidiary or between
consolidated subsidiaries of a covered
company. Such transactions were
excluded on the grounds that they
would not result in a net liquidity
change for a covered company on a
consolidated basis.
One commenter expressed concern
that section 32(h) of the proposed rule
was contrary to the symmetrical
treatment of funding provided by and to
85 See, e.g., OCC, Board, FDIC, and SEC,
‘‘Prohibitions and Restrictions on Proprietary
Trading and Certain Interests in, and Certain
Relationships With, Hedge Funds and Private
Equity Funds,’’ 79 FR 5536, 5790 (January 31,
2014); ‘‘Interagency Policy on Banks/Thrifts
Providing Financial Support to Funds Advised by
the Banking Organization or its Affiliates,’’ OCC
Bulletin 2004–2, Federal Reserve Supervisory Letter
04–1, FDIC FIL–1–2004 (January 5, 2004).

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covered companies and its subsidiaries
and between its subsidiaries in section
32(m)(1), which would have entirely
excluded outflows arising from
transactions between the covered
company and its consolidated
subsidiary. Consistent with the
proposed rule’s section 32(m), the final
rule excludes from a covered company’s
outflows and inflows all transactions
between the covered company and a
consolidated subsidiary or between
consolidated subsidiaries of a covered
company. As discussed above under
II.C.3.h, to address commenters
concerns, the agencies have clarified
that the 100 percent affiliate outflow
rate under § l.32(h)(2) of the final rule
applies solely to funding from a
consolidated subsidiary of the same toptier company of which the covered
company is a consolidated subsidiary,
but that is not a consolidated subsidiary
of the covered company, due to the lack
of the consolidation of the inflows and
outflows with the covered company
under applicable accounting standards.
Accordingly, the agencies have removed
the language from proposed § l.32(h)(2)
that would have applied the outflow
rate to funding from a consolidated
subsidiary of the covered company.

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4. Inflow Amounts
Under the proposed rule, a covered
company’s total cash inflow amount
would be the lesser of: (1) the sum of the
cash inflow amounts as described in
§ l.33 of the proposed rule; and (2) 75
percent of the expected cash outflows as
calculated under § l.32 of the proposed
rule. Similar to the total cash outflow
amount, the total cash inflow amount
would have been calculated by
multiplying the outstanding balances of
contractual receivables and other cash
inflows as of a calculation date by the
inflow rates described in § l.33 of the
proposed rule. In addition, the proposed
rule would have excluded certain
inflows from the cash inflow amounts,
as described immediately below. The
agencies have adopted this structure for
calculating total cash inflows in the
final rule, with certain updates to the
proposed inflow rates to address
comments received.
a. Items Not Included as Inflows
Under the proposed rule, the agencies
identified six categories of items that
would have been explicitly excluded
from cash inflows. These exclusions
were meant to ensure that the
denominator of the proposed LCR
would not be influenced by potential
cash inflows that may not be reliable
sources of liquidity during a stressed
scenario. The first excluded category

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would have consisted of any inflows
derived from amounts that a covered
company holds in operational deposits
at other regulated financial companies.
Because these deposits are made for
operational purposes, the agencies
reasoned that it would be unlikely that
a covered company would be able to
withdraw these funds in a crisis to meet
other liquidity needs, and therefore
excluded them. The final rule adopts
this provision as proposed. The agencies
expect covered companies to
understand what deposits they have
placed at other financial companies that
are operational in nature and to use the
same methodology to assess the
operational nature of its deposits at
other financial companies as it uses to
assess the operational nature of their
deposit liabilities from other financial
companies.
A commenter requested clarification
as to whether cash held at agent banks
for other than operational purposes can
count towards a covered company’s
HQLA or inflow amount. The agencies
are clarifying that, depending on the
manner in which the cash is held, it
may qualify as an unsecured payment
contractually payable to the covered
company by a financial sector entity
under § l.33(d)(1) of the final rule, in
which case it would be subject to a 100
percent inflow rate. As discussed in
section II.B.2.c above such placements
do not meet the criteria for inclusion as
HQLA.
The second category would have
excluded amounts that a covered
company expects to receive or is
contractually entitled to receive from
derivative transactions due to forward
sales of mortgage loans and any
derivatives that are mortgage
commitments.
Two commenters recommended that
the agencies distinguish forward sales of
mortgage loans under GSE standby
programs from other warehouse
facilities, reasoning that the nature of
the commitments provided under those
programs and the creditworthiness of
the GSEs should permit each covered
company to include 100 percent of its
notional balances under GSE standby
programs as an inflow. Commenters
argued that, unlike a warehouse facility,
which involves the counterparty risk of
a non-government-sponsored enterprise
and the potential that loans will not
close or will have incomplete loan
documents, GSE standby programs
include only closed and funded loans
with the liquidity option provided
directly by FNMA and FHLMC.
According to the commenters, the loans
are always eligible to be delivered to
FNMA and FHLMC regardless of credit

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deterioration. Another commenter
remarked on the asymmetry of the
proposed rule’s treatment of
commitments, noting that if a covered
company must include loan
commitments in its outflows, then it
should be allowed to include forward
commitments to sell loans to GSEs in its
inflows.
A commenter argued that the
proposed rule would discourage
covered companies from investing in
the housing industry or GSE-backed
securities because these would be
subject to a 15 percent haircut when
counted as HQLA and any expected
inflow from mortgage commitments
within the next 30 days would be
excluded from the net outflow
calculation. This commenter noted that
it is unclear what impact this treatment
would have on the mortgage markets.
The agencies recognize that covered
companies may receive inflows as a
result of the sale of mortgages or
derivatives that are mortgage
commitments within 30 days after the
calculation date. However, the agencies
believe that there are some potential
liquidity risks from mortgage operations
that should be captured in the LCR.
During the recent financial crisis, it was
evident that many institutions were
unable to rapidly reduce mortgage
lending pipelines even as market
demand for mortgages slowed. Because
of these liquidity risks, the final rule
requires an outflow rate for mortgage
commitments of 10 percent, with an
exclusion of inflows. On balance, the
agencies believe the 10 percent outflow
rate for commitments coupled with no
recognition of inflows is appropriate
due to the risks evidenced in the recent
financial crisis. The agencies are
therefore finalizing this aspect of the
rule as proposed.
The third excluded category would
have comprised amounts arising from
any credit or liquidity facility extended
to a covered company. The agencies
believe that in a stress scenario, inflows
from such facilities may not materialize
due to restrictive covenants or
termination clauses. Furthermore,
reliance by covered companies on
inflows from credit facilities with other
financial entities would materially
increase the interconnectedness within
the system. Thus, the material financial
distress at one institution could result in
additional strain throughout the
financial system as the company draws
down its lines of credit. Because of
these likelihoods, the proposed rule
would not have counted a covered
company’s credit and liquidity facilities
as inflows.

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Some commenters recommended that
at least 50 percent of the unused
portions of a covered company’s
committed borrowing capacity at a
FHLB be treated as an inflow under the
final rule. Commenters requested that
the agencies allow a banking
organization to increase its inflow
amounts and thus decrease the
denominator of its LCR by an amount
equal to at least 50 percent of the
unused borrowing commitments from
an FHLB. The agencies have considered
the role that FHLB borrowings played in
the recent crisis and have decided not
to recognize collateralized lines of credit
in favor of promoting on-balance sheet
liquidity.
A commenter requested that the
agencies revisit the assumptions about
asymmetric outflows and inflows under
credit and liquidity facilities. The
commenter proposed that a covered
nonbank company be permitted to
include amounts from committed credit
and liquidity facilities extended to
covered companies as inflows at the
same rates at which it would be
required to assume outflows if it
extended the same facilities to the same
counterparties, but only if the facilities
do not contain material adverse change
clauses, financial covenants, or other
terms that could allow a counterparty to
cancel the facility if the covered
company experienced stress. According
to the commenter, the balance sheet and
funding profile of covered nonbank
companies are substantially different
from other covered companies.
The agencies continue to emphasize
the importance of on-balance sheet
liquidity and not the capacity to draw
upon a facility, which, as stated above,
may or may not materialize in a
liquidity stress scenario even where the
facilities do not contain material
adverse change clauses or financial
covenants. During a period of material
financial distress, companies may not be
in a position to extend funds under the
facilities. Therefore, the agencies are
adopting this provision in the final rule
as proposed.
The fourth excluded category of
inflows would have consisted of
amounts included in a covered
company’s HQLA amount under
§ l.21 of the proposed rule and any
amount payable to the covered company
with respect to those assets. The
agencies reasoned that because HQLA is
already included in the numerator at
fair market value, including such
amounts as inflows would result in
double counting. Consistent with the
Basel III Revised Liquidity Framework,
this exclusion also would have included
all HQLA that mature within 30

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calendar days of a calculation date. The
agencies received no comments on this
provision of the proposed rule and have
adopted it in the final rule without
change.
The fifth excluded category of inflows
would have comprised amounts payable
to the covered company or any
outstanding exposure to a customer or
counterparty that is a nonperforming
asset as of a calculation date or that the
covered company has reason to expect
will become a nonperforming exposure
30 calendar days or less from a
calculation date. Under the proposed
rule, a nonperforming exposure was
defined as any exposure that is past due
by more than 90 calendar days or on
nonaccrual status. This provision
recognized the potential that a covered
company will not receive the full inflow
amounts due from a nonperforming
customer. The agencies received no
comments on this provision of the
proposed rule and have retained it in
the final rule as proposed.
The sixth excluded category of
inflows would have comprised items
that have no contractual maturity date
or items that mature more than 30
calendar days after a calculation date.
The agencies are concerned that in a
time of liquidity stress a covered
company’s counterparties will not pay
amounts that are not contractually
required in order to maintain their own
liquidity or balance sheet. Items that
mature more than 30 calendar days after
a calculation date generally fall outside
of the scope of the net cash outflow
denominator.
The agencies received several
comments relating to the treatment of
the term of margin loans and, more
generally, the maturity treatment of
secured transactions that may be
interrelated. The treatment of these
secured transactions is described in
section II.C.4.f, below.
Another commenter stated that loans
that are offered on an open maturity
basis and contractually due on demand,
such as trade receivables, should be
included as inflows rather than
excluded as items that do not have a
contractual maturity date under
proposed § l.33(a)(6).
Section l.31 of the final rule
describes how a covered company must
determine the maturity date of a
transaction for the purposes of the rule.
The agencies have revised this provision
to provide a maturity date for certain
non-maturity transactions that would
have otherwise been excluded as
inflows under the final rule. Thus, as
discussed below, certain unsecured
wholesale cash inflows (including nonmaturity deposits at other financial

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sector entities) and secured lending
transactions, are treated as maturing on
the first calendar day after the
calculation date. The agencies recognize
these specific inflows as day-one
inflows to reflect symmetry in the
outflow assumptions. Any other nonmaturity inflow would be excluded
under this provision.
b. Net Derivatives Cash Inflow Amount
In § l.33(b) of the proposed rule, the
agencies proposed that a covered
company’s net derivative cash inflow
amount would equal the sum of the
payments and collateral that a covered
company will receive from each
counterparty to its derivative
transactions, less, for each counterparty,
if subject to a qualifying master netting
agreement, the sum of payments and
collateral that the covered company will
make or deliver to each counterparty.
This calculation would have
incorporated the amounts due from and
to counterparties under applicable
transactions within 30 calendar days of
a calculation date. Netting would have
been permissible at the highest level
permitted by a covered company’s
contracts with a counterparty and could
not include off-setting inflows where a
covered company has included as
eligible HQLA any assets that the
counterparty has posted to support
those inflows. If the derivatives
transactions are not subject to a
qualifying master netting agreement,
then the derivative cash inflows for that
counterparty would have been included
in the net derivative cash inflow amount
and the derivative cash outflows for that
counterparty would have been included
in the net derivative cash outflow
amount, without any netting. Under the
proposed rule, the net derivative cash
inflow amount would have been
calculated in accordance with existing
valuation methodologies and expected
contractual derivative cash flows. In the
event that the net derivative cash inflow
for a particular counterparty was less
than zero, such amount would have
been required to be included in a
covered company’s net derivative cash
outflow amount for that counterparty.
As with the net derivative cash
outflow amount, pursuant to
§ l.33(a)(2), the net derivative cash
inflow amount would not have included
amounts arising in connection with
forward sales of mortgage loans and
derivatives that are mortgage
commitments. The net derivative cash
inflow amount would have included
derivatives that hedge interest rate risk
associated with a mortgage pipeline.
The agencies received no comments
unique to this provision of the proposed

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rule. All related comments focused on
the net derivatives cash outflow amount
provision. This provision was intended
to complement the net derivatives cash
outflow amount provision, and the
provision that would apply at any given
time would depend on whether the
covered company had a net ‘‘due to’’ or
‘‘due from’’ position with the
counterparty. In the final rule, the
agencies have made changes to
§ l.33(b) that are consistent with the
changes described above in section
II.C.3.c that the agencies made to
§ l.32(c). In both cases, the agencies
have permitted the netting of foreign
currency exchange derivative
transactions that result in the full
exchange of cash principal payments in
different currencies within the same
business day. As with all net cash
inflows, any resulting net derivatives
cash inflow amount would be subject to
the overall 75 percent cap on total net
inflows.

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c. Retail Cash Inflow Amount
The proposed rule would have
allowed a covered company to count as
an inflow 50 percent of all contractual
payments it expects to receive within 30
calendar days from retail customers and
counterparties. This inflow rate
reflected the agencies’ expectation that
covered companies will need to
maintain a portion of their retail lending
activity even during periods of liquidity
stress. The agencies received no
comments on this provision of the
proposed rule and have retained it in
the final rule as proposed.
d. Unsecured Wholesale Cash Inflow
Amount
The agencies believed that for
purposes of the proposed rule, all
wholesale inflows (for example,
principal and interest receipts) from
financial sector entities (and
consolidated subsidiaries thereof) and
from central banks generally would
have been available to meet a covered
company’s liquidity needs. Therefore,
the agencies proposed to assign such
inflows a rate of 100 percent.
The agencies also expect covered
companies to maintain ample liquidity
to sustain core businesses lines,
including continuing to extend credit to
retail customers and wholesale
customers and counterparties that are
not financial sector entities. Indeed, one
purpose of the proposed rule was to
ensure that covered companies would
have sufficient liquidity to sustain such
business lines during a period of
liquidity stress. While the agencies
acknowledge that, in times of liquidity
stress, covered companies can curtail

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some activity to a limited extent,
covered companies would likely
continue to renew at least a portion of
maturing credit and extend some new
loans due to reputational and business
considerations. Therefore, the agencies
proposed to apply an inflow rate of 50
percent for inflows due from wholesale
customers or counterparties that are not
financial sector entities, or consolidated
subsidiaries thereof. With respect to
revolving credit facilities, already drawn
amounts would not have been included
in a covered company’s inflow amount,
and undrawn amounts would be treated
as outflows under § l.32(e) of the
proposed rule. This is based upon the
agencies’ assumption that a covered
company’s counterparty would not
repay funds it is not contractually
obligated to repay in a stressed scenario.
A commenter requested that the final
rule provide a 100 percent inflow
treatment for inflows due from trade
financing activities with a residual
maturity of 30 calendar days or less as
of the calculation date, rather than the
overall 50 percent outflow for nonfinancial sector entities. Trade finance
receivables coming due from nonfinancial corporate entities that are
contractually due within 30 days
receive the same treatment as other
loans coming due from non-financial
counterparties and that is a 50 percent
inflow. This recognizes that the covered
company will likely have new lending
and loan renewals for at least a portion
of loans coming due within the next 30
days. The agencies continue to believe
that these inflow rates accurately reflect
the effect of material liquidity stress
upon an institution, as described above,
and are thus adopting this provision of
the final rule as proposed.
One commenter requested
clarification regarding the proposed
rule’s treatment of fee income. The
commenter argued that unless fee
income is included under wholesale
payments, there appeared to be no
provision or discussion of the
possibility that fee income will greatly
decline during market stress. The
agencies consider fee income to be a
contractual payment and its inflow rate
would depend on whether the
counterparty owing the fee is a retail
customer or counterparty (in which case
the inflow rate would be 50 percent
under § l.33(c)), a financial sector
entity or central bank (in which case the
inflow rate would be 100 percent under
§ l.33(d)(1)), or a non-financial sector
wholesale customer or counterparty (in
which case the inflow rate would be 50
percent under § l.33(d)(2)).

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e. Securities Cash Inflow Amount
The proposed rule would have
provided that inflows from securities
owned by a covered company that were
not included in a covered company’s
HQLA amount and that would mature
within 30 calendar days of the
calculation date would have received a
100 percent inflow rate. Such amounts
would have included all contractual
dividend, interest, and principal
payments due and expected to be paid
to a covered company within 30
calendar days of a calculation date,
regardless of their liquidity. The
agencies received no comments on this
provision of the proposed rule and have
retained it in the final rule.
f. Secured Lending and Asset Exchange
Cash Inflow Amounts
i. Definitions and Inflow Rates
The proposed rule provided that a
covered company would be able to
recognize cash inflows from secured
lending transactions that matured
within 30 calendar days of a calculation
date. The proposed rule would have
defined a secured lending transaction as
any lending transaction that gave rise to
a cash obligation of a counterparty to a
covered company that was secured
under applicable law by a lien on
specifically designated assets owned by
the counterparty and included in the
covered company’s HQLA amount that
gave the covered company, as a holder
of the lien, priority over the assets in the
case of bankruptcy, insolvency,
liquidation, or resolution. Secured
lending transactions would have
included reverse repurchase
transactions, margin loans, and
securities borrowing transactions.
The proposed rule would have
assigned inflow rates to all contractual
payments due to the covered company
under secured lending transactions
based on the quality of the assets
securing the transaction. These inflow
rates generally would have
complemented the outflow rates on
secured funding transactions under
§ l.32(j)(1) of the proposed rule.
Consistent with the Basel III Revised
Liquidity Framework, the inflow
amount from secured lending
transactions or the outflow amount from
secured funding transactions would
have been calculated on the basis of
each transaction individually. However,
the symmetry between the proposed
inflow and outflow rates recognized the
benefits of a matched book approach to
managing secured transactions, where
applicable. The proposed rule also
would have assigned a 50 percent
inflow rate to the contractual payments

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due from customers that had borrowed
on margin, where such margin loans
were collateralized by assets that were
not HQLA.
While the provisions relating to
secured lending transactions governed
the cash obligations of counterparties,
the proposed rule would have defined
asset exchanges as the transfer of noncash assets. A covered company’s
liquidity position may improve in
instances where a counterparty is
contractually obligated to deliver higher
quality assets to the covered company in
return for less liquid, lower-quality
assets. The proposed rule would have
reflected this through the proposed asset
exchange inflow rates, which were
based on a comparison of the quality of
the asset to be delivered by a covered
company with the quality of the asset to
be received from a counterparty. Asset
exchange inflow rates progressively
increased on a spectrum that ranged
from a zero percent inflow rate where a
covered company would be receiving
assets that are the same HQLA level as
the assets that it would be required to
deliver through a 100 percent inflow
rate where a covered company would be
receiving assets that are of significantly
higher quality than the assets that it
would be required to deliver.
Many commenters noted that a
contradiction existed between the
definition of a secured lending
transaction under the proposed rule,
which would have been limited to
transactions that were secured by assets
included in the covered company’s
HQLA amount, and the proposed
secured lending transaction cash inflow
amounts which would have recognized
inflows for secured lending transactions
that are secured by assets that are not
HQLA. Commenters therefore requested
that the final rule clarify that the 100
percent inflow rate would be applied to
transactions secured by assets that are
not eligible HQLA. In addition, other
commenters objected to the fact that the
proposed rule applied inflow rates for
secured lending transactions secured by
level 1, level 2A, and level 2B liquid
assets only when the assets were eligible
HQLA. These commenters argued that
the difference in phrasing could lead to
uncertainty about the treatment of
transactions secured by liquid assets
that are not included in a company’s
eligible HQLA because the operational
requirements are not satisfied.
Moreover, the commenters argued that
the perceived matched book parity of
the proposed rule would not apply to a
large number of transactions that
actually have matched maturities.
As described in section II.B.3 of this
Supplementary Information section, the

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agencies recognized the need to clarify
the distinction between the criteria for
assets identified as HQLA in § l.20 of
the final rule and the requirements for
eligible HQLA set forth in § l.22 of the
final rule. The agencies recognize that
secured lending transactions may be
secured by assets that are not eligible
HQLA and agree with commenters that
the definition of secured lending
transaction was too narrow and that it
should be revised to remove the
requirement that the collateral securing
a secured lending transaction must be
eligible HQLA. Therefore, under the
final rule, secured lending transactions
include the cash obligations of
counterparties to the covered company
that are secured by assets that are HQLA
regardless of whether the HQLA is
eligible HQLA and also include the cash
obligations of counterparties that are
secured by assets that are not HQLA.
Accordingly, the agencies have
amended the requirements for the
secured lending transaction inflow
amounts under § l.33(f) of the final
rule to remove the references to the
requirement that the assets securing a
secured lending transaction be eligible
HQLA.
The agencies continue to believe that
the inflow rate for a secured lending
transaction that has a maturity date (as
determined under § l.31 of the final
rule) within 30 calendar days should be
based on the type of collateral that is
used to secure that transaction.
Generally, the agencies assume that
upon the maturity of a secured lending
transaction, the covered company may
be obligated to return the collateral to
the counterparty and receive cash from
the counterparty in fulfilment of the
counterparty’s cash obligation.
Therefore, for the purpose of
recognizing a cash inflow, it is crucial
that the collateral securing a secured
lending transaction be identified as
being available for return to the
counterparty at the maturity of the
transaction.
Under the final rule, the secured
lending transaction inflow rates are
designed to complement the outflow
rates for secured funding transactions
(that are not secured funding
transactions conducted with sovereigns,
multilateral development banks, or U.S.
GSEs and are not customer short
positions facilitated by other customers’
collateral) secured by the same quality
of collateral and, for collateral that is
held by the covered company as eligible
HQLA,86 the haircuts for the various
categories of HQLA.
86 The agencies reiterate that a covered company
cannot treat an asset as eligible HQLA that it

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In the case of a secured lending
transaction that matures within 30
calendar days of a calculation date that
is secured by an asset that is not held
by the covered company as eligible
HQLA, but where the collateral has not
been rehypothecated such that the asset
is still held by the covered company and
is available for immediate return to the
counterparty, the agencies have adopted
a 100 percent inflow rate (except for
margin loans secured by assets that are
not HQLA, which will receive a 50
percent inflow rate). Unlike secured
lending transactions where collateral is
held as eligible HQLA and is therefore
included in the calculation of the HQLA
amount at the calculation date, the
agencies determined that the inflow for
transactions where collateral is not held
as eligible HQLA but is available for
immediate return to the counterparty
should receive a 100 percent inflow
reflecting the settlement of the
counterparty’s cash obligation at the
maturity date.
Section II.C.4.ii below discusses
instances where the collateral securing
the secured lending transaction has
been rehypothecated in another
transaction as of a calculation date. The
inflow rates applied to maturing secured
lending transactions are shown in Table
4a.
With respect to asset exchange
inflows, the agencies did not receive
significant comments on the proposed
rule’s treatment of asset exchanges and
are adopting them in the final rule
largely as proposed (Table 4b.).
However, the agencies are clarifying for
purposes of the final rule that where a
covered company has rehypothecated
an asset received from a counterparty in
an asset exchange transaction, a zero
percent inflow rate would be applied to
the transaction under the final rule,
reflecting the agencies’ concern that the
covered company would be required to
purchase the asset on the open market
to settle the asset exchange, as described
for assets exchange outflows in section
II.C.3.j above.
ii. The Reuse of Collateral and Certain
Prime Brokerage Transactions
The proposed rule would have
applied a 50 percent inflow rate to
inflows from collateralized margin loans
that are secured by assets that are not
HQLA and that are not reused by the
covered company to cover any of its
short positions. Several commenters
received with rehypothecation rights if the owner
has the contractual right to withdraw the asset
without an obligation to pay more than de minimis
remuneration at any time during the prospective 30
calendar-day period per § l.22(b)(5) of the final
rule.

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requested that the agencies expand this
inflow rate to also apply to
collateralized margin loans that are
secured by collateral that is eligible
HQLA or otherwise held at the covered
company and not reused in any other
transaction.87 These commenters also
suggested this proposed 50 percent
inflow rate should be applied regardless
of the maturity of the loan because,
although such margin loans may have a
contractual maturity date that is more
than 30 calendar days from a calculation
date, the contractual agreements would
require the customer to repay the loan
in the event the customer’s portfolio
composition materially changes.
Commenters argued that the agencies
had not taken into account that a
significant portion of prime brokerage
business consists of short-term secured
financing, such as margin loans and
loans of securities to effect customer
short positions. Commenters also
expressed concern that the terms of
certain contracts, such as term margin
agreements, require customers to
maintain market neutral portfolios with
increasing margin requirements and
reduced leverage or financing based on
the level of asymmetry between
customer long and short positions. In
particular, commenters requested that
the agencies recognize collateralized
term margin loans not secured by HQLA
as generating inflows regardless of
maturity because financings under term
margin loans are designed to be treated
as overnight transactions that are due on
demand if the customer does not satisfy
the loan terms.
More generally, commenters asked
that the agencies revise the proposed
rule such that it more fully capture the
matched secured lending and secured
funding transactions that occur in prime
brokerage and matched book activity. As
addressed in section II.C.1. b of this
Supplementary Information section,
commenters also requested that certain
related inflow amounts be excluded
from the aggregate cap on inflows in
calculating the net cash inflow amount.
Commenters asked the agencies to
reevaluate the treatment of matched
transactions based on whether the
collateral is rehypothecated or remains
in inventory and based on the term of
the secured funding transaction to
determine the covered company’s net
cash outflow over a 30 calendar-day
period.
87 As discussed above, the agencies have adopted
a 100 percent inflow rate for all secured lending
transactions that are secured by assets that are not
eligible HQLA, have not been rehypothecated by
the bank, and are available for the immediate return
to the counterparty at any time.

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The agencies recognize that prime
brokerage, matched book, and other
activities conducted at covered
companies make significant use of the
rehypothecation of collateral that may
have been provided for use by the
covered company through secured
lending transactions and asset
exchanges (together with derivative
assets, other secured counterparty
obligations, or other transactions).
Beyond the reuse of specific collateral,
the agencies also recognize the potential
interrelationship of certain transactions
within prime brokerage activities, both
at an individual customer level (for
example, through market neutrality
requirements) and in the aggregate
portfolio of customers. Consistent with
the Basel III Revised Liquidity
Framework, the agencies do not believe
that a 100 percent inflow rate for all
margin loans secured by assets that are
not HQLA and that mature within 30
calendar days of a calculation date is
appropriate. The 50 percent inflow rate
on these margin loans recognizes that
not all margin loans may pay down
during a stress period and covered
companies may have to continue to
fund a proportion of margin loans over
time. In requiring the 50 percent inflow
rate on such margin loans, the agencies
note the symmetry with the secured
funding transaction outflow rate
required for customer short positions
that are covered by other customers’
collateral that is not HQLA. The
agencies believe this symmetrical
treatment balances the general treatment
of individual secured funding and
secured lending transactions under the
rule with certain relationships that may
potentially apply within prime
brokerage activities, including
contractual market neutrality clauses
applicable to certain customers and
certain aggregate customer behaviors.
The agencies are further clarifying that
margin loans secured by HQLA are
required to apply the inflow rates
applicable to any other type of secured
lending transaction secured by the same
collateral, including inflow rates
applicable to collateral that is eligible
HQLA. As discussed in section II.C.1.b
above, although the final rule permits
the use of specified netting in the
determination of certain transaction
amounts, no individual inflow
categories are exempt from the aggregate
cap of inflows at 75 percent of gross
outflows in the net cash inflow amount
calculation.
The agencies believe that, consistent
with other foundational elements of the
final rule, secured lending transactions
that have a maturity date as determined

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under the final rule of greater than 30
calendar days from a calculation date
should be excluded from the LCR
calculation. Similarly, the agencies
believe this principle should be
maintained in respect to margin loans
with remaining contractual terms of
greater than 30 calendar days from a
calculation date because a covered
company may not rely on inflows that
are not required, by relevant contractual
terms, to occur within the 30 calendarday period of the LCR calculation. With
respect to margin loans that are secured
by HQLA, the agencies believe that the
inflow rates applied to secured lending
transactions, which are complementary
to the outflow rates for secured funding
transactions that are secured by HQLA,
are appropriate given the cash
obligation of the counterparty.
Moreover, where margin loans are
secured by assets that the covered
company includes as eligible HQLA, the
inflow rates applied to the secured
lending transactions would be
complementary to the haircut
assumptions for the various categories
of HQLA and also are appropriate given
the cash obligation of the counterparty
and the covered company’s obligation to
return the value of the HQLA.
The agencies are aware that collateral
may be rehypothecated to secure a
secured funding transaction or other
transaction or obligation (or delivered in
an asset exchange) that matures either
within 30 calendar days of a calculation
date, or that matures more than 30
calendar days after a calculation date. In
either case, different inflow rates are
applied under the final rule to the
secured lending transaction (or asset
exchange) that provides the collateral in
order to address the interdependency
with the secured funding transaction (or
asset exchange) for which the collateral
was reused.
If the transaction or obligation for
which the collateral has been reused has
a maturity date (as determined under
§ l.31 of the final rule) within 30
calendar days of a calculation date, the
covered company may anticipate
receiving, or regaining access to, the
collateral within the 30-day period.
Assuming that the maturities are
matched or that the maturity of the
secured lending transaction is later than
that of the secured funding transaction,
the covered company may therefore
anticipate having the collateral available
at the maturity of the secured lending
transaction (or asset exchange) from
which the collateral was originally
obtained. Accordingly, under the final
rule, if collateral obtained from a
secured lending transaction (or received
from a prior asset exchange) that

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
matures within 30 calendar days of a
calculation date is reused in a secured
funding transaction (or delivered in a
second asset exchange) that matures
within 30 calendar days of a calculation
date, the covered company may
recognize an inflow from the secured
lending transaction (or prior asset
exchange) as occurring at the maturity
date.88 As required under § l.31 of the
final rule, the maturity of this secured
lending transaction (or prior asset
exchange) must be no earlier than the
secured funding transaction (or second
asset exchange). This treatment will
generally apply a symmetric treatment

for outflows and inflows occurring
within a 30 calendar-day period.
Consistent with the Basel III Revised
Liquidity Framework, the final rule will
not recognize inflows from secured
lending transactions (or asset
exchanges) that mature within 30
calendar days from a calculation date
where the collateral received is reused
in a secured funding transaction (or
asset exchange) that matures more than
30 calendar days from the calculation
date, or where the collateral is otherwise
reused in a transaction or to cover any
obligation that could extend beyond 30
calendar days from a calculation date.
This is because a covered company
should assume that such secured

61515

lending transaction (or asset exchange)
may need to be rolled over and will not
give rise to a cash (or net collateral)
inflow, reflecting its need to continue to
cover the secured funding transaction
(or asset exchange or other transaction
or obligation). For example, a covered
company would not recognize an inflow
from a margin loan that matures within
30 calendar days of a calculation date if
the loan was secured by collateral that
had been reused in a term repurchase
transaction that matured more than 30
calendar days from a calculation date.
Tables 4a and 4b summarize the
inflow rates for secured lending
transactions and asset exchanges.

TABLE 4a—SECURED LENDING TRANSACTION INFLOW RATES

Categories for secured lending transactions maturing within 30 calendar days of the calculation date

Secured lending
inflow rate applied
to contractual
amounts due from
the counterparty

Where the asset securing the secured lending transaction is included in the covered company’s eligible HQLA as of the calculation date, and
the transaction is:
Secured by level 1 liquid assets ..................................................................................................................................................
Secured by level 2A liquid assets ...............................................................................................................................................
Secured by level 2B liquid assets ...............................................................................................................................................

0%
15%
50%

Where the asset securing the secured lending transaction is not included in the covered company’s eligible HQLA as of the calculation date but
is still held by the covered company and is available for immediate return to the counterparty, and the transaction is:
Secured by level 1, level 2A or level 2B liquid assets ................................................................................................................
A collateralized margin loan secured by assets that are not HQLA ...........................................................................................
Not a collateralized margin loan and is secured by assets that are not HQLA .........................................................................

100%
50%
100%

Where the asset securing the secured lending transaction has been rehypothecated and used to secure, or has been delivered into, any transaction or obligation which:
Will not mature or expire within 30 calendar days or may extend beyond 30 calendar days of the calculation date ...............

0%

Where the asset securing the secured lending transaction has been rehypothecated and used to secure any secured funding transaction or obligation, or delivered in an asset exchange, that will mature within 30 calendar days of the calculation date,* and the secured lending transaction is:
Secured by level 1 liquid assets ..................................................................................................................................................
Secured by level 2A liquid assets ...............................................................................................................................................
Secured by level 2B liquid assets ...............................................................................................................................................
A collateralized margin loan secured by assets that are not HQLA ...........................................................................................
Not a collateralized margin loan and is secured by assets that are not HQLA .........................................................................

0%
15%
50%
50%
100%

* Under § l.31(a)(3) of the final rule, the maturity date of the secured lending transaction cannot be earlier than the maturity date of the secured funding transaction or asset exchange.

TABLE 4b—ASSET EXCHANGE INFLOW RATES

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Covered company will receive at maturity

Covered company must post at maturity

Asset exchange
inflow rate

Where the asset originally received in the asset exchange has not been rehypothecated to secure any transaction or obligation, or delivered in
an asset exchange, that will mature or expire more than 30 calendar days from a calculation date or may extend beyond 30 calendar days of
a calculation date: **
Level
Level
Level
Level

1
1
1
1

liquid
liquid
liquid
liquid

assets
assets
assets
assets

.............................................
.............................................
.............................................
.............................................

88 The amount of the inflow would be determined
by whether the collateral that the covered company

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Level 1 liquid assets ....................................................................................
Level 2A liquid assets ..................................................................................
Level 2B liquid assets ..................................................................................
Assets that are not HQLA ............................................................................

received in the secured lending transaction or prior

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asset exchange was HQLA or non-HQLA as
summarized in Tables 4a and 4b.

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0%
15%
50%
100%

61516

Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
TABLE 4b—ASSET EXCHANGE INFLOW RATES—Continued

Covered company will receive at maturity
Level
Level
Level
Level
Level

2A
2A
2A
2B
2B

liquid
liquid
liquid
liquid
liquid

assets
assets
assets
assets
assets

Covered company must post at maturity

...........................................
...........................................
...........................................
...........................................
...........................................

Asset exchange
inflow rate

Level 1 or level 2A liquid assets ..................................................................
Level 2B liquid assets ..................................................................................
Assets that are not HQLA ............................................................................
Level 1 or level 2A or level 2B liquid assets ...............................................
Assets that are not HQLA ............................................................................

0%
35%
85%
0%
50%

Where the asset originally received in the asset exchange has been rehypothecated to secure any transaction or obligation,
or delivered in an asset exchange, which will mature or expire more than 30 calendar days from the calculation date or
may extend beyond 30 calendar days of the calculation date:

0%

** Under § l.31(a)(3) of the final rule, the maturity date of the asset exchange cannot be earlier than the maturity date of the transaction or
obligation for which the collateral was reused.

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g. Segregated Account Inflow Amount
Several commenters noted that unlike
the Basel III Revised Liquidity
Framework, the proposed rule did not
recognize inflows from the release of
assets held in segregated accounts in
accordance with regulatory
requirements for the protection of
customer trading assets, such as Rule
15c3–3.89 A few commenters argued
that Rule 15c3–3 is, in effect, a liquidity
rule that ensures that broker-dealers
have sufficient liquid assets to meet
their obligations to customers. Another
commenter argued that by failing to
address these assets in the proposed
rule, the agencies had failed to consider
the SEC’s functional regulation of
broker-dealers. Commenters noted that
because these inflows are not
specifically addressed in the proposed
rule, the assets would be treated as
encumbered and would not be eligible
to offset deposits subject to the outflow
rate applicable to affiliated sweep
deposits. A commenter argued that
because of the regulatory regime that
governs these segregated assets, there is
no market risk to the banking
organization. One commenter requested
that the release of balances held in
segregated accounts be subject to a 100
percent inflow rate.
The agencies recognize that
segregated accounts required for the
protection of customer trading assets are
designed to meet potential outflows to
customers under certain circumstances.
The agencies also recognize, however,
that such segregated amounts held as of
an LCR calculation date will be amounts
calculated by the covered company at or
prior to the calculation date and
generally on a net basis across existing
customer free cash, loans, and short
positions. The agencies acknowledge
that these segregated amounts will
necessarily be recalculated within a 30
calendar-day period, which could
89 17

CFR 240.15c3–3.

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potentially lead to a reduction in the
amount that is required to be segregated,
and a corresponding release of a portion
of the amount held as of a calculation
date. Accordingly, the agencies have
included a provision in the final rule
that permits a covered company to
recognize certain inflows from brokerdealer segregated account releases based
on the change in fair value of the
customer segregated account balances
between the calculation date and 30
calendar days following the calculation
date.
The agencies do not believe that 100
percent of the value of segregated
accounts held as of a calculation date
would be an appropriate inflow amount
because this inflow amount may not, in
fact, be realized by the covered
company. As a general matter, the final
rule requires outflow amounts and
inflow amounts to be calculated by
using only the balances and transaction
amounts at a calculation date, and not
based on anticipated future balances or
obligation amounts. However,
consistent with the Basel III Revised
Liquidity Framework, the agencies have
determined that the appropriate inflow
amount for the release of broker-dealer
segregated account assets is dependent
on the anticipated amount of brokerdealer segregated account assets that
may need to be held by the covered
company 30 calendar days from a
calculation date. The anticipated
amount of broker-dealer segregated
account assets that may need to be held
30 calendar days from a calculation date
should be based on the impact of those
outflow and inflow amounts described
under the final rule that are specifically
relevant to the calculation of the
segregated amount under applicable
law. The covered company must
therefore calculate the anticipated
required balance of the broker-dealer
segregated account assets as of 30
calendar days from a calculation date,
assuming that customer cash and
collateral positions have changed

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consistent with the outflow and inflow
calculations required under § l.32 and
§ l.33 of the final rule as applied to any
transaction affecting the calculation of
the segregated balance. If the calculated
future balance of the segregated account
assets is less than the balance at the
calculation date, then the broker-dealer
segregated account inflow amount is the
value of assets that would be released
from the segregated accounts.
In addition and as discussed above,
the agencies have added a provision to
the maturity date calculation
requirements of § l.31(a)(5) of the final
rule to clarify that broker-dealer
segregated account inflow under
§ l.33(g) will not be deemed to occur
until the date of the next scheduled
calculation of the amount as required
under applicable legal requirements for
the protection of customer assets with
respect to each broker-dealer segregated
account, in accordance with the covered
company’s normal frequency of
recalculating such requirements. If, for
example, a broker-dealer performs this
calculation on a daily basis, the inflow
may occur on the day following a
calculation date. If a broker-dealer
typically performs the calculation on a
weekly basis, the inflow would be
deemed to occur the day of the next
regularly scheduled calculation.
h. Other Cash Inflow Amounts
Under the proposed rule, the covered
company’s inflow amount, as of the
calculation date, would have included
zero percent of other cash inflow
amounts not described elsewhere in the
proposed rule. The agencies continue to
believe that limiting inflow amounts in
the final rule to those categories
specified, which reflect certain stressed
assumptions, is important to the
calculation of the total cash inflow
amount and the LCR as a whole. The
agencies received no comments on this
provision of the proposed rule and have
retained it in the final rule as proposed.

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
i. Excluded Amount for Intragroup
Transactions
Under the proposed rule, inflow
amounts would not have included
amounts arising out of transactions
between a covered company and its
consolidated subsidiary or amounts
arising out of transactions between a
consolidated subsidiary of a covered
company and another consolidated
subsidiary of that covered company.
The agencies received no comments on
this provision of the proposed rule and
have retained it in the final rule.

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III. Liquidity Coverage Ratio Shortfall
Although the Basel III Revised
Liquidity Framework provides that a
banking organization is required to
maintain an amount of HQLA sufficient
to meet its liquidity needs within a 30
calendar-day stress period, it also makes
clear that it may be necessary for a
banking organization to fall below the
requirement during a period of liquidity
stress. The Basel III Revised Liquidity
Framework therefore provides that any
supervisory decisions in response to a
reduction of a banking organization’s
LCR should take into consideration the
objectives of the Basel III Revised
Liquidity Framework. This provision of
the Basel III Revised Liquidity
Framework indicates that supervisory
actions should not discourage or deter a
banking organization from using its
HQLA when necessary to meet
unforeseen liquidity needs arising from
financial stress that exceeds normal
business fluctuations.
The proposed rule included a
supervisory framework for addressing a
shortfall with respect to the rule’s LCR
that is consistent with the intent of
having HQLA available for use during
stressed conditions, as described in the
Basel III Revised Liquidity Framework.
This supervisory framework included
notice and response procedures that
would have required a covered
company to notify its appropriate
Federal banking agency of any LCR
shortfall on any business day, and
would have provided the appropriate
Federal banking agency with flexibility
in its supervisory response. In addition,
if a covered company’s LCR fell below
the minimum requirement for three
consecutive business days or if its
supervisor determined that the covered
company is otherwise materially
noncompliant with the proposed rule,
the proposed rule would have required
the covered company to provide to its
supervisor a plan for remediation of the
liquidity shortfall.
Some commenters stated that the
requirement in the proposed rule to

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report non-compliance to the
appropriate Federal banking agency
appears to contradict the BCBS premise
that the stock of HQLA should be
available for use during periods of
stress. Other commenters requested that
the agencies take into consideration that
when an institution’s LCR falls below
100 percent, it is not necessarily
indicative of any real liquidity concerns.
Commenters expressed concern that
disclosure requirements under
securities laws or stock exchange listing
rules could require an institution to
immediately and publicly report an LCR
below 100 percent or the adoption of a
remediation plan, which would make
the HQLA de facto unusable during
times of stress and could exacerbate any
burgeoning liquidity stress being
experienced. Similarly, commenters
expressed concern that media reports of
an institution’s LCR falling below100
percent would not necessarily reflect
the underlying reasons and complexities
in the case of a temporary LCR shortfall
and may create liquidity instability.
Accordingly, such commenters
recommended that any public
disclosure at the bank holding company
level be carefully tailored. Alternatively,
one commenter requested that any
supervisory procedures be triggered
only when a covered company’s LCR
has fallen by at least 5 percent for a
period of at least 3 business days. In
order to accommodate normal
fluctuations in a firm’s day-to-day
liquidity position, the commenter
encouraged the agencies to consider
providing more flexibility in the final
rule. One commenter requested that the
agencies clarify whether, in addition to
monitoring a covered company’s
compliance with the LCR, the agencies
would be taking other indicators of
financial health into account. Another
commenter noted that daily notification
requirements to a covered company’s
appropriate Federal banking agency for
non-compliance with the LCR would
detract from the company’s critical
operating duties. Several commenters
requested that the agencies reconsider
the negative connotation of falling
below the target ratio and the
requirement to provide a written
remediation plan, which they stated
would cause the LCR to become a bright
line requirement to be met each day
instead of serving as a cushion for
stressful times. One commenter
requested that the agencies consider
making greater use of the
countercyclical potential of liquidity
regulation by permitting liquidity
requirements to be adjusted upward
during periods where markets are

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61517

overheated, similar to the
countercyclical capital requirements
under the Basel III capital framework.
In the proposed rule, consistent with
the Basel III Revised Liquidity
Framework, the agencies affirmed the
principle that a covered company’s
HQLA amount is expected to be
available for use to address liquidity
needs in a time of stress. The agencies
believe that the proposed LCR shortfall
framework would provide them with
the appropriate amount of supervisory
flexibility to respond to LCR shortfalls.
Depending on the circumstances, an
LCR shortfall would not have
necessarily resulted in supervisory
action, but, at a minimum, would have
resulted in heightened supervisory
monitoring. The notification procedures
that were to be followed whenever a
covered company dropped below the
required LCR were intended to enable
supervisors to monitor and respond
appropriately to the unique
circumstances that are giving rise to a
covered company’s LCR shortfall. This
supervisory monitoring and response
would be hindered if such notification
were only to occur when a covered
company dropped a specified
percentage below the LCR requirement.
Such notification may give rise to a
supervisory or enforcement action,
depending on operational issues at a
covered company, whether the violation
is a part of a pattern or practice, whether
the liquidity shortfall was temporary or
caused by an unusual event, and the
extent of the shortfall or
noncompliance. The agencies believe
the proposed LCR shortfall framework
provides appropriate supervisory
flexibility and are adopting it in the
final rule substantially as proposed.
The agencies recognize that there will
be a period of time during which
covered companies will be calculating
their LCR on the last day of each
calendar month, rather than on each
business day. Accordingly, the final rule
requires that during that period, if a
covered company’s LCR is below the
required minimum when it is calculated
on the last day of each calendar month,
or if its supervisor has determined that
the covered company is otherwise
materially noncompliant, the covered
company must promptly consult with
the appropriate Federal banking agency
to determine whether the covered
company must provide a written
remediation plan.
A covered company dropping below
the LCR requirement will necessitate
allocating resources to address the LCR
shortfall. However, the agencies believe
this allocation of resources is
appropriate to promote the overall

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

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safety and soundness of the covered
company. As with all supervisory
monitoring, the agencies will monitor a
covered company’s compliance with the
final rule in conjunction with the
agencies’ overall supervisory
framework. If necessary, the agencies
will adjust the supervisory response to
address any deterioration in the
financial condition of a covered
company.
With regard to counter cyclicality, by
requiring that ample liquid assets be
held during favorable conditions such
that a covered company can use them in
times of stress, the LCR effectively
works as a countercyclical requirement.
The agencies are not adding additional
countercyclical elements to the final
rule.
As noted elsewhere in this
Supplementary Information section, the
proposed rule did not include
disclosure requirements for the LCR and
the agencies anticipate that they will
seek comment on reporting
requirements through a future notice,
which will be tailored to disclose the
appropriate level of information. The
agencies are clarifying that, other than
any public disclosure requirements that
may be proposed in a separate notice,
reports to the agencies of any decline in
a covered company’s LCR below 100
percent, and any related supervisory
actions would be considered and treated
as confidential supervisory information.
IV. Transition and Timing
The proposed rule included a
transition period for the LCR that would
have required covered companies to
maintain a minimum LCR as follows: 80
percent beginning on January 1, 2015,
90 percent beginning on January 1,
2016, and 100 percent beginning on
January 1, 2017, and thereafter. The
proposed transition period accounted
for the potential implications of the
proposed rule on financial markets,
credit extension, and economic growth
and sought to balance these concerns
with the proposed LCR’s important role
in promoting a more robust and resilient
banking sector.
Commenters expressed concern with:
(i) The proposed transition period with
regard to the operational requirements
necessary to meet the proposed rule, (ii)
the fact that the transition period differs
from the timetable published in the
Basel III Revised Liquidity Framework,
and (iii) the HQLA shortfall amount that
the financial system faces. One
commenter expressed concern that the
proposal was premature because the
BCBS is currently reviewing ways to
reduce the complexity and opaqueness
of the Basel III capital framework.

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Several commenters stated that
compliance with the proposed
transition timeline would require
comprehensive information technology
improvements and governance
processes over a short period of time.
One commenter noted that covered
companies will need to make
operational changes to comply with the
new requirement and that some covered
companies will need to adjust their
asset composition significantly. One
commenter argued that certain covered
companies have not historically been
subject to formal regulatory reporting
requirements at the holding company
level and that the agencies should
consider this in determining whether to
impose accelerated implementation on
these companies. The commenter
further stated that the implementation
challenges posed by the proposal would
be particularly acute for these covered
companies and requested that the final
rule provide an extended transition
period for those companies that have
not traditionally been subject to the
regulatory reporting regimes that are
applicable to bank holding companies.
Similarly, two commenters noted that
U.S. banking organizations that have not
been identified as G–SIBs by the
Financial Stability Board have not been
previously required to report their
liquidity positions on a daily basis
under the Board’s FR 2052a reporting
form, and thus these banking
organizations have not had time to
upgrade data and systems to be in a
position to comply with the proposed
rule and its daily reporting
requirements. Additionally, according
to commenters, accelerated
implementation would compress the
full cost and burden of compliance into
an extremely brief period for these
organizations.
A few commenters requested that the
agencies consider that the
implementation of the proposed LCR
requirements would happen
contemporaneously with the
implementation of other resourceintensive regulatory requirements, all of
which would require changes to the
infrastructure of banking organizations.
Several commenters requested that the
implementation date of the rule be
delayed, with some specifically
requesting delay by 12 months to begin
no earlier than January 1, 2016, one
commenter requesting a delay by 24
months to begin no earlier than January
1, 2017, and another commenter
requesting a phase-in period of three
years.
Several commenters requested that
the proposed transition time frame
follow the Basel III Revised Liquidity

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Framework. One commenter stated that
this approach would minimize the
likelihood of an adverse impact on the
financial markets. One commenter
stated that an accelerated
implementation timeline would make it
impossible for there to be a level playing
field for LCR comparison across all
internationally active banking
organizations until 2019 when the Basel
III Revised Liquidity Framework
becomes fully implemented in other
jurisdictions, and that asymmetrical
treatment between the United States and
Europe will advantage foreign lenders
and borrowers, as well as their
economies.
A few commenters expressed concern
that the proposed transition timeline
was in part predicated on a level of
shortfall in HQLA estimated by the
agencies. One commenter argued that
the empirical evidence justifying the
agencies’ aggregate HQLA amount
shortfall conclusion on which the
implementation timing was based is
very limited and requested that the
agencies revisit the conclusion
regarding the amount of shortfall. The
commenter expressed concern that the
shortfall assumption may be based on
the less stringent approach of the Basel
III Revised Liquidity Framework. The
commenter also expressed concern that
the estimate of the LCR shortfall does
not take into account any shortfall that
may be present in foreign banking
organizations that will be required to
form an intermediate holding company
under the Board’s Regulation YY,90 and
thus the estimate of the shortfall is
likely significantly underestimated.91 A
commenter stated that its analysis
indicated that a number of institutions
would find it difficult to reach a LCR of
80 percent by 2015. Several commenters
requested that a quantitative impact
study be conducted before the agencies
implement an accelerated
implementation schedule. Several
commenters requested that the agencies
clarify the interaction between the daily
calculation requirement under the
proposed rule, and the current liquidity
reporting that certain firms are
undertaking under the Board’s FR 2052a
and Liquidity Monitoring Report (FR
2052b) reporting forms. In particular,
the commenters expressed concern that
the agencies would be requiring
multiple daily calculations and reports
with respect to the same data.
90 See

12 CFR 252.153.
noted above, the agencies have not applied
the requirements of the rule to foreign banking
organizations or intermediate holding companies
that are not otherwise covered companies.
91 As

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
With respect to commenters’ concerns
regarding the proposed rule’s deviation
from the Basel III Revised Liquidity
Framework phase-in, the agencies
believe the accelerated phase-in
properly reflects the significant progress
covered companies have made since the
financial crisis in enhancing their
overall liquidity positions. The agencies
continue to believe that the minimum
level of the LCR that would be
applicable in each calendar year
specified in the proposed transition
periods is appropriate to ensure that the
financial stability benefits presented by
the standard are appropriately realized.
Accordingly, as with the proposed rule,
the final rule requires covered
companies to maintain a LCR as follows:
80 percent beginning on January 1,
2015, 90 percent beginning on January
1, 2016, and 100 percent beginning on
January 1, 2017, and thereafter. These
transition periods are intended to
facilitate compliance with a new
minimum liquidity requirement and the
agencies expect that covered companies
with LCRs at or near 100 percent
generally would not reduce their
liquidity coverage during the transition
period. The agencies emphasize that the
final rule’s LCR is a minimum
requirement and that companies should
have internal liquidity management
systems and policies in place to ensure
they hold liquid assets sufficient to meet
their institution-specific liquidity needs
that could arise in a period of stress.

In determining the proposed
transition time frame, the agencies were
aware that covered companies may face
a range of implementation issues in
coming into compliance with the
proposed rule. The agencies asked in
the proposal whether the proposed
transition periods were appropriate for
all covered companies in respect to the
proposed LCR. Recognizing
commenters’ concerns regarding the
operational difficulty for organizations
that were not already subject to daily
liquidity reporting requirements, and
the systems changes necessary to
calculate the LCR accurately on a daily
basis, the agencies believe it is
appropriate to differentiate the
transition periods for calculation of the
liquidity coverage ratio based on the
size, complexity, and potential systemic
impact of covered companies. The final
rule therefore requires covered
depository institution holding
companies with $700 billion or more in
total consolidated assets or $10 trillion
or more in assets under custody, and
any depository institution that is a
consolidated subsidiary of such
depository institution holding
companies that has total consolidated
assets equal to $10 billion or more, to
conform to transition periods that are
different from those for other covered
companies. The agencies expect these
largest, most complex firms to have the
most sophisticated liquidity risk
monitoring procedures, commensurate
with their size and complexity,92 and

61519

these firms are currently submitting
daily liquidity reports. Under the final
rule, these covered companies are
required to calculate the LCR on the last
business day of each calendar month
from January 1, 2015, to June 30, 2015,
and on each business day from July 1,
2015, onwards. All other covered
companies must calculate the LCR on
the last business day of each calendar
month beginning January 1, 2015, and
on each business day from July 1, 2016,
onwards. The transition provisions of
the final rule are also set forth in Table
5 below.
In developing these transition
periods, the agencies analyzed data
received from several institutions under
a quantitative impact study as well as
supervisory data from each of the
institutions that would be subject to the
final rule. Based on the review of this
data, the agencies believe that the
transition periods set forth in the rule
are appropriately tailored to the size,
complexity, and potential systemic
impact of covered companies. The
agencies do not currently believe that
additional data is necessary for the
adjustment of the transition periods, but
will monitor the implementation of the
final rule by covered companies during
the transition periods.
Although the agencies have not
proposed the regulatory or public
reporting requirements for the final rule,
the agencies anticipate that they will
seek comment on reporting
requirements through a future notice.

TABLE 5—TRANSITION PERIOD FOR THE LIQUIDITY COVERAGE RATIO
Transition period

Liquidity coverage ratio

Calendar year 2015 ....................................................................................................................................
Calendar year 2016 ....................................................................................................................................
Calendar year 2017 and thereafter ............................................................................................................

.80
.90
1.00

Calculation Frequency
Covered depository institution holding companies with $700 billion or more in total consolidated assets
or $10 trillion or more in assets under custody, and any depository institution that is a consolidated
subsidiary of such depository institution holding companies that has total consolidated assets equal
to $10 billion or more:
Last business day of the calendar month ...........................................................................................
Each business day ..............................................................................................................................
All other covered companies:
Last business day of the calendar month ...........................................................................................
Each business day ..............................................................................................................................

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V. Modified Liquidity Coverage Ratio
Section 165 of the Dodd-Frank Act
authorizes the Board to tailor the
application of its enhanced prudential
92 For example, the Board’s Regulation YY
requires large domestic bank holding companies to
develop internal liquidity risk-management and
stress testing practices that are tailored to the risk

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Beginning January 1, 2015.
Beginning July 1, 2015 and thereafter.
Beginning January 1, 2015.
Beginning July 1, 2016 and thereafter.

standards, including differentiating
among covered companies on an
individual basis or by category of
institution.93 When differentiating

among companies for purposes of
applying the Board’s standards
established under section 165, the Board
may consider the companies’ size,

profile and business model of the particular
institution. See 12 CFR 252.33–35. The firmspecific liquidity requirements set forth in the
Board’s Regulation YY are intended to complement

the standardized approach of the U.S. liquidity
coverage ratio framework, which provides for
comparability across firms within the United States.
93 See 12 U.S.C. 5365(a) and (b).

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

capital structure, riskiness, complexity,
financial activities, and any other riskrelated factor the Board deems
appropriate.94
The Basel III Revised Liquidity
Framework was developed for
internationally active banking
organizations, taking into account the
complexity of their funding sources and
structure. Although depository
institution holding companies with at
least $50 billion in total consolidated
assets that are not covered companies
(modified LCR holding companies) are
large financial companies with
extensive operations in banking,
brokerage, and other financial activities,
they generally are smaller in size, less
complex in structure, and less reliant on
riskier forms of market funding than
covered companies. On a relative basis,
the modified LCR holding companies
tend to have simpler balance sheets,
better enabling management and
supervisors to take corrective actions
more quickly in a stressed scenario than
is the case with a covered company.
Accordingly, the Board proposed to
tailor the proposed rule’s application of
the liquidity coverage ratio requirement
to modified LCR holding companies
pursuant to its authority under section
165 of the Dodd-Frank Act. Although
the Board believes it is important for all
bank holding companies subject to
section 165 of the Dodd-Frank Act (and
similarly situated savings and loan
holding companies) to be subject to a
quantitative liquidity requirement as an
enhanced prudential standard, it
recognizes that these smaller companies
would likely not have as great a
systemic impact as larger, more complex
companies if they experienced liquidity
stress. Therefore, because the options
for addressing their liquidity needs
under such a scenario (or, if necessary,
for resolving such companies) would
likely be less complex and therefore
more likely to be implemented in a
shorter period of time, the Board
proposed a modified LCR incorporating
a shorter (21 calendar-day) stress
scenario for modified LCR holding
companies.
The proposed modified LCR would
have been a simpler, less stringent form
of the proposed rule’s liquidity coverage
ratio (for the purposes of this section V.,
unmodified LCR) and would have
imposed outflow rates based on a 21
calendar-day rather than a 30 calendarday stress scenario. As a result, outflow
rates for the proposed modified LCR
generally would have been 70 percent of
the unmodified LCR’s outflow rates. In
addition, modified LCR holding
94 See

12 U.S.C. 5365(a)(2).

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companies would not have been
required to calculate a maximum
cumulative peak net outflow day for
total net cash outflows as required for
covered companies subject to the
unmodified LCR.95 The requirements of
the modified LCR standard would have
otherwise been the same as the
unmodified LCR as described in the
proposal, including the proposed HQLA
criteria and the calculation of the HQLA
amount, and modified LCR holding
companies would have to comply with
all unmodified aspects of the standard
to the same extent as covered
companies.
A. Threshold for Application of the
Modified Liquidity Coverage Ratio
Requirement
One commenter expressed support for
the modified LCR, stating that modified
LCR holding companies have
substantially less complex funding and
risk profiles than covered companies.
The commenter stated that operating
under the modified LCR will allow such
a holding company to remain
competitive without compromising its
commitment to liquidity risk
management or drastically limiting the
amount of maturity transformation it
undertakes on behalf of its customers. A
commenter further expressed support
for the Board’s use of cumulative net
cash outflows over the stress period in
the modified LCR compared to the net
cumulative peak calculation in the
unmodified LCR requirement’s
proposed rule.
As discussed above in section I.D.,
several commenters requested that the
agencies apply the modified LCR to all
banking organizations with limited
international operations regardless of
asset size. The commenters argued that
the risk and funding profile of banking
organizations with balance sheets of
$250 billion or more in total
consolidated assets and limited
international operations is more
consistent with that of modified LCR
holding companies than with
internationally active G–SIBs, for which
the commenters say the LCR was
originally intended. A commenter stated
that deposit pricing may be adversely
affected by the threshold for application
of the modified LCR requirement and
expressed concerns regarding an unlevel
playing field across banking
organizations. Another commenter
stated that the proposed rule’s tiered
approach to assessing liquidity risks
among U.S. banking organizations raises
the potential unintended consequence
that certain risks the agencies wish to
95 See

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ensure are backed by adequate liquidity
will migrate to those institutions that
are not required to hold as much
liquidity. One commenter requested that
the Federal Reserve articulate the
justification for applying the LCR to the
selected institutions, particularly in
light of other supervisory efforts to
monitor and strengthen liquidity
management.
As discussed in section I of this
Supplementary Information section, the
agencies believe that the unmodified
LCR is appropriate for the size,
complexity, risk profile, and
interconnectedness of covered
companies. Consistent with the
enhanced prudential standards
requirements in Regulation YY, the
Board continues to believe that bank
holding companies and savings and
loan holding companies with total
consolidated assets of at least $50
billion dollars that are not covered
companies should be subject to the
modified LCR. Further, the Board
believes that tailoring the requirements
of the quantitative minimum standard
for organizations that are not covered
companies under the rule is consistent
with the Dodd-Frank Act and that it is
appropriate for modified LCR holding
companies with less complex funding
structures to be required to hold lower
amounts of HQLA under the rule.
B. 21 Calendar-Day Stress Period
Several commenters noted that the 21
calendar-day stress period is
operationally challenging because
banking organizations typically manage
and operate on a month-end or 30-day
cycle. Thus, commenters suggested that
the modified LCR be based on a
calendar month stress period, rather
than the 21 calendar-day stress period
in the proposal, and argued that the 21
calendar-day basis of the modified LCR
would have made it difficult to fully
embed the calculation into internal
processes including liquidity stress
testing and balance sheet forecasts. One
commenter argued that the benefits of a
21 calendar-day measurement period
would typically be small because most
holding companies that would be
subject to the modified LCR do not
generally rely on short-term funding;
however, the same commenter
requested the 70% outflow rate for nonmaturity cash outflows be retained.
Commenters argued that the 21
calendar-day forward-looking stress
period required under the modified LCR
would consistently omit key recurring
payment activity that occurs on the
calendar-month cycle and would force
the banks to manage cash flows in an
abnormal manner. Commenters also

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
argued that the 21 calendar-day
measurement period would make the
modified LCR holding companies’ LCR
extremely volatile. One commenter
requested that the agencies give such
firms the option to utilize a 30 calendarday measurement period, whereas
others requested that the modified LCR
be based on 30 calendar-day time frame
and outflow rates be set at 70 percent of
the outflow rate in the unmodified
liquidity coverage ratio. One commenter
stated that many of the calibrations in
the rule, such as the treatment of
operational deposits, municipal
deposits, and level 2A securities,
overstate the liquidity risk of the
institutions covered by the modified
LCR. The commenter requested that the
agencies consider a lower LCR
compliance threshold, such as 50
percent, to better align with the more
stable funding profile of modified LCR
holding companies.
Commenters suggested that the
modified LCR be based on a monthly
cycle so that 31-day, 30-day, and 28-day
months are all treated as a cycle for the
modified LCR. Two commenters stated
that the 21 calendar-day measurement
period would create additional
measurement and reporting burdens and
inconsistencies, because it deviates from
other similar liquidity standards
proposed by the BCBS and by the DoddFrank Act.
The Board agrees with commenters
that there is merit in using a stress
period that is consistent with periods
over which liquidity risk is monitored
by modified LCR holding companies as
part of their internal practices. Thus,
consistent with the risk management
practices required under the Board’s
Regulation YY, the Board is applying a
stress period of 30 days to the

calculation of the modified LCR. To
tailor the minimum quantitative
standard for modified LCR holding
companies while generally maintaining
the amount of HQLA required for these
firms under the proposal, the Board is
amending the modified LCR
denominator such that the net cash
outflows shall be the net cash outflows
calculated under the unmodified
liquidity coverage ratio requirements
over a 30 calendar-day stress period
(excluding step 2 of the peak day
approach described in section II.C.1 of
this Supplementary Information section)
multiplied by a factor of 0.7.
C. Calculation Requirements and
Comments on Modified LCR Reporting
The proposed rule would have
applied the modified LCR to depository
institution holding companies
domiciled in the United States that have
total consolidated assets of $50 billion
or more based on the average of the total
asset amount reported on the
institution’s four most recent FR Y–9Cs.
One commenter requested that the
agencies clarify when companies subject
to the modified LCR are required to start
meeting the requirement: The day on
which the company files the fourth FR
Y–9C showing that it is subject to the
rule, the day of the quarter following the
filing of that report, or another date.
One commenter requested that the
agencies clarify the mechanics for
calculating the modified LCR and
reporting to the regulators. Specifically,
the commenter asked whether the
modified LCR requires a daily
calculation. One commenter
recommended that regional banking
organizations be required to calculate
the LCR monthly and to report the
information on a delayed basis, for
example on the 20th day of the calendar

61521

month following the calculation date.
The Board recognizes that the
calculation requirements under the
modified LCR present certain
operational challenges to modified LCR
holding companies. The Board is
delaying the earliest date upon which a
modified LCR holding company must
comply with this rule to January 1,
2016. In addition, the Board is adopting
in the final rule a monthly calculation
requirement, rather than the daily
calculation requirement in the proposed
rule. This monthly calculation
requirement reflects the difference in
size, complexity, and funding profile of
the institutions subject to the modified
LCR. Modified LCR holding companies
will be subject to the transition periods
set forth in Table 6 below. If a modified
LCR holding company’s LCR is below
the required minimum when it is
calculated on the last day of each
calendar month, or if its supervisor has
determined that the covered company is
otherwise materially noncompliant, the
covered company must promptly
consult with the Board to determine
whether the covered company must
provide a written remediation plan.
As discussed in section I of this
Supplementary Information section, the
agencies anticipate proposing reporting
requirements in a future notice. This
future notice would contain the
reporting requirements for institutions
subject to the Board’s modified LCR,
including any applicable reporting date
requirements.
The Board is clarifying that a
modified LCR holding company is
required to comply with the modified
LCR on the first day of the quarter
following the date at which the average
total consolidated assets of the holding
company equal or exceed $50 billion.

TABLE 6—TRANSITION PERIOD FOR THE MODIFIED LIQUIDITY COVERAGE RATIO
Transition period

Liquidity coverage ratio

Calendar year 2016
Calendar year 2017 and thereafter

.90
1.00
Calculation Frequency

All modified LCR holding companies .......................................

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VI. Plain Language
Section 722 of the Gramm-Leach
Bliley Act 96 requires the agencies to use
plain language in all proposed and final
rules published after January 1, 2000.

Last business day of the calendar
month.

The agencies sought to present the
proposed rule in a simple and
straightforward manner and did not
receive any comments on the use of
plain language.

96 Pub L. 106–102, 113 Stat. 1338, 1471, 12 U.S.C.
4809.

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VII. Regulatory Flexibility Act
Section 4 of the Regulatory Flexibility
Act 97 (RFA), requires an agency to
prepare a final regulatory flexibility
analysis (FRFA) when an agency
promulgates a final rule unless,
97 5

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pursuant to section 5(b) of the RFA, the
agency certifies that the final rule will
not, if promulgated, have a significant
economic impact on a substantial
number of small entities 98 (defined for
purposes of the RFA to include banking
entities with total assets less than or
equal to $550 million and trust
companies with total assets less than or
equal to $38.5 million (small banking
entities)).99 Pursuant to section 5(b) of
the RFA, the OCC and the FDIC are
certifying that the final rule will not
have a significant economic impact on
a substantial number of small entities.

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OCC
As discussed previously in this
Supplementary Information section, the
final rule generally will apply to
national banks and Federal savings
associations with: (i) Total consolidated
assets equal to $250 billion or more; (ii)
consolidated total on-balance sheet
foreign exposure equal to $10 billion or
more; or (iii) total consolidated assets
equal to $10 billion or more if a national
bank or Federal savings association is a
consolidated subsidiary of a company
subject to the proposed rule. As of
December 31, 2013, the OCC supervises
1,231 small entities. The only OCCsupervised institutions subject to the
final rule have $10 billion or more in
total consolidated assets. Accordingly,
no OCC-supervised small banking
entities meet the criteria to be a covered
institution under the final rule.
Therefore, the final rule will not have a
significant economic impact on a
substantial number of small OCCsupervised banking entities.
Pursuant to section 5(b) of the RFA,
the OCC certifies that the final rule will
not have a significant economic impact
on a substantial number of small
national banks and small Federal
savings associations.
Board
The Board is providing a final
regulatory flexibility analysis with
respect to this final rule. As discussed
above, this final rule would implement
a quantitative liquidity requirement
consistent with the liquidity coverage
ratio established by the BCBS. The
Board received no public comments
related to the initial Regulatory
Flexibility Act analysis in the proposed
rule from the Chief Council for
Advocacy of the Small Business
Administration or from the general
public.
As discussed previously in this
Supplementary Information section, the
98 5

U.S.C. 605(b).
79 FR 33647 (June 12, 2014).

99 See

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final rule generally would apply to
Board-regulated institutions with (i)
total consolidated assets equal to $250
billion or more; (ii) total consolidated
on-balance sheet foreign exposure equal
to $10 billion or more; or (iii) total
consolidated assets equal to $10 billion
or more if that Board-regulated
institution is a depository institution
subsidiary of a company subject to the
proposed rule. The modified version of
the liquidity coverage ratio would apply
to top-tier bank holding companies and
savings and loan holding companies
domiciled in the United States that have
total consolidated assets of $50 billion
or more. The modified version of the
liquidity coverage ratio would not apply
to: (i) A grandfathered unitary savings
and loan holding company that derived
50 percent or more of its total
consolidated assets or 50 percent of its
total revenues on an enterprise-wide
basis from activities that are not
financial in nature under section 4(k) of
the Bank Holding Company Act; (ii) a
top-tier bank holding company or
savings and loan holding company that
is an insurance underwriting company;
or (iii) a top-tier bank holding company
or savings and loan holding company
that has 25 percent or more of its total
consolidated assets in subsidiaries that
are insurance underwriting companies
and either calculates its total
consolidated assets in accordance with
GAAP or estimates its total consolidated
assets, subject to review and adjustment
by the Board. The final rule focuses on
these financial institutions because of
their complexity, funding profiles, and
potential risk to the financial system.
As of June 30, 2014, there were
approximately 657 small state member
banks, 3,716 small bank holding
companies, and 254 small savings and
loan holding companies. No small toptier bank holding company, top-tier
savings and loan holding company, or
state member bank would be subject to
the rule, so there would be no
additional projected compliance
requirements imposed on small bank
holding companies, savings and loan
holding companies, or state member
banks.
The Board believes that the final rule
will not have a significant impact on
small banking organizations supervised
by the Board and therefore believes that
there are no significant alternatives to
the rule that would reduce the economic
impact on small banking organizations
supervised by the Board.
FDIC
As described previously in this
Supplementary Information section, the
final rule generally will establish a

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quantitative liquidity standard for
internationally active banking
organizations with $250 billion or more
in total assets or $10 billion or more of
on-balance sheet foreign exposure
(internationally active banking
organizations), and their consolidated
subsidiary depository institutions with
$10 billion or more in in total
consolidated assets. One FDICsupervised institution will satisfy the
foregoing criteria as of the effective date
of the final rule, and it is not a small
entity. As of December 31, 2013, based
on a $550 million threshold, the FDIC
supervises 3,353 small state nonmember
banks, and 51 small state savings
associations. The only FDIC-supervised
institutions subject to the final rule have
$10 billion or more in total consolidated
assets. Therefore, the FDIC does not
believe that the proposed rule will
result in a significant economic impact
on a substantial number of small entities
under its supervisory jurisdiction.
Pursuant to section 5(b) of the RFA,
the FDIC certifies that the final rule will
not have a significant economic impact
on a substantial number of small FDICsupervised institutions.
VIII. Paperwork Reduction Act
Request for Comment on Proposed
Information Collection
Certain provisions of the proposed
rule contain ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act (PRA) of 1995
(44 U.S. C. 3501–3521). In accordance
with the requirements of the PRA, the
agencies may not conduct or sponsor,
and the respondent is not required to
respond to, an information collection
unless it displays a currently valid
Office of Management and Budget
(OMB) control number.
The OCC and FDIC submitted this
collection to OMB at the proposed rule
stage. The information collection
requirements contained in this joint
final rule are being submitted by the
FDIC and OCC to OMB for approval
under section 3507(d) of the PRA and
section 1320.11 of OMB’s implementing
regulations (5 CFR part 1320). The
Board reviewed the final rule under the
authority delegated to the Board by
OMB. The agencies received no
comments regarding the collection at
the proposed rule stage.
Comments are invited on:
(a) Whether the collections of
information are necessary for the proper
performance of the agencies’ functions,
including whether the information has
practical utility;
(b) The accuracy of the agencies’
estimates of the burden of the

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information collections, including the
validity of the methodology and
assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collections on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start-up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
All comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
Commenters may submit comments
on aspects of this notice that may affect
burden estimates at the addresses listed
in the ADDRESSES section. A copy of the
comments may also be submitted to the
OMB desk officer for the agencies: By
mail to U.S. Office of Management and
Budget, 725 17th Street NW., 10235,
Washington, DC 20503; by facsimile to
202–395–6974; or by email to: oira_
submission@omb.eop.gov. Attention,
Federal Banking Agency Desk Officer.
Proposed Information Collection
Title of Information Collection:
Reporting and Recordkeeping
Requirements Associated with Liquidity
Coverage Ratio: Liquidity Risk
Measurement, Standards, and
Monitoring.
Frequency of Response: Annual and
event generated.
Affected Public:
FDIC: Insured state non-member
banks, state savings associations, and
certain subsidiaries of these entities.
OCC: National banks, Federal savings
associations, or any operating subsidiary
thereof.
Board: Insured state member banks,
bank holding companies, savings and
loan holding companies, and any
subsidiary thereof.
Abstract:
The final rule implements a
quantitative liquidity requirement
consistent with the LCR standard
established by the BCBS and contains
requirements subject to the PRA. The
reporting and recordkeeping
requirements are found in §§ l.22 and
l.40. Compliance with the information
collections will be mandatory.
Responses to the information collections
will be kept confidential to the extent

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permitted by law, and there would be
no mandatory retention period for the
proposed collections of information.
Section l.22 will require that, with
respect to each asset eligible for
inclusion in a covered company’s HQLA
amount, the covered company must
implement policies that require eligible
HQLA to be under the control of the
management function in the covered
company responsible for managing
liquidity risk. The management function
must evidence its control over the
HQLA by segregating the HQLA from
other assets, with the sole intent to use
the HQLA as a source of liquidity, or
demonstrating the ability to monetize
the assets and making the proceeds
available to the liquidity management
function without conflicting with a
business or risk management strategy of
the covered company. In addition,
§ l.22 will require that a covered
company must have a documented
methodology that results in a consistent
treatment for determining that the
covered company’s eligible HQLA meet
the requirements of § l.22.
Section l.40 will require that a
covered company must notify its
appropriate Federal banking agency on
any day when its liquidity coverage
ratio is calculated to be less than the
minimum requirement in § l.10. If a
covered company’s liquidity coverage
ratio is below the minimum requirement
in § __.10 for three consecutive days, or
if its appropriate Federal banking
agency has determined that the
institution is otherwise materially
noncompliant, the covered company
must promptly provide a plan for
achieving compliance with the
minimum liquidity requirement in
§ l.10 and all other requirements of
this part to its appropriate Federal
banking agency.
The liquidity plan must include, as
applicable, (1) an assessment of the
covered company’s liquidity position;
(2) the actions the covered company has
taken and will take to achieve full
compliance, including a plan for
adjusting the covered company’s risk
profile, risk management, and funding
sources in order to achieve full
compliance and a plan for remediating
any operational or management issues
that contributed to noncompliance; (3)
an estimated time frame for achieving
full compliance; and (4) a commitment
to provide a progress report to its
appropriate Federal banking agency at
least weekly until full compliance is
achieved.
Estimated Paperwork Burden

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61523

Reporting Burden
§ l.40(a)—0.25 hours.
§ l.40(b)—0.25 hours.
§ l.40(b)(4)—0.25 hours.
Recordkeeping Burden
§ l.22(a)(2) and (5)—20 hours.
§ l.40(b)—100 hours.
FDIC
Estimated Number of Respondents: 2.
Total Estimated Annual Burden: 249
hours.
OCC
Estimated Number of Respondents: 20
national banks and Federal savings
associations.
Total Estimated Annual Burden: 2,485
hours.
Board
Estimated Number of Respondents: 42
for § l.22; 3 for § l.40.
Total Estimated Annual Burden: 1,153
hours.
IX. OCC Unfunded Mandates Reform
Act of 1995 Determination
The OCC has analyzed the final rule
under the factors set forth in the
Unfunded Mandates Reform Act of 1995
(UMRA) (2 U.S.C. 1532). For purposes
of this analysis, the OCC considered
whether the final rule includes a
Federal mandate that may result in the
expenditure by State, local, and tribal
governments, in the aggregate, or by the
private sector, of $100 million or more
(adjusted annually for inflation) in any
one year.
The OCC has determined that this
final rule is likely to result in the
expenditure by the private sector of
$100 million or more (adjusted annually
for inflation) in any one year. When the
final rule is published in the Federal
Register, the OCC’s UMRA written
statement will be available at: http://
www.regulations.gov, Docket ID OCC–
2013–0016.
Text of Common Rule
(All Agencies)
PART [ll]—LIQUIDITY RISK
MEASUREMENT STANDARDS
Subpart A General Provisions
Sec.
l.1 Purpose and applicability.
l.2 Reservation of authority.
l.3 Definitions.
l.4 Certain operational requirements.
Subpart B Liquidity Coverage Ratio
l.10 Liquidity coverage ratio.
Subpart C High-Quality Liquid Assets
l.20 High-quality liquid asset criteria.

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l.21 High-quality liquid asset amount.
l.22 Requirements for eligible highquality liquid assets.
Subpart D Total Net Cash Outflow
l.30 Total net cash outflow amount.
l.31 Determining maturity.
l.32 Outflow amounts.
l.33 Inflow amounts.
Subpart E Liquidity Coverage Shortfall
l.40 Liquidity coverage shortfall:
Supervisory framework.
Subpart F Transitions
l.50 Transitions.

Subpart A—General Provisions

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§ l.1

Purpose and applicability.

(a) Purpose. This part establishes a
minimum liquidity standard for certain
[BANK]s on a consolidated basis, as set
forth herein.
(b) Applicability. (1) A [BANK] is
subject to the minimum liquidity
standard and other requirements of this
part if:
(i) It has total consolidated assets
equal to $250 billion or more, as
reported on the most recent year-end
[REGULATORY REPORT];
(ii) It has total consolidated onbalance sheet foreign exposure at the
most recent year-end equal to $10
billion or more (where total on-balance
sheet foreign exposure equals total
cross-border claims less claims with a
head office or guarantor located in
another country plus redistributed
guaranteed amounts to the country of
the head office or guarantor plus local
country claims on local residents plus
revaluation gains on foreign exchange
and derivative transaction products,
calculated in accordance with the
Federal Financial Institutions
Examination Council (FFIEC) 009
Country Exposure Report);
(iii) It is a depository institution that
is a consolidated subsidiary of a
company described in paragraphs
(b)(1)(i) or (ii) of this section and has
total consolidated assets equal to $10
billion or more, as reported on the most
recent year-end Consolidated Report of
Condition and Income; or
(iv) The [AGENCY] has determined
that application of this part is
appropriate in light of the [BANK]’s
asset size, level of complexity, risk
profile, scope of operations, affiliation
with foreign or domestic covered
entities, or risk to the financial system.
(2) Subject to the transition periods
set forth in subpart F of this part:
(i) A [BANK] that is subject to the
minimum liquidity standard and other
requirements of this part under
paragraph (b)(1) of this section on
September 30, 2014, must comply with

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the requirements of this part beginning
on January 1, 2015;
(ii) A [BANK] that becomes subject to
the minimum liquidity standard and
other requirements of this part under
paragraphs (b)(1)(i) through (iii) of this
section after September 30, 2014, must
comply with the requirements of this
part beginning on April 1 of the year in
which the [BANK] becomes subject to
the minimum liquidity standard and
other requirements of this part, except:
(A) From April 1 to December 31 of
the year in which the [BANK] becomes
subject to the minimum liquidity
standard and other requirements of this
part, the [BANK] must calculate and
maintain a liquidity coverage ratio
monthly, on each calculation date that
is the last business day of the applicable
calendar month; and
(B) Beginning January 1 of the year
after the first year in which the [BANK]
becomes subject to the minimum
liquidity standard and other
requirements of this part under
paragraph (b)(1) of this section, and
thereafter, the [BANK] must calculate
and maintain a liquidity coverage ratio
on each calculation date; and
(iii) A [BANK] that becomes subject to
the minimum liquidity standard and
other requirements of this part under
paragraph (b)(1)(iv) of this section after
September 30, 2014, must comply with
the requirements of this part subject to
a transition period specified by the
[AGENCY].
(3) This part does not apply to:
(i) A bridge financial company as
defined in 12 U.S.C. 5381(a)(3), or a
subsidiary of a bridge financial
company; or
(ii) A new depository institution or a
bridge depository institution, as defined
in 12 U.S.C. 1813(i).
(4) A [BANK] subject to a minimum
liquidity standard under this part shall
remain subject until the [AGENCY]
determines in writing that application of
this part to the [BANK] is not
appropriate in light of the [BANK]’s
asset size, level of complexity, risk
profile, scope of operations, affiliation
with foreign or domestic covered
entities, or risk to the financial system.
(5) In making a determination under
paragraphs (b)(1)(iv) or (4) of this
section, the [AGENCY] will apply notice
and response procedures in the same
manner and to the same extent as the
notice and response procedures in [12
CFR 3.404 (OCC), 12 CFR 263.202
(Board), and 12 CFR 324.5 (FDIC)].
§ l.2

Reservation of authority.

(a) The [AGENCY] may require a
[BANK] to hold an amount of highquality liquid assets (HQLA) greater

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than otherwise required under this part,
or to take any other measure to improve
the [BANK]’s liquidity risk profile, if the
[AGENCY] determines that the
[BANK]’s liquidity requirements as
calculated under this part are not
commensurate with the [BANK]’s
liquidity risks. In making
determinations under this section, the
[AGENCY] will apply notice and
response procedures as set forth in [12
CFR 3.404 (OCC), 12 CFR 263.202
(Board), and 12 CFR 324.5 (FDIC)].
(b) Nothing in this part limits the
authority of the [AGENCY] under any
other provision of law or regulation to
take supervisory or enforcement action,
including action to address unsafe or
unsound practices or conditions,
deficient liquidity levels, or violations
of law.
§ l.3

Definitions.

For the purposes of this part:
Affiliated depository institution
means with respect to a [BANK] that is
a depository institution, another
depository institution that is a
consolidated subsidiary of a bank
holding company or savings and loan
holding company of which the [BANK]
is also a consolidated subsidiary.
Asset exchange means a transaction
in which, as of the calculation date, the
counterparties have previously
exchanged non-cash assets, and have
each agreed to return such assets to each
other at a future date. Asset exchanges
do not include secured funding and
secured lending transactions.
Bank holding company is defined in
section 2 of the Bank Holding Company
Act of 1956, as amended (12 U.S.C. 1841
et seq.).
Brokered deposit means any deposit
held at the [BANK] that is obtained,
directly or indirectly, from or through
the mediation or assistance of a deposit
broker as that term is defined in section
29 of the Federal Deposit Insurance Act
(12 U.S.C. 1831f(g)), and includes a
reciprocal brokered deposit and a
brokered sweep deposit.
Brokered sweep deposit means a
deposit held at the [BANK] by a
customer or counterparty through a
contractual feature that automatically
transfers to the [BANK] from another
regulated financial company at the close
of each business day amounts identified
under the agreement governing the
account from which the amount is being
transferred.
Calculation date means any date on
which a [BANK] calculates its liquidity
coverage ratio under § l.10.
Client pool security means a security
that is owned by a customer of the
[BANK] that is not an asset of the

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
[BANK], regardless of a [BANK]’s
hypothecation rights with respect to the
security.
Collateralized deposit means:
(1) A deposit of a public sector entity
held at the [BANK] that is secured
under applicable law by a lien on assets
owned by the [BANK] and that gives the
depositor, as holder of the lien, priority
over the assets in the event the [BANK]
enters into receivership, bankruptcy,
insolvency, liquidation, resolution, or
similar proceeding; or
(2) A deposit of a fiduciary account
held at the [BANK] for which the
[BANK] is a fiduciary and sets aside
assets owned by the [BANK] as security
under 12 CFR 9.10 (national bank) or 12
CFR 150.300 through 150.320 (Federal
savings associations) and that gives the
depositor priority over the assets in the
event the [BANK] enters into
receivership, bankruptcy, insolvency,
liquidation, resolution, or similar
proceeding.
Committed means, with respect to a
credit facility or liquidity facility, that
under the terms of the legally binding
written agreement governing the facility:
(1) The [BANK] may not refuse to
extend credit or funding under the
facility; or
(2) The [BANK] may refuse to extend
credit under the facility (to the extent
permitted under applicable law) only
upon the satisfaction or occurrence of
one or more specified conditions not
including change in financial condition
of the borrower, customary notice, or
administrative conditions.
Company means a corporation,
partnership, limited liability company,
depository institution, business trust,
special purpose entity, association, or
similar organization.
Consolidated subsidiary means a
company that is consolidated on the
balance sheet of a [BANK] or other
company under GAAP.
Controlled subsidiary means, with
respect to a company or a [BANK], a
consolidated subsidiary or a company
that otherwise meets the definition of
‘‘subsidiary’’ in section 2(d) of the Bank
Holding Company Act of 1956 (12
U.S.C. 1841(d)).
Covered depository institution
holding company means a top-tier bank
holding company or savings and loan
holding company domiciled in the
United States other than:
(1) A top-tier savings and loan
holding company that is:
(i) A grandfathered unitary savings
and loan holding company as defined in
section 10(c)(9)(A) of the Home Owners’
Loan Act (12 U.S.C. 1461 et seq.); and
(ii) As of June 30 of the previous
calendar year, derived 50 percent or

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more of its total consolidated assets or
50 percent of its total revenues on an
enterprise-wide basis (as calculated
under GAAP) from activities that are not
financial in nature under section 4(k) of
the Bank Holding Company Act (12
U.S.C. 1842(k));
(2) A top-tier depository institution
holding company that is an insurance
underwriting company; or
(3)(i) A top-tier depository institution
holding company that, as of June 30 of
the previous calendar year, held 25
percent or more of its total consolidated
assets in subsidiaries that are insurance
underwriting companies (other than
assets associated with insurance for
credit risk); and
(ii) For purposes of paragraph 3(i) of
this definition, the company must
calculate its total consolidated assets in
accordance with GAAP, or if the
company does not calculate its total
consolidated assets under GAAP for any
regulatory purpose (including
compliance with applicable securities
laws), the company may estimate its
total consolidated assets, subject to
review and adjustment by the Board of
Governors of the Federal Reserve
System.
Covered nonbank company means a
designated company that the Board of
Governors of the Federal Reserve
System has required by rule or order to
comply with the requirements of 12 CFR
part 249.
Credit facility means 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.
A credit facility does not include 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. See liquidity facility.
Customer short position means a
legally binding written agreement
pursuant to which the customer must
deliver to the [BANK] a non-cash asset
that the customer has already sold.
Deposit means ‘‘deposit’’ as defined
in section 3(l) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(l)) or an
equivalent liability of the [BANK] in a
jurisdiction outside of the United States.
Depository institution is defined in
section 3(c) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(c)).
Depository institution holding
company means a bank holding
company or savings and loan holding
company.

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61525

Deposit insurance means deposit
insurance provided by the Federal
Deposit Insurance Corporation under
the Federal Deposit Insurance Act (12
U.S.C. 1811 et seq.).
Derivative transaction means a
financial contract whose value is
derived from the values of one or more
underlying assets, reference rates, or
indices of asset values or reference rates.
Derivative contracts include interest rate
derivative contracts, exchange rate
derivative contracts, equity derivative
contracts, commodity derivative
contracts, credit derivative contracts,
forward contracts, and any other
instrument that poses similar
counterparty credit risks. Derivative
contracts also include unsettled
securities, commodities, and foreign
currency exchange transactions with a
contractual settlement or delivery lag
that is longer than the lesser of the
market standard for the particular
instrument or five business days. A
derivative does not include any
identified banking product, as that term
is defined in section 402(b) of the Legal
Certainty for Bank Products Act of 2000
(7 U.S.C. 27(b)), that is subject to section
403(a) of that Act (7 U.S.C. 27a(a)).
Designated company means a
company that the Financial Stability
Oversight Council has determined
under section 113 of the Dodd-Frank
Act (12 U.S.C. 5323) shall be supervised
by the Board of Governors of the Federal
Reserve System and for which such
determination is still in effect.
Dodd-Frank Act means the DoddFrank Wall Street Reform and Consumer
Protection Act, Public Law 111–203,
124 Stat. 1376 (2010).
Eligible HQLA means a high-quality
liquid asset that meets the requirements
set forth in § l.22.
Fair value means fair value as
determined under GAAP.
Financial sector entity means an
investment adviser, investment
company, pension fund, non-regulated
fund, regulated financial company, or
identified company.
Foreign withdrawable reserves means
a [BANK]’s balances held by or on
behalf of the [BANK] at a foreign central
bank that are not subject to restrictions
on the [BANK]’s ability to use the
reserves.
GAAP means generally accepted
accounting principles as used in the
United States.
High-quality liquid asset (HQLA)
means an asset that is a level 1 liquid
asset, level 2A liquid asset, or level 2B
liquid asset, in accordance with the
criteria set forth in § l_.20.
HQLA amount means the HQLA
amount as calculated under § l.21.

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Identified company means any
company that the [AGENCY] has
determined should be treated for the
purposes of this part the same as a
regulated financial company,
investment company, non-regulated
fund, pension fund, or investment
adviser, based on activities similar in
scope, nature, or operations to those
entities.
Individual means a natural person,
and does not include a sole
proprietorship.
Investment adviser means a company
registered with the SEC as an
investment adviser under the
Investment Advisers Act of 1940 (15
U.S.C. 80b–1 et seq.) or foreign
equivalents of such company.
Investment company means a person
or company registered with the SEC
under the Investment Company Act of
1940 (15 U.S.C. 80a–1 et seq.) or foreign
equivalents of such persons or
companies.
Liquid and readily-marketable means,
with respect to a security, that the
security is traded in an active secondary
market with:
(1) More than two committed market
makers;
(2) A large number of non-market
maker participants on both the buying
and selling sides of transactions;
(3) Timely and observable market
prices; and
(4) A high trading volume.
Liquidity facility means 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. A
liquidity facility includes an agreement
to provide liquidity support to assetbacked 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.
Liquidity facilities exclude facilities that
are established solely for the purpose of
general working capital, such as
revolving credit facilities for general
corporate or working capital purposes. If
a facility has characteristics of both
credit and liquidity facilities, the facility
must be classified as a liquidity facility.
See credit facility.
Multilateral development bank means
the International Bank for
Reconstruction and Development, the
Multilateral Investment Guarantee
Agency, the International Finance
Corporation, the Inter-American
Development Bank, the Asian
Development Bank, the African
Development Bank, the European Bank

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for Reconstruction and Development,
the European Investment Bank, the
European Investment Fund, the Nordic
Investment Bank, the Caribbean
Development Bank, the Islamic
Development Bank, the Council of
Europe Development Bank, and any
other entity that provides financing for
national or regional development in
which the U.S. government is a
shareholder or contributing member or
which the [AGENCY] determines poses
comparable risk.
Non-regulated fund means 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.).
Nonperforming exposure means an
exposure that is past due by more than
90 days or nonaccrual.
Operational deposit means unsecured
wholesale funding or a collateralized
deposit that is necessary for the [BANK]
to provide operational services as an
independent third-party intermediary,
agent, or administrator to the wholesale
customer or counterparty providing the
unsecured wholesale funding or
collateralized deposit. In order to
recognize a deposit as an operational
deposit for purposes of this part, a
[BANK] must comply with the
requirements of § l.4(b) with respect to
that deposit.
Operational services means the
following services, provided they are
performed as part of cash management,
clearing, or custody services:
(1) Payment remittance;
(2) Administration of payments and
cash flows related to the safekeeping of
investment assets, not including the
purchase or sale of assets;
(3) Payroll administration and control
over the disbursement of funds;
(4) Transmission, reconciliation, and
confirmation of payment orders;
(5) Daylight overdraft;
(6) Determination of intra-day and
final settlement positions;
(7) Settlement of securities
transactions;
(8) Transfer of capital distributions
and recurring contractual payments;
(9) Customer subscriptions and
redemptions;
(10) Scheduled distribution of
customer funds;
(11) Escrow, funds transfer, stock
transfer, and agency services, including
payment and settlement services,

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payment of fees, taxes, and other
expenses; and
(12) Collection and aggregation of
funds.
Pension fund means an employee
benefit plan as defined in paragraphs (3)
and (32) of section 3 of the Employee
Retirement Income and Security Act of
1974 (29 U.S.C. 1001 et seq.), a
‘‘governmental plan’’ (as defined in 29
U.S.C. 1002(32)) that complies with the
tax deferral qualification requirements
provided in the Internal Revenue Code,
or any similar employee benefit plan
established under the laws of a foreign
jurisdiction.
Public sector entity means a state,
local authority, or other governmental
subdivision below the U.S. sovereign
entity level.
Publicly traded means, with respect to
an equity security, that the equity
security is traded on:
(1) Any exchange registered with the
SEC as a national securities exchange
under section 6 of the Securities
Exchange Act of 1934 (15 U.S.C. 78f); or
(2) Any non-U.S.-based securities
exchange that:
(i) Is registered with, or approved by,
a national securities regulatory
authority; and
(ii) Provides a liquid, two-way market
for the security in question.
Qualifying master netting agreement
(1) Means a legally binding written
agreement that:
(i) Creates a single obligation for all
individual transactions covered by the
agreement upon an event of default,
including upon an event of receivership,
bankruptcy, insolvency, liquidation,
resolution, or similar proceeding, of the
counterparty;
(ii) Provides the [BANK] the right to
accelerate, terminate, and close out on
a net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, bankruptcy, insolvency,
liquidation, resolution, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
U.S. government-sponsored enterprises;
and
(iii) Does not contain a walkaway
clause (that is, a provision that permits
a non-defaulting counterparty to make a
lower payment than it otherwise would
make under the agreement, or no

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payment at all, to a defaulter or the
estate of a defaulter, even if the
defaulter or the estate of the defaulter is
a net creditor under the agreement); and
(2) In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this part, a [BANK] must
comply with the requirements of
§ l.4(a) with respect to that agreement.
Reciprocal brokered deposit means a
brokered deposit that a [BANK] receives
through a deposit placement network on
a reciprocal basis, such that:
(1) For any deposit received, the
[BANK] (as agent for the depositors)
places the same amount with other
depository institutions through the
network; and
(2) Each member of the network sets
the interest rate to be paid on the entire
amount of funds it places with other
network members.
Regulated financial company means:
(1) A depository institution holding
company or designated company;
(2) A company included in the
organization chart of a depository
institution holding company on the
Form FR Y–6, as listed in the hierarchy
report of the depository institution
holding company produced by the
National Information Center (NIC) Web
site,1 provided that the top-tier
depository institution holding company
is subject to a minimum liquidity
standard under 12 CFR part 249;
(3) A depository institution; foreign
bank; credit union; industrial loan
company, industrial bank, or other
similar institution described in section
2 of the Bank Holding Company Act of
1956, as amended (12 U.S.C. 1841 et
seq.); national bank, state member bank,
or state non-member bank that is not a
depository institution;
(4) An insurance company;
(5) A securities holding company as
defined in section 618 of the DoddFrank Act (12 U.S.C. 1850a); broker or
dealer registered with the SEC under
section 15 of the Securities Exchange
Act (15 U.S.C. 78o); futures commission
merchant as defined in section 1a of the
Commodity Exchange Act of 1936 (7
U.S.C. 1 et seq.); swap dealer as defined
in section 1a of the Commodity
Exchange Act (7 U.S.C. 1a); or securitybased swap dealer as defined in section
3 of the Securities Exchange Act (15
U.S.C. 78c);
(6) A designated financial market
utility, as defined in section 803 of the
Dodd-Frank Act (12 U.S.C. 5462); and
(7) Any company not domiciled in the
United States (or a political subdivision
thereof) that is supervised and regulated
1 http://www.ffiec.gov/nicpubweb/nicweb/
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in a manner similar to entities described
in paragraphs (1) through (6) of this
definition (e.g., a foreign banking
organization, foreign insurance
company, foreign securities broker or
dealer or foreign financial market
utility).
(8) A regulated financial company
does not include:
(i) U.S. government-sponsored
enterprises;
(ii) Small business investment
companies, as defined in section 102 of
the Small Business Investment Act of
1958 (15 U.S.C. 661 et seq.);
(iii) Entities designated as Community
Development Financial Institutions
(CDFIs) under 12 U.S.C. 4701 et seq. and
12 CFR part 1805; or
(iv) Central banks, the Bank for
International Settlements, the
International Monetary Fund, or
multilateral development banks.
Reserve Bank balances means:
(1) Balances held in a master account
of the [BANK] at a Federal Reserve
Bank, less any balances that are
attributable to any respondent of the
[BANK] if the [BANK] is a
correspondent for a pass-through
account as defined in section 204.2(l) of
Regulation D (12 CFR 204.2(l));
(2) Balances held in a master account
of a correspondent of the [BANK] that
are attributable to the [BANK] if the
[BANK] is a respondent for a passthrough account as defined in section
204.2(l) of Regulation D;
(3) ‘‘Excess balances’’ of the [BANK]
as defined in section 204.2(z) of
Regulation D (12 CFR 204.2(z)) that are
maintained in an ‘‘excess balance
account’’ as defined in section 204.2(aa)
of Regulation D (12 CFR 204.2(aa)) if the
[BANK] is an excess balance account
participant; or
(4) ‘‘Term deposits’’ of the [BANK] as
defined in section 204.2(dd) of
Regulation D (12 CFR 204.2(dd)) if such
term deposits are offered and
maintained pursuant to terms and
conditions that:
(i) Explicitly and contractually permit
such term deposits to be withdrawn
upon demand prior to the expiration of
the term, or that
(ii) Permit such term deposits to be
pledged as collateral for term or
automatically-renewing overnight
advances from the Federal Reserve
Bank.
Retail customer or counterparty
means a customer or counterparty that
is:
(1) An individual;
(2) A business customer, but solely if
and to the extent that:
(i) The [BANK] manages its
transactions with the business customer,

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including deposits, unsecured funding,
and credit facility and liquidity facility
transactions, in the same way it
manages its transactions with
individuals;
(ii) Transactions with the business
customer have liquidity risk
characteristics that are similar to
comparable transactions with
individuals; and
(iii) The total aggregate funding raised
from the business customer is less than
$1.5 million; or
(3) A living or testamentary trust that:
(i) Is solely for the benefit of natural
persons;
(ii) Does not have a corporate trustee;
and
(iii) Terminates within 21 years and
10 months after the death of grantors or
beneficiaries of the trust living on the
effective date of the trust or within 25
years, if applicable under state law.
Retail deposit means a demand or
term deposit that is placed with the
[BANK] by a retail customer or
counterparty, other than a brokered
deposit.
Retail mortgage means a mortgage that
is primarily secured by a first or
subsequent lien on one-to-four family
residential property.
Savings and loan holding company
means a savings and loan holding
company as defined in section 10 of the
Home Owners’ Loan Act (12 U.S.C.
1467a).
SEC means the Securities and
Exchange Commission.
Secured funding transaction means
any funding transaction that is subject
to a legally binding agreement as of the
calculation date and gives rise to a cash
obligation of the [BANK] to a
counterparty that is secured under
applicable law by a lien on assets
owned by the [BANK], which gives the
counterparty, as holder of the lien,
priority over the assets in the event the
[BANK] enters into receivership,
bankruptcy, insolvency, liquidation,
resolution, or similar proceeding.
Secured funding transactions include
repurchase transactions, loans of
collateral to the [BANK]’s customers to
effect short positions, other secured
loans, and borrowings from a Federal
Reserve Bank.
Secured lending transaction means
any lending transaction that is subject to
a legally binding agreement of the
calculation date and gives rise to a cash
obligation of a counterparty to the
[BANK] that is secured under applicable
law by a lien on assets owned by the
counterparty, which gives the [BANK],
as holder of the lien, priority over the
assets in the event the counterparty
enters into receivership, bankruptcy,

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insolvency, liquidation, resolution, or
similar proceeding, including reverse
repurchase transactions and securities
borrowing transactions.
Securities Exchange Act means the
Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.).
Sovereign entity means a central
government (including the U.S.
government) or an agency, department,
ministry, or central bank of a central
government.
Special purpose entity means a
company organized for a specific
purpose, the activities of which are
significantly limited to those
appropriate to accomplish a specific
purpose, and the structure of which is
intended to isolate the credit risk of the
special purpose entity.
Stable retail deposit means a retail
deposit that is entirely covered by
deposit insurance and:
(1) Is held by the depositor in a
transactional account; or
(2) The depositor that holds the
account has another established
relationship with the [BANK] such as
another deposit account, a loan, bill
payment services, or any similar service
or product provided to the depositor
that the [BANK] demonstrates to the
satisfaction of the [AGENCY] would
make deposit withdrawal highly
unlikely during a liquidity stress event.
Structured security means a security
whose cash flow characteristics depend
upon one or more indices or that has
embedded forwards, options, or other
derivatives or a security where an
investor’s investment return and the
issuer’s payment obligations are
contingent on, or highly sensitive to,
changes in the value of underlying
assets, indices, interest rates, or cash
flows.
Structured transaction means a
secured transaction in which repayment
of obligations and other exposures to the
transaction is largely derived, directly or
indirectly, from the cash flow generated
by the pool of assets that secures the
obligations and other exposures to the
transaction.
Two-way market means a market
where there are independent bona fide
offers to buy and sell so that a price
reasonably related to the last sales price
or current bona fide competitive bid and
offer quotations can be determined
within one day and settled at that price
within a relatively short time frame
conforming to trade custom.
U.S. government-sponsored enterprise
means an entity established or chartered
by the Federal government to serve
public purposes specified by the United
States Congress, but whose debt
obligations are not explicitly guaranteed

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by the full faith and credit of the United
States government.
Unsecured wholesale funding means a
liability or general obligation of the
[BANK] to a wholesale customer or
counterparty that is not secured under
applicable law by a lien on assets
owned by the [BANK], including a
wholesale deposit.
Wholesale customer or counterparty
means a customer or counterparty that
is not a retail customer or counterparty.
Wholesale deposit means a demand or
term deposit that is provided by a
wholesale customer or counterparty.
§ __.4

Certain operational requirements.

(a) Qualifying master netting
agreements. In order to recognize an
agreement as a qualifying master netting
agreement as defined in § l.3, a
[BANK] must:
(1) Conduct sufficient legal review to
conclude with a well-founded basis
(and maintain sufficient written
documentation of that legal review) that:
(i) The agreement meets the
requirements of the definition of
qualifying master netting agreement in
§ l.3; and
(ii) In the event of a legal challenge
(including one resulting from default or
from receivership, bankruptcy,
insolvency, liquidation, resolution, or
similar proceeding) the relevant judicial
and administrative authorities would
find the agreement to be legal, valid,
binding, and enforceable under the law
of the relevant jurisdictions; and
(2) Establish and maintain written
procedures to monitor possible changes
in relevant law and to ensure that the
agreement continues to satisfy the
requirements of the definition of
qualifying master netting agreement in
§ l.3.
(b) Operational deposits. In order to
recognize a deposit as an operational
deposit as defined in § l.3:
(1) The related operational services
must be performed pursuant to a legally
binding written agreement, and:
(i) The termination of the agreement
must be subject to a minimum 30
calendar-day notice period; or
(ii) As a result of termination of the
agreement or transfer of services to a
third-party provider, the customer
providing the deposit would incur
significant contractual termination costs
or switching costs (switching costs
include significant technology,
administrative, and legal service costs
incurred in connection with the transfer
of the operational services to a thirdparty provider);
(2) The deposit must be held in an
account designated as an operational
account;

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(3) The customer must hold the
deposit at the [BANK] for the primary
purpose of obtaining the operational
services provided by the [BANK];
(4) The deposit account must not be
designed to create an economic
incentive for the customer to maintain
excess funds therein through increased
revenue, reduction in fees, or other
offered economic incentives;
(5) The [BANK] must demonstrate
that the deposit is empirically linked to
the operational services and that it has
a methodology that takes into account
the volatility of the average balance for
identifying any excess amount, which
must be excluded from the operational
deposit amount;
(6) The deposit must not be provided
in connection with the [BANK]’s
provision of prime brokerage services,
which, for the purposes of this part, are
a package of services offered by the
[BANK] whereby the [BANK], among
other services, executes, clears, settles,
and finances transactions entered into
by the customer or a third-party entity
on behalf of the customer (such as an
executing broker), and where the
[BANK] has a right to use or
rehypothecate assets provided by the
customer, including in connection with
the extension of margin and other
similar financing of the customer,
subject to applicable law, and includes
operational services provided to a nonregulated fund; and
(7) The deposits must not be for
arrangements in which the [BANK] (as
correspondent) holds deposits owned by
another depository institution bank (as
respondent) and the respondent
temporarily places excess funds in an
overnight deposit with the [BANK].
Subpart B—Liquidity Coverage Ratio
§ l.10

Liquidity coverage ratio.

(a) Minimum liquidity coverage ratio
requirement. Subject to the transition
provisions in subpart F of this part, a
[BANK] must calculate and maintain a
liquidity coverage ratio that is equal to
or greater than 1.0 on each business day
in accordance with this part. A [BANK]
must calculate its liquidity coverage
ratio as of the same time on each
business day (elected calculation time).
The [BANK] must select this time by
written notice to the [AGENCY] prior to
the effective date of this rule. The
[BANK] may not thereafter change its
elected calculation time without prior
written approval from the [AGENCY].
(b) Calculation of the liquidity
coverage ratio. A [BANK]’s liquidity
coverage ratio equals:

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
(1) The [BANK]’s HQLA amount as of
the calculation date, calculated under
subpart C of this part; divided by
(2) The [BANK]’s total net cash
outflow amount as of the calculation
date, calculated under subpart D of this
part.
Subpart C—High-Quality Liquid Assets

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§ l.20

High-quality liquid asset criteria.

(a) Level 1 liquid assets. An asset is
a level 1 liquid asset if it is one of the
following types of assets:
(1) Reserve Bank balances;
(2) Foreign withdrawable reserves;
(3) A security that is issued by, or
unconditionally guaranteed as to the
timely payment of principal and interest
by, the U.S. Department of the Treasury;
(4) A security that is issued by, or
unconditionally guaranteed as to the
timely payment of principal and interest
by, a U.S. government agency (other
than the U.S. Department of the
Treasury) whose obligations are fully
and explicitly guaranteed by the full
faith and credit of the U.S. government,
provided that the security is liquid and
readily-marketable;
(5) A security that is issued by, or
unconditionally guaranteed as to the
timely payment of principal and interest
by, a sovereign entity, the Bank for
International Settlements, the
International Monetary Fund, the
European Central Bank, European
Community, or a multilateral
development bank, that is:
(i) Assigned a zero percent risk weight
under subpart D of [AGENCY CAPITAL
REGULATION] as of the calculation
date;
(ii) Liquid and readily-marketable;
(iii) Issued or guaranteed by an entity
whose obligations have a proven record
as a reliable source of liquidity in
repurchase or sales markets during
stressed market conditions; and
(iv) Not an obligation of a financial
sector entity and not an obligation of a
consolidated subsidiary of a financial
sector entity; or
(6) A security issued by, or
unconditionally guaranteed as to the
timely payment of principal and interest
by, a sovereign entity that is not
assigned a zero percent risk weight
under subpart D of [AGENCY CAPITAL
REGULATION], where the sovereign
entity issues the security in its own
currency, the security is liquid and
readily-marketable, and the [BANK]
holds the security in order to meet its
net cash outflows in the jurisdiction of
the sovereign entity, as calculated under
subpart D of this part.
(b) Level 2A liquid assets. An asset is
a level 2A liquid asset if the asset is

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liquid and readily-marketable and is one
of the following types of assets:
(1) A security issued by, or guaranteed
as to the timely payment of principal
and interest by, a U.S. governmentsponsored enterprise, that is investment
grade under 12 CFR part 1 as of the
calculation date, provided that the claim
is senior to preferred stock; or
(2) A security that is issued by, or
guaranteed as to the timely payment of
principal and interest by, a sovereign
entity or multilateral development bank
that is:
(i) Not included in level 1 liquid
assets;
(ii) Assigned no higher than a 20
percent risk weight under subpart D of
[AGENCY CAPITAL REGULATION] as
of the calculation date;
(iii) Issued or guaranteed by an entity
whose obligations have a proven record
as a reliable source of liquidity in
repurchase or sales markets during
stressed market conditions, as
demonstrated by:
(A) The market price of the security
or equivalent securities of the issuer
declining by no more than 10 percent
during a 30 calendar-day period of
significant stress, or
(B) The market haircut demanded by
counterparties to secured lending and
secured funding transactions that are
collateralized by the security or
equivalent securities of the issuer
increasing by no more than 10
percentage points during a 30 calendarday period of significant stress; and
(iv) Not an obligation of a financial
sector entity, and not an obligation of a
consolidated subsidiary of a financial
sector entity.
(c) Level 2B liquid assets. An asset is
a level 2B liquid asset if the asset is
liquid and readily-marketable and is one
of the following types of assets:
(1) A corporate debt security that is:
(i) Investment grade under 12 CFR
part 1 as of the calculation date;
(ii) Issued or guaranteed by an entity
whose obligations have a proven record
as a reliable source of liquidity in
repurchase or sales markets during
stressed market conditions, as
demonstrated by:
(A) The market price of the corporate
debt security or equivalent securities of
the issuer declining by no more than 20
percent during a 30 calendar-day period
of significant stress, or
(B) The market haircut demanded by
counterparties to secured lending and
secured funding transactions that are
collateralized by the corporate debt
security or equivalent securities of the
issuer increasing by no more than 20
percentage points during a 30 calendarday period of significant stress; and

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61529

(iii) Not an obligation of a financial
sector entity and not an obligation of a
consolidated subsidiary of a financial
sector entity; or
(2) A publicly traded common equity
share that is:
(i) Included in:
(A) The Russell 1000 Index; or
(B) An index that a [BANK]’s
supervisor in a foreign jurisdiction
recognizes for purposes of including
equity shares in level 2B liquid assets
under applicable regulatory policy, if
the share is held in that foreign
jurisdiction;
(ii) Issued in:
(A) U.S. dollars; or
(B) The currency of a jurisdiction
where the [BANK] operates and the
[BANK] holds the common equity share
in order to cover its net cash outflows
in that jurisdiction, as calculated under
subpart D of this part;
(iii) Issued by an entity whose
publicly traded common equity shares
have a proven record as a reliable source
of liquidity in repurchase or sales
markets during stressed market
conditions, as demonstrated by:
(A) The market price of the security
or equivalent securities of the issuer
declining by no more than 40 percent
during a 30 calendar-day period of
significant stress, or
(B) The market haircut demanded by
counterparties to securities borrowing
and lending transactions that are
collateralized by the publicly traded
common equity shares or equivalent
securities of the issuer increasing by no
more than 40 percentage points, during
a 30 calendar day period of significant
stress;
(iv) Not issued by a financial sector
entity and not issued by a consolidated
subsidiary of a financial sector entity;
(v) If held by a depository institution,
is not acquired in satisfaction of a debt
previously contracted (DPC); and
(vi) If held by a consolidated
subsidiary of a depository institution,
the depository institution can include
the publicly traded common equity
share in its level 2B liquid assets only
if the share is held to cover net cash
outflows of the depository institution’s
consolidated subsidiary in which the
publicly traded common equity share is
held, as calculated by the [BANK] under
subpart D of this part.
§ l.21

High-quality liquid asset amount.

(a) Calculation of the HQLA amount.
As of the calculation date, a [BANK]’s
HQLA amount equals:
(1) The level 1 liquid asset amount;
plus
(2) The level 2A liquid asset amount;
plus

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(3) The level 2B liquid asset amount;
minus
(4) The greater of:
(i) The unadjusted excess HQLA
amount; and
(ii) The adjusted excess HQLA
amount.
(b) Calculation of liquid asset
amounts. (1) Level 1 liquid asset
amount. The level 1 liquid asset amount
equals the fair value of all level 1 liquid
assets held by the [BANK] as of the
calculation date that are eligible HQLA,
less the amount of the reserve balance
requirement under section 204.5 of
Regulation D (12 CFR 204.5).
(2) Level 2A liquid asset amount. The
level 2A liquid asset amount equals 85
percent of the fair value of all level 2A
liquid assets held by the [BANK] as of
the calculation date that are eligible
HQLA.
(3) Level 2B liquid asset amount. The
level 2B liquid asset amount equals 50
percent of the fair value of all level 2B
liquid assets held by the [BANK] as of
the calculation date that are eligible
HQLA.
(c) Calculation of the unadjusted
excess HQLA amount. As of the
calculation date, the unadjusted excess
HQLA amount equals:
(1) The level 2 cap excess amount;
plus
(2) The level 2B cap excess amount.
(d) Calculation of the level 2 cap
excess amount. As of the calculation
date, the level 2 cap excess amount
equals the greater of:
(1) The level 2A liquid asset amount
plus the level 2B liquid asset amount
minus 0.6667 times the level 1 liquid
asset amount; and
(2) 0.
(e) Calculation of the level 2B cap
excess amount. As of the calculation
date, the level 2B excess amount equals
the greater of:
(1) The level 2B liquid asset amount
minus the level 2 cap excess amount
minus 0.1765 times the sum of the level
1 liquid asset amount and the level 2A
liquid asset amount; and
(2) 0.
(f) Calculation of adjusted liquid asset
amounts. (1) Adjusted level 1 liquid
asset amount. A [BANK]’s adjusted
level 1 liquid asset amount equals the
fair value of all level 1 liquid assets that
would be eligible HQLA and would be
held by the [BANK] upon the unwind of
any secured funding transaction (other
than a collateralized deposit), secured
lending transaction, asset exchange, or
collateralized derivatives transaction
that matures within 30 calendar days of
the calculation date where the [BANK]
will provide an asset that is eligible
HQLA and the counterparty will

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provide an asset that will be eligible
HQLA; less the amount of the reserve
balance requirement under section
204.5 of Regulation D (12 CFR 204.5).
(2) Adjusted level 2A liquid asset
amount. A [BANK]’s adjusted level 2A
liquid asset amount equals 85 percent of
the fair value of all level 2A liquid
assets that would be eligible HQLA and
would be held by the [BANK] upon the
unwind of any secured funding
transaction (other than a collateralized
deposit), secured lending transaction,
asset exchange, or collateralized
derivatives transaction that matures
within 30 calendar days of the
calculation date where the [BANK] will
provide an asset that is eligible HQLA
and the counterparty will provide an
asset that will be eligible HQLA.
(3) Adjusted level 2B liquid asset
amount. A [BANK]’s adjusted level 2B
liquid asset amount equals 50 percent of
the fair value of all level 2B liquid assets
that would be eligible HQLA and would
be held by the [BANK] upon the unwind
of any secured funding transaction
(other than a collateralized deposit),
secured lending transaction, asset
exchange, or collateralized derivatives
transaction that matures within 30
calendar days of the calculation date
where the [BANK] will provide an asset
that is eligible HQLA and the
counterparty will provide an asset that
will be eligible HQLA.
(g) Calculation of the adjusted excess
HQLA amount. As of the calculation
date, the adjusted excess HQLA amount
equals:
(1) The adjusted level 2 cap excess
amount; plus
(2) The adjusted level 2B cap excess
amount.
(h) Calculation of the adjusted level 2
cap excess amount. As of the
calculation date, the adjusted level 2
cap excess amount equals the greater of:
(1) The adjusted level 2A liquid asset
amount plus the adjusted level 2B
liquid asset amount minus 0.6667 times
the adjusted level 1 liquid asset amount;
and
(2) 0.
(i) Calculation of the adjusted level 2B
excess amount. As of the calculation
date, the adjusted level 2B excess liquid
asset amount equals the greater of:
(1) The adjusted level 2B liquid asset
amount minus the adjusted level 2 cap
excess amount minus 0.1765 times the
sum of the adjusted level 1 liquid asset
amount and the adjusted level 2A liquid
asset amount; and
(2) 0.
§ l.22 Requirements for eligible highquality liquid assets.

(a) Operational requirements for
eligible HQLA. With respect to each

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asset that is eligible for inclusion in a
[BANK]’s HQLA amount, a [BANK]
must meet all of the following
operational requirements:
(1) The [BANK] must demonstrate the
operational capability to monetize the
HQLA by:
(i) Implementing and maintaining
appropriate procedures and systems to
monetize any HQLA at any time in
accordance with relevant standard
settlement periods and procedures; and
(ii) Periodically monetizing a sample
of HQLA that reasonably reflects the
composition of the [BANK]’s eligible
HQLA, including with respect to asset
type, maturity, and counterparty
characteristics;
(2) The [BANK] must implement
policies that require eligible HQLA to be
under the control of the management
function in the [BANK] that is charged
with managing liquidity risk, and this
management function must evidence its
control over the HQLA by either:
(i) Segregating the HQLA from other
assets, with the sole intent to use the
HQLA as a source of liquidity; or
(ii) Demonstrating the ability to
monetize the assets and making the
proceeds available to the liquidity
management function without
conflicting with a business or risk
management strategy of the [BANK];
(3) The fair value of the eligible HQLA
must be reduced by the outflow amount
that would result from the termination
of any specific transaction hedging
eligible HQLA;
(4) The [BANK] must implement and
maintain policies and procedures that
determine the composition of its eligible
HQLA on each calculation date, by:
(i) Identifying its eligible HQLA by
legal entity, geographical location,
currency, account, or other relevant
identifying factors as of the calculation
date;
(ii) Determining that eligible HQLA
meet the criteria set forth in this section;
and
(iii) Ensuring the appropriate
diversification of the eligible HQLA by
asset type, counterparty, issuer,
currency, borrowing capacity, or other
factors associated with the liquidity risk
of the assets; and
(5) The [BANK] must have a
documented methodology that results in
a consistent treatment for determining
that the [BANK]’s eligible HQLA meet
the requirements set forth in this
section.
(b) Generally applicable criteria for
eligible HQLA. A [BANK]’s eligible
HQLA must meet all of the following
criteria:
(1) The assets are unencumbered in
accordance with the following criteria:

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(i) The assets are free of legal,
regulatory, contractual, or other
restrictions on the ability of the [BANK]
to monetize the assets; and
(ii) The assets are not pledged,
explicitly or implicitly, to secure or to
provide credit enhancement to any
transaction, but the assets may be
considered unencumbered if the assets
are pledged to a central bank or a U.S.
government-sponsored enterprise
where:
(A) Potential credit secured by the
assets is not currently extended to the
[BANK] or its consolidated subsidiaries;
and
(B) The pledged assets are not
required to support access to the
payment services of a central bank;
(2) The asset is not:
(i) A client pool security held in a
segregated account; or
(ii) An asset received from a secured
funding transaction involving client
pool securities that were held in a
segregated account;
(3) For eligible HQLA held in a legal
entity that is a U.S. consolidated
subsidiary of a [BANK]:
(i) If the U.S. consolidated subsidiary
is subject to a minimum liquidity
standard under this part, the [BANK]
may include the eligible HQLA of the
U.S. consolidated subsidiary in its
HQLA amount up to:
(A) The amount of net cash outflows
of the U.S. consolidated subsidiary
calculated by the U.S. consolidated
subsidiary for its own minimum
liquidity standard under this part; plus
(B) Any additional amount of assets,
including proceeds from the
monetization of assets, that would be
available for transfer to the top-tier
[BANK] during times of stress without
statutory, regulatory, contractual, or
supervisory restrictions, including
sections 23A and 23B of the Federal
Reserve Act (12 U.S.C. 371c and 12
U.S.C. 371c–1) and Regulation W (12
CFR part 223); and
(ii) If the U.S. consolidated subsidiary
is not subject to a minimum liquidity
standard under this part, the [BANK]
may include the eligible HQLA of the
U.S. consolidated subsidiary in its
HQLA amount up to:
(A) The amount of the net cash
outflows of the U.S. consolidated
subsidiary as of the 30th calendar day
after the calculation date, as calculated
by the [BANK] for the [BANK]’s
minimum liquidity standard under this
part; plus
(B) Any additional amount of assets,
including proceeds from the
monetization of assets, that would be
available for transfer to the top-tier
[BANK] during times of stress without

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statutory, regulatory, contractual, or
supervisory restrictions, including
sections 23A and 23B of the Federal
Reserve Act (12 U.S.C. 371c and 12
U.S.C. 371c–1) and Regulation W (12
CFR part 223);
(4) For HQLA held by a consolidated
subsidiary of the [BANK] that is
organized under the laws of a foreign
jurisdiction, the [BANK] may include
the eligible HQLA of the consolidated
subsidiary organized under the laws of
a foreign jurisdiction in its HQLA
amount up to:
(i) The amount of net cash outflows of
the consolidated subsidiary as of the
30th calendar day after the calculation
date, as calculated by the [BANK] for
the [BANK]’s minimum liquidity
standard under this part; plus
(ii) Any additional amount of assets
that are available for transfer to the toptier [BANK] during times of stress
without statutory, regulatory,
contractual, or supervisory restrictions;
(5) The [BANK] must not include as
eligible HQLA any assets, or HQLA
resulting from transactions involving an
asset that the [BANK] received with
rehypothecation rights, if the
counterparty that provided the asset or
the beneficial owner of the asset has a
contractual right to withdraw the assets
without an obligation to pay more than
de minimis remuneration at any time
during the 30 calendar days following
the calculation date; and
(6) The [BANK] has not designated
the assets to cover operational costs.
(c) Maintenance of U.S. eligible
HQLA. A [BANK] is generally expected
to maintain as eligible HQLA an amount
and type of eligible HQLA in the United
States that is sufficient to meet its total
net cash outflow amount in the United
States under subpart D of this part.
Subpart D—Total Net Cash Outflow
§ l.30

Total net cash outflow amount.

(a) Calculation of total net cash
outflow amount. As of the calculation
date, a [BANK]’s total net cash outflow
amount equals:
(1) The sum of the outflow amounts
calculated under § l.32(a) through (l);
minus
(2) The lesser of:
(i) The sum of the inflow amounts
calculated under § l.33(b) through (g);
and
(ii) 75 percent of the amount
calculated under paragraph (a)(1) of this
section; plus
(3) The maturity mismatch add-on as
calculated under paragraph (b) of this
section.
(b) Calculation of maturity mismatch
add-on. (1) For purposes of this section:

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61531

(i) The net cumulative maturity
outflow amount for any of the 30
calendar days following the calculation
date is equal to the sum of the outflow
amounts for instruments or transactions
identified in § l.32(g), (h)(1), (h)(2),
(h)(5), (j), (k), and (l) that have a
maturity date prior to or on that
calendar day minus the sum of the
inflow amounts for instruments or
transactions identified in § l.33(c), (d),
(e), and (f) that have a maturity date
prior to or on that calendar day.
(ii) The net day 30 cumulative
maturity outflow amount is equal to, as
of the 30th day following the calculation
date, the sum of the outflow amounts for
instruments or transactions identified in
§ l.32(g), (h)(1), (h)(2), (h)(5), (j), (k),
and (l) that have a maturity date 30
calendar days or less from the
calculation date minus the sum of the
inflow amounts for instruments or
transactions identified in § l.33(c), (d),
(e), and (f) that have a maturity date 30
calendar days or less from the
calculation date.
(2) As of the calculation date, a
[BANK]’s maturity mismatch add-on is
equal to:
(i) The greater of:
(A) 0; and
(B) The largest net cumulative
maturity outflow amount as calculated
under paragraph (b)(1)(i) of this section
for any of the 30 calendar days
following the calculation date; minus
(ii) The greater of:
(A) 0; and
(B) The net day 30 cumulative
maturity outflow amount as calculated
under paragraph (b)(1)(ii) of this section.
(3) Other than the transactions
identified in § l.32(h)(2), (h)(5), or (j) or
§ l.33(d) or (f), the maturity of which
is determined under § l.31(a),
transactions that have no maturity date
are not included in the calculation of
the maturity mismatch add-on.
§ l.31

Determining maturity.

(a) For purposes of calculating its
liquidity coverage ratio and the
components thereof under this subpart,
a [BANK] shall assume an asset or
transaction matures:
(1) With respect to an instrument or
transaction subject to § l.32, on the
earliest possible contractual maturity
date or the earliest possible date the
transaction could occur, taking into
account any option that could accelerate
the maturity date or the date of the
transaction as follows:
(i) If an investor or funds provider has
an option that would reduce the
maturity, the [BANK] must assume that
the investor or funds provider will

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exercise the option at the earliest
possible date;
(ii) If an investor or funds provider
has an option that would extend the
maturity, the [BANK] must assume that
the investor or funds provider will not
exercise the option to extend the
maturity;
(iii) If the [BANK] has an option that
would reduce the maturity of an
obligation, the [BANK] must assume
that the [BANK] will exercise the option
at the earliest possible date, except if
either of the following criteria are
satisfied, in which case the maturity of
the obligation for purposes of this part
will be the original maturity date at
issuance:
(A) The original maturity of the
obligation is greater than one year and
the option does not go into effect for a
period of 180 days following the
issuance of the instrument; or
(B) The counterparty is a sovereign
entity, a U.S. government-sponsored
enterprise, or a public sector entity.
(iv) If the [BANK] has an option that
would extend the maturity of an
obligation it issued, the [BANK] must
assume the [BANK] will not exercise
that option to extend the maturity; and
(v) If an option is subject to a
contractually defined notice period, the
[BANK] must determine the earliest
possible contractual maturity date
regardless of the notice period.
(2) With respect to an instrument or
transaction subject to § l.33, on the
latest possible contractual maturity date
or the latest possible date the
transaction could occur, taking into
account any option that could extend
the maturity date or the date of the
transaction as follows:
(i) If the borrower has an option that
would extend the maturity, the [BANK]
must assume that the borrower will
exercise the option to extend the
maturity to the latest possible date;
(ii) If the borrower has an option that
would reduce the maturity, the [BANK]
must assume that the borrower will not
exercise the option to reduce the
maturity;
(iii) If the [BANK] has an option that
would reduce the maturity of an
instrument or transaction, the [BANK]
must assume the [BANK] will not
exercise the option to reduce the
maturity;
(iv) If the [BANK] has an option that
would extend the maturity of an
instrument or transaction, the [BANK]
must assume the [BANK] will exercise
the option to extend the maturity to the
latest possible date; and
(v) If an option is subject to a
contractually defined notice period, the
[BANK] must determine the latest

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possible contractual maturity date based
on the borrower using the entire notice
period.
(3) With respect to a transaction
subject to § l.33(f)(1)(iii) through (vii)
(secured lending transactions) or § l
.33(f)(2)(ii) through (x) (asset
exchanges), to the extent the transaction
is secured by collateral that has been
pledged in connection with either a
secured funding transaction or asset
exchange that has a remaining maturity
of 30 calendar days or less as of the
calculation date, the maturity date is the
later of the maturity date determined
under paragraph (a)(2) of this section for
the secured lending transaction or asset
exchange or the maturity date
determined under paragraph (a)(1) of
this section for the secured funding
transaction or asset exchange for which
the collateral has been pledged.
(4) With respect to a transaction that
has no maturity date, is not an
operational deposit, and is subject to the
provisions of § l.32(h)(2), (h)(5), (j), or
(k) or § l.33(d) or (f), the maturity date
is the first calendar day after the
calculation date. Any other transaction
that has no maturity date and is subject
to the provisions of § l.32 must be
considered to mature within 30 calendar
days of the calculation date.
(5) With respect to a transaction
subject to the provisions of § l.33(g), on
the date of the next scheduled
calculation of the amount required
under applicable legal requirements for
the protection of customer assets with
respect to each broker-dealer segregated
account, in accordance with the
[BANK]’s normal frequency of
recalculating such requirements.
(b) [Reserved]
§ l.32

Outflow amounts.

(a) Retail funding outflow amount. A
[BANK]’s retail funding outflow amount
as of the calculation date includes
(regardless of maturity or
collateralization):
(1) 3 percent of all stable retail
deposits held at the [BANK];
(2) 10 percent of all other retail
deposits held at the [BANK];
(3) 20 percent of all deposits placed
at the [BANK] by a third party on behalf
of a retail customer or counterparty that
are not brokered deposits, where the
retail customer or counterparty owns
the account and the entire amount is
covered by deposit insurance;
(4) 40 percent of all deposits placed
at the [BANK] by a third party on behalf
of a retail customer or counterparty that
are not brokered deposits, where the
retail customer or counterparty owns
the account and where less than the

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entire amount is covered by deposit
insurance; and
(5) 40 percent of all funding from a
retail customer or counterparty that is
not:
(i) A retail deposit;
(ii) A brokered deposit provided by a
retail customer or counterparty; or
(iii) A debt instrument issued by the
[BANK] that is owned by a retail
customer or counterparty (see paragraph
(h)(2)(ii) of this section).
(b) Structured transaction outflow
amount. If the [BANK] is a sponsor of
a structured transaction where the
issuing entity is not consolidated on the
[BANK]’s balance sheet under GAAP,
the structured transaction outflow
amount for each such structured
transaction as of the calculation date is
the greater of:
(1) 100 percent of the amount of all
debt obligations of the issuing entity
that mature 30 calendar days or less
from such calculation date and all
commitments made by the issuing entity
to purchase assets within 30 calendar
days or less from such calculation date;
and
(2) The maximum contractual amount
of funding the [BANK] may be required
to provide to the issuing entity 30
calendar days or less from such
calculation date through a liquidity
facility, a return or repurchase of assets
from the issuing entity, or other funding
agreement.
(c) Net derivative cash outflow
amount. The net derivative cash outflow
amount as of the calculation date is the
sum of the net derivative cash outflow
amount for each counterparty. The net
derivative cash outflow amount does
not include forward sales of mortgage
loans and any derivatives that are
mortgage commitments subject to
paragraph (d) of this section. The net
derivative cash outflow amount for a
counterparty is the sum of:
(1) The amount, if greater than zero,
of contractual payments and collateral
that the [BANK] will make or deliver to
the counterparty 30 calendar days or
less from the calculation date under
derivative transactions other than
transactions described in paragraph
(c)(2) of this section, less the contractual
payments and collateral that the [BANK]
will receive from the counterparty 30
calendar days or less from the
calculation date under derivative
transactions other than transactions
described in paragraph (c)(2) of this
section, provided that the derivative
transactions are subject to a qualifying
master netting agreement; and
(2) The amount, if greater than zero,
of contractual principal payments that
the [BANK] will make to the

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counterparty 30 calendar days or less
from the calculation date under foreign
currency exchange derivative
transactions that result in the full
exchange of contractual cash principal
payments in different currencies within
the same business day, less the
contractual principal payments that the
[BANK] will receive from the
counterparty 30 calendar days or less
from the calculation date under foreign
currency exchange derivative
transactions that result in the full
exchange of contractual cash principal
payments in different currencies within
the same business day.
(d) Mortgage commitment outflow
amount. The mortgage commitment
outflow amount as of a calculation date
is 10 percent of the amount of funds the
[BANK] has contractually committed for
its own origination of retail mortgages
that can be drawn upon 30 calendar
days or less from such calculation date.
(e) Commitment outflow amount. (1)
A [BANK]’s commitment outflow
amount as of the calculation date
includes:
(i) Zero percent of the undrawn
amount of all committed credit and
liquidity facilities extended by a
[BANK] that is a depository institution
to an affiliated depository institution
that is subject to a minimum liquidity
standard under this part;
(ii) 5 percent of the undrawn amount
of all committed credit and liquidity
facilities extended by the [BANK] to
retail customers or counterparties;
(iii) 10 percent of the undrawn
amount of all committed credit facilities
extended by the [BANK] to a wholesale
customer or counterparty that is not a
financial sector entity or a consolidated
subsidiary thereof, including a special
purpose entity (other than those
described in paragraph (e)(1)(viii) of this
section) that is a consolidated
subsidiary of such wholesale customer
or counterparty;
(iv) 30 percent of the undrawn
amount of all committed liquidity
facilities extended by the [BANK] to a
wholesale customer or counterparty that
is not a financial sector entity or a
consolidated subsidiary thereof,
including a special purpose entity (other
than those described in paragraph
(e)(1)(viii) of this section) that is a
consolidated subsidiary of such
wholesale customer or counterparty;
(v) 50 percent of the undrawn amount
of all committed credit and liquidity
facilities extended by the [BANK] to
depository institutions, depository
institution holding companies, and
foreign banks, but excluding
commitments described in paragraph
(e)(1)(i) of this section;

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(vi) 40 percent of the undrawn
amount of all committed credit facilities
extended by the [BANK] to a financial
sector entity or a consolidated
subsidiary thereof, including a special
purpose entity (other than those
described in paragraph (e)(1)(viii) of this
section) that is a consolidated
subsidiary of a financial sector entity,
but excluding other commitments
described in paragraph (e)(1)(i) or (v) of
this section;
(vii) 100 percent of the undrawn
amount of all committed liquidity
facilities extended by the [BANK] to a
financial sector entity or a consolidated
subsidiary thereof, including a special
purpose entity (other than those
described in paragraph (e)(1)(viii) of this
section) that is a consolidated
subsidiary of a financial sector entity,
but excluding other commitments
described in paragraph (e)(1)(i) or (v) of
this section and liquidity facilities
included in paragraph (b)(2) of this
section;
(viii) 100 percent of the undrawn
amount of all committed credit and
liquidity facilities extended to a special
purpose entity that issues or has issued
commercial paper or securities (other
than equity securities issued to a
company of which the special purpose
entity is a consolidated subsidiary) to
finance its purchases or operations, and
excluding liquidity facilities included in
paragraph (b)(2) of this section; and
(ix) 100 percent of the undrawn
amount of all other committed credit or
liquidity facilities extended by the
[BANK].
(2) For the purposes of this paragraph
(e), the undrawn amount of a committed
credit facility or committed liquidity
facility is the entire unused amount of
the facility that could be drawn upon
within 30 calendar days of the
calculation date under the governing
agreement, less the amount of level 1
liquid assets and the amount of level 2A
liquid assets securing the facility.
(3) For the purposes of this paragraph
(e), the amount of level 1 liquid assets
and level 2A liquid assets securing a
committed credit or liquidity facility is
the fair value of level 1 liquid assets and
85 percent of the fair value of level 2A
liquid assets that are required to be
pledged as collateral by the
counterparty to secure the facility,
provided that:
(i) The assets pledged upon a draw on
the facility would be eligible HQLA; and
(ii) The [BANK] has not included the
assets as eligible HQLA under subpart C
of this part as of the calculation date.
(f) Collateral outflow amount. The
collateral outflow amount as of the
calculation date includes:

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61533

(1) Changes in financial condition.
100 percent of all additional amounts of
collateral the [BANK] could be
contractually required to pledge or to
fund under the terms of any transaction
as a result of a change in the [BANK]’s
financial condition;
(2) Derivative collateral potential
valuation changes. 20 percent of the fair
value of any collateral securing a
derivative transaction pledged to a
counterparty by the [BANK] that is not
a level 1 liquid asset;
(3) Potential derivative valuation
changes. The absolute value of the
largest 30-consecutive calendar day
cumulative net mark-to-market
collateral outflow or inflow realized
during the preceding 24 months
resulting from derivative transaction
valuation changes;
(4) Excess collateral. 100 percent of
the fair value of collateral that:
(i) The [BANK] could be required by
contract to return to a counterparty
because the collateral pledged to the
[BANK] exceeds the current collateral
requirement of the counterparty under
the governing contract;
(ii) Is not segregated from the
[BANK]’s other assets such that it
cannot be rehypothecated; and
(iii) Is not already excluded as eligible
HQLA by the [BANK] under § l
.22(b)(5);
(5) Contractually required collateral.
100 percent of the fair value of collateral
that the [BANK] is contractually
required to pledge to a counterparty
and, as of such calculation date, the
[BANK] has not yet pledged;
(6) Collateral substitution. (i) Zero
percent of the fair value of collateral
pledged to the [BANK] by a
counterparty where the collateral
qualifies as level 1 liquid assets and
eligible HQLA and where, under the
contract governing the transaction, the
counterparty may replace the pledged
collateral with other assets that qualify
as level 1 liquid assets, without the
consent of the [BANK];
(ii) 15 percent of the fair value of
collateral pledged to the [BANK] by a
counterparty, where the collateral
qualifies as level 1 liquid assets and
eligible HQLA and where, under the
contract governing the transaction, the
counterparty may replace the pledged
collateral with assets that qualify as
level 2A liquid assets, without the
consent of the [BANK];
(iii) 50 percent of the fair value of
collateral pledged to the [BANK] by a
counterparty where the collateral
qualifies as level 1 liquid assets and
eligible HQLA and where under, the
contract governing the transaction, the
counterparty may replace the pledged

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collateral with assets that qualify as
level 2B liquid assets, without the
consent of the [BANK];
(iv) 100 percent of the fair value of
collateral pledged to the [BANK] by a
counterparty where the collateral
qualifies as level 1 liquid assets and
eligible HQLA and where, under the
contract governing the transaction, the
counterparty may replace the pledged
collateral with assets that do not qualify
as HQLA, without the consent of the
[BANK];
(v) Zero percent of the fair value of
collateral pledged to the [BANK] by a
counterparty where the collateral
qualifies as level 2A liquid assets and
eligible HQLA and where, under the
contract governing the transaction, the
counterparty may replace the pledged
collateral with assets that qualify as
level 1 or level 2A liquid assets, without
the consent of the [BANK];
(vi) 35 percent of the fair value of
collateral pledged to the [BANK] by a
counterparty where the collateral
qualifies as level 2A liquid assets and
eligible HQLA and where, under the
contract governing the transaction, the
counterparty may replace the pledged
collateral with assets that qualify as
level 2B liquid assets, without the
consent of the [BANK];
(vii) 85 percent of the fair value of
collateral pledged to the [BANK] by a
counterparty where the collateral
qualifies as level 2A liquid assets and
eligible HQLA and where, under the
contract governing the transaction, the
counterparty may replace the pledged
collateral with assets that do not qualify
as HQLA, without the consent of the
[BANK];
(viii) Zero percent of the fair value of
collateral pledged to the [BANK] by a
counterparty where the collateral
qualifies as level 2B liquid assets and
eligible HQLA and where, under the
contract governing the transaction, the
counterparty may replace the pledged
collateral with other assets that qualify
as HQLA, without the consent of the
[BANK]; and
(ix) 50 percent of the fair value of
collateral pledged to the [BANK] by a
counterparty where the collateral
qualifies as level 2B liquid assets and
eligible HQLA and where, under the
contract governing the transaction, the
counterparty may replace the pledged
collateral with assets that do not qualify
as HQLA, without the consent of the
[BANK].
(g) Brokered deposit outflow amount
for retail customers or counterparties.
The brokered deposit outflow amount
for retail customers or counterparties as
of the calculation date includes:

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(1) 100 percent of all brokered
deposits at the [BANK] provided by a
retail customer or counterparty that are
not described in paragraphs (g)(5)
through (9) of this section and which
mature 30 calendar days or less from the
calculation date;
(2) 10 percent of all brokered deposits
at the [BANK] provided by a retail
customer or counterparty that are not
described in paragraphs (g)(5) through
(9) of this section and which mature
later than 30 calendar days from the
calculation date;
(3) 20 percent of all brokered deposits
at the [BANK] provided by a retail
customer or counterparty that are not
described in paragraphs (g)(5) through
(9) of this section and which are held in
a transactional account with no
contractual maturity date, where the
entire amount is covered by deposit
insurance;
(4) 40 percent of all brokered deposits
at the [BANK] provided by a retail
customer or counterparty that are not
described in paragraphs (g)(5) through
(9) of this section and which are held in
a transactional account with no
contractual maturity date, where less
than the entire amount is covered by
deposit insurance;
(5) 10 percent of all reciprocal
brokered deposits at the [BANK]
provided by a retail customer or
counterparty, where the entire amount
is covered by deposit insurance;
(6) 25 percent of all reciprocal
brokered deposits at the [BANK]
provided by a retail customer or
counterparty, where less than the entire
amount is covered by deposit insurance;
(7) 10 percent of all brokered sweep
deposits at the [BANK] provided by a
retail customer or counterparty:
(i) That are deposited in accordance
with a contract between the retail
customer or counterparty and the
[BANK], a controlled subsidiary of the
[BANK], or a company that is a
controlled subsidiary of the same toptier company of which the [BANK] is a
controlled subsidiary; and
(ii) Where the entire amount of the
deposits is covered by deposit
insurance;
(8) 25 percent of all brokered sweep
deposits at the [BANK] provided by a
retail customer or counterparty:
(i) That are not deposited in
accordance with a contract between the
retail customer or counterparty and the
[BANK], a controlled subsidiary of the
[BANK], or a company that is a
controlled subsidiary of the same toptier company of which the [BANK] is a
controlled subsidiary; and

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(ii) Where the entire amount of the
deposits is covered by deposit
insurance; and
(9) 40 percent of all brokered sweep
deposits at the [BANK] provided by a
retail customer or counterparty where
less than the entire amount of the
deposit balance is covered by deposit
insurance.
(h) Unsecured wholesale funding
outflow amount. A [BANK]’s unsecured
wholesale funding outflow amount, for
all transactions that mature within 30
calendar days or less of the calculation
date, as of the calculation date includes:
(1) For unsecured wholesale funding
that is not an operational deposit and is
not provided by a financial sector entity
or consolidated subsidiary of a financial
sector entity:
(i) 20 percent of all such funding,
where the entire amount is covered by
deposit insurance and the funding is not
a brokered deposit;
(ii) 40 percent of all such funding,
where:
(A) Less than the entire amount is
covered by deposit insurance; or
(B) The funding is a brokered deposit;
(2) 100 percent of all unsecured
wholesale funding that is not an
operational deposit and is not included
in paragraph (h)(1) of this section,
including:
(i) Funding provided by a company
that is a consolidated subsidiary of the
same top-tier company of which the
[BANK] is a consolidated subsidiary;
and
(ii) Debt instruments issued by the
[BANK], including such instruments
owned by retail customers or
counterparties;
(3) 5 percent of all operational
deposits, other than operational
deposits that are held in escrow
accounts, where the entire deposit
amount is covered by deposit insurance;
(4) 25 percent of all operational
deposits not included in paragraph
(h)(3) of this section; and
(5) 100 percent of all unsecured
wholesale funding that is not otherwise
described in this paragraph (h).
(i) Debt security buyback outflow
amount. A [BANK]’s debt security
buyback outflow amount for debt
securities issued by the [BANK] that
mature more than 30 calendar days after
the calculation date and for which the
[BANK] or a consolidated subsidiary of
the [BANK] is the primary market maker
in such debt securities includes:
(1) 3 percent of all such debt
securities that are not structured
securities; and
(2) 5 percent of all such debt
securities that are structured securities.
(j) Secured funding and asset
exchange outflow amount. (1) A

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[BANK]’s secured funding outflow
amount, for all transactions that mature
within 30 calendar days or less of the
calculation date, as of the calculation
date includes:
(i) Zero percent of all funds the
[BANK] must pay pursuant to secured
funding transactions, to the extent that
the funds are secured by level 1 liquid
assets;
(ii) 15 percent of all funds the [BANK]
must pay pursuant to secured funding
transactions, to the extent that the funds
are secured by level 2A liquid assets;
(iii) 25 percent of all funds the
[BANK] must pay pursuant to secured
funding transactions with sovereign
entities, multilateral development
banks, or U.S. government-sponsored
enterprises that are assigned a risk
weight of 20 percent under subpart D of
[AGENCY CAPITAL REGULATION], to
the extent that the funds are not secured
by level 1 or level 2A liquid assets;
(iv) 50 percent of all funds the
[BANK] must pay pursuant to secured
funding transactions, to the extent that
the funds are secured by level 2B liquid
assets;
(v) 50 percent of all funds received
from secured funding transactions that
are customer short positions where the
customer short positions are covered by
other customers’ collateral and the
collateral does not consist of HQLA; and
(vi) 100 percent of all other funds the
[BANK] must pay pursuant to secured
funding transactions, to the extent that
the funds are secured by assets that are
not HQLA.
(2) If an outflow rate specified in
paragraph (j)(1) of this section for a
secured funding transaction is greater
than the outflow rate that the [BANK] is
required to apply under paragraph (h) of
this section to an unsecured wholesale
funding transaction that is not an
operational deposit with the same
counterparty, the [BANK] may apply to
the secured funding transaction the
outflow rate that applies to an
unsecured wholesale funding
transaction that is not an operational
deposit with that counterparty, except
in the case of:
(i) Secured funding transactions that
are secured by collateral that was
received by the [BANK] under a secured
lending transaction or asset exchange, in
which case the [BANK] must apply the
outflow rate specified in paragraph (j)(1)
of this section for the secured funding
transaction; and
(ii) Collateralized deposits that are
operational deposits, in which case the
[BANK] may apply to the operational
deposit amount, as calculated in
accordance with § l.4(b), the
operational deposit outflow rate

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specified in paragraph (h)(3) or (4) of
this section, as applicable, if such
outflow rate is lower than the outflow
rate specified in paragraph (j)(1) of this
section.
(3) A [BANK]’s asset exchange
outflow amount, for all transactions that
mature within 30 calendar days or less
of the calculation date, as of the
calculation date includes:
(i) Zero percent of the fair value of the
level 1 liquid assets the [BANK] must
post to a counterparty pursuant to asset
exchanges, not described in paragraphs
(j)(3)(x) through (xiii) of this section,
where the [BANK] will receive level 1
liquid assets from the asset exchange
counterparty;
(ii) 15 percent of the fair value of the
level 1 liquid assets the [BANK] must
post to a counterparty pursuant to asset
exchanges, not described in paragraphs
(j)(3)(x) through (xiii) of this section,
where the [BANK] will receive level 2A
liquid assets from the asset exchange
counterparty;
(iii) 50 percent of the fair value of the
level 1 liquid assets the [BANK] must
post to a counterparty pursuant to asset
exchanges, not described in paragraphs
(j)(3)(x) through (xiii) of this section,
where the [BANK] will receive level 2B
liquid assets from the asset exchange
counterparty;
(iv) 100 percent of the fair value of the
level 1 liquid assets the [BANK] must
post to a counterparty pursuant to asset
exchanges, not described in paragraphs
(j)(3)(x) through (xiii) of this section,
where the [BANK] will receive assets
that are not HQLA from the asset
exchange counterparty;
(v) Zero percent of the fair value of
the level 2A liquid assets that [BANK]
must post to a counterparty pursuant to
asset exchanges, not described in
paragraphs (j)(3)(x) through (xiii) of this
section, where [BANK] will receive
level 1 or level 2A liquid assets from the
asset exchange counterparty;
(vi) 35 percent of the fair value of the
level 2A liquid assets the [BANK] must
post to a counterparty pursuant to asset
exchanges, not described in paragraphs
(j)(3)(x) through (xiii) of this section,
where the [BANK] will receive level 2B
liquid assets from the asset exchange
counterparty;
(vii) 85 percent of the fair value of the
level 2A liquid assets the [BANK] must
post to a counterparty pursuant to asset
exchanges, not described in paragraphs
(j)(3)(x) through (xiii) of this section,
where the [BANK] will receive assets
that are not HQLA from the asset
exchange counterparty;
(viii) Zero percent of the fair value of
the level 2B liquid assets the [BANK]
must post to a counterparty pursuant to

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61535

asset exchanges, not described in
paragraphs (j)(3)(x) through (xiii) of this
section, where the [BANK] will receive
HQLA from the asset exchange
counterparty; and
(ix) 50 percent of the fair value of the
level 2B liquid assets the [BANK] must
post to a counterparty pursuant to asset
exchanges, not described in paragraphs
(j)(3)(x) through (xiii) of this section,
where the [BANK] will receive assets
that are not HQLA from the asset
exchange counterparty;
(x) Zero percent of the fair value of
the level 1 liquid assets the [BANK] will
receive from a counterparty pursuant to
an asset exchange where the [BANK]
has rehypothecated the assets posted by
the asset exchange counterparty, and, as
of the calculation date, the assets will
not be returned to the [BANK] within 30
calendar days;
(xi) 15 percent of the fair value of the
level 2A liquid assets the [BANK] will
receive from a counterparty pursuant to
an asset exchange where the [BANK]
has rehypothecated the assets posted by
the asset exchange counterparty, and, as
of the calculation date, the assets will
not be returned to the [BANK] within 30
calendar days;
(xii) 50 percent of the fair value of the
level 2B liquid assets the [BANK] will
receive from a counterparty pursuant to
an asset exchange where the [BANK]
has rehypothecated the assets posted by
the asset exchange counterparty, and, as
of the calculation date, the assets will
not be returned to the [BANK] within 30
calendar days; and
(xiii) 100 percent of the fair value of
the non-HQLA the [BANK] will receive
from a counterparty pursuant to an asset
exchange where the [BANK] has
rehypothecated the assets posted by the
asset exchange counterparty, and, as of
the calculation date, the assets will not
be returned to the [BANK] within 30
calendar days.
(k) Foreign central bank borrowing
outflow amount. A [BANK]’s foreign
central bank borrowing outflow amount
is, in a foreign jurisdiction where the
[BANK] has borrowed from the
jurisdiction’s central bank, the outflow
amount assigned to borrowings from
central banks in a minimum liquidity
standard established in that jurisdiction.
If the foreign jurisdiction has not
specified a central bank borrowing
outflow amount in a minimum liquidity
standard, the foreign central bank
borrowing outflow amount must be
calculated in accordance with paragraph
(j) of this section.
(l) Other contractual outflow amount.
A [BANK]’s other contractual outflow
amount is 100 percent of funding or
amounts, with the exception of

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operating expenses of the [BANK] (such
as rents, salaries, utilities, and other
similar payments), payable by the
[BANK] to counterparties under legally
binding agreements that are not
otherwise specified in this section.
(m) Excluded amounts for intragroup
transactions. The outflow amounts set
forth in this section do not include
amounts arising out of transactions
between:
(1) The [BANK] and a consolidated
subsidiary of the [BANK]; or
(2) A consolidated subsidiary of the
[BANK] and another consolidated
subsidiary of the [BANK].

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§ l.33

Inflow amounts.

(a) The inflows in paragraphs (b)
through (g) of this section do not
include:
(1) Amounts the [BANK] holds in
operational deposits at other regulated
financial companies;
(2) Amounts the [BANK] expects, or is
contractually entitled to receive, 30
calendar days or less from the
calculation date due to forward sales of
mortgage loans and any derivatives that
are mortgage commitments subject to
§ l.32(d);
(3) The amount of any credit or
liquidity facilities extended to the
[BANK];
(4) The amount of any asset that is
eligible HQLA and any amounts payable
to the [BANK] with respect to that asset;
(5) Any amounts payable to the
[BANK] from an obligation of a
customer or counterparty that is a
nonperforming asset as of the
calculation date or that the [BANK] has
reason to expect will become a
nonperforming exposure 30 calendar
days or less from the calculation date;
and
(6) Amounts payable to the [BANK]
with respect to any transaction that has
no contractual maturity date or that
matures after 30 calendar days of the
calculation date (as determined by § l
.31).
(b) Net derivative cash inflow amount.
The net derivative cash inflow amount
as of the calculation date is the sum of
the net derivative cash inflow amount
for each counterparty. The net
derivative cash inflow amount does not
include amounts excluded from inflows
under paragraph (a)(2) of this section.
The net derivative cash inflow amount
for a counterparty is the sum of:
(1) The amount, if greater than zero,
of contractual payments and collateral
that the [BANK] will receive from the
counterparty 30 calendar days or less
from the calculation date under
derivative transactions other than
transactions described in paragraph

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(b)(2) of this section, less the contractual
payments and collateral that the [BANK]
will make or deliver to the counterparty
30 calendar days or less from the
calculation date under derivative
transactions other than transactions
described in paragraph (b)(2) of this
section, provided that the derivative
transactions are subject to a qualifying
master netting agreement; and
(2) The amount, if greater than zero,
of contractual principal payments that
the [BANK] will receive from the
counterparty 30 calendar days or less
from the calculation date under foreign
currency exchange derivative
transactions that result in the full
exchange of contractual cash principal
payments in different currencies within
the same business day, less the
contractual principal payments that the
[BANK] will make to the counterparty
30 calendar days or less from the
calculation date under foreign currency
exchange derivative transactions that
result in the full exchange of contractual
cash principal payments in different
currencies within the same business
day.
(c) Retail cash inflow amount. The
retail cash inflow amount as of the
calculation date includes 50 percent of
all payments contractually payable to
the [BANK] from retail customers or
counterparties.
(d) Unsecured wholesale cash inflow
amount. The unsecured wholesale cash
inflow amount as of the calculation date
includes:
(1) 100 percent of all payments
contractually payable to the [BANK]
from financial sector entities, or from a
consolidated subsidiary thereof, or
central banks; and
(2) 50 percent of all payments
contractually payable to the [BANK]
from wholesale customers or
counterparties that are not financial
sector entities or consolidated
subsidiaries thereof, provided that, with
respect to revolving credit facilities, the
amount of the existing loan is not
included in the unsecured wholesale
cash inflow amount and the remaining
undrawn balance is included in the
outflow amount under § l.32(e)(1).
(e) Securities cash inflow amount. The
securities cash inflow amount as of the
calculation date includes 100 percent of
all contractual payments due to the
[BANK] on securities it owns that are
not eligible HQLA.
(f) Secured lending and asset
exchange cash inflow amount. (1) A
[BANK]’s secured lending cash inflow
amount as of the calculation date
includes:
(i) Zero percent of all contractual
payments due to the [BANK] pursuant

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to secured lending transactions,
including margin loans extended to
customers, to the extent that the
payments are secured by collateral that
has been rehypothecated in a
transaction and, as of the calculation
date, will not be returned to the [BANK]
within 30 calendar days;
(ii) 100 percent of all contractual
payments due to the [BANK] pursuant
to secured lending transactions not
described in paragraph (f)(1)(vii) of this
section, to the extent that the payments
are secured by assets that are not
eligible HQLA, but are still held by the
[BANK] and are available for immediate
return to the counterparty at any time;
(iii) Zero percent of all contractual
payments due to the [BANK] pursuant
to secured lending transactions not
described in paragraphs (f)(1)(i) or (ii) of
this section, to the extent that the
payments are secured by level 1 liquid
assets;
(iv) 15 percent of all contractual
payments due to the [BANK] pursuant
to secured lending transactions not
described in paragraphs (f)(1)(i) or (ii) of
this section, to the extent that the
payments are secured by level 2A liquid
assets;
(v) 50 percent of all contractual
payments due to the [BANK] pursuant
to secured lending transactions not
described in paragraphs (f)(1)(i) or (ii) of
this section, to the extent that the
payments are secured by level 2B liquid
assets;
(vi) 100 percent of all contractual
payments due to the [BANK] pursuant
to secured lending transactions not
described in paragraphs (f)(1)(i), (ii), or
(vii) of this section, to the extent that the
payments are secured by assets that are
not HQLA; and
(vii) 50 percent of all contractual
payments due to the [BANK] pursuant
to collateralized margin loans extended
to customers, not described in
paragraph (f)(1)(i) of this section,
provided that the loans are secured by
assets that are not HQLA.
(2) A [BANK]’s asset exchange inflow
amount as of the calculation date
includes:
(i) Zero percent of the fair value of
assets the [BANK] will receive from a
counterparty pursuant to asset
exchanges, to the extent that the asset
received by the [BANK] from the
counterparty has been rehypothecated
in a transaction and, as of the
calculation date, will not be returned to
the [BANK] within 30 calendar days;
(ii) Zero percent of the fair value of
level 1 liquid assets the [BANK] will
receive from a counterparty pursuant to
asset exchanges, not described in
paragraph (f)(2)(i) of this section, where

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the [BANK] must post level 1 liquid
assets to the asset exchange
counterparty;
(iii) 15 percent of the fair value of
level 1 liquid assets the [BANK] will
receive from a counterparty pursuant to
asset exchanges, not described in
paragraph (f)(2)(i) of this section, where
the [BANK] must post level 2A liquid
assets to the asset exchange
counterparty;
(iv) 50 percent of the fair value of
level 1 liquid assets the [BANK] will
receive from counterparty pursuant to
asset exchanges, not described in
paragraph (f)(2)(i) of this section, where
the [BANK] must post level 2B liquid
assets to the asset exchange
counterparty;
(v) 100 percent of the fair value of
level 1 liquid assets the [BANK] will
receive from a counterparty pursuant to
asset exchanges, not described in
paragraph (f)(2)(i) of this section, where
the [BANK] must post assets that are not
HQLA to the asset exchange
counterparty;
(vi) Zero percent of the fair value of
level 2A liquid assets the [BANK] will
receive from a counterparty pursuant to
asset exchanges, not described in
paragraph (f)(2)(i) of this section, where
the [BANK] must post level 1 or level
2A liquid assets to the asset exchange
counterparty;
(vii) 35 percent of the fair value of
level 2A liquid assets the [BANK] will
receive from a counterparty pursuant to
asset exchanges, not described in
paragraph (f)(2)(i) of this section, where
the [BANK] must post level 2B liquid
assets to the asset exchange
counterparty;
(viii) 85 percent of the fair value of
level 2A liquid assets the [BANK] will
receive from a counterparty pursuant to
asset exchanges, not described in
paragraph (f)(2)(i) of this section, where
the [BANK] must post assets that are not
HQLA to the asset exchange
counterparty;
(ix) Zero percent of the fair value of
level 2B liquid assets the [BANK] will
receive from a counterparty pursuant to
asset exchanges, not described in
paragraph (f)(2)(i) of this section, where
the [BANK] must post assets that are
HQLA to the asset exchange
counterparty; and
(x) 50 percent of the fair value of level
2B liquid assets the [BANK] will receive
from a counterparty pursuant to asset
exchanges, not described in paragraph
(f)(2)(i) of this section, where the
[BANK] must post assets that are not
HQLA to the asset exchange
counterparty.
(g) Broker-dealer segregated account
inflow amount. A [BANK]’s broker-

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dealer segregated account inflow
amount is the fair value of all assets
released from broker-dealer segregated
accounts maintained in accordance with
statutory or regulatory requirements for
the protection of customer trading
assets, provided that the calculation of
the broker-dealer segregated account
inflow amount, for any transaction
affecting the calculation of the
segregated balance (as required by
applicable law), shall be consistent with
the following:
(1) In calculating the broker-dealer
segregated account inflow amount, the
[BANK] must calculate the fair value of
the required balance of the customer
reserve account as of 30 calendar days
from the calculation date by assuming
that customer cash and collateral
positions have changed consistent with
the outflow and inflow calculations
required under §§ l.32 and l.33.
(2) If the fair value of the required
balance of the customer reserve account
as of 30 calendar days from the
calculation date, as calculated
consistent with the outflow and inflow
calculations required under §§ l.32 and
l.33, is less than the fair value of the
required balance as of the calculation
date, the difference is the segregated
account inflow amount.
(3) If the fair value of the required
balance of the customer reserve account
as of 30 calendar days from the
calculation date, as calculated
consistent with the outflow and inflow
calculations required under §§ l.32 and
l.33, is more than the fair value of the
required balance as of the calculation
date, the segregated account inflow
amount is zero.
(h) Other cash inflow amounts. A
[BANK]’s inflow amount as of the
calculation date includes zero percent of
other cash inflow amounts not included
in paragraphs (b) through (g) of this
section.
(i) Excluded amounts for intragroup
transactions. The inflow amounts set
forth in this section do not include
amounts arising out of transactions
between:
(1) The [BANK] and a consolidated
subsidiary of the [BANK]; or
(2) A consolidated subsidiary of the
[BANK] and another consolidated
subsidiary of the [BANK].
Subpart E—Liquidity Coverage
Shortfall
§ l.40 Liquidity coverage shortfall:
Supervisory framework.

(a) Notification requirements. A
[BANK] must notify the [AGENCY] on
any business day when its liquidity
coverage ratio is calculated to be less

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61537

than the minimum requirement in § l
.10.
(b) Liquidity plan. (1) For the period
during which a [BANK] must calculate
a liquidity coverage ratio on the last
business day of each applicable
calendar month under subpart F of this
part, if the [BANK]’s liquidity coverage
ratio is below the minimum requirement
in § l.10 for any calculation date that
is the last business day of the applicable
calendar month, or if the [AGENCY] has
determined that the [BANK] is
otherwise materially noncompliant with
the requirements of this part, the
[BANK] must promptly consult with the
[AGENCY] to determine whether the
[BANK] must provide to the [AGENCY]
a plan for achieving compliance with
the minimum liquidity requirement in
§ l.10 and all other requirements of
this part.
(2) For the period during which a
[BANK] must calculate a liquidity
coverage ratio each business day under
subpart F of this part, if a [BANK]’s
liquidity coverage ratio is below the
minimum requirement in § l.10 for
three consecutive business days, or if
the [AGENCY] has determined that the
[BANK] is otherwise materially
noncompliant with the requirements of
this part, the [BANK] must promptly
provide to the [AGENCY] a plan for
achieving compliance with the
minimum liquidity requirement in § l
.10 and all other requirements of this
part.
(3) The plan must include, as
applicable:
(i) An assessment of the [BANK]’s
liquidity position;
(ii) The actions the [BANK] has taken
and will take to achieve full compliance
with this part, including:
(A) A plan for adjusting the [BANK]’s
risk profile, risk management, and
funding sources in order to achieve full
compliance with this part; and
(B) A plan for remediating any
operational or management issues that
contributed to noncompliance with this
part;
(iii) An estimated time frame for
achieving full compliance with this
part; and
(iv) A commitment to report to the
[AGENCY] no less than weekly on
progress to achieve compliance in
accordance with the plan until full
compliance with this part is achieved.
(c) Supervisory and enforcement
actions. The [AGENCY] may, at its
discretion, take additional supervisory
or enforcement actions to address
noncompliance with the minimum
liquidity standard and other
requirements of this part.

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Subpart F—Transitions

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§ __.50

Transitions.

(a) Covered depository institution
holding companies with $700 billion or
more in total consolidated assets or $10
trillion or more in assets under custody.
For any depository institution holding
company that has total consolidated
assets equal to $700 billion or more, as
reported on the company’s most recent
Consolidated Financial Statements for
Holding Companies (FR Y–9C), or $10
trillion or more in assets under custody,
as reported on the company’s most
recent Banking Organization Systemic
Risk Report (FR Y–15), and any
depository institution that is a
consolidated subsidiary of such
depository institution holding company
that has total consolidated assets equal
to $10 billion or more, as reported on
the most recent year-end Consolidated
Report of Condition and Income:
(1) Beginning January 1, 2015,
through June 30, 2015, the [BANK] must
calculate and maintain a liquidity
coverage ratio monthly, on each
calculation date that is the last business
day of the applicable calendar month, in
accordance with this part, that is equal
to or greater than 0.80.
(2) Beginning July 1, 2015 through
December 31, 2015, the [BANK] must
calculate and maintain a liquidity
coverage ratio on each calculation date
in accordance with this part that is
equal to or greater than 0.80.
(3) Beginning January 1, 2016,
through December 31, 2016, the [BANK]
must calculate and maintain a liquidity
coverage ratio on each calculation date
in accordance with this part that is
equal to or greater than 0.90.
(4) On January 1, 2017, and thereafter,
the [BANK] must calculate and maintain
a liquidity coverage ratio on each
calculation date that is equal to or
greater than 1.0.
(b) Other [BANK]s. For any [BANK]
subject to a minimum liquidity standard
under this part not described in
paragraph (a) of this section:
(1) Beginning January 1, 2015,
through December 31, 2015, the [BANK]
must calculate and maintain a liquidity
coverage ratio monthly, on each
calculation date that is the last business
day of the applicable calendar month, in
accordance with this part, that is equal
to or greater than 0.80.
(2) Beginning January 1, 2016,
through June 30, 2016, the [BANK] must
calculate and maintain a liquidity
coverage ratio monthly, on each
calculation date that is the last business
day of the applicable calendar month, in
accordance with this part, that is equal
to or greater than 0.90.

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(3) Beginning July 1, 2016, through
December 31, 2016, the [BANK] must
calculate and maintain a liquidity
coverage ratio on each calculation date
in accordance with this part that is
equal to or greater than 0.90.
(4) On January 1, 2017, and thereafter,
the [BANK] must calculate and maintain
a liquidity coverage ratio on each
calculation date that is equal to or
greater than 1.0.
[End of Common Rule Text]
List of Subjects
12 CFR Part 50
Administrative practice and
procedure; Banks, banking; Liquidity;
Reporting and recordkeeping
requirements; Savings associations.
12 CFR Part 249
Administrative practice and
procedure; Banks, banking; Federal
Reserve System; Holding companies;
Liquidity; Reporting and recordkeeping
requirements.
12 CFR Part 329
Administrative practice and
procedure; Banks, banking; Federal
Deposit Insurance Corporation, FDIC;
Liquidity; Reporting and recordkeeping
requirements.
Adoption of Common Rule
The adoption of the common rules by
the agencies, as modified by the agencyspecific text, is set forth below:
Department of the Treasury
Office of the Comptroller of the
Currency
12 CFR Chapter I

Authority and Issuance
For the reasons set forth in the
common preamble, the OCC adds the
text of the common rule as set forth at
the end of the SUPPLEMENTARY
INFORMATION as part 50 of chapter I of
title 12 of the Code of Federal
Regulations and further amends part 50
as follows:
PART 50—LIQUIDITY RISK
MEASUREMENT STANDARDS
1. The authority citation for part 50 is
added to read as follows:

■

Authority: 12 U.S.C. 1 et seq., 93a, 481,
1818, and 1462 et seq.

2. Part 50 is amended by:
a. Removing ‘‘[AGENCY]’’ and adding
‘‘OCC’’ in its place, wherever it appears;
■ b. Removing ‘‘[AGENCY CAPITAL
REGULATION]’’ and adding ‘‘(12 CFR
part 3)’’ in its place, wherever it
appears;
■
■

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c. Removing ‘‘[BANK]’’ and adding
‘‘national bank or Federal savings
association’’ in its place, wherever it
appears;
■ d. Removing ‘‘[BANK]s’’ and adding
‘‘national banks and Federal savings
associations’’ in its place, wherever it
appears;
■ e. Removing ‘‘[BANK]’s’’ and adding
‘‘national bank’s or Federal savings
association’s’’ in its place, wherever it
appears;
■ f. Removing ‘‘[REGULATORY
REPORT]’’ and adding ‘‘Consolidated
Reports of Condition and Income’’ in its
place, wherever it appears; and
■ g. Removing ‘‘[12 CFR 3.404 (OCC), 12
CFR 263.202 (Board), and 12 CFR 324.5
(FDIC)]’’ and adding ‘‘12 CFR 3.404’’ in
its place, wherever it appears.
■ 3. Section 50.1 is amended by:
■ a. Revising paragraph (b)(1)(iii);
■ b. Removing the word ‘‘or’’ at the end
of paragraph (b)(3)(i);
■ c. Removing the period at the end of
paragraph (b)(3)(ii) and adding ‘‘; or’’ in
its place; and
■ d. Adding paragraph (b)(3)(iii).
The addition and revision read as
follows:
■

§ 50.1

Purpose and applicability.

*

*
*
*
*
(b) * * *
(1) * * *
(iii) It is a depository institution that
has total consolidated assets equal to
$10 billion or more, as reported on the
most recent year-end Consolidated
Report of Condition and Income and is
a consolidated subsidiary of one of the
following:
(A) A covered depository institution
holding company that has total
consolidated assets equal to $250 billion
or more, as reported on the most recent
year-end Consolidated Financial
Statements for Holding Companies
reporting form (FR Y–9C), or, if the
covered depository institution holding
company is not required to report on the
FR Y–9C, its estimated total
consolidated assets as of the most recent
year-end, calculated in accordance with
the instructions to the FR Y–9C;
(B) A depository institution that has
total consolidated assets equal to $250
billion or more, as reported on the most
recent year-end Consolidated Report of
Condition and Income; or
(C) A covered depository institution
holding company or depository
institution that has consolidated total
on-balance sheet foreign exposure at the
most recent year-end equal to $10
billion or more (where total on-balance
sheet foreign exposure equals total
cross-border claims less claims with a
head office or guarantor located in

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another country plus redistributed
guaranteed amounts to the country of
the head office or guarantor plus local
country claims on local residents plus
revaluation gains on foreign exchange
and derivative transaction products,
calculated in accordance with the
Federal Financial Institutions
Examination Council (FFIEC) 009
Country Exposure Report); or
*
*
*
*
*
(3) * * *
(iii) A Federal branch or agency as
defined by 12 CFR 28.11.
*
*
*
*
*
Board of Governors of the Federal
Reserve System
12 CFR Chapter II

Authority and Issuance
For the reasons set forth in the
common preamble, the Board adds the
text of the common rule as set forth at
the end of the SUPPLEMENTARY
INFORMATION as part 249 of chapter II of
title 12 of the Code of Federal
Regulations and further amends part
249 as follows:
PART 249—LIQUIDITY RISK
MEASUREMENT STANDARDS
(REGULATION WW)
4. The authority citation for part 249
is added to read as follows:

■

Authority: 12 U.S.C. 248(a), 321–338a,
481–486, 1467a(g)(1), 1818, 1828, 1831p–1,
1831o–1, 1844(b), 5365, 5366, 5368.

5. Revise the heading for part 249 as
set forth above.
■ 6. Part 249 is amended by:
■ a. Removing ‘‘[AGENCY]’’ and adding
‘‘Board’’ in its place wherever it
appears.
■ b. Removing ‘‘[AGENCY CAPITAL
REGULATION]’’ and adding
‘‘Regulation Q (12 CFR part 217)’’ in its
place wherever it appears.
■ c. Removing ‘‘[BANK]’’ and adding
‘‘Board-regulated institution’’ in its
place wherever it appears.
■ d. Removing ‘‘[BANK]s’’ and adding
‘‘Board-regulated institutions’’ in its
place wherever it appears.
■ e. Removing ‘‘[BANK]’s’’ and adding
‘‘Board-regulated institution’s’’ in its
place wherever it appears.
■ f. Removing‘‘[12 CFR 3.404 (OCC), 12
CFR 263.202 (Board), and 12 CFR 324.5
(FDIC)]’’ and adding ‘‘12 CFR 263.202’’
in its place wherever it appears.
■ 7. Amend § 249.1 by:
■ a. Revising paragraph (b)(1)(i);
■ b. Removing the word ‘‘or’’ at the end
of paragraph (b)(1)(iii);
■ c. Redesignating paragraph (b)(1)(iv)
as paragraph (b)(1)(vi);

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■

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d. Adding new paragraphs (b)(1)(iv)
and (v);
■ e. Revising paragraphs (b)(2)(iii) and
(5); and
■ f. Adding new paragraph (c).
The additions and revisions read as
follows:
■

§ 249.1

Purpose and applicability.

*

*
*
*
*
(b) * * *
(1) * * *
(i) It has total consolidated assets
equal to $250 billion or more, as
reported on the most recent year-end (as
applicable):
(A) Consolidated Financial
Statements for Holding Companies
reporting form (FR Y–9C), or, if the
Board-regulated institution is not
required to report on the FR Y–9C, its
estimated total consolidated assets as of
the most recent year end, calculated in
accordance with the instructions to the
FR Y–9C; or
(B) Consolidated Report of Condition
and Income (Call Report);
*
*
*
*
*
(iv) It is a covered nonbank company;
(v) It is a covered depository
institution holding company that meets
the criteria in § 249.60(a) but does not
meet the criteria in paragraphs (b)(1)(i)
or (ii) of this section, and is subject to
complying with the requirements of this
part in accordance with subpart G of
this part; or
*
*
*
*
*
(2) * * *
(iii) A Board-regulated institution that
becomes subject to the minimum
liquidity standard and other
requirements of this part under
paragraph (b)(1)(vi) of this section after
September 30, 2014, must comply with
the requirements of this part subject to
a transition period specified by the
Board.
*
*
*
*
*
(5) In making a determination under
paragraphs (b)(1)(vi) or (4) of this
section, the Board will apply, as
appropriate, notice and response
procedures in the same manner and to
the same extent as the notice and
response procedures set forth in 12 CFR
263.202.
(c) Covered nonbank companies. The
Board will establish a minimum
liquidity standard for a designated
company under this part by rule or
order. In establishing such standard, the
Board will consider the factors set forth
in sections 165(a)(2) and (b)(3) of the
Dodd-Frank Act and may tailor the
application of the requirements of this
part to the designated company based
on the nature, scope, size, scale,

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61539

concentration, interconnectedness, mix
of the activities of the designated
company or any other risk-related factor
that the Board determines is
appropriate.
8. In § 249.3, add definitions for
‘‘Board’’, ‘‘Board-regulated institution’’,
and ‘‘State member bank’’ in
alphabetical order, to read as follows:

■

§ 249.3

Definitions.

*

*
*
*
*
Board means the Board of Governors
of the Federal Reserve System.
Board-regulated institution means a
state member bank, covered depository
institution holding company, or covered
nonbank company.
*
*
*
*
*
State member bank means a state
bank that is a member of the Federal
Reserve System.
*
*
*
*
*
■ 9. In § 249.22, revise paragraph (b)(3)
to read as follows:
§ 249.22 Requirements for eligible highquality liquid assets.

*

*
*
*
*
(b) * * *
(3) For eligible HQLA held in a legal
entity that is a U.S. consolidated
subsidiary of a Board-regulated
institution:
(i) If the U.S. consolidated subsidiary
is subject to a minimum liquidity
standard under this part, 12 CFR part
50, or 12 CFR part 329, the Boardregulated institution may include the
eligible HQLA of the U.S. consolidated
subsidiary in its HQLA amount up to:
(A) The amount of net cash outflows
of the U.S. consolidated subsidiary
calculated by the U.S. consolidated
subsidiary for its own minimum
liquidity standard under this part, 12
CFR part 50, or 12 CFR part 329; plus
(B) Any additional amount of assets,
including proceeds from the
monetization of assets, that would be
available for transfer to the top-tier
Board-regulated institution during times
of stress without statutory, regulatory,
contractual, or supervisory restrictions,
including sections 23A and 23B of the
Federal Reserve Act (12 U.S.C. 371c and
12 U.S.C. 371c–1) and Regulation W (12
CFR part 223);
(ii) If the U.S. consolidated subsidiary
is not subject to a minimum liquidity
standard under this part, or 12 CFR part
50, or 12 CFR part 329, the Boardregulated institution may include the
eligible HQLA of the U.S. consolidated
subsidiary in its HQLA amount up to:
(A) The amount of the net cash
outflows of the U.S. consolidated
subsidiary as of the 30th calendar day

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

after the calculation date, as calculated
by the Board-regulated institution for
the Board-regulated institution’s
minimum liquidity standard under this
part; plus
(B) Any additional amount of assets,
including proceeds from the
monetization of assets, that would be
available for transfer to the top-tier
Board-regulated institution during times
of stress without statutory, regulatory,
contractual, or supervisory restrictions,
including sections 23A and 23B of the
Federal Reserve Act (12 U.S.C. 371c and
12 U.S.C. 371c–1) and Regulation W (12
CFR part 223); and
*
*
*
*
*
■ 10. In § 249.40, revise paragraph (b)(1)
to read as follows:
§ 249.40 Liquidity coverage shortfall:
Supervisory framework.

*

*
*
*
*
(b) Liquidity plan. (1) For the period
during which a Board-regulated
institution must calculate a liquidity
coverage ratio on the last business day
of each applicable calendar month
under subparts F or G of this part, if the
Board-regulated institution’s liquidity
coverage ratio is below the minimum
requirement in § 249.10 for any
calculation date that is the last business
day of the applicable calendar month, or
if the Board has determined that the
Board-regulated institution is otherwise
materially noncompliant with the
requirements of this part, the Boardregulated institution must promptly
consult with the Board to determine
whether the Board-regulated institution
must provide to the Board a plan for
achieving compliance with the
minimum liquidity requirement in
§ 249.10 and all other requirements of
this part.
*
*
*
*
*
■ 11. Add subpart G to read as follows:
Subpart G—Liquidity Coverage Ratio
for Certain Bank Holding Companies
Sec.
249.60
249.61
249.62
249.63

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§ 249.60

Applicability.
Liquidity coverage ratio.
High-quality liquid asset amount.
Total net cash outflow.
Applicability.

(a) Scope. This subpart applies to a
covered depository institution holding
company domiciled in the United States
that has total consolidated assets equal
to $50 billion or more, based on the
average of the Board-regulated
institution’s four most recent FR Y–9Cs
(or, if a savings and loan holding
company is not required to report on the
FR Y–9C, based on the average of its

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estimated total consolidated assets for
the most recent four quarters, calculated
in accordance with the instructions to
the FR Y–9C) and does not meet the
applicability criteria set forth in
§ 249.1(b).
(b) Applicable provisions. Except as
otherwise provided in this subpart, the
provisions of subparts A through E of
this part apply to covered depository
institution holding companies that are
subject to this subpart.
(c) Applicability. Subject to the
transition periods set forth in § 249.61:
(1) A Board-regulated institution that
meets the threshold for applicability of
this subpart under paragraph (a) of this
section on September 30, 2014, must
comply with the requirements of this
subpart beginning on January 1, 2015;
and
(2) A Board-regulated institution that
first meets the threshold for
applicability of this subpart under
paragraph (a) of this section after
September 30, 2014, must comply with
the requirements of this subpart
beginning on the first day of the first
quarter after which it meets the
threshold set forth in paragraph (a).
§ 249.61

Liquidity coverage ratio.

(a) Calculation of liquidity coverage
ratio. A Board-regulated institution
subject to this subpart must calculate
and maintain a liquidity coverage ratio
in accordance with § 249.10 and this
subpart, provided however, that such
Board-regulated institution shall only be
required to maintain a liquidity
coverage ratio that is equal to or greater
than 1.0 on last business day of the
applicable calendar month. A Boardregulated institution subject to this
subpart must calculate its liquidity
coverage ratio as of the same time on
each calculation day (elected
calculation time). The Board-regulated
institution must select this time by
written notice to the Board prior to the
effective date of this rule. The Boardregulated institution may not thereafter
change its elected calculation time
without prior written approval from the
Board.
(b) Transitions. For any Boardregulated institution subject to a
minimum liquidity standard under this
subpart:
(1) Beginning January 1, 2016,
through December 31, 2016, the Boardregulated institution must calculate and
maintain a liquidity coverage ratio
monthly, on each calculation date, in
accordance with this subpart, that is
equal to or greater than 0.90.
(2) Beginning January 1, 2017 and
thereafter, the Board-regulated
institution must calculate and maintain

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a liquidity coverage ratio monthly, on
each calculation date, in accordance
with this subpart, that is equal to or
greater than 1.0.
§ 249.62

High-quality liquid asset amount.

A covered depository institution
holding company subject to this subpart
must calculate its HQLA amount in
accordance with subpart C of this part.
§ 249.63

Total net cash outflow.

(a) A covered depository institution
holding company subject to this subpart
must calculate its cash outflows and
inflows in accordance with subpart D of
this part, provided, however, that as of
the calculation date, the total net cash
outflow amount of a covered depository
institution subject to this subpart equals
70 percent of:
(1) The sum of the outflow amounts
calculated under § 249.32(a) through (l);
less:
(2) The lesser of:
(i) The sum of the inflow amounts
under § 249.33(b) through (g); and
(ii) 75 percent of the amount in
paragraph (a)(1) of this section as
calculated for that calendar day.
(b) [Reserved]
Federal Deposit Insurance Corporation
12 CFR Chapter III

Authority and Issuance
For the reasons set forth in the
common preamble, the Federal Deposit
Insurance Corporation amends chapter
III of title 12 of the Code of Federal
Regulations as follows:
PART 329—LIQUIDITY RISK
MEASUREMENT STANDARDS
12. The authority citation for part 329
is added to read as follows:

■

Authority: 12 U.S.C. 1815, 1816, 1818,
1819, 1828, 1831p–1, 5412.

13. Part 329 is added as set forth at the
end of the common preamble.
■ 14. Part 329 is amended by:
■ a. Removing ‘‘[AGENCY]’’ and adding
‘‘FDIC’’ in its place wherever it appears.
■ b. Removing ‘‘[AGENCY CAPITAL
REGULATION]’’ and adding ‘‘12 CFR
part 324’’ in its place wherever it
appears.
■ c. Removing ‘‘A [BANK]’’ and adding
‘‘An FDIC-supervised institution’’ in its
place wherever it appears.
■ d. Removing ‘‘a [BANK]’’ and add ‘‘an
FDIC-supervised institution’’ in its place
wherever it appears.
■ e. Removing ‘‘[BANK]’’ and adding
‘‘FDIC-supervised institution’’ in its
place wherever it appears.
■ f. Removing ‘‘[BANK]s’’ and adding
‘‘FDIC-supervised institutions’’ in its
place wherever it appears.
■

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Federal Register / Vol. 79, No. 197 / Friday, October 10, 2014 / Rules and Regulations
g. Removing ‘‘[BANK]’s’’ and adding
‘‘FDIC-supervised institution’s’’ in its
place wherever it appears.
■ h. Removing ‘‘[REGULATORY
REPORT]’’ and adding ‘‘Consolidated
Report of Condition and Income’’ in its
place wherever it appears.
■ i. Removing ‘‘[12 CFR 3.404 (OCC), 12
CFR 263.202 (Board), and 12 CFR 324.5
(FDIC)]’’ and adding ‘‘12 CFR 324.5’’ in
its place wherever it appears.
■ 15. In § 329.1, revise paragraph
(b)(1)(iii) to read as follows:
■

§ 329.1

Purpose and applicability.

*
*
*
*
(b) * * *
(1) * * *
(iii) It is a depository institution that
has total consolidated assets equal to
$10 billion or more, as reported on the
most recent year-end Consolidated
Report of Condition and Income and is
a consolidated subsidiary of one of the
following:
(A) A covered depository institution
holding company that has total assets
equal to $250 billion or more, as
reported on the most recent year-end
Consolidated Financial Statements for
Holding Companies reporting form (FR
Y–9C), or, if the covered depository

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*

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institution holding company is not
required to report on the FR Y–9C, its
estimated total consolidated assets as of
the most recent year-end, calculated in
accordance with the instructions to the
FR Y–9C;
(B) A depository institution that has
total consolidated assets equal to $250
billion or more, as reported on the most
recent year-end Consolidated Report of
Condition and Income;
(C) A covered depository institution
holding company or depository
institution that has total consolidated
on-balance sheet foreign exposure at the
most recent year-end equal to $10
billion or more (where total on-balance
sheet foreign exposure equals total
cross-border claims less claims with a
head office or guarantor located in
another country plus redistributed
guaranteed amounts to the country of
the head office or guarantor plus local
country claims on local residents plus
revaluation gains on foreign exchange
and derivative transaction products,
calculated in accordance with the
Federal Financial Institutions
Examination Council (FFIEC) 009
Country Exposure Report); or
(D) A covered nonbank company.
*
*
*
*
*

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16. In § 329.3, add definitions for
‘‘FDIC’’ and ‘‘FDIC-supervised
institution’’ in alphabetical order, to
read as follows:

■

§ 329.3

Definitions.

*

*
*
*
*
FDIC means the Federal Deposit
Insurance Corporation.
FDIC-supervised institution means
any state nonmember bank or state
savings association.
*
*
*
*
*
Dated: September 3, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 3rd day of
September 2014.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2014–22520 Filed 10–9–14; 8:45 am]
BILLING CODE P

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