September 3, 2014 Alert #2 - Summary of Final LCR Rules
The Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Commission (“FDIC”) today approved final rules to implement the Liquidity Coverage Ratio (“LCR”) in the U.S. as established by the Basel Committee on Banking Supervision. SFIG will hold a call on Thursday, September 11th at 2:00 p.m. (EST) to review the details of the Final Rule with the Regulatory Capital and Liquidity Committee. To join this Committee and participate in the call, please email Mary.Robinson@sfindustry.org.

The provisions of the final regulations relevant to securitizations are largely unchanged from the version of the regulation proposed in October of 2013, with the important exception of the outflow amount treatment of undrawn amounts under credit and liquidity commitments to special purpose entities.


Unfunded Commitments to SPEs

Together with the Office of the Comptroller of the Currency (“OCC”), the FRB and FDIC had initially proposed LCR regulations in October 2013 that, among other things, would have assigned a 100% outflow amount to any unfunded commitment provided by a U.S. bank to a special purpose entity. In response to industry comment, including most prominently a comment letter submitted by SFIG and SIFMA, the Federal Reserve Board and FDIC have adopted changes in the final rule that would apply a "look through" approach to determining outflow amounts for commitments to special purpose entities ("SPEs") that do not issue securities or commercial paper and that are consolidated subsidiaries of certain customers or counterparties of the bank. As such, under the final rule:
  • the outflow amount for facilities extended to an SPE that is a consolidated subsidiary of a wholesale customer or counterparty that is not a financial sector entity is 10% of the undrawn amount for committed credit facilities and 30% of the undrawn amount for committed liquidity facilities; and

  • the outflow amount for facilities extended to an SPE that is a consolidated subsidiary of a financial sector entity is 40% of the undrawn amount for committed credit facilities and 100% of the undrawn amount for committed liquidity facilities.

The outflow amount for undrawn amounts under committed credit or liquidity facilities extended to SPEs that issue or have issued commercial paper or securities, to finance its purchases or operations is 100%. A 100% outflow amount would also apply to undrawn amounts under committed credit or liquidity facilities to other SPEs not described above, including SPEs that are not consolidated subsidiaries of the bank's customer or counterparty and SPEs that are consolidated subsidiaries of depository institutions, depository institution holding companies and foreign banks.


High Quality Liquid Assets

GSE securities continue to be treated as level 2A liquid assets under the final regulation meaning they are subject to a 15% haircut and are subject to the 40% cap that limits the total amount of level 2 assets that can be included as HQLA.

Like the proposed rule, the final rules would not include asset-backed securities, covered bonds, or private label mortgage-backed securities in the definition of high quality liquid assets ("HQLA") used to calculate the numerator of the ratio.


Structured Transaction Outflow Amount

Under the final rules, if a bank is a sponsor of a structured transaction (which would include securitizations) where the issuing entity is not consolidated on the bank's balance sheet under GAAP, an outflow amount is assigned to the transaction that is the greater of (i) 100% of the amount of all obligations of the issuing entity that mature within 30 days or less from the relevant calculation date, and (ii) the maximum contractual amount of funding the bank may be required to provide the issuing entity within 30 days or less of the calculation date. The same outflow amount would have applied under the proposed rules, except that it would have applied to all sponsored structured transactions, regardless of whether the bank consolidated the issuing entity. The change has the effect of exempting many bank sponsored securitizations from the provision given that, since the adoption of FAS 167, many if not most securitization special purpose entities sponsored by banks are consolidated by those banks under GAAP.


Transition Period

The effective date of the final rule is January 1, 2015 and covered companies will be required to maintain a minimum LCR of 80% beginning on that date. However, the Federal Reserve Board has delayed implementation of the daily calculation.

With respect to the daily calculation requirements, covered companies that are depository institutions holding companies with $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody, and any depository institution that is a consolidated subsidiary of such depository institution holding companies that has consolidated assets equal to $10 billion or more are required to calculate their LCR on the last business day of the calendar month from January 1, 2015 to June 30, 2015 and, beginning on July 1, 2015, must calculate their LCR on each business day.

All other covered companies are required to calculate the LCR on the last business day of the calendar month from January 1, 2015 to June 30, 2016 and beginning on July 1, 2016, must calculate their LCR each business day.

Modified LCR holding companies will not be subject to the final rule in 2015 and will be required to calculate and maintain their LCR monthly starting January 1, 2016.
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