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

CourtFederal Reserve System,The Comptroller Of The Currency Office,Treasury Department
Citation86 FR 9120
Record Number2020-26546
SectionRules and Regulations
Published date11 February 2021
Federal Register, Volume 86 Issue 27 (Thursday, February 11, 2021)
[Federal Register Volume 86, Number 27 (Thursday, February 11, 2021)]
                [Rules and Regulations]
                [Pages 9120-9221]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-26546]
                [[Page 9119]]
                Vol. 86
                Thursday,
                No. 27
                February 11, 2021
                Part IIDepartment of the Treasury-----------------------------------------------------------------------Office of the Comptroller of the CurrencyFederal Reserve System-----------------------------------------------------------------------Federal Deposit Insurance Corporation12 CFR Parts 50, 249, and 329-----------------------------------------------------------------------Net Stable Funding Ratio: Liquidity Risk Measurement Standards and
                Disclosure Requirements; Final Rule
                Federal Register / Vol. 86 , No. 27 / Thursday, February 11, 2021 /
                Rules and Regulations
                [[Page 9120]]
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                DEPARTMENT OF THE TREASURY
                Office of the Comptroller of the Currency
                12 CFR Part 50
                [Docket ID OCC-2014-0029]
                RIN 1557-AD97
                FEDERAL RESERVE SYSTEM
                12 CFR Part 249
                [Regulation WW; Docket No. R-1537]
                RIN 7100-AE 51
                FEDERAL DEPOSIT INSURANCE CORPORATION
                12 CFR Part 329
                RIN 3064-AE 44
                Net Stable Funding Ratio: Liquidity Risk Measurement Standards
                and Disclosure Requirements
                AGENCY: Office of the Comptroller of the Currency, Department of the
                Treasury; Board of Governors of the Federal Reserve System; and Federal
                Deposit Insurance Corporation.
                ACTION: Final rule.
                -----------------------------------------------------------------------
                SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
                of Governors of the Federal Reserve System (Board), and the Federal
                Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
                adopting a final rule that implements a stable funding requirement,
                known as the net stable funding ratio (NSFR), for certain large banking
                organizations. The final rule establishes a quantitative metric, the
                NSFR, to measure the stability of the funding profile of certain large
                banking organizations and requires these banking organizations to
                maintain minimum amounts of stable funding to support their assets,
                commitments, and derivatives exposures over a one-year time horizon.
                The NSFR is designed to reduce the likelihood that disruptions to a
                banking organization's regular sources of funding will compromise its
                liquidity position, promote effective liquidity risk management, and
                support the ability of banking organizations to provide financial
                intermediation to businesses and households across a range of market
                conditions. The NSFR supports financial stability by requiring banking
                organizations to fund their activities with stable sources of funding
                on an ongoing basis, reducing the possibility that funding shocks would
                substantially increase distress at individual banking organizations.
                The final rule applies to certain large U.S. depository institution
                holding companies, depository institutions, and U.S. intermediate
                holding companies of foreign banking organizations, each with total
                consolidated assets of $100 billion or more, together with certain
                depository institution subsidiaries (together, covered companies).
                Under the final rule, the NSFR requirement increases in stringency
                based on risk-based measures of the top-tier covered company. U.S.
                depository institution holding companies and U.S. intermediate holding
                companies subject to the final rule are required to publicly disclose
                their NSFR and certain components of their NSFR every second and fourth
                calendar quarter for each of the two immediately preceding calendar
                quarters. The final rule also amends certain definitions in the
                agencies' liquidity coverage ratio rule that are also applicable to the
                NSFR.
                DATES: Effective Date: July 1, 2021.
                FOR FURTHER INFORMATION CONTACT:
                 OCC: Christopher McBride, Director, James Weinberger, Technical
                Expert, or Ang Middleton, Bank Examiner (Risk Specialist), (202) 649-
                6360, Treasury & Market Risk Policy; Dave Toxie, Capital Markets Lead
                Expert, (202) 649-6833; Patrick T. Tierney, Assistant Director, Henry
                Barkhausen, Counsel, or Daniel Perez, Counsel, Chief Counsel's Office,
                (202) 649-5490; for persons who are deaf or hard of hearing, TTY, (202)
                649-5597; Office of the Comptroller of the Currency, 400 7th Street SW,
                Washington, DC 20219.
                 Board: Juan Climent, Assistant Director, (202) 872-7526, Kathryn
                Ballintine, Manager, (202) 452-2555, J. Kevin Littler, Lead Financial
                Institution Policy Analyst, (202) 475-6677, Michael Ofori-Kuragu,
                Senior Financial Institution Policy Analyst II, (202) 475-6623 or
                Christopher Powell, Senior Financial Institution Policy Analyst II,
                (202) 452-3442, Division of Supervision and Regulation; Benjamin W.
                McDonough, Associate General Counsel, (202) 452-2036, Steve Bowne,
                Senior Counsel, (202) 452-3900, Jason Shafer, Senior Counsel, (202)
                728-5811, Laura Bain, Counsel, (202) 736-5546, or Jeffery Zhang,
                Attorney, (202) 736-1968, Legal Division, Board of Governors of the
                Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.
                For the hearing impaired only, Telecommunication Device for the Deaf
                (TDD), (202) 263-4869.
                 FDIC: Bobby R. Bean, Associate Director, [email protected]; Brian Cox,
                Chief, Capital Markets Strategies Section, [email protected]; Eric
                Schatten, Senior Policy Analyst, [email protected]; Andrew
                Carayiannis, Senior Policy Analyst, [email protected]; Kyle
                McCormick, Capital Markets Policy Analyst, [email protected]; Capital
                Markets Branch, Division of Risk Management Supervision, (202) 898-
                6888; Gregory S. Feder, Counsel, [email protected], Andrew B. Williams,
                II, Counsel, and [email protected], or Suzanne J. Dawley, Counsel,
                [email protected], Supervision, Legislation & Enforcement Branch, Legal
                Division, Federal Deposit Insurance Corporation, 550 17th Street NW,
                Washington, DC 20429. For the hearing impaired only, Telecommunication
                Device for the Deaf (TDD), (800) 925-4618.
                SUPPLEMENTARY INFORMATION:
                Table of Contents
                I. Introduction
                II. Background
                III. Overview of the Proposed Rule and Proposed Scope of Application
                 A. The Proposed Stable Funding Requirement
                 B. Revised Scope of Application
                IV. Summary of Comments and Overview of Significant Changes to the
                Proposals
                V. The Final Rule's Purpose, Design, Scope of Application, and
                Minimum Requirements
                 A. Purpose of the Final Rule
                 B. Comments on the Need for the NSFR Requirement
                 C. The NSFR's Conceptual Framework, Design, and Calibration
                 1. Use of an Aggregate Balance Sheet Measure and Weightings
                 2. Use of a Simplified and Standardized Point-in-Time Metric
                 3. Use of a Time Horizon
                 4. Stress Perspectives and Using Elements From the LCR Rule
                 5. Analytical Basis of Factor Calibrations and Supervisory
                Considerations
                 D. Adjusting Calibration for the U.S. Implementation of the NSFR
                 E. NSFR Scope and Minimum Requirement Under the Final Rule--Full
                and Reduced NSFR
                 1. Proposed Minimum Requirement and the Tailoring Final Rule
                 2. Applicability of the Final Rule to U.S. Intermediate Holding
                Companies and Use of the Risk-Based Indicators
                 3. NSFR Minimum Requirements Under the Final Rule: Applicability
                and Calibration
                 4. Applicability to Depository Institution Subsidiaries
                VI. Definitions
                 A. Revisions to Existing Definitions
                 1. Revised Definitions for Which the Agencies Received no
                Comments
                 2. Revised Definitions for Which the Agencies Received Comments
                 3. Other Definitions and Requirements for Which the Agencies
                Received Comments
                 4. Other Definitions and Requirements for Which the Agencies Did
                Not Receive Comments
                 B. New Definitions
                [[Page 9121]]
                 1. New Definitions for Which the Agencies Received no Comments
                 2. New Definitions for Which the Agencies Received Comments
                VII. NSFR Requirement Under the Final Rule
                 A. Rules of Construction
                 1. Balance-Sheet Values
                 2. Netting of Certain Transactions
                 3. Treatment of Securities Received in an Asset Exchange by a
                Securities Lender
                 B. Determining Maturity
                 C. Available Stable Funding
                 1. Calculation of the ASF Amount
                 2. Characteristics for Assignment of ASF Factors
                 3. Categories of ASF Factors
                 D. Required Stable Funding
                 1. Calculation of the RSF Amount
                 2. Characteristics for Assignment of RSF Factors
                 3. Categories of RSF Factors for Unencumbered Assets and
                Commitments
                 4. Treatment of Rehypothecated Off-Balance Sheet Assets
                 E. Derivative Transactions
                 1. Scope of Derivatives Transactions Subject to Sec. __.107 of
                the Final Rule
                 2. Current Net Value Component
                 3. Initial Margin Received by a Covered Company
                 4. Customer Cleared Derivative Transactions
                 5. Initial Margin Component
                 6. Future Value Component
                 7. Comments on the Effect on Capital Markets and Commercial End
                Users
                 8. Derivatives RSF Amount Calculation
                 9. Derivatives RSF Amount Numerical Example
                 F. NSFR Consolidation Limitations
                 G. Treatment of Certain Facilities
                 H. Interdependent Assets and Liabilities
                VIII. Net Stable Funding Ratio Shortfall
                IX. Disclosure Requirements
                 A. NSFR Public Disclosure Requirements
                 B. Quantitative Disclosure Requirements
                 1. Disclosure of ASF Components
                 2. Disclosure of RSF Components
                 C. Qualitative Disclosure Requirements
                 D. Frequency and Timing of Disclosure
                X. Impact Assessment
                 A. Impact on Funding
                 B. Costs and Benefits of an RSF Factor for Level 1 HQLA, Both
                Held Outright and as Collateral for Short-Term Lending Transactions
                 C. Response to Comments
                XI. Effective Dates and Transitions
                 A. Effective Dates
                 B. Transitions
                 1. Initial Transitions for Banking Organizations That Become
                Subject to NSFR Rule After the Effective Date
                 2. Transitions for Changes to an NSFR Requirement
                 3. Reservation of Authority To Extend Transitions
                 4. Cessation of Applicability
                XII. Administrative Law Matters
                 A. Congressional Review Act
                 B. Plain Language
                 C. Regulatory Flexibility Act
                 D. Riegle Community Development and Regulatory Improvement Act
                of 1994
                 E. Paperwork Reduction Act
                 F. OCC Unfunded Mandates Reform Act of 1995 Determination
                I. Introduction
                 The Office of the Comptroller of the Currency (OCC), the Board of
                Governors of the Federal Reserve System (Board), and the Federal
                Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
                adopting in final form the agencies' 2016 proposal to implement a net
                stable funding ratio (NSFR) requirement (the proposed rule), with
                certain adjustments.\1\ The agencies also are finalizing two proposals
                released subsequent to issuance of the proposed rule to revise the
                criteria for determining the scope of application of the NSFR
                requirement (tailoring proposals).\2\ The Board will issue a separate
                proposal for notice and comment to amend its information collection
                under its Complex Institution Liquidity Monitoring Report (FR 2052a) to
                collect information and data related to the requirements of the final
                rule.
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                 \1\ See ``Net Stable Funding Ratio: Liquidity Risk Measurement
                Standards and Disclosure Requirements,'' 81 FR 35124 (June 1, 2016).
                 \2\ See Proposed Changes to Applicability Thresholds for
                Regulatory Capital and Liquidity Requirements, 83 FR 66024 (December
                21, 2018) (domestic tailoring proposal); Changes to Applicability
                Thresholds for Regulatory Capital Requirements for Certain U.S.
                Subsidiaries of Foreign Banking Organizations and Application of
                Liquidity Requirements to Foreign Banking Organizations, Certain
                U.S. Depository Institution Holding Companies, and Certain
                Depository Institution Subsidiaries, 84 FR 24296 (May 24, 2019) (FBO
                tailoring proposal). The agencies indicated that comments regarding
                the NSFR proposed rule would be addressed in the context of a final
                rule to adopt a NSFR requirement for large U.S. banking
                organizations and foreign banking organizations.
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                 The final rule establishes a quantitative metric, the NSFR, to
                measure the stability of the funding profile of large U.S. banking
                organizations, U.S. intermediate holding companies of foreign banking
                organizations, and their depository institution subsidiaries with $10
                billion or more in total consolidated assets. The final rule also
                requires these banking organizations to maintain minimum amounts of
                stable funding to support their assets, commitments, and derivatives
                exposures.\3\ By requiring banking organizations to maintain a stable
                funding profile, the final rule reduces liquidity risk in the financial
                sector and provides for a safer and more resilient financial system.
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                 \3\ See further discussion of balance sheet funding in section
                V.C below.
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                 Sections II and III of this Supplementary Information section
                provide background on the agencies' proposed rule and the tailoring
                proposals (together, the proposals). Section IV provides an overview of
                comments received on the proposals and significant changes to the
                proposals under this final rule. Section V describes the final rule's
                purpose, design, scope of application, and minimum requirements. The
                discussion of the final rule in sections VI through IX describes
                amendments to certain applicable definitions, the calculation of the
                NSFR, requirements imposed on a banking organization that fails to meet
                its minimum NSFR requirement, and the public disclosure requirements
                for U.S. depository institution holding companies and U.S. intermediate
                holding companies subject to the final rule. Sections X through XII
                describe the agencies' impact assessment, the effective date and
                transitions under the final rule, and certain administrative matters.
                II. Background
                 The 2007-2009 financial crisis revealed significant weaknesses in
                banking organizations' liquidity risk management and liquidity
                positions, including how banking organizations managed their
                liabilities to fund their assets in light of the risks inherent in
                their on-balance sheet assets and off-balance sheet commitments.\4\ The
                2007-2009 financial crisis also revealed an overreliance on short-term,
                less-stable funding, and demonstrated the vulnerability of large and
                internationally active banking organizations to funding shocks. For
                example, weaknesses in funding management at many banking organizations
                made them vulnerable to contractions in funding supply, and they had
                difficulties renewing short-term funding that they had used to support
                longer term or illiquid assets. As access to funding became limited and
                asset prices fell, many banking organizations faced an increased
                possibility of default and failure. To stabilize the global financial
                markets, governments and central banks around the world provided
                significant levels of support to these institutions in the form of
                liquidity facilities and capital injections.
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                 \4\ See Senior Supervisors Group, Risk Management Lessons from
                the Global Banking Crisis of 2008, (October 21, 2009), available at
                https://www.newyorkfed.org/medialibrary/media/newsevents/news/banking/2009/SSG_report.pdf.
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                 In response to the 2007-2009 financial crisis, the Basel Committee
                on Banking Supervision (BCBS) established two international liquidity
                standards. In January 2013, the BCBS established a short-term liquidity
                metric, the liquidity coverage ratio (LCR), to mitigate the risks
                arising when banking organizations face significantly increased net
                cash outflows in a period
                [[Page 9122]]
                of stress (Basel LCR standard).\5\ As a complement to the LCR, the BCBS
                in October 2014 established the net stable funding ratio standard
                (Basel NSFR standard) to mitigate the risks presented by banking
                organizations supporting their assets with insufficiently stable
                funding; the Basel NSFR standard requires banking organizations to
                maintain a stable funding profile over a longer, one-year time
                horizon.\6\ The agencies have been, and remain, actively involved in
                the BCBS' international efforts, including the continued development
                and monitoring of the BCBS's framework for liquidity.
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                 \5\ See ``Basel III: The Liquidity Coverage Ratio and liquidity
                risk monitoring tools'' at https://www.bis.org/publ/bcbs238.htm.
                 \6\ See ``Basel III: the net stable funding ratio'' at https://www.bis.org/bcbs/publ/d295.htm. The BCBS relatedly published the net
                stable funding ratio disclosure standards published by the BCBS in
                June 2015. See ``Basel III: the net stable funding ratio'' (October
                2014), available at http://www.bis.org/bcbs/publ/d295.pdf; ``Net
                Stable Funding Ratio disclosure standards'' (June 2015), available
                at http://www.bis.org/bcbs/publ/d324.pdf.
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                 Following the 2007-2009 financial crisis, the agencies implemented
                several requirements designed to improve the largest and most complex
                banking organizations' liquidity positions and liquidity risk
                management practices. In 2014, the agencies adopted the LCR rule to
                improve the banking sector's resiliency to a short-term liquidity
                stress by requiring large U.S. banking organizations to hold a minimum
                amount of unencumbered high-quality liquid assets (HQLA) that can be
                readily converted into cash to meet projected net cash outflows over a
                prospective 30 calendar-day stress period.\7\ In addition, pursuant to
                section 165 of the Dodd-Frank Wall Street Reform and Consumer
                Protection Act \8\ (Dodd-Frank Act) and in consultation with the OCC
                and FDIC, the Board adopted the enhanced prudential standards rule,
                which established general risk management, liquidity risk management,
                and stress testing requirements for certain bank holding companies and
                foreign banking organizations.\9\ These reforms in the post-crisis
                regulatory framework did not include a requirement that directly
                addresses the relationship between a banking organization's funding
                profile and its composition of assets and off-balance commitments.\10\
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                 \7\ 12 CFR part 50 (OCC); 12 CFR part 249 (Board); 12 CFR part
                329 (FDIC). See also ``Liquidity Coverage Ratio: Liquidity Risk
                Measurement Standards,'' 79 FR 61440 (October 10, 2014).
                 \8\ 12 U.S.C. 5365.
                 \9\ See 12 CFR part 252. See also ``Enhanced Prudential
                Standards for Bank Holding Companies and Foreign Banking
                Organizations,'' 79 FR 17240 (March 27, 2014). The Economic Growth,
                Regulatory Relief, and Consumer Protection Act, which became law on
                May 24, 2018, subsequently raised the asset thresholds for
                applicability of enhanced prudential standards under section 165 of
                the Dodd-Frank Act. See Public Law 115-174, 132 Stat. 1296 (2018).
                The Board amended the scope of application of these requirements in
                October 2019. See 84 FR 59032, (November 1, 2019).
                 \10\ During the same period, the Board implemented requirements
                designed to enhance the capital positions and loss-absorbing
                capabilities for global systemically important banking organizations
                (GSIBs), which can also have the effect of improving the funding
                profiles of these firms. The Board adopted a risk-based capital
                surcharge for GSIBs in the United States that is calculated based on
                a bank holding company's risk profile, including its reliance on
                short-term wholesale funding (the GSIB capital surcharge rule). See
                12 CFR 217 subpart H. The Board also adopted a total loss-absorbing
                capacity (TLAC) requirement and a long-term debt requirement (LTD)
                requirement (the TLAC/LTD rule) for U.S. GSIBs and the U.S.
                operations of certain foreign GSIBs, which requires these firms and
                operations to have sufficient amounts of equity and eligible long-
                term debt to improve their ability to absorb significant losses and
                withstand financial stress and to improve their resolvability in the
                event of failure or material distress. See 12 CFR 252 subparts G and
                P.
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                III. Overview of the Proposed Rule and Proposed Scope of Application
                A. The Proposed Stable Funding Requirement
                 In June 2016, the agencies invited comment on a proposal to
                implement a net stable funding requirement for the U.S. banking
                organizations that were subject to the LCR rule at that time.\11\ The
                proposed rule was generally consistent with the Basel NSFR standard,
                with adjustments to reflect the characteristics of U.S. banking
                organizations, markets, and other U.S. specific considerations.\12\
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                 \11\ See ``Net Stable Funding Ratio: Liquidity Risk Measurement
                Standards and Disclosure Requirements,'' 81 FR 35124 (June 1, 2016).
                 \12\ The BCBS developed the Basel NSFR standard as a longer-term
                balance sheet funding metric to complement the Basel LCR standard's
                short-term liquidity stress metric. In developing the Basel NSFR
                standard, the agencies and their international counterparts in the
                BCBS considered a number of possible funding metrics. For example,
                the BCBS considered the traditional ``cash capital'' measure, which
                compares the amount of a firm's long-term and stable sources of
                funding to the amount of the firm's illiquid assets. The BCBS found
                that this cash capital measure failed to account for material
                funding risks, such as those related to off-balance sheet
                commitments and certain on-balance sheet short-term funding and
                lending mismatches. The Basel NSFR standard incorporates
                consideration of these and other funding risks, as does this final
                rule.
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                 The proposed rule would have required a banking organization to
                maintain an amount of available stable funding (ASF) equal to or
                greater than the banking organization's projected minimum funding
                needs, or required stable funding (RSF), over a one-year time
                horizon.\13\ A banking organization's NSFR would have been expressed as
                the ratio of its ASF amount to its RSF amount, with a banking
                organization required to maintain a minimum NSFR of 1.0.\14\
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                 \13\ For certain depository institution holding companies with
                $50 billion or more, but less than $250 billion, in total
                consolidated assets and less than $10 billion in on-balance sheet
                foreign exposure, the Board separately proposed a modified NSFR
                requirement.
                 \14\ Under the Board's proposed modified NSFR requirement, a
                depository institution holding company subject to a modified NSFR
                would have been required to maintain an NSFR of 1.0 but would have
                calculated such ratio using a lower minimum RSF amount in the
                denominator of the ratio, equivalent to 70 percent of the holding
                company's RSF amount as calculated under the agencies' proposed
                rule.
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                 Under the proposed rule, a banking organization's ASF amount would
                have been calculated as the sum of the carrying values of the banking
                organization's liabilities and regulatory capital, each multiplied by a
                standardized weighting (ASF factor) ranging from zero to 100 percent to
                reflect the relative stability of such liabilities and capital over a
                one-year time horizon. Similarly, a banking organization's minimum RSF
                amount would have been calculated as (1) the sum of the carrying values
                of its assets, each multiplied by a standardized weighting (RSF factor)
                ranging from zero to 100 percent to reflect the relative need for
                funding over a one-year time horizon based on the liquidity
                characteristics of the asset, plus (2) RSF amounts based on the banking
                organization's committed facilities and derivative exposures. The
                proposed rule also would have included public disclosure requirements
                for depository institution holding companies subject to the proposed
                rule.
                B. Revised Scope of Application
                 The proposed rule would have applied to: (1) Bank holding
                companies, savings and loan holding companies without significant
                commercial or insurance operations, and depository institutions that,
                in each case, have $250 billion or more in total consolidated assets or
                $10 billion or more in on-balance sheet foreign exposure; and (2)
                depository institutions with $10 billion or more in total consolidated
                assets that are consolidated subsidiaries of such bank holding
                companies and savings and loan holding companies. In addition, the
                Board proposed a modified NSFR requirement that would have applied to
                certain depository institution holding companies with total
                consolidated assets of $50 billion or more.\15\
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                 \15\ Subsequent to the issuance of the proposed rule, certain
                foreign banking organizations with substantial operations in the
                United States were required to form or designate U.S. intermediate
                holding companies. The scope of application under the proposed rule
                would have included certain U.S. bank holding company subsidiaries
                of foreign banking organizations.
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                [[Page 9123]]
                 Subsequent to the proposed rule, the agencies published the
                tailoring proposals to modify the application of the LCR rule and the
                proposed rule consistent with considerations and factors set forth
                under section 165 of the Dodd-Frank Act, as amended by the Economic
                Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).\16\
                As part of the tailoring proposals, the agencies proposed to establish
                four risk-based categories for determining applicability of
                requirements under the LCR rule and the proposed rule. The requirements
                would have increased in stringency based on measures of size, cross-
                jurisdictional activity, weighted short-term wholesale funding, nonbank
                assets, and off-balance sheet exposures (risk-based indicators). In
                addition, the tailoring proposals would have removed the Board's
                proposed modified NSFR requirement for certain depository institution
                holding companies.\17\
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                 \16\ Public Law 115-174, 132 Stat. 1296 (2018).
                 \17\ The tailoring proposals also would have removed the LCR
                rule's modified LCR requirement that at the time applied to certain
                depository institution holding companies with total consolidated
                assets of $50 billion or more.
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                 In October 2019, the agencies adopted a final rule (tailoring final
                rule) that amended the scope of application of the LCR rule so that it
                applies to certain U.S. banking organizations and U.S. intermediate
                holding companies of foreign banking organizations, each with $100
                billion or more in total consolidated assets, together with certain of
                their depository institution subsidiaries.\18\ The tailoring final rule
                applies LCR requirements on the basis of the four risk-based categories
                determined by the risk profile of the top-tier banking organization,
                including a depository institution that is not a subsidiary of a
                depository institution holding company.\19\ The effective date of the
                revisions to the LCR rule's scope was December 31, 2019.\20\
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                 \18\ 84 FR 59230 (November 1, 2019). In a change from the
                tailoring proposals, the tailoring final rule applied LCR
                requirements to a U.S. intermediate holding company of a foreign
                banking organization on the basis of risk-based indicators measured
                for the U.S intermediate holding company and not the foreign banking
                organization's combined U.S. operations.
                 \19\ A ``top-tier banking organization'' means the top-tier bank
                holding company, U.S. intermediate holding company, savings and loan
                holding company, or depository institution domiciled in the United
                States.
                 \20\ The tailoring final rule noted that comments regarding the
                NSFR proposal would be addressed in the context of any final rule to
                adopt a NSFR requirement for large U.S. banking organizations and
                U.S. intermediate holding companies. 84 FR at 59235.
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                IV. Summary of Comments and Overview of Significant Changes to the
                Proposals
                 The agencies received approximately 30 comments on the proposed
                rule, as well as approximately 20 comments related to the NSFR rule in
                response to the tailoring proposals. Commenters included U.S. and
                foreign banking organizations, trade groups, public interest groups,
                and other interested parties. Agency staff also met with some
                commenters at their request to discuss their comments on the proposed
                rule and the tailoring proposals.\21\ Although many commenters
                supported the goal of improving funding stability, many commenters
                expressed concern regarding the overall proposal and criticized
                specific aspects of the proposed rule.
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                 \21\ Summaries of these meetings are available on the agencies'
                public websites. See https://www.regulations.gov/docket?D=OCC-2014-0029 (OCC), https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R%2D1537&doc_ver=1 (Board), and https://www.fdic.gov/regulations/laws/federal/2016/2016-net_stable-funding-ratio-3064-ae44.html (FDIC).
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                 A number of commenters argued that the proposed rule was
                unnecessary because it would target risks already addressed by existing
                regulations, such as the LCR rule. Other commenters expressed concern
                regarding the design and calibration of the proposed rule. These
                commenters requested clarification on the conceptual underpinnings of
                the NSFR, requested additional quantitative support for the proposed
                ASF and RSF factors, and argued that the proposed rule did not satisfy
                Administrative Procedure Act (APA) requirements because it provided
                insufficient support for its design and calibration. Some commenters
                criticized the proposed rule as not being appropriately tailored for
                implementation in the United States and argued that the proposed rule
                was more stringent than the Basel NSFR standard such that it could
                disadvantage U.S. banking organizations relative to their foreign
                competitors. Relatedly, certain commenters requested that the agencies
                conform the final rule to the European Union's implementation of the
                Basel NSFR standard (EU NSFR rule) in order to minimize potential
                adverse effects on U.S. banking organizations.\22\
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                 \22\ The European Union (EU) implementation of the NSFR
                requirement, effective 2021, includes targeted adjustments from the
                Basel NSFR standard in order to reflect EU specificities generally
                consistent with the EU implementation of the Basel LCR standard. The
                EU's NSFR requirements also include targeted adjustments to support
                sovereign bond markets. See Regulation (EU) 2019/876 of the European
                Parliament and the Council, May 20, 2019, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32019R0876 (EU NSFR
                rule).
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                 Some commenters expressed concern that the proposed rule could
                result in increased costs to banking organizations and the financial
                system that would exceed the proposed rule's benefits.\23\
                Specifically, some commenters argued that the proposed rule could
                increase funding and compliance costs, which could cause banking
                organizations to withdraw from or reduce the scale of certain business
                activities with low margins, including certain capital markets-related
                activities. According to the commenters, this could have the effect of
                tightening credit and increasing borrowing costs for households and
                businesses in the United States. Commenters also argued that the
                funding and compliance costs of the proposed rule could increase
                financial stability risk by shifting certain financial intermediation
                activities from the banking sector to less regulated ``shadow banking''
                channels. Commenters also expressed concern that the proposed rule
                could have pro-cyclical effects, for example, by incentivizing banking
                organizations to restrict lending to improve their NSFRs during periods
                of stress.
                ---------------------------------------------------------------------------
                 \23\ The agencies received a number of comments that were not
                specifically responsive to the proposed rule but more generally
                requested that the agencies assess the combined costs of post-crisis
                regulations on the availability of credit and the economy.
                ---------------------------------------------------------------------------
                 Additionally, many commenters requested changes to specific
                elements of the proposed rule. For example, commenters recommended the
                agencies assign higher ASF factors for certain liabilities, such as
                certain types of deposits, and lower RSF factors for certain categories
                of assets and committed facilities. Some commenters recommended changes
                to the proposed rule's treatment of derivatives, particularly the
                treatment of variation margin and the treatment of potential valuation
                changes in a derivatives portfolio. In addition, a number of commenters
                requested that the agencies modify the proposed rule to assign zero
                percent RSF and ASF factors to certain assets and liabilities
                commenters viewed as interdependent such that the specific,
                identifiable assets are funded by the specific, identifiable
                liabilities of an equal or similar tenor and, therefore, present little
                or minimal funding risk. Finally, some commenters requested that the
                agencies delay implementation of the NSFR requirement to allow banking
                organizations additional time to build internal reporting systems and
                comply with disclosure requirements.
                [[Page 9124]]
                 The agencies received a number of comments requesting the agencies
                reconsider the proposed rule's scope of application. Specifically, many
                commenters argued that the proposed thresholds for application were
                arbitrary and insufficiently risk-sensitive and requested the agencies
                further tailor the scope of the proposed rule. The agencies also
                received a number of comments on the appropriateness of the revised
                scope of application in the tailoring proposals.
                 As discussed throughout this Supplementary Information section, the
                final rule retains the general design for the NSFR calculation and
                calibrates minimum requirements to the risk profiles of banking
                organizations in a manner consistent with the tailoring final rule.
                However, the final rule includes a number of modifications, including:
                 The final rule assigns a zero percent RSF factor to
                unencumbered level 1 liquid asset securities and certain short-term
                secured lending transactions backed by level 1 liquid asset securities
                (see section VII.D of this Supplementary Information section).
                 The final rule provides more favorable treatment for
                certain affiliate sweep deposits and non-deposit retail funding (see
                section VII.C of this Supplementary Information section).
                 The final rule permits cash variation margin to be
                eligible to offset a covered company's current exposures under its
                derivatives transactions even if it does not meet all of the criteria
                in the agencies' supplementary leverage ratio rule (SLR rule).\24\ In
                addition, variation margin received in the form of rehypothecatable
                level 1 liquid asset securities also would be eligible to offset a
                covered company's current exposures (see section VII.E of this
                Supplementary Information section).
                ---------------------------------------------------------------------------
                 \24\ 12 CFR 3.10(c)(4) (OCC); 12 CFR 217.10(c)(4) (Board); 12
                CFR 324.10(c)(4) (FDIC). In addition, the final rule includes a new
                provision to exclude assets received by a covered company as
                variation margin under derivative transactions from the treatment of
                rehypothecated assets that are off-balance sheet assets in
                accordance with U.S. generally accepted accounting principles
                (GAAP).
                ---------------------------------------------------------------------------
                 The final rule reduces the amount of a covered company's
                gross derivatives liabilities that will be assigned a 100 percent RSF
                factor (see section VII.E of this Supplementary Information section).
                V. The Final Rule's Purpose, Design, Scope of Application, and Minimum
                Requirements
                A. Purpose of the Final Rule
                 The NSFR is designed to address risks that are inherent in the
                business of banking. Banking organizations perform maturity and
                liquidity transformation,\25\ which is an important financial
                intermediation process that contributes to efficient resource
                allocation and credit creation. To conduct maturity and liquidity
                transformation and meet the long-term credit needs of businesses and
                households, banking organizations also must address the short-term
                liquidity preferences of funds providers. These transformation
                activities create a certain inherent level of risk to banking
                organizations, the U.S. financial system, and the broader economy
                caused by banking organizations' potential overreliance on unstable
                funding sources relative to the composition of their balance sheets.
                Such overreliance could potentially result in the failure of banking
                organizations, disruptions to asset prices, and reduction in the
                provision of credit to households and businesses.
                ---------------------------------------------------------------------------
                 \25\ To conduct financial intermediation, banking organizations
                obtain resources that are currently surplus to the needs of certain
                parts of the economy (funds providers) and lend them to other parts
                of the economy that currently need those resources (users of funds).
                Funds providers generally prefer to supply their resources on a
                short-term basis with easy access to their funds (liquid resources);
                for example, household savings. Users of funds often need these
                resources on a long-term basis and in ways that make such resources
                difficult to convert to cash (illiquid resources); for example,
                building factories or capital for business growth. Maturity and
                liquidity transformation refers to the process of bridging the
                competing needs of funds providers and users of funds.
                ---------------------------------------------------------------------------
                 A banking organization may mitigate these risks by having funding
                sources that are appropriately stable over time. Because short-term
                funding generally tends to be less expensive than longer-term funding,
                banking organizations have incentives to fund their longer-term or
                less-liquid assets with less stable, shorter-term liabilities. While
                this approach may benefit short-term earnings, it may lead to
                imbalances between how a banking organization chooses to fund its
                assets and the funding it may need to maintain the assets over time, as
                well as increases in liquidity and funding risk arising from potential
                customer and counterparty runs and a more interconnected financial
                sector. In turn, this creates a funding risk for banking organizations,
                the financial system, and the broader economy. The final rule requires
                large banking organizations to avoid excessively funding long-term and
                less-liquid assets with short-term or less-reliable funding and thus
                reduces the likelihood that disruptions in a banking organization's
                regular funding sources would compromise its funding stability and
                liquidity position.
                 The final rule establishes a minimum NSFR requirement that is
                applicable on a consolidated basis to certain top-tier banking
                organizations with total consolidated assets of $100 billion or more,
                together with certain depository institution subsidiaries (together,
                covered companies). Consistent with the proposed rule, the final rule
                requires a covered company to calculate an NSFR based on the ratio of
                its ASF amount to its RSF amount and maintain an NSFR equal to or
                greater than 1.0 on an ongoing basis.\26\ In addition, the final rule,
                like the proposed rule, includes public disclosure requirements for
                U.S. depository institution holding companies and U.S. intermediate
                holding companies of foreign banking organizations that are subject to
                the final rule.
                ---------------------------------------------------------------------------
                 \26\ ASF factors are described in section VII.C, RSF factors are
                described in section VII.D, and the derivatives RSF amount is
                described in section VII.E of this Supplementary Information
                section.
                ---------------------------------------------------------------------------
                B. Comments on the Need for the NSFR Requirement
                 Banking organizations have improved their liquidity risk management
                practices and liquidity positions since the 2007-2009 financial crisis,
                including by holding larger liquidity buffers, avoiding excessive
                reliance on very short-term unstable wholesale funding sources, and
                improving their internal controls and governance structures surrounding
                liquidity risk management. The NSFR requirement aims to preserve these
                improvements and help position covered companies to act as resilient
                financial intermediaries through potential future periods of
                instability. The agencies received a number of comments arguing that
                the proposed rule is unnecessary because other elements of the
                agencies' regulatory framework already sufficiently address liquidity
                and funding risk at covered companies.\27\ Some commenters also argued
                that the agencies should not apply an NSFR requirement because many
                covered companies have improved their current funding profiles relative
                to the period leading up to the 2007-2009 financial crisis. By
                contrast, one commenter supported the proposed rule, asserting that it
                would be an important complement to the LCR rule because it would
                address funding stability and
                [[Page 9125]]
                maturity mismatch more broadly and over a longer time horizon.
                ---------------------------------------------------------------------------
                 \27\ Commenters provided examples, including the LCR rule; the
                Board's enhanced prudential standards rule; the TLAC/LTD rule; the
                GSIB capital surcharge rule (which includes a measure of weighted
                short-term wholesale funding), SLR rule, and other capital
                requirements; single counterparty credit limits; mandatory clearing
                requirements and margin requirements for non-cleared swaps and non-
                cleared security-based swaps; and Board and FDIC supervisory
                guidance relating to liquidity in connection with resolution
                planning.
                ---------------------------------------------------------------------------
                 The final rule is intended to complement and reinforce other
                elements of the agencies' regulatory framework that strengthen
                financial sector resiliency by addressing risks that are not directly
                addressed by the agencies' other regulatory measures. For example, the
                NSFR rule provides an important complement to the LCR rule, which
                addresses the risk of increased net cash outflows over a 30-calendar
                day period of stress by requiring banking organizations to hold HQLA
                that can be readily converted to cash. While addressing short-term
                cash-flow related risks is a core component of a banking organization's
                liquidity risk management, a banking organization could comply with the
                LCR requirement and still fund its long-term or illiquid assets and
                commitments with short-term liabilities not sufficiently stable to
                preserve these assets over an extended period.\28\ The final rule
                further complements the LCR rule by mitigating the risk of a banking
                organization concentrating funding just outside the LCR's 30-day
                window. The final rule also complements requirements related to firm-
                specific measures of funding risk under the Board's enhanced prudential
                standards rule by providing a standardized measure of the stability of
                a banking organization's funding profile, which would promote greater
                comparability of funding structures across banking organizations and
                improve transparency and market discipline through public disclosure
                requirements.\29\ With respect to the other rules and guidance
                commenters cited as sufficiently addressing liquidity and funding risk,
                these elements of the agencies' regulatory framework do not directly
                address balance sheet funding risks for covered companies on a going-
                concern basis. \30\
                ---------------------------------------------------------------------------
                 \28\ Cash flow projections, liquidity stress testing, and
                liquidity buffer requirements for certain covered holding companies
                under the Board's enhanced prudential standards rule complement the
                LCR rule by addressing cash flow risks with additional firm-specific
                granularity and across additional time horizons, including a one-
                year planning horizon. These requirements do not directly address
                balance sheet funding risks.
                 \29\ See 12 CFR 252.35 and 12 CFR 252.157.
                 \30\ The final rule reflects that regulatory capital elements
                and long-term debt required under the agencies' regulatory capital
                rule, the Board's GSIB capital surcharge rule, and the TLAC/LTD rule
                provide stable funding by virtue of the long-term or perpetual tenor
                of such regulatory capital elements and long-term debt. The Board's
                GSIB capital surcharge rule and the tailoring final rule include a
                measure of historic funding composition, weighted short-term
                wholesale funding, but this measure does not measure or directly
                address funding risk. The weighted short-term wholesale funding
                measure is based on a banking organization's average use of short-
                term funding sources over the prior year but does not reflect a
                banking organization's assets or the banking organization's use of
                longer-term funding sources.
                ---------------------------------------------------------------------------
                 Reliance on less-stable sources of funding may require a banking
                organization to repay or replace its funding more often and make it
                more exposed to sudden funding market disruptions. Potential loss of
                funding can restrict a banking organization's ability to support its
                assets and commitments over the long term, generating both safety and
                soundness and financial stability risks. The final rule is designed to
                mitigate such risks by directly increasing the funding resilience of
                subject banking organizations. The final rule mitigates risks to U.S.
                financial stability by improving the capacity of banking organizations
                to continue to support their assets and lending activities across a
                range of market conditions. A covered company that sufficiently aligns
                the stability of its funding sources with its funding needs based on
                the liquidity characteristics of its assets and commitments is better
                positioned to avoid asset fire sales and continue to function as a
                financial intermediary in the event of funding or asset market
                disruptions. As a result, a covered company will be better positioned
                to continue to operate and lend, which promotes more stable and
                consistent levels of financial intermediation in the U.S. economy
                across economic and market conditions.
                 As a standardized metric, the NSFR also promotes greater
                comparability across covered companies and foreign banks subject to
                substantially similar requirements in other jurisdictions and
                facilitates supervisory assessments of vulnerability. Through public
                disclosure requirements, the NSFR rule also promotes greater market
                discipline through enhanced transparency.\31\ In these ways, a
                standardized long-term funding measure, such as the NSFR, is intended
                to work in tandem with internal models-based measures to provide a more
                robust and complete framework to monitor and manage funding and
                liquidity risks of covered companies.
                ---------------------------------------------------------------------------
                 \31\ Public disclosure requirements are not required for non-
                standardized measurements of liquidity risk required under the
                Board's enhanced prudential standards rule.
                ---------------------------------------------------------------------------
                C. The NSFR's Conceptual Framework, Design, and Calibration
                 A number of commenters questioned the conceptual framework and
                design of the proposed rule, as well as its overall analytical basis
                and the calibrations of specific components. In particular, commenters
                argued that the agencies did not provide sufficient justification or
                data analysis to support the proposed calibration of the NSFR rule's
                relevant factors. Some commenters questioned whether the calibrations
                in the proposed rule reflected a one-year period of stress or whether
                the calibration was intended to reflect different ``business-as-usual''
                conditions.\32\ A number of commenters also argued that if the proposed
                rule was not calibrated based on the same stress assumptions as the LCR
                rule, the proposed rule should not incorporate elements and definitions
                from the LCR rule. Some commenters also requested that the agencies
                reconsider elements of the proposed rule that they believed to be more
                conservative than the LCR rule. In addition, several commenters argued
                that the proposed rule was focused on commercial banking and was
                therefore not sensitive enough to the different business models of
                covered companies, such as custody banks and banking organizations
                significantly involved in capital markets. Another commenter stated
                that the NSFR is a static measure and does not take into account
                actions a firm may take in the future to address funding risk. As
                addressed in sections VII.C and VII.D of this Supplementary Information
                section, the agencies also received a number of comments on the
                proposed values of ASF factors and RSF factors where the commenter's
                concern was predicated on the design of the NSFR. For example,
                commenters described the value of certain ASF factors as conservative
                based on the assumption that the values represented cash-flow amounts
                and commenters therefore made direct comparison to factors used in the
                LCR rule. In light of these comments, the agencies are clarifying in
                this Supplementary Information section the conceptual basis for the
                NSFR design under the final rule.
                ---------------------------------------------------------------------------
                 \32\ Certain commenters also expressed concerns about the
                descriptions by the BCBS of the Basel NSFR standard between 2009 and
                2014 and the opportunities to comment on certain elements of the
                international standard. Commenters argued that the agencies should
                remove elements of the proposed rule or re-open the comment period
                because, in these commenters' view, the public was unable to comment
                on the inclusion of certain elements in the Basel NSFR standard.
                ---------------------------------------------------------------------------
                1. Use of an Aggregate Balance Sheet Measure and Weightings
                 The NSFR's conceptual design builds on commonly used assessments of
                balance sheet funding.\33\ The NSFR is a standardized measure of a
                banking organization's funding relative to its assets and commitments.
                Consistent with the Basel NSFR standard, the final
                [[Page 9126]]
                rule conceptually draws on supervisory and industry-developed funding
                risk management measures, with modifications to account for material
                funding risks and policy considerations.\34\ Supervisors and industry
                stakeholders such as credit rating agencies and equity analysts
                routinely assess the funding profiles of banking organizations through
                comparisons of the compositions of the banking organization's assets
                and liabilities.\35\ The NSFR's design as a ratio of weighted
                liabilities and regulatory capital to weighted assets and commitments
                is consistent with these approaches. Using a ratio measure is
                appropriate for measuring and addressing funding risks because it
                provides a holistic assessment of a banking organization's funding
                profile based on the aggregate composition of the banking
                organization's balance sheet and commitments rather than on individual
                assets or liabilities.
                ---------------------------------------------------------------------------
                 \33\ See supra note 12.
                 \34\ For example, the final rule takes into account policy
                considerations such as externalities associated with an unstable
                funding structure that can affect the safety and soundness of other
                banking organizations and U.S. financial stability and an interest
                in maintaining financial intermediation of covered companies across
                economic and market conditions.
                 \35\ For example, supervisors and industry analysts compare
                compositions of assets and liabilities though the use of a loans-to-
                deposits ratio or by defining a measure of ``noncore'' funding
                dependency.
                ---------------------------------------------------------------------------
                 The final rule takes into account the differing risk
                characteristics of a covered company's various assets, liabilities, and
                certain off-balance sheet commitments and applies different weightings
                (ASF and RSF factors) to reflect these risk characteristics. Under the
                final rule, ASF and RSF factors are used to determine the numerator and
                denominator of the NSFR and reflect, respectively, the stability of
                funding, and the need for assets and commitments to be supported by
                such funding over a range of market conditions, each as assessed under
                the final rule. As described in sections VII.C and VII.D of this
                Supplementary Information section, the final rule uses broad categories
                of liabilities and assets to assess relative stability and funding
                needs, respectively. These weightings make the NSFR assessment risk
                sensitive by differentiating between types of assets and types of
                liabilities.
                 While the NSFR is a simplified and standardized metric, meeting the
                NSFR minimum requirement of 1.0 provides evidence that a covered
                company has, in aggregate, a sufficient amount of stable liabilities
                and regulatory capital to support over a one-year time horizon its
                aggregate assets and commitments based on the liquidity characteristics
                of such aggregate assets and commitments.\36\ Given the size,
                complexity, scope of activities, and interconnectedness of covered
                companies, a covered company with an NSFR of less than 1.0 may face an
                increased likelihood of liquidity stress or of having to dispose of
                illiquid assets, and may be less well positioned to maintain its level
                of financial intermediation over various market conditions.
                ---------------------------------------------------------------------------
                 \36\ As described in section V.E.3 of this Supplementary
                Information section, the final rule applies an adjustment factor to
                the denominator of the ratio to reflect the risk profile of a
                covered company.
                ---------------------------------------------------------------------------
                 Commenters expressed concerns that application of RSF factors to
                specific assets has the effect of imposing a requirement on covered
                companies to issue additional long-dated liabilities to fund such
                assets. The final rule does not prescribe the method by which a covered
                company must meet its minimum requirement. Under the final rule, the
                NSFR requirement reflects the aggregate balance sheet of a covered
                company, and the final rule does not apply separate minimum funding
                requirements to individual assets, legal entities, or business lines
                represented on the balance sheet. For example, a covered company that
                has an NSFR of 1.0 and increases its holding of certain long-dated
                assets is not required to issue additional long-dated liabilities under
                the final rule but, rather, has discretion on how to continue to meet
                its minimum requirement, including by changing its overall asset
                composition.
                2. Use of a Simplified and Standardized Point-in-Time Metric
                 Many commenters expressed concerns or suggestions that related to
                the level of granularity in the NSFR's conceptual design or that the
                NSFR was a point-in-time measure. For example, commenters suggested the
                NSFR include additional RSF and ASF factors tailored to specific
                products and activities.\37\ Commenters similarly expressed concerns
                about the number of residual maturity categories used in the NSFR. A
                number of commenters criticized the design of the NSFR as a static
                metric arguing that the measurement of the funding risk of a covered
                company's aggregate balance sheet should consider actions that banking
                organizations may undertake in the future.
                ---------------------------------------------------------------------------
                 \37\ See sections VII.C, VII.D and VII.E of this Supplementary
                Information section.
                ---------------------------------------------------------------------------
                 In response to these concerns, the agencies note that a broad
                comparison of the stability of a covered company's funding relative to
                the liquidity characteristics of its assets achieves the final rule's
                funding risk-mitigation objectives. To limit the burden on covered
                companies and to maximize the comparability of the metric between each
                covered company and other international banking organizations, the NSFR
                is designed as a simplified metric that uses a small number of
                categories of assets, exposures, liabilities, counterparty types, and
                residual maturity buckets to achieve its objective. While the balance
                sheets of large banking organizations reflect a complex variety of
                transactions and business activities, additional granularity could be
                burdensome to covered companies relative to the goals of the NSFR
                requirement. The NSFR was designed holistically and introducing
                additional granularity could require recalibration of certain other
                elements. For example, the incorporation of additional RSF factors may
                require other RSF factors to be adjusted upward, as they currently
                reflect an aggregate view of the level of stable funding required for
                the entire set of assets or off-balance sheet commitments in a given
                category. Additionally, to the extent possible, the metric utilizes the
                carrying values of assets and liabilities on a covered company's
                balance sheet under U.S. Generally Accepted Accounting Principles
                (GAAP) and limits the need for additional valuations.
                 In response to comments that the NSFR is not sensitive to the
                different business models of covered companies, the agencies note that
                the NSFR is designed to allow comparison across covered companies and
                other international firms, and to minimize differences in how liquidity
                characteristics of liabilities and assets are evaluated by covered
                companies. As a standardized metric, the final rule is constructed to
                ensure a sufficient amount of stable funding across all covered
                companies, regardless of their business models. The NSFR generally does
                not differentiate by a banking organization's business model, its lines
                of business, or the purpose for which individual assets or liabilities
                are held on its balance sheet. For example, the NSFR treats securities
                held on a covered company's balance sheet based on the securities'
                credit risk and market characteristics regardless of whether such
                securities are held as long-term investments, as hedging instruments,
                or as market making inventory. While the composition of banking
                organizations' balance sheets varies based on business models and the
                services provided to customers, the NSFR is not focused on
                [[Page 9127]]
                any particular business model (for example, commercial banking), as
                suggested by commenters.
                 Like most prudential requirements, the NSFR is a measure of a
                covered company's condition at a point in time and by design does not
                consider the broad variety of actions that management may take in the
                future. As a general principle, the agencies do not speculate about
                future transactions, contingencies, or potential managerial remediation
                steps that the covered company may take.\38\
                ---------------------------------------------------------------------------
                 \38\ As noted above, the point-in-time NSFR complements forward-
                looking assessments of risk, such as a covered company's internal
                liquidity stress testing practices.
                ---------------------------------------------------------------------------
                3. Use of a Time Horizon
                 Certain commenters questioned the NSFR's design in respect to its
                time horizon. While the NSFR measures a banking organization's balance
                sheet and commitments at a point in time, the assessment of adequate
                funding considers the stability of, and the need for, funding with
                reference to a general one-year time horizon and a range of market
                conditions. The measurement incorporates contractual maturities but
                generally does not reflect expectations about the year following the
                calculation date.\39\ Rather, consistent with the Basel NSFR standard,
                the NSFR calibrations seek to reflect resilient credit intermediation
                to the real economy and general behaviors by banking organizations and
                their counterparties.
                ---------------------------------------------------------------------------
                 \39\ As described below, calculation date means any date on
                which a covered company calculates its NSFR. See section VI.A.1 of
                this Supplementary Information section.
                ---------------------------------------------------------------------------
                 The use of a time horizon for the assessment of funding imbalances
                is appropriate because the residual maturities of liabilities and
                assets of a covered company at the calculation date are, among other
                characteristics, indicative of the liabilities' stability and the
                assets' need for funding, respectively. For example, liabilities that
                are due to mature in the short term will generally provide less
                stability to a banking organization's balance sheet than longer-term
                liabilities. Similarly, certain short-dated assets maturing in less
                than one year should require a smaller portion of funding to be
                maintained over a one-year time horizon because banking organizations
                may allow such assets to mature without replacing them. The choice of a
                one-year time horizon is also consistent with traditional accounting
                and supervisory measures of short-term and long-term financial
                instruments and exposures.
                4. Stress Perspectives and Using Elements From the LCR Rule
                 A number of commenters requested clarification on the extent to
                which the NSFR calibrations incorporated stress assumptions. Consistent
                with the complementary designs of the Basel LCR and NSFR standards, the
                final rule is designed differently from, and to be complementary to,
                the LCR rule. Unlike the LCR, which compares immediately available
                sources of cash to potential stressed cash outflows over a 30-calendar
                day period, the NSFR is not a cash-flow coverage metric, and ASF and
                RSF amounts are not cash-flow amounts. While ASF factors take into
                account the characteristics of liabilities that influence relative
                funding stability across a range of market conditions, the values of
                ASF factors do not represent liability outflow rates. Similarly, while
                RSF factors take into account the liquidity characteristics of assets
                that generally influence their need for funding over a one-year
                horizon, the values of RSF factors do not reflect the monetization
                value of assets. In response to comments that the values of factors
                used in the LCR rule imply that ASF or RSF factors were incorrectly
                calibrated, it is important to note that comparisons of the values of
                ASF or RSF factors under the final rule to the values of outflow and
                inflow rates used in the LCR rule are not indicative of the relative
                conservatism of the requirements under both rules.\40\
                ---------------------------------------------------------------------------
                 \40\ See sections VII.C and VII.D of this Supplementary
                Information section.
                ---------------------------------------------------------------------------
                 Further, the final rule is not designed to function as a one-year
                liquidity stress test, and therefore its ASF and RSF factors are not
                assigned based on, or intended to directly translate to, assumed cash
                inflows and outflows over a one-year period of stress. Rather, the
                final rule is intended to serve as a balance-sheet metric, and ASF and
                RSF factors reflect, respectively, the relative stability of funding
                and the need for funding based on the liquidity characteristics of
                assets and commitments, each across a range of economic and financial
                conditions.\41\ Funding and liquidity characteristics of liabilities
                and assets under stress conditions are therefore relevant to, but not
                determinative of, ASF and RSF factors. As a result, ASF and RSF factor
                calibrations take into account potential effects of stress on the
                stability of funding and liquidity characteristics of assets and
                commitments, but are not calibrated to require a covered company to
                retain a buffer against a stress period of one year, as discussed in
                sections VII.C and VII.D of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 \41\ The LCR rule compares cash-generating resources (i.e., the
                HQLA amount) to cash needs (total net cash outflows) in a 30-day
                stress. The final rule compares sources of stable funding (ASF
                amount) to the need for stable funding (RSF amount), each calibrated
                over a 12-month horizon and across a range of market conditions.
                ---------------------------------------------------------------------------
                 Although the NSFR generally is not calibrated to the stress
                assumptions of the LCR rule, it nevertheless shares certain common
                elements and definitions with the complementary LCR where such
                consistency is helpful. The alignment of the final rule with the
                structure and design of the LCR rule, where appropriate, aims to
                improve efficiency and limit compliance costs to covered companies by
                allowing them more efficiently to implement the two requirements. In
                response to commenters' concerns that sharing definitions and elements
                with the LCR rule inappropriately incorporates stress assumptions into
                the NSFR requirement, the agencies note that many shared elements and
                defined terms are independent of stress assumptions.\42\ Moreover, to
                the extent that the final rule incorporates definitions of the LCR
                rule, their usage in the final rule generally reflects assumptions that
                are specific to the final rule.\43\ Finally, while the final rule is
                not calibrated based on a one-year stress, some considerations of
                conservatism are still relevant. For example, as discussed in section
                VII.B of this Supplementary Information section, the final rule
                generally applies the same assumptions for determining maturity as the
                LCR rule because conservative assumptions regarding the maturity of
                funding relative to the duration of asset holdings are appropriate for
                assessing the risks presented by mismatches in balance sheet funding.
                ---------------------------------------------------------------------------
                 \42\ For example, the definitions of ``general obligation,''
                ``affiliate,'' and ``company'' do not incorporate an assumption of
                stress.
                 \43\ For example, the final rule applies the same ASF factor to
                certain forms of funding from a financial sector entity that mature
                in six months or less, regardless of whether such funding is in the
                form of a secured funding transaction or unsecured wholesale
                funding, whereas the LCR rule generally treats these categories of
                funding separately for purposes of determining applicable outflow
                amounts. See 12 CFR 50.32(h) and (j) (OCC); 12 CFR 249.32(h) and (j)
                (Board); 12 CFR 329.32(h) and (j) (FDIC).
                ---------------------------------------------------------------------------
                5. Analytical Basis of Factor Calibrations and Supervisory
                Considerations
                 Several commenters argued that the agencies did not sufficiently
                rely on empirical analysis to inform various portions of the proposed
                rule. Other commenters argued that the agencies
                [[Page 9128]]
                did not sufficiently disclose the quantitative data and analyses on
                which the agencies relied.
                 As explained in detail in sections VII.C and VII.D of this
                Supplementary Information section, the liabilities within an ASF factor
                category generally exhibit similar levels of funding stability and the
                assets within an RSF factor category generally exhibit similar
                liquidity characteristics. In addition, there is a sufficient number of
                ASF factor and RSF factor categories in the final rule to differentiate
                among the funding risks presented by the assets, commitments, and
                liabilities covered by the NSFR. The ASF and RSF factors as calibrated
                for these categories of liabilities and assets, and as applied under
                the Basel NSFR standard to similar categorizations, are generally
                appropriate for U.S. implementation.\44\ However, as discussed below,
                the final rule departs from the Basel NSFR standard where doing so
                would support important domestic policy objectives. The agencies
                regularly review their regulatory framework, including liquidity
                requirements, to ensure it is functioning as intended and will continue
                to assess the NSFR's calibration under the final rule. A more specific
                discussion of the agencies' analysis is provided in sections VII.C and
                VII.D of this Supplementary Information section, which discuss the
                comments received on the calibration of ASF and RSF factors.
                ---------------------------------------------------------------------------
                 \44\ Supervisory experience is informed in part through
                confidential data obtained through the FR 2052a report.
                ---------------------------------------------------------------------------
                 Consistent with the proposed rule and as noted above, certain ASF
                and RSF factor assignments in the final rule take into account policy
                considerations relating to the safety and soundness of covered
                companies and U.S. financial stability.\45\ For example, the assignment
                of a zero percent ASF factor to wholesale funding from financial sector
                entities that matures within six months generally reflects supervisory
                concerns related to the financial stability risks related to
                overreliance on this source of funding by large interconnected banking
                organizations. In calibrating the factors, the agencies also considered
                behavioral and operational factors that can affect funding stability or
                asset liquidity, such as reputational incentives that could cause a
                covered company to maintain lending to certain counterparties.\46\
                ---------------------------------------------------------------------------
                 \45\ See sections VII.C and VII.D of this Supplementary
                Information section.
                 \46\ See section VII of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 In response to commenters' assertion that the agencies failed to
                disclose quantitative data and analyses used to support the proposed
                rule, the agencies note that they disclosed in the proposed rule
                material that was available and reliable. In the instances in which the
                agencies cited data in support of the proposed rule, the agencies
                identified that data, acknowledged the shortcomings of the available
                data, and invited input from the public. In developing the final rule,
                the agencies have considered the comments received.
                D. Adjusting Calibration for the U.S. Implementation of the NSFR
                 As noted above, the final rule is based on the general framework of
                the Basel NSFR standard. Some commenters argued that the agencies
                should not adopt the proposed rule, or should modify certain elements
                of the proposed rule, because the Basel NSFR standard is an
                internationally negotiated standard that was not properly tailored to
                reflect U.S. financial, legal, and market conditions. By contrast, a
                number of commenters argued that the final rule should be more
                consistent with the Basel NSFR standard, particularly with respect to
                elements that would be more stringent under the proposed rule than the
                Basel NSFR standard.
                 In developing the proposed and final rules, the agencies considered
                the Basel NSFR standard as well as financial, legal, market, and other
                considerations specific to the United States. Basing the final rule on
                the general framework of the Basel NSFR standard helps promote
                competitive equity with respect to covered companies and other large,
                internationally active banking organizations in other jurisdictions,
                facilitate regulatory consistency across jurisdictions, and ensure a
                minimum level of resiliency across the global financial system. Where
                appropriate, the final rule differs from the Basel NSFR standard to
                reflect specific characteristics of U.S. markets, practices of U.S.
                banking organizations and domestic policy objectives.\47\
                ---------------------------------------------------------------------------
                 \47\ Notable divergences in the final rule from the Basel NSFR
                standard include the treatment of level 1 liquid asset securities,
                certain short-term secured lending transactions backed by level 1
                liquid assets, variation margin in derivatives transactions, and
                non-deposit retail funding.
                ---------------------------------------------------------------------------
                E. NSFR Scope and Minimum Requirement Under the Final Rule--Full and
                Reduced NSFR
                1. Proposed Minimum Requirement and the Tailoring Final Rule
                 In the tailoring proposals, the agencies re-proposed the scope of
                application of the NSFR proposed rule. The tailoring proposals would
                have established four categories of requirements--Category I, II, III,
                and IV--that would have been used to tailor the application of the NSFR
                requirement based on the risk profile of a top-tier banking
                organization as measured by the risk-based indicators.\48\ Covered
                companies subject to Category I and II requirements would have been
                subject to the full requirements of the proposed rule (full NSFR).
                Under Category III or Category IV, however, covered companies would
                have been subject to further tailored NSFR requirements based on the
                top-tier banking organization's level of weighted short-term wholesale
                funding. Specifically, a covered company that meets the criteria for
                Category III with $75 billion or more in average weighted short-term
                wholesale funding would have been subject to the full NSFR requirement.
                By contrast, banking organizations in Category III with less than $75
                billion in average weighted short-term wholesale funding, or in
                Category IV with $50 billion or more in average weighted short-term
                wholesale funding, would have been required to comply with a reduced
                NSFR (reduced NSFR) requirement, calibrated at a level equivalent to
                between 85 and 70 percent of the full NSFR requirement.\49\ Banking
                organizations in Category IV with less than $50 billion in weighted
                short-term wholesale funding would not have been subject to an NSFR
                requirement. In addition, a depository institution subsidiary of a
                covered company meeting the criteria of Category I, II, or III would
                have been required to comply with the NSFR requirement to which its
                parent covered company was subject if the depository institution
                subsidiary's total consolidated assets were $10 billion or greater.
                Depository institution subsidiaries with less than $10 billion in total
                consolidated assets, as well as depository institution subsidiaries of
                covered companies meeting the criteria of Category IV, would not have
                been required to comply with an NSFR requirement.
                ---------------------------------------------------------------------------
                 \48\ See section III.B of this Supplementary Information
                section. In the tailoring proposals, the proposed scope of
                application for the NSFR was the same as that proposed for the LCR
                rule.
                 \49\ As noted above, the tailoring proposals would have removed
                the Board's modified LCR and modified NSFR requirement because the
                reduced LCR and reduced NSFR would be better designed for assessing
                liquidity and funding risks for banking organizations in Categories
                III and IV.
                ---------------------------------------------------------------------------
                 The tailoring final rule adopted these categories, with certain
                changes, for purposes of the LCR rule and the agencies' capital rule.
                Under the tailoring final rule, Category I requirements apply to U.S.
                global systemically important banks (GSIBs)
                [[Page 9129]]
                and any of their depository institution subsidiaries with $10 billion
                or more in consolidated assets. Category II requirements apply to top-
                tier banking organizations,\50\ other than U.S. GSIBs, with $700
                billion or more in consolidated assets or $75 billion or more in
                average cross-jurisdictional activity, and to their depository
                institution subsidiaries with $10 billion or more in consolidated
                assets. Category III requirements apply to top-tier banking
                organizations that have $250 billion or more in consolidated assets, or
                that have $100 billion or more in consolidated assets and also have $75
                billion or more in (1) average nonbank assets, (2) average weighted
                short-term wholesale funding, or (3) average off-balance sheet
                exposure, that are not subject to Category I or II requirements.
                Category III requirements also apply to depository institution
                subsidiaries of these top-tier banking organizations, each with $10
                billion or more in consolidated assets. Category IV requirements apply
                to top-tier depository institution holding companies or U.S.
                intermediate holding companies that in each case have $100 billion or
                more in consolidated assets and $50 billion or more in average weighted
                short-term wholesale funding that are not subject to Category I, II or
                III requirements.
                ---------------------------------------------------------------------------
                 \50\ See supra note 19.
                ---------------------------------------------------------------------------
                 Under the tailoring final rule, covered companies in Category I and
                II, or in Category III with $75 billion or more in average weighted
                short-term wholesale funding are subject to the full requirements of
                the LCR rule. All other covered companies in Category III and covered
                companies in Category IV with $50 billion or more in average weighted
                short-term wholesale funding are subject to a reduced LCR requirement
                calibrated at 85 percent and 70 percent, respectively. The calibration
                approaches outlined in the tailoring proposals and tailoring final rule
                were designed to better align the regulatory requirements of banking
                organizations with their risk profiles, taking into account their size
                and complexity, as well as their potential impact on systemic risk.
                 The final rule adopts the risk-based category approach used in the
                tailoring final rule for purposes of applying the NSFR. The application
                of the NSFR requirements to specific entities based on their tailoring
                category is discussed further below.
                2. Applicability of the Final Rule to U.S. Intermediate Holding
                Companies and Use of the Risk-Based Indicators
                 The tailoring proposals would have applied liquidity requirements
                to foreign banking organizations based on the risk profile of their
                combined U.S. operations. Specifically, the proposed NSFR requirements
                would have applied to a foreign banking organization based on the
                combined risk profile of its U.S. intermediate holding company and any
                U.S. branches or agencies, as measured by the risk-based
                indicators.\51\
                ---------------------------------------------------------------------------
                 \51\ The tailoring proposals also sought comment on whether
                standardized liquidity requirements, such as the LCR and NSFR,
                should apply to the U.S. branches and agencies of a foreign banking
                organization to complement the internal liquidity stress testing
                standards that currently apply to these entities. As described in
                the tailoring final rule, the Board continues to consider whether to
                develop and propose for implementation a standardized liquidity
                requirement with respect to the U.S. branches and agencies of
                foreign banking organizations. See 84 FR at 59257. Any such
                requirement would be subject to notice and comment as part of a
                separate rulemaking process.
                ---------------------------------------------------------------------------
                 Most commenters argued that the NSFR requirement should apply
                directly to a U.S. intermediate holding company of a foreign banking
                organization based on the U.S. intermediate holding company's risk
                profile. Some commenters further asserted that no NSFR requirement
                should be imposed on U.S. intermediate holding companies in view of the
                application of the NSFR under home country standards to the top-tier
                foreign parent. These commenters argued that the application of an NSFR
                requirement to U.S. intermediate holding companies is inconsistent with
                the principles of national treatment and equality of competitive
                opportunity because mid-tier U.S. bank holding companies of a similar
                size and risk profile would not be subject to an NSFR requirement but
                rather would be reflected in the NSFR applied at the top-tier
                consolidated U.S. parent. Other commenters argued that the liquidity
                requirements that apply to foreign banking organizations' U.S.
                operations, such as internal liquidity stress testing and liquidity
                risk management standards, and total loss-absorbing capacity (TLAC)
                instruments issued by U.S. intermediate holding companies make the
                application of the NSFR rule unnecessary for such companies. In
                addition, some commenters argued that U.S. intermediate holding
                companies should not be subject to the NSFR rule until after the
                agencies have conducted an impact analysis. By contrast, other
                commenters supported the proposed application of an NSFR requirement to
                a U.S. intermediate holding company based on the risk profile of the
                combined U.S. operations of the foreign banking organization.
                 A U.S. intermediate holding company poses risks in the United
                States similar to domestic banking organizations of a similar size and
                risk profile, even if the parent foreign banking organization is
                subject to an NSFR requirement in its home jurisdiction. The LCR rule,
                the Board's enhanced prudential standards rule, and the final rule
                apply to applicable U.S. banking organizations on a global consolidated
                basis and incorporate certain liquidity risks posed by mid-tier holding
                companies and their subsidiaries.\52\ For this reason, such
                requirements do not apply directly to mid-tier holding companies on a
                standalone basis. Consistent with the LCR rule and the Board's enhanced
                prudential standards rule, the final rule applies to a U.S.
                intermediate holding company of a foreign banking organization because
                of the risks it presents to the U.S. financial system on a consolidated
                basis. However, the final rule does not apply liquidity or funding
                requirements to a subsidiary holding company of a U.S. intermediate
                holding company of a foreign banking organization. Further, for the
                reasons described in section V.A of this Supplementary Information
                section, the NSFR requirement is a complement to the LCR rule and other
                regulatory requirements for banking organizations that can present
                material risks to the U.S. financial system. In light of these
                concerns, the agencies are applying an NSFR requirement to U.S.
                intermediate holding companies.
                ---------------------------------------------------------------------------
                 \52\ The consolidated risks posed by U.S. banking organizations
                to the U.S. financial system also include risks derived from
                foreign-based branches and subsidiaries.
                ---------------------------------------------------------------------------
                 In addition, consistent with the scope of application of the LCR
                rule, the final rule applies the NSFR requirement to a U.S.
                intermediate holding company based on the risk profile of the U.S.
                intermediate holding company, rather than on the combined U.S.
                operations of the foreign banking organization.\53\ Specifically, the
                final rule applies a full NSFR or reduced NSFR requirement to a U.S.
                intermediate holding company under the risk-based categories based on
                measures of the U.S. intermediate holding company's risk-based
                indicators. This approach helps to enhance the efficiency of NSFR
                requirements relative to the proposal, because stable funding
                requirements that apply to a U.S. intermediate holding company are
                based on the U.S.
                [[Page 9130]]
                intermediate holding company's risk profile.
                ---------------------------------------------------------------------------
                 \53\ See supra note 18.
                ---------------------------------------------------------------------------
                3. NSFR Minimum Requirements Under the Final Rule: Applicability and
                Calibration
                 A number of commenters argued that the re-proposed scope of
                applicability of the NSFR requirement was too stringent. Some
                commenters argued that smaller regional banking organizations should
                not be subject to the NSFR rule and that NSFR requirements for Category
                IV banking organizations should be eliminated. By contrast, other
                commenters argued that the tailoring proposals would tailor NSFR
                requirements in a way that would weaken the safety and soundness of
                large banking organizations and increase risks to U.S. financial
                stability. Some commenters argued that full NSFR requirements should
                apply to all covered companies until after the final rule has been
                effective for a sufficiently long period of time for the agencies to
                evaluate its efficacy. Other commenters advocated for further tailoring
                of the NSFR requirements.
                 For the reasons discussed below, the final rule generally retains
                the NSFR requirements described under the tailoring proposals. The
                final rule adopts a reduced NSFR requirement calibrated to 85 percent
                of the full NSFR requirement for Category III banking organizations
                with less than $75 billion in weighted short-term wholesale funding,
                and to 70 percent of the full NSFR requirement for Category IV banking
                organizations with $50 billion or more in weighted short-term wholesale
                funding.\54\ Consistent with the tailoring proposals, depository
                institution subsidiaries with less than $10 billion in total
                consolidated assets would not be subject to an NSFR requirement.
                Moreover, no NSFR requirement applies at the subsidiary depository
                institution-level under Category IV.
                ---------------------------------------------------------------------------
                 \54\ Under the final rule, a banking organization applies the
                appropriate adjustment factor to its calculated RSF amount (required
                stable funding adjustment percentage), by multiplying its RSF amount
                by its required stable funding adjustment percentage. Banking
                organizations subject to the full NSFR requirement apply a 100
                percent required stable funding adjustment percentage. Banking
                organizations subject to a reduced NSFR requirement apply an 85 or
                70 percent required stable funding adjustment percentage.
                ---------------------------------------------------------------------------
                a) NSFR Requirements Under Category I
                 Consistent with the scope of application of the LCR rule, the
                tailoring proposals would have applied full NSFR requirements to
                covered companies that meet the criteria for Category I. The agencies
                did not receive comments on the application of the NSFR requirement
                under Category I and are finalizing this aspect as proposed.
                b) NSFR Requirements Under Category II
                 The tailoring proposals would have applied the full NSFR
                requirement to covered companies that meet the criteria for Category
                II. Some commenters argued that Category II should include a reduced
                NSFR requirement to reflect the lower risk profile of Category II
                banking organizations relative to those in Category I. Specifically,
                these commenters argued certain banking organizations in Category II
                present relatively lower stable funding risks than Category I banking
                organizations due to such banking organizations' concentration in
                custody activities and use of operational deposits.
                 Similar to U.S. GSIBs and their large depository institution
                subsidiaries, banking organizations that meet the criteria for Category
                II provide material levels of financial intermediation within the
                United States or internationally, and the NSFR helps to ensure that
                such banking organizations have appropriate funding to be in a position
                to sustain the necessary intermediation activities over a range of
                conditions. Additionally, the failure or distress of banking
                organizations that meet the criteria for Category II could impose
                significant costs on the U.S. financial system and economy. For
                example, any very large or global banking organization, including one
                that has a significant custody business, that is subject to asset fire
                sales resulting from funding disruptions is likely to transmit distress
                on a broader scale because of the greater volume of assets it may sell
                and the number of its counterparties across multiple jurisdictions.
                Similarly, a banking organization with significant international
                activity is more exposed to the risk of ring-fencing of funding
                resources by one or more jurisdictions. Ring-fencing may hamper the
                movement of funding, regardless of the level of custody business. More
                generally, the overall size of a banking organization's operations,
                material transactions in foreign jurisdictions, and the use of overseas
                funding sources add complexity to the management of the banking
                organization's funding profile. For these reasons, the agencies are
                adopting the proposal to apply the full NSFR requirement to Category II
                banking organizations.
                c) NSFR Requirements Under Category III
                 As described above, the tailoring proposals would have
                differentiated NSFR requirements in Category III based on whether the
                level of average weighted short-term wholesale funding of a banking
                organization was at least $75 billion and sought comment on the
                calibration of the reduced NSFR requirement.
                 Some commenters argued that Category III banking organizations with
                less than $75 billion in average weighted short-term wholesale funding
                should not be subject to a reduced NSFR requirement. By contrast, many
                commenters expressed support for a reduced NSFR requirement under
                Category III, and generally recommended that such requirement be
                calibrated to 70 percent of the full NSFR requirement, consistent with
                the calibration of the Board's previously proposed modified NSFR
                requirement. In addition, several of these commenters argued that the
                reduced NSFR requirement should apply only to holding companies.
                 To improve the calibration of a banking organization's minimum ASF
                amount relative to its funding profile and its potential risk to U.S.
                financial stability, the final rule differentiates between banking
                organizations based on their category and their reliance on short-term
                wholesale funding. As discussed in the tailoring final rule, ongoing
                reliance on short-term, wholesale funding can make a banking
                organization more vulnerable to safety and soundness and financial
                stability risks. Accordingly, under the final rule, a banking
                organization subject to Category III standards with average weighted
                short-term wholesale funding of $75 billion or more is subject to the
                full NSFR requirement.
                 A banking organization subject to Category III standards with
                average weighted short-term wholesale funding of less than $75 billion
                is subject to a reduced NSFR requirement calibrated at 85 percent of
                the full NSFR requirement. An 85 percent calibration is appropriate for
                these banking organizations because they are less likely to contribute
                to a systemic event relative to similarly sized banking organizations
                that have a greater reliance on short-term wholesale funding and
                therefore, are more complex, and whose distress or failure is more
                likely to have greater systemic impact.
                 As a general matter, the alignment of the reduced NSFR with the
                Board's initially proposed modified NSFR
                [[Page 9131]]
                would not be appropriate because each of these requirements was
                designed to address different risk profiles. The Board designed the
                modified NSFR for smaller U.S. holding companies with less complex
                business models and more limited potential impact on U.S. financial
                stability compared to banking organizations that would be subject to
                the reduced NSFR requirement.\55\
                ---------------------------------------------------------------------------
                 \55\ The Board's initially proposed modified NSFR applied to
                depository holding companies with between $50 billion and less than
                $250 billion in total assets whereas the tailoring proposal would
                have applied Category III requirements to banking organizations that
                either have $250 billion or more in total assets or have $100
                billion or more in total assets as well as heightened levels of off-
                balance sheet exposure, nonbank assets, or weighted short-term
                wholesale funding.
                ---------------------------------------------------------------------------
                d) NSFR Requirements Under Category IV
                 Under the tailoring proposals, a Category IV banking organization
                with average weighted short-term wholesale funding of $50 billion or
                more would have been required to comply with a reduced NSFR requirement
                of between 70 and 85 percent. However, the reduced NSFR requirement
                under Category IV would not have applied to standalone depository
                institutions or at the level of a subsidiary depository institution.
                 Some commenters argued that all banking organizations subject to
                Category IV should be subject to an NSFR requirement and that the
                requirement could be further modified or simplified for these
                organizations, as appropriate. In contrast, other commenters argued for
                the removal of any NSFR requirement for all banking organizations
                subject to Category IV.
                 For a banking organization with total consolidated assets of at
                least $100 billion and less than $250 billion, average weighted short-
                term wholesale funding of $50 billion or more demonstrates a material
                reliance on short-term, generally uninsured funding from more
                sophisticated counterparties, which can make a banking organization
                more vulnerable to large-scale funding runs, generating both safety and
                soundness and financial stability risks. Accordingly, such a banking
                organization is relatively more vulnerable to the funding stability
                risks addressed by the reduced NSFR requirement relative to similarly
                sized banking organizations that rely more heavily on stable funding
                such as retail deposits and have traditional balance sheet structures.
                The application of the NSFR requirement, albeit at a reduced level, is
                therefore appropriate for these banking organizations given their lower
                potential impact on systemic risk.
                 The final rule calibrates the minimum reduced NSFR requirement
                under Category IV at a level equivalent to 70 percent of the minimum
                level required under Category I and II. The difference between the 85
                percent reduced NSFR calibration in Category III and the reduced 70
                percent LCR calibration in Category IV reflects the differences in risk
                profiles of banking organizations subject to each respective
                requirement. The 70 percent calibration recognizes that these banking
                organizations are less complex and smaller than other banking
                organizations subject to more stringent requirements under the final
                rule and would likely have more modest systemic impact than larger,
                more complex banking organizations if they experienced funding
                disruptions. Banking organizations that are not subject to Category I,
                II or III requirements and that have average weighted short-term
                wholesale funding of less than $50 billion are not subject to an NSFR
                requirement under the final rule. Depository institution subsidiaries
                of banking organizations subject to Category IV requirements are not
                subject to an NSFR requirement.
                4. Applicability to Depository Institution Subsidiaries
                 As described above, the tailoring proposals would have applied the
                same NSFR requirement to top-tier banking organizations subject to
                Category I, II, or III standards and to their subsidiary depository
                institutions with $10 billion or more in total consolidated assets.
                 Although a number of commenters generally supported the application
                of consistent requirements for U.S. depository institutions holding
                companies and their depository institution subsidiaries, many
                commenters requested that the agencies eliminate the application of the
                NSFR requirement to depository institutions that are consolidated
                subsidiaries of covered companies. These commenters stated that the
                NSFR rule should recognize that the holding company structure in the
                United States allows for banking organizations to manage liquidity
                across the broader corporate group and provides firms with flexibility
                regarding where liquidity is held within the corporate structure. These
                commenters also argued that an NSFR requirement for a consolidated
                depository institution is unnecessary in view of the supervisory
                monitoring and prudential limits applicable to the depository
                institution's funding structure, as well as the source of strength
                requirements that obligate the parent to remediate any funding
                deficiencies at a subsidiary depository institution. Alternatively,
                these commenters suggested that the agencies should rely on their
                supervisory authority to ensure stable funding for depository
                institutions. The commenters also requested that, if the agencies apply
                the NSFR requirement to depository institutions, an exemption should
                apply to depository institutions that comprise 85 percent or more of
                the assets of the consolidated organization. Commenters supporting such
                an approach stated that the costs of separately applying an NSFR at the
                subsidiary depository institution-level would outweigh any benefits.
                 The proposed treatment would have aligned with the agencies'
                longstanding policy of applying similar standards to holding companies
                and their depository institution subsidiaries. Large depository
                institution subsidiaries play a significant role in a banking
                organization's funding structure, and in the operation of the payments
                system. Such entities should have sufficient amounts of stable funding
                to meet their funding needs rather than be overly reliant on their
                parents or affiliates. In addition, these large subsidiaries generally
                have access to deposit insurance coverage and, as a result, application
                of standardized funding requirements would help to reduce the potential
                for losses to the FDIC's deposit insurance fund. Accordingly, the final
                rule maintains the application of an NSFR requirement to covered
                depository institution subsidiaries as proposed.
                VI. Definitions
                 The proposed rule would have shared definitions with the LCR rule
                and would have been codified in the same part of the Code of Federal
                Regulations as the LCR rule for each of the agencies.\56\ The proposed
                rule also would have revised certain of the existing definitions under
                the LCR rule and adopted new definitions for purposes of both the LCR
                and NSFR rules. The agencies received a number of comments regarding
                the proposed definitions.
                ---------------------------------------------------------------------------
                 \56\ 12 CFR part 50 (OCC); 12 CFR part 249 (Board); 12 CFR part
                329 (FDIC).
                ---------------------------------------------------------------------------
                 One commenter argued that certain of the LCR rule's definitions are
                flawed and should not be used for purposes of the NSFR rule because
                they are the result of an internationally negotiated standard that was
                not properly calibrated to reflect U.S. market conditions or U.S.
                banking organizations' practices. As discussed in section V.C of this
                Supplementary Information section, to the extent that the final rule
                incorporates definitions
                [[Page 9132]]
                also used in the LCR rule, their usage in the final rule generally
                reflects assumptions specific to the final rule. The agencies also note
                that these common definitions include defined terms that are not
                included in the Basel LCR standard, but are specific to U.S. markets
                and banking organizations. For example, the definitions for certain
                types of brokered deposits and collateralized deposits are not included
                in the Basel LCR standard or the Basel NSFR standard. In addition, the
                final rule has tailored certain definitions, such as the definition of
                ``operational deposit,'' for the U.S. market. The use of common
                definitions across the regulatory framework, as appropriate, helps to
                minimize compliance costs, facilitate comparability across banking
                organizations, and reduce regulatory burden. Comments regarding
                specific defined terms are discussed below. For ease of convenience,
                the following discussion refers to Sec. __.3 of the LCR rule, even
                though the definitions found in Sec. __.3 will apply to both the LCR
                rule and final rule.
                A. Revisions to Existing Definitions
                 The proposed rule would have amended the following definitions that
                were included in Sec. __.3 of the LCR rule: ``calculation date,''
                ``collateralized deposits,'' ``committed,'' ``covered nonbank
                company,'' ``operational deposit,'' ``secured funding transaction,''
                ``secured lending transaction,'' and ``unsecured wholesale funding.''
                1. Revised Definitions for Which the Agencies Received no Comments
                 The proposed rule would have amended the existing definition of
                ``calculation date,'' ``committed,'' and ``covered nonbank company'' in
                Sec. __.3 of the LCR rule. The agencies received no comments on the
                changes to these definitions and are adopting these revised definitions
                as proposed.
                 Calculation date. The final rule amends to the definition of
                ``calculation date'' in Sec. __.3 of the LCR rule to include any date
                on which a covered company calculates its NSFR for purposes of Sec.
                __.100 of the final rule.
                 Committed. The definition of ``committed'' in Sec. __.3 of the LCR
                rule provides the criteria under which a credit facility or liquidity
                facility is considered committed for purposes of the LCR rule. To more
                clearly reflect the intended meaning of ``committed,'' the final rule,
                consistent with the proposed rule, amends the definition to state that
                a credit or liquidity facility is committed if it is not
                unconditionally cancelable under the terms of the facility. Consistent
                with the agencies' risk-based capital rule, the final rule defines
                ``unconditionally cancelable'' to mean that a covered company may
                refuse to extend credit under the facility at any time, including
                without cause (to the extent permitted under applicable law).\57\ For
                example, a credit or liquidity facility that permits a covered company
                to refuse to extend credit only upon the occurrence of a specified
                event (such as a material adverse change) would not be considered
                unconditionally cancelable, and therefore the facility would be
                considered ``committed'' under the final rule. Conversely, a credit or
                liquidity facility that the covered company may cancel without cause
                would be considered unconditionally cancelable because the covered
                company may refuse to extend credit under the facility at any time, and
                therefore the facility would not be considered ``committed.'' For
                example, credit card lines that are cancelable without cause (to the
                extent permitted under applicable law), as is generally the case, are
                not considered committed under the amendment to the definition.
                ---------------------------------------------------------------------------
                 \57\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
                (FDIC).
                ---------------------------------------------------------------------------
                 Covered nonbank company. Consistent with the proposed rule, the
                final rule revises the definition of ``covered nonbank company'' to
                clarify that if the Board requires a company designated by the
                Financial Stability Oversight Council (FSOC) for Board supervision to
                comply with the LCR rule or the final rule, it will do so through a
                rulemaking that is separate from the LCR rule and the final rule or by
                issuing an order.
                2. Revised Definitions for Which the Agencies Received Comments
                 The agencies received comments on the following proposed amendments
                to existing definitions that are included in Sec. __.3 of the LCR
                rule: ``collateralized deposit,'' ``operational deposit,'' ``secured
                funding transaction,'' ``secured lending transaction,'' and ``unsecured
                wholesale funding.''
                 Collateralized Deposit. The proposed rule would have amended the
                definition of ``collateralized deposit'' to include those deposits of a
                fiduciary account collateralized as required under state law, as
                applicable to state member and nonmember banks and state savings
                associations. In addition, the proposed rule would have amended the
                definition to include those deposits of a fiduciary account held at a
                covered company for which a depository institution affiliate of the
                covered company is a fiduciary and that the covered company has opted
                to collateralize pursuant to 12 CFR 9.10(c) (for national banks) or 12
                CFR 150.310 (for federal savings associations).
                 The agencies received two comments regarding the definition of
                ``collateralized deposit.'' One commenter supported the proposed
                amendment to include fiduciary deposits collateralized as required
                under state law, as applicable to state member banks, state nonmember
                banks, and state savings associations. The other commenter requested
                that the agencies revise the definition to include secured sweep
                repurchase arrangements, which the commenter described as arrangements
                that allow a customer's balances to be temporarily ``swept'' out of a
                deposit account and into a secured non-deposit funding arrangement with
                the covered company. The commenter argued that secured sweep repurchase
                arrangements are distinct from other secured funding transactions,
                including wholesale funding offered by a broker-dealer, because they
                are typically tied to operational accounts and involve an automated
                sweep of corporate client funds into a secured sweep repurchase
                account, thus posing, in the commenter's view, less liquidity risk. The
                commenter argued that secured sweep repurchase arrangements are similar
                to secured deposit funding because the arrangements are offered as part
                of a broader business relationship between a covered company and a
                customer and, therefore, should not be subject to the unwind provisions
                in Sec. __.21 of the LCR rule.
                 The final rule adopts the amended definition of ``collateralized
                deposit'' as proposed with an adjustment to expressly include deposits
                of a fiduciary account collateralized pursuant to state law
                requirements for which a covered company's depository institution
                affiliate is a fiduciary. The agencies defined ``collateralized
                deposit'' to identify a narrow set of secured funding transactions that
                should not be subject to the unwind provision in the LCR rule for a
                covered company when determining its HQLA amount.\58\ The agencies
                excluded such deposits from the unwind provision based on their unique
                characteristics, including, among other things, that such deposits
                ``are required to be collateralized under applicable law'' and that
                ``the banking relationship associated with collateralized deposit can
                be different in nature from shorter-term repurchase and
                [[Page 9133]]
                reverse repurchase agreements.'' \59\ The revised definition includes
                deposits of a fiduciary account collateralized pursuant to state law
                requirements or at the covered company's discretion pursuant to 12 CFR
                9.10(c) (for national banks) or 12 CFR 150.310 (for federal savings
                associations) in order to provide consistent treatment to deposits that
                are subject to collateralization requirements or have been
                collateralized. Additionally, temporary secured sweep repurchase
                arrangements, including those offered part of a broader business
                relationship, that will mature in 30 calendar days or less of an LCR
                calculation date may affect a covered company's excess HQLA amount
                similar to other wholesale secured funding transactions conducted by a
                broker-dealer and do not qualify for the treatment afforded to
                collateralized deposits.
                ---------------------------------------------------------------------------
                 \58\ See Sec. __.21 of the LCR rule. Certain secured funding
                transactions other than collateralized deposits are used in
                calculating adjusted liquid asset amounts for determining the
                adjusted excess HQLA amount under the LCR rule.
                 \59\ 79 FR at 61473.
                ---------------------------------------------------------------------------
                 Operational Deposit. The proposed rule would have amended the
                definition of ``operational deposit'' to include both deposits received
                by the covered company in connection with operational services provided
                by the covered company and deposits placed by the covered company in
                connection with operational services received by the covered company.
                The proposed rule also would have amended this definition to clarify
                that only deposits can qualify. Further, because operational deposits
                are limited to accounts that facilitate short-term transactional cash
                flows associated with operational services, operational deposits also
                should only have short-term maturities, falling within the proposed
                rule's less-than-six-month maturity category and generally within the
                LCR rule's 30-calendar-day period. Further, because operational
                deposits are limited to accounts that facilitate short-term
                transactional cash flows associated with operational services,
                operational deposits also should only have short-term maturities,
                falling within the proposed rule's less-than-six-month maturity
                category and generally within the LCR rule's 30-calendar-day period.
                Notwithstanding the proposed revisions to this definition, the
                treatment of operational deposits under Sec. Sec. __.32 and __.33 of
                the LCR rule would have remained the same.
                 The agencies received a number of comments regarding the proposed
                definition of ``operational deposit.'' Some commenters requested
                removal of the limitation that operational deposits cannot be provided
                by non-regulated funds. These commenters argued that a deposit placed
                at a covered company by a non-regulated fund for the provision of
                operational services would have similar liquidity risks as a deposit
                placed by a regulated fund for the same operational purposes.\60\ One
                commenter argued that the exclusion of deposits placed by a non-
                regulated fund lacks a clear policy rationale and is unduly strict
                towards the custody bank business model. The commenter also argued that
                this exclusion is more stringent than the treatment of operational
                deposits in the Basel LCR standard. The commenter expressed concern
                that retaining this exclusion could undermine the current trend among
                non-regulated funds of separating the safekeeping and administration of
                their investment assets from their trading and financing activities. A
                commenter also asserted this exclusion is unnecessary because the risk
                associated with operational deposits from non-regulated funds is
                addressed sufficiently by the exclusion of deposits provided in
                connection with a covered company's provision of prime brokerage
                services.
                ---------------------------------------------------------------------------
                 \60\ See Sec. __.4(b)(6) of the LCR rule; 79 FR at 61501. This
                section provides that operational deposits do not include deposits
                that are provided in connection with the covered company's provision
                of prime brokerage services, which include operational services
                provided to a non-regulated fund. Section __.3 of the LCR rule
                defines a ``non-regulated fund'' as any hedge fund or private equity
                fund whose investment adviser is required to file SEC Form PF
                (Reporting Form for Investment Advisers to Private Funds and Certain
                Commodity Pool Operators and Commodity Trading Advisors), other than
                a small business investment company as defined in section 102 of the
                Small Business Investment Act of 1958 (15 U.S.C. 661 et seq.).
                ---------------------------------------------------------------------------
                 One commenter argued that the definition of ``operational deposit''
                should not be limited to deposits. The commenter suggested instead that
                the definition should be revised to include non-deposit unsecured
                wholesale funding that matures within the LCR rule's 30-day time
                horizon, in order to include arrangements that allow an operational
                customer's balances to be temporarily swept out of a deposit account
                into non-deposit products until such time as the funds are needed to
                meet operational demands. The commenter argued that excluding such
                arrangements from the definition of ``operational deposit'' could
                underrepresent the amount of a covered company's funding that is
                associated with the provision of operational services over the LCR
                rule's 30-day time horizon.
                 Operational deposit are deposits necessary for the covered company
                to provide operational services, as that term is defined in Sec. __.3
                of the LCR rule, to the wholesale customer or counterparty providing
                the deposit.\61\ Among other things, the definition requires compliance
                with certain operational requirements of Sec. __.4 of the LCR rule in
                order for a deposit to be recognized as an operational deposit
                (operational requirements).
                ---------------------------------------------------------------------------
                 \61\ See 79 FR at 61498.
                ---------------------------------------------------------------------------
                 The exclusion of deposits provided by non-regulated funds is
                appropriate because, in general, non-regulated funds tend to be
                sophisticated and are more likely than many other types of
                counterparties to engage in higher-risk trading strategies involving
                leverage, which may result in higher cash needs due to collateral calls
                and less stable deposit balances during certain market conditions. In
                comparison to non-financial wholesale counterparties or regulated
                financial sector entities, it is also more likely that operational
                activities at a non-regulated fund would be impacted by the performance
                of the fund's investment or trading activity that relies upon prime
                brokerage services, and thus it would be more difficult to separate its
                deposit balances that are necessary to maintain operational activities
                from its balances that support trading and investment activities that
                rely on prime brokerage services (even if these services are provided
                by different entities of a covered company). As a result, deposits from
                non-regulated funds may present heightened funding risk relative to
                deposits from other counterparties.
                 In addition, operational deposit balances swept out of a deposit
                account and into non-deposit products will not be eligible to be
                considered ``operational deposits''. The LCR rule provides that in
                order to be recognized as an operational deposit, any excess amount not
                linked to operational services must be excluded.\62\
                ---------------------------------------------------------------------------
                 \62\ See Sec. __.4(b)(5) of the LCR rule.
                ---------------------------------------------------------------------------
                 As the preamble to the LCR rule noted, operational deposits are
                assigned a lower outflow rate under the LCR rule compared to other
                short-term wholesale funding due to the perceived stability arising
                from the relationship between a covered company and a depositor, the
                necessity of the deposit for the provision of operational services, and
                the switching costs associated with moving such deposits.\63\ In
                contrast, excess funds, including funds that are swept into non-deposit
                products until funds are needed to meet operational demands, are not
                necessary for the provision of operational services and therefore do
                not exhibit these
                [[Page 9134]]
                characteristics.\64\ Furthermore, the LCR rule excludes from
                operational deposits those deposits held in an account that is designed
                to incentivize customers to maintain excess funds in the account
                through increased revenue, reduction in fees, or other economic
                incentives.\65\ Because the sweep arrangements described by the
                commenter are typically used to increase returns on deposits, the
                continued exclusion of these sweep arrangements from the definition of
                ``operational deposit'' is consistent with this treatment.
                ---------------------------------------------------------------------------
                 \63\ See 79 FR at 61497-502.
                 \64\ See 79 FR at 61500.
                 \65\ See Sec. __.4(b)(4) of the LCR rule.
                ---------------------------------------------------------------------------
                 For these reasons, the final rule adopts the amended definition of
                ``operational deposits'' as proposed.
                 Secured Funding Transaction and Secured Lending Transaction. The
                proposed rule would have revised the definitions of ``secured funding
                transaction'' and ``secured lending transaction'' to clarify that (i)
                the transactions must be secured by a lien on securities or loans,
                rather than secured by a lien on other assets; (ii) the definitions
                include only transactions with wholesale customers or counterparties,
                and (iii) securities issued or owned by a covered company do not
                constitute secured funding or lending transactions.\66\
                ---------------------------------------------------------------------------
                 \66\ As noted in Sec. __.3 of the LCR rule and the proposed
                rule, the definition of ``secured funding transaction'' also
                includes repurchase agreements and securities lending transactions,
                and the definition of ``secured lending transaction'' also includes
                reverse repurchase agreements and securities borrowing transactions,
                as these transactions result in the equivalent of a lien, securing
                the cash leg of the transaction, that gives the asset borrower
                priority over the asset in the event the covered company or the
                counterparty, as applicable, enters into receivership, bankruptcy,
                insolvency, liquidation, resolution, or similar proceeding.
                ---------------------------------------------------------------------------
                 One commenter recommended amending the definitions of ``secured
                funding transaction'' and ``secured lending transaction'' by replacing
                ``securities'' with ``financial assets'' in order to broaden the forms
                of collateral that may be used in transactions that meet the
                definitions. Specifically, the commenter argued that short-term debt,
                commercial paper, gold, and certain other assets should be permitted
                forms of collateral because they effectively reduce the risk associated
                with secured transactions. The same commenter also requested that the
                definition of ``secured lending transaction'' be expanded to include
                certain transactions with retail customers, and, in particular, open-
                maturity loans to retail customers collateralized by customer
                securities, such as a margin loan. The commenter asserted that a
                securities-based loan to a retail counterparty has similar
                characteristics to an open-maturity reverse repurchase agreement with a
                wholesale counterparty, including that the transaction is fully secured
                by the borrower's collateral, the lender has a legal right and
                operational ability to close out the loan upon default by the
                counterparty and sell the collateral to offset the lender's credit
                exposure, and the maturity of the loan extends each day that a notice
                of termination is not provided.
                 Under the LCR rule, the cash flows associated with secured funding
                and secured lending transactions take into account the relative
                liquidity of the cash and marketable collateral that will be exchanged
                at the maturity of the transaction and recognize that collateral in the
                form of HQLA securities tends to be the most liquid. By contrast,
                collateral that is not generally traded in liquid markets, including
                property, plant, and equipment, may provide limited liquidity value,
                particularly relative to the LCR rule's time horizon. While collateral
                that is not in the form of securities or loans may serve to mitigate
                credit risk, in the agencies' experience, the cash flows on lending
                secured by such collateral, including the likelihood of renewing the
                lending at maturity, depend to a greater degree on the characteristics
                of the counterparty rather than the collateral, thus making the
                liquidity risk associated with such arrangements more akin to that of
                unsecured lending. Accordingly, such lending transactions should not
                necessarily receive a 100 percent inflow rate under the LCR rule;
                rather, the inflow rate should depend on the characteristics of the
                borrower, which more accurately reflect the likelihood that a covered
                company will be able to realize inflows from or roll over some or all
                of the loan during a period of significant stress. In contrast to their
                contributions to total net cash outflows under the LCR rule, the
                contributions of secured loan assets and secured funding liabilities to
                the funding risk of a covered company's aggregate balance sheet
                generally depend on their maturities and counterparty characteristics
                and the final rule generally treats secured and unsecured wholesale
                transactions similarly.
                 In addition, while there is no defined term ``securities'' in the
                LCR rule, the agencies are clarifying that a funding transaction that
                is not a security, is conducted with a wholesale customer or
                counterparty, and is secured under applicable law by a lien on third-
                party short-term debt or commercial paper provided by a covered company
                would qualify as a secured funding transaction. Similarly, a lending
                transaction that is not a security, is conducted with a wholesale
                customer or counterparty, and is secured under applicable law by a lien
                on third-party short-term debt or commercial paper provided by the
                wholesale customer or counterparty would qualify as a secured lending
                transaction. However, secured funding and lending transactions where
                the collateral is in the form of gold or other commodities would not
                meet the definition of a secured funding transaction or secured lending
                transaction. These assets exhibit an increased volatility in market
                value and there are logistical factors associated with holding and
                liquidating these assets as compared to loans and securities.\67\
                ---------------------------------------------------------------------------
                 \67\ The LCR rule for similar reasons does not include gold
                bullion as a level 1 liquid asset. See 79 FR at 61456.
                ---------------------------------------------------------------------------
                 The final rule adopts the amended definitions of ``secured funding
                transaction'' and ``secured lending transaction'' as proposed. Under
                the final rule, the definitions of ``secured funding transaction'' and
                ``secured lending transaction'' include only transactions with
                wholesale customers or counterparties. Secured lending transactions do
                not include secured lending to a retail customer or counterparty, such
                as a retail margin loan. For purposes of the LCR rule generally,
                secured lending transactions categorize certain lending to a wholesale
                customer or counterparty where the expectation is that the transaction
                may mature in the near term with the covered company receiving cash
                from the counterparty and being required to return collateral to the
                counterparty.\68\ In contrast, the treatment of retail exposures
                generally reflects the agencies' expectation that a covered company
                will need to maintain a portion of retail lending even during stress,
                regardless of collateralization.\69\ As noted above, RSF factors
                assigned to unencumbered loans to retail and wholesale customers and
                counterparties under the final rule reflect their maturity and
                counterparty, rather than collateralization, and the RSF factors
                assigned to secured retail lending are the same as for secured lending
                to non-financial sector wholesale counterparties. As a result, the
                final rule, like the proposed rule, categorizes secured lending to a
                retail customer or counterparty separately from secured lending
                transactions with wholesale customers or counterparties for
                [[Page 9135]]
                purposes of assigning RSF factors under the NSFR requirement.\70\
                ---------------------------------------------------------------------------
                 \68\ See 79 FR at 61513.
                 \69\ See 79 FR at 61512.
                 \70\ See section VII.D of this Supplementary Information
                section.
                ---------------------------------------------------------------------------
                 Finally, under the final rule securities issued or owned by a
                covered company do not constitute secured funding or lending
                transactions. For example, asset-backed securities issued by a special
                purpose entity that a covered company consolidates on its balance sheet
                are not secured funding transactions. Similarly, securities owned by a
                covered company where contractual payments to the covered company are
                collateralized are not secured lending transactions.
                 Unsecured wholesale funding. The proposed rule would have amended
                the definition of ``unsecured wholesale funding'' to mean a liability
                or general obligation of a covered company to a wholesale customer or
                counterparty that is not a secured funding transaction. The agencies
                received one comment regarding this proposed definition. The commenter
                asserted that, although ``asset exchange'' is separately defined in the
                LCR rule, an asset exchange could nonetheless fall under the definition
                of ``unsecured wholesale funding'' because it could be viewed as a
                liability or general obligation that is not a secured funding
                transaction if entered into with a wholesale customer or counterparty.
                 The final rule adopts the amended definition of ``unsecured
                wholesale funding'' as proposed with an adjustment to expressly exclude
                asset exchanges. Under the final rule, secured funding with a wholesale
                counterparty that does not meet the revised definition of ``secured
                funding transaction'' generally meets the definition of ``unsecured
                wholesale funding.'' However, consistent with the agencies' intent to
                provide a special framework for asset exchanges, the definitions of
                ``unsecured wholesale funding'' and ``unsecured wholesale lending'' in
                the final rule have been revised to exclude asset exchanges.\71\
                ---------------------------------------------------------------------------
                 \71\ In addition to the unique treatment of asset exchanges in
                Sec. __.102(c) of the final rule, asset exchanges are also subject
                to special treatment pursuant to Sec. __.106(d). These treatments
                are discussed further in section VII.D.4 of this Supplementary
                Information section.
                ---------------------------------------------------------------------------
                3. Other Definitions and Requirements for Which the Agencies Received
                Comments
                 Given that the definitions in the LCR rule would apply to the final
                rule, the proposed rule also requested comment as to whether any other
                existing definitions or terms should be amended. The agencies received
                several comments requesting revisions and clarifications to other
                definitions in the LCR rule that the agencies did not propose to amend.
                 Credit and liquidity facility. One commenter requested that the
                agencies provide examples of a lending commitment that would qualify as
                a ``credit facility'' or ``liquidity facility'' under the rules.
                Section __.3 of the LCR rule defines ``credit facility'' to mean a
                legally binding agreement to extend funds if requested at a future
                date, including a general working capital facility such as a revolving
                credit facility for general corporate or working capital purposes.\72\
                Other examples of credit facilities may include a letter of credit,
                home equity line of credit, or any other legally binding agreement to
                extend funds if requested at a future date that is not included in the
                definition of ``liquidity facility.''
                ---------------------------------------------------------------------------
                 \72\ A credit facility does not include a legally binding
                written agreement to extend funds at a future date to a counterparty
                made for the purpose of refinancing the debt of the counterparty
                when it is unable to obtain a primary or anticipated source of
                funding, which is included in the definition of ``liquidity
                facility.''
                ---------------------------------------------------------------------------
                 Section __.3 of the LCR rule defines ``liquidity facility'' to mean
                a legally binding written agreement to extend funds at a future date to
                a counterparty that is made for the purpose of refinancing the debt of
                the counterparty when it is unable to obtain a primary or anticipated
                source of funding. The definition of ``liquidity facility'' further
                clarifies that it includes an agreement to provide liquidity support to
                asset-backed commercial paper by lending to, or purchasing assets from,
                any structure, program, or conduit in the event that funds are required
                to repay maturing asset-backed commercial paper.\73\ Other examples of
                liquidity facilities include agreements related to non-asset backed
                commercial paper programs, secured financing transactions, securities
                investment vehicles, and conduits that, in each case, meet the
                requirements of the liquidity facility definition in Sec. __.3 of the
                LCR rule. The LCR rule requires a facility that has characteristics of
                both credit and liquidity facilities to be classified as a liquidity
                facility.
                ---------------------------------------------------------------------------
                 \73\ A liquidity facility excludes facilities that are
                established solely for the purpose of general working capital, such
                as revolving credit facilities for general corporate or working
                capital purposes.
                ---------------------------------------------------------------------------
                 In addition, a commenter asked the agencies to clarify the
                treatment of (1) commercial paper backstop facilities where the
                customer has no commercial paper currently outstanding and (2)
                facilities that are expected to be cancelled without funding, such as
                an unfunded bridge lending facility in connection with a capital
                markets issuance. A commercial paper backstop facility may meet the
                definition of a liquidity facility because the purpose of the facility
                is to provide liquidity support in the future, if needed, regardless of
                whether the customer currently has any commercial paper outstanding or
                not. The determination of whether such a facility is ``committed''
                likewise would not be impacted by the fact that the customer has no
                amount of commercial paper outstanding, but would depend on whether it
                was ``unconditionally cancelable'' as described above.\74\ With respect
                to an unfunded bridge lending facility in connection with a capital
                markets issuance, the facility may be considered a credit facility if
                its sole purpose is to provide working capital to the issuer prior to
                the capital markets issuance. If, however, the unfunded bridge lending
                facility's purpose at least partially includes providing funds in the
                event that the issuer cannot otherwise refinance its outstanding
                liabilities prior to the capital market issuance, then the facility
                would likely meet the definition of a liquidity facility. Whether a
                facility meets the definition of a credit or liquidity facility at a
                calculation date is not influenced by expectations regarding its future
                cancellation. In addition, the determination of whether such a facility
                is ``committed'' at a calculation date depends on whether it was
                ``unconditionally cancelable,'' and would not be impacted by the
                likelihood of its cancellation.
                ---------------------------------------------------------------------------
                 \74\ The undrawn amount of the facility would be determined
                under Sec. __.32(e)(2) of the LCR rule and Sec. __.106(a)(2) of
                the final rule.
                ---------------------------------------------------------------------------
                 Retail customer or counterparty. Section __.3 of the LCR rule
                defines ``retail customer or counterparty'' to include 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. One commenter suggested
                changing the definition of ``retail customer or counterparty'' to
                account for certain trusts, such as common trust arrangements with
                corporate trustees that the commenter viewed as akin to a natural
                person. The commenter suggested that a natural person's direct or
                indirect power to control a trust's investment is a better measure for
                assessing whether a trust should be treated for purposes of the LCR and
                NSFR rule as a retail customer or counterparty. The commenter suggested
                that a natural person's direct
                [[Page 9136]]
                or indirect power to control a trust's investment is a better measure
                for assessing whether a trust should be treated for purposes of the LCR
                and NSFR rules as a retail customer or counterparty.
                 The agencies expect that, as a class, living and testamentary
                trusts with corporate trustees are more likely to exhibit behavioral
                traits and sophistication comparable to those of a wholesale rather
                than retail customer or counterparty, even if a natural person has
                indirect authority over the trustee or complementary power to direct
                the trust's investment activity.\75\ For example, despite the authority
                of a natural person to direct the trustee's investment, a corporate
                trustee would be more likely to act for the trust in the manner of a
                financial counterparty. The final rule does not include any change to
                the definition of ``retail customer or counterparty.''
                ---------------------------------------------------------------------------
                 \75\ Subsequent to the proposal, the agencies issued in October
                2017 frequently asked questions related to the LCR rule, including
                discussion of corporate trustees. See https://www.federalreserve.gov/supervisionreg/topics/liquidity-coverage-ratio-faqs.htm.
                ---------------------------------------------------------------------------
                 Liquid and readily-marketable. Under the LCR rule, certain assets
                must be liquid and readily-marketable in order to be included as HQLA
                by a covered company. This requirement is intended to ensure that
                assets included as HQLA exhibit a level of liquidity that would allow a
                covered company to convert them into cash during times of stress in
                order to meet its obligations when other sources of liquidity may be
                reduced or unavailable. Under the LCR rule, an asset is 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 a high trading
                volume.
                 The agencies received several comments and requests for
                clarification on this definition. Several commenters suggested that the
                liquid and readily-marketable criteria are unduly difficult to satisfy.
                One commenter stated that banking organizations have had difficulty
                collecting the data necessary to demonstrate that securities meet these
                criteria, and that the cost of collecting data for certain securities
                that are widely accepted as being liquid and readily-marketable
                outweighs the benefits. Several commenters requested additional
                clarification concerning what is required by each of the elements of
                the liquid and readily-marketable standard. For example, commenters
                requested clarification for how to determine that a market maker is
                ``committed,'' that there is a ``large'' number of market participants,
                and that the trading volume for a security is ``high.'' Commenters
                expressed concern that relatively new types of securities and
                securities that are preferred by investors utilizing a ``buy and hold''
                strategy, including securities of the highest credit quality that have
                strong demand at primary issuance, may not meet the criteria.
                Commenters also expressed concern that there appears to be no widely
                accepted or straightforward method for assessing these criteria.
                 Commenters also provided alternative methods to establish that a
                security is liquid and readily-marketable. Several commenters suggested
                that certain asset classes should be presumed to be liquid and readily-
                marketable without further analysis if they meet certain criteria. For
                example, commenters suggested that certain securities should be
                presumed to be liquid and readily-marketable, including (i) securities
                backed by the full faith and credit of the United States, including
                agency securities, (ii) debt issues of foreign sovereigns that meet
                certain risk weight and other criteria, and (iii) U.S. equities
                included in the Russell 1000 index. These commenters also suggested
                that securities presumed to be liquid and readily-marketable could be
                assessed annually or more frequently to ensure that they are liquid and
                readily-marketable. Another commenter suggested that a security should
                be deemed liquid and readily-marketable if a firm can demonstrate that
                the 30-day trading volume for the security exceeds the firm's holdings
                of that security, or that there has been a purchase in the market for
                each offer to sell the security. One commenter suggested that
                securities should be considered liquid and readily-marketable if other
                securities issued by the same issuer or guaranteed by the same credit
                protection provider have already been deemed liquid and readily-
                marketable.
                 The LCR rule's definition of ``liquid and readily-marketable'' is
                intended to complement other restrictions on the assets that can
                potentially be included in HQLA. Within the universe of possible HQLA,
                the criteria in the definition are not overly prescriptive given the
                divergence of trading frequency and practices. Suggestions to more
                narrowly define these criteria would be difficult to apply because of
                the different market structures for different asset classes. In
                response to commenters' requests for clarification, this Supplementary
                Information section describes the agencies' general expectations
                regarding how assets may satisfy the definition's criteria.
                 The agencies do not expect covered companies to conduct the liquid
                and readily-marketable analysis on a daily basis. However, the agencies
                expect that covered companies monitor the securities included as HQLA
                and conduct the analysis periodically, especially following a change in
                market conditions. Covered companies should be able to demonstrate that
                they have an appropriate process to regularly review that each security
                meets the liquid and readily-marketable requirements and that they do
                in fact perform this analysis.
                 The LCR rule defines ``liquid and readily-marketable'' to mean that
                a given security is traded in an active secondary market that satisfies
                four conditions. The first condition is that the active secondary
                market must have more than two committed market makers. The presence of
                committed market makers is an important characteristic of liquid
                securities markets, to ensure that trades within the market will be
                fulfilled on an ongoing basis. A covered company generally may treat a
                market maker as committed if the market maker has a history of trading
                the security in a substantial volume, particularly during times of
                stress. As with the other criteria necessary for a security to be
                liquid and readily-marketable, once the covered company makes an
                initial determination that a security has more than two committed
                market makers, a periodic review is adequate to confirm the continued
                presence of committed market makers. The second condition is that the
                active secondary market must have a large number of non-market maker
                participants acting as buyers and sellers of the security. The agencies
                generally will consider a security to satisfy this requirement if the
                majority of the trading volume for the security involves non-market
                maker participants. It also may be possible to satisfy this requirement
                for securities traded in secondary markets where most trades are
                between market makers if there are a large number of non-market maker
                participants. The third condition is that the active secondary market
                must have timely and observable market prices. The agencies generally
                expect that securities that trade regularly and at prices that are
                quoted daily can be considered to meet this requirement. The fourth
                condition is that the active secondary market must have a high trading
                volume. The analysis should take into account the depth of the market
                across a range of time periods.
                [[Page 9137]]
                 Operational Requirements for HQLA. One commenter suggested that the
                agencies eliminate the operational requirement that firms periodically
                monetize a sample of their HQLA held as eligible HQLA through an
                outright sale or pursuant to a repurchase (LCR monetization
                requirement). The commenter argued that if a security already satisfies
                the agencies' liquid and readily-marketable standard, then it is
                unnecessary to also sell the security to demonstrate its liquidity to
                determine that it is eligible HQLA. The commenter also suggested that
                the agencies accept proof that a security has been used to secure a
                loan from a Federal Home Loan Bank (FHLB) to satisfy the LCR
                monetization requirement. The LCR rule has separate definitions for
                ``High-quality liquid assets'' and ``Eligible HQLA'' for distinct
                purposes under the LCR rule. The agencies are retaining the LCR
                monetization requirement in order to ensure a covered company's
                continued access to funds providers and the effectiveness of its
                processes for monetization. While satisfaction of the liquid and
                readily-marketable criteria indicates that a covered company should be
                able to monetize a security, actual monetization confirms the
                security's marketability and confirms that the covered company
                maintains adequate processes for monetizing the security.
                3. Other Definitions and Requirements for Which the Agencies Did Not
                Receive Comments
                 As noted above in section VI.A.3 of this Supplementary Information
                section, the proposed rule also requested comment as to whether any
                other existing definitions or terms in Sec. __.3 of the LCR rule
                should be amended. Although the agencies did not receive specific
                requests to change the definition of ``brokered deposit,'' several
                commenters expressed concern that the FDIC's interpretation of
                ``brokered deposit'' is overly broad. The final rule amends certain of
                the definitions related to brokered deposits in Sec. __.3 to improve
                clarity and consistency with the FDIC's brokered deposit framework.\76\
                ---------------------------------------------------------------------------
                 \76\ The FDIC separately published a proposal in February 2020
                to modernize its brokered deposit regulations, which would establish
                a new framework for analyzing whether deposits placed through
                deposit placement arrangements qualify as brokered deposits (FDIC
                brokered deposit proposal). Unsafe and Unsound Banking Practices:
                Brokered Deposits Restrictions, 85 FR 7453 (February 10, 2020). In
                addition, in 2019 the FDIC published a final rule amending its
                brokered deposit regulations to conform with changes to section 29
                of the Federal Deposit Insurance Act (FDI Act) made by section 202
                of EGRRCPA related to reciprocal deposits. See Limited Exception for
                a Capped Amount of Reciprocal Deposits From Treatment as Brokered
                Deposits, 84 FR 1346, 1349 (February 4, 2019), technical amendment
                at 84 FR 15095 (April 15, 2019).
                ---------------------------------------------------------------------------
                 Section __.3 previously defined a brokered deposit to mean 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 of the Federal Deposit
                Insurance Act (12 U.S.C. 1831f(g)) (FDI Act) and includes a reciprocal
                brokered deposit and a brokered sweep deposit. The final rule amends
                this definition by adding a reference to the FDIC's regulations and
                eliminating the reference to reciprocal brokered deposits and brokered
                sweep deposits because not all reciprocal and sweep deposits are
                brokered deposits under section 29 of FDI Act and the FDIC's
                implementing regulations.\77\
                ---------------------------------------------------------------------------
                 \77\ In 2019, the FDIC published a final rule implementing
                section 202 of the Economic Growth, Regulatory Relief, and Consumer
                Protection Act, Public Law 115-174, 132 Stat. 1296-1368 (2018),
                codified at 12 U.S.C. 1831f. 84 FR 1346 (February. 4, 2019). Section
                202 amends section 29 of the FDI Act to except a capped amount of
                reciprocal deposits from treatment as brokered deposits for certain
                insured depository institutions. Additionally, a third party whose
                primary purpose is not the placement of funds with depository
                institutions is not a deposit broker, meaning deposits placed or
                facilitated by such a person are not brokered deposits.
                ---------------------------------------------------------------------------
                 For this reason, the final rule also renames ``brokered sweep
                deposit'' to ``sweep deposit'' and ``reciprocal brokered deposit'' to
                ``brokered reciprocal deposit'' wherever these terms appear. These
                clarifications are important in light of ongoing FDIC efforts to update
                the classification of brokered deposits. Under the final rule, the term
                ``sweep deposit'' includes deposits that are brokered deposits as well
                as deposits that are not brokered deposits. The term ``reciprocal
                brokered deposits'' only includes deposits that are classified as
                brokered deposits.
                 Pursuant to section 553(b)(B) of the APA, general notice and the
                opportunity for public comment are not required with respect to a
                rulemaking when an ``agency for good cause finds (and incorporates the
                finding and a brief statement of reasons therefore in the rules issued)
                that notice and public procedure thereon are impracticable,
                unnecessary, or contrary to the public interest.'' The changes to these
                definitions are only intended to clarify the scope of the definitions,
                not substantively alter the definitions or changes the applicable
                outflow or inflow amounts in the LCR rule. Because these changes are
                technical in nature and merely improve the clarity of these definitions
                in the LCR and NSFR rules, the agencies have determined that it is
                unnecessary to provide notice or the opportunity to comment prior to
                adopting these changes to these definitions related to brokered
                deposits.
                B. New Definitions
                 The proposed rule would have added several new definitions:
                ``carrying value,'' ``encumbered,'' ``NSFR regulatory capital
                element,'' ``NSFR liability,'' and ``QMNA netting set,'' and
                ``unsecured wholesale lending.''
                1. New Definitions for Which the Agencies Received no Comments
                 The agencies received no comments on the proposed definitions of
                ``carrying value,'' ``encumbered,'' ``NSFR regulatory capital
                element,'' ``NSFR liability,'' and ``QMNA netting set,'' and the final
                rule adopts these definitions as proposed.
                 The final rule defines ``carrying value'' to mean the value on a
                covered company's balance sheet of an asset, NSFR regulatory capital
                element, or NSFR liability, as determined in accordance with GAAP. The
                final rule includes this definition because RSF and ASF factors
                generally are applied to the carrying value of a covered company's
                assets, NSFR regulatory capital elements, and NSFR liabilities. By
                relying on values based on GAAP, the final rule aims to ensure
                consistency in the application of the NSFR requirement across covered
                companies and limit operational compliance costs because covered
                companies already prepare financial reports in accordance with GAAP.
                This definition is consistent with the definition used in the agencies'
                regulatory capital rules.\78\
                ---------------------------------------------------------------------------
                 \78\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2
                (FDIC).
                ---------------------------------------------------------------------------
                 The final rule's definition of ``encumbered'' uses the criteria for
                an ``unencumbered'' asset found in Sec. __.22(b) of the LCR rule. The
                definition does not include any substantive changes to the concept of
                encumbrance included in the LCR rule. The final rule uses this
                definition in place of the criteria enumerated in Sec. __.22(b) of the
                LCR rule. The addition of this definition is necessary to apply the
                concept of encumbrance in Sec. Sec. __.106(c) and (d) of the final
                rule, which are discussed in sections VII.D of this Supplementary
                Information section.
                 Additionally, the final rule defines ``NSFR regulatory capital
                element'' to mean any capital element included in a covered company's
                common equity tier 1 capital, additional tier 1 capital, and tier 2
                capital, as those terms are defined
                [[Page 9138]]
                in the agencies' risk-based capital rule, prior to the application of
                capital adjustments or deductions set forth in the agencies' risk-based
                capital rule.\79\ This definition excludes any debt or equity
                instrument that does not meet the criteria for additional tier 1 or
                tier 2 capital instruments in Sec. __.22 of the agencies' risk-based
                capital rule or that is being phased out of tier 1 or tier 2 capital
                pursuant to subpart G of the agencies' risk-based capital rule.\80\ The
                term ``NSFR regulatory capital element'' includes both equity and
                liabilities under GAAP that meet the requirements of the definition.
                This definition of ``NSFR regulatory capital element'' generally aligns
                with the definition of regulatory capital in the agencies' risk-based
                capital rule, but does not include capital deductions and
                adjustments.\81\ As a result, the final rule requires assets that are
                capital deductions (such as goodwill) to be included in the
                determination of required stable funding, as discussed in section VII.D
                of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 \79\ See 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR
                part 324 (FDIC).
                 \80\ Tier 2 capital instruments that have a remaining maturity
                of less than one year are not included in regulatory capital. See 12
                CFR 3.20(d)(1)(iv) (OCC); 12 CFR 217.20(d)(1)(iv) (Board); 12 CFR
                324.20(d)(1)(iv) (FDIC); see also 12 CFR 3.300 (OCC); 12 CFR 217.300
                (Board); 12 CFR 324.300 (FDIC).
                 \81\ The definition of ``NSFR regulatory capital element''
                includes allowances for loan and lease losses (ALLL) to the same
                extent as under the risk-based capital rule. See 12 CFR 3.20(d)(3)
                (OCC); 12 CFR 217.20(d)(3) (Board); 12 CFR 324.20(d)(3) (FDIC).
                ---------------------------------------------------------------------------
                 Further, the final rule defines ``NSFR liability'' to mean any
                liability or equity reported on a covered company's balance sheet that
                is not an ``NSFR regulatory capital element.'' The term ``NSFR
                liability'' primarily refers to balance sheet liabilities but may
                include equity because some equity may not qualify as an ``NSFR
                regulatory capital element.'' The definitions of ``NSFR liability'' and
                ``NSFR regulatory capital element,'' taken together, should cover the
                entirety of the liability and equity side of a covered company's
                balance sheet.
                 Finally, the final rule defines ``QMNA netting set'' to refer to a
                group of derivative transactions with a single counterparty that is
                subject to a qualifying master netting agreement (QMNA),\82\ and is
                netted under the QMNA.\83\ QMNA netting sets include, in addition to
                non-cleared derivative transactions, a group of cleared derivative
                transactions (that is, a group of derivative transactions that have
                been entered into with, or accepted by, a central counterparty (CCP))
                if the applicable governing rules for the group of cleared derivative
                transactions meet the definition of a QMNA. The term ``QMNA netting
                set'' is used in the calculation of a covered company's stable funding
                requirement attributable to its derivative transactions, as discussed
                in section VII.E of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 \82\ Each QMNA netting set must meet each of the conditions
                specified in the definition of ``qualifying master netting
                agreement'' under Sec. __.3 of the LCR rule and the operational
                requirements under Sec. __.4(a) of the LCR rule.
                 \83\ A QMNA may identify a single QMNA netting set (for which
                the agreement creates a single net payment obligation and for which
                collection and posting of margin applies on an aggregate net basis)
                or it may establish multiple QMNA netting sets, each of which would
                be separate from and exclusive of any other QMNA netting set or
                derivative transaction covered by the QMNA.
                ---------------------------------------------------------------------------
                2. New Definitions for Which the Agencies Received Comments
                 Unsecured wholesale lending. The proposed rule would have added a
                definition of ``unsecured wholesale lending'' to mean a liability or
                general obligation of a wholesale customer or counterparty to the
                covered company that is not a secured lending transaction. Similar to
                the comment received regarding the revised definition of ``unsecured
                wholesale funding,'' a commenter noted that an asset exchange could be
                viewed as a liability or general obligation that is not a secured
                lending transaction if entered into with a wholesale customer and
                treated as unsecured wholesale lending under the LCR and NSFR rules.
                For the reasons discussed above in respect to the definition of
                ``unsecured wholesale funding,'' the agencies are revising the
                definition of ``unsecured wholesale lending'' to exclude asset
                exchanges.\84\ The final rule otherwise adopts the definition of
                ``unsecured wholesale lending'' as proposed.
                ---------------------------------------------------------------------------
                 \84\ Under the LCR rule, a covered company should continue to
                look to Sec. __.33(f) for the appropriate methodology for
                determining inflows with respect to asset exchanges.
                ---------------------------------------------------------------------------
                VII. NSFR Requirement Under the Final Rule
                A. Rules of Construction
                 The proposed rule would have included rules of construction in
                Sec. __.102 relating to how items recorded on a covered company's
                balance sheet would be reflected in the covered company's ASF and RSF
                amounts.
                1. Balance-Sheet Values
                 As noted above, a covered company generally would have determined
                its ASF and RSF amounts based on the carrying values of its on-balance
                sheet assets, NSFR regulatory capital elements, and NSFR liabilities as
                determined under GAAP. For off-balance sheet assets, the proposed rule
                would have included a rule of construction in Sec. __.102(a)
                specifying that, unless otherwise provided, a transaction or exposure
                that is not recorded on the balance sheet of a covered company would
                not be assigned an ASF or RSF factor and, conversely, a transaction or
                exposure that is recorded on the balance sheet of the covered company
                would be assigned an ASF or RSF factor. While the proposed rule
                generally would have relied on balance sheet carrying values, it would
                have provided a separate treatment for derivative transactions and the
                undrawn amount of commitments. The proposed rule also would have
                included adjustments to account for certain rehypothecated off-balance
                sheet assets.
                 The agencies received several comments regarding the treatment of
                securitization exposures. Two commenters requested that all or certain
                securitization exposures that are included on a covered company's
                balance sheet pursuant to GAAP be excluded from a covered company's
                NSFR.\85\ The commenters argued that the assets and liabilities of the
                securitization vehicle are not owned or owed, respectively, by the
                covered company or that the securitization vehicle normally has no
                legal obligation to make payments when the cash flow from the assets
                underlying the securitization is insufficient. As an alternative to
                this exclusion, one of the commenters suggested that the assets
                collateralizing the securitization should be assigned an RSF factor to
                match the ASF factor assigned to the securities issued. This commenter
                also argued that where the covered company provides a liquidity
                facility to support an asset-backed commercial paper (ABCP) conduit,
                the NSFR rule should treat the ABCP conduit as a third-party
                securitization and assign a 5 percent RSF factor to the committed
                liquidity facility.
                ---------------------------------------------------------------------------
                 \85\ For example, commenters requested the exclusion of
                securitizations that are ``traditional securitizations'' under the
                agencies' regulatory capital rules and meet the operational
                requirements of risk transfer under those rules, or certain asset-
                backed commercial paper (ABCP) conduits.
                ---------------------------------------------------------------------------
                 During the 2007-2009 financial crisis, a number of banking
                organizations provided funding support for securitization exposures,
                even if the banking organization did not include the exposures on its
                balance sheet. In response to these events, changes were made to GAAP
                that now require firms to include certain securitization
                [[Page 9139]]
                exposures on their balance sheets.\86\ GAAP's requirements for
                including securitization exposures on a firm's balance sheet are based,
                in part, on whether the firm exercises control of those exposures. As
                discussed in section V.C of this Supplementary Information section, the
                NSFR is designed to assess the consolidated balance sheet of a covered
                company and using GAAP both promotes consistency in the application of
                the NSFR across covered companies and limits operational costs
                associated with compliance. In addition, if a covered company meets the
                requirements under GAAP for including securitization exposures on-
                balance sheet, it may be exposed to funding obligations generated by
                those exposures. Therefore, it is appropriate to require stable funding
                for securitization exposures that are reflected on-balance sheet in
                accordance with GAAP.
                ---------------------------------------------------------------------------
                 \86\ For example, GAAP may require consolidation where a covered
                company retains a controlling financial interest in the
                securitization structure.
                ---------------------------------------------------------------------------
                 In response to the request of one commenter that the rule not
                assign RSF factors to assets of an on-balance sheet securitization that
                meets (1) the definition of ``traditional securitization'' under the
                agencies' regulatory capital rules and (2) the operational requirements
                of risk transfer under those rules, the agencies note that the
                operational requirements include the requirement that the exposures are
                not reported on the firm's consolidated balance sheet under GAAP.\87\
                As a result, the commenter's requested treatment would not result in
                the exclusion of any on-balance sheet securitizations from a covered
                company's NSFR. Regardless of the accounting treatment of particular
                securitization transactions, all securitizations carry liquidity risks,
                including unexpected funding needs. Covered companies may experience
                reputational pressure to support securitization transactions that they
                are associated with. The final rule accordingly does not include the
                commenter's requested exclusion.
                ---------------------------------------------------------------------------
                 \87\ See 12 CFR 41(a)(1) (OCC); 12 CFR 217.41(a)(1) (Board); 12
                CFR 324.41(a)(1) (FDIC).
                ---------------------------------------------------------------------------
                2. Netting of Certain Transactions
                 The proposed rule would have included a rule of construction in
                Sec. __.102(b) that describes the treatment of receivables and
                payables that are associated with secured funding transactions, secured
                lending transactions, and asset exchanges with the same counterparty
                that the covered company has netted against each other. The agencies
                did not receive any comments regarding these netting criteria and are
                finalizing these netting criteria as proposed.
                 For purposes of determining the carrying value of these
                transactions, GAAP permits a covered company, when the relevant
                accounting criteria are met, to offset the gross value of receivables
                due from a counterparty under secured lending transactions by the
                amount of payments due to the same counterparty under secured funding
                transactions (GAAP offset treatment). The final rule requires a covered
                company to satisfy these GAAP accounting criteria and the criteria
                applied in Sec. __.102(b) before it can treat the applicable
                receivables and payables on a net basis for the purposes of the NSFR
                requirement.
                 Section __.102(b) of the final rule applies the same netting
                criteria specified in the agencies' SLR rule.\88\ These criteria
                require, first, that the offsetting transactions have the same explicit
                final settlement date under their governing agreements. Second, the
                criteria require that the right to offset the amount owed to the
                counterparty with the amount owed by the counterparty is legally
                enforceable in the normal course of business and in the event of
                receivership, insolvency, liquidation, or similar proceeding. Third,
                the criteria require that under the governing agreements the
                counterparties intended to settle net, settle simultaneously, or settle
                according to a process that is the functional equivalent of net
                settlement (that is, the cash flows of the transactions are equivalent,
                in effect, to a single net amount on the settlement date), where the
                transactions are settled through the same settlement system, the
                settlement arrangements are supported by cash or intraday credit
                facilities intended to ensure that settlement of the transactions will
                occur by the end of the business day, and the settlement of the
                underlying securities does not interfere with the net cash settlement.
                ---------------------------------------------------------------------------
                 \88\ 12 CFR 3.10(c)(4)(ii)(E)(1) through (3) (OCC); 12 CFR
                217.10(c)(4)(ii)(E)(1) through (3) (Board); 12 CFR
                324.10(c)(4)(ii)(E)(1) through (3) (FDIC).
                ---------------------------------------------------------------------------
                3. Treatment of Securities Received in an Asset Exchange by a
                Securities Lender
                 The proposed rule would have included a rule of construction in
                Sec. __.102(c) specifying that when a covered company, acting as a
                securities lender, receives a security in an asset exchange, includes
                the value of the security on its balance sheet, and has not
                rehypothecated the security received, the covered company is not
                required to assign an RSF factor to the security it has received and is
                not permitted to assign an ASF factor to any liability to return the
                security.
                 The agencies received two comments relating to this section of the
                proposed rule. One commenter asserted that Sec. __.102(c), together
                with Sec. __.106(d),\89\ of the proposed rule would be inconsistent
                with the Basel NSFR standard by assigning RSF factors to assets not
                included on the balance sheet of a covered company under GAAP. In
                response to the comment, the agencies note that Sec. __.102(c) of the
                proposed rule, would not have applied to assets excluded from a covered
                company's balance sheet under GAAP; it would have applied only to the
                carrying value of assets received in an asset exchange that the covered
                company includes on its balance sheet.
                ---------------------------------------------------------------------------
                 \89\ Section __.106(d) of the proposed rule would have addressed
                certain assets received by a covered company in an asset exchange
                and not included on the covered company's balance sheet, as well as
                certain other off-balance sheet assets rehypothecated by a covered
                company. Comments regarding that provision are discussed in section
                VII.D.4 of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 The other commenter argued that the proposed rule should apply a
                different treatment for asset exchanges more generally because,
                according to the commenter, the proposed rule did not sufficiently
                recognize the funding value of assets received in an asset exchange. In
                particular, this commenter argued that the rule should assign an ASF
                factor to the value of the asset received in an asset exchange, based
                on the type of asset and the remaining maturity of the asset exchange.
                The commenter asserted that such treatment would also better align with
                the LCR rule, which under certain circumstances allows a covered
                company to include in its HQLA amount an asset received in an asset
                exchange and may take into account both the assets received and
                provided for purposes of assigning inflow or outflow rates. The
                commenter further argued that the proposed rule's treatment of asset
                exchanges would incentivize covered companies to rehypothecate assets
                received in an asset exchange, which the commenter argued would
                increase systemic risk.
                 The NSFR assesses the adequacy of a covered company's funding
                stability based on the covered company's balance sheet at a point in
                time. A covered company, acting as a securities lender, retains the
                security on its balance sheet. Since the covered company is the owner
                of the provided security, it is appropriate for the covered company to
                retain stable funding for that security, even in cases where the
                liquidity characteristics of the asset that the
                [[Page 9140]]
                covered company provides are less favorable relative to the asset it
                receives in the asset exchange. Unlike the LCR, the NSFR is not a cash
                flow coverage metric and, where the asset received has not been
                rehypothecated, the availability of the received asset as a source of
                liquidity is not considered in the design of the NSFR, even in cases
                where the received asset is recorded on a covered company's balance
                sheet.
                 The final rule adopts the proposed treatment for securities
                received in an asset exchange by a covered company acting as a
                securities lender. This provision is intended to neutralize differences
                across accounting frameworks and maintain consistency across covered
                companies, and is consistent with the treatment of security-for-
                security transactions under the SLR rule.\90\ Because the final rule
                does not require stable funding for the securities received, it does
                not treat the covered company's obligation to return these securities
                as stable funding and does not permit a covered company to assign an
                ASF factor to this obligation. If, however, the covered company, acting
                as the securities lender, sells or rehypothecates the securities
                received, the final rule requires the covered company to assign the
                appropriate RSF factor or factors under Sec. __.106 to the proceeds of
                the sale or, in the case of a pledge or rehypothecation, to the
                securities themselves if such securities remain on the covered
                company's balance sheet.\91\ Similarly, the covered company must assign
                a corresponding ASF factor to the NSFR liability associated with the
                asset exchange, for example, with an obligation to return the security
                received.
                ---------------------------------------------------------------------------
                 \90\ 12 CFR 3.10(c)(4)(ii)(A) (OCC); 12 CFR 217.10(c)(4)(ii)(A)
                (Board); 12 CFR 324.10(c)(4)(ii)(A) (FDIC).
                 \91\ If the assets received by the securities lender have been
                rehypothecated but remain on the covered company's balance sheet,
                these collateral securities would have been assigned an RSF factor
                under Sec. __.106(c) to reflect their encumbrance. For the
                treatment of rehypothecated off-balance sheet assets, see section
                VII.D.4 of this Supplementary Information section.
                ---------------------------------------------------------------------------
                B. Determining Maturity
                 The proposed rule would have assigned ASF and RSF factors to a
                covered company's NSFR liabilities and assets based in part on the
                maturity of each NSFR liability or asset. Section __.101 of the
                proposed rule would have incorporated the maturity assumptions in
                Sec. Sec. __.31(a)(1) and (2) of the LCR rule to determine the
                maturities of a covered company's NSFR liabilities and assets. For
                example, the proposed rule would require a covered company to apply the
                earliest possible maturity date to an NSFR liability (which would be
                assigned an ASF factor) and the latest possible maturity date to an
                asset (which would be assigned an RSF factor), taking into account any
                notice periods or options that may modify the maturity date.
                 A commenter argued that the proposed rule's maturity assumptions
                provide a less risk-sensitive approach than the Basel NSFR standard,
                stating that the Basel NSFR standard does not require the assumption
                that a liability matures according to its earliest possible maturity
                date, but provides supervisors with discretion regarding assumptions
                about the exercise of certain options based on reputational factors and
                market expectations. Another commenter posited that the NSFR rule
                should not assume that a covered company would exercise a ``clean-up''
                call option with respect to a securitization at the earliest possible
                date.\92\ Instead, the commenter argued that the NSFR rule should
                require a covered company to identify the securitizations that are
                likely to have a clean-up call option maturing over the next year and
                to reasonably evaluate whether the covered company intends to exercise
                that option.
                ---------------------------------------------------------------------------
                 \92\ The commenter's discussion referred to contractual
                provisions whereby an originating banking organization or servicer
                has the option to exercise a ``clean-up'' call by repurchasing the
                remaining securitization exposures once the amount of the underlying
                asset exposures or outstanding securitization exposures falls below
                a specified amount.
                ---------------------------------------------------------------------------
                 The final rule incorporates the maturity assumptions of the LCR
                rule as proposed. The final rule requires a covered company to identify
                the maturity date of its NSFR liabilities and assets in a conservative
                manner by applying the earliest possible maturity date to an NSFR
                liability and the latest possible maturity date to an asset. The final
                rule generally also requires a covered company to take a conservative
                approach when determining maturity with respect to any notice periods
                and with respect to any options, either explicit or embedded, that may
                modify maturity dates. For example, a covered company is required to
                treat an option to reduce the maturity of an NSFR liability or an
                option to extend the maturity of an asset as if it will be exercised on
                the earliest possible date.
                 The final rule treats an NSFR liability that has an ``open''
                maturity (i.e., the NSFR liability has no maturity date under Sec.
                __.101 and may be closed out on demand) as maturing on the day after
                the calculation date. For example, an ``open'' repurchase transaction
                or a demand deposit placed at a covered company is treated as maturing
                on the day after the calculation date. To ensure consistent use of
                terms in the final rule and LCR rule and to avoid ambiguity between
                perpetual instruments and transactions (i.e., the instrument or
                transaction has no contractual maturity date and may not be closed out
                on demand) and open maturity instruments and transactions, the final
                rule amends Sec. __.31 of the LCR rule to use the term ``open''
                instead of using the phrase ``has no maturity date.'' This change has
                no substantive impact on the LCR rule. The final rule treats a
                perpetual NSFR liability (such as perpetual securities issued by a
                covered company) as maturing one year or more after the calculation
                date.
                 The final rule treats each principal amount due under a
                transaction, such as separate principal payments due under an
                amortizing loan, as a separate transaction for which the covered
                company would be required to identify the date on which the payment is
                contractually due and apply the appropriate ASF or RSF factor based on
                that maturity date. This treatment ensures that a covered company's ASF
                and RSF amounts reflect the timing of the contractual maturities of a
                covered company's liabilities and assets, rather than treating the full
                principal amount as though it were due on one date (such as the last
                contractual principal payment date). For example, if funding provided
                by a counterparty to a covered company requires two contractual
                principal repayments, the first due less than six months from the
                calculation date and the second due one year or more from the
                calculation date, only the principal amount that is due one year or
                more from the calculation date is assigned a 100 percent ASF factor,
                which is the factor assigned to liabilities that have a maturity of one
                year or more from the calculation date. The liability for the
                contractual principal repayment due within six months represents a less
                stable source of funding and is therefore assigned a lower ASF factor.
                 For deferred tax liabilities that have no maturity date, the
                maturity date under the final rule is the first calendar day after the
                date on which the deferred tax liability could be realized.
                 Because the maturity assumptions in Sec. __.101 of the final rule
                apply only to NSFR liabilities and assets, the final rule does not
                apply the LCR rule's maturity assumptions to a covered company's NSFR
                regulatory capital elements. Unlike NSFR liabilities, which have
                varying maturities, NSFR regulatory capital elements are longer-term by
                definition, and as such, the proposed rule would have assigned a
                [[Page 9141]]
                100 percent ASF factor to all NSFR regulatory capital elements.
                 The final rule's incorporation of the above maturity assumptions
                provides for consistent determination of maturities across covered
                companies, which improves comparability and standardization of the
                NSFR. In addition, these assumptions reflect an appropriate degree of
                conservatism regarding the timing of when an asset or NSFR liability
                will mature, which helps to support a covered company's funding
                resiliency across a range of economic and financial conditions. This
                approach is also consistent with a provision in the Basel NSFR standard
                that one commenter argued would be more risk-sensitive. This standard
                provides that for funding with options exercisable at the discretion of
                a firm subject to a jurisdiction's NSFR requirement, national
                supervisors should take into account reputational factors that may
                pressure a firm not to exercise the option. Given the possibility and
                variability of reputational considerations with respect to many forms
                of funding, in addition to the considerations discussed above, the
                final rule incorporates the LCR rule maturity assumptions as proposed.
                 With respect to the treatment of securitization clean-up call
                options, these options are generally features of securitizations with
                terms greater than one year and are generally exercisable near the end
                of the term. Instead of providing for firm specific evaluations of the
                likelihood of exercising a clean-up call option as commenters
                suggested, the final rule employs standardized assumptions to all firms
                to facilitate comparability across firms. The maturity assumptions of
                the LCR rule and final rule, however, do not require all clean-up call
                options to be exercised at the earliest possible date. Section
                __.31(a)(1)(iii)(A) of the LCR rule, applicable to the NSFR through
                Sec. __.101 of the final rule, provides that a covered company must
                treat an option to reduce the maturity of an obligation as though it
                will be exercised at the earliest possible date, except where 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. If that condition is met, then the maturity
                of the obligation will be the original maturity date at issuance under
                both the LCR rule and the final rule.
                C. Available Stable Funding
                1. Calculation of the ASF Amount
                 Section __.103 of the proposed rule would have established the
                requirements for a covered company to calculate its ASF amount, which
                would have equaled the sum of the carrying values of the covered
                company's NSFR regulatory capital elements and NSFR liabilities, each
                multiplied by an ASF factor assigned in Sec. __.104 or Sec.
                __.107(c).\93\
                ---------------------------------------------------------------------------
                 \93\ ASF factors would have been assigned to NSFR regulatory
                capital elements and NSFR liabilities under Sec. __.104, except for
                NSFR liabilities relating to derivatives. As discussed in section
                VII.E of this Supplementary Information section, certain NSFR
                liabilities relating to derivative transactions would not have been
                considered stable funding for purposes of a covered company's NSFR
                calculation and would have been assigned a zero percent ASF factor
                under Sec. __.107(c) of the proposed rule.
                ---------------------------------------------------------------------------
                 In the proposed rule, ASF factors would have been assigned based on
                the relative stability of each category of NSFR regulatory capital
                element or NSFR liability relative to the NSFR's one-year time horizon.
                In addition, Sec. __.108 of the proposed rule would have provided that
                a covered company may include in its ASF amount the ASF of a
                consolidated subsidiary only to the extent that the funding of the
                subsidiary supports the RSF amount of the subsidiary or is readily
                available to support RSF amounts of the covered company outside the
                consolidated subsidiary.\94\ The agencies received no comments on the
                calculation of the ASF amount and are adopting such calculation as
                proposed.
                ---------------------------------------------------------------------------
                 \94\ See section VII.F of this Supplementary Information
                section.
                ---------------------------------------------------------------------------
                 Comments regarding the proposed assignment of ASF factors and
                specific contractual and funding-related features of a number of NSFR
                regulatory capital elements and NSFR liabilities are described below.
                2. Characteristics for Assignment of ASF Factors
                 For the purpose of assigning ASF factors, the proposed rule would
                have categorized NSFR regulatory capital elements and NSFR liabilities
                into five broad categories based on their tenor, the type of funding,
                and the type of funding counterparty. The proposed rule would have
                applied the same ASF factor in each category to reflect the relative
                stability of a covered company's NSFR regulatory capital elements and
                NSFR liabilities over a one-year time horizon. ASF factors would have
                been scaled from zero to 100 percent, with a zero percent weighting
                representing the lowest relative stability and a 100 percent weighting
                representing the highest relative stability.
                 For operational simplicity, the proposed rule would have grouped
                NSFR regulatory capital elements and NSFR liabilities into one of four
                maturity categories: One year or more, less than one year, six months
                or more but less than one year, and less than six months (ASF maturity
                categories). One commenter expressed concern that the ASF maturity
                categories are arbitrary and may lead a covered company to
                unnecessarily adjust its funding profile to align with the ASF maturity
                categories rather than its actual funding needs. This commenter
                recommended that the ASF factor framework provide more granular
                maturity categories (e.g., monthly residual maturity categories), which
                would be more risk-sensitive.
                 The agencies did not receive general comments on the proposed
                approach to differentiate ASF factors based on different funding types
                and counterparties, although some comments were received on the
                proposed categories of ASF and are discussed below. However, some
                commenters suggested that, for purposes of measuring the stand-alone
                NSFR of a covered company that is a depository institution subsidiary
                of another covered company, ASF factors should be higher or subject to
                a floor where the counterparty providing the funding is an affiliated
                insured depository institution. For example, one commenter suggested
                that the ASF factor for funding provided by an affiliated depository
                institution should be no less than 95 percent, particularly where the
                affiliated depository institution has an ASF amount in excess of its
                RSF amount when measured on a stand-alone basis. These commenters
                argued that a higher ASF factor would be appropriate because funding
                provided by an affiliated depository institution is more stable than
                funding from non-affiliated sources. These commenters also asserted
                that special treatment for funding transactions between affiliated
                insured depository institutions in the final rule would be consistent
                with the treatment of affiliates in the U.S. bank regulatory framework,
                such as the treatment of affiliates in sections 23A and 23B of the
                Federal Reserve Act,\95\ the Board's Regulation W,\96\ and cross-
                guarantee liability provisions in the FDI Act.\97\ Commenters also
                suggested that special treatment could be limited to institutions that
                would qualify for the
                [[Page 9142]]
                ``sister bank exemption'' in section 223.41(b) of Regulation W.\98\
                ---------------------------------------------------------------------------
                 \95\ 12 U.S.C. 371c and 12 U.S.C. 371c-1.
                 \96\ 12 CFR part 223.
                 \97\ 12 U.S.C. 1815(e).
                 \98\ 12 CFR 223.41(b).
                ---------------------------------------------------------------------------
                 The final rule generally adopts the proposed rule's approach to
                assigning ASF factors subject to certain modifications and
                clarifications that are discussed below in this Supplementary
                Information section. The final rule treats funding to be relatively
                less stable if there is a greater likelihood that a covered company
                would need to replace or repay it over a one-year time horizon. As in
                the proposed rule, the final rule assigns an ASF factor to NSFR
                regulatory capital elements and NSFR liabilities based on three
                characteristics relating to the stability of the funding: (1) Funding
                tenor, (2) funding type, and (3) counterparty type. As discussed below,
                certain ASF factor assignments under the final rule reflect additional
                policy considerations.
                a) Funding Tenor
                 For purposes of assigning ASF factors, the final rule assigns a
                higher ASF factor to funding that has a longer remaining maturity (or
                tenor) than shorter-term funding because, funding that by its terms has
                a longer tenor is more stable relative to a one-year horizon and should
                be less susceptible to short-term rollover risk. Specifically, the
                assignment of a higher ASF factor reflects the relatively decreased
                likelihood that a firm in the near term would need to replace funding
                that has a longer tenor, or if necessary, monetize assets at a loss to
                repay the funding in comparison to funding of a shorter tenor. The need
                to replace funding or monetize assets could adversely impact a firm's
                liquidity position or generate negative externalities for other market
                participants. Longer-term funding, therefore, generally would provide
                greater stability across all market conditions. For operational
                simplicity, and consistent with the proposed rule, the final rule
                groups the tenor of NSFR regulatory capital elements and NSFR
                liabilities into one of the four ASF maturity categories: One year or
                more, less than one year, six months or more but less than one year,
                and less than six months. These ASF maturity categories are consistent
                with the design principles described in section V of this Supplementary
                Information section and the Basel NSFR standard. They are also
                generally consistent to other approaches used for reflecting the role
                of residual maturities in other agencies' regulations and supervisory
                approaches.\99\
                ---------------------------------------------------------------------------
                 \99\ For example, the Board's GSIB capital surcharge rule
                includes generally similar categories for the maturities of average
                wholesale funding, including short-term wholesale funding, with
                remaining maturities of one year or more and six months or more but
                less than one year.
                ---------------------------------------------------------------------------
                 The purpose of the ASF maturity categories is to categorize NSFR
                regulatory capital elements and NSFR liabilities in a simple manner
                based on the relative stability of such funding. Although the
                categories may result in some greater cliff effects between groups than
                more granular categories (e.g., one-month maturity categories),
                including more granular categories would increase complexity and result
                in a metric that is more difficult to monitor and supervise.\100\ The
                final rule generally treats funding with a remaining maturity of one
                year or more as the most stable and short-term funding as less stable.
                In this manner, the final rule incentivizes a covered company to
                maintain a stable funding profile by utilizing funding, such as equity
                and long-term debt, that matures beyond the NSFR's one-year time
                horizon. The final rule generally treats funding that matures in six
                months or more but less than one year as less stable than regulatory
                capital and long-term debt because a covered company would need to
                replace or repay such funding before the end of the NSFR's one-year
                time horizon. Funding with a remaining maturity of less than six months
                or an open maturity is generally treated as less stable because a
                covered company may need to replace or repay it in the near term.
                ---------------------------------------------------------------------------
                 \100\ The agencies note that adoption of the final rule does not
                preclude covered companies from using other metrics to manage
                funding risks and conduct internal stress testing over various time
                horizons that may include, among other things, more granular
                maturity categories.
                ---------------------------------------------------------------------------
                b) Funding Type
                 The final rule recognizes that certain types of funding, such as
                certain types of deposits, tend to be more stable than other types of
                funding, independent of their tenor. For example, as described below in
                this Supplementary Information section, the final rule assigns a higher
                ASF factor to stable retail deposits relative to other retail deposits,
                due in large part to the presence of full deposit insurance coverage
                and other stabilizing features, such as another established
                relationship with the depository institution,\101\ that increase the
                likelihood of a counterparty continuing the funding across a broad
                range of market conditions. Similarly, the final rule assigns a higher
                ASF factor to operational deposits provided to a covered company than
                to certain other forms of short-term wholesale deposits, as discussed
                below in this Supplementary Information section. In a manner consistent
                with the proposed rule, the final rule takes into account the
                characteristics of funding type on funding stability when assigning ASF
                factors.
                ---------------------------------------------------------------------------
                 \101\ For example, another deposit account, a loan, bill payment
                services, or any similar service or product provided to the
                depositor.
                ---------------------------------------------------------------------------
                c) Counterparty Type
                 The final rule assigns ASF factors by taking into account the type
                of counterparty that provides the funding, using the same counterparty
                type classifications as the LCR rule: (1) Retail customers or
                counterparties, (2) wholesale customers or counterparties that are not
                financial sector entities, and (3) financial sector entities.\102\
                ---------------------------------------------------------------------------
                 \102\ Under Sec. __.3 of the LCR rule, the term ``retail
                customer or counterparty'' includes individuals, certain small
                businesses, and certain living or testamentary trusts. The term
                ``wholesale customer or counterparty'' refers to any customer or
                counterparty that is not a retail customer or counterparty. The term
                ``financial sector entity'' refers to a regulated financial company,
                identified company, investment advisor, investment company, pension
                fund, or non-regulated fund, as such terms are defined in Sec. __.3
                of the LCR rule. The final rule incorporates these definitions. For
                purposes of determining ASF and RSF factors assigned to liabilities,
                assets, and commitments where counterparty type is relevant, the
                final rule treats an unconsolidated affiliate of a covered company
                as a financial sector entity.
                ---------------------------------------------------------------------------
                 Consistent with the proposed rule, the final rule considers the
                differences in funding provided by retail and wholesale customers or
                counterparties when assigning ASF factors. Retail customers or
                counterparties (including small businesses) typically maintain long-
                term relationships with covered companies and their deposits may
                consist of larger numbers of accounts with smaller balances relative to
                wholesale depositors. Retail customers or counterparties are generally
                less likely to move deposits over a one-year time horizon than
                wholesale depositors. In contrast, wholesale depositors are more likely
                to move deposits over a one-year time horizon for business or
                investment reasons. Therefore, the final rule treats most types of
                deposit funding provided by retail customers or counterparties as more
                stable than deposit funding provided by wholesale customers or
                counterparties.
                 In addition, wholesale customers and counterparties that are not
                financial sector entities typically maintain balances with covered
                companies to support their non-financial activities, such as production
                and physical investment, which tend to be less correlated to short-term
                financial market fluctuations than activities of financial sector
                entities. Therefore, non-financial wholesale customers or
                counterparties are more likely than financial sector
                [[Page 9143]]
                entities to continue to provide funding to a covered company over a
                one-year horizon.
                 Further, differences in business models and liability structures
                tend to make short-term funding provided by financial sector entities
                less stable than similar funding provided by non-financial wholesale
                customers or counterparties. Financial sector entities are typically
                less reliable funding providers than non-financial wholesale customers
                or counterparties due, in part, to their financial intermediation
                activities. Financial sector entities tend to be more sensitive to
                market fluctuations that could cause them to reduce their general level
                of funding provided to a covered company. Furthermore, the increased
                interconnectedness between financial sector entities means that there
                is a higher correlation of risks across the financial sector that may
                adversely impact the stability of short-term funding provided by a
                financial sector entity. Therefore, the final rule treats most short-
                term funding that is provided by financial sector entities as less
                stable than similar types of funding provided by non-financial
                wholesale customers or counterparties.
                 Further, as a general matter, an affiliation would not necessarily
                improve the funding stability of the covered company. Banking
                organizations that generally rely on funding from financial sector
                affiliates may have similar balance sheet funding risks to those that
                generally rely on funding of the same tenor from non-affiliates. An
                affiliated depository institution that is providing funding to a
                covered company may have a business model, liability structure,
                sensitivity to market fluctuations, degree of financial sector
                interconnectedness, or other characteristics that are similar to
                unaffiliated financial sector entities. While funding relationships
                with affiliates may provide a banking organization with additional
                flexibility in the normal course of business, ongoing reliance on
                contractually short-term funding from affiliates may present risks that
                are similar to funding from non-affiliate sources, particularly during
                stress. Therefore, the final rule's treatment of funding from
                affiliated sources consistent with non-affiliate funding provides a
                more appropriate measure of balance sheet funding risk.
                 The agencies also are not convinced that the ASF factors applicable
                to funding provided by an affiliated insured depository institution
                should be higher in cases where the affiliated funds provider has an
                ASF amount in excess of its RSF amount when calculated on a standalone
                basis. The comparison of ASF to RSF amounts is informative of the
                overall funding position of a banking organization, taking into account
                its entire balance sheet, lending commitments, and derivative
                exposures. However, the balance sheet funding position of an affiliated
                insured depository institution at a calculation date does not
                necessarily imply that the institution is generally more likely to
                continue to provide funds to a covered company than an unaffiliated
                funding provider. The agencies note that the specific legal provisions
                cited by commenters (e.g., sections 23A and 23B of the Federal Reserve
                Act, the Board's Regulation W, and the FDI Act) address different
                policy considerations than the NSFR and do not suggest that funding
                from affiliates is more stable than funding received from non-
                affiliates.
                 While comprehensive data on the funding of covered companies by
                counterparty type is limited, the agencies' analysis of available data
                confirmed the agencies' expectation of funding stability differences
                across counterparty types.\103\ Prior to issuing the proposed rule, the
                agencies reviewed information collected on the Consolidated Reports of
                Condition and Income (Call Report), Report of Assets and Liabilities of
                U.S. Branches and Agencies of Foreign Banks (FFIEC 002), and the
                Securities and Exchange Commission (SEC) Financial and Operational
                Combined Uniform Single Report (FOCUS Report) over the period beginning
                December 31, 2007, and ending December 31, 2008, in combination with
                more recent FR 2052a report data, and supervisory information collected
                in connection with the LCR rule. In addition, the agencies reviewed
                supervisory information collected from depository institutions for
                which the FDIC was appointed as receiver in 2008 and 2009. Although the
                NSFR requirement is designed to measure the stability of a covered
                company's funding profile across all market conditions and would not be
                specifically based on a particular market stress environment, the
                agencies considered a period of stress for purposes of evaluating the
                relative effects of counterparty type on funding stability. Because a
                covered company under normal conditions may adjust funding across
                counterparty types for any number of reasons, focusing on periods of
                stress allowed the agencies to evaluate general differences in
                stability by counterparty type.
                ---------------------------------------------------------------------------
                 \103\ Prior to the 2007-2009 financial crisis, covered companies
                did not consistently report or disclose detailed liquidity
                information. On November 17, 2015, the Board adopted the revised FR
                2052a to collect quantitative information on selected assets,
                liabilities, funding activities, and contingent liabilities from
                certain large banking organizations.
                ---------------------------------------------------------------------------
                 The agencies' analysis of available public and supervisory
                information shows that, during 2008, funding from financial sector
                entities exhibited less stability than funding provided by non-
                financial wholesale counterparties, which in turn exhibited less
                stability than insured retail deposits. For example, Call Report data
                on insured deposits, deposit data from the FFIEC 002, and broker-dealer
                liability data reported on the FOCUS Report showed higher withdrawals
                in wholesale funding than retail deposits over this period. The
                agencies' analysis of supervisory data from a sample of large
                depository institutions for which the FDIC was appointed as receiver in
                2008 and 2009 also indicated that, during the periods leading up to
                receivership, funding provided by wholesale counterparties was
                significantly less stable, showing higher average total withdrawals,
                than funding provided by retail customers and counterparties.
                3. Categories of ASF Factors
                 Based on the tenor, funding type and counterparty type
                characteristics described above, the agencies categorized NSFR
                regulatory capital elements and NSFR liabilities into five broad
                categories and assigned a single ASF factor in each category, as shown
                in Table 1 below. The types of funding grouped together in each
                category generally displays relatively similar stability as compared to
                funding in a different category. The value of the ASF factor is
                calibrated to reflect the relative distinctions between categories and
                the general composition of balance sheet liabilities, and is generally
                consistent with the Basel NSFR standard to promote comparability across
                jurisdictions and the supervisory assessment of the aggregate funding
                position of covered companies.
                [[Page 9144]]
                 Table 1--Categories of NSFR Regulatory Capital Elements and Liabilities Based on Their Characteristics and
                 Resulting ASF Factors
                ----------------------------------------------------------------------------------------------------------------
                 NSFR regulatory capital ASF factor
                 Tenor Counter-party type Funding type and liabilities percent
                ----------------------------------------------------------------------------------------------------------------
                One year or more............... All............... All............... NSFR regulatory capital 100
                 elements and long-term
                 NSFR liabilities.
                Any tenor...................... Retail............ Fully insured..... Stable retail deposits 95
                 and.
                 certain affiliate sweep
                 deposits.
                 Not fully insured. Other non-brokered 90
                 retail deposits and
                 certain affiliate
                 sweep deposits.
                 Retail brokered... Fully insured..... Brokered reciprocal ..............
                 deposits.
                One year or more............... .................. All............... Other brokered deposits
                 not held in a
                 transactional account.
                Less than one year............. Wholesale......... Non-operational *. Unsecured funding 50
                 provided by, and
                 secured funding
                 transactions with, a
                 counterparty that is
                 not a financial sector
                 entity or central bank.
                Six months but less than one Financial or Non-operational... Unsecured wholesale ..............
                 year. central bank. funding provided by,
                 and secured funding
                 transactions with, a
                 financial sector
                 entity or central bank.
                 All............... Securities........ Securities issued by a ..............
                 covered company.
                 Retail brokered... All............... Retail brokered ..............
                 deposits other than
                 brokered reciprocal
                 deposits, sweep
                 deposits, or
                 transactional deposits.
                Any tenor...................... .................. .................. Transactional retail ..............
                 brokered deposits.
                 Not fully insured. Brokered reciprocal ..............
                 deposits.
                 Retail............ All............... Non-affiliate sweep
                 deposits.
                 Retail funding that is
                 not a deposit or
                 security.
                 Wholesale......... Operational....... Operational deposits... ..............
                Less than six months........... Retail brokered... Any............... Certain short-term 0
                 retail brokered
                 deposits.
                 Financial or Non-operational... Short-term funding from ..............
                 central bank. a financial sector
                 entity or central bank.
                 All............... Securities........ Securities issued by a ..............
                 covered company.
                 Other............. Trade date payables.... ..............
                Any tenor **................... All............... Derivative........ NSFR derivatives ..............
                 liability amount.
                ----------------------------------------------------------------------------------------------------------------
                * That is, not an operational deposit.
                ** The derivative treatment nets derivative transactions with various maturities.
                a) 100 Percent ASF Factor
                 Section __.104(a) of the proposed rule would have assigned a 100
                percent ASF factor to NSFR regulatory capital elements, as defined in
                Sec. __.3 of the proposed rule, and described in section VI.B of this
                Supplementary Information section. The proposed rule also would have
                assigned a 100 percent ASF factor to NSFR liabilities that have a
                remaining maturity of one year or more from the calculation date, other
                than funding typically provided by retail customers or counterparties.
                This category would have included debt or equity securities issued by a
                covered company that have a remaining maturity of one year or more.
                 In the proposed rule, the agencies requested comment on whether
                long-term debt securities issued by a covered company where the company
                is the primary market maker of such securities should be assigned an
                ASF factor other than 100 percent (for example, between 95 and 99
                percent) to recognize the risk that a covered company may buy back
                these debt securities. One commenter supported the proposed assignment
                of a 100 percent ASF factor to such securities on the basis that a
                lower ASF is unnecessary because the NSFR is not a stress metric. The
                agencies did not receive other comments regarding treatment of the NSFR
                regulatory capital elements and NSFR liabilities that mature one year
                or more from the calculation date not provided by retail customers or
                counterparties.
                 The final rule assigns a 100 percent ASF factor to NSFR regulatory
                capital elements and NSFR liabilities that mature one year or more from
                the calculation date as proposed. NSFR regulatory capital elements and
                non-retail long-term liabilities that do not mature during the NSFR's
                one-year time horizon represent the most stable form of funding under
                the final rule because they are not susceptible to rollover risk during
                the NSFR's timeframe. Similarly, and as noted by the commenter, there
                is reduced risk, absent stress conditions, that a covered company will
                face pressure to buy back its long-term debt securities in significant
                quantities during the NSFR's one-year time horizon as compared to other
                liabilities on its balance sheet.
                 The agencies received comments requesting assignment of a 100
                percent ASF factor to certain other NSFR liabilities, which are
                discussed in more detail below.
                b) 95 Percent ASF Factor
                 Section __.104(b) of the proposed rule would have assigned a 95
                percent ASF factor to stable retail deposits held at a covered
                company.\104\ The assignment of a 95 percent ASF factor would have
                reflected that such deposits generally provide a highly stable source
                of funding for covered companies.
                ---------------------------------------------------------------------------
                 \104\ Section __.3 of the LCR rule defines a ``stable retail
                deposit'' as a retail deposit that is entirely covered by deposit
                insurance and either (1) is held by the depositor in a transactional
                account or (2) the depositor that holds the account has another
                established relationship with the covered company such as another
                deposit account, a loan, bill payment services, or any similar
                service or product provided to the depositor that the covered
                company demonstrates, to the satisfaction of the appropriate Federal
                banking agency, would make the withdrawal of the deposit highly
                unlikely during a liquidity stress event.
                ---------------------------------------------------------------------------
                 Some commenters requested that the final rule assign a 95 or 100
                percent ASF factor to certain retail deposits that do not meet the
                definition of ``stable retail deposits,'' but are subject to
                contractual restrictions that make it less likely the deposits would be
                redeemed earlier than their contractual term. For example, some
                commenters suggested that the NSFR rule assign a 100 percent ASF factor
                to a retail deposit, such as a certificate of deposit, with a remaining
                maturity greater than one year if the covered company or its
                consolidated depository institution does not maintain a secondary
                market for the deposit, or if the contract contained provisions
                restricting redemption only to certain specified events, such as death
                or
                [[Page 9145]]
                determination of mental incapacity of the depositor.
                 The final rule assigns a 95 percent ASF factor to deposits that
                meet the definition of ``stable retail deposit'' as proposed. Relative
                to liabilities in the 100 percent ASF category, stable retail deposits
                either have no contractual restriction on withdrawal within a one-year
                period or there is some likelihood that covered companies may permit
                withdrawals despite contractual restrictions within the one-year
                horizon. Although some evidence suggests that these deposits are highly
                stable, they are not as stable as funding for which there is greater
                certainty of maturity outside the NSFR one-year horizon. Therefore, an
                ASF factor that is only slightly lower than that assigned to NSFR
                regulatory capital elements and long-term NSFR liabilities is
                appropriate because stable retail deposits are nearly as stable over
                the NSFR's one-year time horizon as NSFR regulatory capital elements
                and long-term NSFR liabilities under Sec. __.104(a) of the final rule.
                 The remaining maturity of stable retail deposits does not affect
                the assignment of an ASF factor under the final rule because the
                stability of retail deposits is more closely linked to counterparty and
                funding type characteristics. As noted in the preamble to the proposed
                rule, the combination of full deposit insurance coverage, the
                depositor's relationship with the covered company, and the costs of
                moving transactional or multiple accounts to another institution
                substantially reduce the likelihood that retail depositors will
                withdraw stable retail deposits in significant amounts over a one-year
                time horizon.\105\ Maturity or other contractual provisions restricting
                redemption are less relevant, for example, because a covered company
                may permit withdrawal of a retail term deposit for business and
                reputational reasons in the event of a depositor's early withdrawal
                request despite the absence of a contractual requirement to permit such
                a withdrawal within the NSFR's one-year time horizon. Generally, other
                categories of funding that do not have the features of stable retail
                deposits are not as stable and therefore assigned to a lower ASF factor
                category in the final rule.
                ---------------------------------------------------------------------------
                 \105\ See section VII.C.2.b of this Supplementary Information
                section.
                ---------------------------------------------------------------------------
                 Under the proposal, affiliated brokered sweep deposits deposited in
                accordance with a contract with a retail customer or counterparty and
                where the entire amount of the deposit is covered by deposit insurance
                would have been assigned a 90 percent ASF factor.\106\ Commenters
                requested that similar types of deposits be assigned a higher ASF
                factor, claiming that these deposits have historically evidenced
                stability across a range of market conditions.
                ---------------------------------------------------------------------------
                 \106\ Under Sec. __.3 of the LCR rule, a ``brokered sweep
                deposit'' previously was defined to mean a deposit held at a covered
                company by a customer or counterparty through a contractual feature
                that automatically transfers to the covered company 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. As discussed in section
                VI.A.4 of this Supplementary Information section, the final rule
                amends Sec. __.3 to replace ``brokered sweep deposit'' with the
                term ``sweep deposit'' because not all sweep deposits are brokered,
                for example, if they meet the terms of the primary purpose exception
                under section 29 of the FDI Act and the FDIC's brokered deposit
                regulations.
                ---------------------------------------------------------------------------
                 In a change from the proposal, the final rule also assigns a 95
                percent ASF factor to affiliate sweep deposits where the entire amount
                of the sweep deposit is covered by deposit insurance and where a
                covered company has demonstrated to the satisfaction of its appropriate
                Federal banking agency that withdrawal of the deposit is highly
                unlikely to occur during a liquidity stress event. A sweep deposit
                arrangement places deposits at one or more banking organizations, with
                each banking organization receiving the maximum amount that is covered
                by deposit insurance, according to a priority ``waterfall.'' Within the
                waterfall structure, affiliates tend to be the first to receive
                deposits and the last from which deposits are withdrawn. Because of
                this priority relationship with an affiliate, a covered company is more
                likely to receive and maintain a steady stream of sweep deposits
                provided by a retail customer or counterparty across a range of market
                conditions. The priority relationship with an affiliate results in a
                deposit relationship that is reflective of an overall relationship with
                the underlying retail customer or counterparty where these deposits
                generally exhibit a stability profile associated with deposits directly
                from retail customers. This affiliate relationship combined with the
                presence of full deposit insurance coverage reduces the likelihood that
                retail depositors will withdraw these deposits in significant amounts
                over a one-year time horizon. Given these stabilizing characteristics,
                some affiliate sweep deposits from retail customers may provide similar
                funding stability across a range of market conditions as stable retail
                deposits, particularly if there are contractual features or costs that
                substantially reduce the likelihood that an affiliate sweep deposit
                will be withdrawn over a one-year time horizon. In light of this
                possibility, the final rule assigns a 95 percent ASF factor to any
                fully insured affiliate sweep deposit from a retail customer or
                counterparty that the covered company demonstrates is highly unlikely
                to be withdrawn during a liquidity stress event. For the same reasons
                as the agencies described in connection with this final rule, the
                agencies are considering making similar changes to the treatment of
                affiliate sweep deposits in the LCR in a separate rulemaking.
                c) 90 Percent ASF Factor
                 While stable retail deposits and certain fully-insured retail
                affiliate sweep deposits, regardless of tenor, have the highest
                stability characteristics for deposits under the final rule, other non-
                brokered retail deposits and certain retail brokered deposits have a
                combination of deposit insurance, counterparty relationship, and tenor
                characteristics that provide relatively less stability than stable
                retail deposits and are assigned a slightly lower ASF factor of 90
                percent.
                (i) Other Non-Brokered Retail Deposits
                 Section __.104(c) of the proposed rule would have assigned a 90
                percent ASF factor to retail deposits that are neither stable retail
                deposits nor retail brokered deposits. This category would have
                included retail deposits that are not fully insured by the FDIC or are
                insured under non-FDIC deposit insurance systems. The agencies did not
                receive comments on this aspect of the proposed rule, and the final
                rule assigns a 90 percent ASF factor to these other retail deposits as
                proposed.
                 As discussed above in section VII.C.2 of this Supplementary
                Information section, retail customers and counterparties tend to
                provide deposits that are more stable than funding provided by other
                types of counterparties. However, deposits provided by retail customers
                and counterparties that are not fully covered by FDIC deposit insurance
                are assigned a lower ASF factor than the ASF factor assigned to stable
                retail deposits because of the elevated risk that depositors will
                withdraw funds if they become concerned about the condition of the
                bank, in part, because the depositor will have no guarantee that
                uninsured funds will promptly be made available through established and
                timely intervention and resolution protocols. In addition, deposits
                that are neither held in a transactional account nor from a customer
                that has another relationship with a covered company tend to be less
                stable than stable retail deposits because
                [[Page 9146]]
                the depositor is less reliant on the services of the covered company.
                Therefore, the assigned ASF factor reflects the somewhat greater
                likelihood of withdrawal for those deposits that are not stable retail
                deposits. Similar to stable retail deposits and for the same reasons,
                the remaining maturity of these retail deposits does not affect the
                assignment of an ASF factor under the final rule.
                (ii) Affiliate Sweep Deposits, Fully Insured Brokered Reciprocal
                Deposits, and Certain Longer-Term Retail Brokered Deposits
                 Section __.104(c) of the proposed rule would have assigned a 90
                percent ASF factor to the following three categories of brokered
                deposits \107\ provided by retail customers or counterparties: (1) A
                reciprocal brokered deposit where the entire amount is covered by
                deposit insurance,\108\ (2) an affiliated brokered sweep deposit where
                the entire amount of the deposit is covered by deposit insurance,\109\
                and (3) a brokered deposit that is not a reciprocal brokered deposit or
                brokered sweep deposit, is not held in a transactional account, and has
                a remaining maturity of one year or more.\110\ Other types of brokered
                deposits would have been assigned lower ASF factors under the proposed
                rule.\111\
                ---------------------------------------------------------------------------
                 \107\ A ``brokered deposit'' previously was defined in Sec.
                __.3 of the LCR rule as a 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 FDI Act (12 U.S.C. 1831f(g)), and includes
                reciprocal brokered deposits and brokered sweep deposits. In the
                final rule, the agencies have amended the definition to mean a
                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 FDI Act (12
                U.S.C. 1831f(g)) and the FDIC's regulations. See section VI.A.4 of
                this Supplementary Information section.
                 The agencies note that the ASF factors assigned to retail
                brokered deposits are based solely on the stable funding
                characteristics of these deposits over a one-year time horizon. The
                assignment of ASF factors is not intended to reflect other impacts
                of these deposits on a covered company, such as their effect on a
                company's probability of failure or loss given default, franchise
                value, or asset growth rate or lending practices.
                 \108\ A ``reciprocal brokered deposit'' previously was defined
                in Sec. __.3 of the LCR rule as a brokered deposit that the covered
                company receives through a deposit placement network on a reciprocal
                basis, such that: (1) For any deposit received, the covered company
                (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. The final rule
                renames the term ``reciprocal brokered deposit'' to ``brokered
                reciprocal deposit'' to avoid confusion and use terminology
                consistent with other regulations. See 12 CFR 327.8(q).
                 \109\ See supra note 106. Typically, these transactions involve
                securities firms or investment companies that transfer (``sweep'')
                idle customer funds into deposit accounts at one or more banks. An
                affiliate sweep deposit is deposited in accordance with a contract
                between the retail customer or counterparty and the covered company,
                a controlled subsidiary of the covered company, or a company that is
                a controlled subsidiary of the same top-tier company of which the
                covered company is a controlled subsidiary.
                 \110\ Under the final rule, the agencies removed from the
                definition of ``brokered deposit'' references to deposits defined as
                either a ``reciprocal brokered deposit'' or ``brokered sweep
                deposit'' in Sec. __.3 of the LCR rule. This revision reflects
                modifications made to these terms under the final rule, as discussed
                in section VI.A.4 of this Supplementary Information section. See
                supra note 107.
                 \111\ These other types of brokered deposits are discussed in
                sections VII.C.3.d and VII.C.3.e of this Supplementary Information
                section.
                ---------------------------------------------------------------------------
                 A commenter argued that brokered deposits are not inherently
                unstable and should receive similar treatment as non-brokered retail
                deposits. Several commenters suggested that retail brokered deposits
                with a remaining maturity of one year or more be assigned a 100 percent
                ASF factor. Commenters argued that assigning these long-term retail
                brokered deposits an ASF factor of 100 percent would align with the
                Basel standard and recognize the more significant role of this funding
                source in the U.S. financial system relative to other jurisdictions.
                The commenters further argued that covered companies can expect to rely
                on these deposits for funding over the NSFR's one-year time horizon
                given their maturity and because depositors are generally not permitted
                to withdraw such deposits except under narrow circumstances and usually
                not without a significant penalty. The commenters also argued that
                depositors are less likely to accelerate the maturity of their brokered
                deposits outside of a stress scenario. Commenters also expressed
                concern that the FDIC's interpretation of ``brokered deposit'' is
                overly broad and reflects policy concerns, such as rapid deposit
                expansion and improper deposit management that are not relevant for
                purposes of determining the appropriate treatment of such products for
                regulatory liquidity and stable funding requirements.
                 Except in the cases described below where brokered deposits have
                certain stabilizing features, the typical characteristics of brokered
                deposits support assigning a lower ASF factor for retail brokered
                deposits than the ASF factor assigned to stable or other retail
                deposits. Specifically, deposits that are placed by a deposit broker
                are typically at higher risk of being withdrawn over a one-year period
                as compared to a retail deposit placed directly by a retail customer or
                counterparty. As noted, the FDIC has issued a proposal revising its
                brokered deposits framework \112\ and expects the finalization of this
                proposal will address some concerns that the FDIC's existing
                interpretations are overly broad.
                ---------------------------------------------------------------------------
                 \112\ 85 FR 7453.
                ---------------------------------------------------------------------------
                 Additionally, statutory restrictions on certain brokered deposits
                can make this form of funding less stable than other deposit types
                across a range of market environments. Specifically, a covered company
                that becomes less than ``well capitalized'' \113\ is subject to
                restrictions on renewing or rolling over funds obtained directly or
                indirectly through a deposit broker.\114\
                ---------------------------------------------------------------------------
                 \113\ As defined in section 38 of the FDI Act, 12 U.S.C. 1831o.
                 \114\ See 12 U.S.C. 1831f.
                ---------------------------------------------------------------------------
                 For these reasons, the final rule generally assigns a lower ASF
                factor to retail brokered deposits to reflect their reduced stability
                in comparison to other forms of retail deposits. However, consistent
                with the proposal, the final rule applies a 90 percent ASF factor to
                the following retail brokered deposits that have certain stabilizing
                characteristics: (1) A brokered reciprocal deposit provided by a retail
                customer or counterparty, where the entire amount of the deposit is
                covered by deposit insurance; and (2) a brokered deposit provided by a
                retail customer or counterparty that is not a brokered reciprocal
                deposit or sweep deposit, is not held in a transactional account, and
                has a remaining maturity of one year or more. In a change from the
                proposal, the final rule assigns a 90 percent ASF factor to any
                affiliate sweep deposit that does not meet all of the requirements for
                affiliate sweep deposits to be assigned a 95 percent ASF factor, which
                includes affiliate sweep deposits that are not fully covered by deposit
                insurance.\115\ Each of these types of deposits is discussed below.
                ---------------------------------------------------------------------------
                 \115\ Section __.104(d)(7) of the proposed rule would have
                assigned a 50 percent ASF factor to a brokered affiliate sweep
                deposit where less than the entire amount of the deposit is covered
                by deposit insurance and without regard to whether a covered company
                could demonstrate to the satisfaction of its appropriate Federal
                banking agency that a withdrawal of such deposit is highly unlikely
                to occur during a liquidity stress event.
                ---------------------------------------------------------------------------
                 Brokered reciprocal deposits. The reciprocal nature of a brokered
                reciprocal deposit provided by a retail customer or counterparty means
                that a deposit placement network contractually provides a covered
                company with the same amount of deposits that it places with other
                depository institutions. As a result, and because the deposit is fully
                insured, the retail customers or counterparties providing the deposit
                tend to be less
                [[Page 9147]]
                likely to withdraw it than other types of deposits that are assigned a
                lower ASF factor.
                 Affiliate sweep deposits. As described above in section VII.C.3.b
                of this Supplementary Information section, within the waterfall
                structure of sweep deposit arrangements, affiliates tend to be the
                first to receive deposits and the last from which deposits are
                withdrawn. With this priority relationship with an affiliate, a covered
                company is more likely to receive and maintain a steady stream of sweep
                deposits across a range of market conditions. Based on the reliability
                of this stream of sweep deposits the final rule treats sweep deposits
                received from affiliates as more stable than sweep deposits received
                from non-affiliates and more similar to other types of retail deposits.
                The final rule takes into account that the priority relationship with
                an affiliate results in a deposit relationship that is reflective of an
                overall relationship with the underlying retail customer where these
                deposits generally exhibit a stability profile associated with deposits
                directly from retail customers or counterparties, even if the deposits
                are not fully covered by deposit insurance.
                 Certain longer-term brokered deposits. For a brokered deposit
                provided by a retail customer or counterparty that is not a brokered
                reciprocal deposit or sweep deposit, which is not held in a
                transactional account and that has a remaining maturity of one year or
                more, the contractual term makes it a more stable source of funding
                than other types of deposits that are assigned a lower ASF factor.
                However, these brokered deposits are not assigned an ASF factor higher
                than 90 percent, as requested by certain commenters, because a covered
                company may be more likely to permit withdrawal of retail brokered
                deposits in the event of an early withdrawal request by the depositor,
                for reputational or franchise reasons, despite the absence of
                contractual requirements to permit withdrawal within the NSFR's one-
                year time horizon.
                d) 50 Percent ASF Factor
                 The final rule assigns an ASF factor of 50 percent to most forms of
                wholesale funding with residual maturities of less than one year,
                certain retail brokered deposits that do not have the stabilizing
                characteristics described above, and non-deposit retail funding. For
                wholesale funding, the 50 percent ASF factor recognizes that funding
                that contractually matures in less than one year is less stable than
                longer term wholesale funding relative to the NSFR time horizon. The
                likelihood that maturing wholesale funding will be renewed generally
                depends on counterparty relationship characteristics, with financial
                sector entities being less likely than non-financial sector entities to
                renew their provision of funding. In addition, the final rule assigns
                the 50 percent ASF factor to all wholesale operational deposits,
                regardless of contractual maturity or counterparty, reflecting the
                provision of operational services. The 50 percent ASF factor applied to
                certain retail brokered deposits and to retail funding that is not a
                deposit or security reflect the counterparty relationship
                characteristics and the extent to which the retail funding has other
                stabilizing characteristics.
                Unsecured Wholesale Funding Provided by, and Secured Funding
                Transactions With, a Counterparty That is Not a Financial Sector Entity
                or Central Bank and With Remaining Maturity of Less Than One Year
                 Sections __.104(d)(1) and (2) of the proposed rule would have
                assigned a 50 percent ASF factor to a secured funding transaction or
                unsecured wholesale funding (including a wholesale deposit) that, in
                each case, matures less than one year from the calculation date and is
                provided by a wholesale customer or counterparty that is not a central
                bank or a financial sector entity (or a consolidated subsidiary
                thereof). The proposed rule would have assigned this ASF factor because
                covered companies generally will need to roll over or replace funding
                with these characteristics during the NSFR's one-year time horizon.
                 Several commenters also requested that the NSFR assign a higher ASF
                factor to public sector entity deposits, including public deposits that
                must be collateralized and collateralized corporate trust deposits.
                These commenters argued that these public sector entity collateralized
                deposits are more stable than most other wholesale deposits because,
                among other things, the deposit relationship is connected to longer-
                term relationships between a covered company and the public sector
                entity, the relationship is often acquired through prescribed bidding
                processes, and the deposits frequently are secured by HQLA. These
                commenters also argued that assigning a higher ASF factor to
                collateralized deposits would be consistent with the LCR rule, which
                assigns a lower outflow rate to such deposits compared to other forms
                of wholesale funding. The commenters recommended that the agencies
                revise the ASF factor for such deposits to one minus the RSF factor
                applicable to the underlying collateral. One commenter advocated
                assigning a 95 percent ASF factor (or an alternative factor slightly
                lower than 95 percent) to public sector entity deposits in excess of
                FDIC deposit insurance limits if the deposit is privately insured or
                fully collateralized by an FHLB letter of credit. The commenter argued
                that such features would lower the likelihood of withdrawal for these
                types of funds, including during times of stress.
                 Other commenters requested a higher ASF factor for FHLB advances
                because, in their view, FHLB advances are stable, reliable and fully
                secured, and the FHLBs have a proven track record of providing
                liquidity. For example, one commenter recommended assigning an ASF
                factor of 80 percent to FHLB advances with maturities of six months or
                more but less than one year.
                 The treatment of wholesale deposits in the final rule includes
                consideration of counterparty relationships. As compared to retail
                customers or counterparties, wholesale customers or counterparties may
                be motivated to a greater degree by return and risk of an investment,
                tend to be more sophisticated and responsive to changing market
                conditions, and often employ personnel who specialize in the financial
                management of the counterparty. As a result, wholesale customers or
                counterparties are more likely to withdraw their funding than a retail
                customer or counterparty. Further, FDIC deposit insurance coverage does
                not mitigate these motivations and sophistication characteristics to
                increase the stability of funding provided by a wholesale customer or
                counterparty sufficient to warrant an ASF factor higher than 50
                percent.
                 The NSFR's application to a covered company's aggregate balance
                sheet generally does not involve differentiation between secured and
                unsecured liabilities and, by design, the NSFR treats the liquidity
                characteristics of collateral differently from the LCR rule. Although
                collateralization may reduce credit risk in the event of default,
                funding stability is influenced more by tenor, funding type and
                counterparty relationship characteristics. The fact that certain
                deposits placed by public sector entities are required to be
                collateralized for their contractual term does not mitigate the risk
                that a public sector entity may not renew such funding upon maturity.
                The final rule treats the collateralization of FHLB advances in the
                same fashion. Additionally, ASF and RSF factor values are not intended
                to be values of, respectively, cash outflow amounts as in the LCR rule
                or market haircuts of assets
                [[Page 9148]]
                used as collateral. Accordingly, it would not be appropriate for the
                type of collateral, nor the RSF factor assigned to such assets, to
                determine the ASF factor assigned to a collateralized deposit, as
                suggested by commenters.\116\
                ---------------------------------------------------------------------------
                 \116\ Additionally, as discussed in section VII.D of this
                Supplementary Information section, the final rule applies lower RSF
                factors to HQLA on a covered company's balance sheet relative to
                certain less liquid assets, including HQLA used for, or available
                for, the collateralization of public sector entity deposits,
                consistent with the treatment of encumbered assets described below.
                ---------------------------------------------------------------------------
                 The final rule also treats the maturity characteristics of FHLB
                advances consistent with other wholesale funding. Although the FHLBs
                served as a source of liquidity during the 2007-2009 financial crisis,
                covered companies generally may need to renew maturing funding from
                these entities across a range of market conditions. The FHLB system
                also conduct maturity transformation in obtaining the system's funding
                from investors. Similar to other wholesale counterparties, the FHLB
                system responds to events and market conditions in different ways than
                retail counterparties and could be sensitive to fluctuations in market
                conditions, which make funding already obtained from FHLBs less stable
                than retail deposits and other forms of funding that are assigned
                higher ASF factors. As a result, distinguishing FHLB advances from
                other types of wholesale funding would be at odds with the goal of the
                NSFR, which is to provide a standardized measure to ensure appropriate
                stable funding of covered companies relative to their assets and
                commitments.
                 For the reasons discussed above, the final rule assigns an ASF
                factor of 50 percent for a secured funding transaction or unsecured
                wholesale funding (including a wholesale deposit) that, in each case,
                matures less than one year from the calculation date and is provided by
                a wholesale customer or counterparty that is not a central bank or a
                financial sector entity (or a consolidated subsidiary thereof), as
                proposed. Funding from FHLBs and public sector entity deposits that
                have a residual maturity of less than one year from the calculation
                date are included in this category.
                Unsecured Wholesale Funding Provided by, and Secured Funding
                Transactions With, a Financial Sector Entity or Central Bank With
                Remaining Maturity of Six Months or More, but Less Than One Year
                 Sections __.104(d)(3) and (4) of the proposed rule would have
                assigned a 50 percent ASF factor to a secured funding transaction or
                unsecured wholesale funding that matures six months or more but less
                than one year from the calculation date and is provided by a financial
                sector entity or a consolidated subsidiary thereof, or a central
                bank.\117\ The proposed rule would therefore have treated funding from
                central banks consistently with funding from financial sector entities.
                ---------------------------------------------------------------------------
                 \117\ See supra note 102.
                ---------------------------------------------------------------------------
                 The agencies did not receive comments on this aspect of the
                proposed rule, and the final rule adopts this provision as proposed. In
                assigning a 50 percent ASF factor, the final rule treats secured
                funding transactions and unsecured funding that each have a remaining
                maturity of six months or more but less than one year, and are
                conducted with financial sector counterparties and central banks, the
                same as similar types of funding from other wholesale customers and
                counterparties.
                Securities Issued by a Covered Company With Remaining Maturity of Six
                Months or More, but Less Than One Year
                 Section __.104(d)(5) of the proposed rule would have assigned a 50
                percent ASF factor to securities issued by a covered company that
                mature in six months or more, but less than one year, from the
                calculation date.
                 The agencies received no comments on this provision of the proposed
                rule. Consistent with the proposed rule, the final rule assigns a 50
                percent ASF factor to securities issued by a covered company that
                mature in six months or more, but less than one year, from the
                calculation date. This treatment is appropriate because funds providers
                that are investors in securities issued by covered companies include,
                among others, financial sector entities and the relationship of the
                funds provider to a covered company generally will have characteristics
                that make such funding less stable than other types of funding received
                from retail customers or counterparties.\118\ Further, due to the
                operation of secondary markets, a covered company may not be aware of
                the nature of the current investor in a security issued by a covered
                company and requiring a covered company to apply an ASF factor based on
                counterparty type would be operationally complex.
                ---------------------------------------------------------------------------
                 \118\ Securities issued by a covered company that have a
                remaining maturity of one year or more receive an ASF factor of 100
                percent. See section VII.C.3.a of this Supplementary Information
                section.
                ---------------------------------------------------------------------------
                Operational Deposits
                 Section __.104(d)(6) of the proposed rule would have assigned a 50
                percent ASF factor to operational deposit funding, including
                operational deposits from financial sector entities. Operational
                deposits would include both (i) unsecured wholesale funding in the form
                of deposits and (ii) collateralized deposits that, in each case, are
                necessary for the provision of operational services, such as clearing,
                custody, or cash management services.\119\
                ---------------------------------------------------------------------------
                 \119\ The agencies note that the methodology that a covered
                company would have used to determine whether and to what extent a
                deposit is operational for the purposes of the proposed rule must be
                consistent with the methodology used for the purposes of the LCR
                rule. See Sec. __.3 of the LCR rule for the full list of services
                that qualify as operational services and Sec. __.4(b) of the LCR
                rule for additional requirements for operational deposits.
                Consistent with the proposed rule, the methodology for determining
                an operational deposit under the final rule is the same as the
                methodology used for the LCR rule.
                ---------------------------------------------------------------------------
                 Commenters requested that the final rule assign operational
                deposits a higher ASF factor (e.g., one commenter recommended an ASF
                factor of between 60 and 75 percent) because moving operational
                deposits to a different institution is expensive, time consuming, and
                risky. \120\ In support of this request, a commenter stated that
                changing custody service providers can take between six and twelve
                months and can significantly disrupt a company's essential payment,
                clearing, and settlement functions. Another commenter argued that
                depositors are unlikely to move their operational deposits from a
                covered company because of other relationships the depositor has with
                the covered company, particularly when the covered company is a
                regional banking institution. By contrast, one commenter noted that
                operational deposits can be withdrawn from a covered company by a
                customer within the NSFR's one-year time horizon and therefore do not
                warrant a higher ASF factor.
                ---------------------------------------------------------------------------
                 \120\ Comments about the definition of operational deposits are
                discussed in section VI.A of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 Commenters also asserted that the proposed rule's treatment of
                operational deposits was inconsistent with the treatment of operational
                deposits under the LCR rule, and argued that this type of funding is
                more stable than suggested by the treatment in the LCR rule or the
                proposed rule based on historical experience, evidenced in the
                empirical data, and the results of internal stress testing. These
                commenters contended that the proposed treatment of operational
                deposits would compound the already punitive treatment of operational
                deposits under the LCR rule. A commenter also argued that the proposed
                treatment of operational
                [[Page 9149]]
                deposits could penalize the business of custody banks.
                 The final rule applies an ASF factor of 50 percent to operational
                deposits as proposed. By definition, operational deposits are essential
                for the ongoing provision of operational services by a covered company
                to a wholesale depositor. The final rule therefore applies the ASF
                factor for operational deposits based on the operational relationship
                with the depositor rather than the contractual tenor of the funding or
                the type of wholesale counterparty. The level of operational deposits
                from a given funds provider may vary over time based on the customer's
                needs and, consistent with other wholesale funding that matures within
                one year that is assigned a 50 percent ASF factor, is not contractually
                guaranteed for the NSFR's one-year horizon. Further a counterparty
                could successfully restructure how it obtains various operational
                services and could place some or all of its operational deposits with
                another financial institution over a one-year time horizon. The 50
                percent ASF factor also recognizes that the stability of short-term
                operational and non-operational deposits from financial counterparties
                are not identical because switching operational service providers may
                be difficult and have associated costs that are not present with non-
                operational deposits.
                 As discussed in section V.C of this Supplementary Information
                section, ASF factors are not directly comparable to outflow rates
                assigned in the LCR rule or other cash flow risk assessments, such as
                internal liquidity stress testing. While there are some barriers to
                withdrawing operational deposits, such as switching costs, operational
                deposits are not as stable as those forms of funding that are assigned
                a higher ASF factor in the final rule.
                 In response to commenters' concern that the proposed treatment of
                operational deposits is especially impactful to the custody banks
                business model, which place greater reliance on operational deposits
                than other business models, the agencies note the NSFR rule is meant to
                apply a single minimum standard to all covered companies regardless of
                business model, in order to improve resiliency and comparability of
                funding profiles for all covered companies. Accordingly, the NSFR
                assigns ASF factors and RSF factors to categories of liabilities and
                assets based on the characteristics of those liabilities and assets
                rather than their prevalence in certain business models.
                Other Retail Brokered Deposits
                 Section __.104(d)(7) of the proposed rule would have assigned a 50
                percent ASF factor to most categories of brokered deposits provided by
                retail customers or counterparties that do not include the additional
                stabilizing features described under Sec. __.104(c) and summarized
                above. Specifically, retail brokered deposits to which the proposed
                rule would have assigned a 50 percent ASF factor included: (1) A
                brokered deposit that is not a reciprocal brokered deposit or brokered
                sweep deposit and that is held in a transactional account; (2) a
                brokered deposit that is not a reciprocal brokered deposit or brokered
                sweep deposit, is not held in a transactional account, and matures in
                six months or more, but less than one year, from the calculation date;
                (3) a reciprocal brokered deposit or brokered affiliate sweep deposit
                where less than the entire amount of the deposit is covered by deposit
                insurance; and (4) a brokered non-affiliate sweep deposit, regardless
                of deposit insurance coverage.
                 Commenters argued that one or more of the above types of retail
                brokered deposits should be assigned a higher ASF factor. Commenters
                asserted the proposed rule's treatment of brokered deposits was too
                conservative, arguing that brokered deposits have historically been
                stable sources of funding, including during times of stress, and their
                use has not been correlated with the growth of risky assets.
                 Commenters recommended that specific brokered deposits be assigned
                a 90 percent ASF factor. For example, some commenters suggested that
                non-affiliate sweep deposits with contractual agreements that provide a
                depository institution with priority over other participants in a
                brokered sweep deposit program waterfall receive the same 90 percent
                ASF factor assigned to affiliated brokered sweep deposits. Another
                commenter requested that the 90 percent ASF factor be applied to all
                non-affiliate brokered retail sweep deposits that are fully insured and
                with remaining terms of greater than one year. Similarly, one commenter
                suggested that retail brokered deposits categorized as money market
                deposit accounts that are subject to a commitment to leave the balances
                on deposit with the bank for a pre-determined period of time and
                subject to an early withdrawal penalty should be assigned a 90 percent
                ASF factor. The commenter argued that the agreements, which require
                that the funds not be withdrawn for a minimum period without incurring
                a significant interest penalty, make the funds sufficiently stable to
                warrant a higher ASF factor.
                 One commenter argued that many brokered deposits held in
                transactional accounts behave substantially similarly to retail
                deposits and should therefore receive an ASF factor that is higher than
                the proposed 50 percent factor. In particular, this commenter noted
                that, due to the types of deposits that may be considered ``brokered
                deposits'' under the FDIC's brokered deposit guidance,\121\ many
                transactional account products that act as a stable source of retail
                funding could be classified as ``brokered'' due to a referral from a
                third party. This, the commenter noted, would make them subject to a 50
                percent ASF factor under the NSFR rule.\122\ Another commenter argued
                that retail brokered deposits are more stable due to the large number
                and variety of providers of such deposits. Accordingly, the commenter
                asserted that a covered company could easily find a substitute
                counterparty for a company that withdraws its brokered deposits from
                the covered company.
                ---------------------------------------------------------------------------
                 \121\ See Federal Deposit Insurance Corporation, ``Frequently
                Asked Questions on Identifying, Accepting and Reporting Brokered
                Deposits,'' updated June 30, 2016, available at https://www.fdic.gov/news/news/financial/2016/fil16042b.pdf.
                 \122\ Id.
                ---------------------------------------------------------------------------
                 Finally, commenters requested that the agencies increase the ASF
                factors applied to retail brokered deposits to align the ASF factors
                with the outflow rates assigned in the LCR rule. For example, one
                commenter argued that it would be inconsistent for brokered deposits
                that receive a 25 percent outflow rate under the LCR rule to receive a
                50 percent ASF factor under NSFR rule. The commenter argued that the
                ASF factor and LCR outflow rate should be complements, and, if not, the
                ASF factor should be more favorable because a covered company would
                have a full year to make adjustments to its balance sheet to replace a
                withdrawal of retail brokered deposits, whereas the LCR outflow rate is
                assumed to occur over a 30 calendar-day stress period. The same
                commenter argued that the perceived disparate treatment of these
                brokered deposits between the NSFR rule and LCR rule could incentivize
                covered companies to meet funding needs with shorter, rather than long-
                term brokered deposits.
                 The retail brokered deposits to which a 50 percent ASF factor would
                have been assigned are less stable sources of funding than the retail
                brokered deposits that are assigned a 90 percent ASF factor, other
                deposits that are assigned a 90 percent ASF factor, and
                [[Page 9150]]
                stable retail deposits, which are assigned a 95 percent ASF factor.
                Although the considerations identified by commenters may cause certain
                brokered deposits to have increased relative stability, these brokered
                deposits do not have the same combination of stabilizing features that
                warrant assignment of a higher ASF factor. Specifically, they lack a
                combination of being fully covered by deposit insurance, being received
                from an affiliate, or having a longer-term maturity.
                 In response to commenters' request to treat certain non-affiliate
                sweep deposits in a similar manner to affiliate sweep deposits, the
                agencies note that an affiliate sweep deposit relationship is
                reflective of an overall relationship with the underlying retail
                customer or counterparty and these deposits generally exhibit a
                stability profile associated with deposits directly from retail
                customers, which warrants assignment of a higher ASF factor. As a
                result, the final rule assigns a 50 percent ASF factor to non-affiliate
                sweep deposits and a higher ASF factor to affiliate sweep deposits, as
                discussed above. The agencies will continue to review the treatment of
                sweep deposits, including non-affiliate sweep deposits, under the LCR
                and NSFR rules.\123\ In response to the comments regarding treatment
                under the LCR rule, as discussed above in section V.C of this
                Supplementary Information section, the agencies note that the ASF
                factors are not intended to align with the outflow rates assigned in
                the LCR rule in all cases due to the different purposes of the two
                rules. With the exception of affiliate sweep deposits where less than
                the entire amount of the deposit is covered by deposit insurance, which
                the final rule assigns a 90 percent ASF factor,\124\ the agencies are
                adopting the 50 percent ASF factor for these deposits as proposed for
                the reasons discussed above.
                ---------------------------------------------------------------------------
                 \123\ As part of this effort, the agencies intend to revise the
                regulatory reporting (e.g. Call Report) to obtain data that may help
                evaluate funding stability of sweep deposits over time to determine
                their appropriate treatment under liquidity regulations.
                 \124\ See section VII.C.3.c.ii. of this Supplementary
                Information section.
                ---------------------------------------------------------------------------
                Funding From a Retail Customer or Counterparty not in the Form of a
                Deposit or Security
                 The proposed rule would have assigned a zero percent ASF factor to
                retail funding that is not in the form of a deposit or security issued
                by the covered company. In the proposed rule, the agencies noted that
                non-deposit retail liabilities are not regular sources of funding or
                commonly utilized funding arrangements for covered companies.\125\ The
                proposed rule also, however, solicited comment as to whether the final
                rule should assign an ASF factor greater than zero to any non-deposit
                retail liabilities.\126\
                ---------------------------------------------------------------------------
                 \125\ As noted above, a security issued by the covered company
                that is held by a retail customer or counterparty would not take
                into account counterparty type and therefore would not fall within
                this category.
                 \126\ See 81 FR at 35140.
                ---------------------------------------------------------------------------
                 Some commenters expressed concern that the proposed treatment of
                non-deposit retail liabilities was overly conservative and would
                unfairly penalize business models that focus on securities trading,
                such as retail-oriented securities brokerage firms that utilize retail
                brokerage payables as a source of funding.\127\ For example, a
                commenter expressed concern that an organization with a depository
                institution and a broker-dealer subsidiary of equal size could face a
                funding shortfall under the proposed rule because the funding of the
                broker-dealer subsidiary would not be assigned sufficiently high ASF
                factors and the stable funding of the depository institution may not be
                treated under the NSFR rule as available to support the nonbank funding
                needs of the consolidated entity's broker-dealer subsidiary.\128\ Some
                commenters noted that retail brokerage payables have been historically
                stable across both normal and stressed economic periods--for example,
                one commenter asserted that its amount of retail brokerage payables
                increased at the height of the 2007-2009 financial crisis, and from
                2009 to 2016. Commenters further indicated that retail brokerage
                payables have counterparty credit risks similar to uninsured deposits,
                in part because they arise in a transactional context and as part of a
                client's larger brokerage relationship. One commenter argued that
                because the risk-based capital surcharge for GSIBs in the United States
                (GSIB capital surcharge rule) excludes non-deposit retail customer
                funding entirely from its Method 2 calculation methodology,\129\ this
                implicitly suggests that other Board rules consider such funding to be
                stable.
                ---------------------------------------------------------------------------
                 \127\ The term ``retail brokerage payables'' generally refers to
                (1) cash awaiting investment in retail clients' brokerage accounts,
                or ``free credit balances,'' and (2) cash balances in a securities
                firm's bank account related to a retail client's pending securities
                purchase and sale transactions and pending deposits to and
                distributions from clients' brokerage accounts, or ``float.''
                 \128\ See also section VII.F of this Supplementary Information
                section.
                 \129\ 12 CFR 217.405.
                ---------------------------------------------------------------------------
                 Some commenters suggested more favorable treatment for specific
                types of non-deposit retail liabilities. Specifically, commenters
                argued that some liabilities owed to retail counterparties in
                connection with non-deposit products, such as prepaid cards, travelers
                checks, and customer rewards programs, should be recognized as a stable
                source of funding given historical experience of low volatility in
                balances and redemptions over time. In addition, these commenters
                argued that certain features may be offered in connection with certain
                prepaid products that would increase their stability, such as pass-
                through insurance provided by some prepaid card products and state law
                requirements that money transmitters hold and invest funds equal to
                outstanding prepaid liabilities in high grade, low-risk assets.
                 Several commenters argued that the agencies should apply an ASF
                factor higher than zero percent to non-deposit retail liabilities to
                align with the treatment of similar liabilities under the LCR
                rule.\130\ Some commenters recommended assigning an ASF factor of 60
                percent to non-deposit retail liabilities. Other commenters recommended
                assigning a 50 percent ASF factor to non-deposit retail funding or
                assigning a 50 percent ASF factor to the unsecured liabilities of a
                broker-dealer subsidiary of a covered company that are owed to a retail
                customer or counterparty.
                ---------------------------------------------------------------------------
                 \130\ Section __.32(a)(5) of the LCR rule assigns a 40 percent
                outflow rate to non-deposit retail funding. As discussed in section
                V of this Supplementary Information section, the treatment of
                liabilities under the NSFR rule is not intended to align directly
                with that of the LCR rule due to the different purposes of the two
                requirements.
                ---------------------------------------------------------------------------
                 As a general matter, the final rule considers the relationship
                characteristics of retail customers or counterparties at least as
                favorably as wholesale counterparties that are not financial sector
                entities, and takes into account whether funding is obtained in
                connection with a transactional account or as part of another
                relationship with the covered company. However, not all forms of retail
                funding are equally stable. Although the GSIB capital surcharge rule
                excludes certain forms of non-deposit retail funding from the Method 2
                calculation methodology, exclusion of a funding source is not
                dispositive of its stability because the GSIB score measures a banking
                organization's systemic importance and does not measure the stability
                of each type of funding. Accordingly, the final rule does not calibrate
                ASF factors to non-deposit retail liabilities based on whether those
                liabilities are included in the Method 2 calculation under the GSIB
                capital surcharge rule.
                [[Page 9151]]
                 As noted by commenters, many of the liabilities that would have
                been included in the non-deposit retail funding category have
                demonstrated a relative degree of stability during normal and adverse
                economic periods, similar to types of funding that receive a 50 percent
                ASF factor. As non-deposits, however, the types of retail funding
                described above do not have the same stabilizing characteristics as the
                categories of deposits assigned a 90 percent or 95 percent ASF factor
                under the final rule. Although certain non-deposit retail funding may
                have transactional and other counterparty relationship characteristics
                similar to retail deposits and retail brokered deposits, they may also
                reflect counterparty sophistication characteristics similar to certain
                wholesale counterparties. For these reasons, the final rule assigns a
                50 percent ASF factor to funding from a retail customer that is not a
                deposit or a security, including retail brokerage payables.
                All Other NSFR Liabilities With Remaining Maturity of Six Months or
                More, but Less Than One Year
                 Section __.104(d)(8) of the proposed rule would have assigned a 50
                percent ASF factor to all other NSFR liabilities that have a remaining
                maturity of six months or more, but less than one year. As discussed in
                section VII.C.2 of this Supplementary Information section, a covered
                company would not need to roll over a liability of this maturity in the
                shorter-term, but may need to roll it over before the end of the NSFR's
                one-year time horizon.
                 The agencies received no comments on this provision of the proposed
                rule. For the reasons discussed in the proposed rule, the final rule
                assigns a 50 percent ASF factor to all other NSFR liabilities that have
                a remaining maturity of six months or more, but less than one year as
                proposed.
                e) Zero Percent ASF Factor
                 The final rule assigns a zero percent ASF factor to NSFR
                liabilities that demonstrate the least stable funding characteristics,
                including trade date payables, certain short-term retail brokered
                deposits, certain short-term funding from financial sector entities or
                central banks, and any other NSFR liability that matures in less than
                six months and is not described above. In the absence of a remaining
                tenor of at least six months, funding on a covered company's balance
                sheet of these types are considered unreliable sources of funding
                relative to the need to support assets and commitments over the NSFR's
                time horizon.
                Trade Date Payables
                 Section __.104(e)(1) of the proposed rule would have assigned an
                ASF factor of zero percent to trade date payables that result from
                purchases by a covered company of financial instruments, foreign
                currencies, and commodities that are required to settle within the
                lesser of the market standard settlement period for the particular
                transactions and five business days from the date of the sale. Trade
                date payables are established when a covered company buys financial
                instruments, foreign currencies, and commodities, but the transactions
                have not yet settled. Trade date payables are recorded on the covered
                company's balance sheet as a liability. These payables should result in
                a payment from a covered company at the settlement date, which varies
                depending on the specific market. Accordingly, trade date payables are
                not a source of stable funding.
                 The agencies did not receive comments on this provision. As
                proposed, the final rule assigns an ASF factor of zero percent to trade
                date payables because trade date payables should result in a payment
                from a covered company at the settlement date, meaning the liability
                does not represent a stable source of funding.
                Certain Short-Term Retail Brokered Deposits
                 Section __.104(e)(2) of the proposed rule would have assigned a
                zero percent ASF factor to a brokered deposit provided by a retail
                customer or counterparty that is not a reciprocal brokered deposit or
                brokered sweep deposit, is not held in a transactional account, and
                matures less than six months from the calculation date.
                 Commenters argued that non-maturity brokered deposits that are held
                in a savings account are similar in stability to non-brokered retail
                deposits held in a retail savings account, and therefore should be
                assigned a higher ASF factor. The commenters argued that assignment of
                a zero percent ASF factor would overstate the funding risks of brokered
                savings accounts, which these commenters argued include stabilizing
                deposit features such as the availability of full or partial FDIC
                deposit insurance and that the account holder can use other services
                provided by the banking organization.
                 Retail brokered deposits that are not brokered reciprocal deposits
                or sweep deposits, are not held in transactional accounts, and mature
                in less than six months tend to be less stable than other types of
                brokered deposits because they do not have the stabilizing features of
                brokered deposits that are assigned a higher ASF factor. Although non-
                maturity brokered deposits held in savings accounts may be fully or not
                fully insured and may provide similar access to services as a non-
                brokered deposit in a retail savings account, deposit brokers can, in
                some cases, decide whether to move this funding to a different banking
                organization at low cost and with little notice to the covered company.
                Additionally, even if the deposit is fully insured, because the funds
                are held in non-transactional accounts they are less stable due to the
                ease with which the deposits can be withdrawn. Finally, under the
                maturity categories of the final rule, the term of these deposits would
                fall into the shortest-term and thus represent the least stable form of
                funding.
                 For these reasons, the final rule assigns a zero percent ASF factor
                to a brokered deposit provided by a retail customer or counterparty
                that is not a brokered reciprocal deposit or sweep deposit, is not held
                in a transactional account, and matures less than six months from the
                calculation date as proposed.
                Securities Issued by a Covered Company With Remaining Maturity of Less
                Than Six Months
                 Section __.104(e)(4) of the proposed rule would have assigned a
                zero percent ASF factor to securities that are issued by a covered
                company and that have a remaining maturity of less than six months. As
                discussed above in section VII.C.2 of this Supplementary Information
                section, the proposed rule generally would have treated as less stable
                funding that has to be paid within the NSFR's one-year time horizon.
                 The agencies received no comments on this provision of the proposed
                rule. The final rule assigns a zero percent ASF factor to securities
                that are issued by a covered company and that have a remaining maturity
                of less than six months because such funding does not represent a
                source of stable funding over the NSFR's one-year time horizon.
                Short-Term Funding From a Financial Sector Entity
                 Section __.104(e)(5) of the proposed rule would have applied a zero
                percent ASF factor to funding (other than operational deposits) for
                which the counterparty is a financial sector entity or a consolidated
                subsidiary thereof and the transaction matures less than six
                [[Page 9152]]
                months from the calculation date.\131\ In general, financial sector
                entities and their consolidated subsidiaries are more likely than other
                types of counterparties to withdraw funding from a covered company,
                regardless of whether the funding is secured or the type of collateral
                securing the funding, as described in section VII.C.2 of this
                Supplementary Information section.
                ---------------------------------------------------------------------------
                 \131\ See supra note 102.
                ---------------------------------------------------------------------------
                 Many commenters raised concerns that the proposed assignment of a
                zero percent ASF factor to short-term funding from a financial sector
                entity would impair an important funding source for covered companies
                and could adversely affect the functioning of credit markets by
                increasing borrowing and transaction costs for end-users. Specifically,
                commenters objected that the proposed rule would assign a zero percent
                ASF factor to secured funding transactions while also assigning a 10 to
                15 percent RSF factor to secured lending transactions.\132\
                ---------------------------------------------------------------------------
                 \132\ As discussed in section VII.D.3.a of this Supplementary
                Information section, the agencies are decreasing the effect on the
                market for short-term secured lending transactions by adopting a
                zero percent RSF factor for certain secured lending transactions
                that are secured by rehypothecatable level 1 liquid assets.
                ---------------------------------------------------------------------------
                 Commenters also raised domestic and international regulatory
                concerns around the proposed framework for repurchase agreements.
                Commenters stated that rulemakings such as the GSIB capital surcharge
                rule and the SLR rule have increased the costs of transacting in
                matched-book repurchase agreements by adding higher capital
                requirements and that the NSFR would further exacerbate these costs.
                Commenters also questioned the assumption underlying the ASF and RSF
                factors for repurchase agreement and reverse repurchase agreement
                transactions--namely, that a covered company would be more likely to
                roll over short-term loans to financial sector entities than such
                entities would be likely to roll over short-term funding to a covered
                company. Since commenters primarily raised these concerns with regards
                to the assignment of RSF factors to short-term secured funding
                transactions, these issues are addressed more fully in section VII.D of
                this Supplementary Information section.
                 Consistent with the proposed rule, the final rule assigns a zero
                percent ASF factor to funding (other than operational deposits) for
                which the counterparty is a financial sector entity or a consolidated
                subsidiary thereof and the transaction matures less than six months
                from the calculation date because financial sector counterparties are
                more likely to withdraw short term funding within a one-year time
                horizon, regardless of whether the transaction is secured or unsecured.
                As discussed in section V of this Supplementary Information section,
                one of the goals of the final rule is to ensure that covered companies
                have sufficient levels of long-term stable funding and do not
                excessively rely on short-term borrowings from financial sector
                entities. Moreover, these types of short-term borrowings with financial
                sector counterparties can carry elevated risks to the funding needs of
                covered companies when combined with concentrations that can increase
                systemic risk and interconnectedness.
                 The agencies do not anticipate that the treatment of these short-
                term secured funding transactions will have a significant impact on the
                markets identified by commenters, such as fixed income markets,
                commercial mortgage-backed securities, lending markets, or money
                markets, especially in light of the adjustments made in the treatment
                of short-term secured lending transactions as discussed in VII.D.3 of
                this Supplementary Information section. However, the agencies monitor
                these market segments on an ongoing basis to evaluate the impact of
                agency rulemakings on financial intermediation. At the same time, the
                agencies will continue to examine collateral markets for any warning
                signals, including the costs of short- and long-term funding,
                participation rates, and collateral flows between covered companies and
                financial sector entities.
                Short-Term Funding From a Central Bank
                 Section __.104(e)(5) of the proposed rule also would have assigned
                a zero percent ASF factor to short-term funding from central banks to
                recognize the short-term nature of such funding from central banks,
                consistent with the proposed rule's focus on stable funding from market
                sources. For example, funding obtained from the discount window would
                have been assigned a zero percent ASF factor, consistent with the terms
                of discount window advances.
                 The agencies received no comments on this provision of the proposed
                rule. The final rule assigns a zero percent ASF factor to short-term
                funding from central banks as proposed.
                All Other NSFR Liabilities With Remaining Maturity of Less Than Six
                Months or an Open Maturity
                 Section __.104(e)(6) of the proposed rule would have assigned a
                zero percent ASF factor to all other NSFR liabilities, including those
                that mature less than six months from the calculation date and those
                that have an open maturity. NSFR liabilities that do not fall into one
                of the categories that are assigned an ASF factor generally would not
                represent a regular or reliable source of funding and, therefore, the
                proposed rule would not have treated any portion as stable funding.
                 Commenters requested that the NSFR rule assign a non-zero ASF
                factor to the unused borrowing capacity with FHLBs because the FHLB
                system is an important source of liquidity for U.S. banking
                organizations. The commenters pointed to FHLB lending activity during
                the 2007-2009 financial crisis, which demonstrated that FHLBs increased
                their lending by 50 percent between 2007 and 2008. Commenters argued
                that recognizing this source of funding was appropriate since the NSFR
                requirement, unlike the LCR rule, is intended to be a structural metric
                that reflects the stable funding required across all market conditions
                over a longer one-year time horizon. One commenter suggested that the
                agencies conduct a study on the potential impact of the final rule on
                the FHLB system and its role in providing liquidity to banks.
                 As discussed in section V.C of this Supplementary Information
                section, the NSFR is determined based on a covered company's balance
                sheet at a point in time. In order for a funding source to be
                considered relevant stable funding under the NSFR, a covered company
                must have obtained the funding for its balance sheet at that point in
                time. Establishing reliable sources of contingent funding in advance of
                potential funding needs is an essential part of sound liquidity risk
                management for banking organizations. For the purposes of assessing the
                risks presented by a banking organization's balance sheet, however, the
                NSFR does not treat undrawn lines of credit available to a covered
                company as stable funding, regardless of whether they are
                collateralized or whether they are provided by the FHLB system, the
                Federal Reserve System, or any other third parties.
                 The final rule assigns a zero percent ASF factor to all other NSFR
                liabilities, including those that mature less than six months from the
                calculation date and those that have an open maturity.
                D. Required Stable Funding
                1. Calculation of the RSF Amount
                 Consistent with the proposed rule, under the final rule a covered
                company's RSF amount reflects a covered company's funding requirement
                based on the liquidity characteristics of
                [[Page 9153]]
                its assets, commitments, and derivative exposures. Under Sec. __.105
                of the proposed rule, a covered company's RSF amount would have equaled
                the sum of two components: (i) The carrying values of a covered
                company's assets (other than assets included in the calculation of the
                covered company's derivatives RSF amount) and the undrawn amounts of
                its committed credit and liquidity facilities, each multiplied by an
                RSF factor assigned under Sec. __.106 (discussed in section VII.D.3 of
                this Supplementary Information section), and (ii) the covered company's
                derivatives RSF amount, as calculated under Sec. __.107 (discussed in
                section VII.E of this Supplementary Information section). The agencies
                received no comments on the calculation of the RSF amount and are
                adopting it as proposed.
                2. Characteristics for Assignment of RSF Factors
                 The proposed rule would have grouped NSFR assets, derivative
                exposures and commitments into broad categories and assigned RSF
                factors to determine the overall amount of stable funding a covered
                company must maintain. RSF factors would have been scaled from zero to
                100 percent based on the tenor and other liquidity characteristics of
                an asset, derivative exposure, or committed facility. The agencies did
                not receive comments on this general approach to using the
                characteristics of assets and commitments, and the final rule adopts
                the characteristics for assigning RSF factors as proposed. As in the
                proposed rule, the final rule categorizes assets, derivative exposures,
                and committed facilities into categories and assigns RSF factors based
                on the following liquidity characteristics: (1) Tenor; (2) encumbrance;
                (3) type of counterparty; (4) credit quality, and (5) market
                characteristics. As discussed below and in the relevant sections of
                this Supplementary Information section, the final rule assigns RSF
                factors using these characteristics as proposed with certain
                modifications that simplify the framework to seven categories for the
                assignment of RSF factors.
                a) Tenor
                 In general, the final rule requires a covered company to maintain
                more stable funding to support assets that have longer tenors because
                of the greater time the asset will remain on the balance sheet and
                before the covered company is contractually scheduled to realize
                inflows at the maturity of the asset. In addition, if assets with a
                longer tenor are not held to maturity, such assets may liquidate at a
                discount because of the increased market and credit risks associated
                with cash flows occurring further in the future. Assets with a shorter
                tenor, in contrast, generally require a smaller amount of stable
                funding under the final rule because a covered company would not need
                to fund such assets after the maturity date unless the assets are
                extended or rolled over and the covered company would therefore have
                access to the inflows from these maturing assets sooner. The final rule
                divides maturities for purposes of a covered company's RSF amount
                calculation into the same four maturity categories consistent with the
                ASF maturity categories: One year or more, less than one year, six
                months or more but less than one year, and less than six months (RSF
                maturity categories).
                b) Encumbrance
                 As described in section VII.D.3.h of this Supplementary Information
                section, whether an asset is encumbered and the extent of the
                encumbrance dictates the amount of stable funding required to support
                the particular asset. Similar to assets with longer contractual tenors,
                assets that are encumbered at a calculation date may be required to be
                held for the duration of the encumbrance and these assets often cannot
                be monetized while encumbered. In general, the longer an asset is
                encumbered, the more stable funding is required under the final rule.
                c) Counterparty Type
                 A covered company may face pressure to renew some portion of its
                assets at contractual maturity in order to maintain its franchise value
                with customers and because a failure to roll over such assets could be
                perceived by market participants as an indicator of financial distress
                at the covered company. Typically, these pressures are influenced by
                the type of counterparty to the maturing asset. For example, covered
                companies often consider their lending relationships with a wholesale,
                non-financial borrower to be important to maintain current business and
                generate additional business in the future. By contrast, the agencies
                expect these concerns are less likely to be a factor with respect to
                financial sector counterparties because financial counterparties
                typically have a wider range of alternate funding sources already in
                place, face lower transaction costs associated with arranging alternate
                funding, and have less expectation of stable lending relationships with
                any single provider of credit. In light of these business and
                reputational considerations, the final rule generally requires a
                covered company to maintain more aggregate stable funding to support
                certain lending to non-financial counterparties than for lending to
                financial counterparties.\133\
                ---------------------------------------------------------------------------
                 \133\ See supra note 102.
                ---------------------------------------------------------------------------
                d) Credit Quality
                 Credit quality is a factor in an asset's general funding
                requirements because market participants tend to be more willing to
                purchase assets with higher credit quality on a consistent basis and
                the prices of these assets are generally less volatile across a range
                of market and economic conditions. The demand for higher credit quality
                assets, therefore, is more likely to persist, and such assets are more
                likely to have resilient values, allowing a covered company to dispose
                of them more easily across a range of market conditions. Assets of
                lower credit quality, in contrast, are less likely to retain their
                value over time across market conditions. The final rule, like the
                proposed rule, generally requires greater aggregate stable funding with
                respect to assets of lower credit quality, to reduce the risk that in
                the event of having to dispose of such an asset prior to maturity a
                covered company may have to monetize it at a discount.
                e) Market Characteristics
                 Assets that are traded in transparent, standardized markets with
                large numbers of participants and dedicated intermediaries tend to
                exhibit a higher degree of reliable liquidity. The final rule,
                therefore, generally requires less aggregate stable funding for
                holdings of such assets relative to those traded in markets
                characterized by information asymmetry and relatively few participants.
                f) Comments Proposing Other Liquidity Characteristics
                 The agencies invited comment on whether other characteristics
                should be considered for purposes of assigning RSF factors. Several
                commenters suggested that RSF factors should be assigned based on
                criteria related to existing regulations and other market and
                operational factors.\134\ Another commenter argued that RSF factors
                should more closely align with market haircuts used in secured funding
                markets. One commenter recommended
                [[Page 9154]]
                the agencies assign RSF factors based on the intent for which a
                security is held and apply a lower RSF factor to short-term securities
                held for market-making purposes than for securities held for investment
                purposes, arguing that the proposal would negatively impact market-
                making activities. Other commenters argued that the assignment of RSF
                factors should take into account eligibility of assets as collateral
                for FHLB advances.\135\
                ---------------------------------------------------------------------------
                 \134\ For example, a commenter recommended incorporating the
                impact of existing regulations on a given asset or the counterparty
                to the asset, and an asset's external credit rating. The commenter
                recommended other market and operational factors, including the
                seniority, hedging, clearing characteristics of the asset and the
                size of the market for the asset.
                 \135\ As discussed in section VII.C.3 of this Supplementary
                Information section, some commenters also recommended assigning a
                non-zero ASF factor to unused borrowing capacity from FHLBs.
                ---------------------------------------------------------------------------
                 As discussed in section V.B of this Supplementary Information
                section, the final rule addresses funding stability risks not directly
                addressed in other parts of the agencies' regulatory framework.
                Although the agencies recognize that other regulations may require or
                incentivize covered companies to hold, or refrain from holding, certain
                assets, those regulations do not directly address the stability of a
                banking organization's funding profile in relation to the composition
                of its assets and commitments. Accordingly, it would not be appropriate
                to assign RSF factors to assets based on their treatment in other
                regulations or the impact of regulations on the counterparty to an
                asset. The liquidity characteristics described above tend to be
                generally reflected in market haircuts, but RSF factor values are not
                directly representative of asset haircuts and closer alignment of RSF
                factors with haircuts used in secured funding markets would be
                inappropriate for calibrating aggregate funding requirements of covered
                companies. As also discussed in section V.C, the final rule's
                simplified and standardized measure of funding risk does not
                differentiate between business activities or the intent for which a
                covered company holds a given asset. Accordingly, the final rule takes
                into account an asset's contractual residual maturity at a point in
                time and does not speculate on a covered company's intended purpose and
                timeframe for holding an asset in the future. Further, an asset's
                eligibility as collateral for FHLB advances is not an appropriate
                additional basis for determining RSF factors. The liquidity
                characteristics described above, including credit quality, are likely
                factors also considered by FHLBs when assessing collateral eligibility.
                Generally, assets currently held by a covered company contribute to its
                balance sheet funding risk regardless of the covered company's
                operational ability to obtain FHLB advances in the future.\136\
                ---------------------------------------------------------------------------
                 \136\ In respect to FHLB advances, many FHLB advances may have
                long maturities that may be reflected in the assignment of ASF
                factors described in section VII.C.3 of this Supplementary
                Information section.
                ---------------------------------------------------------------------------
                3. Categories of RSF Factors for Unencumbered Assets and Commitments
                 Based on the tenor, encumbrance, counterparty type, credit quality,
                and market characteristics described above, the final rule assigns RSF
                factors to unencumbered assets and commitments in the categories shown
                in Table 2. The treatment of encumbered assets is described below and
                shown in Table 3. The assignment of RSF factors for derivative
                exposures is described in section VII.E of this Supplementary
                Information section.
                 Table 2--Categories of Unencumbered Assets and Commitments Based on Their Characteristsics and Resulting RSF
                 Factors
                ----------------------------------------------------------------------------------------------------------------
                 Credit quality or
                Unencumbered and with tenor of: Counterparty types market NSFR assets or RSF factor
                 characteristics commitments percent
                ----------------------------------------------------------------------------------------------------------------
                Perpetual...................... Central bank...... Other............. Currency and coin...... 0
                Any tenor...................... Non-financial..... HQLA.............. Level 1 liquid assets ..............
                 held on balance sheet.
                Less than six months........... All............... Other............. Cash items in the ..............
                 process of collection
                 and certain trade date
                 receivables.
                 Central bank...... HQLA.............. Reserve Bank balances ..............
                 and claims on foreign
                 central banks.
                 Financial......... Non-operational... Secured lending ..............
                 transactions secured
                 by rehypothecatable
                 level 1 liquid assets.
                Committed...................... All............... Other............. Committed credit and 5
                 liquidity facilities.
                Any tenor...................... Non-financial..... HQLA.............. Level 2A liquid assets 15
                 held on balance sheet.
                Less than six months........... Financial......... Non-operational... Secured lending ..............
                 transactions secured
                 by assets other than
                 rehypothecatable level
                 1 liquid assets and
                 unsecured lending.
                Any tenor...................... Non-financial..... HQLA.............. Level 2B liquid assets 50
                 held on balance sheet.
                Six months or more, but less Financial......... Non-operational... Secured lending ..............
                 than one year. transactions and
                 unsecured wholesale
                 lending.
                Any tenor...................... Financial......... Operational....... Operational deposit ..............
                 placements.
                Less than one year............. Non-financial..... Non-operational... Secured lending ..............
                 transactions and
                 unsecured lending.
                 Retail............ Any............... Retail lending......... ..............
                 Any............... Any............... All other assets....... ..............
                One year or more............... Retail............ Risk weight 50 Retail mortgages....... 85
                 percent.
                 Retail and non- Risk weight >20 Secured lending ..............
                 financial. percent. transactions,
                 unsecured wholesale
                 lending, and retail
                 lending.
                 All............... Non-HQLA.......... Securities other than ..............
                 common equity shares
                 that are not HQLA.
                Any tenor...................... .................. .................. Publicly traded common ..............
                 equity shares that are
                 not HQLA.
                 Derivative Commodities............ ..............
                 transactions are
                 traded on U.S. or
                 non-U.S.
                 exchanges.
                One year or more............... Financial......... Any............... Secured lending 100
                 transactions and
                 unsecured lending to a
                 financial sector
                 entity.
                Any tenor...................... All............... >90 days past due Nonperforming assets... ..............
                 or nonaccrual.
                 Any............... All other assets....... ..............
                [[Page 9155]]
                
                Any tenor *.................... All............... Derivative........ NSFR derivatives asset ..............
                 amount.
                ----------------------------------------------------------------------------------------------------------------
                * The derivative treatment nets derivative transactions with various maturities.
                a) Zero Percent RSF Factor
                 Certain assets held by banking organizations have unique
                characteristics such that they do not contribute risk to a banking
                organization's funding profile. Assets such as currency, coin, cash
                items in the process of collection and short-term central bank reserves
                on a covered company's balance sheet at the NSFR calculation date
                generally can be used in the immediate term to meet obligations and
                eliminate short-term liabilities. In the normal course of business,
                trade date receivables also constitute assets of this type, even though
                they are subject to certain operational frictions.
                 Certain other assets in this category, such as level 1 liquid asset
                securities on a covered company's balance sheet and certain short-term
                secured lending transactions backed by rehypothecatable level 1 liquid
                assets conducted with financial sector entities make minimal
                contribution to a covered company's aggregate funding risk and are
                important to the efficient operation of key short-term funding markets.
                 These unique characteristics make it appropriate to assign an RSF
                factor of zero percent, the lowest RSF factor assigned to assets.
                (i) Asset Classes for Which the Agencies Received No Comments
                 The proposal would have applied a zero percent RSF factor to
                currency, coin, cash items in the process of collection, Reserve Bank
                balances and other central bank reserves with a maturity of less than
                six months. The agencies received no comments on these asset classes
                and are finalizing them as proposed.
                Currency and Coin
                 Section __.106(a)(1)(i) of the final rule assigns a zero percent
                RSF factor to currency and coin because these assets can be directly
                used to meet financial obligations. Currency and coin include U.S. and
                foreign currency and coin owned and held in all offices of a covered
                company; currency and coin in transit to a Federal Reserve Bank or to
                any other depository institution for which the covered company's
                subsidiaries have not yet received credit; and currency and coin in
                transit from a Federal Reserve Bank or from any other depository
                institution for which the accounts of the subsidiaries of the covered
                company have already been charged.\137\
                ---------------------------------------------------------------------------
                 \137\ This description of currency and coin is consistent with
                the treatment of currency and coin in Federal Reserve form FR Y-9C.
                ---------------------------------------------------------------------------
                Cash Items in the Process of Collection
                 Section __.106(a)(1)(ii) of the final rule assigns a zero percent
                RSF factor to cash items in the process of collection because these
                assets will not persist on a covered company's balance sheet, but
                rather will be converted to assets that can be directly used to meet
                financial obligations in the immediate term. These items would include:
                (1) Checks or drafts in process of collection that are drawn on another
                depository institution (or a Federal Reserve Bank) and that are payable
                immediately upon presentation in the country where the covered
                company's office that is clearing or collecting the check or draft is
                located, including checks or drafts drawn on other institutions that
                have already been forwarded for collection, but for which the covered
                company has not yet been given credit (known as cash letters), and
                checks or drafts on hand that will be presented for payment or
                forwarded for collection on the following business day; (2) U.S.
                government checks drawn on the Treasury of the United States or any
                other U.S. government agency that are payable immediately upon
                presentation and that are in process of collection; and (3) such other
                items in process of collection that are payable immediately upon
                presentation and that are customarily cleared or collected as cash
                items by depository institutions in the country where the covered
                company's office that is clearing or collecting the item is
                located.\138\
                ---------------------------------------------------------------------------
                 \138\ This description of cash items in the process of
                collection is consistent with the treatment of cash items in process
                of collection in Federal Reserve form FR Y-9C.
                ---------------------------------------------------------------------------
                Reserve Bank Balances and Other Claims on a Reserve Bank That Mature in
                Less Than Six Months
                 Section __.106(a)(1)(iii) of the final rule assigns a zero percent
                RSF factor to a Reserve Bank balance or to another claim on a Reserve
                Bank that matures in less than six months from the calculation date.
                The term ``Reserve Bank balances'' is defined in Sec. __.3 of the LCR
                rule and includes required reserve balances and excess reserves, but
                not other balances that a covered company maintains on behalf of
                another institution.\139\ Reserve Bank balances can be directly used to
                meet financial obligations through the Federal Reserve's payment
                system. Although other claims on Reserve Banks that mature in less than
                six months cannot be directly used to meet financial obligations, a
                covered company faces little risk of harm to its franchise value if it
                does not roll over the lending to a Reserve Bank at maturity. The
                covered company, therefore, may realize cash flows associated with the
                asset in the near term and not retain the asset on its balance sheet.
                ---------------------------------------------------------------------------
                 \139\ For example, the term ``Reserve Bank balance'' does not
                include balances maintained by a covered company on behalf of a
                respondent for which it acts as a pass-through correspondent. See 12
                CFR 204.5(a)(1)(ii). The definition also does not include balances
                maintained on behalf of an excess balance account participant. See
                12 CFR 204.10(d). The Board reduced reserve requirement ratios to
                zero percent effective March 26, 2020. This action eliminated
                reserve requirements for all depository institutions. See https://www.federalreserve.gov/monetarypolicy/reservereq.htm The Board could
                revise required reserve requirements in the future.
                ---------------------------------------------------------------------------
                Claims on a Foreign Central Bank That Matures in Less Than Six Months
                 Section __.106(a)(1)(iv) of the final rule assigns a zero percent
                RSF factor to claims on a foreign central bank that mature in less than
                six months. Similar to claims on a Reserve Bank, claims on a foreign
                central bank in this category may generally either be directly used to
                meet financial obligations or will be available for such use in the
                near term, and a covered company faces little risk of harm to its
                franchise value if it does not roll over the lending.
                (ii) Asset Classes for Which the Agencies Received Comments
                 The proposed rule would have applied a zero percent RSF factor to
                trade date receivables that met certain criteria. The proposed rule
                also would have assigned RSF factors higher than zero to (1) certain
                level 1 liquid assets and (2) secured lending transactions with a
                maturity of less than six months
                [[Page 9156]]
                conducted with financial sector entities (or their subsidiaries) and
                secured by rehypothecatable level 1 liquid assets. The agencies
                received a number of comments on the proposed treatment of these
                assets.
                Trade Date Receivables
                 Section __.106(a)(1)(v) of the proposed rule would have assigned a
                zero percent RSF factor to a trade date receivable due to a covered
                company that results from the sale of a financial instrument, foreign
                currency, or commodity that (1) is contractually required to settle
                within the lesser of the market standard settlement period for the
                relevant type of transaction, without extension of the standard
                settlement period, and five business days from the date of the sale;
                and (2) has not failed to settle within the required settlement period.
                By contrast, Sec. __.106(a)(8) of the proposed rule would have
                assigned a 100 percent RSF factor to a trade date receivable that (1)
                is contractually required to settle within the lesser of the market
                standard settlement period and five business days, but (2) fails to
                settle within this period.\140\ Several commenters expressed concerns
                that the proposed treatment was overly conservative and would result in
                assignment of a 100 percent RSF to trade date receivables that would
                likely still settle. Some commenters requested a zero percent RSF
                factor for trade date receivables that have failed to settle within the
                standard settlement period or five days, but still are expected to
                settle. These commenters noted that such treatment would align with the
                treatment in the Basel NSFR standard. One commenter contended that
                certain instruments have standard market settlement periods longer than
                five days and requested a zero percent RSF factor for receivables that
                settle within the greater of the standard market settlement period and
                five days. Another commenter requested a zero percent RSF factor for
                trade date receivables that failed to settle but are not more than five
                days past the standard settlement date, arguing that a covered company
                would expect the majority of its trade date receivables to have settled
                by that date.
                ---------------------------------------------------------------------------
                 \140\ In addition, consistent with the definition of
                ``derivative transaction'' under Sec. __.3 of the LCR rule, a trade
                date receivable that has a contractual settlement or delivery lag
                longer than the lesser of the market standard for the particular
                instrument or five days would have been treated as a derivative
                transaction under Sec. __.107 of this final rule.
                ---------------------------------------------------------------------------
                 The final rule expands the types of trade date receivables that are
                assigned a zero percent RSF factor to include trade date receivables
                due to a covered company that result from the sale of a financial
                instrument, foreign currency, or commodity that is required to settle
                no later than the market standard for the particular transaction, and
                that has yet to settle but is not more than five business days past the
                scheduled settlement date. This change from the proposal will more
                accurately measure the amount of receivables that are expected to
                settle and result in inflows in the near future because such trade date
                receivables are still reasonably expected to settle imminently. As
                discussed in section VII.D.3.g of this Supplementary Information, trade
                date receivables that do not qualify for a zero percent RSF factor are
                assigned a 100 percent RSF factor.
                Unencumbered Level 1 Liquid Assets Held on Balance Sheet
                 Section __.106(a)(2)(i) of the proposed rule would have assigned a
                5 percent RSF factor to unencumbered level 1 liquid assets that would
                not have been assigned a zero percent RSF factor. The proposed rule
                would have incorporated the definition of ``level 1 liquid assets'' set
                forth in Sec. __.20(a) of the LCR rule but would not have taken into
                consideration the operational requirements described in Sec. __.22 of
                the LCR rule. As a result, the proposed rule would have assigned a 5
                percent RSF factor to the following level 1 liquid assets: (1)
                Securities issued or unconditionally guaranteed as to the timely
                payment of principal and interest by the U.S. Department of the
                Treasury; (2) liquid and readily-marketable securities,\141\ as defined
                in Sec. __.3 of the LCR rule, 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 U.S.
                government); (3) 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 (4) certain liquid and readily-
                marketable debt securities issued by sovereign entities.
                ---------------------------------------------------------------------------
                 \141\ As discussed in section VI of this Supplementary
                Information section, the final rule incorporates the LCR rule's
                definition of ``liquid and readily-marketable,'' which 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. See Sec. __.3 of the
                LCR rule.
                ---------------------------------------------------------------------------
                 Some commenters argued that the NSFR rule should assign a zero
                percent RSF factor for all HQLA. These commenters argued that the
                proposed non-zero RSF factors for these assets would unduly penalize
                low-risk sources of funding, increase banking organizations' costs for
                holding HQLA and engaging in securities financing transactions
                involving HQLA, and undermine the ability of banking organizations to
                act as market makers. Other commenters believed a zero percent RSF
                factor would provide for a more level playing field by aligning with
                other jurisdictions' implementation of the NSFR.
                 A number of commenters requested a zero percent RSF factor be
                assigned to all level 1 liquid assets, which include certain government
                securities that commenters argued have liquidity characteristics
                similar to assets that would have been assigned a zero percent RSF
                factor under the proposed rule.\142\ Many commenters argued that U.S.
                Treasury securities, in particular, should be assigned a zero percent
                RSF factor because they are among the most liquid and readily
                marketable securities a covered company may hold and benefit from
                flight to quality during times of stress.
                ---------------------------------------------------------------------------
                 \142\ These commenters also argued that the proposed treatment
                would be more conservative than the treatment of level 1 liquid
                assets under the LCR rule, which allows a banking organization to
                include the full fair value of level 1 liquid assets in its HQLA
                amount. The value of RSF factors are not representative of market
                haircuts to asset values.
                ---------------------------------------------------------------------------
                 As described above, assets that a covered company can directly use
                to meet financial obligations or can reasonably expect to obtain the
                cash inflows at the maturity of these assets in the near future are
                assigned a zero percent RSF factor under the final rule. Such assets
                generally do not present risks to a covered company or the financial
                sector in the event of funding disruptions. Similarly, given their
                liquidity characteristics, level 1 liquid asset securities present
                minimal risks resulting from a covered company's funding of these
                assets as assessed over a one-year time horizon. Across a broad range
                of market conditions, a covered company generally may be less likely to
                have to fund these securities for one year compared to other
                securities. Although U.S. Treasury securities and other level 1 liquid
                asset securities generally must be monetized before they can be used to
                settle obligations and face modest transaction costs in doing so, these
                assets, regardless of their
                [[Page 9157]]
                contractual maturity, serve as reliable sources of liquidity across
                market conditions, based on their high credit quality and the favorable
                characteristics of the markets for these assets. Further, level 1
                liquid asset securities generally retain their value in the event of
                market disruptions relative to most other assets. In addition, these
                level 1 liquid asset securities serve a critically important role in
                supporting the smooth functioning of the funding markets, and, as
                further discussed in section X of this Supplementary Information
                section, a non-zero RSF factor on level 1 liquid assets could
                discourage intermediation in the U.S. Treasury market. For these
                reasons, the final rule applies a zero percent RSF factor to
                unencumbered level 1 liquid assets. Responses to comments requesting
                the final rule assign a zero percent RSF factor to all other HQLA are
                included below.
                Secured Lending Transactions With a Financial Sector Entity or a
                Subsidiary Thereof That Mature Within Six Months and Are Secured by
                Rehypothecatable Level 1 Liquid Assets
                 Section __.106(a)(3) of the proposed rule would have assigned a 10
                percent RSF factor to a secured lending transaction \143\ with a
                financial sector entity or a consolidated subsidiary thereof that
                matures within six months of the calculation date and is secured by
                level 1 liquid assets that are rehypothecatable for the duration of the
                transaction.\144\ The proposal explained that a relatively lower amount
                of stable funding is needed to support all forms of short-term lending
                to financial sector entities because the financial nature of the
                counterparty presents relatively lower reputational risk to a covered
                company if it chooses not to roll over the transaction when it matures.
                As a general matter, the proposed rule would have treated secured
                lending transactions and unsecured lending transactions with financial
                sector counterparties the same. However, the proposed rule would have
                assigned a lower RSF factor to such short-term lending transactions
                that are secured by rehypothecatable level 1 assets, relative to most
                other lending, because of a covered company's ability to monetize the
                level 1 liquid asset for the duration of the transactions.
                ---------------------------------------------------------------------------
                 \143\ See section VI of this Supplementary Information section
                for a description of the definition of ``secured lending
                transaction'' in Sec. __.3 of the LCR rule.
                 \144\ The proposal would have assigned a 15 percent RSF factor
                to all other secured lending transactions to a financial sector
                counterparty with a remaining maturity of less than six months.
                ---------------------------------------------------------------------------
                 A number of commenters requested that the agencies reduce or remove
                the proposed RSF factors for all short-term secured lending
                transactions to financial sector entities. These commenters argued that
                the RSF factor should match the zero percent ASF factor assigned to
                short-term secured funding transactions with financial sector entities,
                noting that the proposed asymmetrical treatment would prevent a covered
                company from using such short-term funding transactions wholly to fund
                its short-term lending transactions. Commenters asserted that this
                asymmetry would be overly punitive, impair a covered company's ability
                to conduct prudent short-term liquidity risk management, not accurately
                reflect collateral quality, and increase costs. Such increased costs,
                commenters contended, would cause covered companies to reduce such
                lending, resulting in a further contraction of the repo market,
                increased market volatility for the securities typically used as
                collateral, and have a negative impact on financial institutions that
                rely on the short-term funding market. Commenters also argued that the
                proposed RSF factors for short-term secured lending transactions to
                financial sector entities are unnecessary and overly burdensome because
                other regulatory measures sufficiently address the risks posed by these
                transactions. Several commenters argued that the proposed RSF treatment
                would reduce the competitiveness of covered companies relative to other
                market participants. Other commenters requested that the agencies
                reduce the RSF factors to align with other jurisdictions'
                implementation of the NSFR.
                 The agencies also received comments requesting a zero percent RSF
                factor be assigned to short-term secured lending transactions with
                financial sector entities secured by rehypothecatable level 1 liquid
                assets. One commenter argued that these transactions present few risks
                of disorderly or destabilizing unwinds due to the quality of the
                underlying collateral. Another commenter expressed concern that the
                proposed 10 percent RSF factor would incentivize a covered company to
                purchase on balance sheet level 1 liquid assets rather than borrow such
                assets through secured lending transactions to obtain more favorable
                RSF treatment, which would increase liquidity and interest rate risk as
                a result of holding the assets on balance sheet.
                 Covered companies may use short-term secured funding and lending
                transactions, such as repurchase agreements and reverse repurchase
                agreements, for collateral management and funding purposes as well as
                other business and risk management purposes. Short-term secured funding
                and lending transactions, however, can give rise to certain funding
                risks. For example, a covered company is exposed to risk of borrower
                default and fluctuation in the price of the underlying collateral. At
                the same time, a covered company may be incentivized to continue
                funding a certain portion of its lending under these transactions even
                as it loses access to its short term funding transactions. Although the
                agencies recognize that other regulations reduce certain risks
                associated with short-term secured lending transactions, the NSFR
                requirement is designed to directly measure and ensure the stability of
                covered companies' aggregate funding profile over a one-year horizon.
                 Consistent with the proposed rule, the final rule generally treats
                secured lending transactions with financial sector counterparties the
                same as unsecured lending to these counterparties based on their tenor
                and counterparty characteristics, described below. However, the
                agencies have revised the proposed rule by adding Sec.
                __.106(a)(1)(vii) to the final rule, which assigns an RSF factor of
                zero percent, rather than 10 percent, for short-term lending
                transactions with a financial sector entity secured by rehypothecatable
                level 1 liquid assets, as such short-term secured lending transactions
                present minimal risk to the covered company. Moreover, as further
                discussed in section X of this Supplementary Information section, a
                non-zero RSF factor on secured lending transactions secured with
                rehypothecateble level 1 liquid assets could also discourage
                intermediation in certain short-term secured lending markets. The
                calibration would also align the RSF factor for these loan receivables
                with the RSF factor for level 1 liquid assets that are held on the
                covered company's balance sheet.
                b) 5 Percent RSF Factor
                Committed Credit and Liquidity Facilities--RSF Factor and Undrawn
                Amount
                 Section __.106(a)(2)(ii) of the proposed rule would have assigned a
                5 percent RSF factor to the undrawn amount of committed credit and
                liquidity facilities that a covered company provides to its customers
                and counterparties.\145\ The proposed rule
                [[Page 9158]]
                clarified that the ``undrawn amount'' for purposes of the NSFR rule
                would be the amount that could be drawn within one year of the
                calculation date, but would not have included amounts that could only
                be drawn contingent upon contractual milestones or events that cannot
                reasonably be expected to occur within one year.
                ---------------------------------------------------------------------------
                 \145\ The terms ``credit facility,'' ``liquidity facility,'' and
                ``committed'' are defined terms under Sec. __.3 of the LCR rule. As
                discussed in section VI.A of this Supplementary Information section,
                the final rule modifies the definition of ``committed.''
                ---------------------------------------------------------------------------
                 The agencies did not receive any comments on the proposed 5 percent
                RSF factor assigned to the undrawn amount of committed credit and
                liquidity facilities. However, several commenters requested the
                agencies modify the proposed rule to permit a covered company to reduce
                the undrawn commitments by the value of collateral that it receives to
                secure its committed facility, particularly collateral in the form of
                HQLA, for purposes of determining the applicable RSF amount. Commenters
                noted that the LCR rule permits covered companies to net, for purposes
                of calculating outflow amounts, level 1 and level 2A liquid assets that
                secure a committed credit or liquidity facility against the undrawn
                amount of the facility, and requested similar treatment under the NSFR
                rule.
                 Consistent with the proposed rule, the final rule does not permit a
                covered company to net collateral against undrawn amounts of
                commitments.\146\ As described in section V.C of this Supplementary
                Information section, unlike the LCR rule, which addresses the risk of
                cash outflows and permits a covered company to net certain high-quality
                collateral against the undrawn amount of a committed credit or
                liquidity facility because such collateral may be used to meet its
                short-term obligations,\147\ the NSFR measures the funding profile of a
                covered company's balance sheet and any draw upon a committed facility
                would become an asset (i.e., a loan) on a covered company's balance
                sheet that generally would increase the covered company's stable
                funding needs. Similarly, collateral obtained pursuant to a default of
                a draw on a secured facility would add to a covered company's balance
                sheet and require stable funding.
                ---------------------------------------------------------------------------
                 \146\ The NSFR requirement generally does not take into account
                prospective inflows arising from the receipt of collateral. As
                explained further below in section VII.E of this Supplementary
                Information section, the NSFR requirement's treatment of derivative
                transactions permits the receipt of certain eligible collateral to
                be netted against the derivatives asset amount. Recognition in the
                NSFR requirement of the funding value of collateral for derivatives
                transactions is appropriate notwithstanding the rule's general
                prohibition against netting collateral because of the special role
                of derivatives margin and because the rule sets forth a number of
                restrictions and contractual netting criteria for certain collateral
                to be netted against the derivatives asset amount.
                 \147\ See Sec. __.32(e)(3) of the LCR rule.
                ---------------------------------------------------------------------------
                 One commenter requested clarification of the term ``undrawn
                amount'' and the treatment of funded commitments that result in
                contractually offsetting collateral inflows. The commenter also asked
                what level of support would be required to demonstrate an amount is
                excludable from the undrawn amount because it is contingent upon events
                not reasonably expected to occur within the NSFR's time horizon. The
                agencies are clarifying that the undrawn amount is the maximum amount
                that could be drawn under the agreement within the NSFR requirement's
                one-year time horizon under all reasonably possible circumstances.\148\
                The undrawn amount does not include amounts that are contingent on the
                occurrence of a contractual milestone or other events that cannot
                reasonably be expected to be reached or occur within the one-year time
                horizon. For example, if a construction company can draw a certain
                amount from a credit facility only upon meeting a construction
                milestone that cannot reasonably be expected to be reached within one
                year, such as entering the final stage of a multi-year project that has
                just begun, then the undrawn amount would not include the amount that
                would become available only upon entering the final stage of the
                project.
                ---------------------------------------------------------------------------
                 \148\ For example, if the governing agreement provides that (1)
                the counterparty must liquidate collateral securing the facility
                before drawing on the facility and (2) the covered company must
                provide the amount available under the facility less the proceeds of
                the collateral sale, the undrawn amount would be the full value of
                the amount available under the facility (i.e., not reduced by the
                proceeds of the collateral sale). This reflects the contractual
                possibility that the covered company may still be required to
                provide the counterparty the full value allowed under the facility,
                even though under many circumstances the covered company's exposure
                would be reduced.
                ---------------------------------------------------------------------------
                 Similarly, a letter of credit that meets the definition of credit
                or liquidity facility may entitle a seller to obtain funds from a
                covered company if a buyer fails to pay the seller. If the seller is
                legally entitled to obtain the funds available under the letter of
                credit as of the calculation date (because the buyer has defaulted) or
                if the buyer should reasonably be expected to default within the NSFR's
                one-year time horizon, then the funds available under the letter of
                credit are undrawn amounts. However, if, under the terms of the letter
                of credit, the seller is not legally entitled to obtain funds from the
                covered company as of the calculation date because the buyer has not
                failed to perform under the agreement with the seller, and the covered
                company does not reasonably expect nonperformance within the NSFR's
                one-year time horizon, then the funds potentially available under the
                letter of credit are not undrawn amounts.
                 The agencies expect that a covered company would conduct an
                analysis of the likelihood of contingent contractual milestones or
                other events to be reached or occur, which may include reliance on
                historical experience, including consideration of both internal and
                industry-wide data. The agencies also expect a covered company to be
                able to provide sufficient supporting documentation that justifies its
                assessment that a contractual milestone or other event cannot
                reasonably be expected to be reached or occur within the one-year time
                horizon. The sufficiency and appropriateness of that documentation
                would be reviewed by supervisory staff.
                 The agencies are finalizing the assigned 5 percent RSF factor to
                the undrawn amount of committed credit and liquidity facilities that a
                covered company provides to its customers and counterparties as
                proposed. The final rule requires a covered company to recognize
                committed facilities in its aggregate stable funding requirement to a
                limited extent, even though they are generally not included on a
                covered company's balance sheet. The 5 percent RSF factor is the lowest
                non-zero RSF factor and is applied uniquely to off-balance sheet
                commitments.
                c) 15 Percent RSF Factor
                 The final rule applies a 15 percent RSF factor to unencumbered
                level 2A liquid assets held on a covered company's balance sheet and
                lending to financial counterparties that matures in less than six
                months, other than secured lending transactions backed by
                rehypothecatable level 1 liquid assets. Based on their liquidity
                characteristics, including their high credit quality, these assets may
                also not need to be funded for the entirety of the NSFR's one-year time
                horizon, and covered companies may have the ability to recognize
                inflows from such assets within one year across a range of market
                conditions.
                Unencumbered Level 2A Liquid Assets
                 Section __.106(a)(4)(i) of the proposed rule would have assigned a
                15 percent RSF factor to level 2A liquid assets, as defined in Sec.
                __.20(b) of the LCR rule, but would not have taken into consideration
                the operational requirements described in Sec. __.22 or the level 2
                cap in Sec. __.21. As set forth in the LCR rule, level 2A liquid
                assets
                [[Page 9159]]
                include certain obligations issued or guaranteed by a Government
                Sponsored Enterprise (GSE) and certain obligations issued or guaranteed
                by a sovereign entity or a multilateral development bank. The LCR rule
                requires these securities to be liquid and readily-marketable, as
                defined in Sec. __.3, to qualify as level 2A liquid assets.
                 Commenters requested more favorable treatment for certain GSE
                securities under the NSFR rule. Several commenters recommended that
                mortgage-backed securities issued by the Federal National Mortgage
                Association (Fannie Mae) and Federal Home Loan Mortgage Corporation
                (Freddie Mac) should receive the same 5 percent RSF factor proposed for
                level 1 liquid assets, as long as Fannie Mae and Freddie Mac remain
                under the conservatorship of the Federal Housing Finance Agency (FHFA).
                One commenter argued these securities exhibit favorable liquidity
                characteristics and are low risk, and expressed concern that the
                proposed 15 percent RSF factor would discourage banks from purchasing
                these mortgage-backed securities, which would result in increased
                mortgage interest rates for homeowners. Another commenter noted that
                the European Union allows covered bonds with similar liquidity
                characteristics to qualify as level 1 liquid assets. Another commenter
                recommended that FHLB consolidated debt obligations should receive a 5
                percent RSF factor based on the historical performance of these
                obligations during financial stress and their strong market attributes,
                including narrow bid-ask spreads, numerous active and diverse market
                makers, timely market prices, and high trading volumes.
                 Similar to other HQLA, level 2A liquid assets held by covered
                companies on their balance sheets have a broad range of residual
                maturities and are held for a variety of purposes. For example, covered
                companies hold such securities as long-term investments, as instruments
                to maintain medium-term hedges or as part of the covered company's
                eligible HQLA under the LCR rule. Holdings of unencumbered level 2A
                liquid assets on a covered company's balance sheet present only modest
                risks to the covered company or financial system in the event of
                funding disruptions. A 15 percent RSF factor is appropriate for GSE-
                issued or GSE-guaranteed obligations because they have high credit
                quality and are traded in deep, liquid markets. For example, mortgage-
                backed securities issued by GSEs have a higher credit quality, higher
                average daily trading volume, and lower bid-ask spreads relative to
                corporate debt securities, which are assigned a higher RSF factor.
                However, these securities have different liquidity characteristics than
                U.S. Treasury securities and other level 1 liquid assets. For instance,
                GSE obligations are not subject to the same unconditional sovereign
                guarantee as certain securities that are level 1 liquid assets, which
                are assigned a zero percent RSF factor. Moreover, while certain GSEs
                are currently operating under the conservatorship of the FHFA, GSE
                obligations are not explicitly guaranteed by the full faith and credit
                of the United States, and they should not receive the same treatment as
                obligations that have such an explicit guarantee. This treatment is
                consistent with the agencies' risk-based capital rule, which
                differentiates between obligations and guarantees of U.S. GSEs,
                including those operating under conservatorship of FHFA and securities
                explicitly guaranteed by the full faith and credit of the United
                States.\149\ With respect to covered bonds, the agencies have
                determined that covered bonds do not meet the liquid and readily-
                marketable standard in the United States and thus do not meet the
                liquidity characteristics to qualify as a level 1 or level 2A liquid
                asset. The final rule adopts a 15 percent RSF factor for level 2A
                liquid assets as proposed.
                ---------------------------------------------------------------------------
                 \149\ 12 CFR 3.32 (OCC); 12 CFR 217.32 (Board); 12 CFR 324.32
                (FDIC).
                ---------------------------------------------------------------------------
                Secured Lending Transactions Secured by All Other Collateral and
                Unsecured Wholesale Lending With a Financial Sector Entity or a
                Subsidiary Thereof That Mature Within Six Months
                 Section __.106(a)(4)(ii) of the proposed rule would have assigned a
                15 percent RSF factor to a secured lending transaction with a financial
                sector entity or a consolidated subsidiary thereof that is secured by
                assets other than rehypothecatable level 1 liquid assets and that
                matures within six months of the calculation date. The proposal also
                would have assigned a 15 percent RSF factor to unsecured wholesale
                lending to a financial sector entity or a consolidated subsidiary
                thereof that matures within six months of the calculation date.\150\
                ---------------------------------------------------------------------------
                 \150\ See supra note 102.
                ---------------------------------------------------------------------------
                 The comments received by the agencies regarding the treatment of
                secured lending transactions generally, as well as the agencies'
                response to the comments, are summarized above in section VII.D.3.a of
                this Supplementary Information section. The agencies did not receive
                any comments specific to the proposed treatment of unsecured wholesale
                lending to a financial sector entity or a subsidiary thereof that
                matures within six months.
                 The final rule adopts the proposed treatment for these transactions
                without any modification. A 15 percent RSF factor reflects that these
                transactions contribute less to a covered company's aggregate funding
                requirement because of their shorter tenors relative to loans with a
                longer remaining maturity, when considering cash inflows upon maturity
                of the loan. In addition, these loans also generally present lower
                reputational risk if a covered company chooses not to roll over the
                transaction because of the financial nature of the counterparty. For
                these reasons, a 15 percent RSF factor for these assets is lower than
                the RSF factor assigned to longer-term secured transactions to similar
                counterparties or to similar-term loans to non-financial
                counterparties. However, the assignment of a higher RSF factor to these
                assets compared to similar short-term secured lending transactions to
                financial counterparties that are secured by rehypothecatable level 1
                liquid assets reflects the covered company's more limited ability to
                monetize assets that are not level 1 liquid assets for the duration of
                the transaction.
                d) 50 Percent RSF Factor
                 Based on the NSFR's one-year time horizon, the final rule applies
                the median RSF factor of 50 percent to unencumbered level 2B liquid
                assets of all maturities. Covered companies may not need to fund these
                securities for the entirety of the NSFR's one-year time horizon, and
                covered companies may have the ability to recognize inflows from such
                assets within one year, each across a range of market conditions.
                 The final rule also applies a 50 percent RSF factor to most loans
                with remaining maturities of less than one year and to operational
                deposit placements. Lending that matures in less than one year is less
                likely to require funding for a full year relative to loans that have
                residual maturities of one year or more, which generally receive a
                higher RSF factor under the final rule. While certain loans that mature
                in less than one year may be renewed, covered companies are generally
                more likely to receive cash inflows when these loans mature compared to
                longer maturities. With respect to operational deposit placements, the
                50 percent RSF factor reflects that covered companies as recipients of
                operational services likely would face limitations to making
                significant changes to their operational activities during the NSFR's
                one-year
                [[Page 9160]]
                time horizon across a range of market conditions.
                Unencumbered Level 2B Liquid Assets
                 Section __.106(a)(5)(i) of the proposed rule would have assigned a
                50 percent RSF factor to level 2B liquid assets, as defined in Sec.
                __.20(c) of the LCR rule, but without taking into consideration the
                operational requirements described in Sec. __.22 or the level 2 caps
                in Sec. __.21. At the time of proposal, level 2B liquid assets
                included certain publicly traded corporate debt securities and publicly
                traded common equity shares that are liquid and readily-marketable. To
                qualify as a level 2B liquid asset, the asset must meet certain
                criteria under Sec. __.20 of the LCR rule. For example, among other
                criteria, equity securities must be part of a major index and both
                corporate debt securities and municipal obligations must be
                ``investment grade'' under 12 CFR part 1.
                 Subsequent to the issuance of the proposed rule, EGRRCPA was
                enacted, which requires the agencies to treat certain municipal
                obligations as a level 2B liquid asset for purposes of the LCR rule and
                any other regulation that incorporates a definition of the term ``high-
                quality liquid asset'' or substantially similar term.\151\ Consistent
                with EGRRCPA, the agencies amended the LCR rule to treat municipal
                obligations that are investment grade and liquid and readily-marketable
                as level 2B liquid assets.\152\
                ---------------------------------------------------------------------------
                 \151\ Public Law 115-174, 132 Stat. 1296-1368 (May 24, 2018).
                 \152\ See 84 FR 25975 (June 5, 2019). As a result, the agencies
                are not also finalizing proposed Sec. __.106(a)(5)(iv).
                ---------------------------------------------------------------------------
                 Several commenters expressed concern that the proposed RSF factor
                for level 2B liquid assets was too high and argued that these
                securities should be considered more liquid over the NSFR's one-year
                horizon. For example, one commenter requested a 15 percent RSF factor
                for equity securities that are included in major market indices, such
                as exchange-traded funds that track a major market index. Some
                commenters recommended revised RSF treatment for level 2B liquid asset
                eligible corporate debt securities. For example, some commenters
                requested that the RSF factor for corporate debt securities be more
                granular and calibrated based on the tenor of the securities, the
                issuer's creditworthiness, or the desired tenor of funding used to
                purchase the securities. One commenter requested eliminating the
                requirement that a corporate debt security be investment grade.\153\
                Another commenter recommended the agencies adopt the RSF factors
                assigned to various types of corporate debt in the Basel NSFR standard.
                One commenter recommended that the agencies more closely align the RSF
                factor for these assets to the market haircuts in secured funding
                markets. Another commenter expressed concern that the proposed RSF
                treatment would make it more expensive for banking organizations to
                hold debt and equity securities intended for trading, which would
                result in decreased willingness to hold inventories and negatively
                impact capital markets. The commenter asserted that, given the
                importance of capital markets in the United States, the proposed RSF
                factor would place the United States at a competitive disadvantage to
                other jurisdictions.
                ---------------------------------------------------------------------------
                 \153\ Pursuant to the LCR rule, corporate debt securities must
                be investment grade in order to qualify as a level 2B liquid asset.
                12 CFR 249.20(c)(1)(i).
                ---------------------------------------------------------------------------
                 The final rule maintains as proposed the 50 percent RSF factor for
                level 2B liquid assets, which include certain investment grade publicly
                traded corporate debt securities and municipal obligations \154\ and
                certain publicly traded common equity shares included on the Russell
                1000 or an index that a foreign supervisor recognizes for purposes of
                including equity shares in level 2B liquid assets under applicable
                regulatory policy of a foreign jurisdiction. As described in section
                V.C of this Supplementary Information section, the final rule uses
                definitions common to the LCR rule to increase the efficiency of the
                rule. The agencies did not propose and the final rule does not adopt
                any changes to the definition of level 2B liquid assets. The agencies,
                therefore, are not changing the requirements for corporate debt
                securities to qualify as a level 2B liquid asset. Such changes would be
                outside the scope of this rulemaking. Assets that meet the definition
                of level 2B liquid assets have distinctive liquidity characteristics as
                described in the LCR rule, which include either relatively higher
                credit risk, lower trading volumes, or elevated price volatility across
                market conditions when compared to level 1 and level 2A liquid assets.
                These securities also have relatively greater liquidity relative to
                assets that are not HQLA under the LCR rule. For these reasons, the RSF
                factor assigned to level 2B liquid assets is materially higher than the
                RSF factor of 15 percent applied to level 2A liquid assets, but lower
                than the RSF factor applied to securities that do not qualify as HQLA.
                ---------------------------------------------------------------------------
                 \154\ Section __.106(a)(5)(iv) of the proposed rule, which would
                have assigned a 50 percent RSF factor to general obligation
                securities of a public sector entity, is removed because such
                securities now are encompassed by the definition of municipal
                obligations in Sec. __.3 of the LCR rule. Consistent with section
                403 of EGRRCPA, Sec. __.3 of the LCR rule defines a ``municipal
                obligation'' as ``an obligation of (1) a state or any political
                subdivision thereof, or (2) any agency or instrumentality of a state
                or any political subdivision thereof.''
                ---------------------------------------------------------------------------
                 Covered companies may be holding level 2B liquid assets on balance
                sheet at a calculation date that have a wide range of residual
                maturities and for a range of purposes, each of which may require
                various contractual or anticipated holding periods. While some portion
                of level 2B liquid assets may mature or be contractually scheduled to
                be sold within one year, a covered company may need to fund certain of
                these securities over a one-year time horizon. Similar to level 2A
                liquid assets, covered companies may hold these securities for
                investment purposes or as part of a covered company's HQLA amount. Over
                a range of market conditions, a covered company may be generally less
                likely to have to fund these securities for one year compared to
                securities that do not qualify as HQLA. For the reasons above, it is
                appropriate for the RSF factor applied to level 2B liquid assets to be
                materially higher than the RSF factor of 15 percent applied to level 2A
                liquid assets but lower than that applied to securities that do not
                qualify as HQLA.
                 In response to commenters' requests for additional granularity, the
                agencies note that the purpose of the NSFR is to provide a broad,
                standardized measure of funding stability that can be compared across
                covered companies. As discussed in section V.C, to achieve this
                purpose, the final rule uses a small number of standardized maturity
                buckets rather than using granular maturity buckets of debt instruments
                or the funding used to purchase such assets. In addition, the final
                rule does not differentiate between assets based on other difficult to
                monitor criteria, such as a covered company's intent for holding or
                funding the asset or the characteristics of the issuer, because to do
                so would require the agencies to make determinations about each covered
                company's intent or the credit risk of each issuer. Such individualized
                determinations would be contrary to the NSFR's purpose as a
                standardized measure. In addition, contrary to commenters' concerns,
                the agencies expect that the final rule will strengthen the U.S.
                financial system, including capital markets, by ensuring banking
                organizations maintain sufficiently stable funding on an ongoing basis.
                [[Page 9161]]
                Secured Lending Transactions and Unsecured Wholesale Lending to a
                Financial Sector Entity or a Subsidiary Thereof or a Central Bank That
                Mature in Six Months or More, But Less Than One Year
                 Section __.106(a)(5)(ii) of the proposed rule would have assigned a
                50 percent RSF factor to a secured lending transaction or unsecured
                wholesale lending transaction that matures in six months or more, but
                less than one year from the calculation date, where the counterparty is
                a financial sector entity or a consolidated subsidiary thereof or the
                counterparty is a central bank.\155\ As discussed above, a covered
                company faces lower reputational risk if it chooses not to roll over
                secured or unsecured loans to financial counterparties or claims on a
                central bank than it would with loans to non-financial counterparties.
                Even though loans in this category have terms greater than six months
                (and liquidity from principal repayments will not be available in the
                near term) these loans mature within the NSFR's one-year time horizon
                so the proposed rule would not have required them to be fully supported
                by stable funding. For the reasons discussed in the proposal, the
                agencies are finalizing a 50 percent RSF factor for these transactions
                as proposed.
                ---------------------------------------------------------------------------
                 \155\ Section __.106(a)(5)(ii) of the final rule does not apply
                to an operational deposit placed at a financial sector entity or
                consolidated subsidiary thereof. The treatment of such an
                operational deposit is covered by Sec. __.106(a)(4)(iii) of the
                final rule.
                ---------------------------------------------------------------------------
                Operational Deposits Held at Financial Sector Entities
                 Section __.106(a)(5)(iii) of the proposed rule would have assigned
                a 50 percent RSF factor to an operational deposit, as defined in Sec.
                __.3 of the LCR rule, placed by the covered company at a financial
                sector entity. Consistent with the reasoning for the ASF factor
                assigned to operational deposits placed at a covered company, described
                in section VII.C.3.d of this Supplementary Information section, such
                operational deposits placed by a covered company are less readily
                monetizable by the covered company compared to non-operational
                placements. These deposits are placed for operational purposes, and
                covered companies likely would face legal or operational limitations to
                making significant withdrawals during the NSFR's one-year time horizon.
                While the agencies received comments addressing the ASF factor assigned
                to operational deposits received by a covered company, as discussed
                above at section VII.C.3.d, the agencies did not receive any comments
                addressing the RSF factor assigned to operational deposits placed by a
                covered company at an unaffiliated financial sector entity. For the
                reasons discussed in the proposed rule, the final rule adopts the 50
                percent RSF factor for operational deposits placed by a covered company
                at another financial sector entity as proposed.
                Secured Lending Transactions and Unsecured Wholesale Lending to
                Counterparties That Are Not Financial Sector Entities and Are Not
                Central Banks and That Mature in Less Than One Year
                 Section __.106(a)(5)(v) of the proposed rule would have assigned a
                50 percent RSF factor to lending to a wholesale customer or
                counterparty that is not a financial sector entity or central bank,
                including a non-financial corporate, sovereign, or public sector
                entity, that matures in less than one year from the calculation date.
                Unlike with lending to financial sector entities and central banks, the
                proposed rule would have assigned the same RSF factor to lending to
                these entities with a remaining maturity of less than six months as it
                would have assigned to lending with a remaining maturity of six months
                or more, but less than one year. The proposed rule would not have
                required this lending to be fully supported by stable funding based on
                its maturity within the NSFR's one-year time horizon and the assumption
                that a covered company may be able to reduce its lending to some degree
                over the NSFR's one-year time horizon. However, the proposed rule's
                assignment of a 50 percent RSF factor reflected the stronger incentives
                that a covered company is likely to have to continue to lend to these
                wholesale counterparties due to reputational risk and a covered
                company's need to maintain its franchise value, even when the lending
                is scheduled to mature in the nearer term, as discussed in section
                VII.D.2.c of this Supplementary Information section. The agencies did
                not receive any comments addressing the proposed RSF factor assigned to
                this category. For the reasons discussed in the proposal, the agencies
                are adopting this provision as proposed.\156\
                ---------------------------------------------------------------------------
                 \156\ This provision is adopted at Sec. __.106(a)(4)(iv)(A) of
                the final rule.
                ---------------------------------------------------------------------------
                Lending to Retail Customers and Counterparties That Matures in Less
                Than One Year
                 Section __.106(a)(5)(v) of the proposed rule would have assigned a
                50 percent RSF factor to lending to retail customers or counterparties
                (including certain small businesses), as defined in Sec. __.3 of the
                LCR rule, that matures less than one year from the calculation date for
                the same reputational and franchise value maintenance reasons for which
                it would have assigned a 50 percent RSF factor to lending to wholesale
                customers and counterparties that are not financial sector entities or
                central banks. The agencies did not receive any comments specific to
                the RSF factor assigned to this asset category. For the reasons
                described in the proposed rule, the agencies are adopting this
                provision as proposed.\157\
                ---------------------------------------------------------------------------
                 \157\ This provision is adopted at Sec. __.106(a)(4)(iv)(B) of
                the final rule.
                ---------------------------------------------------------------------------
                All Other Assets That Mature in Less Than One Year
                 Section __.106(a)(5)(v) of the proposed rule would have assigned a
                50 percent RSF factor to all other assets that mature within one year
                of the calculation date but are not described in the categories above.
                The shorter maturity of an asset in this category reduces a covered
                company's funding needs, since the asset may not need to be retained on
                the covered company's balance sheet past maturity and provides for cash
                inflows upon maturity during the NSFR's one-year time horizon. However,
                a covered company generally may be less able to monetize these assets
                due to their lower credit quality and their relevant market
                characteristics as compared to the enumerated asset classes that are
                assigned lower RSF factors.
                 One commenter expressed concern that this category would capture
                asset-backed commercial paper that is fully supported by a credit or
                liquidity facility provided by another bank and has a maturity of six
                months or less, while unencumbered loans to banks with maturities of
                less than six months are assigned a 15 percent RSF factor. The
                commenter argued that a covered company's risk exposure for purchasing
                asset-backed commercial paper that is fully supported by a facility
                provided by a bank is equivalent to its risk exposure for a loan to
                another bank. Accordingly, the commenter argued that such asset-backed
                commercial paper should receive the same 15 percent RSF factor as a
                short-term loan to a financial sector entity. Another commenter argued
                that the RSF factor assigned to commercial
                [[Page 9162]]
                paper should be based on the creditworthiness of the issuing company.
                 In response, the agencies note that the final rule generally
                assigns RSF factors to exposures as of a point in time. For holdings of
                asset-backed commercial paper that are supported by a credit or
                liquidity facility provided by a bank, a covered company would not have
                an exposure to a financial sector entity unless the facility has been
                drawn upon; therefore, such asset-backed commercial paper is not
                treated as a loan to a financial sector entity under the final rule.
                Although the contractual features of an individual asset or the credit
                worthiness of its issuer can affect the funding needs related to
                holding that particular asset, the final rule is intended to provide a
                standardized measure of funding stability that can be compared across
                covered companies. Differentiating between holdings of commercial paper
                based on contractual features or the issuer's credit worthiness would
                require the agencies to make determinations based on each contractual
                arrangement and the credit risk of each issuer. Such individualized
                determinations would be contrary to the NSFR's purpose as a
                standardized measure.
                 For the reasons discussed in the proposed rule, the agencies are
                finalizing this provision as proposed.\158\
                ---------------------------------------------------------------------------
                 \158\ This provision is adopted at Sec. __106(a)(4)(iv) of the
                final rule.
                ---------------------------------------------------------------------------
                e) 65 Percent RSF Factor
                 Under the final rule, loans that mature in one year or more (other
                than operational deposit placements) are assigned higher RSF factors
                than loans that mature in less than one year. The final rule assigns a
                65 percent RSF factor to retail mortgages that mature in one year or
                more and are assigned a risk weight of no greater than 50 percent under
                the agencies' risk-based capital rule and loans to retail and non-
                financial wholesale counterparties that mature in one year or more and
                are assigned a risk weight of no greater than 20 percent.
                Retail Mortgages That Mature in One Year or More and Are Assigned a
                Risk Weight of No Greater Than 50 Percent
                 Section __.106(a)(6)(i) of the proposed rule would have assigned a
                65 percent RSF factor to retail mortgages that mature one year or more
                from the calculation date and are assigned a risk weight of no greater
                than 50 percent under subpart D of the agencies' risk-based capital
                rule. Under the agencies' risk-based capital rule, residential mortgage
                exposures secured by a first lien on a one-to-four family property that
                are prudently underwritten, are not 90 days or more past due or carried
                in nonaccrual status, and that are neither restructured nor modified
                generally receive a 50 percent risk weight.\159\
                ---------------------------------------------------------------------------
                 \159\ See 12 CFR 3.32(g) (OCC); 12 CFR 217.32(g) (Board); 12 CFR
                324.32(g) (FDIC). The final rule is consistent with the Basel NSFR
                standard, which assigns a 65 percent RSF factor to residential
                mortgages that receive a 35 percent risk weight under the Basel II
                standardized approach for credit risk, because the agencies' risk-
                based capital rule assigns a 50 percent risk weight to residential
                mortgage exposures that meet the same criteria as those that receive
                a 35 percent risk weight under the Basel II standardized approach
                for credit risk.
                ---------------------------------------------------------------------------
                 Some commenters argued that the proposed rule's treatment for
                mortgage loans would be overly conservative in comparison to the 15
                percent RSF factor assigned to certain GSE-issued or GSE-guaranteed
                mortgage-backed securities. One commenter noted that prudently
                underwritten mortgages can be pooled into GSE or private label
                mortgage-backed securities and argued that, as a result, they should
                receive an RSF factor no higher than 50 percent. Similarly, another
                commenter noted that single family mortgage loans should not receive an
                RSF factor above 50 percent because such loans can be used as
                collateral for FHLB loans. One commenter suggested that the proposed
                RSF factor for mortgage loans under the NSFR could encourage banks to
                originate and sell loans rather than hold them in portfolio.
                 Mortgage lending to households is an important form of financial
                intermediation conducted by banking organizations, including during
                times of funding disruptions. To support financial intermediation, and
                based on the residual maturity and other liquidity characteristics of
                mortgage loans, the final rule requires individual mortgages that meet
                certain criteria to be supported by a greater amount of stable funding
                than assets assigned a 50 percent RSF factor. Individual mortgage loans
                have substantially different credit and liquidity characteristics than
                mortgage-backed securities eligible for a lower RSF factor. In
                particular, GSE-issued and GSE-guaranteed securities have a much higher
                trading volume than individual mortgage loans. Mortgage loans also do
                not have the same liquidity characteristics as assets that are assigned
                a 50 percent RSF factor, such as assets that are either securities that
                satisfy certain benchmark market thresholds or assets with relatively
                short maturity. In contrast, mortgage loans in the 65 percent RSF
                category mature in more than one year from the calculation date, and
                typically have many years until they mature. Prior to maturity, it may
                be difficult to monetize an individual mortgage loan in a timely
                fashion or without incurring a relatively higher haircut in a secured
                funding transaction compared to HQLA.
                 In addition, the agencies acknowledge that covered companies will
                take into account the final rule's assignment of a 65 percent RSF
                factor when deciding whether to sell mortgage loans or retain them in
                portfolio. However, covered companies may choose to retain or sell
                mortgage loan originations for a variety of reasons including earnings,
                liquidity, and capital management. Accordingly, the 65 percent RSF
                factor for mortgage loans would not significantly impact a covered
                company's decision to retain a mortgage loan in portfolio. The primary
                purpose of the final rule is to ensure that a banking organization's
                assets are adequately funded. For the reasons described above, the
                final rule assigns a 65 percent RSF factor to mortgage loans that meet
                certain criteria as proposed.
                Secured Lending Transactions, Unsecured Wholesale Lending, and Lending
                to Retail Customers and Counterparties That Mature in One Year or More
                and Are Assigned a Risk Weight of No Greater Than 20 Percent
                 Section __.106(a)(6)(ii) of the proposed rule would have assigned a
                65 percent RSF factor to secured lending transactions, unsecured
                wholesale lending, and lending to retail customers and counterparties
                that are not otherwise assigned an RSF factor, that mature one year or
                more from the calculation date, that are assigned a risk weight of no
                greater than 20 percent under subpart D of the agencies' risk-based
                capital rule, and where the borrower is not a financial sector entity
                or a consolidated subsidiary thereof.\160\ As discussed in the proposed
                rule, these loans generally have more favorable liquidity
                characteristics because of their lower credit risk than loans that have
                a risk weight greater than 20 percent under the agencies' risk-based
                capital rule. However, these loans require more stable funding than
                loans that mature and provide liquidity within the NSFR's one-year time
                horizon. The agencies did not receive any comments on this provision.
                For the reasons discussed in
                [[Page 9163]]
                the proposed rule, the agencies are adopting this provision as
                proposed.
                ---------------------------------------------------------------------------
                 \160\ See 12 CFR 3.32(g) (OCC); 12 CFR 217.32(g) (Board); 12 CFR
                324.32(g) (FDIC). This aspect of the proposed rule would have been
                consistent with the Basel NSFR standard, which assigns a 65 percent
                RSF factor to loans that receive a 35 percent or lower risk weight
                under the Basel II standardized approach for credit risk, because
                the standardized approach in the agencies' risk-based capital rule
                does not assign a risk weight that is between 20 and 35 percent to
                such loans.
                ---------------------------------------------------------------------------
                f) 85 Percent RSF Factor
                 The final rule assigns an 85 percent RSF factor to all other retail
                mortgages not assigned an RSF factor above, all other loans to non-
                financial sector counterparties, publicly traded common equity shares
                that are not HQLA, other non-HQLA securities that mature in one year or
                more, and certain commodities.
                Retail Mortgages That Mature in One Year or More and Are Assigned a
                Risk Weight of Greater Than 50 Percent
                 Section __.106(a)(7)(i) of the proposed rule would have assigned an
                85 percent RSF factor to retail mortgages that mature one year or more
                from the calculation date and are assigned a risk weight of greater
                than 50 percent under subpart D of the agencies' risk-based capital
                rule. As noted above, under the agencies' risk-based capital rule, a
                retail mortgage is assigned a 50 percent risk weight if it is secured
                by a first lien on a one-to-four family property, prudently
                underwritten, not 90 days or more past due or carried in nonaccrual
                status, and has not been restructured or modified.\161\ Mortgages that
                do not meet these criteria are assigned a risk weight of greater than
                50 percent.\162\ The proposed rule would have treated these mortgages
                as generally riskier than mortgages that receive a risk weight of 50
                percent or less and would have required them to be supported by more
                stable funding because of the possibility that they would be more
                difficult to monetize.
                ---------------------------------------------------------------------------
                 \161\ See supra note 159.
                 \162\ Under the agencies' risk-based capital rule, the risk
                weight on mortgages may be reduced to less than 50 percent if
                certain conditions are satisfied. In these cases, the final rule
                assigns an RSF factor of 65 percent, which is the RSF factor
                assigned to retail mortgages that mature in one year or more and are
                assigned a risk weight of no greater than 50 percent. See 12 CFR
                3.36 (OCC); 12 CFR 217.36 (Board); 12 CFR 324.36 (FDIC).
                ---------------------------------------------------------------------------
                 For the reasons discussed in the proposed rule, the final rule
                assigns an 85 percent RSF factor to these mortgage exposures as
                proposed.
                Secured Lending Transactions, Unsecured Wholesale Lending, and Lending
                to Retail Customers and Counterparties That Mature in One Year or More
                and Are Assigned a Risk Weight of Greater Than 20 Percent
                 Section __.106(a)(7)(ii) of the proposed rule would have assigned
                an 85 percent RSF factor to secured lending transactions, unsecured
                wholesale lending, and lending to retail customers and counterparties
                that are not otherwise assigned an RSF factor (such as retail
                mortgages), that mature one year or more from the calculation date,
                that are assigned a risk weight greater than 20 percent under subpart D
                of the agencies' risk-based capital rule, and for which the borrower is
                not a financial sector entity or consolidated subsidiary thereof.
                 Several commenters requested lower RSF factors for certain lending
                transactions. For example, a few commenters argued that commercial real
                estate mortgages should be assigned an RSF factor lower than 85 percent
                because commercial real estate loans are low risk, and covered
                companies already are subject to regulatory requirements related to
                their real estate portfolios, which renders an RSF requirement
                unnecessary. Another commenter requested the agencies reduce the RSF
                factor for credit card exposures to customers who pay their entire
                account balances each month. This commenter argued that credit card
                exposures to these customers are analogous to short-term loans that
                receive a 50 percent RSF factor.
                 The final rule retains the 85 percent RSF factor for this category
                of lending. These loans mature in one year or more and have less
                favorable liquidity and market characteristics, including greater
                credit risk associated with higher risk weights under the agencies'
                risk-based capital rule. Commercial real estate loans generally present
                a higher risk profile, heightened vulnerability to changing market
                conditions, and greater monetization difficulty than loans that are
                assigned a lower RSF factor. Although commercial real estate lending is
                subject to other regulations designed to promote safe and sound lending
                practices, these regulations do not specifically address the funding
                risks presented by these loans. Accordingly, the agencies consider the
                85 percent RSF factor appropriate for these loans in order to ensure
                covered companies maintain sufficient funding to support these assets.
                 In addition, the agencies decline to adopt a commenter's suggestion
                to apply a lower RSF factor to credit card exposures to customers who
                repay their entire account balances each month. Although some credit
                card customers fully and regularly repay account balances, assigning
                different RSF factors to credit card exposures based on a covered
                company's assumptions of a credit card customer's future repayment
                behavior would be inconsistent with the NSFR's purpose as a
                standardized measure of funding stability. Accordingly, the final rule
                assigns an 85 percent RSF factor to all credit card exposures that
                mature in one year or more and have a risk weight of greater than 20
                percent under the agencies' risk-based capital rule as proposed. The
                agencies are clarifying, however, that contractual minimum payment
                amounts due on credit card exposures would generally be considered to
                be a loan to a retail customer maturing in less than one year and would
                be subject to the 50 percent RSF factor.
                Publicly Traded Common Equity Shares That Are Not HQLA and Other
                Securities That Mature in One Year or More That Are Not HQLA
                 Sections __.106(a)(7)(iii) and (iv) of the proposed rule would have
                assigned an 85 percent RSF factor to publicly traded common equity
                shares that are not HQLA and other non-HQLA securities that mature one
                year or more from the calculation date. For example, these assets would
                have included equity shares not listed on a recognized exchange, low
                rated corporate debt securities and municipal obligations, private-
                label mortgage-backed securities, and other types of asset-backed
                securities.
                 As described above, commenters generally expressed concern that the
                proposed rule's assignment of RSF factors to equity shares was overly
                conservative and not reflective of market haircuts for such securities.
                Commenters, however, also expressed specific concerns related to the 85
                percent RSF factor assigned to non-HQLA publicly traded common equity
                shares and other securities that mature in one year or more. One
                commenter expressed concern that higher RSF factors for non-HQLA
                securities would be procyclical and incentivize covered companies to
                sell non-HQLA securities in favor of HQLA securities in a crisis. Other
                commenters argued that even though equity and debt securities issued by
                a financial sector entity are precluded from qualifying as HQLA, these
                assets should receive a lower RSF factor because there is no empirical
                basis for assigning a higher RSF factor to securities issued by a
                financial sector entity than to securities issued by a non-financial
                sector entity. These commenters also asserted that the 85 percent RSF
                factor would adversely impact capital flows to financial sector
                entities, which would impair their ability to provide market-making and
                other services. Another commenter argued that the 85 percent RSF factor
                is overly conservative because it fails to take into account a bank's
                ability to mitigate its exposure risk with liquid options, swaps, or
                future instruments.
                 Several commenters also requested that lower RSF factors be
                assigned to
                [[Page 9164]]
                specific types of equities and securities. For example, one commenter
                recommended a 50 percent RSF factor for equities traded on an exchange
                that are included in certain global stock indexes. Other commenters
                requested lower RSF factors for certain private-label residential
                mortgage-backed securities, commercial mortgage backed securities, and
                certain asset-backed securities. Commenters argued that the 85 percent
                RSF factor was overly punitive and would discourage covered companies
                from holding these securities, which would impair the markets served by
                these securities. Some of these commenters argued that residential
                mortgage-backed securities, in particular, should receive the same RSF
                treatment as level 2 liquid assets consistent with the Basel NSFR
                standard and the EU NSFR rule. Other commenters requested lower RSF
                factors for certain traditional securitizations, which commenters
                asserted are safer assets as a result of certain changes to regulatory
                requirements and rating agency protocols. One commenter recommended the
                agencies examine recent initiatives by the BCBS and International
                Organizations of Securities Commission to identify specific securities
                that warrant lower RSF factors.
                 The final rule retains the 85 percent RSF factor for publicly
                traded securities that are not HQLA and mature in one year or more.
                Non-HQLA securities, including securities issued by financial sector
                entities, historically have demonstrated greater price volatility and
                lower marketability across market conditions than securities that
                qualify as HQLA. Given this historical experience, it is appropriate to
                assign a higher RSF factor to these securities than HQLA securities.
                Although a banking organization may have some ability to mitigate its
                risk exposure to these assets, the final rule is designed as a
                standardized measure of the stability of a covered company's funding
                profile and therefore does not take into account the company's
                idiosyncratic risk management practices. With respect to the concern
                that the 85 percent RSF factor would incentivize covered companies to
                liquidate non-HQLA during a stress period, the 85 percent RSF factor
                will reduce this risk because covered companies would be holding large
                amounts of stable funding to support these assets, decreasing the need
                to immediately monetize these assets.
                 For the reasons described above, the agencies decline to reduce the
                RSF factor for certain types of securities which are not eligible as
                HQLA, as requested by commenters. As previously explained, equities
                that are not HQLA generally exhibit less favorable liquidity
                characteristics relative to equities that qualify as HQLA, regardless
                of the country location of the index or exchange on which that equity
                is traded. Although specific issuances of private-label residential
                mortgage-backed securities, commercial mortgage backed securities, or
                asset-backed securities may exhibit liquidity characteristics similar
                to HQLA, the final rule assigns RSF factors based on asset class to
                ensure standardization and ease of comparability of the measure. These
                securities can exhibit high price volatility, depending on the
                performance of their underlying assets and specific contractual
                features. In addition, the bespoke characteristics of securitization
                structures may be tailored to a limited range of investors, which can
                limit a banking organization's ability to monetize a given
                securitization issuance. Although changes in regulatory requirements
                and rating agency protocols regulations may have reduced certain risks
                associated with certain securitizations, many of these assets do not
                have a proven history of liquidity. As a result, the final rule assigns
                an 85 percent RSF factor as proposed.
                Commodities
                 Section __.106(a)(7)(v) of the proposed rule would have assigned an
                85 percent RSF factor to commodities held by a covered company for
                which a liquid market exists, as indicated by whether derivative
                transactions for the commodity are traded on a U.S. board of trade or
                trading facility designated as a contract market (DCM) under sections 5
                and 6 of the Commodity Exchange Act \163\ or on a U.S. swap execution
                facility (SEF) registered under section 5h of the Commodity Exchange
                Act.\164\ The proposed rule would have assigned a 100 percent RSF
                factor to all other commodities held by a covered company. The proposed
                rule would have required a covered company to support its commodities
                positions with a substantial amount of stable funding because, in
                general, commodities as an asset class have historical material price
                volatility.
                ---------------------------------------------------------------------------
                 \163\ 7 U.S.C. 7 and 7 U.S.C. 8.
                 \164\ 7 U.S.C. 7b-3.
                ---------------------------------------------------------------------------
                 The proposed rule would have assigned an 85 percent RSF factor,
                rather than a 100 percent RSF factor, to commodities for which
                derivative transactions are traded on a U.S. DCM or U.S. SEF because
                the exchange trading of derivatives on a commodity tends to indicate a
                greater degree of standardization, fungibility, and liquidity in the
                market for the commodity.\165\ As noted in the Supplementary
                Information section to the proposed rule, a market for a commodity for
                which a derivative transaction is traded on a U.S. DCM or U.S. SEF is
                more likely to have established standards (for example, with respect to
                different grades of commodities) that are relied upon in determining
                the commodities that can be provided to effect physical settlement
                under a derivative transaction. In addition, the exchange-traded market
                for a commodity derivative transaction generally increases price
                transparency for the underlying commodity. A covered company could
                therefore more easily monetize a commodity that meets this requirement
                than a commodity that does not, either through the spot market or
                through derivative transactions based on the commodity. The proposed
                rule accordingly would have required less stable funding to support
                holdings of commodities for which derivative transactions are traded on
                a U.S. DCM or U.S. SEF than it would have required for other
                commodities, which a covered company may not be able to monetize as
                easily.
                ---------------------------------------------------------------------------
                 \165\ Examples of commodities that currently meet this
                requirement are gold, oil, natural gas, and various agricultural
                products.
                ---------------------------------------------------------------------------
                 One commenter argued that the stated rationale for assigning an 85
                percent RSF factor to commodities traded on U.S. exchanges should apply
                equally to commodities traded on non-U.S. exchanges. The commenter
                requested that rather than assigning a 100 percent RSF factor to
                commodities traded on non-U.S. exchanges, the final rule assign an 85
                percent RSF factor to commodities that are traded on non-U.S. exchanges
                that are registered in non-U.S. jurisdictions in order to provide
                consistent treatment with commodities traded on a U.S. exchange. These
                commodities, the commenter argued, have similar liquidity
                characteristics to commodities traded on U.S. exchanges.
                 As noted by the commenter, commodities for which derivative
                transactions are traded on exchanges registered outside the United
                States may have a similar degree of liquidity as commodities for which
                derivative transactions are traded on a U.S. DCM or U.S. SEF. To
                provide consistent treatment of commodities traded on U.S. and non-U.S.
                exchanges, the final rule assigns an 85 percent RSF factor to any
                commodity held by a covered company for which derivative transactions
                are
                [[Page 9165]]
                authorized to be traded on an U.S. DCM, U.S. SEF, or any other
                exchange, whether located in the United States or in a jurisdiction
                outside of the United States.\166\ The agencies note that covered
                companies are limited in the types of physical commodities activities
                in which they are able to engage. For example, the Board has approved
                requests from certain financial holding companies to engage in certain
                physical commodities trading activities for which derivative contracts
                are approved for trading on a U.S. futures exchange by the U.S.
                Commodity Futures Trading Commission (CFTC) (unless specifically
                excluded by the Board) or other commodities that have been specifically
                authorized by the Board under section 4(k)(1)(B) of the Bank Holding
                Company Act of 1956.\167\ The legal restrictions applicable to bank
                holding companies and financial holding companies under the BHC Act (as
                well as restrictions applicable to national banks and state-chartered
                banks under the National Bank Act and the FDI Act, respectively)
                continue to apply, and the final rule does not grant a covered company
                the authority to engage in any commodities activities not otherwise
                permitted by applicable law.
                ---------------------------------------------------------------------------
                 \166\ As with all derivatives, commodity derivatives are subject
                to Sec. __.107 of the final rule.
                 \167\ 12 U.S.C. 1843(k)(1)(B). The types of commodities
                permitted by the Board for financial holding companies generally are
                assigned an 85 percent RSF factor under the final rule. For example,
                under Board precedent, commodity trading activities involving any
                type of coal would be permissible for a financial holding company,
                even though the CFTC has authorized only Central Appalachian coal.
                Therefore, under the final rule, the carrying value of any type of
                coal would be assigned an 85 percent RSF factor. Any derivative
                transaction based on coal, though, would be subject to Sec. __.107
                of the final rule. With respect to commodities for which a
                derivative is traded on a non-U.S. exchange, the agencies note that
                such non-U.S. exchanges will be supervised by a prudential regulator
                in the relevant jurisdiction.
                ---------------------------------------------------------------------------
                g) 100 Percent RSF Factor
                All Other Assets Not Described Above
                 Section __.106(a)(8) of the proposed rule would have assigned a 100
                percent RSF factor to all other performing assets not otherwise
                assigned an RSF factor under Sec. __.106 or Sec. __.107. These assets
                include, but are not limited to, loans to financial institutions
                (including to an unconsolidated affiliate) that mature in one year or
                more; assets deducted from regulatory capital; \168\ common equity
                shares that are not traded on a public exchange; unposted debits; and
                trade date receivables that have failed to settle within the lesser of
                the market standard settlement period for the relevant type of
                transaction, without extension of the standard settlement period, and
                five business days from the date of the sale.
                ---------------------------------------------------------------------------
                 \168\ Assets deducted from regulatory capital include, but are
                not limited to, goodwill, certain deferred tax assets, certain
                mortgage servicing assets, and certain defined benefit pension fund
                net assets. See 12 CFR 3.22 (OCC); 12 CFR 217.22 (Board); 12 CFR
                324.22 (FDIC). These assets, as a class, tend to be difficult for a
                covered company to readily monetize.
                ---------------------------------------------------------------------------
                 The agencies received a number of comments suggesting that certain
                trade date receivables receiving a 100 percent RSF factor under the
                proposed rule should receive a lower RSF factor. As described above,
                several commenters opposed the proposal's assignment of a 100 percent
                RSF factor to trade date receivables that fail to settle within the
                lesser of five business days and the standard settlement period but are
                still expected to settle. Another commenter argued that, in the case of
                trade date receivables generated by primary offerings, settlement
                delays reflect unique timing needs rather than increased funding risk.
                Accordingly, the commenter recommended that the agencies assign a zero
                percent RSF factor to trade date receivables generated by primary
                offering settlements for the duration of the primary offering.
                 As described above, the agencies are amending the final rule to
                assign a zero percent RSF factor to trade date receivables due to a
                covered company that result from the sale of a financial instrument,
                foreign currency, or commodity that are required to settle no later
                than the market standard for the particular instrument, and have yet to
                settle but are not more than five business days past the scheduled
                settlement date. The final rule otherwise retains the assignment of a
                100 percent RSF factor as proposed. Assets in this category do not
                consistently exhibit liquidity characteristics that would suggest a
                covered company should support them with anything less than full stable
                funding.
                Nonperforming Assets RSF Factor
                 Section __.106(b) of the proposed rule would have assigned a 100
                percent RSF factor to any asset on a covered company's balance sheet
                that is past due by more than 90 days or that has nonaccrual status.
                Because these assets have an elevated risk of non-payment, these assets
                tend to be illiquid regardless of their tenor. The agencies did not
                receive any comments on this aspect of the proposal. Consistent with
                the proposed rule, the final rule requires a covered company to assign
                a 100 percent RSF factor to nonperforming assets.\169\
                ---------------------------------------------------------------------------
                 \169\ The final rule's description of nonperforming assets in
                Sec. __.106(b), like the proposed rule's description, is consistent
                with the definition of ``nonperforming exposure'' in Sec. __.3 of
                the LCR rule.
                ---------------------------------------------------------------------------
                h) RSF Factors for Encumbered Balance Sheet Assets
                 Consistent with the criteria used for assigning RSF factors
                described above, the RSF factor that the proposed rule would have
                assigned to an asset would have depended on whether or not the asset is
                encumbered and the length of any encumbrance. As discussed in section
                VI of this Supplementary Information section, the proposed rule would
                have defined ``encumbered'' (a new defined term under Sec. __.3), as
                the converse of the term ``unencumbered'' currently used in the LCR
                rule. Encumbered assets must generally be retained for the period of
                encumbrance and generally cannot be monetized during this period. Thus,
                Sec. __.106(c) of the proposed rule would have assigned the RSF factor
                to encumbered assets based on the tenor of the encumbrance.
                 The agencies received one comment regarding the potential impact of
                the proposed rule's treatment of assets pledged for six months or
                longer by a covered company to an FHLB under a blanket, but not asset-
                specific, lien to secure an extension of credit to the covered company.
                 As is the case for an asset pledged to any other counterparty to
                secure or provide credit enhancement to a transaction, a covered
                company generally must retain or replace an asset pledged to an FHLB
                during the period in which it is encumbered and cannot monetize the
                asset while encumbered.\170\ However, where an asset of a covered
                company is subject to a blanket, rather than asset-specific lien, in
                favor of an FHLB, such asset would not be considered ``encumbered'' if
                credit secured by the asset is not currently extended to the covered
                company or its consolidated subsidiaries. Where credit has been
                extended and is secured by a blanket
                [[Page 9166]]
                lien, a covered company may identify which specific assets covered by
                the blanket lien secure the amount of extended credit, consistent with
                the requirements of the LCR rule.
                ---------------------------------------------------------------------------
                 \170\ As discussed in section VI.B of this Supplementary
                Information section, the final rule's definition of ``encumbered''
                does not consider an asset to be encumbered solely because the asset
                is pledged to a central bank or GSE to secure a transaction if (i)
                potential credit secured by the asset is not currently extended to
                the covered company or its consolidated subsidiaries and (ii) the
                pledged asset is not required to support access to the payment
                services of a central bank. The final rule's definition of
                ``encumbered'' does not include any substantive changes to the
                concept of encumbrance included in the LCR rule. See 79 FR at 61469.
                ---------------------------------------------------------------------------
                 The final rule retains the treatment of encumbered assets as
                proposed. Under the final rule, an asset that is encumbered for less
                than six months from the calculation date is assigned the same RSF
                factor as would be assigned to the asset if it were not encumbered
                because the covered company will not need to retain the asset beyond
                six months. For an asset that is encumbered for a period of six months
                or more, but less than one year, the final rule assigns an RSF factor
                equal to the greater of 50 percent and the RSF factor that would be
                assigned if the asset were not encumbered. This treatment ensures that
                a covered company's RSF amount reflects the effect of the encumbrance
                on an asset that would be assigned a lower RSF factor if unencumbered
                based on its tenor and other liquidity characteristics. Additionally,
                the final rule assigns a 100 percent RSF factor to an asset that is
                encumbered for a remaining period of one year or more because the asset
                would be retained and unavailable to the covered company for the
                entirety of the NSFR's one-year time horizon. Finally, in cases where
                the duration of an asset's encumbrance exceeds the maturity of that
                asset, the final rule assigns an RSF factor to the asset based on its
                encumbrance period. For example, if a covered company provides a level
                1 liquid asset security that matures in three months as collateral in a
                one-year repurchase agreement, the covered company would need to
                replace that security upon its maturity with another asset that meets
                the requirements of the repurchase agreement. Thus, even though the
                maturity of the asset currently provided as collateral is short-dated,
                a covered company must fully support an asset with stable funding for
                the duration of the one-year repurchase agreement. As a result, the RSF
                factor determined by on the one-year encumbrance period.
                 Table 3 sets forth the RSF factors for assets that are encumbered.
                 Table 3--RSF Factors for Encumbered Assets
                ----------------------------------------------------------------------------------------------------------------
                 RSF factors for encumbered assets *
                 --------------------------------------------------------------------------
                 Asset encumbered =6 Asset encumbered >=1
                 months months 50 percent:. asset as if it were asset as if it were
                 unencumbered. unencumbered.
                ----------------------------------------------------------------------------------------------------------------
                * If the remaining encumbrance period exceeds the effective maturity of the asset, the final rule assigns an RSF
                 factor to the asset based on its encumbrance period.
                i) Assets Held in Certain Customer Protection Segregated Accounts
                 Section __.106(c)(3) of the proposed rule would have specified that
                an asset held in a segregated account maintained pursuant to statutory
                or regulatory requirements for the protection of customer assets would
                not have been considered to be encumbered solely because it is held in
                such a segregated account.\171\ Instead, the proposed rule would have
                assigned an asset held in such a segregated account the RSF factor that
                would be assigned to the asset under Sec. __.106 if it were not held
                in a segregated account. For example, a covered company must segregate
                customer free credits, which are customer funds held prior to their
                investment, until the customer decides to invest or withdraw the funds.
                The proposed rule would have treated the funds that a covered company
                places on deposit with a third-party depository institution in
                accordance with segregation requirements as a short-term loan to a
                financial sector entity, which would have been assigned a 15 percent
                RSF factor.
                ---------------------------------------------------------------------------
                 \171\ For example, the proposed rule would not consider an asset
                held pursuant to the SEC's Rule 15c3-3 (17 CFR 240.15c3-3) or the
                CFTC's Rule 1.20 or Part 22 (17 CFR 1.20; 17 CFR part 22) to be
                encumbered solely because it is held in a segregated account.
                ---------------------------------------------------------------------------
                 Several commenters argued that segregated client assets should have
                no stable funding requirement because, among other reasons, they
                already are funded by liabilities to the client and pose limited
                funding risks to covered companies. Some commenters noted that SEC and
                CFTC rules require client assets to be segregated and accounted for
                separately from the covered company's assets, protected from the
                bankruptcy of the covered company, and held in cash or other limited
                investments. Commenters also argued that segregated client assets
                should be treated analogously to currency and coin, which are assigned
                a 0 percent RSF factor. One commenter argued that the proposed
                treatment for segregated client assets would conflict with the
                treatment of such assets under the LCR rule, which recognizes some
                inflows from anticipated changes in the value of segregated client
                accounts and 100 percent outflows for non-operational deposits placed
                by financial institution counterparties.
                 Several commenters claimed that requiring stable funding for
                segregated client assets would inappropriately incentivize covered
                companies to maintain such balances in non-cash form (e.g., U.S.
                Treasury securities) rather than hold them in a deposit account at a
                third-party bank in order to reduce the RSF factor. Other commenters
                expressed concern that covered companies may pass the cost of
                maintaining stable funding for segregated client assets on to the
                client or stop providing services that require segregated accounts.
                 The agencies are finalizing the treatment of customer segregated
                account assets as proposed.\172\ As discussed in section V.C of this
                Supplementary Information section, the NSFR applies to a covered
                company's entire balance sheet, does not differentiate between assets
                based on business line or the reason for which they are held, and is
                not designed to mirror the treatment of assets under the LCR rule.
                Regulatory or contractual requirements to segregate certain assets for
                the benefit of customers do not necessarily reduce a covered company's
                funding risks relative to holding the same assets absent segregation,
                based on the covered company's funding stability relative to the tenor
                and other liquidity characteristics of its assets. The NSFR measure
                generally utilizes the carrying value of assets where possible and,
                [[Page 9167]]
                consistent with GAAP, does not distinguish segregated balance sheet
                assets from other assets, except to the extent the final rule does not
                consider assets to be encumbered solely as a result of segregation.
                Additionally, regulatory requirements to hold specified amounts of
                assets for clients, in the form of cash, limited investments, or other
                assets, may result in a covered company holding additional assets
                relative to the absence of such regulatory requirements and the need to
                fund such assets is treated consistently in the final rule relative to
                assets of the same type. For example, the covered company may hold, and
                need to fund, identical level 1 liquid asset securities for the purpose
                of customer protection and as a hedging instrument to provide
                protection to the covered company; therefore, the final rule would
                assign the RSF factor corresponding to the level 1 liquid asset
                securities. Further, the NSFR applies to an aggregate balance sheet and
                generally does not associate specific assets with specific
                funding.\173\ For example, the NSFR does not associate aggregate
                deposit placements for the protection of clients collectively that may
                be funded with individual liabilities due to certain clients, as
                described by commenters.
                ---------------------------------------------------------------------------
                 \172\ Comments requesting treatment as interdependent assets and
                liabilities are discussed in section VII.H of this Supplementary
                Information section.
                 \173\ The final rule does include certain netting of specific
                assets against certain liabilities as described in sections VII.A.2
                and VII.E.2 of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 As discussed above, the final rule assigns a zero percent RSF
                factor to unencumbered level 1 liquid assets and generally assigns a 15
                percent RSF factor to a deposit placed at a third-party financial
                institution with a remaining maturity of less than six months, based on
                the tenor and other liquidity characteristics of these assets. A
                covered company's requirement to comply with certain customer
                protection segregation requirements that result in a deposit at a
                third-party financial institution does not, by itself, adjust the tenor
                of such a placement or serve to improve the covered company's ability
                to withdraw the funds or otherwise monetize the asset in comparison to
                other deposits placed with a third-party banking organization. For
                example, unlike coin and currency, a covered company cannot directly
                use customer segregated account assets to satisfy its own
                obligations.\174\
                ---------------------------------------------------------------------------
                 \174\ See section VII.D.3.a of this Supplementary Information
                section.
                ---------------------------------------------------------------------------
                 For these reasons, it would not be appropriate to assign a zero
                percent RSF factor to assets based on their segregated status and an
                asset held in this type of segregated account is assigned the RSF
                factor that would be assigned to the asset under Sec. __.106 as if it
                was not held in a segregated account.
                4. Treatment of Rehypothecated Off-Balance Sheet Assets
                 As discussed in section V of this Supplementary Information
                section, the NSFR calculation is based on the carrying value of assets
                on a covered company's balance sheet consistent with GAAP. However,
                certain assets that can affect a covered company's aggregate funding
                risks may not be included on a covered company's balance sheet under
                GAAP. The proposed rule, therefore, would have included provisions to
                address the funding risks associated with certain off-balance sheet
                assets that a covered company may obtain through lending transactions,
                asset exchanges, or other transactions. These assets can affect a
                covered company's balance sheet risk profile where they are
                rehypothecated and used to obtain funding. For example, a covered
                company may use off-balance sheet assets to generate funding. The
                assignment of an ASF factor to this liability without recognizing the
                encumbrance placed on a covered company's balance sheet would distort
                the NSFR assessment of a covered company's overall balance sheet risks.
                Therefore, it is appropriate that such reuse of off-balance sheet
                assets should be associated with an appropriate contribution to a
                covered company's RSF amount regardless of the source of the assets.
                This is especially the case if the off-balance sheet asset is
                encumbered to generate funding that has a longer tenor than the
                transaction through which the off-balance sheet asset was sourced. In
                that case, a covered company may need to roll over the transaction
                through which it obtained the off-balance sheet asset before the
                encumbrance of the asset terminates. Alternatively, the covered company
                may need to obtain a replacement asset to close out the sourcing
                transaction under which it obtained the asset before the encumbrance
                expires. Under either approach, the covered company must fund an asset
                for the duration of the encumbrance.
                 Section __.106(d) of the proposed rule specified how a covered
                company would have assigned an RSF factor to a transaction involving an
                off-balance sheet asset that secures an NSFR liability or the sale of
                an off-balance sheet asset that results in an NSFR liability (for
                instance, in the case of a short sale). The proposed rule would have
                assigned an RSF factor to a receivable of a lending transaction, a
                security provided in an asset exchange, or to the off-balance sheet
                asset itself depending on the transaction through which the covered
                company obtained the off-balance sheet asset. Specifically, for an off-
                balance sheet asset obtained under a lending transaction, Sec.
                __.106(d)(1) of the proposed rule would have assigned an RSF factor to
                the receivable of the lending transaction as if it were encumbered for
                the longer of (1) the remaining maturity of the NSFR liability secured
                by or resulting from the sale of the off-balance sheet asset and (2)
                any other encumbrance period already applicable to the lending
                transaction. For an off-balance sheet asset obtained through an asset
                exchange, Sec. __.106(d)(2) of the proposed rule would have assigned
                an RSF factor to the asset provided by the covered company in the asset
                exchange as if it were encumbered for the longer of (1) the remaining
                maturity of the NSFR liability secured by or resulting from the sale of
                the off-balance sheet asset and (2) any other encumbrance period
                applicable to the provided asset. For an off-balance sheet asset not
                obtained under either a lending transaction or asset exchange, Sec.
                .106(d)(3) of the proposed rule would have assigned an RSF factor to
                the off-balance sheet asset as if it were encumbered for the longer of
                (1) the remaining maturity of the NSFR liability secured by or
                resulting from the sale of the off-balance sheet asset and (2) any
                other encumbrance period applicable to the off-balance sheet asset.
                 The agencies received several comments on the proposed treatment of
                rehypothecated off-balance sheet assets under Sec. __.106(d) of the
                proposed rule. Commenters argued that the proposed treatment would be
                inconsistent with the concept of the NSFR as a balance-sheet metric
                because it would assign RSF factors based on assets not included on the
                covered company's balance sheet under GAAP. Some commenters also argued
                that the agencies should not adopt the proposed treatment because it
                would result in stable funding requirements that would be greater than
                specified under the Basel NSFR standard. Commenters also argued that
                the proposed rule lacked a clear empirical foundation for the treatment
                of rehypothecated off-balance sheet assets. One commenter argued that
                the proposed treatment would result in the assignment of ASF and RSF
                factors that do not accurately reflect the funding risk of the
                underlying transactions. One commenter objected to the proposed
                treatment for rehypothecated off-balance sheet assets received in an
                asset exchange, asserting
                [[Page 9168]]
                that the final rule should assign an ASF factor to the value of the
                asset received in an asset exchange, based on the type of asset and the
                remaining maturity of the asset exchange. Another commenter asserted
                that asset exchanges enable a covered company to manage its collateral
                at reduced funding costs and lower funding risks, so the proposed
                treatment of rehypothecated off-balance sheet assets received in an
                asset exchange is unnecessary to achieve the agencies' stated goal of
                ensuring that off-balance sheet assets are not used to generate ASF
                while not reducing the covered company's overall funding risk.
                 Commenters requested additional clarification as to the scope of
                activities intended to be covered by Sec. __.106(d) of the proposed
                rule, in particular by proposed Sec. __.106(d)(3), which would have
                addressed off-balance sheet assets that are sourced through all other
                types of transactions. One of these commenters stated that proposed
                Sec. __.106(d)(3) is extremely punitive and could lead to unintended
                consequences.
                 Another commenter asserted that it would be operationally difficult
                to comply with Sec. __.106(d) of the proposed rule if a covered
                company is required to link each source and use of off-balance sheet
                assets to on-balance sheet assets and liabilities. This commenter also
                suggested that the final rule should recognize the benefits to a
                covered company of collateral substitution rights, for example, where a
                covered company has provided two assets to a single counterparty or a
                single tri-party repurchase agreement intermediary to secure two
                separate NSFR liabilities, and the covered company has the operational
                and legal capability to determine the allocation of the assets to each
                NSFR liability.
                 To address the funding risks presented when a covered company has
                an NSFR liability that is secured by, or results from the sale of, an
                off-balance sheet asset and to prevent distortion of the NSFR metric,
                the agencies are finalizing the treatment of rehypothecated off-balance
                sheet assets under Sec. __.106(d) generally as proposed, but are
                narrowing the scope of the section such that Sec. __.106(d) does not
                apply to off-balance sheet assets received as variation margin under a
                derivative transaction. The agencies also are modifying Sec.
                __.106(d)(3), as explained in this Supplementary Information section.
                As noted by commenters, the NSFR is a balance-sheet metric, and the
                treatment for rehypothecated off-balance sheet assets under the final
                rule assigns RSF factors to assets recorded on a covered company's
                balance sheet, rather than to off-balance sheet assets. The agencies
                also note that the BCBS clarified the treatment of certain off-balance
                sheet assets under the Basel NSFR standard as a result of
                rehypothecation, which is generally consistent with the treatment under
                the final rule.\175\
                ---------------------------------------------------------------------------
                 \175\ BCBS, ``Basel III--The Net Stable Funding Ratio:
                frequently asked questions,'' February 2017, available at https://www.bis.org/bcbs/publ/d396.pdf.
                ---------------------------------------------------------------------------
                a) Off-Balance Sheet Assets Obtained in Lending Transactions
                 Where a covered company obtains an off-balance sheet asset through
                a lending transaction,\176\ the lending transaction will be included as
                a receivable asset on the covered company's balance sheet. Under Sec.
                __.106(d)(1) of the final rule, if a covered company obtained an off-
                balance sheet asset through a lending transaction (e.g., a reverse
                repurchase agreement), the final rule treats the balance sheet
                receivable associated with the lending transaction as encumbered for
                the longer of: (1) The remaining maturity of the NSFR liability secured
                by the off-balance sheet asset (e.g., a repurchase agreement) or
                resulting from the sale of the off-balance sheet asset (e.g., a short
                sale), as the case may be, and (2) any other encumbrance period already
                applicable to the lending transaction. The remaining maturity of the
                liability secured by the off-balance sheet asset, or resulting from the
                sale of the off-balance sheet asset, restricts the ability of a covered
                company to monetize the lending transaction receivable and the lending
                receivable is therefore treated as encumbered.\177\ For example, Sec.
                __.106(d)(1) applies if a covered company obtains a level 2A liquid
                asset as collateral under an overnight reverse repurchase agreement
                with a financial counterparty and subsequently pledges the level 2A
                liquid asset as collateral in a repurchase transaction with a maturity
                of one year or more but, consistent with GAAP, does not include the
                level 2A liquid asset on its balance sheet. In this case, the final
                rule treats the covered company's balance-sheet receivable associated
                with the reverse repurchase agreement as encumbered for a period of one
                year or more, since the remaining maturity of the repurchase agreement
                secured by the rehypothecated level 2A liquid asset is one year or
                more. Accordingly, the final rule assigns the reverse repurchase
                agreement receivable an RSF factor of 100 percent (under Sec.
                __.106(c)(1)(iii)) instead of 15 percent (under Sec. __.106(a)(3)(i)).
                ---------------------------------------------------------------------------
                 \176\ As described in section VI.A.2 of this Supplementary
                Information section, the final rule defines the term ``secured
                lending transaction'' to mean any lending transaction that is
                subject to a legally binding agreement that gives rise to a cash
                obligation of a wholesale customer or counterparty to the covered
                company that is secured under applicable law by a lien on securities
                or loans provided by the wholesale customer or counterparty, which
                gives the covered company, as holder of the lien, priority over the
                securities or loans. Section .__106(d)(1) applies to an off-balance
                sheet asset obtained under any lending transaction, regardless of
                the nature of the counterparty or the off-balance sheet asset. For
                the purposes of this section of this Supplementary Information
                section, a lending transaction is not an asset exchange or a
                derivative transaction.
                 \177\ As described in section VI.B of this Supplementary
                Information section, the final rule includes a new definition of
                ``Encumbered'' based on any legal, regulatory, contractual or other
                restrictions on the ability of a covered company to monetize an
                asset. See Sec. __.3 of the LCR rule.
                ---------------------------------------------------------------------------
                 A commenter asserted that this type of position poses less funding
                risk, because the on-balance sheet receivable has a shorter maturity
                than the liability and the off-balance sheet asset is highly liquid.
                However, the asset funding need for this type of transaction is driven
                by the obligation to continue to collateralize the liability for a
                period of one year or more relative to the short-term sourcing
                transaction rather than the liquidity characteristics of the asset
                pledged. Therefore, the effective funding need of the receivable
                associated with the asset pledged must take into account the one-year
                period of encumbrance, consistent with a 100 percent RSF factor.
                b) Off-Balance Sheet Assets Obtained in an Asset Exchange
                 Where a covered company provides a security in an asset exchange,
                the security provided remains on the covered company's balance sheet
                under GAAP. However, the security received by the covered company in
                the asset exchange may be an off-balance sheet asset under GAAP (for
                example, because the covered company acted as a securities borrower in
                the asset exchange). Under Sec. __.106(d)(2) of the final rule, if a
                covered company obtains an off-balance sheet asset under an asset
                exchange and has an NSFR liability secured by, or resulting from the
                sale of, the off-balance sheet asset, the final rule treats the on-
                balance sheet asset provided by the covered company in the asset
                exchange as encumbered for the longer of: (1) The remaining maturity of
                the NSFR liability secured by the off-balance sheet asset or resulting
                from the sale of the off-balance asset, as the case may be, and (2) any
                encumbrance period already applicable to the provided asset. For
                example, assume a covered company, acting as a securities borrower,
                provides a level 2A liquid asset as collateral and obtains a level 1
                liquid asset security under an asset
                [[Page 9169]]
                exchange with counterparty A and with a remaining maturity of six
                months, and subsequently provides the level 1 liquid asset security as
                collateral to secure a repurchase agreement with counterparty B and
                that matures in one year or more. In such a case, the covered company
                typically would not include the level 1 liquid asset security on its
                balance sheet.\178\ Under Sec. __.106(d)(2) of the final rule, the
                level 2A liquid asset provided by the covered company (which remains on
                the covered company's balance sheet) is treated as encumbered for a
                period of one year or more (equal to the remaining maturity of the
                repurchase agreement secured by the rehypothecated level 1 liquid asset
                security) instead of six months (equal to the remaining maturity of the
                asset exchange) and the carrying value of the level 2A liquid asset
                provided is assigned an RSF factor of 100 percent (in accordance with
                Sec. __.106(c)(1)(iii)) instead of 50 percent.
                ---------------------------------------------------------------------------
                 \178\ Under GAAP, where a covered company acting as a securities
                borrower engages in an asset exchange, the asset provided by the
                covered company typically remains on the covered company's balance
                sheet while the received asset, if not rehypothecated, would not be
                on the covered company's balance sheet. To the extent a covered
                company includes on its balance sheet an asset received in an asset
                exchange and the covered company subsequently uses the on-balance
                sheet asset as collateral to secure a separate NSFR liability, Sec.
                __.106(d) of the final rule does not apply. For example, if a
                covered company acts as a securities lender in an asset exchange and
                recognizes the collateral securities received on its balance sheet,
                the covered company should treat those collateral securities
                received as encumbered if the covered company sells or
                rehypothecates the collateral securities received, taking into
                account the remaining maturity of the transaction in which they have
                been rehypothecated. While the covered company should treat the
                securities it provided in the asset exchange as encumbered, the
                covered company would not be required to treat the securities it
                provided in the original asset exchange as encumbered for a period
                other than the remaining maturity of the asset exchange. The on-
                balance sheet asset used as collateral to secure the NSFR liability
                is assigned an RSF factor in the same manner as other assets on the
                covered company's balance sheet (including by taking into account
                the asset's encumbrance) pursuant to Sec. Sec. __.106(a) through
                (c) or Sec. __.107 of the final rule, as applicable. See section
                VII.A.3 of this Supplementary Information section for assets
                received that remain unencumbered and section VII.D.3.h of this
                Supplementary Information section for any balance sheet assets that
                are encumbered.
                ---------------------------------------------------------------------------
                 With regard to comments that the final rule should recognize the
                funding value of the off-balance sheet asset received in an asset
                exchange (in the example above where the covered company acts a
                securities borrower, the level 1 liquid asset) and for the reasons
                described in section VII.A.3 of this Supplementary Information section,
                the final rule provides that a covered company must assign an RSF
                factor to the on-balance sheet asset provided (in the example above,
                the level 2A liquid asset) rather than the off-balance sheet asset
                received because the on-balance sheet asset is a component of the
                covered company's aggregate funding need at the calculation date.
                Unlike the LCR rule, where an off-balance sheet asset received in an
                asset exchange can potentially qualify as eligible HQLA available to
                satisfy short-term cash-flow needs, the NSFR is a measure of the
                stability of a covered company's funding profile relative to its
                assets. As discussed in section V of this Supplementary Information
                section, the final rule generally does not consider the future
                availability of an asset as a source of liquidity and assigns RSF
                factors to assets rather than ASF factors as suggested by commenters.
                c) Off-Balance Sheet Assets Obtained Through Other Transactions
                 Where a covered company obtains an off-balance sheet asset through
                a transaction that is not a lending transaction or an asset exchange
                (source transaction), there is the potential that the covered company
                might not record the source transaction on its balance sheet. At the
                same time, the covered company may rehypothecate the off-balance sheet
                asset obtained in the source transaction to obtain funding and generate
                an NSFR liability. This funding could increase the covered company's
                ASF amount, depending on the maturity and other characteristics of the
                NSFR liability, without the source transaction or the off-balance sheet
                asset itself being reflected in its RSF amount. However, due to the
                rehypothecation of the off-balance sheet asset, a covered company may
                record a liability to return the asset to the counterparty of the
                source transaction or a liability secured by the off-balance sheet
                asset.\179\ Further, the covered company may need to roll over the
                source transaction if this transaction matures before the encumbrance
                of the rehypothecated asset terminates. Alternatively, the covered
                company may need to obtain a replacement asset to close out the source
                transaction before the encumbrance expires.
                ---------------------------------------------------------------------------
                 \179\ If the NSFR liability is a short sale that is booked on an
                open basis or otherwise has a remaining maturity of less than six
                months, the asset resulting from the NSFR liability would be treated
                as unencumbered.
                ---------------------------------------------------------------------------
                 To address this risk and prevent potential distortions of the NSFR,
                under Sec. __.106(d)(3) of the final rule, if a covered company has an
                off-balance sheet asset that it did not obtain under either a lending
                transaction or an asset exchange, the covered company is required to
                treat any associated on-balance sheet asset resulting from the
                rehypothecation transaction as encumbered for a period equal to the
                greater of the remaining maturity of the NSFR liability or the
                encumbrance of the source transaction. This provision would apply to
                any proceeds that appeared on a covered company's balance sheet as a
                result of a rehypothecation transaction. For example, if a covered
                company rehypothecates an off-balance sheet asset for a period of one
                year more and receives cash as proceeds of the rehypothecation, the
                covered company would be required to treat the cash received as
                encumbered and assigned a 100 percent RSF factor. Covered companies are
                not required to treat the off-balance sheet asset as if the off-balance
                sheet asset was included on a company's balance sheet. Even if a
                covered company reuses the proceeds of the rehypothecated transaction,
                the covered company should still apply an RSF factor, based on the
                encumbrance, to the on-balance sheet asset that was the direct result
                of the transaction. Without this treatment, a covered company's RSF
                amount would not reflect the funding risk that the covered company must
                maintain the asset, or a similar asset, or the fact that the covered
                company has limited its ability to monetize or recognize inflows from
                the source transaction for the duration of the rehypothecation.
                 Additionally, Sec. __.106(d)(3) of the proposed rule would have
                applied in the case of an NSFR liability secured by, or resulting from
                the sale of, an off-balance sheet asset that a covered company had
                received in the form of variation margin under a derivative
                transaction. The final rule modifies the proposal by not subjecting
                assets received as variation margin under a derivative transaction to
                the requirements of Sec. __.106(d).\180\ Excluding such variation
                margin from Sec. __.106(d) of the final rule is appropriate because
                the final rule accounts for variation margin within the derivatives RSF
                amount calculation specified in Sec. __.107.\181\ Section __.106(d)(3)
                of the final rule therefore
                [[Page 9170]]
                applies where a covered company has rehypothecated an off-balance sheet
                asset not received under a lending transaction or asset exchange or as
                variation margin under a derivative transaction. For example, the
                agencies note that Sec. __.106(d)(3) of the final rule applies if a
                covered company obtains an asset as initial margin under a derivative
                transaction or borrows an asset for a fee without providing collateral
                and uses the asset to generate an NSFR liability without including the
                asset on its balance sheet under GAAP.
                ---------------------------------------------------------------------------
                 \180\ This treatment applies to both assets received as
                variation margin necessary to cover the current exposure of a
                derivative or derivative netting set and variation margin received
                in excess of such an amount.
                 \181\ Section __.107 of the final rule provides for netting of
                certain rehypothecatable level 1 liquid assets received as variation
                margin by the covered company against the value of the underlying
                derivative asset for purposes of a covered company's derivatives RSF
                amount. See section VII.E.2 of this Supplementary Information
                section. The final rule's modifications to Sec. __.106(d)(3) of the
                proposed rule are consistent with Sec. __.107 of the final rule.
                 Table 4--Treatment of Off-Balance Sheet Assets
                ------------------------------------------------------------------------
                
                ------------------------------------------------------------------------
                Transaction through which a covered RSF factor is applied to the
                 company obtains an off-balance sheet following on-balance sheet
                 asset (source transaction) and whether asset, taking into account the
                 the asset is subsequently used in a remaining maturity of the NSFR
                 transaction to generate a NSFR liability and the encumbrance
                 liability. period of the source
                 transaction.
                Off-balance sheet asset received in any No RSF factor applied.
                 source transaction and is not
                 rehypothecated.
                Off-balance sheet asset received in a RSF factor is applied to on-
                 lending transaction and subsequently balance sheet lending
                 used to generate a NSFR liability. transaction receivable under
                 Sec. __.106(d)(1).
                Off-balance sheet asset received in an RSF factor is applied to the on-
                 asset exchange (e.g., where a covered balance sheet asset provided
                 company acts as securities borrower) in the asset exchange under
                 subsequently used to generate a NSFR Sec. __.106(d)(2).
                 liability *.
                Off-balance sheet asset received as See derivative treatment under
                 variation margin under a derivative Sec. __.107 of the final
                 transaction. rule.
                Off-balance sheet asset received in a RSF factor is applied to the on-
                 source transaction other than a balance sheet asset resulting
                 lending transaction, or asset from the NSFR liability under
                 exchange, and the asset is not Sec. __.106(d)(3).
                 received as variation margin under a
                 derivative transaction, and
                 subsequently used to generate a NSFR
                 liability.
                ------------------------------------------------------------------------
                * For assets received in an asset exchange recorded on balance sheet
                 (e.g., when a covered company acts as a securities lender) see
                 sections VII.A.3 and VII.D.3.h of this Supplementary Information
                 section.
                 Consistent with the proposed rule, Sec. __.106(d) of the final
                rule does not apply in cases where a covered company has an NSFR
                liability secured by, or resulting from the sale of, an on-balance
                sheet asset.
                d) Technical and Operational Clarifications
                (i) Amounts of Rehypothecated Off-Balance Sheet Assets Relative to
                Transactions Through Which the Assets Are Obtained
                 If the value of rehypothecated off-balance sheet assets obtained in
                lending transactions or asset exchanges is less than the carrying value
                of the on-balance sheet receivables for the lending transactions or
                assets provided under the asset exchanges, respectively, the covered
                company should treat the value of the receivables or assets provided as
                encumbered in an amount equivalent to the value of the rehypothecated
                off-balance sheet assets, for purposes of Sec. Sec. __.106(d)(1) and
                (2).\182\ This treatment recognizes that when a covered company
                rehypothecates only a portion of the value of off-balance sheet assets
                obtained in a lending transaction or an asset exchange, it would be
                overly conservative to apply an RSF factor based on such encumbrance to
                the entire value of the lending transaction receivable, or to the full
                value of assets provided in the asset exchange, as applicable.
                Accordingly, the covered company need not treat the entire value of the
                receivables or assets provided as encumbered.
                ---------------------------------------------------------------------------
                 \182\ A covered company would assign appropriate RSF factors to
                the value of the lending transaction receivables, or assets provided
                in the asset exchanges, equivalent to the value of the
                rehypothecated off-balance sheet assets based on the appropriate
                encumbrance periods and categories of RSF factors under Sec. __.106
                of the final rule.
                ---------------------------------------------------------------------------
                 Conversely, the value of rehypothecated off-balance sheet assets
                received by a covered company in a lending transaction, asset exchange,
                or other transaction might exceed the value of the on-balance sheet
                receivable for the lending transaction, the assets provided under the
                asset exchange, or the asset resulting from the NSFR liability,
                respectively. In such cases, a covered company potentially could
                rehypothecate an amount of off-balance sheet assets to produce an NSFR
                liability that exceeds the value of the on-balance sheet lending
                transaction receivable or assets provided (excess rehypothecated
                assets). Under the final rule, on-balance sheet assets resulting from
                the rehypothecation of the off-balance sheet assets are assigned the
                appropriate RSF factor consistent with other on-balance sheet assets.
                Covered companies should use appropriate and justifiable assumptions in
                identifying and attributing the sources and uses of off-balance sheet
                assets, including excess rehypothecated assets, consistent with the
                operational clarifications below.
                (ii) Operational Clarifications
                 With regard to a commenter's concerns about the operational burden
                associated with linking assets and liabilities for purposes of Sec.
                __.106(d), if a covered company provides an asset as collateral, and
                the covered company operationally could have provided either an off-
                balance sheet asset or the same security in the form of on-balance
                sheet asset, the final rule permits the covered company to identify
                either the off-balance sheet asset or the on-balance sheet asset as the
                provided collateral for purposes of determining encumbrance treatment
                under Sec. Sec. __.106(c) and (d). Similarly, if a covered company
                operationally could have provided either of two equivalent off-balance
                sheet assets, one received under a lending transaction and the other
                under an asset exchange, the final rule does not restrict the covered
                company's ability to identify either asset as the provided collateral
                for purposes of determining encumbrance treatment under Sec.
                __.106(d). In either case, the covered company's identification for
                purposes of Sec. Sec. __.106(c) and __.106(d) must be consistent with
                contractual and other applicable requirements on the relevant
                calculation date. The same treatment would apply for a covered
                company's use of a security as collateral and the covered company's
                ability to identify whether the security is already owned by the
                covered company or is an identical security received from a lending
                transaction, asset exchange, or other transaction.
                 For example, if a covered company receives a security in a reverse
                repurchase agreement that is identical to a security the covered
                company already owns, and the covered company provides one of these
                securities as collateral to secure a repurchase
                [[Page 9171]]
                agreement, the final rule permits the covered company to identify, for
                purposes of determining encumbrance treatment under Sec. Sec.
                __.106(c) and (d), either the owned security or the security received
                in the reverse repurchase agreement as the encumbered collateral for
                the repurchase agreement, provided that the covered company had the
                operational and legal capability to provide either one of the
                securities as of the calculation date. If the covered company chooses
                to treat the off-balance sheet security received in connection with the
                reverse repurchase agreement as the collateral securing the repurchase
                agreement at the calculation date, Sec. __.106(d)(1) would apply and
                the covered company would treat the reverse repurchase agreement as
                encumbered for purposes of assigning an RSF factor. If the covered
                company instead chooses to treat the owned security as the collateral
                encumbered by the repurchase agreement, the covered company would apply
                the appropriate RSF factor (reflecting the encumbrance) to the owned
                security under Sec. __.106(c) and no additional adjustment would need
                to be made to the encumbrance of the reverse repurchase agreement under
                Sec. __.106(d).
                 The agencies anticipate that a covered company would be able to
                comply with this section based on aggregate information (because much
                of the data is currently collected and monitored for other purposes,
                including the FR 2052a and compliance with the LCR rule) rather than
                through transaction-by-transaction tracking. For example, a covered
                company may determine its requirements under Sec. Sec. __.106(c) and
                __.106(d) based on the aggregate value of an asset class pledged at
                each of the NSFR rule's encumbrance periods (less than six months, six
                months or more but less than one year, or one year or more); the
                aggregate value of the asset class on the covered company's balance
                sheet; and the values and maturity categories of balance sheet
                receivables or assets provided by the covered company under
                transactions sourcing each type of borrowed asset.\183\ The agencies
                expect this approach to substantially limit any incremental operational
                costs of compliance for covered companies.
                ---------------------------------------------------------------------------
                 \183\ In the case of securities, this approach would involve a
                covered company identifying its aggregate encumbrances by each
                security identifier (e.g., CUSIP or ISIN) for each of the NSFR's
                encumbrance periods; the aggregate value held in a covered company's
                inventory by each security identifier; and the aggregate value of
                on-balance sheet receivables or assets associated with transactions
                sourcing each security identifier. Since the NSFR generally applies
                the same funding requirement to all transaction types that have
                similar counterparty, collateral and maturity characteristics (e.g.,
                a margin loan to a financial sector entity maturing in six months
                and a reverse repo to a financial sector entity maturing in six
                months would have the same funding requirement), a covered company
                may consider transactions that are treated equivalently by the NSFR
                in aggregate when calculating the receivable amounts that are
                subject to Sec. __.106(d) of the final rule.
                ---------------------------------------------------------------------------
                 In addition, when the covered company has provided two assets to a
                single counterparty to secure two different NSFR liabilities, and the
                covered company had the sole legal right and operational capability to
                determine the allocation of the collateral provided to each of the NSFR
                liabilities at the calculation date, the final rule permits the covered
                company to identify which asset secures which NSFR liability for
                purposes of determining encumbrance treatment under Sec. Sec.
                __.106(c) and __.106(d). As an example, assume that a covered company
                enters into two secured funding transactions with a single counterparty
                (or with a single tri-party repo intermediary), one with an overnight
                maturity and one with a maturity of one year, and provides level 2A
                liquid assets as collateral for one secured funding transaction and
                level 2B liquid assets as collateral for the second secured funding
                transaction. If the covered company had the legal right and operational
                capability to allocate the provided level 2A and level 2B liquid assets
                between the two secured funding transactions, the final rule permits
                the covered company to identify which of the securities are encumbered
                for a period of one year and which are encumbered overnight for
                purposes of Sec. Sec. __.106(c) and __.106(d). As described above, the
                covered company's determinations for purposes of these sections must be
                consistent with contractual and other applicable requirements,
                including accounting treatment.\184\ Similar considerations apply where
                a covered company has borrowed an asset of one type from a counterparty
                pursuant to an asset borrowing transaction and the covered company has
                the legal right and operational capability to substitute another type
                of asset to return.
                ---------------------------------------------------------------------------
                 \184\ Covered companies may allocate collateral encumbered at
                the calculation date between transactions secured by such collateral
                based on the eligibility of the currently encumbered pool of
                collateral using justifiable and consistent assumptions. For the
                purposes of Sec. __.106 of the final rule, a covered company should
                not make assumptions regarding the potential future substitution of
                encumbered collateral with other assets.
                ---------------------------------------------------------------------------
                E. Derivative Transactions
                 The proposed rule would have required a covered company to maintain
                stable funding to support its on-balance sheet derivative activities.
                Under the proposed rule, a covered company would have calculated its
                required stable funding amount relating to its derivative transactions
                \185\ (derivatives RSF amount) separately from its other assets,
                commitments, and liabilities due to the variable nature and generally
                more complex features of derivative transactions relative to other on-
                balance sheet assets and liabilities of covered companies.\186\ For
                similar reasons, the proposed rule would not have separately treated
                derivative liabilities in excess of derivative assets as available
                stable funding to support non-derivative assets and commitments, as
                described below.
                ---------------------------------------------------------------------------
                 \185\ As defined in Sec. __.3 of the LCR rule, ``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)).
                 \186\ The proposed rule would have included mortgage commitments
                that are derivative transactions in the general derivative
                transactions treatment, in contrast to the LCR rule, which excludes
                those transactions and applies a separate, self-contained mortgage
                commitment treatment. See Sec. Sec. __.32(c) and (d) of the LCR
                rule.
                ---------------------------------------------------------------------------
                 Under the proposed rule, a covered company's derivatives RSF amount
                would have consisted of three general components, each described
                further below: (1) A component reflecting the current net value of a
                covered company's derivative assets and liabilities, taking into
                account variation margin provided by and received by the covered
                company (current net value component); (2) a component to account for
                initial margin provided by a covered company for its derivative
                transactions and assets contributed by a covered company to a CCP's
                mutualized loss-sharing arrangement in connection with cleared
                derivative transactions (initial margin component); and (3) a component
                to account for potential future derivatives valuation changes (future
                value component). For the current net value component, a covered
                company would have netted its derivatives transactions and certain
                variation margin amounts to identify whether the current net value of
                its
                [[Page 9172]]
                derivatives positions was either an NSFR derivatives asset amount or an
                NSFR derivatives liability amount (described below) and assigned a 100
                percent RSF factor or zero percent ASF factor, respectively. For the
                initial margin component, the proposed rule would have assigned an 85
                percent RSF factor to CCP contributions and a minimum 85 percent RSF
                factor to initial margin provided by a covered company. The proposed
                rule also would have assigned a 100 percent RSF factor to the future
                value component, which would have equaled 20 percent of the sum of a
                covered company's gross derivative liabilities. The final rule makes
                certain adjustments to the current net value component's treatment of
                variation margin received by covered companies and the calibration of
                the future value component.
                1. Scope of Derivatives Transactions Subject to Sec. __.107 of the
                Final Rule
                 The proposed rule would have required a covered company to measure
                its derivatives exposures in its calculation of the NSFR, regardless of
                the counterparty. A few commenters suggested that all derivative
                transactions with commercial end-users--specifically, entities that are
                not subject to the clearing requirement under the Commodity Exchange
                Act \187\ or the margin requirements for non-cleared swaps under the
                agencies' swap margin rule (swap margin rule)--should be excluded from
                the NSFR rule.\188\ These commenters argued that derivative activities
                of commercial end-users do not pose a threat to financial stability and
                that applying funding requirements for such activities would be
                inconsistent with Congress's intent in the Dodd-Frank Act that the
                regulation of derivative trading not impose costs on commercial end-
                users.\189\
                ---------------------------------------------------------------------------
                 \187\ Although the term ``commercial end-user'' is not defined
                in the Dodd-Frank Act, it is used in this Supplementary Information
                section to mean a company that is eligible for the exception to the
                mandatory clearing requirement for swaps under section 2(h)(7)(A) of
                the Commodity Exchange Act and section 3C(g)(1) of the Securities
                Exchange Act, respectively. This exception is generally available to
                a person that (1) is not a financial entity, (2) is using the swap
                to hedge or mitigate commercial risk, and (3) has notified the CFTC
                or SEC how it generally meets its financial obligations with respect
                to non-cleared swaps or security-based swaps. See 7 U.S.C.
                2(h)(7)(A) and 15 U.S.C. 78c-3(g)(1).
                 \188\ See 12 CFR part 45 (OCC); 12 CFR part 237 (Board); 12 CFR
                part 349 (FDIC); see also Final Rule, Margin and Capital
                Requirements for Covered Swap Entities, 80 FR 74840 (November 30,
                2015).
                 \189\ These commenters cited to 7 U.S.C. 2(h)(7), 6s(e)(4) as
                examples within the Dodd-Frank Act. One commenter noted that certain
                regulatory requirements relating to derivative transactions in
                jurisdictions outside the United States also exempt certain
                derivative transactions with non-financial sector entities, which
                the commenter argued provided support for an exemption from the
                NSFR.
                ---------------------------------------------------------------------------
                 The final rule does not distinguish between derivative transactions
                with commercial end-users and other counterparty types. Unlike the
                clearing and margin requirements cited by commenters, which apply
                specifically to derivative transactions and include statutory
                exemptions for certain transactions with non-financial sector
                counterparties, the final rule seeks to measure and address funding
                risks of a covered company's aggregate balance sheet. The final rule
                therefore includes derivative transactions as one of many types of
                exposures that contribute to a covered company's aggregate funding
                risk.\190\ Derivative transactions are subject to a range of funding
                risks driven by the underlying economic exposures and contractual
                features, such as their variable nature and the regular need to
                exchange collateral. These funding risks are not primarily determined
                by the derivative transaction's counterparty, and therefore
                transactions with commercial end-user counterparties could contribute
                to funding risk in a manner similar to derivative transactions with
                financial sector entity counterparties. In addition, although the
                agencies' regulatory capital rule differentiates the capital
                requirements for derivative transactions with commercial end-user and
                financial sector counterparties in certain cases, such distinction is
                based largely on the potential for the transactions with commercial
                end-users to be primarily used to hedge or mitigate commercial risks,
                which can be a material consideration in determining the counterparty
                credit risk for an exposure.\191\ By contrast, the NSFR is not designed
                to measure the risks associated with counterparty defaults, but instead
                presumes a covered company would continue to intermediate and fund its
                derivatives portfolio over a one-year horizon. Accordingly, the final
                rule does not provide an exclusion for derivative transactions with
                commercial end-user counterparties and requires a covered company to
                include all its balance sheet derivatives exposures in its calculation
                of the NSFR.
                ---------------------------------------------------------------------------
                 \190\ As discussed further below, the final rule, like the
                proposed rule, also applies a stable funding requirement based on a
                covered company's derivative transactions in the aggregate, using a
                standardized measure rather than a more granular approach that would
                consider in greater detail specific features of individual
                transactions, such as counterparty type.
                 \191\ For example, the standardized approach for calculating the
                exposure amount of derivative contracts under the agencies'
                regulatory capital rule removes the alpha factor from the exposure
                amount formula for derivative contracts with commercial end-user
                counterparties, resulting in lower requirements in comparison to
                similar derivative contracts with a counterparty that is not a
                commercial end-user.
                ---------------------------------------------------------------------------
                2. Current Net Value Component
                 Under the proposed rule, the stable funding requirement for the
                current net value component of a covered company's derivative assets
                and liabilities would have been based on the value (as of the
                calculation date) of each of its derivative transactions (not subject
                to a QMNA) and each QMNA netting set and the variation margin provided
                by and received by the covered company. For the current net value
                component, the proposed rule would have measured a covered company's
                aggregate derivative activities on a net basis by: (i) Reducing
                exposures with each counterparty by taking into account QMNA netting
                sets; (ii) determining the value of each derivative asset, liability or
                QMNA netting set after netting certain variation margin amounts; and
                (iii) offsetting a covered company's overall total derivatives asset
                amount with its total derivatives liability amount, each as described
                below (i.e., the proposed rule's NSFR derivatives asset or liability
                amount). Through these netting calculations, a covered company would
                have determined whether the current net value of its derivatives
                positions was either an NSFR derivatives asset amount or an NSFR
                derivatives liability amount. The proposed rule would have assigned a
                100 percent RSF factor to a covered company's NSFR derivatives asset
                amount or a zero percent ASF factor to a covered company's NSFR
                derivatives liability amount. By netting across assets and liabilities
                in addition to counterparties and transactions, the current net value
                component would have reflected the current stable funding needs
                associated with the covered company's overall derivatives activities.
                 The agencies received a number of comments regarding this
                component, including comments on the calculation of the NSFR derivative
                asset or liability amount, the proposed RSF and ASF factors for these
                amounts, and how the proposed calculation would have accounted for
                variation margin received and provided by a covered company. The final
                rule modifies the calculation of the current net value component with
                certain adjustments to the types of variation margin that are eligible
                for netting in such component, but otherwise adopts the treatment as
                proposed. Due to the variable nature of derivative transactions, the
                interdependencies within the derivative
                [[Page 9173]]
                portfolios of covered companies, and the connection to assets and
                liabilities related to margin provided and received by a covered
                company, the final rule, like the proposed rule, assesses the funding
                risks of derivatives activities on a net basis. Under the final rule,
                the NSFR point-in-time measure generally reflects the funding provided
                by derivative transactions and associated variation margin in
                supporting a covered company's funding needs for its derivative
                portfolio. Under the final rule, the current net value component is
                calculated as follows:
                Step 1: Calculation of Derivative and QMNA Netting set Asset and
                Liability Values
                 First, a covered company determines the asset or liability value of
                each derivative transaction (not subject to a QMNA) and each QMNA
                netting set. Each derivative transaction or QMNA netting set has either
                a derivatives asset value or derivatives liability value, depending on
                (1) the derivative transaction's or QMNA netting set's asset or
                liability valuation and (2) the value of variation margin provided or
                received under the derivative transaction or QMNA netting set that is
                eligible for netting under the final rule.\192\
                ---------------------------------------------------------------------------
                 \192\ See Sec. __.107(f) of the final rule.
                ---------------------------------------------------------------------------
                 A derivatives asset value of a derivative transaction or QMNA
                netting set is the asset value after netting variation margin received
                in the form of cash or rehypothecatable level 1 liquid asset securities
                by the covered company that meets the eligibility conditions described
                in Sec. __.107(f)(1) of the final rule and discussed in section
                VII.E.2.b of this Supplementary Information section.
                 A derivatives liability value of a derivative transaction or QMNA
                netting set is the liability value after netting any variation margin
                provided by the covered company, regardless of the type of variation
                margin. The final rule also specifies that a covered company may not
                reduce its derivatives asset or liability values by initial margin
                provided to or received from counterparties.\193\
                ---------------------------------------------------------------------------
                 \193\ Initial margin includes payments provided and received by
                a covered company to provide credit protection relative to a
                derivative exposure, including independent amounts. Such payments
                should be considered as initial margin under the final rule except
                in instances where a payment, such as the return of part or all of
                an independent amount, has occurred due to the change in the value
                of a derivative exposure and the payment has been netted against the
                covered company's exposure, in which case the payment should be
                treated as variation margin.
                ---------------------------------------------------------------------------
                Step 2: Calculation of Total Derivatives Asset Amounts and Total
                Derivatives Liability Amounts
                 Second, a covered company sums its derivatives asset values, as
                calculated in step 1, to determine its total derivatives asset amount,
                and separately sums its derivatives liability values, as calculated in
                step 1, to determine its total derivatives liability amount.\194\
                ---------------------------------------------------------------------------
                 \194\ See Sec. __.107(e) of the final rule.
                ---------------------------------------------------------------------------
                Step 3: Calculation of NSFR Derivatives Asset Amount or NSFR
                Derivatives Liability Amount
                 Third, a covered company calculates its overall NSFR derivatives
                asset amount or NSFR derivatives liability amount by calculating the
                difference between its total derivatives asset amount and its total
                derivatives liability amount, each as calculated in step 2.\195\ If a
                covered company's total derivatives asset amount exceeds its total
                derivatives liability amount, the covered company would have an NSFR
                derivatives asset amount. Conversely, if a covered company's total
                derivatives liability amount exceeds the total derivatives asset
                amount, the covered company would have an NSFR derivatives liability
                amount. The NSFR derivatives asset or NSFR derivatives liability amount
                represents a covered company's overall derivatives activities on a net
                basis.
                ---------------------------------------------------------------------------
                 \195\ See Sec. __.107(d) of the final rule.
                ---------------------------------------------------------------------------
                Step 4: Application of RSF or ASF Factors to the NSFR Derivatives Asset
                Amount or NSFR Derivatives Liability Amount
                 Fourth, and finally, the final rule assigns a 100 percent RSF
                factor to a covered company's NSFR derivatives asset amount or a zero
                percent ASF factor to a covered company's NSFR derivatives liability
                amount. \196\
                ---------------------------------------------------------------------------
                 \196\ See Sec. Sec. __.107(b) and (c) of the final rule.
                ---------------------------------------------------------------------------
                a) Comments Regarding NSFR Derivatives Asset Amount and NSFR
                Derivatives Liability Amount
                 A number of commenters recommended that the approach for
                calculating the NSFR derivatives asset amount or NSFR derivatives
                liability amount should be based on the remaining maturity of a covered
                company's derivative transactions or netting sets, which commenters
                asserted would be more consistent with the proposed rule's
                consideration of tenor for assigning an RSF factor for certain other
                assets. Moreover, commenters asserted that short-dated derivatives do
                not require as much long-term funding as long-dated derivatives because
                a covered company could generally expect to allow its short-dated
                derivative transactions to mature within the NSFR's one-year horizon,
                there are generally no market or client expectations that firms would
                roll over derivative transactions, and the agencies did not provide
                empirical evidence suggesting otherwise. For example, commenters
                suggested reducing the RSF factor for assets based on individual
                derivative transactions with a remaining maturity of less than one
                year, with a further reduction for asset values based on individual
                derivative transactions with a remaining maturity of six months or
                less. Some commenters suggested that the agencies should rely on other
                regulatory measures to determine the remaining maturity of derivative
                netting sets, such as the calculation of maturity for derivative
                netting sets under the internal models methodology for counterparty
                credit risk under the agencies' advanced approaches risk-based capital
                rule.\197\ As an alternative to incorporating tenor considerations to
                determine a covered company's derivatives asset amount, one commenter
                suggested that the final rule assign reduced RSF factors for an asset
                purchased by a covered company as a hedge to a derivative transaction
                based on the remaining maturity of the derivative it is meant to hedge.
                ---------------------------------------------------------------------------
                 \197\ See 12 CFR 3.132(d)(4) (OCC); 12 CFR 217.132(d)(4)
                (Board); 12 CFR 324.132(d)(4) (FDIC).
                ---------------------------------------------------------------------------
                 The agencies are not adopting in the final rule a more granular
                approach to the calculation of the NSFR derivatives asset amount and
                are instead adopting the approach under the proposed rule. The current
                net value component is an operationally simple measure of the funding
                needs associated with a covered company's aggregate derivatives
                portfolio. Relative to other approaches, such as the more granular
                approaches suggested by commenters that would take into account the
                remaining maturity of certain derivative transactions or hedging
                transactions, the final rule's approach allows for a consistent and
                comparable measure of net derivative exposures across covered
                companies. Further, while a more complex approach based on a covered
                company's internal models methodology as suggested by commenters may be
                appropriate in other contexts, such an approach would be contrary to
                the NSFR's standardized calculation of a relatively simple measure of
                the risks raised by a covered company's derivative positions. Although
                this simplified approach may overstate the funding risk of certain
                short-maturity derivative assets, it may
                [[Page 9174]]
                also understate the funding risk of certain short-maturity derivative
                liabilities. As described above, the current net value component is
                arrived at through a series of netting procedures to determine the NSFR
                derivatives asset amount. Derivative asset exposures to a counterparty
                with varying maturities may be offset by derivative liabilities within
                a netting set. Additionally, total derivative assets are netted with
                total derivative liabilities. Given the inclusion of many different
                transactions in the calculation, the remaining maturity of the
                resulting NSFR derivatives asset amount or NSFR derivatives liability
                amount to which the RSF or ASF factor is applied would not be intuitive
                or meaningful for the NSFR's one-year time horizon and estimating its
                effective maturity would require complex calculations. Under the final
                rule's approach, a covered company's current net value component can be
                reduced by the value of derivative liabilities of any maturity,
                including short-dated positions. This simplified approach should serve
                as a reasonable and balanced approximation of the current stable
                funding needs associated with a covered company's overall derivatives
                activities.
                 In response to comments requesting the assignment of reduced RSF
                factors to assets that hedge derivative transactions, the agencies
                similarly note that the current net value component of the final rule
                is designed as a simplified approach that nets all derivative
                liabilities against derivative assets. An alternative approach that
                permits a covered company to match particular derivative assets or
                liabilities to specific hedging positions (whether derivative
                transactions or otherwise) to determine the assignment of RSF factors
                for the current net value component would introduce significant
                complexity, reduce standardization, and, depending on the approach,
                introduce an additional operational burden or increased reliance on
                covered companies' internal models. In addition, although derivative
                assets or liabilities may reduce certain risks of the specific
                positions for which they are hedging, they would still require stable
                funding to enable the covered company to continue to intermediate and
                fund its derivatives portfolio and hedging positions over a one-year
                time horizon. The final rule therefore adopts the same calculation
                structure as the proposed rule for the current net value component,
                with modifications discussed below with respect to consideration of
                variation margin received by a covered company.
                 The agencies are adopting the proposed rule's assignment of a 100
                percent RSF factor to an NSFR derivatives asset amount and a zero
                percent ASF factor to an NSFR derivatives liability amount. The
                calculation of a covered company's NSFR derivatives asset amount
                already recognizes the contribution made by variation margin and
                derivative liabilities to the funding for derivative asset positions,
                based on their treatment under the final rule. As a result, the NSFR
                derivatives asset amount represents overall derivatives activities that
                are not fully margined, based on the eligibility of variation margin
                for netting under the rule. Derivative transactions are complex
                financial instruments that can significantly and quickly fluctuate in
                value. Given these risks, the final rule, like the proposed rule, would
                require full stable funding for these net residual exposures. Moreover,
                while the final rule's current net value component recognizes the
                contribution made by derivative liabilities to the funding for
                derivative asset positions, the agencies do not consider a covered
                company's NSFR derivatives liability amount, if any, to be available
                stable funding to support assets outside of the covered company's
                derivative portfolio.
                b) Variation Margin Received and Provided
                 Under the proposed rule's calculation of a covered company's
                current net value component, a covered company would have been
                permitted to offset derivative assets only by variation margin received
                that was in the form of cash that met criteria at Sec.
                __.10(c)(4)(ii)(C)(1) through (7) of the SLR rule (SLR netting
                criteria).\198\ Additionally, under the proposed rule, all variation
                margin provided by the covered company would have been taken into
                account in determining derivatives liability values. The proposed rule
                also would have assigned RSF factors to on-balance sheet assets that
                the covered company has provided or received as variation margin under
                a derivative transaction (not subject to a QMNA netting set) or QMNA
                netting set, and an ASF factor to any liability that arises from an
                obligation to return variation margin.
                ---------------------------------------------------------------------------
                 \198\ See 12 CFR 3.10(c)(4)(ii)(C) (OCC); 12 CFR
                217.10(c)(4)(ii)(C) (Board); 12 CFR 324.10(c)(4)(ii)(C) (FDIC).
                Specifically, under the proposed rule, these conditions were: (1)
                Cash collateral received is not segregated; (2) variation margin is
                calculated and transferred on a daily basis based on mark-to-fair
                value of the derivative contract; (3) variation margin transferred
                is the full amount necessary to fully extinguish the net current
                credit exposure to the counterparty, subject to the applicable
                threshold and minimum transfer amounts; (4) variation margin is cash
                in the same currency as the settlement currency in the contract; (5)
                the derivative contract and the variation margin are governed by a
                QMNA between the counterparties to the contract, which stipulates
                that the counterparties agree to settle any payment obligations on a
                net basis, taking into account any variation margin received or
                provided; (6) variation margin is used to reduce the current credit
                exposure of the derivative contract and not the PFE (as that term is
                defined in the SLR rule); and (7) variation margin may not reduce
                net or gross credit exposure for purposes of calculating the Net-to-
                gross Ratio (as that term is defined in the SLR rule).
                ---------------------------------------------------------------------------
                (i) Criteria for Netting of Variation Margin Received or Provided
                Against Derivative Assets or Liabilities, Respectively
                 The agencies received comments regarding the proposed rule's
                criteria for variation margin received to be eligible for netting
                against derivatives asset values. Commenters argued that the proposed
                rule lacked a rationale for recognizing all forms of variation margin
                provided by a covered company against derivatives liability values,
                while only permitting derivatives asset values to be netted by
                variation margin received by a covered company if the variation margin
                met the SLR netting criteria. These commenters argued that the proposed
                treatment for netting variation margin received was overly conservative
                and would increase costs to covered companies. Commenters requested
                that the agencies allow additional forms of variation margin received
                to be netted against derivatives assets.
                Operational and Contractual Criteria for Netting Variation Margin
                Received
                 Many commenters requested that the final rule permit netting of
                additional variation margin received against the covered company's
                derivative assets because the amounts received would represent a
                funding benefit to the covered company. Commenters argued that, unlike
                the SLR rule, the NSFR rule is designed to measure the funding risk of
                a covered company's balance sheet and, therefore, should recognize the
                value of collateral received when the receipt of collateral represents
                a source of liquidity or facilitates the monetization of the underlying
                derivative asset. These commenters asserted that the final rule should
                recognize netting for any cash collateral that is received by a covered
                company, specifically criticizing the proposed criteria that variation
                margin be calculated and transferred on a daily basis or provide for
                the full extinguishment of a net current credit exposure, as the
                amounts of cash collateral received would represent a funding benefit
                to the covered company. Commenters noted that, under the proposed rule,
                a small shortfall of variation margin would result in a
                [[Page 9175]]
                derivative asset being considered as entirely un-margined, which could
                lead to volatility in the amounts allowed for netting due to periodic
                shortfalls. Certain commenters requested that, at a minimum, this
                requirement be revised so that margin disputes or operational
                shortfalls would not have an impact on the netting amount. Commenters
                also argued that, if the SLR netting criteria are retained in the final
                rule, the criteria should be changed to align with proposed changes to
                the Basel Leverage Ratio Framework to avoid the final rule being more
                be more stringent than the Basel NSFR standard, which incorporates the
                Basel Leverage Ratio Framework netting criteria by reference.\199\
                ---------------------------------------------------------------------------
                 \199\ See BCBS, Consultative Document: Revisions to the Basel
                Leverage Ratio Framework (April 2016), p. 7, Annex ] 24(iv).
                ---------------------------------------------------------------------------
                 Commenters also specifically recommended that the final rule not
                include the proposed criterion that cash variation margin received must
                be in the same currency as the settlement currency in the contract.
                These commenters noted that the LCR rule treats HQLA denominated in a
                foreign currency as a source of liquidity that can be used to meet
                near-term outflows denominated in a different currency and the swap
                margin rule permits the receipt of cash collateral denominated in a
                currency different from the settlement currency of the derivative
                transaction if the currency falls within swap margin rule's definition
                of ``major currency'' or, if the cash variation margin is not in a
                ``major currency,'' subject to an 8 percent haircut under that
                rule.\200\ Commenters expressed concern that the proposed criterion
                would discourage covered companies from accepting variation margin in
                certain currencies. These commenters argued the proposed criterion
                would make transactions more expensive if covered companies passed
                along any increased costs to counterparties by requiring them to
                provide variation margin in certain currencies.
                ---------------------------------------------------------------------------
                 \200\ See 12 CFR 45.6 (OCC); 12 CFR 237.6. (Board); 12 CFR 349.6
                (FDIC).
                ---------------------------------------------------------------------------
                 After considering these comments, the agencies have revised the
                proposal by: (1) Removing the requirement that variation margin be
                received in the full amount necessary to extinguish the net current
                credit exposure to a counterparty in order to be recognized for netting
                purposes; and (2) modifying the currency requirement. In the final
                rule, to be recognized for netting purposes, the variation margin (1)
                must not be segregated; (2) must be received in connection with a
                derivative transaction that is governed by a QMNA or other contract
                between the counterparties to the derivative transaction, which
                stipulates that the counterparties agree to settle any payment
                obligations on a net basis, taking into account any variation margin
                received or provided; (3) must be calculated and transferred on a daily
                basis on mark-to-fair value of the derivative contract; and (4) must be
                in a currency specified as an acceptable currency to settle payment
                obligations in the relevant governing contract.
                 In response to commenters, the final rule does not include the
                requirement that variation margin be received in the full amount
                necessary to extinguish the net current credit exposure to a
                counterparty in order to be recognized for netting purposes. This
                change will avoid unduly penalizing a covered company if variation
                margin the covered company has received does not fully extinguish the
                underlying derivative exposure due to short-term margin disputes or
                operational reasons and would avoid volatility in a covered company's
                funding requirement due to periodic, short-term shortfalls in variation
                margin received.\201\
                ---------------------------------------------------------------------------
                 \201\ Because the final rule does not include the proposed
                criterion regarding full extinguishment, the agencies note that
                comparisons of this criterion to the Basel Leverage Ratio Framework
                are accordingly no longer relevant.
                ---------------------------------------------------------------------------
                 The final rule includes a modified version of the proposed netting
                criterion for currency. Specifically, the final rule requires that in
                order to qualify for netting treatment, variation margin received by a
                covered company must be in a currency specified as an acceptable
                currency to settle the obligation in the relevant governing contract.
                Non-cash variation margin must be denominated in a currency specified
                as an acceptable currency. The final rule does not adopt certain
                commenters' suggestions to permit netting of variation margin only if
                it is denominated in certain major currencies, or to apply discount
                rates to account for costs of currency conversion, because such
                requirements would have significantly increased the complexity of the
                final rule. Allowing variation margin, whether cash or non-cash, that
                is not in a currency specified as an acceptable currency would also
                entail currency conversion risks and decrease the certainty about
                whether the variation margin truly netted out a derivatives exposure.
                 The final rule retains the requirement that variation margin is
                calculated on a daily basis based on the fair value of the derivative
                contract. To satisfy this criterion, derivative positions must be
                valued daily, and margin must be transferred daily when the threshold
                and daily minimum transfer amounts are satisfied according to the terms
                of the derivative contract. While variation margin exchanged less
                frequently may reduce the funding risk associated with a derivative
                position, the requirement that margin be exchanged daily makes the
                funding flows associated with derivative positions more predictable and
                manageable. Derivative positions with less frequent or episodic
                transfers of variation margin present more significant funding concerns
                than derivative positions subject to daily margin exchanges.
                Netting Variation Margin Received in the Form of Non-Cash Collateral
                 With respect to non-cash variation margin received by a covered
                company, commenters recommended that the final rule recognize variation
                margin received in the form of rehypothecatable securities. In
                particular, commenters argued that variation margin received in the
                form of rehypothecatable level 1 liquid assets represents stable
                funding to a covered company with respect to derivative assets. The
                commenters cited the treatment of level 1 liquid assets under the LCR
                rule as evidence that such securities have limited liquidity and market
                risk.
                 Other commenters recommended that all classes of rehypothecatable
                HQLA, not only rehypothecatable level 1 liquid assets, should be
                recognized for netting under Sec. __.107 of the final rule. Some
                commenters urged the agencies to permit netting of variation margin
                received in the form of rehypothecatable HQLA, subject to haircuts
                equivalent to the applicable RSF factors for such assets. One commenter
                also suggested applying the haircuts used by the Board for collateral
                accepted at the discount window to determine the amount by which such
                collateral received as variation margin would offset a derivatives
                asset. Other commenters asserted that market practices--such as
                haircuts and daily exchange of collateral--ensure that non-cash
                variation margin received would provide a sufficiently stable source of
                funding for purposes of netting against a covered company's derivative
                assets.
                 Commenters also asserted that permitting netting of non-cash
                variation margin received would better align with the treatment of
                collateral under the swap margin rule, which allows certain non-cash
                collateral to be used to meet variation margin requirements.\202\
                [[Page 9176]]
                Commenters further argued that recognition of non-cash variation margin
                received would be consistent with the proposed rule's treatment of
                variation margin provided as well as other parts of the proposed rule
                that would have assigned lower RSF factors to an asset based on receipt
                of collateral.\203\
                ---------------------------------------------------------------------------
                 \202\ See 12 CFR 45.6 (OCC); 12 CFR 237.6. (Board); 12 CFR 349.6
                (FDIC).
                 \203\ Commenters noted that short-term secured lending
                transactions with a financial sector entity secured by
                rehypothecatable level 1 liquid assets would have received a lower
                RSF factor than other secured and unsecured lending transactions
                under the proposed rule.
                ---------------------------------------------------------------------------
                 Commenters argued that the proposed treatment of non-cash variation
                margin received would have a disproportionately adverse impact on
                certain counterparties, such as mutual funds, pension funds, and
                insurance companies, which generally provide securities as variation
                margin due to their business models. Commenters stated that, in order
                to be able to provide cash variation margin to a covered company, these
                counterparties would have to engage in securities lending or repurchase
                agreements, which could increase interconnectedness and systemic risks
                within the financial system, adversely affect the liquidity of such
                securities, and reduce returns to these counterparties.\204\ Another
                commenter argued that the NSFR rule would create a substantial new
                funding requirement across all covered companies if it did not allow
                netting of non-cash variation margin received in the form of HQLA.
                ---------------------------------------------------------------------------
                 \204\ The commenters also noted that a covered company may then
                have an incentive to invest the cash variation margin received in
                securities for business and risk management reasons.
                ---------------------------------------------------------------------------
                 In a change from the proposed rule, for purposes of determining
                derivatives asset values under the final rule, a covered company may
                take into account variation margin received in the form of
                rehypothecatable level 1 liquid asset securities. Level 1 liquid asset
                securities tend to have very stable value and reliable liquidity across
                market conditions. However, other types of non-cash collateral (i.e.,
                non-level 1 liquid asset securities) are less likely to hold their
                value across market conditions, are more likely to be difficult to
                monetize, and may fluctuate in value to a greater degree. Therefore,
                the final rule does not permit a covered company to net against a
                derivatives asset variation margin received in the form of non-level 1
                liquid asset securities or other non-cash assets. Moreover, the
                contractual ability to rehypothecate the level 1 liquid asset
                securities ensures that the covered company is able to monetize the
                collateral without a triggering event, such as a default by the
                counterparty, across market conditions. Therefore, in order to be
                recognized for netting under the final rule, level 1 liquid asset
                securities received as variation margin must be rehypothecatable, in
                addition to meeting the other netting criteria that are required for
                recognition of cash variation margin.\205\
                ---------------------------------------------------------------------------
                 \205\ As noted above, for purposes of the netting criterion for
                currency, rehypothecatable level 1 liquid assets received as
                variation margin must be denominated in a currency that is specified
                as an acceptable currency to settle the obligation in the relevant
                governing contract.
                ---------------------------------------------------------------------------
                 The final rule's allowance of rehypothecatable level 1 liquid
                assets to be netted against derivatives assets will further align the
                final rule and the agencies' swap margin rule. Although the swap margin
                rule permits certain non-level l liquid assets to be used as variation
                margin for certain swap transactions, limiting the final rule's
                permissible netting to variation margin received in the form of cash
                and rehypothecatable level 1 liquid asset securities is appropriate
                because permitting a covered company to reduce its derivative assets by
                other types of non-cash collateral could increase the funding risk
                associated with its derivative portfolio and reduce its ability to
                continue to intermediate and fund its derivatives portfolio over a one-
                year horizon. The agencies also recognize that, when measured by total
                volume, a significant majority of variation margin exchanged by swap
                dealers continues to be comprised of cash, with the majority of the
                remaining variation margin comprised of government securities.\206\ As
                a result, the agencies do not expect that the final rule's allowance of
                rehypothecatable level 1 liquid assets for the purposes of netting will
                materially alter counterparties' behaviors regarding variation margin
                or result in substantial new funding requirements.
                ---------------------------------------------------------------------------
                 \206\ The swap margin rule requires variation margin exchanged
                between swap entities to be cash, which represents a significant
                portion of the swaps market. See 12 CFR 45.6(a) (OCC); 12 CFR
                237.6(a) (Board); 12 CFR 349.6(a) (FDIC). According to the ISDA's
                Margin Survey for 2019, the 20 counterparties with the largest
                outstanding notional amounts of derivative transactions reported
                that their regulatory and discretionary variation margin delivered
                is comprised of approximately 84.6 percent cash, and 13.2 percent
                government securities, and regulatory and discretionary variation
                margin received is approximately 76.5 percent cash and 14.2 percent
                government securities. See ISDA Margin Survey 2019 (September 2019),
                available at https://www.isda.org/a/1F7TE/ISDA-Margin-Survey-Year-end-2019.pdf.
                ---------------------------------------------------------------------------
                 Accordingly, Sec. __.107(f)(1)(ii) of the final rule provides that
                a covered company must calculate the derivatives asset value of the
                underlying derivative transaction or QMNA netting set by subtracting
                the value of variation margin received that is in the form of
                rehypothecatable level 1 liquid asset securities from the asset value
                of the derivative transaction or QMNA netting set.\207\
                ---------------------------------------------------------------------------
                 \207\ To the extent a covered company receives variation margin
                in excess of the asset value of the derivative transaction or QMNA
                netting set, the derivative asset value may not be reduced below
                zero, treated as a derivative liability value, or netted against
                other derivative asset values.
                ---------------------------------------------------------------------------
                (ii) RSF and ASF Factors Assigned to Assets Provided or Received as
                Variation Margin and Associated Liabilities
                 The proposed rule would have required a covered company to include
                in its RSF amount on-balance sheet assets that the covered company has
                provided (that remain on a covered company's balance sheet) and
                received as variation margin in connection with its derivative
                transactions.
                On-Balance Sheet Variation Margin Provided by a Covered Company
                 The proposed rule would have assigned an RSF factor to on-balance
                sheet variation margin \208\ provided by a covered company based on
                whether the variation margin reduces the covered company's derivatives
                liability value or whether it is excess variation margin. The agencies
                did not receive any comments regarding this proposed treatment.
                ---------------------------------------------------------------------------
                 \208\ For example, if a covered company uses securities from its
                trading inventory to satisfy a requirement to provide variation
                margin in respect to a derivative liability, these securities would
                remain on its balance sheet under GAAP. For cash variation margin
                provided in respect to a similar derivative transaction, a covered
                company's cash balance would already have been reduced, and the
                covered company would have recorded a receivable. The receivable
                amount may reflect amounts of cash variation margin previously
                provided in excess of a covered company's liability and owed by a
                counterparty.
                ---------------------------------------------------------------------------
                 As described above, under the final rule, the liability value of a
                derivative transaction or QMNA netting set, as applicable, takes into
                account any variation margin provided by a covered company. A covered
                company may have provided variation margin in an amount that reduces
                its liability to a counterparty or variation margin in excess of this
                amount. For example, the amount of a receivable or of securities
                recorded on a covered company's balance sheet may represent both an
                amount of variation margin provided that reduces a covered company's
                derivative liability, as calculated under the final rule, and excess
                variation margin provided. Consistent with the
                [[Page 9177]]
                proposed rule, if the variation margin provided by a covered company
                reduces the derivatives liability value of a derivative transaction or
                QMNA netting set, the final rule assigns a zero percent RSF factor to
                the carrying value of such variation margin. This variation margin
                already reduces the covered company's derivatives liabilities,
                resulting in a lower total derivatives liability amount that, in turn,
                offsets the covered company's total derivatives asset amount when
                calculating its NSFR derivatives asset amount. As a result, the funding
                needs for this variation margin provided is already reflected in a
                covered company's RSF amount through the current net value component.
                 To the extent a covered company provides excess variation margin--
                that is, an amount of variation margin that does not reduce the
                liability value of a derivative transaction or QMNA netting set--and
                includes the excess variation margin asset on its balance sheet, the
                final rule assigns such excess variation margin an RSF factor under
                Sec. __.106, based on the characteristics of the asset or balance
                sheet receivable associated with the asset, as applicable. Since excess
                variation margin does not reduce a covered company's derivatives
                liabilities values, the covered company's current net value component
                does not reflect these on-balance sheet assets. The final rule assigns
                RSF factors to excess variation margin on a covered company's balance
                sheet to reflect the need for stable funding for such assets as part of
                the covered company's aggregate balance sheet. The RSF factor applied
                to excess variation margin provided depends on the asset provided. If a
                covered company has provided different types of variation margin (for
                example, both cash and securities), the covered company can determine
                which variation margin should be treated as excess and apply the
                appropriate RSF factor.
                On-Balance Sheet Assets for Variation Margin Received by a Covered
                Company
                 The proposed rule would have assigned an RSF factor to all
                variation margin received by a covered company that is on the balance
                sheet of the covered company,\209\ according to the characteristics of
                each asset received. The agencies received no comments on this aspect
                of the proposal.
                ---------------------------------------------------------------------------
                 \209\ Under the final rule, RSF factors are assigned to
                variation margin received that are recorded as on-balance sheet
                assets of a covered company regardless of whether the variation
                margin received has reduced the covered company's derivative asset
                value under the rule. GAAP's treatment of variation margin assets
                received by a covered company depends on whether the variation
                margin was received in the form of cash or securities. Variation
                margin received that is eligible for netting under GAAP reduces the
                value of derivative assets under GAAP.
                ---------------------------------------------------------------------------
                 The agencies are adopting the requirement for variation margin
                received by a covered company that is on the covered company's balance
                sheet as proposed. As described above, under the final rule, the
                derivatives asset value of a derivative transaction or QMNA netting
                set, as applicable, takes into account certain variation margin
                received by a covered company. This variation margin received reduces
                the covered company's derivative assets, resulting in a lower total
                derivatives asset amount. As a result, the funding needs for this
                variation margin received is not reflected in the current net value
                component. Therefore, regardless of whether on-balance sheet variation
                margin received is eligible for netting under the current net value
                component calculation, assignment of an RSF factor to these on-balance
                sheet assets under Sec. __.106 is necessary to capture the funding
                risk associated with these assets.
                ASF Assignment for Balance Sheet Liabilities Representing the Return of
                Variation Margin Received by a Covered Company
                 The proposed rule would have assigned a zero percent ASF factor to
                any liability that arises from an obligation to return \210\ variation
                margin received by a covered company related to its derivative
                transactions. One commenter suggested that the final rule assign an ASF
                factor of greater than zero to the liability to return variation margin
                received by a covered company. The commenter argued that this change
                would be consistent with the BCBS and the International Organization of
                Securities Commission guidelines for acceptable classes of derivatives
                collateral.
                ---------------------------------------------------------------------------
                 \210\ A covered company generally will record a liability on its
                balance sheet representing its obligation to return a value of
                variation margin received.
                ---------------------------------------------------------------------------
                 As discussed in the proposed rule, given that these liabilities can
                change based on the underlying derivative transactions and remain on
                balance sheet, at most, only for the duration of the associated
                derivative transactions, they do not represent stable funding for a
                covered company. Additionally, the contribution of variation margin
                received to the covered company's funding risk is appropriately
                recognized through the final rule's calculation of the NSFR derivatives
                asset amount described above and an additional contribution to a
                covered company's ASF amount in respect to an accounting liability to
                return such assets would be duplicative. For these reasons, the final
                rule assigns a zero percent ASF factor to liabilities representing an
                obligation to return variation margin received by a covered company.
                3. Initial Margin Received by a Covered Company
                 For initial margin received by the covered company that is recorded
                as an asset on its balance sheet, the proposed rule would not have
                treated the asset received as initial margin differently from other
                balance sheet assets and would have assigned an RSF factor according to
                the characteristics of each asset received. Additionally, the proposed
                rule would have assigned a zero percent ASF factor to any liability
                that arises from an obligation to return initial margin received by a
                covered company related to its derivative transactions.\211\
                ---------------------------------------------------------------------------
                 \211\ Similar to variation margin received, a covered company
                will record a liability for its obligation to return initial margin
                and independent amounts received.
                ---------------------------------------------------------------------------
                 Some commenters argued that the final rule should recognize the
                receipt of initial margin by a covered company as a potential source of
                stable funding, especially if the covered company has the contractual
                and operational ability to re-use the collateral assets in the future,
                which commenters asserted is common market practice in the over-the-
                counter derivatives market. Commenters requested that the final rule
                more closely align the ASF treatment of liabilities for initial margin
                received with the RSF treatment of initial margin assets provided by a
                covered company, in particular with respect to initial margin received
                from a counterparty that is a commercial end-user. Some commenters
                requested that the final rule apply an ASF factor of at least 50
                percent to liabilities for initial margin received by a covered company
                and permit initial margin received to reduce the RSF amount for initial
                margin provided by a covered company in the initial margin component.
                As another approach, commenters requested that the NSFR rule permit
                initial margin assets received by a covered company that can be
                rehypothecated in the future to offset the current RSF amount derived
                from the related derivative asset, subject to haircuts on the initial
                margin assets, because such initial margin is contractually linked to
                the covered company's rights and obligations under the derivative
                transaction and is
                [[Page 9178]]
                available to the covered company for the duration of the derivative
                contract.
                 The agencies are adopting the treatment of initial margin received
                as proposed. As discussed in section V of this Supplementary
                Information section, the general design of the final rule requires a
                covered company to assess of the amount of its stable funding based on
                NSFR regulatory capital and liabilities at a point in time, and the
                adequacy of such funding based on the characteristics of assets and
                commitments. The NSFR generally does not determine current stable
                funding based on the potential future reuse of assets. Consistent with
                this approach, the derivative framework under the final rule does not
                recognize as stable funding the potential reuse at a future date of
                assets received as initial margin. Additionally, the amount of initial
                margin received by a covered company, and the liability to return such
                margin, can change based on the aggregate underlying derivative
                transactions and customer preferences, such as counterparties' demand
                for derivatives exposure, which may fluctuate over time. Moreover, the
                extent to which the initial margin assets received are available to a
                covered company may also fluctuate. Initial margin received by a
                covered company, including initial margin subject to the swap margin
                rule, often is subject to segregation requirements that arise from
                regulatory or contractual requirements, which limits the ability of the
                covered company to re-use initial margin assets. Even absent a
                segregation requirement, a covered company may voluntarily agree to
                segregate the initial margin received at the request of its
                counterparties or novate the position from the covered company to
                another counterparty at some point in the future in order to preserve
                franchise value and avoid negative signaling to market participants,
                making unsegregated initial margin also an unstable source of funding.
                This is true also in those cases where a covered company currently has
                the ability to re-use the initial margin assets that it receives, as
                the initial margin is only available to the covered company at most for
                the duration of the derivative transaction. Consistent with the general
                treatment of balance sheet assets, the final rule applies an RSF factor
                to a covered company's on-balance sheet assets received as initial
                margin. These assets result from the current level of activity with
                derivative counterparties and likely will be held on balance sheet for
                the duration of the associated derivative transactions or counterparty
                relationships. It is therefore appropriate to assign RSF factors to
                these assets based on their liquidity characteristics.
                 With respect to the liability to return initial margin received,
                this liability is subject to change based on a covered company's
                counterparties and their derivative positions and remains, at most,
                only for the duration of the associated derivative transactions, such
                that it does not represent stable funding for a covered company. In
                response to commenters' request that initial margin received be
                permitted to reduce the RSF amount for initial margin provided, the
                agencies note that unlike variation margin that is exchanged to account
                for changes in the current valuations of a derivative transaction or
                QMNA netting set, initial margin received from counterparties is
                intended to cover a covered company's potential losses in connection
                with a counterparty's default (e.g., the cost to close out or replace
                the transaction with a defaulted counterparty) and therefore would not
                factor into the measure of the current value of a covered company's
                derivatives portfolio.
                 For these reasons, the final rule assigns a zero percent ASF factor
                to any liability representing an obligation to return initial margin
                received and assigns an RSF factor under Sec. __.106 to an asset
                received as initial margin that is on the covered company's balance
                sheet based on the characteristics of the asset.
                4. Customer Cleared Derivative Transactions
                 Under the proposed rule, the treatment of a covered company's
                cleared derivative transaction would have depended on whether the
                covered company was acting as an agent or as a principal. A covered
                company's NSFR derivatives asset amount or NSFR derivatives liability
                amount would have taken into account the asset or liability values of
                derivative transactions between a CCP and a covered company, acting as
                principal, where the covered company has entered into an offsetting
                transaction (commonly known as a ``back-to-back'' transaction) with a
                customer. Because a covered company would have obligations as a
                principal under both derivative transactions comprising the back-to-
                back transaction, any asset or liability values arising from these
                transactions, or any variation margin provided or received in
                connection with these transactions, would have been taken into account
                in the covered company's calculations of its NSFR derivatives asset or
                liability amount.
                 If a covered company was a clearing member of a CCP, it would not
                have included in its NSFR derivatives asset amount or NSFR derivatives
                liability amount the value of a cleared derivative transaction that the
                covered company, acting as agent, has submitted to the CCP on behalf of
                a customer, including when the covered company has provided a guarantee
                to the CCP for the performance of the customer. As the proposed rule
                explained, these cleared derivative transactions are assets or
                liabilities of a covered company's customer and not the covered
                company. Similarly, a covered company would not have included in its
                calculations under Sec. __.107 of the proposed rule variation margin
                provided or received in connection with customer cleared derivative
                transactions.
                 To the extent a covered company includes on its balance sheet under
                GAAP a derivative asset or liability value (as opposed to a separate
                receivable or payable in connection with a derivative transaction)
                associated with a customer cleared derivative transaction, the
                derivative transaction would have constituted a derivative transaction
                of the covered company under the proposed rule.\212\ If a covered
                company includes on its balance sheet an asset associated with a
                guarantee of a customer's performance on a cleared derivative
                transaction and that balance sheet entry is substantially equivalent to
                a derivative contract, the asset should be treated as a derivative.
                ---------------------------------------------------------------------------
                 \212\ The proposed rule requested comment regarding whether the
                value of a cleared derivative transaction that a covered company,
                acting as agent, has submitted to a CCP on behalf of a customer of
                the covered company would be included on the covered company's
                balance sheet under any circumstances other than in connection with
                a default by the customer. Commenters did not identify any such
                circumstances.
                ---------------------------------------------------------------------------
                 To the extent a covered company has an asset or liability on its
                balance sheet associated with a customer derivative transaction that is
                not a derivative asset or liability--for example, if a covered company
                has extended credit on behalf of a customer to cover a variation margin
                payment or a covered company holds customer funds relating to
                derivative transactions in a customer protection segregated account--
                such asset or liability of the covered company would have been assigned
                an RSF or ASF factor under Sec. Sec. __.106 or __.104 of the proposed
                rule, respectively. Accordingly, to the extent a covered company's
                balance sheet includes a receivable asset owed by a CCP or payable
                liability owed to a CCP in connection with customer receipts and
                payments under derivative
                [[Page 9179]]
                transactions, this asset or liability would not have constituted a
                derivative asset or liability of the covered company and would not have
                been included in the covered company's calculations under Sec. __.107
                of the proposed rule.
                 Commenters supported the proposed exclusion from a covered
                company's NSFR for a cleared derivative transaction that the covered
                company, acting as agent, has submitted to a CCP on behalf of a
                customer, stating that this treatment appropriately reflected the
                limited funding risks of these activities. Some commenters suggested
                that certain back-to-back derivative transactions with a customer and a
                CCP also should be excluded from a covered company's NSFR derivatives
                asset or liability amount because they present minimal funding risks
                that are similar to cleared derivative transactions where the covered
                company is acting as an agent. Specifically, commenters highlighted as
                low risk a derivative transaction where the covered company is not
                contractually required to make a payment to the customer unless and
                until the covered company has received a corresponding payment from the
                CCP. These commenters noted that in both a back-to-back arrangement and
                a cleared derivative transaction submitted by a covered company as
                agent with a guarantee of the customer's performance, the covered
                company faces the same risk upon customer default of being required to
                make payments to the CCP without receiving a corresponding payment from
                the customer.
                 One commenter asked how the proposed rule would treat initial
                margin that a covered company receives from customers in excess of
                amounts provided to the CCP in connection with a cleared derivative
                transaction. The commenter asked how the proposed rule would treat a
                customer's initial margin that a covered company maintains in
                segregated accounts and invests in accordance with applicable rules,
                regulations and agreements with the customer. The commenter also
                asserted that the customer's initial margin functions as funding for
                the resulting assets.
                 Under the final rule, and consistent with the proposal, a covered
                company's NSFR derivatives asset amount or NSFR derivatives liability
                amount does not include the value of a cleared derivative transaction
                that the covered company, acting as agent, has submitted to a CCP on
                behalf of a customer. This includes instances when the covered company,
                acting as agent, has provided a guarantee to the CCP for the
                performance of the customer, as long as the cleared derivative
                transaction does not appear on a covered company's balance sheet.
                Additionally, consistent with GAAP, the final rule requires a covered
                company to include in its NSFR the derivative asset or liability
                amounts related to back-to-back derivative transactions that the
                covered company has executed with a CCP and a customer of the covered
                company as proposed.
                 As discussed in section V of this Supplementary Information
                section, the NSFR rule is a standardized metric that generally relies
                on the assets and liabilities on a covered company's balance sheet. The
                treatments of submitted agency transactions and executed back-to-back
                derivative transactions are consistent with the final rule's reliance
                of on-balance sheet items. Since exposures due to back-to-back
                derivative transactions are recorded on the balance sheet of a covered
                company, the final rule's treatment for these exposures will ease
                administration of the rule by aligning with the balance sheet
                treatment, consistent with the design of the NSFR. The agencies note
                that in the case of back-to-back derivative transactions executed with
                a customer and a CCP where the covered company maintains equal
                exposures to each counterparty (which reflects the amount of variation
                margin posted and collected), the covered company's derivative asset
                and liability positions facing the customer and CCP should generally
                offset within the covered company's NSFR derivatives asset or liability
                amount, reflecting a neutral stable funding requirement. However, by
                taking this approach, the final rule reflects the incremental funding
                risk that is present when these exposures are not fully offset, such as
                in the case where there are differences in the amount of eligible
                variation margin received and collected. In addition, these net
                exposures are not excluded from the final rule as certain funding risks
                may still be present. For example, as commenters noted, a covered
                company in a back-to-back arrangement may be required to make payments
                to the CCP even if the covered company's customer has failed to make a
                corresponding payment to the covered company. Initial margin received
                by a covered company from customers in excess of amounts provided to a
                CCP in connection with a cleared derivative transaction, including
                initial margin maintained in segregated accounts and other permitted
                assets, is treated the same as other initial margin received by a
                covered company, as described in section VII.E.3 of this Supplementary
                Information section. Additional RSF amounts could also result from
                initial margin provided by a covered company to the CCP and the
                derivatives future value component, each as described below.
                5. Initial Margin Component
                 The proposed derivative framework included an initial margin
                component that would address the treatment of assets contributed to a
                CCP's mutualized loss-sharing arrangement and initial margin provided
                by a covered company in respect to its derivative transactions. Under
                the proposed rule, a covered company's contribution to a CCP's
                mutualized loss-sharing arrangement would have been assigned an RSF
                factor of 85 percent. Similarly, under the proposed rule, initial
                margin provided by a covered company for derivative transactions
                (except where the covered company acts as an agent for a customer's
                cleared derivative transaction, as described below) would have been
                assigned an RSF factor equal to the higher of 85 percent or the RSF
                factor applicable under Sec. __.106 to each asset comprising the
                initial margin provided. The proposed rule would have assigned an 85
                percent RSF factor to the fair value of a covered company's
                contributions to a CCP's mutualized loss-sharing arrangement or initial
                margin provided by a covered company regardless of whether the
                contribution or initial margin is included on the covered company's
                balance sheet. This treatment reflects the fact that a covered company
                would have faced the same funding needs and risks as a result of having
                to provide these assets, regardless of their balance sheet treatment
                under GAAP. Under the proposed rule, to the extent a covered company
                included on its balance sheet a receivable for its contributions to a
                CCP's mutualized loss-sharing arrangement or for initial margin
                provided for derivative transactions, the covered company would have
                assigned an RSF factor to the fair value of the asset, but not the
                receivable, in order to avoid double-counting.
                 Under the proposed rule, a covered company would not have assigned
                an RSF factor to initial margin provided by the covered company when it
                is acting as an agent for a customer's cleared derivative transaction
                and the covered company does not guarantee return of the initial margin
                to the customer. The preamble to the proposal noted that a covered
                company would have had limited liquidity risk for such initial margin
                because, following certain timing delays, the customer would have been
                obligated to fund the initial margin for the duration of the
                transaction.
                [[Page 9180]]
                However, to the extent a covered company would have included such
                initial margin on its balance sheet, the proposed rule would have
                required the covered company to assign an RSF factor to the resulting
                initial margin asset under Sec. __.106 of the proposed rule and an ASF
                factor to the corresponding liability under Sec. __.104 of the
                proposed rule, similar to the treatment of other on-balance sheet
                items.
                 One commenter asserted that the agencies should not adopt the 85
                percent RSF factor because the process by which this percentage was
                developed for the Basel NSFR standard did not include public input or
                publication of supporting evidence by the BCBS. Commenters also
                requested that a lower RSF factor be assigned to a covered company's
                contributions to a CCP's mutualized loss-sharing arrangement (e.g., one
                commenter requested an RSF factor of 50 percent, other commenters
                recommended assigning the RSF factor that applies to operational
                deposits held at a financial sector entity). To support a lower RSF
                factor, one commenter asserted that the amount of such contributions
                tend to exhibit low variability over time and are typically redeemable
                within a three-month time horizon. The commenter also asserted that
                there is a low probability of a CCP drawing on the funds available in
                the mutualized loss-sharing account, which are used in very rare cases
                of a clearing member default and only after exhaustion of the defaulter
                clearing member's resources and the CCP's first loss contributions to
                the mutualized loss-sharing resources. Finally, the commenter argued
                that a lower RSF amount could be more appropriately set by assigning
                RSF factors directly to the underlying assets contributed to a CCP's
                mutualized loss-sharing arrangement, given the low probability that the
                assets will be used by a CCP.
                 With respect to the treatment of initial margin provided by a
                covered company for derivative transactions, the agencies received
                several comments recommending that such initial margin should be
                assigned an RSF factor of less than 85 percent and also that the RSF
                factor should be assigned based on the remaining contractual maturity
                of the relevant derivative transaction or QMNA netting set. Commenters
                argued that such treatment is warranted because a covered company may
                choose to not re-enter into a short-dated derivative transaction
                following its maturity if the covered company has liquidity needs at
                that point and a covered company will be able to liquidate the initial
                margin provided for the transaction in a short period of time after the
                contract matures.
                 One commenter argued that initial margin provided to a CCP for
                cleared derivative transactions should be assigned a lower RSF factor
                than initial margin provided for non-cleared derivative transactions
                because cleared derivatives tend to be more standardized and liquid,
                and turn over more frequently, than non-cleared derivatives. The
                commenter asserted that a covered company could choose to reduce its
                cleared derivative activities with a CCP in the future and realize the
                return of initial margin provided to a CCP within a six-month time
                horizon. Therefore, the commenter argued, the final rule should assign
                an RSF factor of 50 percent to initial margin provided for cleared
                derivative transactions, similar to the RSF factor assigned to secured
                lending transactions with a financial sector entity that matures in six
                months or more but less than one year. The commenter also argued that
                providing favorable treatment for initial margin provided for cleared
                derivative transactions would be consistent with the CFTC's margin
                requirements for derivatives clearing organizations, which assume short
                liquidation periods,\213\ and the agencies' swap margin rule.\214\
                ---------------------------------------------------------------------------
                 \213\ See 17 CFR 39.13(g).
                 \214\ See supra note 188.
                ---------------------------------------------------------------------------
                 One commenter supported the proposed rule's treatment of initial
                margin provided by a covered company when the covered company is acting
                as an agent for the client and does not guarantee the performance of
                the CCP to the client. This commenter stated that the proposed rule
                appropriately reflects the central clearing market structure and noted
                that the majority of initial margin that a covered company receives
                from a client for the client's cleared derivative transactions is
                passed through to the CCP.
                 After reviewing these comments, the agencies are adopting the
                treatment of assets provided to a CCP's mutualized loss sharing
                arrangement and initial margin provided by a covered company for
                derivative transactions as proposed.
                 The final rule assesses a covered company's funding profile for its
                derivative activities on an aggregate net basis based on its current
                contractual positions. In addition, the final rule generally does not
                consider the range of potential activities that covered companies or
                counterparties may take in the future.\215\ For example, the
                standardized initial margin component is applied consistently to all
                covered companies and does not take into account an individual covered
                company's ability to adjust its level of cleared derivative activities
                or the probability of individual CCP's usage of a covered company's
                contributions to a default fund upon a member default. Additionally, an
                individual covered company may face challenges in meaningfully reducing
                its derivative exposures and initial margin requirements without
                impacting its customer relationships and intermediation. Moreover,
                during periods of market volatility, initial margin requirements may
                increase, which would increase a covered company's funding needs
                related to initial margin assets.
                ---------------------------------------------------------------------------
                 \215\ See section V of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 The final rule does not incorporate more granular assignments of
                RSF factors to initial margin provided by a covered company based on
                the maturity of the underlying derivative transactions. As discussed
                above, the final rule's treatment of initial margin provided is
                consistent with the overall approach taken in the rule to utilize an
                aggregate portfolio framework with respect to derivative transactions
                that does not take into account the scheduled maturity of individual
                transactions. For the reasons discussed, while there may be some
                benefits to a more granular approach, the agencies have determined that
                a change from the proposal is not justified because such an approach
                would unnecessarily increase the complexity of the measure and require
                reliance on covered companies' internal modeling, which is contrary to
                the NSFR's design as a standardized measure.
                 Specifically, the final rule assigns an RSF factor of 85 percent to
                the fair value of assets provided to a CCP's mutualized loss sharing
                arrangement and an RSF factor of at least 85 percent to the fair value
                of initial margin provided for derivatives transactions. The
                application of these RSF factors is based on the assumption that a
                covered company generally must maintain most of its CCP mutualized loss
                sharing arrangement contributions or initial margin provided in order
                to continue to support its customers and intermediate in derivative
                markets. For similar reasons, the treatment applies regardless of
                whether the contribution or initial margin is included on the covered
                company's balance sheet. The final rule's assignment of an 85 percent
                RSF factor reflects a standardized assumption across all derivative
                transactions based on an assumption of derivatives activities at an
                aggregate level. In addition, the standardized
                [[Page 9181]]
                minimum 85 percent RSF factor reflects the difficulty for covered
                companies generally to significantly reduce the aggregate level of
                derivative activity (both principal and client-driven behavior) without
                damaging their customer relationships or reputations as intermediaries.
                 Another commenter asked that the agencies clarify whether initial
                margin provided by a covered company in connection with cleared
                derivative transactions of a customer that have a remaining maturity of
                one year or more would be assigned an RSF factor of 100 percent,
                similar to the proposed treatment of assets encumbered for a period of
                one year or longer.
                 Like the proposed rule, Sec. __.107 of the final rule does not
                assign an RSF factor to initial margin provided by a covered company
                acting as agent for a customer's cleared derivative transactions where
                the covered company does not guarantee the return of the initial margin
                to the customer. To the extent a covered company includes on its
                balance sheet any such initial margin provided, this initial margin
                would instead be assigned an RSF factor pursuant to Sec. __.106 of the
                final rule and any corresponding liability would be assigned an ASF
                factor pursuant to Sec. __.104.
                6. Future Value Component
                 In addition to the current net value component, which requires a
                covered company to maintain stable funding relative to its net current
                derivatives position as of the calculation date, the proposed rule
                would have required a covered company to maintain stable funding to
                support potential changes in the valuation of its derivative
                transactions over the NSFR's one-year horizon (future value component).
                Specifically, this future value component would have addressed the risk
                that the covered company may need to provide or return margin or make
                settlement payments to its counterparties as the net value of its
                derivatives portfolio fluctuates.
                 Under the proposed rule, the future value component would have
                equaled 20 percent of the sum of a covered company's gross derivative
                values that are liabilities (i.e., liabilities related to each of its
                derivative transactions not subject to a QMNA and each of its QMNA
                netting sets that are liabilities prior to consideration of margin,
                hereinafter gross derivative liabilities), multiplied by an RSF factor
                of 100 percent. Gross derivative liabilities in this context would have
                referred to derivative liabilities calculated without recognition of
                variation margin or settlement payments provided or received based on
                changes in the value of the covered company's derivative transactions.
                For example, if the value of a covered company's derivative transaction
                moves from $0 to a liability position of -$10, the covered company's
                gross derivative liability value would be $10, even if the covered
                company has provided $10 of variation margin to cover the change in
                value.
                 While some commenters supported addressing funding risk associated
                with changes in the value of derivative transactions in the final rule,
                other commenters asserted that this component should not be included in
                the final rule because the NSFR, as a business-as-usual and point-in-
                time funding metric, should not take into account funding needs that
                could result from potential future market changes. One commenter argued
                that the future value component was unnecessary because the LCR rule
                already adequately addresses the risks associated with potential
                valuation changes in a covered company's derivatives portfolio.
                 The agencies also received a number of comments on the specific
                design and calibration of the proposed future value component. Many of
                these commenters asserted that the proposed calibration was overly
                conservative and was not sufficiently supported by empirical evidence.
                Commenters also argued that gross derivative liabilities are a poor
                indicator of a covered company's potential contingent funding
                obligation. The value of a covered company's derivatives portfolio may
                fluctuate over time (e.g., due to a covered company having to provide
                or return margin to its counterparties) in a way that results in a
                material increase to its funding requirements over the one-year time
                horizon. It is necessary to address the contingent funding risk
                associated with derivatives in the final rule in order to adequately
                ensure the resilience of a covered company's funding profile and to
                address a funding need not picked up by the current net value
                component. Covered companies require sufficient stable funding to
                support margin flows in a range of market conditions, including a
                stress event.\216\
                ---------------------------------------------------------------------------
                 \216\ For example, during the 2007-2009 financial crisis, some
                covered companies experienced volatility in their derivatives
                portfolios, which led to margin payments that were a significant
                drain on liquidity and contributed to systemic instability. Since
                the 2007-2009 crisis, banking organizations continue to experience
                funding needs in their net margin flows over time, with the size and
                impact of the funding needs varying across covered companies
                depending on the size and composition of their derivatives
                portfolios.
                ---------------------------------------------------------------------------
                 The current net value component relies on a uniform netting
                treatment that assumes payment inflows and outflows related to
                derivatives assets and liabilities would be perfectly offsetting across
                QMNAs, counterparties, derivative types, and maturities. On its own,
                this assumption generally benefits covered companies by resulting in a
                lower funding requirement under the NSFR than might occur in practice.
                In addition, even if a covered company's payment inflows and outflows
                under its derivatives are matched, as the first component assumes, the
                covered company's margin inflows and outflows may not be. For example,
                even where a covered company has entered into offsetting positions in
                terms of market risk, its margin rights and obligations (based on
                changes in the value of its derivatives, contractual triggers such as
                changes in the covered company's financial condition, or business
                considerations such as customer requests) may differ. This could occur
                if it faces different types of counterparties, such as a commercial
                end-user on one side and a dealer on the other side, for each
                offsetting position. For covered companies with substantial derivatives
                activities, margin flows can be a significant source of liquidity risk.
                 The final rule generally retains the proposed rule's treatment of
                derivative portfolio potential valuation changes but reduces the
                weighting of this component from 20 percent to 5 percent of gross
                derivative liabilities. This revision should reduce the potentially
                pro-cyclical effects raised by commenters in response to the proposed
                rule's calibration at 20 percent. To the extent the proposed rule's
                requirement could have disincentivized covered companies from
                maintaining longer-dated derivative transactions used by clients for
                hedging purposes, this change also should reduce such effects. This
                calibration also ensures covered companies maintain at least a minimum
                amount of stable funding for funding risks associated with potential
                valuation changes in derivatives portfolios. In addition, the agencies
                expect the final rule's reduction of the calibration from 20 percent to
                5 percent should lessen the incentive for a covered company to reduce
                its NSFR funding requirement without meaningfully changing its risk
                profile by closing out derivative transactions with large gross
                derivative liabilities and re-entering into equivalent transactions
                with zero liability exposure. The agencies will monitor this risk
                through supervisory processes and evaluate the appropriateness of the 5
                percent calibration as more data, reflective of a
                [[Page 9182]]
                wider variety of economic conditions, become available.\217\
                ---------------------------------------------------------------------------
                 \217\ Any change to the 5 percent calibration would be subject
                to the agencies' notice and comment rulemaking process.
                ---------------------------------------------------------------------------
                 The final rule relies on gross derivative liabilities as the basis
                for measuring a covered company's funding risks associated with
                derivatives portfolio potential valuation changes. Gross derivative
                liabilities tend to positively correlate with cumulative losses
                realized over the life of outstanding contracts. Thus, large amounts of
                gross derivative liabilities are likely to be positively correlated
                with derivatives portfolios characterized by higher average volatility
                and collateral and settlement flows. In addition, although gross
                derivative liabilities may include transactions that are not currently
                subject to the exchange of variation margin, the agencies note that
                these transactions may become subject to margin calls or early
                repayment due to contractual triggers or client requests, for example
                in response to a change in the covered company's financial condition.
                 Consistent with the proposed rule, the final rule requires a
                covered company to treat settlement payments based on changes in the
                fair value of derivative transactions equivalently to variation margin
                for purposes of calculating the covered company's gross derivative
                liabilities. While these settlement payments fully extinguish a covered
                company's current derivative exposure from an accounting perspective,
                they do not reduce a derivative transaction's funding risk related to
                potential valuation changes. Under both the collateralized-to-market
                and settled-to-market approaches, a covered company may be required to
                fund equivalent flows of margin or settlement payments based on changes
                in the value of its derivative transactions. Permitting settlement
                payments to reduce the gross derivatives liability measure could
                inappropriately incentivize covered companies to re-characterize
                variation margin as settlement payments in order to evade the stable
                funding requirement for potential derivative valuation changes.
                Therefore, derivative liabilities that have been extinguished from the
                balance sheet by such settlement payments must still be included in the
                covered company's calculation of gross derivative liabilities for the
                purposes of this component. This requirement also should reduce
                opportunities for evasion.\218\
                ---------------------------------------------------------------------------
                 \218\ As noted above, some commenters argued that the agencies
                should not include the proposed treatment of variation margin
                exchanged characterized as settlement payments because the
                commenters believed such an approach would be more stringent than
                the Basel NSFR standard. While it is possible that covered companies
                could be subject to a more stringent requirement with respect to
                this component of the final rule than banking organizations in
                foreign jurisdictions that adopt a different approach, the final
                rule's treatment of settlement payments is necessary to prevent
                evasion of the final rule's requirements.
                ---------------------------------------------------------------------------
                 The agencies also considered a range of alternative approaches for
                addressing funding risks associated with derivatives portfolio
                potential valuation changes, including alternative approaches suggested
                by commenters. The agencies, however, have determined to adopt this
                component as proposed because the benefits of a simpler measure with
                less operational costs outweighs its shortcomings. Although many of the
                alternatives could have increased this component's risk sensitivity,
                they also would have introduced increased complexity and pro-
                cyclicality. In addition, the suggested alternative of applying the 20
                percent calculation as a floor to the overall NSFR derivatives RSF
                amount would not reflect the funding risks arising from the other
                components of the NSFR derivatives treatment.
                7. Comments on the Effect on Capital Markets and Commercial End Users
                 The agencies received a number of comments arguing that the
                proposed rule would increase the cost to covered companies of engaging
                in derivative transactions, which commenters argued would harm capital
                markets and the economy. Some of these commenters asserted that covered
                companies would pass on increased costs to derivatives end-users,
                making it more expensive for commercial firms to hedge business risks.
                 The final rule promotes stable funding by a covered company of
                derivatives activities and restricts a covered company's ability to
                fund such activities with unstable liabilities in a manner that could
                generate undue risks to the safety and soundness of the covered company
                or impose costs on U.S. businesses, consumers, and taxpayers in the
                event of a disruption to the U.S. financial system. In addition, in
                comparison to the proposed rule, certain modifications included in the
                final rule will reduce the RSF amount in connection with derivative
                transactions, thereby also reducing any incremental funding cost
                increases for covered companies that would have resulted from the
                proposed requirement. Section X of this Supplementary Information
                section further discusses the expected impacts of the rule, including
                potential benefits and costs for covered companies and other market
                participants.
                8. Derivatives RSF Amount Calculation
                 Under the final rule, a covered company must sum the required
                stable funding amounts calculated under Sec. __.107 to determine the
                covered company's derivatives RSF amount. A covered company's
                derivatives RSF amount includes the following components:
                 (1) The RSF amount for the current net value component, which is
                equal to the covered company's NSFR derivatives asset amount,
                multiplied by an RSF of 100 percent, as described in section VII.E.2 of
                this Supplementary Information section;
                 (2) The RSF amount for non-excess variation margin provided by the
                covered company, which, as described in section VII.E.2 of this
                Supplementary Information section, equals the carrying value of
                variation margin provided by the covered company that reduces the
                covered company's derivatives liability value of the relevant QMNA
                netting set or derivative transaction not subject to a QMNA netting
                set, multiplied by an RSF factor of zero percent;
                 (3) The RSF amount for excess variation margin provided by the
                covered company, which as described in section VII.E.2 of this
                Supplementary Information section, equals the sum of the carrying
                values of each excess variation margin asset provided by the covered
                company, multiplied by the RSF factor assigned to the asset pursuant to
                Sec. __.106;
                 (4) The RSF amount for variation margin received, which comprises
                the total of the carrying value of variation margin received by the
                covered company, multiplied by the RSF factor assigned to each asset
                comprising the variation margin pursuant to Sec. __.106, as described
                in section VII.E.2 of this Supplementary Information section; and
                 (5) The RSF amount for potential future valuation changes of the
                covered company's derivatives portfolio, which, as described in section
                VII.E.6 of this Supplementary Information section, equals 5 percent of
                the sum of the covered company's gross derivatives liabilities,
                calculated as if no variation margin had been exchanged and no
                settlement payments had been made based on changes in the values of the
                derivative transactions, multiplied by an RSF factor of 100 percent;
                 (6) The fair value of a covered company's contributions to CCP
                mutualized loss sharing arrangements, multiplied by an RSF factor of 85
                percent, as described in section VII.E.5
                [[Page 9183]]
                of this Supplementary Information section.
                 (7) The fair value of initial margin provided by the covered
                company, multiplied by the higher of an RSF factor of 85 percent and
                the RSF factor assigned to the initial margin asset pursuant to Sec.
                __.106, as described in section VII.E.5 of this Supplementary
                Information section.
                9. Derivatives RSF Amount Numerical Example
                 The following is a numerical example illustrating the calculation
                of a covered company's derivatives RSF amount under the final rule.
                Table 5 sets forth the facts of the example, which assumes that: (1)
                Each transaction is covered by a QMNA between the covered company and
                each counterparty; (2) any cash and U.S. Treasury securities received
                as variation margin by the covered company meet the conditions
                specified in Sec. __.107(f)(1); (3) variation margin provided by the
                covered company is not included on the covered company's balance sheet;
                (4) the covered company has provided U.S. Treasuries as initial margin
                to its counterparties; and (5) the derivative transactions are not
                cleared through a CCP.
                 Table 5--Derivatives RSF Amount Numerical Example
                ----------------------------------------------------------------------------------------------------------------
                 Derivatives RSF amount numerical example
                 --------------------------------------------------------------------
                 Asset (liability)
                 value for the Variation margin provided Initial margin
                 covered company, (received) by the covered provided by the
                 prior to netting company covered company
                 variation margin
                ----------------------------------------------------------------------------------------------------------------
                 Counterparty A:
                 Derivative 1A.......................... 10 (1) cash..................... 2
                 Derivative 2A.......................... (2) (1) U.S. Treasury securities.
                 Counterparty B:
                 Derivative 1B.......................... (10) 3 cash....................... 1
                 Derivative 2B.......................... 5
                 Counterparty C:
                 Derivative 1C.......................... (2) 0............................ 0
                ----------------------------------------------------------------------------------------------------------------
                 Calculation of derivatives assets and liabilities.
                 (1) The derivatives asset value for counterparty A = (10-2)-2 = 6.
                 (2) The derivatives liability value for counterparty B = (10-5)-3 =
                2.
                 (3) The derivatives liability value for counterparty C = 2.
                 Calculation of total derivatives asset and liability amounts.
                 (1) The covered company's total derivatives asset amount = 6.
                 (2) The covered company's total derivatives liability amount = 2 +
                2 = 4.
                 Calculation of NSFR derivatives asset or liability amount.
                 (1) The covered company's NSFR derivatives asset amount = max (0,
                6-4) = 2.
                 (2) The covered company's NSFR derivatives liability amount = max
                (0, 4-6) = 0.
                 Required stable funding relating to derivative transactions.
                 The covered company's derivatives RSF amount is equal to the sum of
                the following:
                 (1) NSFR derivatives asset amount x 100% = 2 x 1.0 = 2;
                 (2) Non-excess variation margin provided x 0% = 3 x 0.0 = 0;
                 (3) Excess variation provided x applicable RSF factor(s) = 0;
                 (4) Variation margin received x applicable RSF factor(s) = 2 x 0.0
                = 0;
                 (5) Gross derivatives liabilities x 5% x 100% = (5+2) x 0.05 x 1.0
                = 0.35;
                 (6) Contributions to CCP mutualized loss-sharing arrangements x 85%
                = 0 x 0.85 = 0; and
                 (7) Initial margin provided x higher of 85% or applicable RSF
                factor(s) = (2+1) x max (0.85, 0.0) = 2.55.
                 The covered company's derivatives RSF amount = 2 + 0 + 0 + 0 + 0.35
                + 0 + 2.55 = 4.90.
                F. NSFR Consolidation Limitations
                 The proposed rule would have required a covered company to
                calculate its NSFR on a consolidated basis. When calculating its
                consolidated ASF amount, the proposed rule would have required a
                covered company to take into account restrictions on the availability
                of stable funding at a consolidated subsidiary to support assets,
                derivative exposures, and commitments of the covered company held at
                entities other than the subsidiary.
                 To determine a consolidated ASF amount, a covered company would
                have calculated the contribution to its consolidated ASF and RSF
                amounts, respectively, associated with each consolidated subsidiary,
                each as calculated by the covered company for purposes of the covered
                company's consolidated NSFR (subsidiary ASF contribution and subsidiary
                RSF contribution). Where a subsidiary's ASF contribution is greater
                that the subsidiary's RSF contribution, the amounts above the
                subsidiary RSF contribution would have been considered an ``excess''
                ASF amount of the subsidiary, as calculated for the purpose of the
                consolidated firm (excess ASF amount). The proposed rule would have
                permitted the covered company to include in its consolidated ASF amount
                each subsidiary ASF contribution: (1) Up to the subsidiary RSF
                contribution, as calculated from the covered company's perspective,
                plus (2) any excess ASF amount above the subsidiary's RSF contribution,
                only to the extent the consolidated subsidiary could transfer assets to
                the top-tier entity of the covered company, taking into account
                statutory, regulatory, contractual, or supervisory restrictions. This
                approach to calculating a covered company's consolidated ASF amount
                would have been similar to the approach taken in the LCR rule to
                calculate a covered company's HQLA amount.
                 ASF amounts associated with a consolidated subsidiary, in this
                context, refer to those amounts that would be calculated from the
                perspective of the covered company. That is, in calculating the ASF
                amount of a consolidated subsidiary that can be included in the covered
                company's consolidated ASF amount, the covered company would not
                include certain transactions between consolidated subsidiaries that are
                netted under GAAP. For this reason, an ASF amount of a consolidated
                subsidiary that is included in a covered company's consolidated NSFR
                calculation may not always be equal to the ASF amount of
                [[Page 9184]]
                the consolidated subsidiary when calculated on a standalone basis if
                the consolidated subsidiary is itself a covered company.
                 The proposed rule would have required a covered company that
                includes a consolidated subsidiary's excess ASF amount in its
                consolidated NSFR to implement and maintain written procedures to
                identify and monitor restrictions on transferring assets from its
                consolidated subsidiaries. The covered company would have been required
                to document the types of transactions, such as loans or dividends, a
                covered company's consolidated subsidiary could use to transfer assets
                and how the transactions would comply with applicable restrictions. The
                proposed rule would have required the covered company to be able to
                demonstrate to the satisfaction of the appropriate agency that assets
                may be transferred freely in compliance with statutory, regulatory,
                contractual, or supervisory restrictions that may apply in any relevant
                jurisdiction. A covered company that did not include any excess ASF
                amount from its consolidated subsidiaries in its NSFR would not have
                been be required to have such procedures in place. The proposal also
                requested alternative approaches that the agencies should consider
                regarding the treatment of excess ASF amounts.
                 Two commenters requested that the agencies clarify how the proposed
                consolidation provisions would apply to inter-affiliate transactions,
                including those that qualify as regulatory capital of a covered
                company's consolidated subsidiary. One commenter supported the proposed
                rule's treatment of certain inter-affiliate transactions for purposes
                of determining the subsidiary ASF and RSF contributions because
                ignoring such inter-affiliate transactions is consistent with the GAAP
                accounting treatment of such transactions. Another commenter argued
                that the ASF and RSF contribution amounts of a consolidated subsidiary
                should reflect the calculation of ASF and RSF from the subsidiary's
                perspective on a standalone basis. For example, under this approach,
                the funding raised by a covered company that is downstreamed to a
                consolidated subsidiary and included as capital at that subsidiary
                (downstream funding) would be counted as ASF of the subsidiary and part
                of the subsidiary ASF contribution. In addition, one commenter
                requested that the agencies clarify whether the consolidation
                provisions would apply to securitization vehicles that must be
                consolidated on the covered company's balance sheet in accordance with
                GAAP.
                 The agencies also received comments on the calculation of the
                consolidated NSFR for covered companies that are subject to a reduced
                NSFR requirement. Several commenters requested that covered companies
                subject to a reduced NSFR requirement be allowed to automatically
                include in their consolidated NSFR a subsidiary's ASF contribution up
                to 100 percent of the subsidiary's RSF contribution, rather than
                limiting the automatically included amount based on a reduced
                requirement at the subsidiary. These commenters asserted that the
                subsidiary's ASF contribution would be available to meet its full RSF
                contribution without regards to a reduced consolidated requirement and
                that this approach would be consistent with the Board's originally
                proposed modified NSFR treatment.
                 The final rule includes the consolidation provisions as proposed.
                Consistent with the proposed rule, the final rule permits a covered
                company to include in its consolidated ASF amount any portion of the
                subsidiary ASF contribution of a consolidated subsidiary that is less
                than or equal to the subsidiary RSF contribution because the
                subsidiary's NSFR liabilities and NSFR regulatory capital elements
                generating that ASF amount are available as stable funding for the
                subsidiary's assets, derivative exposures, and commitments. The final
                rule limits the automatic inclusion of excess ASF amounts, however,
                because the stable funding at one consolidated subsidiary of the
                covered company may not always be available to support assets,
                derivative exposures, and commitments at another consolidated
                subsidiary.
                 For example, if a covered company calculates a subsidiary RSF
                contribution of $90 based on the assets, derivative exposures, and
                commitments of a consolidated subsidiary and a subsidiary ASF
                contribution of $100 based on the NSFR regulatory capital elements and
                NSFR liabilities of the consolidated subsidiary, the consolidated
                subsidiary would have an excess ASF amount of $10 for purposes of the
                consolidation provision in the final rule. The covered company may only
                include an amount of this $10 excess ASF amount in its consolidated ASF
                amount to the extent the consolidated subsidiary may transfer assets to
                the top-tier entity of the covered company (for example, through a
                dividend or loan from the subsidiary to the top-tier covered company),
                taking into account any statutory, regulatory, contractual, or
                supervisory restrictions. Examples of restrictions on transfers of
                assets that a covered company must take into account in calculating its
                NSFR include sections 23A and 23B of the Federal Reserve Act (12 U.S.C.
                371c and 12 U.S.C. 371c-1); the Board's Regulation W (12 CFR part 223);
                any restrictions on a consolidated subsidiary by state or Federal law,
                such as restrictions imposed by a state banking or insurance
                supervisor; and any restrictions on a consolidated subsidiary or
                branches of a U.S. entity domiciled outside the United States by a
                foreign regulatory authority, such as a foreign banking supervisor.
                This limitation on the excess ASF amount of a consolidated subsidiary
                includable in a covered company's consolidated NSFR applies to both
                U.S. and non-U.S. consolidated subsidiaries.
                 The agencies are not modifying the consolidation provisions, as
                suggested by one commenter, to require a covered company to determine
                the excess ASF amount of a consolidated subsidiary based on ASF and RSF
                amounts of the subsidiary as calculated from the subsidiary's
                perspective on a standalone basis. The final rule aligns with the
                netting of exposures under GAAP at the consolidated level, and the
                final rule's consolidation provisions would not require a covered
                company to take into account, in the calculation of the subsidiary ASF
                contribution, ASF and RSF amounts resulting from transactions between
                consolidated subsidiaries that are netted under GAAP.
                 As described in section V of this Supplementary Information
                section, the NSFR uses carrying value on a covered company's balance
                sheet where appropriate. The calculation of subsidiary ASF contribution
                does not include certain inter-affiliate transactions that are
                eliminated when a covered company constructs its consolidated balance
                sheet under GAAP. For example, if consolidated subsidiary ``A'' makes a
                loan to consolidated subsidiary ``B'', the loan asset of subsidiary A
                and the liability of subsidiary B generally would be eliminated when a
                covered company constructs a consolidated balance sheet in accordance
                with GAAP. Therefore, in this example, subsidiary B's liability is not
                included in the calculation of subsidiary B's subsidiary ASF
                contribution.
                 The scope of the inter-affiliate transactions that are excluded
                from the calculation of a subsidiary's excess ASF amount includes
                transactions between a covered company and its consolidated subsidiary,
                including where the covered company downstreams funding that is
                recognized as capital at the consolidated subsidiary. For example, if a
                [[Page 9185]]
                subsidiary's ASF contribution equals $110, consisting of $10 of capital
                placed by the parent and $100 of retail deposits, only the retail
                deposits would be subject to the excess ASF calculation. If the
                subsidiary's RSF contribution was $90 (calculated from the perspective
                of the parent covered company, after excluding inter-affiliate
                transactions), then there would be $10 of excess ASF.
                 To the extent a large depository institution subsidiary of a
                covered company is subject to a stand-alone NSFR requirement under the
                final rule, the subsidiary's compliance with its stand-alone NSFR
                requirement could potentially constitute a restriction on the
                subsidiary's ability to transfer assets to the covered company,
                depending on the circumstances. Such a restriction would limit the
                parent covered company's ability to include portions of the depository
                institution's excess ASF amount (calculated from the perspective of the
                consolidated parent covered company), but would not change the
                calculation of the ASF amount of the subsidiary, as calculated on a
                standalone basis for purposes of its NSFR requirement. Likewise,
                regulatory capital requirements applicable to a consolidated subsidiary
                of a covered company could limit the extent to which the covered
                company may count the excess ASF amount of the subsidiary towards the
                covered company's consolidated ASF amount, but would not change the
                calculation of the subsidiary's ASF amount.
                 Similar to other balance sheet items, the assets and liabilities of
                securitization vehicles that are consolidated onto a covered company's
                balance sheet under GAAP are included in the calculation of the
                consolidated vehicle's ASF contributions and RSF contributions. For
                example, securities issued by a securitization vehicle that are
                liabilities on a consolidated covered company's balance sheet, and
                assets of a securitization vehicle that are included on a covered
                company's balance sheet are included in the calculation of the ASF
                contributions and RSF contributions.
                 In cases where a covered company is subject to a reduced NSFR
                requirement, the covered company must calculate the subsidiary ASF
                contribution and subsidiary RSF contribution amount of each
                consolidated subsidiary from the perspective of the covered company for
                purposes of its consolidated reduced NSFR requirement. Specifically, a
                covered company must apply the appropriate adjustment factor to its
                consolidated subsidiary's RSF contribution amount when determining the
                amount of the subsidiary RSF contribution for purposes of determining
                the amount of the consolidated subsidiary's ASF that can automatically
                be included in the covered company's consolidated ASF amount. Any
                amount of the consolidated subsidiary's ASF in excess of its adjusted
                RSF contribution amount, as calculated by the covered company, may only
                be included in the covered company's consolidated NSFR to the extent
                the consolidated subsidiary can transfer assets to the covered company,
                taking into account statutory, regulatory, contractual, or supervisory
                restrictions. It is important that covered companies consider funding
                needs across the consolidated entity for the NSFR calculation as
                required. Accordingly, covered companies must consider the extent to
                which assets held at a consolidated subsidiary are transferable across
                the organization and ensure that a minimum level of ASF is positioned
                or freely available to transfer to meet funding needs at the subsidiary
                where they are expected to occur. Although ASF contribution amounts at
                a consolidated subsidiary in excess of its adjusted RSF contribution
                amount may be available to support that subsidiary during the NSFR's
                one-year time horizon, permitting the automatic inclusion of such ASF
                contribution amounts up to 100 percent of the subsidiary's standalone
                RSF contribution amounts, as requested by commenters, without
                appropriate consideration of transfer restrictions, may make the
                consolidated NSFR requirement less effective.
                G. Treatment of Certain Facilities
                 In light of recent disruptions in economic conditions caused by the
                outbreak of the coronavirus disease 2019 and the stress in U.S.
                financial markets, the Board, with the approval of the U.S. Secretary
                of the Treasury, established certain liquidity facilities pursuant to
                section 13(3) of the Federal Reserve Act.\219\
                ---------------------------------------------------------------------------
                 \219\ 12 U.S.C. 343(3).
                ---------------------------------------------------------------------------
                 In order to prevent disruptions in the money markets from
                destabilizing the financial system, the Board authorized the Federal
                Reserve Bank of Boston to establish the Money Market Mutual Fund
                Liquidity Facility (MMLF). Under the MMLF, the Federal Reserve Bank of
                Boston may extend non-recourse loans to eligible borrowers to purchase
                assets from money market mutual funds. Assets purchased from money
                market mutual funds are posted as collateral to the Federal Reserve
                Bank of Boston. MMLF collateral generally comprises securities and
                other assets with the same maturity date as the MMLF non-recourse
                loan.\220\
                ---------------------------------------------------------------------------
                 \220\ The maturity date of a MMLF advance equals the earlier of
                the maturity date of the eligible collateral pledged to secure the
                advance and 12 months from the date of the advance.
                ---------------------------------------------------------------------------
                 In order to provide liquidity to small business lenders and the
                broader credit markets, and to help stabilize the financial system, the
                Board authorized each of the Federal Reserve Banks to extend credit
                under the Paycheck Protection Program Liquidity Facility (PPPLF).\221\
                Under the PPPLF, each of the Federal Reserve Banks may extend non-
                recourse loans to institutions that are eligible to make Paycheck
                Protection Program (PPP) covered loans as defined in section 7(a)(36)
                of the Small Business Act.\222\ Under the PPPLF, only PPP covered loans
                that are guaranteed by the Small Business Administration (SBA) with
                respect to both principal and accrued interest and that are originated
                by an eligible institution may be pledged as collateral to the Federal
                Reserve Banks. The maturity date of the extension of credit under the
                PPPLF equals the maturity date of the PPP covered loans pledged to
                secure the extension of credit.\223\
                ---------------------------------------------------------------------------
                 \221\ The Paycheck Protection Program Liquidity Facility was
                previously known as the Paycheck Protection Program Lending
                Facility.
                 \222\ 15 U.S.C. 636(a)(36). Congress created the PPP as part of
                the Coronavirus Aid, Relief, and Economic Security Act and in
                recognition of the exigent circumstances faced by small businesses.
                PPP covered loans are fully guaranteed as to principal and accrued
                interest by the Small Business Administration (SBA) and also afford
                borrower forgiveness up to the principal amount and accrued interest
                of the PPP covered loan, if the proceeds of the PPP covered loan are
                used for certain expenses. Under the PPP, eligible borrowers
                generally include businesses with fewer than 500 employees or that
                are otherwise considered to be small by the SBA. The SBA reimburses
                PPP lenders for any amount of a PPP covered loan that is forgiven.
                In general, PPP lenders are not held liable for any representations
                made by PPP borrowers in connection with a borrower's request for
                PPP covered loan forgiveness. For more information on the Paycheck
                Protection Program, see https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.
                 \223\ The maturity date of the loan made under the PPPLF will be
                accelerated if the underlying PPP covered loan goes into default and
                the eligible borrower sells the PPP covered loan to the SBA to
                realize the SBA guarantee. The maturity date of the loan made under
                the PPPLF also will be accelerated to the extent of any PPP covered
                loan forgiveness reimbursement received by the eligible borrower
                from the SBA.
                ---------------------------------------------------------------------------
                 Eligible borrowers under the MMLF and PPPLF include certain banking
                organizations that are currently subject to the LCR rule and that will
                be subject to the final rule upon its effective date. Advances from the
                MMLF and PPPLF facilities are non-recourse, and the maturity of the
                advance generally aligns with the maturity of the collateral.
                Accordingly, a covered company is not
                [[Page 9186]]
                exposed to credit or market risk from the collateral securing the MMLF
                or PPPLF advance that could otherwise affect the banking organization's
                ability to settle the loan and generally can use the value of cash
                received from the collateral to repay the advances at maturity.
                 To facilitate the use of the MMLF and the PPPLF, on May 6, 2020,
                the agencies published in the Federal Register an interim final rule to
                require a banking organization subject to the LCR rule to neutralize
                the effect on its LCR of participation in the MMLF and PPPLF (LCR
                interim final rule).\224\ The LCR interim final rule requires a covered
                company to neutralize the LCR effects of the advances made by the MMLF
                and PPPLF together with the assets securing these advances.
                Specifically, the LCR interim final rule added a new definition to the
                LCR rule for ``Covered Federal Reserve Facility Funding'' to identify
                MMLF and PPPLF advances separately from other secured funding
                transactions under the LCR rule. The LCR interim final rule requires
                outflow amounts associated with Covered Federal Reserve Facility
                Funding and inflow amounts associated with the assets securing this
                funding to be excluded from a covered company's total net cash outflow
                amount under the LCR rule.\225\ The treatment under the LCR interim
                final rule better aligns the treatment of these advances and collateral
                under the LCR rule with the liquidity risk associated with funding
                exposures through these facilities, and to ensure consistent and
                predictable treatment of covered companies' participation in the
                facilities under the LCR rule. The agencies received one comment
                letter, from a trade association, on the LCR interim final rule. The
                commenter supported the requirements under the LCR interim final rule,
                arguing that the requirements encourage participation in the
                facilities, which ultimately provides benefits to small businesses,
                households, and investors.
                ---------------------------------------------------------------------------
                 \224\ 85 FR 26835 (May 6, 2020). The agencies also adopted
                interim final rules to address the capital treatment of
                participation in the MMLF (85 FR 16232 (Mar. 23, 2020)) and capital
                treatment of participation in the PPPLF (85 FR 20387 (Apr. 13,
                2020)). These interim final rules were adopted as final on September
                29, 2020.
                 \225\ See 12 CFR 50.34 (OCC); 12 CFR 249.34 (Board); 12 CFR
                329.34 (FDIC). Section __.34 does not apply to the extent the
                covered company secures Covered Federal Reserve Facility Funding
                with securities, debt obligations, or other instruments issued by
                the covered company or its consolidated entity.
                ---------------------------------------------------------------------------
                 For the same reasons that the agencies issued the LCR interim final
                rule, the agencies are adopting, as final, provisions to better align
                the treatment of these advances and collateral under the NSFR rule with
                the liquidity risk associated with funding exposures through these
                facilities, and to ensure consistent and predictable treatment of
                covered companies' participation in the facilities under the NSFR
                rule.\226\ Specifically, the final rule adds a new Sec. __.108 that
                requires liability and asset amounts associated with Covered Federal
                Reserve Facility Funding to be excluded from a covered company's NSFR.
                Consistent with the LCR rule, this new Sec. __.108 does not apply to
                the extent the covered company secures Covered Federal Reserve Facility
                Funding with securities, debt obligations, or other instruments issued
                by the covered company or its consolidated entity. This arrangement
                presents liquidity risk due to the asymmetric cash flows of the covered
                company because the covered company would not have an inflow to offset
                its cash outflows.
                ---------------------------------------------------------------------------
                 \226\ The new definition of ``Covered Federal Reserve Facility
                Funding'' was added into the common definitions section of the LCR
                and NSFR rules. Consistent with the LCR interim final rule, the
                final rule does not amend the agencies' definitions of average
                weighted short-term wholesale funding in the common definitions
                section of the LCR and NSFR rules and the Board is not amending the
                calculation of weighted short-term wholesale funding on reporting
                form FR Y-15 related to Sec. __.108 of the final rule. Weighted
                short-term wholesale funding measures a banking organization's
                typical dependency on certain types of funding and generally does
                not measure funding risks related to the composition of a banking
                organization's assets and commitments.
                ---------------------------------------------------------------------------
                 Pursuant to section 553(b)(B) of the APA, general notice and the
                opportunity for public comment are not required with respect to a
                rulemaking when an ``agency for good cause finds (and incorporates the
                finding and a brief statement of reasons therefore in the rules issued)
                that notice and public procedure thereon are impracticable,
                unnecessary, or contrary to the public interest.'' The agencies have
                determined that it is in the public interest to finalize these changes
                without notice and comment. The MMLF and PPPLF were established in
                response to urgent and severe economic disruptions, and these changes
                will provide certainty to covered companies regarding the NSFR
                treatment of transactions under the facilities, thereby facilitating
                the continued operation of, and covered companies' participation in the
                facilities. In addition, the agencies note that it may be unnecessary
                to provide notice or the opportunity to comment prior to adopting these
                changes because the public recently had an opportunity to comment on
                substantively similar changes to the LCR rule, and no adverse comments
                were submitted to the agencies in connection with those changes.
                H. Interdependent Assets and Liabilities
                 The Basel NSFR standard provides that, subject to strict conditions
                and in limited circumstances, it may be appropriate for an asset and a
                liability to be considered interdependent and assigned a zero percent
                RSF factor and a zero percent ASF factor, respectively.\227\ The
                proposed rule did not include a framework for interdependent assets and
                liabilities because, as stated in the proposal, the agencies did not
                identify transactions conducted by U.S. banking organizations that
                would meet the conditions in the Basel NSFR standard.
                ---------------------------------------------------------------------------
                 \227\ See supra note 6 at para 45.
                ---------------------------------------------------------------------------
                 As the proposed rule noted, in order for an asset and liability to
                be considered interdependent, the Basel NSFR standard would require all
                of the following conditions to be met: (1) The interdependence of the
                asset and liability must be established on the basis of contractual
                arrangements, (2) the liability cannot fall due while the asset remains
                on the balance sheet, (3) the principal payment flows from the asset
                cannot be used for purposes other than repaying the liability, (4) the
                liability cannot be used to fund other assets, (5) the individual
                interdependent asset and liability must be clearly identifiable, (6)
                the maturity and principal amount of both the interdependent liability
                and asset must be the same, (7) the bank must be acting solely as a
                pass-through unit to channel the funding received from the liability
                into the corresponding interdependent asset, and (8) the counterparties
                for each pair of interdependent liabilities and assets must not be the
                same.
                 The Basel NSFR standard's conditions for establishing
                interdependence are intended to ensure that the specific liability
                will, on the basis of contractual terms and under all circumstances,
                remain for the life of the asset and all cash flows during the life of
                the asset and at maturity are perfectly matched with cash flows of the
                liability. Under such conditions, a covered company would face no
                funding risk or benefit arising from the interdependent asset and
                liability. For example, the proposed rule noted that if a sovereign
                entity establishes a program where it provides funding through
                financial institutions that act as pass-through entities to make loans
                to third parties, and all the conditions set forth in the Basel NSFR
                standard are met, the liquidity profile of a financial institution
                would not be
                [[Page 9187]]
                affected by its participation in the program. As such, the assets of
                the financial institution created through such a program could be
                considered interdependent with the liabilities that would also be
                created through the program, and the assets and liabilities could be
                assigned a zero percent RSF factor and a zero percent ASF factor,
                respectively. The proposed rule noted that no such programs at that
                time existed in the United States. Therefore, the proposed rule did not
                include a provision for assigning zero percent RSF and ASF factors to
                assets and liabilities that are ``interdependent.'' However, the
                proposed rule requested comment as to whether any assets and
                liabilities of covered companies should receive such treatment under
                the NSFR rule.
                 Commenters requested that the final rule recognize as
                interdependent various assets and liabilities. Specifically, commenters
                requested interdependent treatment in connection with securities
                borrowing and lending transactions to facilitate client short
                positions; securities borrowing transactions and covered company short
                positions; certain client segregated assets and liabilities for client
                claims on those assets; assets and liabilities arising from derivatives
                clearing activities on behalf of clients; initial margin received by a
                covered company under client-facing derivative transactions and used to
                fund hedge positions for the derivative transactions, and assets and
                liabilities related to mortgage servicing activities. Commenters
                asserted that these transactions present no funding risk to covered
                companies. Discussions below address comments on the treatment of
                assets and liabilities as interdependent.
                 As discussed in section V of this Supplementary Information
                section, the NSFR is a broad measure of the funding profile of the
                whole balance sheet of a covered company at a point in time and the
                final rule generally does not apply separate requirements to individual
                lines of business or to subsets of assets and liabilities of a covered
                company. The treatment of specific assets and liabilities as
                interdependent would effectively remove these items from the assessment
                of the covered company's stable funding profile overall. As discussed
                in sections VII.C.2.a and VII.D.2.a of this Supplementary Information
                section, the final rule uses the remaining maturity of assets and
                liabilities to assess a covered company's funding risks. As a general
                principle, it would be inconsistent with the purposes and design of the
                NSFR to provide interdependent treatment to a specific asset and
                liability where the specified asset can contractually persist on the
                balance sheet of the covered company after the extinguishment of the
                specified liability. Additionally, the final rule generally does not
                consider the range of actions that a covered company may take in the
                future that would adjust the maturity of an asset in response to the
                maturity of a liability. Consistent with the purposes and design of the
                NSFR, as discussed above, the agencies have concluded that it would be
                inappropriate to recognize any assets and liabilities as
                interdependent. Additionally, including in the final rule the criteria
                under which certain transactions could qualify as interdependent would
                add considerable complexity and undermine the NSFR's design as a simple
                and standardized measure. In the discussion below, the agencies discuss
                concerns about why particular transactions suggested by commenters will
                not qualify as interdependent.
                Short Sales
                 Commenters requested that the agencies reconsider interdependent
                treatment for transactions conducted by a covered company that
                facilitate the covered company or its customers entering into short
                positions. Commenters provided examples of certain secured funding
                transactions, such as firm shorts or loans of collateral to customers,
                that they asserted directly fund certain secured lending transactions,
                such as a reverse repurchase agreement or a securities borrowing
                transaction. These commenters asserted that the short sale of a
                security by a covered company represents a liability on its balance
                sheet. In a similar manner, a client short sale may result in a covered
                company receiving the cash proceeds as collateral for the security
                provided to cover the client's short position, increasing the covered
                company's balance sheet liability to its clients. In each case, the
                covered company may use the proceeds from its short sale or the cash
                collateral from the client's short sale to collateralize a secured
                lending transaction to source the security sold short. The secured
                lending transaction is recorded as an asset on the covered company's
                balance sheet.
                 At the time of terminating its short exposure, the covered company
                extinguishes its short position liability. Similarly, at the unwind of
                the client short transaction, the client may return the security to the
                covered company in return for the cash proceeds of the initial short
                sale, closing out the covered company's liability to the client. In
                either case, to close out the asset the covered company may return the
                security to the securities lender or reverse repurchase agreement
                counterparty and receive back the cash collateral. Commenters asserted
                that when either type of short position is unwound, the associated
                balance sheet liabilities and assets would roll off simultaneously.
                These commenters argued that such transactions are substantially
                similar to transactions in which a covered company acts as riskless
                principal; that the transactions are linked by regulation, internal
                procedures, and business practices; that the principal amounts of the
                asset and liability generated by a customer short position are
                generally the same; and that such treatment would be consistent with
                the Basel NSFR standard that provides special treatment for securities
                borrowing transactions. As a result, commenters requested that the
                agencies assign no funding requirement to the secured lending
                transaction that sources the security, which is the covered company's
                balance-sheet asset.
                 Commenters also noted that certain securities borrowing
                transactions conducted by a covered company are subject to the Board's
                Regulation T and requested that the agencies recognize that conducting
                a stock borrow for a permitted purpose under Regulation T creates a
                clear link between the liability to the client and the secured lending
                transaction. One commenter speculated that covered companies would need
                to raise additional long-term funding to support the stable funding
                requirement for activities that facilitate short positions and that the
                cash raised through such issuance may increase a covered company's
                balance sheet leverage, which in turn may cause the covered company to
                reduce other financial intermediation activities. One commenter argued
                that failing to reduce the funding requirement for facilitating short-
                sale activities would impede market liquidity and cited a report by the
                Federal Reserve Bank of New York concerning the short-sale ban in the
                United States from September 18, 2018, to October 8, 2018, as evidence
                that impeding the short-sale market would damage equities markets.
                 The agencies have concluded that because there is a risk that the
                maturities of the assets and liabilities for these transactions may not
                match, it would be inappropriate to treat these assets and liabilities
                as interdependent. It is unclear whether the consequence of the
                maturity of all short sales liabilities on related assets would be the
                same in practice. For example, the related assets may potentially
                persist beyond the maturity of the liability. In addition,
                [[Page 9188]]
                although there are regulatory requirements that could require broker-
                dealers to take a capital charge if they do not return securities to a
                securities lender, these regulations may not subject all potential
                transactions to capital charges and a covered company could still
                technically retain a security if it is was willing to incur such
                capital charges.
                 Secured funding and lending transactions conducted by a covered
                company that facilitate the covered company, or its customers, entering
                into a short exposure contribute to the funding profile of the covered
                company similar to secured funding and lending transactions conducted
                for other purposes, such as matched book repurchase and reverse
                repurchase agreements. Providing interconnected treatment for assets
                and liabilities related to short positions could incent covered
                companies to engage in regulatory arbitrage by transforming some
                matched book repurchase agreements into customer shorts covered by
                sourcing an asset from a third party. Further, covered companies
                frequently conduct short-facilitation transactions on an open basis, or
                with significant embedded optionality, and with highly sophisticated
                financial counterparties. A covered company may have limited control
                over the maturity of either the related asset or liability and may be
                exposed to the asymmetric timing of the maturities or the termination
                amounts. The decision to terminate the funding received from a short
                sale may be influenced by a range of factors outside the control of the
                covered company, such as market volatility or the investment priorities
                of a covered company's client. In the case of a short exposure covered
                by a security borrow from a third party, the decision to terminate the
                secured lending transaction by the covered company may be influenced by
                the presence of alternative eligible uses for the security borrowed.
                The secured lending transaction maturity is also dependent upon the
                capacity of the securities lender to terminate the transaction by
                returning cash collateral on demand. Conversely, the securities lender
                may disrupt the symmetry of the transactions by terminating the secured
                lending transaction prior to the termination of the short. The covered
                company may not be able to source the securities elsewhere or may not
                be able to demand additional collateral from the customer but may have
                to continue facilitating the customer short. As discussed in section
                VII.D.3.c of this Supplementary Information section, the relatively low
                RSF factor applied to short-term secured lending transactions with
                financial counterparties is designed to address uncertainty as to
                whether assets may persist on the balance sheet. For these reasons, the
                agencies are not applying interdependent treatment to transactions
                facilitating short positions.
                Assets Held in Certain Customer Protection Segregated Accounts and
                Associated Liabilities
                 In another example, commenters requested that the agencies
                recognize as interdependent assets that are required to be segregated
                according to regulations and the associated liabilities for client
                claims on these assets. In particular, a covered company may be
                required to hold a certain amount of segregated assets in order to
                comply with regulations applicable to customer funds of a broker-dealer
                or futures commission merchant. Under the proposed rule, segregated
                assets that are included on a covered company's balance sheet under
                GAAP would be assigned RSF factors in the same manner as other assets
                of the covered company. Commenters asserted that this treatment would
                overstate the funding requirement associated with these assets since
                the assets are held for the benefit of clients, covered companies have
                limited reinvestment rights over the assets, and the assets are funded
                by associated liabilities to customers. Commenters also argued that the
                proposed treatment would incentivize covered companies to hold
                segregated client assets in non-cash form rather than deposit cash with
                third parties.\228\
                ---------------------------------------------------------------------------
                 \228\ See section VII.D.3.i of this Supplementary Information
                section, which discusses the assignment of RSF factors to assets
                held in certain customer protection segregated accounts.
                ---------------------------------------------------------------------------
                 Covered companies face funding risk with respect to such segregated
                accounts due to potential asymmetry between the relevant assets and
                liabilities. Accordingly, it would be inappropriate to treat such
                assets and the corresponding liabilities as interdependent. Covered
                companies have the ability to exercise control over client assets held
                in segregated accounts, and covered companies may be able to earn a
                return on those assets depending on reinvestment choices. Additionally,
                the amount and maturity of segregated assets may not be directly
                connected to the amount and maturity of liabilities to customers. In
                cases where a covered company is required to segregate an amount of
                assets, the determination of the aggregate value segregated may be
                dependent on many different activities and liabilities to customers,
                each subject to optionality exercisable at the discretion of the
                customer. For example, the amount of assets to be segregated for client
                protection under the SEC's Rule 15c3-3 may be based on a substantial
                volume of individual customer free credit balances, margin loans
                extended to customers, and short positions.
                Clearing Activities
                 Commenters requested that the agencies treat clearing activities
                conducted on behalf of clients as interdependent transactions. Under
                these transactions, covered companies would guarantee the performance
                of a client to the CCP and would collect any necessary margin
                requirements from the client and post them to the CCP on behalf of the
                client. Commenters argued that these client clearing activities should
                be considered as interdependent transactions, as the covered company
                would be acting solely on behalf of the client.
                 As discussed in section VII.E.4 of this Supplementary Information
                section, if a covered company is engaged in clearing activities as an
                agent for a client, it may be that the covered company would record no
                balance sheet entries associated with such activities. Accordingly,
                there would be no RSF factor assigned to such activities. Under these
                circumstances, interdependent treatment would be unnecessary. To the
                extent that a covered company guarantees the performance of its client
                or otherwise engages in activities that cause these transactions to be
                recorded on its balance sheet, it would be inappropriate to de-
                recognize them for purposes of the NSFR. In some situations, a covered
                company may continue to face funding risk as the intermediary between
                its client and the CCP.
                Hedges of Derivative Transactions Financed With Initial Margin
                 Commenters stated that a covered company in certain circumstances
                can use initial margin that is provided by a client to purchase a
                security that can then be used to hedge the market risk of a client-
                facing derivative transaction. In these cases, commenters asserted that
                a covered company's liability to return initial margin may be viewed as
                directly funding the hedge security on the covered company's balance
                sheet. Commenters argued that interdependent treatment is warranted for
                the assets and liabilities generated by such activity because the
                covered company acts as an intermediary when using client funds to
                hedge the risk created by the client-
                [[Page 9189]]
                facing derivative. Additionally, the covered company generally sells
                the hedge asset when the client's derivative position is unwound,
                regardless of the remaining maturity of the hedge asset. The commenters
                alternatively recommended that the agencies could limit interdependent
                treatment in these cases to circumstances where the sale of the hedge
                asset and the unwind of the derivative (together with the associated
                liability to return the initial margin) occur simultaneously pursuant
                to a contract or internal procedures. One commenter argued that
                contractual provisions and auditable internal policies and procedures
                create links between assets and liabilities that are sufficiently
                formal and enforceable such that interdependent treatment is warranted.
                For example, in the case of initial margin provided by a client and
                used by a covered company to purchase a security to hedge the customer-
                facing derivative exposure, one commenter argued that force majeure
                clauses relieve a covered company from returning initial margin to a
                client when the company is unable to sell the hedge security asset. In
                this case, the commenter argued that the hedge asset and initial margin
                liability are linked because the firm will not be required to return
                the initial margin until it is able to sell the hedge security.
                 In these cases, commenters requested that the agencies either
                assign a non-zero ASF factor for rehypothecatable initial margin
                received by a covered company or reduce the RSF factor assigned to the
                hedge asset purchased using initial margin provided by a client.
                Commenters asserted that the proposed rule should provide greater
                funding value to initial margin received by a covered company from
                clients and used by the covered company to hedge its derivative
                position with the client because this source of funding is more closely
                related to the covered company's derivatives activities than other
                sources of funding that receive higher ASF factors, like retail
                deposits. The commenters also expressed the view that failure to give
                interdependent treatment to initial margin liabilities and related
                hedge assets under these circumstances effectively punishes covered
                companies for financing corporate entities, which would adversely
                impact corporate financing.
                 While a covered company may be unlikely in practice to continue to
                hold a hedge asset without a corresponding liability to its client,
                there is generally no absolute contractual bar against this. A covered
                company generally could continue to hold an asset formally used as a
                hedge despite a change in or elimination of a particular client's
                derivative position. A covered company could, for example, return a
                client's initial margin but continue to hold the asset purchased as a
                hedge, if only for a short time. It is not the case that the asset and
                liability necessarily fall due at the same time. Accordingly, it would
                not be appropriate to treat these assets and liabilities as
                interdependent.
                Mortgage Servicing
                 A commenter also suggested that mortgage servicing rights and
                deposits related to mortgage servicing be granted interdependent
                treatment. The commenter argued that the asset (mortgage servicing
                rights) and liability (mortgage borrower deposits consisting of the
                principal, interest, tax, and insurance payments collected from the
                borrowers to be remitted to investors, insurers, and state and local
                governments) are linked and treated as self-funding by the industry.
                The commenter also argued that deposits arising from mortgage servicing
                should be considered stable because they have predictable inflow and
                outflow patterns.
                 It would be inconsistent with the NSFR's aggregated balance sheet
                approach to remove from the ratio calculation, through interdependent
                treatment, an asset and a liability that are not each clearly
                identifiable or where the maturities and amounts of the asset and the
                liability do not align. While certain assets and liabilities may be
                closely linked (such as mortgage servicing rights and borrower
                liabilities), there is not enough certainty that the size and maturity
                of these assets and liabilities would always align.
                Other Comments on Interdependent Assets and Liabilities
                 Commenters also submitted several general comments applicable to
                many types of transactions that they argued should receive
                interdependent treatment. Commenters suggested that the agencies could
                impose data reporting requirements to verify that internal policies and
                procedures are maintaining a link between the various parts of the
                transactions they believe should be granted interdependent treatment.
                Another commenter argued that, if covered companies engage in the
                transactions outlined above in accordance with the BCBS haircut floors
                for non-centrally cleared securities financing transactions,\229\ then
                the transactions should be treated as interdependent. Several
                commenters also warned that failure to provide interdependent treatment
                for the positions described above would significantly reduce liquidity
                in the relevant markets.
                ---------------------------------------------------------------------------
                 \229\ Basel Committee, Haircut floors for non-centrally cleared
                securities financing transactions (November 2015), available at
                http://www.bis.org/bcbs/publ/d340.htm.
                ---------------------------------------------------------------------------
                 A discussed in section V of this Supplementary Information section,
                the NSFR is a broad measure of the funding profile of the whole balance
                sheet of a covered company and the final rule does not apply separate
                requirements to individual lines of business or to subsets of assets
                and liabilities of a covered company. The treatment of specific assets
                and liabilities as interconnected would effectively remove these items
                from the assessment of the covered company's stable funding profile
                overall. As a general principle, it would be inconsistent with the
                purposes and design of the NSFR to provide interdependent treatment to
                a specific asset and liability where the specified asset can
                contractually persist on the balance sheet of the covered company after
                the extinguishment of the specified liability. While internal processes
                and procedures may increase the probability of such assets and
                liabilities aligning, it would be impractical to expand the final rule
                to create or regulate such processes in a manner that would ensure
                alignment.
                VIII. Net Stable Funding Ratio Shortfall
                 As noted above, the proposed rule would have required a covered
                company to maintain an NSFR of at least 1.0 on an ongoing basis. The
                agencies expect circumstances where a covered company has an NSFR below
                1.0 to arise rarely. However, given the range of reasons, both
                idiosyncratic and systemic, a covered company could have an NSFR below
                1.0 (for example, a covered company's NSFR might temporarily fall below
                1.0 during a period of extreme liquidity stress), the proposed rule
                would not have prescribed a particular supervisory response to address
                a violation of the NSFR requirement. Instead, the proposed rule would
                have provided flexibility for the appropriate Federal banking agency to
                respond based on the circumstances of a particular case. Potential
                supervisory responses could include, for example, an informal
                supervisory action, a cease-and-desist order, or a civil money penalty.
                 The proposed rule would have required a covered company to notify
                the appropriate Federal banking agency of an NSFR shortfall or
                potential shortfall. Specifically, the proposed rule would have
                required a covered company to notify its appropriate Federal banking
                agency no later than 10 business days, or such other period as
                [[Page 9190]]
                the appropriate Federal banking agency may otherwise require by written
                notice, following the date that any event has occurred that has caused
                or would cause the covered company's NSFR to fall below the minimum
                requirement.
                 In addition, a covered company would have been required to develop
                a plan for remediation in the event of an NSFR shortfall. As set forth
                in the proposed rule, such a plan would have been required to include
                an assessment of the covered company's liquidity profile, the actions
                the covered company has taken and will take to achieve full compliance
                with the proposed rule (including a plan for adjusting the covered
                company's liquidity profile to comply with the proposed rule's NSFR
                requirement and a plan for fixing any operational or management issues
                that may have contributed to the covered company's noncompliance), and
                an estimated time frame for achieving compliance. The proposed rule
                would have required a covered company to submit its remediation plan to
                its appropriate Federal banking agency no later than 10 business days,
                or such other period as the appropriate Federal banking agency may
                otherwise require by written notice, after: (1) The covered company's
                NSFR falls below, or is likely to fall below, the minimum requirement
                and the covered company has or should have notified the appropriate
                Federal banking agency, as required under the proposed rule; (2) the
                covered company's required NSFR disclosures or other regulatory reports
                or disclosures indicate that its NSFR is below the minimum requirement;
                or (3) the appropriate Federal banking agency notifies the covered
                company that it must submit a plan for NSFR remediation and the agency
                provides a reason for requiring such a plan.
                 Finally, the covered company would have been required to report to
                the appropriate Federal banking agency no less than monthly (or other
                frequency, as required by the agency) on its progress towards achieving
                full compliance with the proposed rule. These reports would have been
                mandatory until the firm's NSFR was equal to or greater than 1.0.
                 The agencies would have retained the authority to take supervisory
                action against a covered company that fails to comply with the NSFR
                requirement.\230\ Any action taken would have depended on the
                circumstances surrounding the funding shortfall, including, but not
                limited to, operational issues at a covered company, the frequency or
                magnitude of the noncompliance, the nature of the event that caused a
                shortfall, and whether such an event was temporary or unusual.
                ---------------------------------------------------------------------------
                 \230\ See Sec. __.2(c) of the final rule.
                ---------------------------------------------------------------------------
                 The agencies received one comment requesting clarification of how
                frequently a covered company must calculate its NSFR to meet the
                proposed rule's requirement to maintain an NSFR of 1.0 on an ``ongoing
                basis.'' The commenter suggested that the final rule should require a
                covered company to calculate its NSFR in the same manner as it
                calculates its regulatory capital levels. The commenter argued that,
                because the NSFR is a long-term funding metric calculated primarily by
                reference to a covered company's balance sheet, it would not be
                possible to calculate a firm's NSFR more frequently than monthly.
                 The agencies also received two comments related to the proposed
                rule's shortfall provisions. One commenter asserted that the proposed
                rule did not have a mechanism similar to the LCR permitting a covered
                company's NSFR to fall below 1.0. Another commenter responded to the
                agencies' request for comment as to whether the proposed shortfall
                framework should include a de minimis exception, such that a covered
                company would not be required to report a shortfall if its NSFR
                returned to the required minimum within a short grace period. This
                commenter requested a de minimis exception when the cause of an NSFR
                shortfall is beyond a covered company's control and the shortfall would
                not be expected to increase systemic risk because of an expected short
                duration and minimal amount. This commenter also requested that the
                final rule include a cure period where a shortfall is caused by a
                merger or acquisition by a covered company. Another commenter requested
                that the requirement to submit a formal remediation plan should be
                determined on a case-by-case basis by the covered company's appropriate
                Federal banking agency. The commenter also requested that the
                requirement to respond to an NSFR shortfall be calibrated to the
                materiality and likely persistence of the shortfall.
                 Consistent with the proposed rule, the final rule requires a
                covered company to maintain an NSFR of at least 1.0 on an ongoing
                basis. The NSFR is designed to ensure that covered companies have the
                ability to serve households and businesses in both normal and adverse
                economic situations. The agencies would generally support a covered
                company that chooses to reduce its NSFR during a liquidity stress
                period in order to continue to lend and undertake other actions to
                support the broader economy in a safe and sound manner.
                 While the final rule requires a covered company that is a U.S.
                depository institution holding company or U.S. intermediate holding
                company to disclose its NSFR for each quarter on a semi-annual
                basis,\231\ a covered company needs to monitor its funding profile on
                an ongoing basis to ensure compliance with the NSFR requirement. If a
                covered company's funding profile materially changes intra-quarter, the
                agencies expect the company to be able to calculate its NSFR to
                determine whether it remains compliant with the NSFR requirement,
                consistent with the notification requirements of Sec. __.110 of the
                final rule.\232\ The agencies are adopting the shortfall provisions of
                the final rule as proposed. Consistent with the shortfall framework in
                the LCR rule, the final rule's shortfall framework provides supervisory
                flexibility for the appropriate agency to respond to an NSFR shortfall
                based on the particular circumstances of the shortfall. Depending on
                the circumstances, an NSFR shortfall would not necessarily result in
                supervisory action, but, at a minimum, would result in a notification
                to the appropriate agency and heightened supervisory monitoring through
                a remediation plan.
                ---------------------------------------------------------------------------
                 \231\ See section IX of this Supplementary Information section.
                 \232\ The ability for a covered company to calculate its NSFR at
                any point in which its funding profile materially changes intra-
                quarter is similar to the application of minimum capital
                requirements under the agencies regulatory capital rule. For
                example, Prompt Corrective Action requires an insured depository
                institution to provide written notice to its primary supervisor that
                an adjustment to its capital category may have occurred no later
                than 15 calendar days following the date that any material event has
                occurred that would cause the insured depository institution to be
                placed in a lower capital category. See 12 CFR 6.3 (OCC); 12 CFR
                208.42 (Board); 12 CFR 324.402 (FDIC).
                ---------------------------------------------------------------------------
                 The agencies have determined not to include a cure period or de
                minimis exception to the shortfall notification requirement in the
                final rule. The shortfall notification procedures are intended to help
                the agencies identify a covered company that has a heightened liquidity
                risk profile, and identify and evaluate shortfall patterns over time
                and across covered companies. Timely notification of a shortfall allows
                the appropriate Federal banking agency to make an informed
                determination as to the appropriate supervisory response. As a result,
                the agencies are finalizing the requirement that a covered company must
                provide such notification no later than 10 business days, or such other
                period as the appropriate agency may otherwise require by written
                notice, following the date that any shortfall event has occurred.
                Similarly, timely submission of a remediation plan
                [[Page 9191]]
                facilitates evaluation of shortfalls and the efforts undertaken by
                covered companies to address them, which assists the agencies in
                determining the appropriate supervisory response. Such supervisory
                monitoring and response could be hindered if notice were to occur or
                remediation plans were only submitted after a shortfall persisted in
                duration or increased in amount.
                IX. Disclosure Requirements
                A. NSFR Public Disclosure Requirements
                 The disclosure requirements of the proposed rule would have applied
                to certain bank holding companies and savings and loan holding
                companies. The tailoring proposals would have amended the scope of
                application of the proposed disclosure requirements to apply to
                domestic top-tier depository institution holding companies and U.S.
                intermediate holding companies of foreign banking organizations subject
                to the proposed NSFR rule.\233\ The disclosure requirements of the
                proposed rule would not have applied to depository institutions.\234\
                The proposed rule would have required public disclosure of a company's
                NSFR and components, as well as discussion of certain qualitative
                features to facilitate an understanding of the company's calculation
                and results. The final rule adopts the public disclosure requirements
                for domestic top-tier depository institution holding companies and U.S.
                intermediate holding companies of foreign banking organizations that
                are subject to the final rule (covered holding companies).
                ---------------------------------------------------------------------------
                 \233\ The FBO tailoring proposal would have applied NSFR public
                disclosure requirements to a U.S. intermediate holding company of a
                foreign banking organization subject to Category II or III liquidity
                standards, or subject to Category IV liquidity standards with $50
                billion or more in weighted short-term wholesale funding. 84 FR at
                24320.
                 \234\ The Board noted in the Supplementary Information section
                of the proposed rule that it may develop a different or modified
                reporting form that would be required for both depository
                institutions and depository institution holding companies subject to
                the proposed rule. The Board stated that it anticipated that it
                would solicit public comment on any such new reporting form.
                ---------------------------------------------------------------------------
                B. Quantitative Disclosure Requirements
                 The proposals would have required a company subject to the proposed
                disclosure requirements to publicly disclose the company's NSFR and its
                components. The proposed NSFR disclosure template would have included
                components of a company's ASF and RSF calculations (ASF components and
                RSF components, respectively), as well as the company's ASF amount, RSF
                amount, and NSFR. For most ASF and RSF components, the proposed rule
                would have required disclosure of both ``unweighted'' and ``weighted''
                amounts.\235\ For certain line items in the proposed NSFR disclosure
                template relating to derivative transactions that include components of
                multi-step calculations before an ASF or RSF factor is applied, a
                company would only have been required to disclose a single amount for
                the component.
                ---------------------------------------------------------------------------
                 \235\ The ``unweighted'' amount generally refers to values of
                ASF or RSF components prior to applying the assigned ASF or RSF
                factors, whereas the ``weighted'' amount generally refers to the
                amounts resulting after applying the assigned ASF or RSF factors.
                ---------------------------------------------------------------------------
                 Two commenters argued that the proposed NSFR disclosure template
                should not include certain information that is more granular than, or
                in addition to, the information specified in the BCBS common template,
                such as the requirement for additional detail regarding a company's
                HQLA and certain other assets. One of these commenters asserted that
                the proposed level of detail of required disclosures could constrain a
                company's ability to execute its funding and related business
                strategies because a firm subject to the disclosure requirements would
                be wary of adjusting its funding structure in a way that would appear
                to market participants to diverge from the funding structures of peer
                firms. The commenter also argued this anticipation of a market response
                would inappropriately force firms with different business models and
                funding needs to maintain similar funding structures. The commenter
                acknowledged that these concerns could be mitigated if firms explain
                the difference between their funding structures and those of other
                firms in the qualitative portion of the public disclosure, but argued
                that market participants are likely to pay more attention to the
                quantitative portion of a firm's disclosure. To address these concerns,
                the commenter argued that reducing the required granularity of the
                proposed disclosures would provide the market with sufficient
                information about a company's liquidity profile without resulting in
                what the commenter argued would be negative effects of overly detailed
                disclosures.
                 Other commenters suggested that the final rule require a company to
                disclose its average NSFR over the relevant reporting period, rather
                than the company's NSFR at the end of the quarter. The commenters
                argued that liquidity positions, and consequently a company's NSFR, can
                be volatile. Accordingly, disclosing a company's NSFR for the day
                ending a reporting period could suggest that the company's liquidity
                position is more volatile than an average of the company's NSFR over
                the entire reporting period would suggest. One commenter also argued
                that using an average value would be consistent with the disclosure
                requirements for the LCR. The final rule retains the quantitative
                disclosure requirements largely as proposed.\236\ However, in a change
                from the proposal, the final rule requires covered holding companies to
                use simple daily averages rather than quarter end data in its public
                disclosures. This change from the proposal will reduce the possibility
                of ``window dressing'' by covered holding companies and will benefit
                the public by more accurately reflecting the long term funding profile
                of the reporting covered holding companies.
                ---------------------------------------------------------------------------
                 \236\ As described in section V.E.3 of this Supplementary
                Information section, the final rule includes reduced NSFR
                requirements for certain covered companies. The final rule makes
                certain adjustments to the NSFR disclosure template in Sec. __.131
                of the final rule to incorporate the reduced requirements.
                ---------------------------------------------------------------------------
                 Although the final rule requires disclosure of certain liquidity
                data, it does not require a covered holding company to disclose
                specific asset-, liability-, or transaction-level details. This should
                limit the risk that public disclosures will prevent a covered holding
                company from executing its risk management and business strategies. The
                disclosure requirements in the final rule are generally consistent with
                the items specified in the BCBS common template, with some relatively
                small differences, as described below. By using a standardized tabular
                format that is generally similar to the BCBS common template, the final
                rule's NSFR disclosure template enables market participants to compare
                funding characteristics of covered holding companies in the United
                States and other banking organizations subject to similar requirements
                in other jurisdictions.
                 For most ASF or RSF components, the final rule's NSFR disclosure
                template, like the proposed NSFR disclosure template, requires
                separation of the unweighted amount based on maturity categories
                relevant to the NSFR requirement: Open maturity; less than six months
                after the calculation date; six months or more, but less than one year
                after the calculation date; one year or more after the calculation
                date; and perpetual. While the BCBS common template does not
                distinguish between the ``open'' and ``perpetual'' maturity categories
                (grouping them together under the heading ``no maturity''), the final
                rule requires a company to disclose
                [[Page 9192]]
                amounts in the ``open'' and ``perpetual'' maturity categories
                separately because the categories are on opposite ends of the maturity
                spectrum for purposes of the final rule. The ``open'' maturity category
                is meant to identify instruments that do not have a stated contractual
                maturity and may be closed out on demand, such as demand deposits. The
                ``perpetual'' category is intended to identify instruments that
                contractually may never mature and may not be closed out on demand,
                such as equity securities. The final rule's NSFR disclosure template
                separates these two categories into different columns to improve the
                transparency and quality of the disclosure without undermining the
                ability to compare the NSFR component disclosures of banking
                organizations in other jurisdictions that utilize the BCBS common
                template because these two columns can be summed for comparison
                purposes. For certain ASF and RSF components that represent
                calculations that do not depend on maturities, such as the NSFR
                derivatives asset or liability amount, the final rule's NSFR disclosure
                template, like the proposed NSFR disclosure template, does not require
                a covered holding company to separate its disclosed amount by maturity
                category.
                 As described further below, the final rule, like the proposed rule,
                identifies the ASF and RSF components that a covered holding company
                must include in each row of the NSFR disclosure template, including
                cross-references to the relevant sections of the final rule. In some
                cases, the final rule's NSFR disclosure template requires instruments
                that are assigned identical ASF or RSF factors to be disclosed in
                different rows or columns, and some rows and columns combine disclosure
                of instruments that are assigned different ASF or RSF factors.
                 For consistency, the final rule's NSFR disclosure template requires
                a covered holding company to clearly indicate the as-of date for
                disclosed amounts and report all amounts on a consolidated basis and
                expressed in millions of U.S. dollars or as a percentage, as
                applicable.
                1. Disclosure of ASF Components
                 The proposed rule would have required a company subject to the
                proposed requirement to disclose its ASF components, separated into the
                following categories: (1) Capital and securities, which includes NSFR
                regulatory capital elements and other capital elements and securities;
                (2) retail funding, which includes stable retail deposits, less stable
                retail deposits, retail brokered deposits, and other retail funding;
                (3) wholesale funding, which includes operational deposits and other
                wholesale funding; and (4) other liabilities, which include the
                company's NSFR derivatives liability amount and any other liabilities
                not included in other categories. The Board is adopting the ASF
                component disclosure categories as proposed.
                 The final rule's NSFR disclosure template differs from the BCBS
                common template by including some additional ASF categories that are
                not separately broken out under the Basel NSFR, such as retail brokered
                deposits. The final rule's NSFR disclosure template also includes
                additional information regarding a covered holding company's total
                derivatives amount. These differences from the BCBS common template
                provide greater transparency by requiring disclosure of additional
                information relevant for understanding a covered holding company's
                liquidity profile. These differences would not impact comparability
                across jurisdictions, as the more specific line items can be added
                together to produce a comparable total amount.
                2. Disclosure of RSF Components
                 The proposed disclosure requirements would have required a company
                to disclose its RSF components, separated into the following
                categories: (1) Total HQLA and each of its component asset categories
                (i.e., level 1, level 2A, and level 2B liquid assets); (2) assets other
                than HQLA that are assigned a zero percent RSF factor; (3) operational
                deposits; (4) loans and securities, separated into categories including
                retail mortgages and securities that are not HQLA; (5) other assets,
                which include commodities, certain components of the company's
                derivatives RSF amount, and all other assets not included in another
                category (including nonperforming assets); \237\ and (6) undrawn
                amounts of committed credit and liquidity facilities.
                ---------------------------------------------------------------------------
                 \237\ A company would have been required to disclose
                nonperforming assets as part of the line item for other assets and
                nonperforming assets, rather than as part of a line item based on
                the type of asset that has become nonperforming.
                ---------------------------------------------------------------------------
                 As discussed in section VII.D.3.h of this Supplementary Information
                section, the proposed rule would have assigned RSF factors to
                encumbered assets under Sec. Sec. __.106(c) and (d). A company subject
                to the proposed disclosure requirements would have been required to
                include encumbered assets in a cell of the NSFR disclosure template
                based on the asset category and asset maturity rather than based on the
                encumbrance period. Similar treatment would have applied for an asset
                provided or received by a company as variation margin to which an RSF
                factor is assigned under Sec. __.107.
                 The final rule includes the RSF component disclosure categories as
                proposed with adjustments to incorporate the reduced requirements under
                the final rule. The final rule's NSFR disclosure template differs in
                some respects from the BCBS common template to provide more granular
                information regarding RSF components without undermining comparability
                across jurisdictions. For example, the final rule requires disclosure
                of a covered holding company's level 1, level 2A, and level 2B liquid
                assets by maturity category, which is not required under the BCBS
                common template, to assist market participants and other parties in
                assessing the composition of a covered holding company's HQLA
                portfolio.\238\ Additionally, because some assets that are assigned a
                zero percent RSF factor under the final rule are not HQLA under the LCR
                rule, such as currency and coin and certain trade date receivables, the
                template includes a distinct category for zero percent RSF assets that
                are not level 1 liquid assets. The NSFR disclosure template also
                differs from the BCBS common template in its presentation of the
                components of a covered holding company's NSFR derivatives asset
                amount, generally to improve the clarity of disclosure by separating
                components into distinct rows and by including the total derivatives
                asset amount so that market participants and other parties can better
                understand a covered holding company's NSFR derivatives asset
                calculation.
                ---------------------------------------------------------------------------
                 \238\ The Board notes that the information to be disclosed
                relating to HQLA is consistent with the design and purpose of the
                NSFR and is different from disclosures under the LCR rule. The
                carrying values of the various types of liquid assets at the
                reporting date, together with their maturity profile, provide
                additional clarity regarding the structure of the reporting
                company's balance sheet. In contrast, the LCR rule focuses on the
                ability to monetize assets in a period of stress and the LCR
                disclosure template contains averages of market values of eligible
                HQLA.
                ---------------------------------------------------------------------------
                C. Qualitative Disclosure Requirements
                 A company subject to the proposed disclosure requirements would
                have been required to provide a qualitative discussion of the company's
                NSFR and its components sufficient to facilitate an understanding of
                the calculation and results. The proposed rule would not have
                prescribed the content or format of a company's qualitative
                disclosures; rather, it would have allowed flexibility for discussion
                based on each company's particular circumstances. The proposed rule
                would, however, have provided guidance through examples of topics
                [[Page 9193]]
                that a company may discuss, to the extent they would be significant to
                the company's NSFR. These examples would have included: (1) The main
                drivers of the company's NSFR; (2) changes in the company's NSFR over
                time and the causes of such changes (for example, changes in strategies
                or circumstances); (3) concentrations of funding sources and changes in
                funding structure; (4) concentrations of available and required stable
                funding within a company's corporate structure (for example, across
                legal entities); and (5) other sources of funding or other factors in
                the NSFR calculation that the company considers to be relevant to
                facilitate an understanding of its liquidity profile.
                 One commenter requested that under the final rule a company only be
                required to provide a qualitative discussion of items that are
                ``material'' rather than ``significant'' to the company's NSFR, which
                the commenter argued would be consistent with disclosure requirements
                applicable under U.S. federal securities laws and facilitate more
                effective compliance.
                 The final rule, like the proposed rule, uses the term
                ``significant'' to describe the examples of items affecting a covered
                holding company's NSFR about which a covered holding company should
                provide a qualitative discussion. However, a covered holding company
                may determine the relevant qualitative disclosures based on a
                materiality concept. Information is regarded as material for purposes
                of the disclosure requirements in the final rule if the information's
                omission or misstatement could change or influence the assessment or
                decision of a user relying on that information for the purpose of
                making investment decisions. This approach is consistent with the
                disclosure requirements under the Board's regulatory capital rules and
                the LCR public disclosure requirement.\239\
                ---------------------------------------------------------------------------
                 \239\ See 12 CFR 217.62, 217.172 and ``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, 62129 (October 11, 2013);
                12 CFR 249.91(d) and ``Liquidity Coverage Ratio: Public Disclosure
                Requirements; Extension of Compliance Period for Certain Companies
                to Meet the Liquidity Coverage Ratio Requirements,'' 81 FR 94922,
                94926 (December 27, 2016).
                ---------------------------------------------------------------------------
                 As noted above, the proposed rule would have required a company to
                provide a qualitative discussion of its NSFR and included an
                illustrative list of potentially relevant items that a company could
                discuss, to the extent relevant to its NSFR. Among the illustrative
                list of potentially relevant items was an item titled ``Other sources
                of funding or other factors in the net stable funding ratio calculation
                that the covered depository institution holding company considers to be
                relevant to facilitate an understanding of its liquidity profile.'' The
                Board has determined that this item would have been redundant given the
                proposed rule's general requirement that a covered holding company must
                provide a qualitative discussion of its NSFR. For this reason, the
                final rule eliminates this example.
                 Disclosure requirements under the LCR rule also include a
                qualitative disclosure section.\240\ Given that the proposed rule and
                the LCR rule would be complementary quantitative liquidity
                requirements, a company subject to both disclosure requirements would
                have been permitted to combine the two qualitative disclosures, as long
                as the specific qualitative disclosure requirements of each are
                satisfied. In response to a comment that the Board received on the
                proposed rule for the LCR public disclosure requirements suggesting
                that required qualitative disclosures include an exemption for certain
                confidential or proprietary information, the final LCR public
                disclosure rule clarified that a firm subject to that rule is not
                required to include in its qualitative disclosures any information that
                is proprietary or confidential.\241\ Instead, the covered holding
                company is only required to disclose general information about those
                subjects and provide a reason why the specific information has not been
                disclosed. To maintain consistency between the qualitative disclosure
                requirements of the LCR and final rules, the final rule does not
                require a covered holding company to include in the qualitative
                disclosure for its NSFR any information that is proprietary or
                confidential so long as the company discloses general information about
                the non-disclosed subject and provides a specific reason why the
                information is not being disclosed.
                ---------------------------------------------------------------------------
                 \240\ 81 FR 94922.
                 \241\ 81 FR at 94926.
                ---------------------------------------------------------------------------
                D. Frequency and Timing of Disclosure
                 The proposed rule would have required a company to provide timely
                public disclosures after each calendar quarter. One commenter argued
                that the frequency of the required disclosure should be increased to
                daily because market participants need more timely information to
                adequately adjust their risk management and business activities based
                on the liquidity risk of companies. The commenter also argued that
                quarterly NSFR disclosures could increase market instability relative
                to more frequent disclosures, because, the commenter argued, large
                changes in a company's NSFR between quarters would be more disruptive
                to the market compared to more frequent disclosures that revealed
                smaller incremental changes to a company's NSFR. Finally, the commenter
                argued that more frequent disclosure would make it more difficult for a
                company to engage in ``window dressing'' its NSFR to create the
                appearance that its liquidity profile is more stable than the company
                normally maintains.
                 Like the proposed rule, the final rule requires public disclosures
                for each calendar quarter. However, in a change from the proposal, the
                quarterly NSFR disclosures are required to be reported on a semiannual
                basis for every second and fourth calendar quarter. For example,
                following the end of the second quarter of 2023, covered holding
                companies are required to publicly disclose their NSFRs and ASF and RSF
                components for the first quarter of 2023 and the second quarter of
                2023. This approach balances the benefits of quarterly disclosures,
                which includes allowing market participants and other parties to assess
                the funding risk profiles of covered holding companies, with the
                concerns that more frequent disclosure could result in unintended
                consequences. The Board will continue to assess the potential effects
                that public disclosures have on the ability of banking organizations to
                engage in banking activities that support the economy, especially in
                times of stress. The Board will work with international groups, such as
                the BCBS, as part of its continuing evaluation of the efficacy of
                timely public disclosures.
                 For supervisory purposes, the Board will continue to monitor on a
                more frequent basis any changes to a covered holding company's
                liquidity profile through the information submitted on the FR 2052a
                report.\242\
                ---------------------------------------------------------------------------
                 \242\ The Board will issue a separate proposal for notice and
                comment to amend its information collection under its FR 2052a to
                collect information and data related to the requirements of the
                final rule.
                ---------------------------------------------------------------------------
                 As noted above, the proposed rule would have required a company
                subject to the proposed requirements to publicly disclose, in a direct
                and prominent manner, the required information on its public internet
                site or in its public financial or other public regulatory reports. The
                Board requires that the disclosures be readily accessible to the
                general public for a period of at least five years after the disclosure
                date.
                [[Page 9194]]
                The Board received no comments on this aspect of the proposed rule and
                are including it in the final rule without modification.
                 Under the proposed rule, the first reporting period for which a
                company would have been required to disclose its NSFR and its
                components would have been the calendar quarter that begins on the date
                the company becomes subject to the proposed NSFR requirement. Several
                commenters suggested that companies be given additional time to comply
                with disclosure and reporting requirements after becoming subject to
                the final rule. In addition, one commenter suggested that the
                disclosure requirements not be effective until at least two years after
                a final NSFR rule is adopted. Some argued that companies need
                additional time to build and implement the data collection systems
                necessary to meet the NSFR disclosure requirements. Other commenters
                argued that companies need additional time to align their existing
                liquidity data reporting processes under the FR 2052a and the LCR
                public disclosure requirements with those required for the NSFR rule.
                Another commenter also argued that additional time is necessary to
                allow the Board to clarify, through interpretation, the definitions of
                various terms used in the LCR rule and the proposed NSFR, and to allow
                companies to modify their compliance systems consistent with such
                interpretations.
                 To allow covered holding companies sufficient time to modify their
                reporting and compliance systems, the final rule does not require
                covered holding companies to provide public NSFR disclosures until the
                first calendar quarter that includes the date that is 18 months after
                the covered holding company becomes subject to the NSFR
                requirement.\243\ This means that covered holding companies that are
                subject to the final rule beginning on the effective date of July 1,
                2021, are required to make public disclosures for the first and second
                quarters of 2023 approximately 45 days after the end of the second
                quarter of 2023.
                ---------------------------------------------------------------------------
                 \243\ The LCR rule similarly does not require covered holding
                companies to provide public LCR disclosures until the first calendar
                quarter that includes the date that is 18 months after the covered
                holding company becomes subject to the LCR rule. 12 CFR 249.90(b).
                ---------------------------------------------------------------------------
                 As discussed in the Supplementary Information section of the
                proposed rule, the timing of disclosures required under the Federal
                banking laws may not always coincide with the timing of disclosures
                required under other Federal laws, including disclosures required under
                the Federal securities laws. For calendar quarters that do not
                correspond to a company's fiscal year or quarter end, under the
                proposals the Board would have considered those disclosures that are
                made within 45 days of the end of the calendar quarter (or within 60
                days for the limited purpose of the company's first reporting period in
                which it is subject to the proposed rule's disclosure requirements) as
                timely. In general, where a company's fiscal year end coincides with
                the end of a calendar quarter, the Board would have considered
                disclosures to be timely if they are made no later than the applicable
                SEC disclosure deadline for the corresponding Form 10-K annual report.
                In cases where a company's fiscal year end does not coincide with the
                end of a calendar quarter, the Board would have considered the
                timeliness of disclosures on a case-by-case basis.
                 This approach to timely disclosures is consistent with the approach
                to public disclosures that the Board has taken in the context of other
                regulatory reporting and disclosure requirements. For example, the
                Board has used the same indicia of timeliness with respect to the
                public disclosures required under its regulatory capital rules and the
                LCR public disclosure requirements.\244\ The Board did not receive any
                comments regarding this aspect of the proposed rule, and the final rule
                includes it as proposed.
                ---------------------------------------------------------------------------
                 \244\ See 78 FR 62018, 62129 (capital); 12 CFR 249.94 (LCR).
                ---------------------------------------------------------------------------
                X. Impact Assessment
                A. Impact on Funding
                 The agencies analyzed the potential impact of the final rule on the
                funding structure of covered companies and estimated the potential
                increase in funding costs for covered companies. In addition, the
                impact analysis considered the potential costs and benefits of an
                alternative policy of incorporating a small RSF requirement for level 1
                liquid assets and certain short-term secured lending transactions with
                financial sector counterparties secured by level 1 liquid assets.
                Finally, this section presents responses to impact-related comments
                received on the NSFR proposed rule.
                 The agencies used bank funding data from the second quarter of 2020
                to obtain the latest available view of the impact of the final rule.
                While the second quarter of 2020 represents a period of macroeconomic
                stress as a result of economic disruptions related to the COVID-19
                pandemic, the banking system was healthy and bank funding markets
                remained open and functioning, partly due to the establishment of
                facilities by the Board that supported market functioning and provision
                of credit to households and businesses.\245\ The impact of the final
                rule could vary through the economic and credit cycle based on the
                liquidity profile of a covered company's assets and appetite for
                funding risk. However, the agencies expect the impact of the final rule
                to be broadly similar if estimated using assets, commitments, and
                liabilities data from periods immediately preceding the onset of the
                COVID-19 pandemic.
                ---------------------------------------------------------------------------
                 \245\ Short-term funding markets experienced a period of
                significant stress in March 2020 that was alleviated by financial
                and economic policy interventions.
                ---------------------------------------------------------------------------
                 The agencies approximated ASF and RSF amounts at the consolidated
                level for covered companies that would be subject to the full or
                reduced NSFR requirement, as applicable, to estimate stable funding
                shortfalls and excesses. These estimates were based on confidential
                supervisory data collected on the FR 2052a report and publicly
                available data from the FR Y-9C. As the available regulatory reports do
                not correspond perfectly to the final rule's categories of assets,
                commitments, and liabilities to which RSF and ASF factors are assigned,
                the estimation entailed the use of staff judgment, which may introduce
                some measurement error and hence, uncertainty into the estimates.
                 The scope of application for the final rule includes 20 banking
                organizations, 11 of which would be Category III banking organizations
                subject to a reduced NSFR requirement.\246\ Additionally, 27 depository
                institutions with $10 billion or more in total consolidated assets that
                are consolidated subsidiaries of the 20 banking organizations described
                above are also covered by the final rule. The initial proposal would
                have included a broader set of covered companies, but the agencies
                subsequently established a modified scope as part of their recent
                efforts to tailor regulations for domestic and foreign banks to more
                closely match their risk profiles.\247\ The final rule
                [[Page 9195]]
                aligns its scope of application with the LCR rule.
                ---------------------------------------------------------------------------
                 \246\ Eleven banking organizations that would be subject to
                Category III standards that have less than $75 billion in average
                weighted short-term wholesale funding and would be subject to a
                reduced NSFR requirement calibrated at 85 percent.
                 \247\ As described above in Supplementary Information section
                III, the tailoring proposals would have modified the scope of
                application of the LCR rule and the proposed NSFR rule to apply to
                certain U.S. banking organizations and U.S. intermediate holding
                companies of foreign banking organizations, each with $100 billion
                or more in total consolidated assets, together with certain of their
                depository institution subsidiaries. In 2019, the agencies adopted a
                tailoring final rule that amended the scope of the LCR rule. See
                ``Changes to Applicability Thresholds for Regulatory Capital and
                Liquidity Requirements,'' 84 FR 59230.
                ---------------------------------------------------------------------------
                 Using the approach described above, and assuming uncertainty of 5
                percent in the NSFR due to measurement errors and management buffers,
                the agencies estimate that nearly all of these covered companies would
                be in compliance with the applicable NSFR requirement in the second
                quarter of 2020. The agencies estimate that a small number of GSIBs
                subject to the full NSFR could face an expected NSFR shortfall. The
                total shortfall is estimated to be $10 to $31 billion of stable
                funding. The agencies' estimates of shortfalls at these individual
                covered companies range from a negligible amount to 8 percent of the
                company's current level of ASF of their estimated NSFR. Beyond this
                small number of companies with shortfalls, the additional change in
                stable funding necessary to comply with the final rule at other covered
                companies, including all depository institution subsidiaries, is zero.
                Considering all banking organizations that would be subject to the
                final rule, the agencies estimate that there is a total ASF of $8.5
                trillion, a $1.3 trillion surplus over the total RSF.
                 As the final rule has differential effects on the use of funding of
                different tenors, the agencies studied the effect of the final rule on
                overall bank funding costs. The agencies do not expect most covered
                companies to incur an increase in funding costs to comply with the NSFR
                requirements. Across the companies with possible NSFR shortfalls, the
                agencies estimate that the annual funding costs of raising additional
                stable funding ranges from $80 to $250 million. For the individual
                companies, estimates of the funding costs range from a negligible
                amount to about 3 percent of net income from the third quarter of 2019
                to the second quarter of 2020. The cost estimate assumes companies with
                a shortfall would elect to eliminate it by replacing liabilities that
                are assigned a lower ASF factor with longer maturity liabilities that
                are assigned a higher ASF factor. This cost is based on an estimated
                difference in relative interest expense between 90 day AA-rated
                commercial paper (assigned a zero percent ASF factor) and unsecured
                debt that matures in one year (assigned a 100 percent ASF factor). The
                estimated difference is approximately 80 basis points, based on the
                average cost difference between these two sources of funding from
                January 2002 to February 2020.
                 Covered companies have multiple avenues by which to adjust their
                funding sources to increase their NSFRs, such as raising more retail
                deposits, raising capital, or lengthening funding terms. In general,
                covered companies would be expected to adjust to changes in regulation
                in a manner that provides the most favorable tradeoff between revenues
                and the cost of compliance. For this analysis, the agencies assumed
                that covered companies would resolve any NSFR shortfall by increasing
                their use of 12-month term funding, which is the shortest term that
                qualifies for a 100 percent ASF factor, and thus is a good proxy for
                the lowest cost way of resolving an NSFR shortfall through additional
                funding.
                 Instead of changing their funding mix to increase available stable
                funding, covered companies with a stable funding shortfall could
                instead change their asset mix to reduce their required stable funding.
                Covered companies may do so if the forgone revenues from such assets
                are smaller than the cost of raising additional stable funding. In this
                scenario, the costs incurred by covered companies would be even smaller
                than the agencies' estimates. Due to the depth and competitiveness of
                U.S. financial markets, such portfolio changes, if they were to occur,
                would likely have little knock-on effects on households and businesses.
                 Maintaining stable funding requirements may reduce the risk of
                covered company failure and the vulnerability of the financial system
                more broadly. To assess this, the agencies examined measures of stable
                funding for financial institutions leading up to and during the 2007-
                2009 financial crisis. The agencies found that, during the crisis,
                financial institutions that held low amounts of stable funding were
                significantly more likely to fail, be resolved, or receive liquidity
                and funding assistance from federal programs such as the FDIC's
                Temporary Liquidity Guarantee Program. This analysis indicates that the
                final rule is likely to increase the overall resilience of the banking
                system.
                 To assess changes since the financial crisis, the agencies examined
                broad measures of funding stability, including the loans-to-deposits
                ratio and an approximation of the NSFR that, unlike the more precise
                measure used to estimate the shortfall, can be calculated back to the
                mid-2000's. These measures show clear improvement since the mid-2000's.
                Much of this improvement appeared soon after the financial crisis,
                potentially reflecting the combined effects of the post-crisis
                regulatory reforms as well as the release of the BCBS's draft NSFR
                standard in 2010. These broader improvements in funding stability
                suggest that the total adjustments that banking organizations have made
                in response to the NSFR standard and proposed rule may be greater than
                the stable funding shortfalls suggested by the most recent data.
                 To assess changes in stable funding since the NSFR notice of
                proposed rulemaking, the agencies compared the stable funding shortfall
                under the proposed rule, estimated at the time of the proposed rule
                (December 2015), and the stable funding shortfall under the final rule.
                Under the proposed rule, the agencies estimated an aggregate stable
                funding shortfall of $39 billion as of December 2015. The agencies
                estimate that, as of June 2020 under the final rule, the shortfall is
                between $10 and $31 billion, or a difference of $8 to $29 billion from
                the proposed rule in December 2015.\248\ This difference is similar to
                the difference in stable funding requirements caused by the changes in
                the RSF factors in the final rule for level 1 high quality liquid
                assets and gross derivative liabilities from the proposal. The agencies
                estimate that the aggregate required stable funding needed by banking
                organizations to comply with the NSFR would have been $28 to $65
                billion had these changes not been implemented. The comparable figures
                suggest that the change in the shortfall from the proposal to the final
                rule is comparable to the isolated impact of the changes implemented in
                the final rule. More broadly, the historical perspective suggests that
                the final rule will help lock in the gains in funding stability made
                since the financial crisis.
                ---------------------------------------------------------------------------
                 \248\ The agencies have explored the methodological differences
                between the proposal and final rule estimates and concluded these
                differences likely would not substantially affect the estimates.
                ---------------------------------------------------------------------------
                B. Costs and Benefits of an RSF Factor for Level 1 HQLA, Both Held
                Outright and as Collateral for Short-Term Lending Transactions
                 The final rule establishes a zero percent RSF factor for level 1
                liquid assets held outright and short-term secured lending transactions
                with financial sector counterparties that are secured by level 1 high
                quality liquid assets. The agencies analyzed the costs and benefits of
                an alternate policy of a 5 percent RSF factor for such assets. As
                discussed above, the agencies estimated that the marginal cost of
                additional stable funding is about 80 basis points.\249\ Based on this
                estimate, the
                [[Page 9196]]
                agencies predict that covered companies with an NSFR shortfall would
                have to incur an annual cost of about four basis points for each dollar
                of level 1 liquid assets needed to comply with a 5 percent stable
                funding requirement.\250\ For such a covered company, the increase in
                funding costs due to a 5 percent RSF factor on level 1 liquid assets
                would offset about 3 percent of interest revenues on U.S. Treasury and
                Agency securities and about 2 percent of interest revenues on reverse
                repurchase agreements.
                ---------------------------------------------------------------------------
                 \249\ The agencies also analyzed the costs and benefits of a 10
                percent RSF factor for short-term secured lending transactions to
                financial sector counterparties, and came to the same conclusion as
                with the 5 percent RSF factor. This reflects the fact that a higher
                RSF factor on these assets increases both the associated costs and
                benefits,
                 \250\ A stable funding requirement of 5 percent multiplied by an
                80 basis points stable funding annual premium equals an annual cost
                of four basis points.
                ---------------------------------------------------------------------------
                 By reducing the profitability of holding these assets, the funding
                cost of a non-zero RSF factor on level 1 liquid assets could discourage
                intermediation in U.S. Treasury and repo markets by covered companies
                that have an NSFR close to or below 100 percent or are concerned that
                they could have an NSFR below 100 percent under stress. To the extent
                that higher costs discourage private sector intermediation in these
                markets, these costs could reduce intermediation activity. Robust
                intermediation activity is seen as beneficial to the smooth functioning
                of these key components of the financial system. During past periods of
                significant market stress or impaired liquidity, the Federal Reserve
                has taken actions to support the smooth functioning of the markets for
                Treasury securities and short-term U.S. dollar funding markets. These
                actions have been taken to prevent strains in the Treasury market from
                impeding the flow of credit in the economy or to mitigate the risk that
                money market pressures could adversely affect monetary policy
                implementation.
                 In addition, a non-zero RSF factor for level 1 liquid assets would
                make it more costly for covered companies to hold level 1 liquid assets
                than to hold central bank reserves, which have a zero percent RSF
                factor. The differential treatment of these assets, which count equally
                towards HQLA requirements under the LCR rule, may increase demand for
                central bank reserves relative to other level 1 liquid assets. Having a
                range of high-quality assets that can serve as near substitutes for
                each other allows more flexibility in monetary policy implementation
                and supports banking organizations' ability to manage liquidity risks
                efficiently as the supply of these different asset types varies over
                time, further supporting smooth market functioning.
                 The agencies identified two benefits of a small RSF requirement on
                level 1 liquid assets. The first benefit is that the stable funding
                requirement would help insulate covered companies against sharp price
                declines of level 1 liquid assets. Such price declines might put
                liquidity pressure on covered companies by triggering collateral and
                margin calls, and, in more severe cases, fire sales. Although level 1
                liquid assets are less volatile and more liquid than other securities,
                selling large quantities of them in a short period can depress their
                price further. In particular, using BrokerTec data, the agencies
                estimated that the price impact of selling $100 million of on-the-run
                U.S. Treasury securities ranges from 2 to 13 basis points during
                financial market stress. A small RSF requirement on level 1 liquid
                assets would ensure that covered companies fund a small portion of
                these securities from stable sources, which could ease the liquidity
                pressure caused by price declines and thus potentially reduce the need
                for Federal Reserve liquidity support in times of stress.
                 The second benefit of a small RSF requirement is that it would
                insulate covered companies against the systemic risk associated with
                the interconnectedness of short-term financing positions secured by
                level 1 liquid assets. In particular, covered companies may want to
                provide short-term financing to counterparties during financial market
                stress to preserve client relationships, thus maintaining a set of
                interconnected positions. In the event of counterparty default, covered
                companies might be forced to sell the level 1 liquid asset collateral
                securing these positions to be able to perform on their short-term
                obligations. However, unwinding such interconnected positions could
                potentially put further liquidity stress on both covered companies and
                short-term financing markets, especially during periods of stress.
                Importantly, the agencies found that, over the last 15 years, there
                were several episodes where the typical 1 to 2 percent haircuts used in
                U.S. Treasury repurchase agreements did not provide sufficient
                protection against day-to-day losses on U.S. Treasury securities. A
                small RSF requirement would incentivize covered companies to fund level
                1 liquid assets with more stable funding, which would reduce the risks
                associated with interconnected short-term financing positions.
                 After considering the above costs and benefits, importantly
                including the concern that a small RSF requirement could interfere with
                the functioning of U.S. Treasury and repo markets by disincentivizing
                covered companies from acting as intermediaries, the agencies are
                adopting as part of the final rule a zero percent RSF factor for level
                1 liquid assets held as securities and for short-term secured lending
                transactions secured by level 1 liquid assets.
                C. Response to Comments
                 The agencies received many comments concerning the potential impact
                of the proposal, most of which argued that the cost of the proposal
                would have been greater than predicted by the agencies. Commenters
                argued the impact of the NSFR alone and together with other more
                recently finalized regulations would have adverse impacts on banking
                activities, markets, and the real economy. For example, one commenter
                argued that the NSFR would further reduce the ability of covered
                companies to act as financial intermediaries, extend credit, promote
                price discovery, and conduct segregation and custody of client assets,
                which the commenters argued has already been reduced by recent
                regulation, including the SLR rule and the GSIB capital surcharge rule.
                This commenter also argued that the NSFR would reduce liquidity in the
                markets for securities, raise costs for derivatives end-users, make
                pricing less efficient, and result in a sunk cost to covered companies
                in the form of a liquidity buffer. The commenter further argued that
                the increase in costs to covered companies stemming from the NSFR could
                be passed on to a covered company's clients. The commenters noted that
                the predicted cost of the Basel NSFR standard has been cited by other
                jurisdictions as justification to change the standard, and that the
                agencies should consider changes to reduce the costs of the proposal.
                 In regard to commenters' concerns that the proposal would decrease
                financial intermediation, reduce market liquidity, and increase costs
                to customers, the estimates from the analysis demonstrated that nearly
                all covered companies are already in compliance with their NSFR
                requirements, and there is a substantial surplus of ASF in excess of
                RSF across covered companies at an aggregate level. The agencies also
                studied the effect of the final rule on overall bank funding costs and
                do not expect most covered companies to incur an increase in funding
                costs to comply with the final NSFR requirements. As such, the final
                rule would not require further changes by most covered companies to
                comply with the rule, limiting adverse effects on financial
                intermediation or market liquidity.
                [[Page 9197]]
                 In developing the final rule, the agencies considered commenters'
                concerns regarding potential costs of specific aspects of the NSFR, and
                in some cases have made certain targeted changes that reduce potential
                negative impacts on covered companies. For example, the proposal set
                the RSF factors for level 1 liquid asset securities held outright and
                short-term reverse repos secured by level 1 liquid assets to 5 percent
                and 10 percent, respectively. The final rule establishes a zero percent
                RSF factor for both level 1 liquid asset securities held outright and
                short-term reverse repos secured by level 1 liquid assets, in part to
                avoid disincentivizing covered companies from U.S. Treasury and repo
                market intermediation. The proposal also required a 20 percent RSF add-
                on factor for gross derivatives liabilities. Many commenters expressed
                concerns that this treatment would reduce the willingness of covered
                companies to act as derivatives counterparties and could thus aggravate
                financial market liquidity stress. The final rule establishes a 5
                percent RSF add-on factor for gross derivatives liabilities to take
                these concerns into account. The change in the RSF factor from 20
                percent to 5 percent reduces estimated aggregate RSF by $77 billion, or
                1 percent of the estimated total RSF.
                 Commenters also asserted that the agencies had insufficient data to
                estimate the impact of the NSFR on covered companies. The agencies note
                that the impact analysis for the final rule used publicly available FR
                Y-9C report data and confidential data from the FR 2052a report data
                from the second quarter of 2020, which is the most up-to-date and
                comprehensive information on covered companies.\251\ Although the
                confidential supervisory and publicly available data in the analysis
                does not perfectly correspond to the categories of assets, commitments,
                and liabilities used in the final rule, the data is sufficient to
                construct informative estimates in the impact analysis.
                ---------------------------------------------------------------------------
                 \251\ The impact analysis reported in the proposal used a
                different data collection that was less comprehensive in its
                coverage of banking companies covered by the NSFR, and less detailed
                in its description of balance sheet items.
                ---------------------------------------------------------------------------
                 The agencies also received comments suggesting that a point-in-time
                estimate of the amount of ASF relative to RSF, as provided above, is an
                inadequate measure of the economic effect of the NSFR. In particular,
                the commenters argued that the NSFR fluctuates over the business cycle
                because categories with high RSF factors, such as nonperforming assets
                and gross derivatives liabilities, tend to increase during economic
                downturns. The commenters expressed concerns that, as a result, the
                NSFR requirement could have pro-cyclical effects. The agencies partly
                address this concern by reducing the RSF factor for gross derivative
                liabilities from 20 percent to 5 percent. In addition, the agencies
                note that the NSFR of nearly all covered companies increased over the
                first half of 2020, while nonperforming assets and gross derivative
                liabilities increased for most covered companies. Notably, this
                increase in the NSFR was partly driven by the inflow of retail deposits
                at covered companies, which was similar to the inflow of retail
                deposits during the global financial crisis of 2007-2009. Therefore,
                the available empirical evidence currently available suggests that
                retail deposit inflows can partially counteract the potential pro-
                cyclicality of the NSFR requirement on covered companies during
                economic downturns.
                 One commenter agreed with the agencies' statement in the
                Supplementary Information section to the proposal that even a slight
                reduction in the probability of another financial crisis would far
                outweigh the additional costs of the proposal. This commenter cites a
                study showing that the estimated cost of the 2007-2009 financial crisis
                was greater than $20 trillion.\252\ The BCBS finds banking crises
                typically have smaller but still very large cumulative discounted costs
                of 20 to 60 percent of GDP, which translates to a total cost of $4 to
                $12 trillion.\253\ The final rule promotes safety and soundness by
                protecting covered companies against an extended period of liquidity
                and market stress by mandating a minimum amount of stable funding
                commensurate to the liquidity risks of their assets and certain
                contingent exposures.
                ---------------------------------------------------------------------------
                 \252\ Better Markets, The Cost of the Crisis: $20 Trillion and
                Counting (2015).
                 \253\ The Basel Committee on Banking Supervision, an Assessment
                of the Long-Term Economic Impact of Stronger Capital and Liquidity
                Requirements (2010).
                ---------------------------------------------------------------------------
                 Several commenters questioned whether the impact assessment in the
                proposal adequately accounts for costs to the intermediate holding
                companies of foreign banking organizations, noting that the impact
                assessment was developed prior to the finalization of the requirement
                that certain foreign banking organizations form an intermediate holding
                company in the United States under the Board's enhanced prudential
                standards rule. The commenters asserted that this timing likely
                resulted in the impact assessment in the proposal not including or
                underestimating the impact to intermediate holding companies. The
                impact analysis in the final rule considered all covered companies,
                including intermediate holding companies, using data from the second
                quarter of 2020.
                XI. Effective Dates and Transitions
                A. Effective Dates
                 Under the proposed rule, the NSFR requirement would have been
                effective as of January 1, 2018. At the time the proposal was issued in
                April 2016, the agencies set this effective date to provide covered
                companies with sufficient time to adjust to the requirements of the
                proposal, including to make any changes to ensure their assets,
                derivative exposures, and commitments are stably funded and to adjust
                information systems to calculate and monitor their NSFR ratios. The
                NSFR is a balance-sheet metric and its calculations would generally be
                based on the carrying value, as determined under GAAP, of a covered
                company's assets, liabilities, and equity. As a result, covered
                companies should generally be able to leverage current financial
                reporting systems to comply with the NSFR requirement.
                 Under the proposed rule, the updated definitions were set to become
                effective for purposes of the LCR rule at the beginning of the calendar
                quarter after finalization of the proposed NSFR rule, instead of on
                January 1, 2018. The agencies proposed that revisions to definitions in
                the LCR rule become effective sooner than the proposed NSFR effective
                date because they would enhance the clarity of certain definitions used
                in the LCR rule. Several commenters requested additional time to adjust
                the revised LCR definitions into their liquidity compliance systems.
                One commenter requested at least 180 days after the final rule is
                published for the revised LCR definitions to be effective. Another
                commenter requested that the Board issue additional guidance on how the
                revised definitions should be incorporated into FR 2052a reporting
                requirements prior to implementation of the final rule, particularly
                the definitions of ``secured funding'' and ``secured lending.''
                 Many commenters requested that the January 1, 2018 effective date
                be delayed to provide covered companies additional time to achieve
                compliance with the NSFR requirement. For example, one commenter
                requested that the effective date be delayed to at least January 2020.
                One commenter argued that the agencies should take additional time to
                better understand the multiple new regulatory initiatives, including
                [[Page 9198]]
                proposed and potential total loss absorbing capacity requirements,
                before introducing a new NSFR requirement. Commenters argued that
                covered companies should be given additional time to build and update
                internal reporting systems and comply with public disclosure
                requirements given their ongoing work to implement existing
                requirements under the LCR rule and the Board's FR 2052a reporting
                form.\254\ These commenters asserted that covered companies required
                additional time beyond 2018 to develop necessary staffing, management,
                compliance, and information technology resources. Some commenters also
                noted that certain covered companies would likely require additional
                time to make structural adjustments to their balance sheets to be in
                compliance with the NSFR requirement and other pending rulemakings. One
                commenter suggested that the final rule should be implemented in three
                transitional phrases consisting of a study of the cumulative impacts of
                existing post-crisis regulatory reforms on the economy, finalizing the
                NSFR with an initial ratio of ASF to RSF of 0.70, and adjusting the
                NSFR requirement to 1.0 only for certain of the largest banking
                organizations.\255\ The commenter also suggested that the agencies
                should not implement beyond the first phase if they find that economic
                impacts are not minimal or the rule is found to be ineffective. Another
                commenter suggested that the treatment for derivatives should be
                instituted through a phased-in transition to better align with the
                agencies' margin requirements for non-cleared swaps.\256\
                ---------------------------------------------------------------------------
                 \254\ On November 17, 2015, the Board adopted the revised FR
                2052a report to collect quantitative information on selected assets,
                liabilities, funding activities, and contingent liabilities from
                certain large banking organizations.
                 \255\ https://www.federalreserve.gov/bankinforeg/large-institution-supervision.htm.
                 \256\ See 12 CFR 45.1(e) (OCC); 12 CFR 237.1(e) (Board); 12 CFR
                349.1(e) (FDIC).
                ---------------------------------------------------------------------------
                 In response to commenters' concerns and in light of the revised
                date on which the agencies are finalizing the NSFR rule, the agencies
                are revising the final rule to require covered companies to maintain an
                NSFR of 1.0 beginning on July 1, 2021. This effective date provides
                sufficient time for covered companies to take into account the new
                requirement and, as necessary, to make infrastructure and operational
                adjustments that may be required to comply with the final rule. To the
                extent a covered company is required to change its funding profile to
                comply with the final rule, the effective date should be sufficient to
                allow the firm to assess the prevailing market conditions to achieve
                optimal results.
                 The final rule also adopts an effective date of July 1, 2021 for
                revisions to definitions currently used in the LCR rule. The effective
                date for revisions to the definitions in the LCR rule is appropriate,
                as the revisions will provide additional clarity on the meaning of such
                terms. In addition, covered companies will be able to modify their
                compliance systems to incorporate the revised definitions by the
                effective date, especially since the revisions will likely require
                covered companies to make adjustments to their existing systems and not
                require covered companies to develop entirely new systems.
                B. Transitions
                1. Initial Transitions for Banking Organizations That Become Subject to
                NSFR Rule After the Effective Date
                 Under the tailoring proposals, a banking organization that would
                have become subject to the LCR rule or proposed rule after the
                effective date of the final rule would have been required to comply
                with the LCR rule or proposed rule on the first day of the second
                quarter after the banking organization became subject to it (newly
                covered banking organizations), consistent with the amount of time
                previously provided under the LCR rule or proposed rule.
                 Some commenters requested additional time to comply with the LCR
                rule, and the tailoring final rule provided an additional quarter to
                comply for newly covered banking organizations to comply with the LCR
                rule. Consistent with the LCR rule, the final rule provides an
                additional quarter to comply with the final rule, such that a newly
                covered company will be required to comply with these requirements on
                the first day of the third quarter after becoming subject to these
                requirements. A covered company becomes subject to the NSFR based on
                its category of applicable standards. A covered company's category is
                determined based on risk-based indicators as reported on its Call
                Report, FR Y-9LP or FR Y-15, or on averages of such reported items.
                2. Transitions for Changes to an NSFR Requirement
                 Under the tailoring proposals, a banking organization subject to
                the LCR rule or proposed rule that becomes subject to a higher outflow
                or required stable funding adjustment percentage would have been able
                to continue using a lower calibration for one quarter. A banking
                organization that becomes subject to a lower outflow or required stable
                funding adjustment percentage at a quarter end would have been able to
                use the lower percentage immediately, as of the first day of the
                subsequent quarter. Some commenters requested longer transitions before
                a banking organization is required to meet an increased LCR
                requirement.
                 The tailoring final rule provided an additional quarter in the LCR
                rule to continue to use a lower outflow adjustment percentage after a
                banking organization becomes subject to a higher outflow adjustment
                percentage, but retained the one quarter transition period for a
                banking organization that transitions to a lower outflow adjustment
                percentage. Consistent with the LCR rule, the final rule allows a
                covered company an additional quarter to continue using a lower
                required stable funding adjustment percentage after becoming subject to
                a higher required stable funding adjustment percentage.\257\ The
                agencies are finalizing the transition period for a banking
                organization that transitions to a lower required stable funding
                adjustment percentage as proposed. A depository institution subsidiary
                with $10 billion or more in total consolidated assets must begin
                complying on the same dates as its top-tier banking organization.\258\
                ---------------------------------------------------------------------------
                 \257\ Section __.105 of the final rule assigns required stable
                funding adjustment percentages to banking organizations based on
                their category of standards and amount of average weighted short-
                term wholesale funding. A banking organization's category and
                average weighted short-term wholesale funding are deemed to change
                during the quarter in which the banking organization files the
                reporting form demonstrating it meets the definition of a new
                category or its level of average weighted short-term wholesale
                funding triggers an increased or decreased required stable funding
                adjustment percentage under section __.105 of the final rule.
                Accordingly, the banking organization is deemed to be subject to a
                new required stable funding adjustment percentage in the quarter
                during which the relevant information (used to determine category
                eligibility or level of average weighted short-term wholesale
                funding) is reported. For example, if a banking organization subject
                to Category III standards and an 85 percent required stable funding
                adjustment percentage subsequently files an FR Y-15 during the
                fourth quarter of a calendar year (representing a September 30 as-of
                reporting date) that reports an amount of weighted short-term
                wholesale funding such that the banking organization's average
                weighted short-term wholesale funding is $75 billion or more, the
                banking organization would be deemed to be subject to the higher
                required stable funding adjustment percentage (100 percent) as of
                the fourth quarter of that calendar year. Such a banking
                organization would have a two-quarter transition period and be
                required to comply with the higher adjustment percentage by the
                first day of the third calendar quarter of the next calendar year
                (July 1st).
                 \258\ See supra note 19.
                [[Page 9199]]
                 Table 6--Example Dates for Changes to an NSFR Requirement
                ------------------------------------------------------------------------
                 Continue to apply
                 prior required Apply new required
                 stable funding stable funding
                 adjustment adjustment percentage
                 percentage
                ------------------------------------------------------------------------
                Example 1:
                 Banking organization that 1st and 2nd Beginning July 1,
                 becomes subject to a quarter of 2024. 2024.
                 higher required stable
                 funding adjustment
                 percentage as of December
                 31, 2023,\259\ as a
                 result of having an
                 average weighted-short-
                 term wholesale funding
                 level of greater than $75
                 billion based on the four
                 prior calendar quarters.
                Example 2:
                 Covered subsidiary No prior Comply with required
                 depository institution of requirement. stable funding
                 banking organization that adjustment
                 moves from Category IV to percentage
                 another category as of applicable to new
                 December 31, 2023. category beginning
                 July 1, 2024.
                Example 3:
                 Banking organization that 1st quarter of Beginning April 1,
                 becomes subject to a 2024. 2024.
                 lower required stable
                 funding adjustment
                 percentage as of December
                 31, 2023, as a result of
                 having an average
                 weighted-short-term
                 wholesale funding level
                 of less than $75 billion
                 based on the four prior
                 calendar quarters.
                ------------------------------------------------------------------------
                3. Reservation of Authority To Extend Transitions
                ---------------------------------------------------------------------------
                 \259\ That is, the banking organization filed reports in the 4th
                quarter of 2023 (as of September 30 report date) demonstrating that
                it had an average weighted-short-term wholesale funding level of
                greater than $75 billion during the four prior calendar quarters.
                ---------------------------------------------------------------------------
                 The final rule includes a reservation of authority that provides
                the agencies with the flexibility to extend transitions for banking
                organizations where warranted by events and circumstances. There may be
                limited circumstances where a banking organization needs a longer
                transition period. For example, an extension may be appropriate when
                unusual or unforeseen circumstances, such as a merger with another
                entity, cause a banking organization to become subject to an NSFR
                requirement for the first time. However, the agencies expect that this
                authority would be exercised in limited situations, consistent with
                prior practice.
                4. Cessation of Applicability
                 Under the tailoring proposals, once a banking organization became
                subject to an LCR or proposed NSFR requirement, it would have remained
                subject to the rule until the appropriate agency determined that
                application of the rule would not be appropriate in light of the
                banking organization's asset size, level of complexity, risk profile,
                or scope of operations. The tailoring final rule repealed this
                provision in the LCR rule because the revised scope of application
                framework made this cessation provision unnecessary. Consistent with
                the LCR rule, the agencies are repealing this provision in the final
                rule. A banking organization that no longer meets the relevant criteria
                for being subject to the final rule will not be required to comply with
                the final rule.
                XII. Administrative Law Matters
                A. Congressional Review Act
                 For purposes of the Congressional Review Act, the Office of
                Management and Budget (OMB) makes a determination as to whether a final
                rule constitutes a ``major'' rule.\260\ If a rule is deemed a ``major
                rule'' by the OMB, the Congressional Review Act generally provides that
                the rule may not take effect until at least 60 days following its
                publication.\261\
                ---------------------------------------------------------------------------
                 \260\ 5 U.S.C. 801 et seq.
                 \261\ 5 U.S.C. 801(a)(3).
                ---------------------------------------------------------------------------
                 The Congressional Review Act defines a ``major rule'' as any rule
                that the Administrator of the Office of Information and Regulatory
                Affairs of the OMB finds has resulted in or is likely to result in (A)
                an annual effect on the economy of $100,000,000 or more; (B) a major
                increase in costs or prices for consumers, individual industries,
                Federal, State, or local government agencies or geographic regions; or
                (C) significant adverse effects on competition, employment, investment,
                productivity, innovation, or on the ability of United States-based
                enterprises to compete with foreign-based enterprises in domestic and
                export markets.\262\
                ---------------------------------------------------------------------------
                 \262\ 5 U.S.C. 804(2).
                ---------------------------------------------------------------------------
                 As required by the Congressional Review Act, the agencies will
                submit the final rule and other appropriate reports to Congress and the
                Government Accountability Office for review.
                B. Plain Language
                 Section 722 of the Gramm-Leach-Bliley Act,\263\ requires the
                Federal banking agencies to use plain language in all proposed and
                final rules published after January 1, 2000. The agencies sought to
                present the final rule in a simple and straightforward manner and did
                not receive any comments on the use of plain language in the proposed
                rule.
                ---------------------------------------------------------------------------
                 \263\ Public Law 106-102, sec. 722, 113 Stat. 1338, 1471 (1999),
                12 U.S.C. 4809.
                ---------------------------------------------------------------------------
                C. Regulatory Flexibility Act
                 The Regulatory Flexibility Act \264\ (RFA) generally requires an
                agency to either provide a regulatory flexibility analysis with a final
                rule or to certify that the final rule will not have a significant
                economic impact on a substantial number of small entities. The U.S.
                Small Business Administration (SBA) establishes size standards that
                define which entities are small businesses for purposes of the
                RFA.\265\ Except as otherwise specified below, the size standard to be
                considered a small business for banking entities subject to the final
                rule is $600 million or less in consolidated assets.\266\ In accordance
                with section 3(a) of the RFA, the Board is publishing a regulatory
                flexibility analysis with respect to the final rule. The OCC and FDIC
                are certifying that
                [[Page 9200]]
                the final rule will not have a significant economic impact on a
                substantial number of small entities.
                ---------------------------------------------------------------------------
                 \264\ 5 U.S.C. 601 et seq.
                 \265\ U.S. SBA, Table of Small Business Size Standards Matched
                to North American Industry Classification System Codes, available at
                https://www.sba.gov/document/support-table-size-standards.
                 \266\ See id. Pursuant to SBA regulations, the asset size of a
                concern includes the assets of the concern whose size is at issue
                and all of its domestic and foreign affiliates. 13 CFR 121.103(6).
                ---------------------------------------------------------------------------
                Board
                 Based on its analysis and for the reasons stated below, the Board
                believes that the final rule will not have a significant economic
                impact on a substantial number of small entities.
                 The final rule is intended to implement a quantitative liquidity
                requirement applicable for certain bank holding companies, savings and
                loan holding companies, and state member banks.
                 Under regulations issued by the Small Business Administration, a
                ``small entity'' includes firms within the ``Finance and Insurance''
                sector with total assets of $600 million or less.\267\ The Board
                believes that the Finance and Insurance sector constitutes a reasonable
                universe of firms for these purposes because such firms generally
                engage in activities that are financial in nature. Consequently, bank
                holding companies, savings and loan holding companies, and state member
                banks with asset sizes of $600 million or less are small entities for
                purposes of the RFA.
                ---------------------------------------------------------------------------
                 \267\ 13 CFR 121.201.
                ---------------------------------------------------------------------------
                 As discussed in section V.E of this Supplementary Information
                section, the final rule will generally apply to certain Board-regulated
                institutions with $100 billion or more total consolidated assets, and
                certain of their depository institution subsidiaries with $10 billion
                or more in total assets.
                 Companies that are subject to the final rule therefore
                substantially exceed the $600 million asset threshold at which a
                banking entity is considered a ``small entity'' under SBA regulations.
                Because the final rule does not apply to any company with assets of
                $600 million or less, the final rule is not expected to apply to any
                small entity for purposes of the RFA. As discussed in the Supplementary
                Information section, including section V of the Supplementary
                Information section, the Board does not believe that the final rule
                duplicates, overlaps, or conflicts with any other Federal rules. In
                light of the foregoing, the Board does not believe that the final rule
                will have a significant economic impact on a substantial number of
                small entities.
                OCC
                 The OCC considered whether the final rule is likely to have a
                significant economic impact on a substantial number of small entities,
                pursuant to the RFA. The OCC currently supervises approximately 745
                small entities. Because the final rule will only apply to OCC-regulated
                entities that have $10 billion or more in assets, the OCC concludes the
                rule will not have a significant economic impact on a substantial
                number of small OCC-regulated entities.
                FDIC
                 The RFA generally requires an agency, in connection with a final
                rule, to prepare and make available for public comment a final
                regulatory flexibility analysis that describes the impact of a final
                rule on small entities.\268\ However, a regulatory flexibility analysis
                is not required if the agency certifies that the rule will not have a
                significant economic impact on a substantial number of small entities.
                The SBA has defined ``small entities'' to include banking organizations
                with total assets of less than or equal to $600 million that are
                independently owned and operated or owned by a holding company with
                less than $600 million in total assets.\269\ Generally, the FDIC
                considers a significant effect to be a quantified effect in excess of 5
                percent of total annual salaries and benefits per institution, or 2.5
                percent of total noninterest expenses. The FDIC believes that effects
                in excess of these thresholds typically represent significant effects
                for FDIC-supervised institutions. For the reasons described below and
                under section 605(b) of the RFA, the FDIC certifies that the final rule
                will not have a significant economic impact on a substantial number of
                small entities.
                ---------------------------------------------------------------------------
                 \268\ 5 U.S.C. 601 et seq.
                 \269\ The SBA defines a small banking organization as having
                $600 million or less in assets, where ``a financial institution's
                assets are determined by averaging the assets reported on its four
                quarterly financial statements for the preceding year.'' See 13 CFR
                121.201 (as amended, effective August 19, 2019). ``SBA counts the
                receipts, employees, or other measure of size of the concern whose
                size is at issue and all of its domestic and foreign affiliates.''
                See 13 CFR 121.103. Following these regulations, the FDIC uses a
                covered entity's affiliated and acquired assets, averaged over the
                preceding four quarters, to determine whether the covered entity is
                ``small'' for the purposes of RFA.
                ---------------------------------------------------------------------------
                 The FDIC supervises 3,270 institutions,\270\ of which 2,492 are
                considered small entities for the purposes of the RFA.\271\
                ---------------------------------------------------------------------------
                 \270\ FDIC-supervised institutions are set forth in 12 U.S.C.
                1813(q)(2).
                 \271\ Call Report data, June 30, 2020.
                ---------------------------------------------------------------------------
                 The final rule applies the full NSFR requirement to companies that
                are subject to the Category I and Category II liquidity standards.
                Companies subject to the Category III liquidity standards with $75
                billion or more in average weighted short-term wholesale funding are
                also subject to the full NSFR requirement. All other companies subject
                to the Category III standards, and companies subject to the Category IV
                standards with $50 billion or more in average weighted short-term
                wholesale funding, are subject to a reduced NSFR requirement calibrated
                at 85 percent and 70 percent, respectively. Depository institution
                subsidiaries of companies subject to the Category I, II, or III
                liquidity standards are subject to the same NSFR requirement as their
                top tier holding company if the depository institution subsidiary has
                total consolidated assets of $10 billion or more. Depository
                institution subsidiaries of companies subject to Category IV liquidity
                standards are not subject to the NSFR.
                 As of June 30, 2020, the FDIC supervises four depository
                institutions that would be subject to an NSFR requirement calibrated at
                85 percent.\272\ No depository institutions that are subject to the
                NSFR requirements would be considered small entities for the purposes
                of the RFA because the NSFR requirements apply only to depository
                institutions with at least $10 billion in total consolidated assets,
                and whose parent company is subject to the Category I, II, or III
                liquidity standards and, therefore, has least $100 billion in total
                consolidated assets.\273\
                ---------------------------------------------------------------------------
                 \272\ Call Report data, June 30, 2020.
                 \273\ No companies with less than $100 billion in total
                consolidated assets would be subject to the capital and liquidity
                standards set forth in the agencies' tailoring rule. See 84 FR
                59230, 59235 (November 1, 2019).
                ---------------------------------------------------------------------------
                 Because this rule does not apply to any FDIC-supervised
                institutions that would be considered small entities for the purposes
                of the RFA, the FDIC certifies that this final rule will not have a
                significant economic impact on a substantial number of small entities.
                D. Riegle Community Development and Regulatory Improvement Act of 1994
                 Section 302(a) of the Riegle Community Development and Regulatory
                Improvement Act of 1994 (RCDRIA) \274\ requires that each Federal
                banking agency, in determining the effective date and administrative
                compliance requirements for new regulations that impose additional
                reporting, disclosure, or other requirements on insured depository
                institutions, consider, consistent with principles of safety and
                soundness and the public interest, any administrative burdens that such
                regulations would place on depository institutions, including small
                depository institutions, and customers of depository institutions, as
                well as the benefits of
                [[Page 9201]]
                such regulations. The agencies have considered comments on these
                matters in other sections of this Supplementary Information section.
                ---------------------------------------------------------------------------
                 \274\ 12 U.S.C. 4802(a).
                ---------------------------------------------------------------------------
                 In addition, under section 302(b) of the RCDRIA, new regulations
                that impose additional reporting, disclosures, or other new
                requirements on insured depository institutions generally must take
                effect on the first day of a calendar quarter that begins on or after
                the date on which the regulations are published in final form.\275\
                Therefore, the final rule will be effective on July 1, 2021, the first
                day of the third calendar quarter of 2021.
                ---------------------------------------------------------------------------
                 \275\ 12 U.S.C. 4802(b).
                ---------------------------------------------------------------------------
                E. Paperwork Reduction Act
                 Certain provisions of the final 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 OMB control number. The
                OMB control numbers are 1557-0323 for the OCC, 7100-0367 for the Board,
                and 3064-0197 for the FDIC. These information collections will be
                extended for three years, with revision. The information collection
                requirements contained in this final rule have been submitted by the
                OCC and FDIC to OMB for review and approval under section 3507(d) of
                the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the 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 did not receive any specific public comments on the PRA
                analysis.
                 The agencies have a continuing interest in the public's opinions of
                information collections. At any time, commenters may submit comments
                regarding the burden estimate, or any other aspect of this collection
                of information, including suggestions for reducing the burden, to the
                addresses listed in the ADDRESSES section. All comments will become a
                matter of public record. 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) 395-5806; or by email to:
                [email protected], Attention, Federal Banking Agency Desk
                Officer.
                Proposed Revision, With Extension, of the Following Information
                Collections
                 Title of information collection and OMB control number: Reporting
                and Recordkeeping Requirements Associated with Liquidity Coverage
                Ratio: Liquidity Risk Measurement, Standards, and Monitoring (1557-0323
                for the OCC); Reporting, Recordkeeping, and Disclosure Requirements
                Associated with Liquidity Risk Measurement Standards (7100-0367 for the
                Board); and Liquidity Coverage Ratio: Liquidity Risk Measurement,
                Standards, and Monitoring (LCR) (3064-0197 for the FDIC).
                 Frequency of Response: Biannually, quarterly, monthly, and event
                generated.
                 Affected Public: Businesses or other for-profit.
                 Respondents:
                 OCC: National banks and federal savings associations.
                 Board: Insured state member banks, bank holding companies, and
                savings and loan holding companies, and U.S intermediate holding
                companies of foreign banking organizations.
                 FDIC: State nonmember banks and state savings associations.
                 Current actions: The reporting requirements in the final rule are
                found in section __.110, the recordkeeping requirements are found in
                sections __.108(b) and __.110(b), and the disclosure requirements are
                found in sections __.130 and __.131. The disclosure requirements are
                only for Board supervised entities. Since the burden estimates for the
                NSFR revisions were inadvertently included in the November 1, 2019,
                tailoring final rule (84 FR 59230), the burden estimates will not
                change for this submission with the exception of the FDIC's burden
                estimates which have been updated to reflect the addition of two
                additional supervised institutions.
                 Section __.110 requires a covered company to take certain actions
                following any NSFR shortfall. A covered company would be required to
                notify its appropriate Federal banking agency of the shortfall no later
                than 10 business days (or such other period as the appropriate Federal
                banking agency may otherwise require by written notice) following the
                date that any event has occurred that would cause or has caused the
                covered company's NSFR to be less than 1.0. It must also submit to its
                appropriate Federal banking agency its plan for remediation of its NSFR
                to at least 1.0, and submit at least monthly reports on its progress to
                achieve compliance.
                 Section __.108(b) provides that if an institution includes an ASF
                amount in excess of the RSF amount of the consolidated subsidiary, it
                must implement and maintain written procedures to identify and monitor
                applicable statutory, regulatory, contractual, supervisory, or other
                restrictions on transferring assets from the consolidated subsidiaries.
                These procedures must document which types of transactions the
                institution could use to transfer assets from a consolidated subsidiary
                to the institution and how these types of transactions comply with
                applicable statutory, regulatory, contractual, supervisory, or other
                restrictions. Section __.110(b) requires preparation of a plan for
                remediation to achieve an NSFR of at least equal to 1.0, as required
                under Sec. __.100.
                 Section __.130 requires that a depository institution holding
                company subject to the NSFR publicly disclose on a biannual basis its
                NSFR calculated for each of the two immediately preceding calendar
                quarters, in a direct and prominent manner on its public internet site
                or in its public financial or other public regulatory reports. These
                disclosures must remain publicly available for at least five years
                after the date of disclosure. Section __.131 specifies the quantitative
                and qualitative disclosures required and provides the disclosure
                template to be used.
                 Estimated average hour per response:
                 Reporting
                 Sections __.40(a) and __.110(a) (filed monthly)--0.5 hours.
                 Sections __.40(b) and __.110(b)--0.5 hours.
                 Sections __.40(b)(3)(iv) and __.110(b) (filed quarterly)--0.5
                hours.
                 Recordkeeping
                 Sections __.22(a)(2), __.22(a)(5), and __.108(b)--40 hours.
                 Sections __.40(b) and __.110(b)--200 hours.
                 Disclosure (Board only)
                 Sections 249.90, 249.91, 249.130, and 249.131 (filed biannually)--
                24 hours.
                 OCC:
                 OMB control number: 1557-0323.
                 Number of Respondents: 13.
                 Total Estimated Annual Burden: 4,722 hours.
                 Board:
                 OMB control number: 7100-0367.
                 Number of Respondents: 19 for Recordkeeping Sections 249.22(a)(2),
                249.22(a)(5), and 249.108(b) and Disclosure Sections 249.90, 249.91,
                249.130, and 249.131; 1 for all other rows.
                 Total Estimated Annual Burden: 2,793 hours.
                 FDIC:
                 OMB control number: 3064-0197.
                 Number of Respondents: 4.
                 Total Estimated Annual Burden: 994 hours.
                [[Page 9202]]
                F. OCC Unfunded Mandates Reform Act of 1995 Determination
                 The Unfunded Mandates Reform Act requires that an agency prepare a
                budgetary impact statement before promulgating a rule that 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 for inflation (currently $157 million), in
                any one year. The OCC interprets ``expenditure'' to mean assessment of
                costs (i.e., this part of our UMRA analysis assesses the costs of a
                rule on OCC-supervised entities, rather than the overall impact). The
                OCC's estimate of banks' operational costs to comply with mandates is
                approximately $26 million in the first year. In addition to these
                operational expenditures, the OCC anticipates that in order to comply
                with the final rule, banks may have to substitute lower RSF-factor
                assets for higher yielding assets that have higher RSF factors. The OCC
                estimates the impact of this substitution may cost two affiliated banks
                approximately $240 million per year. The total UMRA cost is
                approximately $266 million ($26 million in compliance related
                expenditures + $240 million in shortfall funding). Therefore,
                consistent with the UMRA, the OCC has concluded that the final rule
                will result in private sector costs that exceed the threshold for a
                significant regulatory action. 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-2014-0029.
                Text of Common Rule
                0
                (All agencies)
                PART [ ]--LIQUIDITY RISK MEASUREMENT, STANDARDS, AND MONITORING
                Subpart K--Net Stable Funding Ratio
                Sec.
                __.100 Net stable funding ratio.
                __.101 Determining maturity.
                __.102 Rules of construction.
                __.103 Calculation of available stable funding amount.
                __.104 ASF factors.
                __.105 Calculation of required stable funding amount.
                __.106 RSF factors.
                __.107 Calculation of NSFR derivatives amounts.
                __.108 Funding related to Covered Federal Reserve Facility Funding.
                __.109 Rules for consolidation.
                Subpart L--Net Stable Funding Shortfall
                Sec. __.110 NSFR shortfall: supervisory framework.
                Subpart K--Net Stable Funding Ratio
                Sec. __.100 Net stable funding ratio.
                 (a) Minimum net stable funding ratio requirement. A [BANK] must
                maintain a net stable funding ratio that is equal to or greater than
                1.0 on an ongoing basis in accordance with this subpart.
                 (b) Calculation of the net stable funding ratio. For purposes of
                this part, a [BANK]'s net stable funding ratio equals:
                 (1) The [BANK]'s available stable funding (ASF) amount, calculated
                pursuant to Sec. __.103, as of the calculation date; divided by
                 (2) The [BANK]'s required stable funding (RSF) amount, calculated
                pursuant to Sec. __.105, as of the calculation date.
                Sec. __.101 Determining maturity.
                 For purposes of calculating its net stable funding ratio, including
                its ASF amount and RSF amount, under subparts K through N, a [BANK]
                shall assume each of the following:
                 (a) With respect to any NSFR liability, the NSFR liability matures
                according to Sec. __.31(a)(1) of this part without regard to whether
                the NSFR liability is subject to Sec. __.32;
                 (b) With respect to an asset, the asset matures according to Sec.
                __.31(a)(2) of this part without regard to whether the asset is subject
                to Sec. __.33 of this part;
                 (c) With respect to an NSFR liability or asset that is perpetual,
                the NSFR liability or asset matures one year or more after the
                calculation date;
                 (d) With respect to an NSFR liability or asset that has an open
                maturity, the NSFR liability or asset matures on the first calendar day
                after the calculation date, except that in the case of a deferred tax
                liability, the NSFR liability matures on the first calendar day after
                the calculation date on which the deferred tax liability could be
                realized; and
                 (e) With respect to any principal payment of an NSFR liability or
                asset, such as an amortizing loan, that is due prior to the maturity of
                the NSFR liability or asset, the payment matures on the date on which
                it is contractually due.
                Sec. __.102 Rules of construction.
                 (a) Balance-sheet metric. Unless otherwise provided in this
                subpart, an NSFR regulatory capital element, NSFR liability, or asset
                that is not included on a [BANK]'s balance sheet is not assigned an RSF
                factor or ASF factor, as applicable; and an NSFR regulatory capital
                element, NSFR liability, or asset that is included on a [BANK]'s
                balance sheet is assigned an RSF factor or ASF factor, as applicable.
                 (b) Netting of certain transactions. Where a [BANK] has secured
                lending transactions, secured funding transactions, or asset exchanges
                with the same counterparty and has offset the gross value of
                receivables due from the counterparty under the transactions by the
                gross value of payables under the transactions due to the counterparty,
                the receivables or payables associated with the offsetting transactions
                that are not included on the [BANK]'s balance sheet are treated as if
                they were included on the [BANK]'s balance sheet with carrying values,
                unless the criteria in [Sec. __.10(c)(4)(ii)(E)(1) through (3) of the
                AGENCY SUPPLEMENTARY LEVERAGE RATIO RULE] are met.
                 (c) Treatment of Securities Received in an Asset Exchange by a
                Securities Lender. Where a [BANK] receives a security in an asset
                exchange, acts as a securities lender, includes the carrying value of
                the received security on its balance sheet, and has not rehypothecated
                the security received:
                 (1) The security received by the [BANK] is not assigned an RSF
                factor; and
                 (2) The obligation to return the security received by the [BANK] is
                not assigned an ASF factor.
                Sec. __.103 Calculation of available stable funding amount.
                 A [BANK]'s ASF amount equals the sum of the carrying values of the
                [BANK]'s NSFR regulatory capital elements and NSFR liabilities, in each
                case multiplied by the ASF factor applicable in Sec. __.104 or Sec.
                __.107(c) and consolidated in accordance with Sec. __.109.
                Sec. __.104 ASF factors.
                 (a) NSFR regulatory capital elements and NSFR liabilities assigned
                a 100 percent ASF factor. An NSFR regulatory capital element or NSFR
                liability of a [BANK] is assigned a 100 percent ASF factor if it is one
                of the following:
                 (1) An NSFR regulatory capital element; or
                 (2) An NSFR liability that has a maturity of one year or more from
                the calculation date, is not described in paragraph (d)(9) of this
                section, and is not a retail deposit or brokered deposit provided by a
                retail customer or counterparty.
                 (b) NSFR liabilities assigned a 95 percent ASF factor. An NSFR
                liability of a [BANK] is assigned a 95 percent ASF factor if it is one
                of the following:
                [[Page 9203]]
                 (1) A stable retail deposit (regardless of maturity or
                collateralization) held at the [BANK]; or
                 (2) A sweep deposit that:
                 (i) Is 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;
                 (ii) Is entirely covered by deposit insurance; and
                 (iii) The [BANK] demonstrates to the satisfaction of the [AGENCY]
                that a withdrawal of such deposit is highly unlikely to occur during a
                liquidity stress event.
                 (c) NSFR liabilities assigned a 90 percent ASF factor. An NSFR
                liability of a [BANK] is assigned a 90 percent ASF factor if it is
                funding provided by a retail customer or counterparty that is:
                 (1) A retail deposit (regardless of maturity or collateralization)
                other than a stable retail deposit or brokered deposit;
                 (2) A brokered reciprocal deposit where the entire amount is
                covered by deposit insurance;
                 (3) A sweep deposit that is 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, where the sweep deposit does not meet the
                requirements of paragraph (b)(2) of this section; or
                 (4) A brokered deposit that is not a brokered reciprocal deposit or
                a sweep deposit, that is not held in a transactional account, and that
                matures one year or more from the calculation date.
                 (d) NSFR liabilities assigned a 50 percent ASF factor. An NSFR
                liability of a [BANK] is assigned a 50 percent ASF factor if it is one
                of the following:
                 (1) Unsecured wholesale funding that:
                 (i) Is not provided by a financial sector entity, a consolidated
                subsidiary of a financial sector entity, or a central bank;
                 (ii) Matures less than one year from the calculation date; and
                 (iii) Is not a security issued by the [BANK] or an operational
                deposit placed at the [BANK];
                 (2) A secured funding transaction with the following
                characteristics:
                 (i) The counterparty is not a financial sector entity, a
                consolidated subsidiary of a financial sector entity, or a central
                bank;
                 (ii) The secured funding transaction matures less than one year
                from the calculation date; and
                 (iii) The secured funding transaction is not a collateralized
                deposit that is an operational deposit placed at the [BANK];
                 (3) Unsecured wholesale funding that:
                 (i) Is provided by a financial sector entity, a consolidated
                subsidiary of a financial sector entity, or a central bank;
                 (ii) Matures six months or more, but less than one year, from the
                calculation date; and
                 (iii) Is not a security issued by the [BANK] or an operational
                deposit;
                 (4) A secured funding transaction with the following
                characteristics:
                 (i) The counterparty is a financial sector entity, a consolidated
                subsidiary of a financial sector entity, or a central bank;
                 (ii) The secured funding transaction matures six months or more,
                but less than one year, from the calculation date; and
                 (iii) The secured funding transaction is not a collateralized
                deposit that is an operational deposit;
                 (5) A security issued by the [BANK] that matures six months or
                more, but less than one year, from the calculation date;
                 (6) An operational deposit placed at the [BANK];
                 (7) A brokered deposit provided by a retail customer or
                counterparty that is not described in paragraphs (c) or (e)(2) of this
                section;
                 (8) A sweep deposit provided by a retail customer or counterparty
                that is not described in paragraphs (b) or (c) of this section;
                 (9) An NSFR liability owed to a retail customer or counterparty
                that is not a deposit and is not a security issued by the [BANK]; or
                 (10) Any other NSFR liability that matures six months or more, but
                less than one year, from the calculation date and is not described in
                paragraphs (a) through (c) or (d)(1) through (d)(9) of this section.
                 (e) NSFR liabilities assigned a zero percent ASF factor. An NSFR
                liability of a [BANK] is assigned a zero percent ASF factor if it is
                one of the following:
                 (1) A trade date payable that results from a purchase by the [BANK]
                of a financial instrument, foreign currency, or commodity that is
                contractually required to settle within the lesser of the market
                standard settlement period for the particular transaction and five
                business days from the date of the sale;
                 (2) A brokered deposit provided by a retail customer or
                counterparty that is not a brokered reciprocal deposit or sweep
                deposit, is not held in a transactional account, and matures less than
                six months from the calculation date;
                 (3) A security issued by the [BANK] that matures less than six
                months from the calculation date;
                 (4) An NSFR liability with the following characteristics:
                 (i) The counterparty is a financial sector entity, a consolidated
                subsidiary of a financial sector entity, or a central bank;
                 (ii) The NSFR liability matures less than six months from the
                calculation date or has an open maturity; and
                 (iii) The NSFR liability is not a security issued by the [BANK] or
                an operational deposit placed at the [BANK]; or
                 (5) Any other NSFR liability that matures less than six months from
                the calculation date and is not described in paragraphs (a) through (d)
                or (e)(1) through (4) of this section.
                Sec. __.105 Calculation of required stable funding amount.
                 (a) Required stable funding amount. A [BANK]'s RSF amount equals
                the [BANK's] required stable funding adjustment percentage as
                determined under paragraph (b) of this section multiplied by the sum
                of:
                 (1) The carrying values of a [BANK]'s assets (other than amounts
                included in the calculation of the derivatives RSF amount pursuant to
                Sec. __.107(b)) and the undrawn amounts of a [BANK]'s credit and
                liquidity facilities, in each case multiplied by the RSF factors
                applicable in Sec. __.106; and
                 (2) The [BANK]'s derivatives RSF amount calculated pursuant to
                Sec. __.107(b).
                 (b) Required stable funding adjustment percentage. A [BANK's]
                required stable funding adjustment percentage is determined pursuant to
                Table 1 to this paragraph (b).
                Table 1 to Paragraph (b)--Required Stable Funding Adjustment Percentages
                ------------------------------------------------------------------------
                 Required stable funding adjustment percentage Percent
                ------------------------------------------------------------------------
                Global systemically important BHC or GSIB depository 100
                 institution............................................
                Category II [BANK]...................................... 100
                [[Page 9204]]
                
                Category III [BANK] with $75 billion or more in average 100
                 weighted short-term wholesale funding and Category III
                 [BANK] that is a consolidated subsidiary of such a
                 [BANK].................................................
                Category III [BANK] with less than $75 billion in 85
                 average weighted short-term wholesale funding and any
                 Category III [BANK] that is a consolidated subsidiary
                 of such a Category III [BANK]..........................
                Category IV [BANK] with $50 billion or more in average 70
                 weighted short-term wholesale funding..................
                ------------------------------------------------------------------------
                 (c) Transition into a different required stable funding
                adjustment percentage. (1) A [BANK] whose required stable funding
                adjustment percentage increases from a lower to a higher required
                stable funding adjustment percentage may continue to use its
                previous lower required stable funding adjustment percentage until
                the first day of the third calendar quarter after the required
                stable funding adjustment percentage increases.
                 (2) A [BANK] whose required stable funding adjustment percentage
                decreases from a higher to a lower required stable funding
                adjustment percentage must continue to use its previous higher
                required stable funding adjustment percentage until the first day of
                the first calendar quarter after the required stable funding
                adjustment percentage decreases.
                Sec. __.106 RSF factors.
                 (a) Unencumbered assets and commitments. All assets and undrawn
                amounts under credit and liquidity facilities, unless otherwise
                provided in Sec. __.107(b) relating to derivative transactions or
                paragraphs (b) through (d) of this section, are assigned RSF factors as
                follows:
                 (1) Unencumbered assets assigned a zero percent RSF factor. An
                asset of a [BANK] is assigned a zero percent RSF factor if it is one of
                the following:
                 (i) Currency and coin;
                 (ii) A cash item in the process of collection;
                 (iii) A Reserve Bank balance or other claim on a Reserve Bank that
                matures less than six months from the calculation date;
                 (iv) A claim on a foreign central bank that matures less than six
                months from the calculation date;
                 (v) A trade date receivable due to the [BANK] resulting from the
                [BANK]'s sale of a financial instrument, foreign currency, or commodity
                that is required to settle no later than the market standard, without
                extension, for the particular transaction, and that has yet to settle
                but is not more than five business days past the scheduled settlement
                date;
                 (vi) Any other level 1 liquid asset not described in paragraphs
                (a)(1)(i) through (a)(1)(v) of this section; or
                 (vii) A secured lending transaction with the following
                characteristics:
                 (A) The secured lending transaction matures less than six months
                from the calculation date;
                 (B) The secured lending transaction is secured by level 1 liquid
                assets;
                 (C) The borrower is a financial sector entity or a consolidated
                subsidiary thereof; and
                 (D) The [BANK] retains the right to rehypothecate the collateral
                provided by the counterparty for the duration of the secured lending
                transaction.
                 (2) Unencumbered assets and commitments assigned a 5 percent RSF
                factor. An undrawn amount of a committed credit facility or committed
                liquidity facility extended by a [BANK] is assigned a 5 percent RSF
                factor. For the purposes of this paragraph (a)(2), 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
                one year of the calculation date under the governing agreement.
                 (3) Unencumbered assets assigned a 15 percent RSF factor. An asset
                of a [BANK] is assigned a 15 percent RSF factor if it is one of the
                following:
                 (i) A level 2A liquid asset; or
                 (ii) A secured lending transaction or unsecured wholesale lending
                with the following characteristics:
                 (A) The asset matures less than six months from the calculation
                date;
                 (B) The borrower is a financial sector entity or a consolidated
                subsidiary thereof; and
                 (C) The asset is not described in paragraph (a)(1)(vii) of this
                section and is not an operational deposit described in paragraph
                (a)(4)(iii) of this section.
                 (4) Unencumbered assets assigned a 50 percent RSF factor. An asset
                of a [BANK] is assigned a 50 percent RSF factor if it is one of the
                following:
                 (i) A level 2B liquid asset;
                 (ii) A secured lending transaction or unsecured wholesale lending
                with the following characteristics:
                 (A) The asset matures six months or more, but less than one year,
                from the calculation date;
                 (B) The borrower is a financial sector entity, a consolidated
                subsidiary thereof, or a central bank; and
                 (C) The asset is not an operational deposit described in paragraph
                (a)(4)(iii) of this section;
                 (iii) An operational deposit placed by the [BANK] at a financial
                sector entity or a consolidated subsidiary thereof; or
                 (iv) An asset that is not described in paragraphs (a)(1) through
                (a)(3) or (a)(4)(i) through (a)(4)(iii) of this section that matures
                less than one year from the calculation date, including:
                 (A) A secured lending transaction or unsecured wholesale lending
                where the borrower is a wholesale customer or counterparty that is not
                a financial sector entity, a consolidated subsidiary thereof, or a
                central bank; or
                 (B) Lending to a retail customer or counterparty.
                 (5) Unencumbered assets assigned a 65 percent RSF factor. An asset
                of a [BANK] is assigned a 65 percent RSF factor if it is one of the
                following:
                 (i) A retail mortgage that matures one year or more from the
                calculation date and is assigned a risk weight of no greater than 50
                percent under subpart D of [AGENCY CAPITAL REGULATION]; or
                 (ii) A secured lending transaction, unsecured wholesale lending, or
                lending to a retail customer or counterparty with the following
                characteristics:
                 (A) The asset is not described in paragraphs (a)(1) through
                (a)(5)(i) of this section;
                 (B) The borrower is not a financial sector entity or a consolidated
                subsidiary thereof;
                 (C) The asset matures one year or more from the calculation date;
                and
                 (D) The asset is assigned a risk weight of no greater than 20
                percent under subpart D of [AGENCY CAPITAL REGULATION].
                 (6) Unencumbered assets assigned an 85 percent RSF factor. An asset
                of a [BANK] is assigned an 85 percent RSF factor if it is one of the
                following:
                 (i) A retail mortgage that matures one year or more from the
                calculation date and is assigned a risk weight of greater than 50
                percent under subpart D of [AGENCY CAPITAL REGULATION];
                 (ii) A secured lending transaction, unsecured wholesale lending, or
                lending to a retail customer or counterparty with the following
                characteristics:
                [[Page 9205]]
                 (A) The asset is not described in paragraphs (a)(1) through
                (a)(6)(i) of this section;
                 (B) The borrower is not a financial sector entity or a consolidated
                subsidiary thereof;
                 (C) The asset matures one year or more from the calculation date;
                and
                 (D) The asset is assigned a risk weight of greater than 20 percent
                under subpart D of [AGENCY CAPITAL REGULATION];
                 (iii) A publicly traded common equity share that is not HQLA;
                 (iv) A security, other than a publicly traded common equity share,
                that matures one year or more from the calculation date and is not
                HQLA; or
                 (v) A commodity for which derivative transactions are traded on a
                U.S. board of trade or trading facility designated as a contract market
                under sections 5 and 6 of the Commodity Exchange Act (7 U.S.C. 7 and 8)
                or on a U.S. swap execution facility registered under section 5h of the
                Commodity Exchange Act (7 U.S.C. 7b-3) or on another exchange, whether
                located in the United States or in a jurisdiction outside of the United
                States.
                 (7) Unencumbered assets assigned a 100 percent RSF factor. An asset
                of a [BANK] is assigned a 100 percent RSF factor if it is not described
                in paragraphs (a)(1) through (a)(6) of this section, including a
                secured lending transaction or unsecured wholesale lending where the
                borrower is a financial sector entity or a consolidated subsidiary
                thereof and that matures one year or more from the calculation date.
                 (b) Nonperforming assets. An RSF factor of 100 percent is assigned
                to any asset that is past due by more than 90 days or nonaccrual.
                 (c) Encumbered assets. An encumbered asset, unless otherwise
                provided in Sec. __.107(b) relating to derivative transactions, is
                assigned an RSF factor as follows:
                 (1)(i) Encumbered assets with less than six months remaining in the
                encumbrance period. For an encumbered asset with less than six months
                remaining in the encumbrance period, the same RSF factor is assigned to
                the asset as would be assigned if the asset were not encumbered.
                 (ii) Encumbered assets with six months or more, but less than one
                year, remaining in the encumbrance period. For an encumbered asset with
                six months or more, but less than one year, remaining in the
                encumbrance period:
                 (A) If the asset would be assigned an RSF factor of 50 percent or
                less under paragraphs (a)(1) through (a)(4) of this section if the
                asset were not encumbered, an RSF factor of 50 percent is assigned to
                the asset.
                 (B) If the asset would be assigned an RSF factor of greater than 50
                percent under paragraphs (a)(5) through (a)(7) of this section if the
                asset were not encumbered, the same RSF factor is assigned to the asset
                as would be assigned if it were not encumbered.
                 (iii) Encumbered assets with one year or more remaining in the
                encumbrance period. For an encumbered asset with one year or more
                remaining in the encumbrance period, an RSF factor of 100 percent is
                assigned to the asset.
                 (2) Assets encumbered for period longer than remaining maturity. If
                an asset is encumbered for an encumbrance period longer than the
                asset's maturity, the asset is assigned an RSF factor under paragraph
                (c)(1) of this section based on the length of the encumbrance period.
                 (3) Segregated account assets. An asset held in a segregated
                account maintained pursuant to statutory or regulatory requirements for
                the protection of customer assets is not considered encumbered for
                purposes of this paragraph solely because such asset is held in the
                segregated account.
                 (d) Off-balance sheet rehypothecated assets. When an NSFR liability
                of a [BANK] is secured by an off-balance sheet asset or results from
                the [BANK] selling an off-balance sheet asset (for instance, in the
                case of a short sale), other than an off-balance sheet asset received
                by the [BANK] as variation margin under a derivative transaction:
                 (1) If the [BANK] received the off-balance sheet asset under a
                lending transaction, an RSF factor is assigned to the lending
                transaction as if it were encumbered for the longer of:
                 (i) The remaining maturity of the NSFR liability; and
                 (ii) Any other encumbrance period applicable to the lending
                transaction;
                 (2) If the [BANK] received the off-balance sheet asset under an
                asset exchange, an RSF factor is assigned to the asset provided by the
                [BANK] in the asset exchange as if the provided asset were encumbered
                for the longer of:
                 (i) The remaining maturity of the NSFR liability; and
                 (ii) Any other encumbrance period applicable to the provided asset;
                or
                 (3) If the [BANK] did not receive the off-balance sheet asset under
                a lending transaction or asset exchange, an RSF factor is assigned to
                the on-balance sheet asset resulting from the rehypothecation of the
                off-balance sheet asset as if the on-balance sheet asset were
                encumbered for the longer of:
                 (i) The remaining maturity of the NSFR liability; and
                 (ii) Any other encumbrance period applicable to the transaction
                through which the off-balance sheet asset was received.
                Sec. __.107 Calculation of NSFR derivatives amounts.
                 (a) General requirement. A [BANK] must calculate its derivatives
                RSF amount and certain components of its ASF amount relating to the
                [BANK]'s derivative transactions (which includes cleared derivative
                transactions of a customer with respect to which the [BANK] is acting
                as agent for the customer that are included on the [BANK]'s balance
                sheet under GAAP) in accordance with this section.
                 (b) Calculation of required stable funding amount relating to
                derivative transactions. A [BANK]'s derivatives RSF amount equals the
                sum of:
                 (1) Current derivative transaction values. The [BANK]'s NSFR
                derivatives asset amount, as calculated under paragraph (d)(1) of this
                section, multiplied by an RSF factor of 100 percent;
                 (2) Variation margin provided. The carrying value of variation
                margin provided by the [BANK] under each derivative transaction not
                subject to a qualifying master netting agreement and each QMNA netting
                set, to the extent the variation margin reduces the [BANK]'s
                derivatives liability value under the derivative transaction or QMNA
                netting set, as calculated under paragraph (f)(2) of this section,
                multiplied by an RSF factor of zero percent;
                 (3) Excess variation margin provided. The carrying value of
                variation margin provided by the [BANK] under each derivative
                transaction not subject to a qualifying master netting agreement and
                each QMNA netting set in excess of the amount described in paragraph
                (b)(2) of this section for each derivative transaction or QMNA netting
                set, multiplied by the RSF factor assigned to each asset comprising the
                variation margin pursuant to Sec. __.106;
                 (4) Variation margin received. The carrying value of variation
                margin received by the [BANK], multiplied by the RSF factor assigned to
                each asset comprising the variation margin pursuant to Sec. __.106;
                 (5) Potential valuation changes. (i) An amount equal to 5 percent
                of the sum of the gross derivative values of the [BANK] that are
                liabilities, as calculated under paragraph (b)(5)(ii) of this section,
                for each of the [BANK]'s derivative transactions not subject to a
                qualifying master netting agreement and each of its QMNA netting sets,
                multiplied by an RSF factor of 100 percent;
                [[Page 9206]]
                 (ii) For purposes of paragraph (5)(i) of this section, the gross
                derivative value of a derivative transaction not subject to a
                qualifying master netting agreement or of a QMNA netting set is equal
                to the value to the [BANK], calculated as if no variation margin had
                been exchanged and no settlement payments had been made based on
                changes in the value of the derivative transaction or QMNA netting set.
                 (6) Contributions to central counterparty mutualized loss sharing
                arrangements. The fair value of a [BANK]'s contribution to a central
                counterparty's mutualized loss sharing arrangement (regardless of
                whether the contribution is included on the [BANK]'s balance sheet),
                multiplied by an RSF factor of 85 percent; and
                 (7) Initial margin provided. The fair value of initial margin
                provided by the [BANK] for derivative transactions (regardless of
                whether the initial margin is included on the [BANK]'s balance sheet),
                which does not include initial margin provided by the [BANK] for
                cleared derivative transactions with respect to which the [BANK] is
                acting as agent for a customer and the [BANK] does not guarantee the
                obligations of the customer's counterparty to the customer under the
                derivative transaction (such initial margin would be assigned an RSF
                factor pursuant to Sec. __.106 to the extent the initial margin is
                included on the [BANK]'s balance sheet), multiplied by an RSF factor
                equal to the higher of 85 percent or the RSF factor assigned to each
                asset comprising the initial margin pursuant to Sec. __.106.
                 (c) Calculation of available stable funding amount relating to
                derivative transactions. The following amounts of a [BANK] are assigned
                a zero percent ASF factor:
                 (1) The [BANK]'s NSFR derivatives liability amount, as calculated
                under paragraph (d)(2) of this section; and
                 (2) The carrying value of NSFR liabilities in the form of an
                obligation to return initial margin or variation margin received by the
                [BANK].
                 (d) Calculation of NSFR derivatives asset or liability amount.
                 (1) A [BANK]'s NSFR derivatives asset amount is the greater of:
                 (i) Zero; and
                 (ii) The [BANK]'s total derivatives asset amount, as calculated
                under paragraph (e)(1) of this section, less the [BANK]'s total
                derivatives liability amount, as calculated under paragraph (e)(2) of
                this section.
                 (2) A [BANK]'s NSFR derivatives liability amount is the greater of:
                 (i) Zero; and
                 (ii) The [BANK]'s total derivatives liability amount, as calculated
                under paragraph (e)(2) of this section, less the [BANK]'s total
                derivatives asset amount, as calculated under paragraph (e)(1) of this
                section.
                 (e) Calculation of total derivatives asset and liability amounts.
                 (1) A [BANK]'s total derivatives asset amount is the sum of the
                [BANK]'s derivatives asset values, as calculated under paragraph (f)(1)
                of this section, for each derivative transaction not subject to a
                qualifying master netting agreement and each QMNA netting set.
                 (2) A [BANK]'s total derivatives liability amount is the sum of the
                [BANK]'s derivatives liability values, as calculated under paragraph
                (f)(2) of this section, for each derivative transaction not subject to
                a qualifying master netting agreement and each QMNA netting set.
                 (f) Calculation of derivatives asset and liability values. For each
                derivative transaction not subject to a qualifying master netting
                agreement and each QMNA netting set:
                 (1) The derivatives asset value is equal to the asset value to the
                [BANK], after taking into account:
                 (i) Any variation margin received by the [BANK] that is in the form
                of cash and meets the following conditions:
                 (A) The variation margin is not segregated;
                 (B) The variation margin is received in connection with a
                derivative transaction that is governed by a QMNA or other contract
                between the counterparties to the derivative transaction, which
                stipulates that the counterparties agree to settle any payment
                obligations on a net basis, taking into account any variation margin
                received or provided;
                 (C) The variation margin is calculated and transferred on a daily
                basis based on mark-to-fair value of the derivative contract; and
                 (D) The variation margin is in a currency specified as an
                acceptable currency to settle obligations in the relevant governing
                contract; and
                 (ii) Any variation margin received by the [BANK] that is in the
                form of level 1 liquid assets and meets the conditions of paragraph
                (f)(1)(i) of this section provided the [BANK] retains the right to
                rehypothecate the asset for the duration of time that the asset is
                posted as variation margin to the [BANK]; or
                 (2) The derivatives liability value is equal to the liability value
                of the [BANK], after taking into account any variation margin provided
                by the [BANK].
                Sec. __.108 Funding related to Covered Federal Reserve Facility
                Funding.
                 (a) Treatment of Covered Federal Reserve Facility Funding.
                Notwithstanding any other section of this part and except as provided
                in paragraph (b) of this section, available stable funding amounts and
                required stable funding amounts related to Covered Federal Reserve
                Facility Funding and the assets securing Covered Federal Reserve
                Facility Funding are excluded from the calculation of a [BANK]'s net
                stable funding ratio calculated under Sec. __.100(b).
                 (b) Exception. To the extent the Covered Federal Reserve Facility
                Funding is secured by securities, debt obligations, or other
                instruments issued by the [BANK] or one of its consolidated
                subsidiaries, the Covered Federal Reserve Facility Funding and assets
                securing the Covered Federal Reserve Facility Funding are not subject
                to paragraph (a) of this section and the available stable funding
                amount and required stable funding amount must be included in the
                [BANK]'s net stable funding ratio calculated under Sec. __.100(b).
                Sec. __.109 Rules for consolidation.
                 (a) Consolidated subsidiary available stable funding amount. For
                available stable funding of a legal entity that is a consolidated
                subsidiary of a [BANK], including a consolidated subsidiary organized
                under the laws of a foreign jurisdiction, the [BANK] may include the
                available stable funding of the consolidated subsidiary in its ASF
                amount up to:
                 (1) The RSF amount of the consolidated subsidiary, as calculated by
                the [BANK] for the [BANK]'s net stable funding ratio under this part;
                plus
                 (2) Any amount in excess of the RSF amount of the consolidated
                subsidiary, as calculated by the [BANK] for the [BANK]'s net stable
                funding ratio under this part, to the extent the consolidated
                subsidiary may transfer assets to the top-tier [BANK], taking into
                account statutory, regulatory, contractual, or supervisory
                restrictions, such as 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).
                 (b) Required consolidation procedures. To the extent a [BANK]
                includes an ASF amount in excess of the RSF amount of the consolidated
                subsidiary, the [BANK] must implement and maintain written procedures
                to identify and monitor applicable statutory, regulatory, contractual,
                supervisory, or other restrictions on transferring assets from any of
                its consolidated subsidiaries. These procedures must document which
                types of transactions the [BANK] could use to
                [[Page 9207]]
                transfer assets from a consolidated subsidiary to the [BANK] and how
                these types of transactions comply with applicable statutory,
                regulatory, contractual, supervisory, or other restrictions.
                Subpart L--Net Stable Funding Shortfall
                Sec. __.110 NSFR shortfall: Supervisory framework.
                 (a) Notification requirements. A [BANK] must notify the [AGENCY] no
                later than 10 business days, or such other period as the [AGENCY] may
                otherwise require by written notice, following the date that any event
                has occurred that would cause or has caused the [BANK]'s net stable
                funding ratio to be less than 1.0 as required under Sec. __.100.
                 (b) Liquidity Plan. (1) A [BANK] must within 10 business days, or
                such other period as the [AGENCY] may otherwise require by written
                notice, provide to the [AGENCY] a plan for achieving a net stable
                funding ratio equal to or greater than 1.0 as required under Sec.
                __.100 if:
                 (i) The [BANK] has or should have provided notice, pursuant to
                Sec. __.110(a), that the [BANK]'s net stable funding ratio is, or will
                become, less than 1.0 as required under Sec. __.100;
                 (ii) The [BANK]'s reports or disclosures to the [AGENCY] indicate
                that the [BANK]'s net stable funding ratio is less than 1.0 as required
                under Sec. __.100; or
                 (iii) The [AGENCY] notifies the [BANK] in writing that a plan is
                required and provides a reason for requiring such a plan.
                 (2) The plan must include, as applicable:
                 (i) An assessment of the [BANK]'s liquidity profile;
                 (ii) The actions the [BANK] has taken and will take to achieve a
                net stable funding ratio equal to or greater than 1.0 as required under
                Sec. __.100, including:
                 (A) A plan for adjusting the [BANK]'s liquidity profile;
                 (B) A plan for remediating any operational or management issues
                that contributed to noncompliance with subpart K of this part; and
                 (iii) An estimated time frame for achieving full compliance with
                Sec. __.100.
                 (3) The [BANK] must report to the [AGENCY] at least monthly, or
                such other frequency as required by the [AGENCY], on progress to
                achieve full compliance with Sec. __.100.
                 (c) Supervisory and enforcement actions. The [AGENCY] may, at its
                discretion, take additional supervisory or enforcement actions to
                address noncompliance with the minimum net stable funding ratio and
                other requirements of subparts K through N of this part (see also Sec.
                __.2(c)).
                [End of Proposed 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, Savings associations.
                Adoption of the Common Rule Text
                 The proposed adoption of the common rules by the agencies, as
                modified by agency-specific 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, part 50 of
                chapter I of title 12 of the Code of Federal Regulations is amended as
                follows:
                PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS
                0
                1. The authority citation for part 50 continues to read as follows:
                 Authority: 12 U.S.C. 1 et seq., 93a, 481, 1818, 1828, and 1462
                et seq.
                0
                2. Amend Sec. 50.1 by revising paragraphs (a) and (b)(1) introductory
                text to read as follows:
                Sec. 50.1 Purpose and applicability.
                 (a) Purpose. This part establishes a minimum liquidity standard and
                a minimum stable funding standard for certain national banks and
                Federal savings associations on a consolidated basis, as set forth
                herein.
                 (b) Applicability. (1) A national bank or Federal savings
                association is subject to the minimum liquidity standard, minimum
                stable funding standard, and other requirements of this part if:
                * * * * *
                0
                3. Amend Sec. 50.2 by redesignating paragraph (b) as paragraph (c),
                adding new paragraph (b), and revising newly redesignated paragraph (c)
                to read as follows:
                Sec. 50.2 Reservation of authority.
                * * * * *
                 (b) The OCC may require a national bank or Federal savings
                association to maintain an amount of available stable funding greater
                than otherwise required under this part, or to take any other measure
                to improve the national bank's or Federal savings association's stable
                funding, if the OCC determines that the national bank's or Federal
                savings association's stable funding requirements as calculated under
                this part are not commensurate with the national bank's or Federal
                savings association's funding risks. In making determinations under
                this section, the OCC will apply notice and response procedures as set
                forth in 12 CFR 3.404.
                 (c) Nothing in this part limits the authority of the OCC 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, deficient stable funding
                levels, or violations of law.
                0
                4. Amend Sec. 50.3 by:
                0
                a. Removing the definition for ``Brokered sweep deposit'', ``Covered
                nonbank company'', and ``Reciprocal brokered deposit'';
                0
                b. Adding definitions for ``Brokered reciprocal deposit'', ``Carrying
                value'', ``Encumbered'', ``NSFR liability'', ``NSFR regulatory capital
                element'', ``QMNA netting set'', ``Sweep deposit'', ``Unconditionally
                cancelable'', and ``Unsecured wholesale lending''; and
                0
                c. Revising definitions for ``Brokered deposit'', ``Calculation date'',
                ``Collateralized deposit'', ``Committed'', ``Operational deposit'',
                ``Secured funding transaction'', ``Secured lending transaction'', and
                ``Unsecured wholesale funding.''
                 The additions and revisions, in alphabetical order, read as
                follows:
                Sec. 50.3 Definitions.
                * * * * *
                 Brokered deposit means any deposit held at the national bank or
                Federal savings association 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
                [[Page 9208]]
                (12 U.S.C. 1831f(g)) and the Federal Deposit Insurance Corporation's
                regulations.
                 Brokered reciprocal deposit means a brokered deposit that a
                national bank or Federal savings association receives through a deposit
                placement network on a reciprocal basis, such that:
                 (1) For any deposit received, the national bank or Federal savings
                association (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.
                 Calculation date means, for subparts B through J of this part, any
                date on which a national bank or Federal savings association calculates
                its liquidity coverage ratio under Sec. 50.10, and for subparts K
                through M of this part, any date on which a national bank or Federal
                savings association calculates its net stable funding ratio under Sec.
                50.100.
                * * * * *
                 Carrying value means, with respect to an asset, NSFR regulatory
                capital element, or NSFR liability, the value on the balance sheet of
                the national bank or Federal savings association, each as determined in
                accordance with GAAP.
                * * * * *
                 Collateralized deposit means:
                 (1) A deposit of a public sector entity held at the national bank
                or Federal savings association that is required to be secured under
                applicable law by a lien on assets owned by the national bank or
                Federal savings association and that gives the depositor, as holder of
                the lien, priority over the assets in the event the national bank or
                Federal savings association enters into receivership, bankruptcy,
                insolvency, liquidation, resolution, or similar proceeding;
                 (2) A deposit of a fiduciary account awaiting investment or
                distribution held at the national bank or Federal savings association
                for which the national bank or Federal savings association is a
                fiduciary and is required under 12 CFR 9.10(b) (national banks) or 12
                CFR 150.300 through 150.320 (Federal savings associations) to set aside
                assets owned by the national bank or Federal savings association as
                security, which gives the depositor priority over the assets in the
                event the national bank or Federal savings association enters into
                receivership, bankruptcy, insolvency, liquidation, resolution, or
                similar proceeding; or
                 (3) A deposit of a fiduciary account awaiting investment or
                distribution held at the national bank or Federal savings association
                for which the national bank's or Federal savings association's
                affiliated insured depository institution is a fiduciary and where the
                national bank or Federal savings association under 12 CFR 9.10(c)
                (national banks), 12 CFR 150.310 (Federal savings associations), or
                applicable state law (state member and nonmember banks, and state
                savings associations) has set aside assets owned by the national bank
                or Federal savings association as security, which gives the depositor
                priority over the assets in the event the national bank or Federal
                savings association enters into receivership, bankruptcy, insolvency,
                liquidation, resolution, or similar proceeding.
                 Committed means, with respect to a credit or liquidity facility,
                that under the terms of the facility, it is not unconditionally
                cancelable.
                * * * * *
                 Encumbered means, with respect to an asset, that the asset:
                 (1) Is subject to legal, regulatory, contractual, or other
                restriction on the ability of the national bank or Federal savings
                association to monetize the asset; or
                 (2) Is pledged, explicitly or implicitly, to secure or to provide
                credit enhancement to any transaction, not including when the asset is
                pledged to a central bank or a U.S. government-sponsored enterprise
                where:
                 (i) Potential credit secured by the asset is not currently extended
                to the national bank or Federal savings association or its consolidated
                subsidiaries; and
                 (ii) The pledged asset is not required to support access to the
                payment services of a central bank.
                * * * * *
                 NSFR liability means any liability or equity reported on a national
                bank's or Federal savings association's balance sheet that is not an
                NSFR regulatory capital element.
                 NSFR regulatory capital element means any capital element included
                in a national bank's or Federal savings association's common equity
                tier 1 capital, additional tier 1 capital, and tier 2 capital, in each
                case as defined in 12 CFR 3.20, prior to application of capital
                adjustments or deductions as set forth in 12 CFR 3.22, excluding any
                debt or equity instrument that does not meet the criteria for
                additional tier 1 or tier 2 capital instruments in 12 CFR 3.22 and is
                being phased out of tier 1 capital or tier 2 capital pursuant to
                subpart G of 12 CFR part 3.
                 Operational deposit means short-term unsecured wholesale funding
                that is a deposit, unsecured wholesale lending that is a deposit, or a
                collateralized deposit, in each case that meets the requirements of
                Sec. 50.4(b) with respect to that deposit and is necessary for the
                provision of operational services as an independent third-party
                intermediary, agent, or administrator to the wholesale customer or
                counterparty providing the deposit.
                * * * * *
                 QMNA netting set means a group of derivative transactions with a
                single counterparty that is subject to a qualifying master netting
                agreement and is netted under the qualifying master netting agreement.
                * * * * *
                 Secured funding transaction means any funding transaction that is
                subject to a legally binding agreement that gives rise to a cash
                obligation of the national bank or Federal savings association to a
                wholesale customer or counterparty that is secured under applicable law
                by a lien on securities or loans provided by the national bank or
                Federal savings association, which gives the wholesale customer or
                counterparty, as holder of the lien, priority over the securities or
                loans in the event the national bank or Federal savings association
                enters into receivership, bankruptcy, insolvency, liquidation,
                resolution, or similar proceeding. Secured funding transactions include
                repurchase transactions, securities lending transactions, other secured
                loans, and borrowings from a Federal Reserve Bank. Secured funding
                transactions do not include securities.
                 Secured lending transaction means any lending transaction that is
                subject to a legally binding agreement that gives rise to a cash
                obligation of a wholesale customer or counterparty to the national bank
                or Federal savings association that is secured under applicable law by
                a lien on securities or loans provided by the wholesale customer or
                counterparty, which gives the national bank or Federal savings
                association, as holder of the lien, priority over the securities or
                loans in the event the counterparty enters into receivership,
                bankruptcy, insolvency, liquidation, resolution, or similar proceeding.
                Secured lending transactions include reverse repurchase transactions
                and securities borrowing transactions. Secured lending transactions do
                not include securities.
                * * * * *
                 Sweep deposit means a deposit held at the national bank or Federal
                savings association by a customer or counterparty through a contractual
                feature that automatically transfers to the national bank or Federal
                savings
                [[Page 9209]]
                association 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.
                * * * * *
                 Unconditionally cancelable means, with respect to a credit or
                liquidity facility, that a national bank or Federal savings association
                may, at any time, with or without cause, refuse to extend credit under
                the facility (to the extent permitted under applicable law).
                 Unsecured wholesale funding means a liability or general obligation
                of the national bank or Federal savings association to a wholesale
                customer or counterparty that is not a secured funding transaction.
                Unsecured wholesale funding includes wholesale deposits. Unsecured
                wholesale funding does not include asset exchanges.
                 Unsecured wholesale lending means a liability or general obligation
                of a wholesale customer or counterparty to the national bank or Federal
                savings association that is not a secured lending transaction or a
                security. Unsecured wholesale lending does not include asset exchanges.
                * * * * *
                0
                5. Amend Sec. 50.22 by revising paragraph (b)(1) to read as follows:
                Sec. 50.22 Requirements for eligible high-quality liquid assets.
                * * * * *
                 (b) * * *
                 (1) The assets are not encumbered.
                * * * * *
                0
                6. In Sec. 50.30, amend paragraph (b)(3) to read as follows:
                Sec. 50.30 Total net cash outflow amount.
                * * * * *
                 (b) * * *
                 (3) Other than the transactions identified in Sec. 50.32(h)(2),
                (h)(5), or (j) or Sec. 50.33(d) or (f), the maturity of which is
                determined under Sec. 50.31(a), transactions that have an open
                maturity are not included in the calculation of the maturity mismatch
                add-on.
                * * * * *
                0
                7. In Sec. 50.31, amend paragraphs (a)(1) introductory text, (a)(2)
                introductory text, and (a)(4) to read as follows:
                Sec. 50.31 Determining maturity.
                 (a) * * *
                 (1) With respect to an instrument or transaction subject to Sec.
                50.32, 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, except that when considering the earliest possible
                contractual maturity date or the earliest possible date the transaction
                could occur, the national bank or Federal savings association should
                exclude any contingent options that are triggered only by regulatory
                actions or changes in law or regulation, as follows:
                * * * * *
                 (2) With respect to an instrument or transaction subject to Sec.
                50.33, 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, except that when considering the latest possible
                contractual maturity date or the latest possible date the transaction
                could occur, the national bank or Federal savings association may
                exclude any contingent options that are triggered only by regulatory
                actions or changes in law or regulation, as follows:
                * * * * *
                 (4) With respect to a transaction that has an open maturity, is not
                an operational deposit, and is subject to the provisions of Sec.
                50.32(h)(2), (h)(5), (j), or (k) or Sec. 50.33(d) or (f), the maturity
                date is the first calendar day after the calculation date. Any other
                transaction that has an open maturity and is subject to the provisions
                of Sec. 50.32 shall be considered to mature within 30 calendar days of
                the calculation date.
                * * * * * *
                Sec. 50.32 [Amended]
                0
                8. Amend Sec. 50.32 by:
                0
                a. Removing the phrase ``reciprocal brokered deposits'' and adding the
                phrase ``brokered reciprocal deposits'' in its place wherever it
                appears.
                0
                b. Removing the phrase ``brokered sweep deposits'' and adding the
                phrase ``sweep deposits'' in its place wherever it appears.
                * * * * *
                Subpart G through J [Added and Reserved]
                0
                9. Add and reserve subparts G through J to part 50.
                Subparts K and L [Added]
                0
                10. Amend part 50 by adding subparts K and L as set forth at the end of
                the common preamble.
                Subparts K and L [Amended]
                0
                11. Amend subparts K and L of part 50 by:
                0
                a. Removing ``[AGENCY]'' and adding ``OCC'' in its place wherever it
                appears.
                0
                b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``12 CFR part
                3'' in its place wherever it appears.
                0
                c. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
                SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
                3.10(c)(2)(v)(A) through (C)'' in its place wherever it appears.
                0
                d. Removing ``[BANK]'s'' and adding ``national bank's or Federal
                savings association's'' in its place wherever it appears.
                0
                e. Removing ``[BANK]'' and adding ``national bank or Federal savings
                association'' in its place wherever it appears.
                0
                f. Amending Sec. 50.105 by revising paragraph (b) to read as follows:
                Sec. 50.105 Calculation of required stable funding amount.
                * * * * *
                 (b) Required stable funding adjustment percentage. A national
                bank's or Federal savings association's required stable funding
                adjustment percentage is determined pursuant to Table 1 to this
                paragraph (b).
                Table 1 to Paragraph (b)--Required Stable Funding Adjustment Percentages
                ------------------------------------------------------------------------
                
                ------------------------------------------------------------------------
                GSIB depository institution that is a national bank or 100
                 Federal savings association............................
                Category II national bank or Federal savings association 100
                Category III national bank or Federal savings 100
                 association that:......................................
                (1) Is a consolidated subsidiary of (a) a covered
                 depository institution holding company or U.S.
                 intermediate holding company identified as a Category
                 III banking organization pursuant to 12 CFR 252.5 or 12
                 CFR 238.10 or (b) a depository institution that meets
                 the criteria set forth in paragraphs (2)(ii)(A) and (B)
                 of the definition of Category III national bank or
                 Federal savings association in this part, in each case
                 with $75 billion or more in average weighted short-term
                 wholesale funding; or
                [[Page 9210]]
                
                (2) Has $75 billion or more in average weighted short-
                 term wholesale funding and is not a consolidated
                 subsidiary of (a) a covered depository institution
                 holding company or U.S. intermediate holding company
                 identified as a Category III banking organization
                 pursuant to 12 CFR 252.5 or 12 CFR 238.10 or (b) a
                 depository institution that meets the criteria set
                 forth in paragraphs (2)(ii)(A) and (B) of the
                 definition of Category III national bank or Federal
                 savings association in this part.
                Category III national bank or Federal savings 85
                 association that:......................................
                (1) Is a consolidated subsidiary of (a) a covered
                 depository institution holding company or U.S.
                 intermediate holding company identified as a Category
                 III banking organization pursuant to 12 CFR 252.5 or 12
                 CFR 238.10 or (b) a depository institution that meets
                 the criteria set forth in paragraphs (2)(ii)(A) and (B)
                 of the definition of Category III national bank or
                 Federal savings association in this part, in each case
                 with less than $75 billion in average weighted short-
                 term wholesale funding; or
                (2) Has less than $75 billion in average weighted short-
                 term wholesale funding and is not a consolidated
                 subsidiary of (a) a covered depository institution
                 holding company or U.S. intermediate holding company
                 identified as a Category III banking organization
                 pursuant to 12 CFR 252.5 or 12 CFR 238.10 or (b) a
                 depository institution that meets the criteria set
                 forth in paragraphs (2)(ii)(A) and (B) of the
                 definition of Category III national bank or Federal
                 savings association in this part.
                ------------------------------------------------------------------------
                0
                12. Amend part 50 by adding subpart M to read as follows:
                Subpart M--Transitions
                Sec. 50.120 Transitions.
                 (a) Initial application. (1) A national bank or Federal savings
                association that initially becomes subject to the minimum net stable
                funding requirement under Sec. 50.1(b)(1)(i) after July 1, 2021, must
                comply with the requirements of subparts K through M of this part
                beginning on the first day of the third calendar quarter after which
                the national bank or Federal savings association becomes subject to
                this part.
                 (2) A national bank or Federal savings association that becomes
                subject to the minimum net stable funding requirement under Sec.
                50.1(b)(1)(ii) must comply with the requirements of subparts K through
                M of this part subject to a transition period specified by the OCC.
                 (b) Transition to a different required stable funding adjustment
                percentage.
                 (1) A national bank or Federal savings association whose required
                stable funding adjustment percentage changes is subject to the
                transition periods as set forth in Sec. 50.105(c).
                 (2) A national bank or Federal savings association institution that
                is no longer subject to the minimum stable funding requirement of this
                part pursuant to Sec. 50.1(b)(1)(i) based on the size of total
                consolidated assets, cross-jurisdictional activity, total nonbank
                assets, weighted short-term wholesale funding, or off-balance sheet
                exposure calculated in accordance with the Call Report, or instructions
                to the FR Y-9LP, the FR Y-15, or equivalent reporting form, as
                applicable, for each of the four most recent calendar quarters may
                cease compliance with the requirements of subparts K through M of this
                part as of the first day of the first calendar quarter after it is no
                longer subject to Sec. 50.1(b).
                 (c) Reservation of authority. The OCC may extend or accelerate any
                compliance date of this part if the OCC determines such extension or
                acceleration is appropriate. In determining whether an extension or
                acceleration is appropriate, the OCC will consider the effect of the
                modification on financial stability, the period of time for which the
                modification would be necessary to facilitate compliance with the
                requirements of subparts K through M of this part, and the actions the
                national bank or Federal savings association is taking to come into
                compliance with the requirements of subparts K through M of this part.
                Board of Governors of the Federal Reserve System
                12 CFR Chapter II
                Authority and Issuance
                 For the reasons set forth in the common preamble, part 249 of
                chapter II of title 12 of the Code of Federal Regulations is amended as
                follows:
                PART 249--LIQUIDITY RISK MEASUREMENT, STANDARDS, AND MONITORING
                (REGULATION WW)
                0
                13. The authority citation for part 249 continues 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.
                0
                14. Revise the heading for part 249 as set forth above.
                0
                15. Revise Sec. 249.1 to read as follows:
                Sec. 249.1 Purpose and applicability.
                 (a) Purpose. This part establishes a minimum liquidity standard and
                a minimum stable funding standard for certain Board-regulated
                institutions on a consolidated basis, as set forth herein.
                 (b) Applicability. (1) A Board-regulated institution is subject to
                the minimum liquidity standard and a minimum stable funding standard,
                and other requirements of this part if:
                 (i) It is a:
                 (A) Global systemically important BHC;
                 (B) GSIB depository institution;
                 (C) Category II Board-regulated institution;
                 (D) Category III Board-regulated institution; or
                 (E) Category IV Board-regulated institution with $50 billion or
                more in average weighted short-term wholesale funding;
                 (ii) It is a covered nonbank company; or
                 (iii) The Board has determined that application of this part is
                appropriate in light of the Board-regulated institution'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) 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).
                 (3) In making a determination under paragraph (b)(1)(iii) 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 and minimum stable funding standard and other
                requirements for a designated company under this part by rule or order.
                In establishing such standards, 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,
                concentration, interconnectedness, mix of the activities of the
                designated company, or any other risk-related factor that the Board
                determines is appropriate.
                [[Page 9211]]
                0
                16. Amend Sec. 249.2, by revising paragraph (b) and adding paragraph
                (c) to read as follows:
                Sec. 249.2 Reservation of authority.
                * * * * *
                 (b) The Board may require a Board-regulated institution to maintain
                an amount of available stable funding greater than otherwise required
                under this part, or to take any other measure to improve the Board-
                regulated institution's stable funding, if the Board determines that
                the Board-regulated institution's stable funding requirements as
                calculated under this part are not commensurate with the Board-
                regulated institution's funding risks. In making determinations under
                this section, the Board will apply notice and response procedures as
                set forth in 12 CFR 263.202.
                 (c) Nothing in this part limits the authority of the Board 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, deficient stable
                funding levels, or violations of law.
                0
                17. Amend Sec. 249.3 by:
                0
                a. Adding the definitions for ``Brokered reciprocal deposit'',
                ``Carrying value'', ``Encumbered'', ``NSFR liability'', ``NSFR
                regulatory capital element'', ``QMNA netting set'', ``Sweep deposit'',
                ``Unconditionally cancelable'', and ``Unsecured wholesale lending''.
                0
                b. Revising the definitions for ``Brokered deposit'', ``Calculation
                date'', ``Collateralized deposit'', ``Committed'', ``Covered nonbank
                company'', ``Operational deposit'', ``Secured funding transaction'',
                ``Secured lending transaction'', and ``Unsecured wholesale funding''.
                0
                c. Removing the definitions for ``Reciprocal brokered deposit'' and
                ``Brokered sweep deposit''.
                 The additions and revisions, in alphabetical order, read as
                follows:
                Sec. 249.3 Definitions.
                * * * * *
                 Brokered deposit means any deposit held at the Board-regulated
                institution 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 the Federal Deposit Insurance Corporation's regulations.
                 Brokered reciprocal deposit means a brokered deposit that a Board-
                regulated institution receives through a deposit placement network on a
                reciprocal basis, such that:
                 (1) For any deposit received, the Board-regulated institution (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.
                 Calculation date means, for subparts B through J of this part, any
                date on which a Board-regulated institution calculates its liquidity
                coverage ratio under Sec. 249.10, and for subparts K through N of this
                part, any date on which a Board-regulated institution calculates its
                net stable funding ratio under Sec. 249.100.
                * * * * *
                 Carrying value means, with respect to an asset, NSFR regulatory
                capital element, or NSFR liability, the value on the balance sheet of
                the Board-regulated institution, each as determined in accordance with
                GAAP.
                * * * * *
                 Collateralized deposit means:
                 (1) A deposit of a public sector entity held at the Board-regulated
                institution that is required to be secured under applicable law by a
                lien on assets owned by the Board-regulated institution and that gives
                the depositor, as holder of the lien, priority over the assets in the
                event the Board-regulated institution enters into receivership,
                bankruptcy, insolvency, liquidation, resolution, or similar proceeding;
                 (2) A deposit of a fiduciary account awaiting investment or
                distribution held at the Board-regulated institution for which the
                Board-regulated institution is a fiduciary and is required under 12 CFR
                9.10(b) (national banks), 12 CFR 150.300 through 150.320 (Federal
                savings associations), or applicable state law (state member and
                nonmember banks, and state savings associations) to set aside assets
                owned by the Board-regulated institution as security, which gives the
                depositor priority over the assets in the event the Board-regulated
                institution enters into receivership, bankruptcy, insolvency,
                liquidation, resolution, or similar proceeding; or
                 (3) A deposit of a fiduciary account awaiting investment or
                distribution held at the Board-regulated institution for which the
                Board-regulated institution's affiliated insured depository institution
                is a fiduciary and where the Board-regulated institution under 12 CFR
                9.10(c) (national banks), 12 CFR 150.310 (Federal savings
                associations), or applicable state law (state member and nonmember
                banks, state savings associations) has set aside assets owned by the
                Board-regulated institution as security, which gives the depositor
                priority over the assets in the event the Board-regulated institution
                enters into receivership, bankruptcy, insolvency, liquidation,
                resolution, or similar proceeding.
                 Committed means, with respect to a credit or liquidity facility,
                that under the terms of the facility, it is not unconditionally
                cancelable.
                * * * * *
                 Covered nonbank company means a designated company that the Board
                of Governors of the Federal Reserve System has required by separate
                rule or order to comply with the requirements of 12 CFR part 249.
                * * * * *
                 Encumbered means, with respect to an asset, that the asset:
                 (1) Is subject to legal, regulatory, contractual, or other
                restriction on the ability of the Board-regulated institution to
                monetize the asset; or
                 (2) Is pledged, explicitly or implicitly, to secure or to provide
                credit enhancement to any transaction, not including when the asset is
                pledged to a central bank or a U.S. government-sponsored enterprise
                where:
                 (i) Potential credit secured by the asset is not currently extended
                to the Board-regulated institution or its consolidated subsidiaries;
                and
                 (ii) The pledged asset is not required to support access to the
                payment services of a central bank.
                * * * * *
                 NSFR liability means any liability or equity reported on a Board-
                regulated institution's balance sheet that is not an NSFR regulatory
                capital element.
                 NSFR regulatory capital element means any capital element included
                in a Board-regulated institution's common equity tier 1 capital,
                additional tier 1 capital, and tier 2 capital, in each case as defined
                in Sec. 217.20 of Regulation Q (12 CFR part 217), prior to application
                of capital adjustments or deductions as set forth in Sec. 217.22 of
                Regulation Q (12 CFR part 217), excluding any debt or equity instrument
                that does not meet the criteria for additional tier 1 or tier 2 capital
                instruments in Sec. 217.22 of Regulation Q (12 CFR part 217) and is
                being phased out of tier 1 capital or tier 2 capital pursuant to
                subpart G of Regulation Q (12 CFR part 217).
                 Operational deposit means short-term unsecured wholesale funding
                that is a deposit, unsecured wholesale lending that is a deposit, or a
                collateralized deposit, in each case that meets the requirements of
                Sec. 249.4(b) with respect to that deposit and is necessary for the
                [[Page 9212]]
                provision of operational services as an independent third-party
                intermediary, agent, or administrator to the wholesale customer or
                counterparty providing the deposit.
                * * * * *
                 QMNA netting set means a group of derivative transactions with a
                single counterparty that is subject to a qualifying master netting
                agreement and is netted under the qualifying master netting agreement.
                * * * * *
                 Secured funding transaction means any funding transaction that is
                subject to a legally binding agreement that gives rise to a cash
                obligation of the Board-regulated institution to a wholesale customer
                or counterparty that is secured under applicable law by a lien on
                securities or loans provided by the Board-regulated institution, which
                gives the wholesale customer or counterparty, as holder of the lien,
                priority over the securities or loans in the event the Board-regulated
                institution enters into receivership, bankruptcy, insolvency,
                liquidation, resolution, or similar proceeding. Secured funding
                transactions include repurchase transactions, securities lending
                transactions, other secured loans, and borrowings from a Federal
                Reserve Bank. Secured funding transactions do not include securities.
                 Secured lending transaction means any lending transaction that is
                subject to a legally binding agreement that gives rise to a cash
                obligation of a wholesale customer or counterparty to the Board-
                regulated institution that is secured under applicable law by a lien on
                securities or loans provided by the wholesale customer or counterparty,
                which gives the Board-regulated institution, as holder of the lien,
                priority over the securities or loans in the event the counterparty
                enters into receivership, bankruptcy, insolvency, liquidation,
                resolution, or similar proceeding. Secured lending transactions include
                reverse repurchase transactions and securities borrowing transactions.
                Secured lending transactions do not include securities.
                * * * * *
                 Sweep deposit means a deposit held at the Board-regulated
                institution by a customer or counterparty through a contractual feature
                that automatically transfers to the Board-regulated institution 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.
                * * * * *
                 Unconditionally cancelable means, with respect to a credit or
                liquidity facility, that a Board-regulated institution may, at any
                time, with or without cause, refuse to extend credit under the facility
                (to the extent permitted under applicable law).
                 Unsecured wholesale funding means a liability or general obligation
                of the Board-regulated institution to a wholesale customer or
                counterparty that is not a secured funding transaction. Unsecured
                wholesale funding includes wholesale deposits. Unsecured wholesale
                funding does not include asset exchanges.
                 Unsecured wholesale lending means a liability or general obligation
                of a wholesale customer or counterparty to the Board-regulated
                institution that is not a secured lending transaction or a security.
                Unsecured wholesale lending does not include asset exchanges.
                * * * * *
                0
                18. Amend Sec. 249.22 by revising paragraph (b)(1) to read as follows:
                Sec. 249.22 Requirements for eligible high-quality liquid assets.
                * * * * *
                 (b) * * *
                 (1) The assets are not encumbered.
                * * * * *
                0
                19. In Sec. 249.30, revise paragraph (b)(3) to read as follows:
                Sec. 249.30 Total net cash outflow amount.
                 (b) * * *
                 (3) Other than the transactions identified in Sec. 249.32(h)(2),
                (h)(5), or (j) or Sec. 249.33(d) or (f), the maturity of which is
                determined under Sec. 249.31(a), transactions that have an open
                maturity are not included in the calculation of the maturity mismatch
                add-on.
                * * * * *
                0
                20. In Sec. 249.31, revise paragraphs (a)(1) introductory text, (a)(2)
                introductory text, and (a)(4) to read as follows:
                Sec. 249.31 Determining maturity.
                 (a) * * *
                 (1) With respect to an instrument or transaction subject to Sec.
                249.32, 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, except that when considering the earliest possible
                contractual maturity date or the earliest possible date the transaction
                could occur, the Board-regulated institution should exclude any
                contingent options that are triggered only by regulatory actions or
                changes in law or regulation, as follows:
                * * * * *
                 (2) With respect to an instrument or transaction subject to Sec.
                249.33, 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, except that when considering the latest possible
                contractual maturity date or the latest possible date the transaction
                could occur, the Board-regulated institution may exclude any contingent
                options that are triggered only by regulatory actions or changes in law
                or regulation, as follows:
                * * * * *
                 (4) With respect to a transaction that has an open maturity, is not
                an operational deposit, and is subject to the provisions of Sec.
                249.32(h)(2), (h)(5), (j), or (k) or Sec. 249.33(d) or (f), the
                maturity date is the first calendar day after the calculation date. Any
                other transaction that has an open maturity and is subject to the
                provisions of Sec. 249.32 shall be considered to mature within 30
                calendar days of the calculation date.
                * * * * *
                Sec. 249.32 [Amended]
                0
                21. Amend Sec. 249.32 by:
                0
                a. Removing the phrase ``reciprocal brokered deposits'' and adding the
                phrase ``brokered reciprocal deposits'' in its place wherever it
                appears.
                0
                b. Removing the phrase ``brokered sweep deposits'' and adding the
                phrase ``sweep deposits'' in its place wherever it appears.
                Subparts K and L [Added]
                0
                22. Amend part 249 by adding subparts K and L as set forth at the end
                of the common preamble.
                Subparts K and L [Amended]
                0
                23. Amend subparts K and L of part 249 by:
                0
                a. Removing ``[AGENCY]'' and adding ``Board'' in its place wherever it
                appears.
                0
                b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``Regulation Q
                (12 CFR part 217)'' in its place wherever it appears.
                0
                c. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
                SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
                217.10(c)(2)(v)(A) through (C)'' in its place wherever it appears.
                [[Page 9213]]
                0
                d. Removing ``[BANK]'' and adding ``Board-regulated institution'' in
                its place wherever it appears.
                0
                e. Removing ``[BANK]'s'' and adding ``Board-regulated institution's''
                in its place wherever it appears.
                0
                24. Amend part 249 by adding subparts M and N to read as follows:
                Subpart M--Transitions.
                Sec. 249.120 Transitions.
                 (a) Initial application. (1) A Board-regulated institution that
                initially becomes subject to the minimum net stable funding requirement
                under Sec. 249.1(b)(1)(i) or (ii) after July 1, 2021, must comply with
                the requirements of subparts K through N of this part beginning on the
                first day of the third calendar quarter after which the Board-regulated
                institution becomes subject to this part.
                 (2) A Board-regulated institution that becomes subject to the
                minimum net stable funding requirement under Sec. 249.1(b)(1)(iii)
                must comply with the requirements of subparts K through N of this part
                subject to a transition period specified by the Board.
                 (b) Transition to a different required stable funding adjustment
                percentage. (1) A Board-regulated institution whose required stable
                funding adjustment percentage changes is subject to the transition
                periods as set forth in Sec. 249.105(c).
                 (2) A Board-regulated institution that is no longer subject to the
                minimum stable funding requirement of this part pursuant to Sec.
                249.1(b)(1)(i) or (ii) based on the size of total consolidated assets,
                cross-jurisdictional activity, total nonbank assets, weighted short-
                term wholesale funding, or off-balance sheet exposure calculated in
                accordance with the Call Report, or instructions to the FR Y-9LP, the
                FR Y-15, or equivalent reporting form, as applicable, for each of the
                four most recent calendar quarters may cease compliance with the
                requirements of subparts K through N of this part as of the first day
                of the first calendar quarter after it is no longer subject to Sec.
                249.1(b).
                 (c) Reservation of authority. The Board may extend or accelerate
                any compliance date of this part if the Board determines such extension
                or acceleration is appropriate. In determining whether an extension or
                acceleration is appropriate, the Board will consider the effect of the
                modification on financial stability, the period of time for which the
                modification would be necessary to facilitate compliance with the
                requirements of subparts K through N of this part, and the actions the
                Board-regulated institution is taking to come into compliance with the
                requirements of subparts K through N of this part.
                Subpart N--NSFR Public Disclosure
                Sec. 249.130 Timing, method, and retention of disclosures.
                 (a) Applicability. A covered depository institution holding
                company, U.S. intermediate holding company, or covered nonbank company
                that is subject to the minimum stable funding requirement in Sec.
                249.100 of this part must publicly disclose the information required
                under this subpart.
                 (b) Timing of disclosure. (1) A covered depository institution
                holding company, U.S. intermediate holding company, or covered nonbank
                company that is subject to the minimum stable funding requirement in
                Sec. 249.100 of this part must provide timely public disclosures every
                second and fourth calendar quarter of all of the information required
                under this subpart for each of the two immediately preceding calendar
                quarters.
                 (2) A covered depository institution holding company, U.S.
                intermediate holding company, or covered nonbank holding company that
                is subject to this subpart must provide the disclosures required by
                this subpart beginning with the first calendar quarter that includes
                the date that is 18 months after the covered depository institution
                holding company, U.S. intermediate holding company, or covered nonbank
                company first became subject to the minimum stable funding requirement
                in Sec. 249.100 of this part.
                 (c) Disclosure method. A covered depository institution holding
                company, U.S. intermediate holding company, or covered nonbank company
                must publicly disclose, in a direct and prominent manner, the
                information required under this subpart on its public internet site or
                in its public financial or other public regulatory reports.
                 (d) Availability. The disclosures provided under this subpart must
                remain publicly available for at least five years after the initial
                disclosure date.
                Sec. 249.131 Disclosure requirements.
                 (a) General. A covered depository institution holding company, U.S.
                intermediate holding company, or covered nonbank company must publicly
                disclose the information required by this subpart in the format
                provided in Table 1 to this paragraph:
                BILLING CODE P
                [[Page 9214]]
                [GRAPHIC] [TIFF OMITTED] TR11FE21.000
                [[Page 9215]]
                [GRAPHIC] [TIFF OMITTED] TR11FE21.001
                [[Page 9216]]
                [GRAPHIC] [TIFF OMITTED] TR11FE21.002
                BILLING CODE C
                 (b) Calculation of disclosed average amounts--(1) General. (i) A
                covered depository institution holding company, U.S. intermediate
                holding company, or covered nonbank company must calculate its
                disclosed amounts:
                 (A) On a consolidated basis and presented in millions of U.S.
                dollars or as a percentage, as applicable; and
                 (B) As simple averages of daily amounts for each calendar quarter.
                 (ii) A covered depository institution holding company, U.S.
                intermediate holding company, or covered nonbank company must disclose
                the beginning date and end date for each calendar quarter.
                 (2) Calculation of unweighted amounts. (i) For each component of a
                covered depository institution holding company's, U.S. intermediate
                holding company's, or covered nonbank company's ASF amount calculation,
                other than the NSFR derivatives liability amount and total derivatives
                liability amount, the ``unweighted amount'' means the sum of the
                carrying values of the covered depository institution holding
                company's, U.S. intermediate holding company's, or covered nonbank
                company's NSFR regulatory capital elements and NSFR liabilities, as
                applicable, determined before applying the appropriate ASF factors, and
                subdivided into the following maturity categories, as applicable: Open
                maturity; less than six months after the calculation date; six months
                or more, but less than one year, after the calculation date; one year
                or more after the calculation date; and perpetual.
                 (ii) For each component of a covered depository institution holding
                company's, U.S. intermediate holding company's, or covered nonbank
                company's RSF amount calculation, other than amounts included in
                paragraphs (c)(2)(xvi) through (xix) of this section, the ``unweighted
                amount'' means the sum of the carrying values of the covered depository
                institution holding company's, U.S. intermediate holding company's, or
                covered nonbank company's assets and undrawn amounts of committed
                credit facilities and committed liquidity facilities extended by the
                covered depository institution holding company, or U.S. intermediate
                holding company, or covered nonbank company, as applicable, determined
                before applying the appropriate RSF factors, and subdivided by maturity
                into the following maturity categories, as applicable: Open maturity;
                less than six months after the calculation date; six months or more,
                but less than one year,
                [[Page 9217]]
                after the calculation date; one year or more after the calculation
                date; and perpetual.
                 (3) Calculation of weighted amounts. (i) For each component of a
                covered depository institution holding company's, U.S. intermediate
                holding company's, or covered nonbank company's ASF amount calculation,
                other than the NSFR derivatives liability amount and total derivatives
                liability amount, the ``weighted amount'' means the sum of the carrying
                values of the covered depository institution holding company's, U.S.
                intermediate holding company's, or covered nonbank company's NSFR
                regulatory capital elements and NSFR liabilities, as applicable,
                multiplied by the appropriate ASF factors.
                 (ii) For each component of a covered depository institution holding
                company's, U.S. intermediate holding company's, or covered nonbank
                company's RSF amount calculation, other than amounts included in
                paragraphs (c)(2)(xvi) through (xix) of this section, the ``weighted
                amount'' means the sum of the carrying values of the covered depository
                institution holding company's, U.S. intermediate holding company's, or
                covered nonbank company's assets and undrawn amounts of committed
                credit facilities and committed liquidity facilities extended by the
                covered depository institution holding company, U.S. intermediate
                holding company, or covered nonbank company, multiplied by the
                appropriate RSF factors.
                 (c) Quantitative disclosures. A covered depository institution
                holding company, U.S. intermediate holding company, or covered nonbank
                company must disclose all of the information required under Table 1 to
                paragraph (a) of this section including:
                 (1) Disclosures of ASF amount calculations:
                 (i) The sum of the average weighted amounts and, for each
                applicable maturity category, the sum of the average unweighted amounts
                of paragraphs (c)(1)(ii) and (iii) of this section (row 1);
                 (ii) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of NSFR regulatory capital
                elements described in Sec. 249.104(a)(1) (row 2);
                 (iii) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of securities described in
                Sec. Sec. 249.104(a)(2), 249.104(d)(5), and 249.104(e)(3) (row 3);
                 (iv) The sum of the average weighted amounts and, for each
                applicable maturity category, the sum of the average unweighted amounts
                of paragraphs (c)(1)(v) through (viii) of this section (row 4);
                 (v) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of stable retail deposits and
                sweep deposits held at the covered depository institution holding
                company, U.S. intermediate holding company, or covered nonbank company
                described in Sec. 249.104(b) (row 5);
                 (vi) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of retail deposits other than
                stable retail deposits or brokered deposits, described in Sec.
                249.104(c)(1) (row 6);
                 (vii) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of sweep deposits, brokered
                reciprocal deposits, and brokered deposits provided by a retail
                customer or counterparty described in Sec. Sec. 249.104(c)(2),
                249.104(c)(3), 249.104(c)(4), 249.104(d)(7), 249.104(d)(8) and
                249.104(e)(2) (row 7);
                 (viii) The average weighted amount and, for each applicable
                maturity category, the average unweighted amount of other funding
                provided by a retail customer or counterparty described in Sec.
                249.104(d)(9) (row 8);
                 (ix) The sum of the average weighted amounts and, for each
                applicable maturity category, the sum of the average unweighted amounts
                of paragraphs (c)(1)(x) and (xi) of this section (row 9);
                 (x) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of operational deposits placed
                at the covered depository institution holding company, U.S.
                intermediate holding company, or covered nonbank company described in
                Sec. 249.104(d)(6) (row 10);
                 (xi) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of other wholesale funding
                described in Sec. Sec. 249.104(a)(2), 249.104(d)(1), 249.104(d)(2),
                249.104(d)(3), 249.104(d)(4), 249.104(d)(10), and 249.104(e)(4) (row
                11);
                 (xii) In the ``unweighted'' cell, the average amount of the NSFR
                derivatives liability amount described in Sec. 249.107(d)(2) (row 12);
                 (xiii) In the ``unweighted'' cell, the average amount of the total
                derivatives liability amount described in Sec. 249.107(e)(2) (row 13);
                 (xiv) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of all other liabilities not
                included in amounts disclosed under paragraphs (c)(1)(i) through (xiii)
                of this section (row 14);
                 (xv) The average amount of the ASF amount described in Sec.
                249.103 (row 15);
                 (2) Disclosures of RSF amount calculations, including to reflect
                any encumbrances under Sec. Sec. 249.106(c) and 249.106(d):
                 (i) The sum of the average weighted amounts and the sum of the
                average unweighted amounts of paragraphs (c)(2)(ii) through (iv) of
                this section (row 16);
                 (ii) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of level 1 liquid assets
                described in Sec. Sec. 249.106(a)(1) (row 17);
                 (iii) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of level 2A liquid assets
                described in Sec. 249.106(a)(3)(i) (row 18);
                 (iv) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of level 2B liquid assets
                described in Sec. 249.106(a)(4)(i) (row 19);
                 (v) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of assets described in Sec.
                249.106(a)(1), other than level 1 liquid assets included in amounts
                disclosed under paragraph (c)(2)(ii) of this section or secured lending
                transactions included in amounts disclosed under paragraph (c)(2)(viii)
                of this section (row 20);
                 (vi) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of operational deposits placed
                at financial sector entities or consolidated subsidiaries thereof
                described in Sec. 249.106(a)(4)(iii) (row 21);
                 (vii) The sum of the average weighted amounts and, for each
                applicable maturity category, the sum of the average unweighted amounts
                of paragraphs (c)(2)(viii), (ix), (x), (xii), and (xiv) of this section
                (row 22);
                 (viii) The average weighted amount and, for each applicable
                maturity category, the average unweighted amount of secured lending
                transactions where the borrower is a financial sector entity or a
                consolidated subsidiary of a financial sector entity and the secured
                lending transaction is secured by level 1 liquid assets, described in
                Sec. Sec. 249.106(a)(1)(vii), 249.106(a)(3)(ii), 249.106(a)(4)(ii),
                and 249.106(a)(7) (row 23);
                 (ix) The average weighted amount and, for each applicable maturity
                category, the average unweighted
                [[Page 9218]]
                amount of secured lending transactions that are secured by assets other
                than level 1 liquid assets and unsecured wholesale lending, in each
                case where the borrower is a financial sector entity or a consolidated
                subsidiary of a financial sector entity, described in Sec. Sec.
                249.106(a)(3)(ii), 249.106(a)(4)(ii), and 249.106(a)(7) (row 24);
                 (x) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of secured lending transactions
                and unsecured wholesale lending to wholesale customers or
                counterparties that are not financial sector entities or consolidated
                subsidiaries thereof, and lending to retail customers and
                counterparties other than retail mortgages, described in Sec. Sec.
                249.106(a)(4)(iv), 249.106(a)(5)(ii), and 249.106(a)(6)(ii) (row 25);
                 (xi) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of secured lending
                transactions, unsecured wholesale lending, and lending to retail
                customers or counterparties that are assigned a risk weight of no
                greater than 20 percent under subpart D of Regulation Q (12 CFR part
                217) described in Sec. Sec. 249.106(a)(4)(ii), 249.106(a)(4)(iv), and
                249.106(a)(5)(ii) (row 26);
                 (xii) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of retail mortgages described
                in Sec. Sec. 249.106(a)(4)(iv), 249.106(a)(5)(i), and 249.106(a)(6)(i)
                (row 27);
                 (xiii) The average weighted amount and, for each applicable
                maturity category, the average unweighted amount of retail mortgages
                assigned a risk weight of no greater than 50 percent under subpart D of
                Regulation Q (12 CFR part 217) described in Sec. Sec.
                249.106(a)(4)(iv) and 249.106(a)(5)(i) (row 28);
                 (xiv) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of publicly traded common
                equity shares and other securities that are not HQLA and are not
                nonperforming assets described in Sec. Sec. 249.106(a)(6)(iii), and
                249.106(a)(6)(iv) (row 29);
                 (xv) The average weighted amount and average unweighted amount of
                commodities described in Sec. Sec. 249.106(a)(6)(v) and 249.106(a)(7)
                (row 30);
                 (xvi) The average unweighted amount and average weighted amount of
                the sum of (A) assets contributed by the covered depository institution
                holding company to a central counterparty's mutualized loss-sharing
                arrangement described in Sec. 249.107(b)(6) (in which case the
                ``unweighted amount'' shall equal the fair value and the ``weighted
                amount'' shall equal the unweighted amount multiplied by 85 percent)
                and (B) assets provided as initial margin by the covered depository
                institution holding company, U.S. intermediate holding company, or
                covered nonbank company for derivative transactions described in Sec.
                249.107(b)(7) (in which case the ``unweighted amount'' shall equal the
                fair value and the ``weighted amount'' shall equal the unweighted
                amount multiplied by the higher of 85 percent or the RSF factor
                assigned to the asset pursuant to Sec. 249.106) (row 31);
                 (xvii) In the ``unweighted'' cell, the covered depository
                institution holding company's, U.S. intermediate holding company's, or
                covered nonbank company's average amount of the NSFR derivatives asset
                amount under Sec. 249.107(d)(1) and in the ``weighted'' cell, the
                covered depository institution holding company's, U.S. intermediate
                holding company's, or covered nonbank company's average amount of the
                NSFR derivatives asset amount under Sec. 249.107(d)(1) multiplied by
                100 percent (row 32);
                 (xviii) In the ``unweighted'' cell, the covered depository
                institution holding company's, U.S. intermediate holding company's, or
                covered nonbank company's average amount of the total derivatives asset
                amount described in Sec. 249.107(e)(1) (row 33);
                 (xix) (A) In the ``unweighted'' cell, the average amount of the sum
                of the gross derivative liability values of the covered depository
                institution holding company, U.S. intermediate holding company, or
                covered nonbank company that are liabilities for each of its derivative
                transactions not subject to a qualifying master netting agreement and
                each of its QMNA netting sets, described in Sec. 249.107(b)(5), and
                (B) in the ``weighted'' cell, such sum multiplied by 5 percent, as
                described in Sec. 249.107(b)(5) (row 34);
                 (xx) The average weighted amount and, for each applicable maturity
                category, the average unweighted amount of all other asset amounts not
                included in amounts disclosed under paragraphs (c)(2)(i) through (xix)
                of this section, including nonperforming assets (row 35);
                 (xxi) The average weighted and unweighted amount of undrawn credit
                and liquidity facilities described in Sec. 249.106(a)(2) (row 36);
                 (xxii) The average amount of the RSF amount as calculated in Sec.
                249.105(a) prior to the application of the applicable required stable
                funding adjustment percentage in Sec. 249.105(b) (row 37);
                 (xxiii) The applicable required stable funding adjustment
                percentage described in Table 1 to Sec. 249.105(b) (row 38);
                 (xxiv) The average amount of the RSF amount as calculated under
                Sec. 249.105 (row 39);
                 (3) The average of the net stable funding ratios as calculated
                under Sec. 249.100(b) (row 40);
                 (d) Qualitative disclosures. (1) A covered depository institution
                holding company, U.S. intermediate holding company, or covered nonbank
                company must provide a qualitative discussion of the factors that have
                a significant effect on its net stable funding ratio, which may include
                the following:
                 (i) The main drivers of the net stable funding ratio;
                 (ii) Changes in the net stable funding ratio results over time and
                the causes of such changes (for example, changes in strategies and
                circumstances);
                 (iii) Concentrations of funding sources and changes in funding
                structure; or
                 (iv) Concentrations of available and required stable funding within
                a covered company's corporate structure (for example, across legal
                entities).
                 (2) If a covered depository institution holding company, U.S.
                intermediate holding company, or covered nonbank company subject to
                this subpart believes that the qualitative discussion required in
                paragraph (d)(1) of this section would prejudice seriously its position
                by resulting in public disclosure of specific commercial or financial
                information that is either proprietary or confidential in nature, the
                covered depository institution holding company, U.S. intermediate
                holding company, or covered nonbank company is not required to include
                those specific items in its qualitative discussion, but must provide
                more general information about the items that had a significant effect
                on its net stable funding ratio, together with the fact that, and the
                reason why, more specific information was not discussed.
                FEDERAL DEPOSIT INSURANCE CORPORATION
                12 CFR Chapter III
                Authority and Issuance
                 For the reasons set forth in the common preamble, part 329 of
                chapter III of title 12 of the Code of Federal Regulations is amended
                as follows:
                PART 329--LIQUIDITY RISK MEASUREMENT STANDARDS
                0
                25. The authority citation for part 329 continues to read as follows:
                 Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1,
                5412.
                [[Page 9219]]
                0
                26. Amend Sec. 329.1 by revising paragraphs (a) and (b)(1)
                introductory text to read as follows:
                Sec. 329.1 Purpose and applicability.
                 (a) Purpose. This part establishes a minimum liquidity standard and
                a minimum stable funding standard for certain FDIC-supervised
                institutions on a consolidated basis, as set forth herein.
                 (b) * * *
                 (1) An FDIC-supervised institution is subject to the minimum
                liquidity standard, minimum stable funding standard, and other
                requirements of this part if:
                * * * * *
                0
                27. Amend Sec. 329.2 by revising paragraph (b) and adding paragraph
                (c) to read as follows:
                Sec. 329.2 Reservation of authority.
                * * * * *
                 (b) The FDIC may require an FDIC-supervised institution to maintain
                an amount of available stable funding greater than otherwise required
                under this part, or to take any other measure to improve the FDIC-
                supervised institution's stable funding, if the FDIC determines that
                the FDIC-supervised institution's stable funding requirements as
                calculated under this part are not commensurate with the FDIC-
                supervised institution's funding risks. In making determinations under
                this section, the FDIC will apply notice and response procedures as set
                forth in 12 CFR 324.5.
                 (c) Nothing in this part limits the authority of the FDIC 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, deficient stable funding
                levels, or violations of law.
                0
                28. Amend Sec. 329.3 by:
                0
                a. Removing the definitions for ``Brokered sweep deposit'', ``Covered
                nonbank company'', and ``Reciprocal brokered deposit'';
                0
                b. Adding definitions for ``Brokered reciprocal deposit'', ``Carrying
                value'', ``Encumbered'', ``NSFR liability'', ``NSFR regulatory capital
                element'', ``QMNA netting set'', ``Sweep deposit'', ``Unconditionally
                cancelable'', and ``Unsecured wholesale lending''; and
                0
                c. Revising definitions for ``Brokered deposit'', ``Calculation date'',
                ``Collateralized deposit'', ``Committed'', ``Operational deposit'',
                ``Secured funding transaction'', ``Secured lending transaction'', and
                ``Unsecured wholesale funding.''
                 The additions and revisions, in alphabetical order, read as
                follows:
                Sec. 329.3 Definitions.
                * * * * *
                 Brokered deposit means any deposit held at the FDIC-supervised
                institution 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 the Federal Deposit Insurance Corporation's regulations.
                 Brokered reciprocal deposit means a brokered deposit that an FDIC-
                supervised institution receives through a deposit placement network on
                a reciprocal basis, such that:
                 (1) For any deposit received, the FDIC-supervised institution (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.
                 Calculation date means, for subparts B through J of this part, any
                date on which an FDIC-supervised institution calculates its liquidity
                coverage ratio under Sec. 329.10, and for subparts K through M of this
                part, any date on which an FDIC-supervised institution calculates its
                net stable funding ratio under Sec. 329.100.
                * * * * *
                 Carrying value means, with respect to an asset, NSFR regulatory
                capital element, or NSFR liability, the value on the balance sheet of
                the FDIC-supervised institution, each as determined in accordance with
                GAAP.
                * * * * *
                 Collateralized deposit means:
                 (1) A deposit of a public sector entity held at the FDIC-supervised
                institution that is required to be secured under applicable law by a
                lien on assets owned by the FDIC-supervised institution and that gives
                the depositor, as holder of the lien, priority over the assets in the
                event the FDIC-supervised institution enters into receivership,
                bankruptcy, insolvency, liquidation, resolution, or similar proceeding;
                 (2) A deposit of a fiduciary account awaiting investment or
                distribution held at the FDIC-supervised institution for which the
                FDIC-supervised institution is a fiduciary and is required under
                applicable state law to set aside assets owned by the FDIC-supervised
                institution as security, which gives the depositor priority over the
                assets in the event the FDIC-supervised institution enters into
                receivership, bankruptcy, insolvency, liquidation, resolution, or
                similar proceeding; or
                 (3) A deposit of a fiduciary account awaiting investment or
                distribution held at the FDIC-supervised institution for which the
                FDIC-supervised institution's affiliated insured depository institution
                is a fiduciary and where the FDIC-supervised institution under 12 CFR
                9.10(c) (national banks), 12 CFR 150.310 (Federal savings
                associations), or applicable state law (state member and nonmember
                banks, and state savings associations) has set aside assets owned by
                the FDIC-supervised institution as security, which gives the depositor
                priority over the assets in the event the FDIC-supervised institution
                enters into receivership, bankruptcy, insolvency, liquidation,
                resolution, or similar proceeding.
                 Committed means, with respect to a credit or liquidity facility,
                that under the terms of the facility, it is not unconditionally
                cancelable.
                * * * * *
                 Encumbered means, with respect to an asset, that the asset:
                 (1) Is subject to legal, regulatory, contractual, or other
                restriction on the ability of the FDIC-supervised institution to
                monetize the asset; or
                 (2) Is pledged, explicitly or implicitly, to secure or to provide
                credit enhancement to any transaction, not including when the asset is
                pledged to a central bank or a U.S. government-sponsored enterprise
                where:
                 (i) Potential credit secured by the asset is not currently extended
                to the FDIC-supervised institution or its consolidated subsidiaries;
                and
                 (ii) The pledged asset is not required to support access to the
                payment services of a central bank.
                * * * * *
                 NSFR liability means any liability or equity reported on an FDIC-
                supervised institution's balance sheet that is not an NSFR regulatory
                capital element.
                 NSFR regulatory capital element means any capital element included
                in an FDIC-supervised institution's common equity tier 1 capital,
                additional tier 1 capital, and tier 2 capital, in each case as defined
                in 12 CFR 324.20, prior to application of capital adjustments or
                deductions as set forth in 12 CFR 324.22, excluding any debt or equity
                instrument that does not meet the criteria for additional tier 1 or
                tier 2 capital instruments in 12 CFR 324.22 and is being phased out of
                tier 1 capital or tier 2 capital pursuant to subpart G of 12 CFR part
                324.
                 Operational deposit means short-term unsecured wholesale funding
                that is a deposit, unsecured wholesale lending that is a deposit, or a
                collateralized deposit, in each case that meets the requirements of
                Sec. 329.4(b) with respect to that deposit and is necessary for the
                [[Page 9220]]
                provision of operational services as an independent third-party
                intermediary, agent, or administrator to the wholesale customer or
                counterparty providing the deposit.
                * * * * *
                 QMNA netting set means a group of derivative transactions with a
                single counterparty that is subject to a qualifying master netting
                agreement and is netted under the qualifying master netting agreement.
                * * * * *
                 Secured funding transaction means any funding transaction that is
                subject to a legally binding agreement that gives rise to a cash
                obligation of the FDIC-supervised institution to a wholesale customer
                or counterparty that is secured under applicable law by a lien on
                securities or loans provided by the FDIC-supervised institution, which
                gives the wholesale customer or counterparty, as holder of the lien,
                priority over the securities or loans in the event the FDIC-supervised
                institution enters into receivership, bankruptcy, insolvency,
                liquidation, resolution, or similar proceeding. Secured funding
                transactions include repurchase transactions, securities lending
                transactions, other secured loans, and borrowings from a Federal
                Reserve Bank. Secured funding transactions do not include securities.
                 Secured lending transaction means any lending transaction that is
                subject to a legally binding agreement that gives rise to a cash
                obligation of a wholesale customer or counterparty to the FDIC-
                supervised institution that is secured under applicable law by a lien
                on securities or loans provided by the wholesale customer or
                counterparty, which gives the FDIC-supervised institution, as holder of
                the lien, priority over the securities or loans in the event the
                counterparty enters into receivership, bankruptcy, insolvency,
                liquidation, resolution, or similar proceeding. Secured lending
                transactions include reverse repurchase transactions and securities
                borrowing transactions. Secured lending transactions do not include
                securities.
                * * * * *
                 Sweep deposit means a deposit held at the FDIC-supervised
                institution by a customer or counterparty through a contractual feature
                that automatically transfers to the FDIC-supervised institution 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.
                * * * * *
                 Unconditionally cancelable means, with respect to a credit or
                liquidity facility, that an FDIC-supervised institution may, at any
                time, with or without cause, refuse to extend credit under the facility
                (to the extent permitted under applicable law).
                 Unsecured wholesale funding means a liability or general obligation
                of the FDIC-supervised institution to a wholesale customer or
                counterparty that is not a secured funding transaction. Unsecured
                wholesale funding includes wholesale deposits. Unsecured wholesale
                funding does not include asset exchanges.
                 Unsecured wholesale lending means a liability or general obligation
                of a wholesale customer or counterparty to the FDIC-supervised
                institution that is not a secured lending transaction or a security.
                Unsecured wholesale lending does not include asset exchanges.
                * * * * *
                0
                29. Amend Sec. 329.22, by revising paragraph (b)(1) to read as
                follows:
                Sec. 329.22 Requirements for eligible high-quality liquid assets.
                * * * * *
                 (b) * * *
                 (1) The assets are not encumbered.
                * * * * *
                0
                30. Amend Sec. 329.30, by revising paragraph (b)(3) to read as
                follows:
                Sec. 329.30 Total net cash outflow amount.
                * * * * *
                 (b) * * *
                 (3) Other than the transactions identified in Sec. 329.32(h)(2),
                (h)(5), or (j) or Sec. 329.33(d) or (f), the maturity of which is
                determined under Sec. 329.31(a), transactions that have an open
                maturity are not included in the calculation of the maturity mismatch
                add-on.
                * * * * *
                0
                31. Amend Sec. 329.31, by revising paragraphs (a)(1) introductory
                text, (a)(2) introductory text, and (a)(4) to read as follows:
                Sec. 329.31 Determining maturity.
                 (a) * * *
                 (1) With respect to an instrument or transaction subject to Sec.
                329.32, 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, except that when considering the earliest possible
                contractual maturity date or the earliest possible date the transaction
                could occur, the FDIC-supervised institution should exclude any
                contingent options that are triggered only by regulatory actions or
                changes in law or regulation, as follows:
                * * * * *
                 (2) With respect to an instrument or transaction subject to Sec.
                329.33, 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, except that when considering the latest possible
                contractual maturity date or the latest possible date the transaction
                could occur, the FDIC-supervised institution may exclude any contingent
                options that are triggered only by regulatory actions or changes in law
                or regulation, as follows:
                * * * * *
                 (4) With respect to a transaction that has an open maturity, is not
                an operational deposit, and is subject to the provisions of Sec.
                329.32(h)(2), (h)(5), (j), or (k) or Sec. 329.33(d) or (f), the
                maturity date is the first calendar day after the calculation date. Any
                other transaction that has an open maturity and is subject to the
                provisions of Sec. 329.32 shall be considered to mature within 30
                calendar days of the calculation date.
                * * * * *
                Sec. 329.32 [Amended]
                0
                32. Amend Sec. 329.32 by:
                0
                a. Removing the phrase ``reciprocal brokered deposits'' and adding the
                phrase ``brokered reciprocal deposits'' in its place wherever it
                appears.
                0
                b. Removing the phrase ``brokered sweep deposits'' and adding the
                phrase ``sweep deposits'' in its place wherever it appears.
                Subparts G through J [Added and Reserved]
                0
                33. Add and reserve subparts G through J to part 329.
                Subparts K and L [Added]
                0
                34. Amend part 329 by adding subparts K and L as set forth at the end
                of the common preamble.
                Subparts K and L [Amended]
                0
                35. Subparts K and L to part 329 are amended by:
                0
                a. Removing ``[AGENCY]'' and adding ``FDIC'' in its place wherever it
                appears.
                0
                b. Removing ``[AGENCY CAPITAL REGULATION]'' and adding ``12 CFR part
                324'' in its place wherever it appears.
                0
                c. Removing ``A [BANK]'' and adding ``An FDIC-supervised institution''
                in its place wherever it appears.
                [[Page 9221]]
                0
                d. Removing ``a [BANK]'' and add ``an FDIC-supervised institution'' in
                its place wherever it appears.
                0
                e. Removing ``[BANK]'' and adding ``FDIC-supervised institution'' in
                its place wherever it appears.
                0
                f. Removing ``[Sec. __.10(c)(4)(ii)(E)(1) through (3) of the AGENCY
                SUPPLEMENTARY LEVERAGE RATIO RULE]'' and adding ``12 CFR
                324.10(c)(2)(v)(A) through (C)'' in its place wherever it appears.
                0
                g. Amending Sec. 329.105, by revising paragraph (b) to read as
                follows:
                Sec. 329.105 Calculation of required stable funding amount.
                * * * * *
                 (b) Required stable funding adjustment percentage. An FDIC-
                supervised institution's required stable funding adjustment percentage
                is determined pursuant to Table 1 to this paragraph (b).
                Table 1 to Paragraph (b)--Required Stable Funding Adjustment Percentages
                ------------------------------------------------------------------------
                
                ------------------------------------------------------------------------
                GSIB depository institution supervised by the FDIC...... 100
                Category II FDIC-supervised institution................. 100
                Category III FDIC-supervised institution that:.......... 100
                (1) Is a consolidated subsidiary of (a) a covered
                 depository institution holding company or U.S.
                 intermediate holding company identified as a Category
                 III banking organization pursuant to 12 CFR 252.5 or 12
                 CFR 238.10 or (b) a depository institution that meets
                 the criteria set forth in paragraphs (2)(ii)(A) and (B)
                 of the definition of Category III FDIC-supervised
                 institution in this part, in each case with $75 billion
                 or more in average weighted short-term wholesale
                 funding; or
                (2) Has $75 billion or more in average weighted short-
                 term wholesale funding and is not a consolidated
                 subsidiary of (a) a covered depository institution
                 holding company or U.S. intermediate holding company
                 identified as a Category III banking organization
                 pursuant to 12 CFR 252.5 or 12 CFR 238.10 or (b) a
                 depository institution that meets the criteria set
                 forth in paragraphs (2)(ii)(A) and (B) of the
                 definition of Category III FDIC-supervised institution
                 in this part.
                Category III FDIC-supervised institution that:.......... 85
                (1) Is a consolidated subsidiary of (a) a covered
                 depository institution holding company or U.S.
                 intermediate holding company identified as a Category
                 III banking organization pursuant to 12 CFR 252.5 or 12
                 CFR 238.10 or (b) a depository institution that meets
                 the criteria set forth in paragraphs (2)(ii)(A) and (B)
                 of the definition of Category III FDIC-supervised
                 institution in this part, in each case with less than
                 $75 billion in average weighted short-term wholesale
                 funding; or
                (2) Has less than $75 billion in average weighted short-
                 term wholesale funding and is not a consolidated
                 subsidiary of (a) a covered depository institution
                 holding company or U.S. intermediate holding company
                 identified as a Category III banking organization
                 pursuant to 12 CFR 252.5 or 12 CFR 238.10 or (b) a
                 depository institution that meets the criteria set
                 forth in paragraphs (2)(ii)(A) and (B) of the
                 definition of Category III FDIC-supervised institution
                 in this part.
                ------------------------------------------------------------------------
                0
                36. Amend part 329 by adding subpart M to read as follows:
                Subpart M--Transitions
                Sec. 329.120 Transitions.
                 (a) Initial application. (1) An FDIC-supervised institution that
                initially becomes subject to the minimum net stable funding requirement
                under Sec. 329.1(b)(1)(i) after July 1, 2021, must comply with the
                requirements of subparts K through M of this part beginning on the
                first day of the third calendar quarter after which the FDIC-supervised
                institution becomes subject to this part.
                 (2) An FDIC-supervised institution that becomes subject to the
                minimum net stable funding requirement under Sec. 329.1(b)(1)(ii) must
                comply with the requirements of subparts K through M of this part
                subject to a transition period specified by the FDIC.
                 (b) Transition to a different required stable funding adjustment
                percentage.
                 (1) An FDIC-supervised institution whose required stable funding
                adjustment percentage changes is subject to the transition periods as
                set forth in Sec. 329.105(c).
                 (2) An FDIC-supervised institution that is no longer subject to the
                minimum stable funding requirement of this part pursuant to Sec.
                329.1(b)(1)(i) based on the size of total consolidated assets, cross-
                jurisdictional activity, total nonbank assets, weighted short-term
                wholesale funding, or off-balance sheet exposure calculated in
                accordance with the Call Report, or instructions to the FR Y-9LP, the
                FR Y-15, or equivalent reporting form, as applicable, for each of the
                four most recent calendar quarters may cease compliance with the
                requirements of subparts K through M of this part as of the first day
                of the first calendar quarter after it is no longer subject to Sec.
                329.1(b).
                 (c) Reservation of authority. The FDIC may extend or accelerate any
                compliance date of this part if the FDIC determines such extension or
                acceleration is appropriate. In determining whether an extension or
                acceleration is appropriate, the FDIC will consider the effect of the
                modification on financial stability, the period of time for which the
                modification would be necessary to facilitate compliance with the
                requirements of subparts K through M of this part, and the actions the
                FDIC-supervised institution is taking to come into compliance with the
                requirements of subparts K through M of this part.
                Brian P. Brooks,
                Acting Comptroller of the Currency.
                 By order of the Board of Governors of the Federal Reserve
                System.
                Ann Misback,
                Secretary of the Board,
                Federal Deposit Insurance Corporation.
                 By order of the Board of Directors.
                 Dated at Washington, DC, on October 20, 2020.
                James P. Sheesley,
                Assistant Executive Secretary.
                [FR Doc. 2020-26546 Filed 2-4-21; 4:15 pm]
                BILLING CODE P