FDIC Meeting on LCR , SLR and Margin Requirements
Key Topics & Takeaways
- Establishing Margin and Capital Requirements for Covered Swap Entities: The board of directors approved a proposed rulemaking.
- Under the rule, a covered swap entity would determine its initial margin requirement either through a standardized lookup table or by using an internal model that would have to be approved by the FDIC.
- Gruenberg highlighted the fact that the rule would be consistent with Basel Committee and IOSCO proposed framework.
- Liquidity Coverage Ratio: The board voted unanimously in favor of a final rule for the liquidity coverage ratio.
- The LCR requirement will take effect on January 1, 2015, with a minimum requirement equaling 80 percent and increasing 10 percent a year until 2017.
- FDIC staff believe excluding municipal securities will not have an impact of the securities’ pricing, but are sensitive to concerns about the exclusion, will monitor the impacts of the final rule, and will consider adjustments if needed.
- Supplementary Leverage Ratio: The board voted unanimously in favor of a final rule for the supplementary leverage ratio.
- Gruenberg pointed out that the supplementary leverage ratio includes certain off-balance sheet exposures, saying this is important since advanced-approach banking organizations tend to have large off-balance sheet activities.
- Horton said it is worth questioning whether regulators have gone far enough, but the financial system is in a better place than it was under pre-crisis requirements.
Speakers:
Martin Gruenberg, Chairman, FDIC
- Thomas Hoenig, Vice Chairman, FDIC
- Jeremiah Norton, Director, FDIC
- Thomas Curry, Comptroller of the Currency
- Richard Cordray, Director, Consumer Financial Protection Bureau
Notice of Proposed Rulemaking to Establish Margin and Capital Requirements for Covered Swap Entities
Staff Presentation
FDIC staff provided a staff presentation regarding a notice of proposed rulemaking to establish margin and capital requirements for covered swap entities. They said the rulemaking comes from sections 731 and 764 of the Dodd-Frank Act, and that there would be a public comment period of 60 days. The staff noted that the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) published a proposed framework for margin requirements with the goal of creating an international standard, and said the new proposed rulemaking would be consistent with this international framework.
Covered swap entities, the staff said, would be required to post and collect initial and variation margin for derivatives entered into with certain counterparties, and the rule specifies minimum “safekeeping standards” for initial margin required to be collected. To implement this risk-based approach, the presenter said, the proposed rule distinguishes among four types of swap counterparties: 1) covered swap entities; 2) financial end-users with material swap exposure; financial end-users without material swap exposure; and 4) other counterparties including non-financial end-users and multi-lateral development banks. He said these categories reflect the agencies’ belief that risk-based distinctions can be made among these types of counterparties.
The presenter explained that under the proposed rule, a covered swap entity would be required to calculate the initial margin required using one of two alternatives: 1) through the use of a standardized lookup table that specifies the minimum initial margin collection requirement as a percentage of a swap notional amount; or 2) through the use of an internal model that would require agency approval.
The types of collateral eligible to satisfy the initial margin requirement would be limited to immediately-available cash funds, obligations of or fully guaranteed by the United States, senior debt obligations of government sponsored entities, and other high-quality collateral, FDIC staff said. The rule would not apply retroactively to transactions prior to the effective date of the proposed rule, he stated.
Board Statements and Vote
FDIC Chairman Martin Gruenberg said the rules being considered today address three areas of systemic risk, and that taken together are an important step forward in addressing the risks posed by the largest systemically important financial institutions (SIFIs). He continued to say that establishing margin requirements for over-the-counter (OTC) derivatives is one of the most important reforms of Dodd-Frank, noting that before the financial crisis some institutions would enter into large OTC derivative positions without the prudent exchange of collateral on margin to support them. The margin in the proposed rule, he stated, would promote financial stability by reducing systemic leverage in the derivatives marketplace and promote the safety and soundness of banks by discouraging the excessive growth of risky positions.
Gruenberg offered four points he said were worth highlighting: 1) the proposed rulemaking is consistent with the Basel Committee and IOSCO proposed framework; 2) it does not require covered swap entities to collect initial margin or variation margin from commercial entities; 3) the rule would have little if any impact on community banks; and 4) the rule would not be applied retroactively.
FDIC Vice Chairman Thomas Hoenig expressed support for the proposed rulemaking but voiced concerns over the ability of companies to avoid designation by moving activities overseas and removing guarantees, thereby removing reporting requirements in some rules.
The staff member replied that the rule is structured to be consistent with sections 731 and 764, which provides the FDIC with authority to set regulations to collect and post margin for entities that have been designated as swap dealers or major swap participants. The Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) have this definitional authority over designation, he said, but if a foreign subsidiary does not meet the CFTC or SEC definition, then the guarantee is removed and the entity would not fall under the FDIC rule.
Comptroller of the Currency Thomas Curry noted that the swap margin requirements being discussed were originally put out for comment in 2011, and that while it has been a long time, the day’s actions represent significant progress. He recalled that one of the chief concerns from commenters was the call for international coordination in the development of rules, and said he is very pleased that U.S. regulatory staffs were active in leading to an international consensus.
CFPB Director Richard Cordray agreed with Curry’s sentiment that the regulation could have easily been implemented in the U.S. alone, and acknowledged the work done to ensure international coordination.
The board of directors voted unanimously to support the notice of proposed rulemaking.
The Liquidity Coverage Ratio Final Rule
Staff Presentation
FDIC staff pointed out that the liquidity coverage ratio (LCR) final rule implements standards generally consistent with the liquidity standards adopted by the Basel Committee and issued in January of 2013, and that the rule promotes the short-term resilience of banking organizations and improves the banking sector’s ability to withstand stress during a time of financial turmoil. The presenter said the LCR requirement will take effect on January 1, 2015, with a minimum requirement equaling 80 percent and increasing 10 percent a year until 2017.
The presenter broke down the two main components of the LCR. He explained that the numerator represents the covered company stock of high-quality liquid assets, which are broken into three categories: level 1, the most liquid, including securities issued or guaranteed by the U.S. government; level 2A, slightly less liquid and including certain claims issued by government-sponsored enterprises; and level 2B, which include certain corporate debt securities and common stocks. He explained that level 2A cannot exceed 40 percent of the total amount, and 2B cannot exceed 14 percent. The second component is the denominator, which the staff member explained represents the firms’ stress cash outflows and equals the largest daily cumulative difference between outflows and inflows over a 30-day stress period.
Board Statements and Vote
Gruenberg said he supports the final rule and pointed out that it would be the first quantitative liquidity requirement in the U.S. and an important step towards bolstering the liquidity position of large banking organizations, thereby strengthening the financial system.
Gruenberg noted that many commenters expressed concern about municipal securities being excluded from the high-quality liquid asset standard, but said it is his understanding that banks do not hold municipal securities for liquidity purposes, but rather as long-term investments. However, he said the FDIC will monitor the impact of the rule and consider adjustments if necessary.
FDIC Director Jeremiah Norton said the agencies must continue to monitor the effectiveness of the final rule. He also said they should be careful about substituting liquidity as a cover for capital, and called for a robust capital framework to be put in place. He also raised his concern with the categorization of other sovereign securities, saying the market would not evaluate the credit risk of certain sovereigns as such itself. Despite this, he stated that he would support the rule and that the agencies should give the LCR an opportunity to work.
Cordray acknowledged that he had already signed the final liquidity rule on behalf of the OCC and said the recent financial crisis taught regulators about the importance of liquidity to the financial system and individual banks. He said the final rule enhances supervisory efforts by regulators, and will help ensure that a banking organization will be able to support itself without taxpayer money to withstand short-term funding risks.
Hoenig said the LCR is necessary because firms remain highly leveraged and illiquid. He then raised the issue of whether municipal securities should have been included as high-quality liquid assets, noting that there has been much focus on them in recent days.
A FDIC staff member replied that most concerns were about how the pricing on municipal securities would be affected by the exclusion, and how it would affect the funding of small municipalities, but said the staff do not believe there will be any material impact on the market. He added though that staff is very sensitive to the issue and will closely monitor the impact of the rule and make adjustments if needed.
The board voted unanimously in favor of the final rule.
Supplementary Leverage Ratio Final Rule
Staff Presentation
FDIC staff said the proposed supplementary leverage ratio was proposed in April to be consistent with the revisions to the nominator measure for the Basel III leverage ratio. He explained that under the final rule, total leverage exposure for the supplementary leverage ratio would include on-balance sheet assets, potential future exposure associated with derivatives contracts, any cash collateral received from or posted to a counterparty derivative contract (except for cash variation margin to meet certain requirements), the notional amount of credit derivatives, or other similar instruments under which a banking organization provides credit protection.
Fourteen comments were received on the proposed rule, which the presenter said generally supported the fact that the proposed rule promotes international consistency. He said a number of the comments asked for clarity regarding certain aspects of the proposal, and some changes were made in response to these comments. The final rule will go into effect on January 1, 2015, with disclosure of the supplementary leverage ratio starting in the first quarter of 2015, however the standards would not become binding regulatory requirements until January 1, 2018.
Board Statements and Vote
Gruenberg said the final rule would apply to all advanced-approach banking organizations including the largest and most systemically important organizations that are subject to the enhanced supplementary leverage ratio standards. In contrast to the generally applicable leverage ratio that has long applied to U.S. insured depository institutions, he said, the supplementary leverage ratio includes certain off-balance sheet exposures in the denominator, which is important since the advanced-approach banking organizations tend to have large balances of off-balance sheet activities.
Curry expressed his support for the final rule, pointing out that the revisions are consistent with the ratio framework published by the Basel committee in January of 2014 and stating his belief that the changes will strengthen the supplemental leverage ratio and enhance the associated public disclosures.
Norton pointed out that one “has to search long and hard to find these levels of capital,” and noted that academic studies show that capital helps during crises. He said it is worth questioning whether regulators have gone far enough, but that, regardless, the financial system is in a better place than it was under pre-crisis requirements.
The board voted unanimously in support of the final rule.
For more information on this meeting, please click here.
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Key Topics & Takeaways
- Establishing Margin and Capital Requirements for Covered Swap Entities: The board of directors approved a proposed rulemaking.
- Under the rule, a covered swap entity would determine its initial margin requirement either through a standardized lookup table or by using an internal model that would have to be approved by the FDIC.
- Gruenberg highlighted the fact that the rule would be consistent with Basel Committee and IOSCO proposed framework.
- Liquidity Coverage Ratio: The board voted unanimously in favor of a final rule for the liquidity coverage ratio.
- The LCR requirement will take effect on January 1, 2015, with a minimum requirement equaling 80 percent and increasing 10 percent a year until 2017.
- FDIC staff believe excluding municipal securities will not have an impact of the securities’ pricing, but are sensitive to concerns about the exclusion, will monitor the impacts of the final rule, and will consider adjustments if needed.
- Supplementary Leverage Ratio: The board voted unanimously in favor of a final rule for the supplementary leverage ratio.
- Gruenberg pointed out that the supplementary leverage ratio includes certain off-balance sheet exposures, saying this is important since advanced-approach banking organizations tend to have large off-balance sheet activities.
- Horton said it is worth questioning whether regulators have gone far enough, but the financial system is in a better place than it was under pre-crisis requirements.
Speakers:
Martin Gruenberg, Chairman, FDIC
- Thomas Hoenig, Vice Chairman, FDIC
- Jeremiah Norton, Director, FDIC
- Thomas Curry, Comptroller of the Currency
- Richard Cordray, Director, Consumer Financial Protection Bureau
Notice of Proposed Rulemaking to Establish Margin and Capital Requirements for Covered Swap Entities
Staff Presentation
FDIC staff provided a staff presentation regarding a notice of proposed rulemaking to establish margin and capital requirements for covered swap entities. They said the rulemaking comes from sections 731 and 764 of the Dodd-Frank Act, and that there would be a public comment period of 60 days. The staff noted that the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) published a proposed framework for margin requirements with the goal of creating an international standard, and said the new proposed rulemaking would be consistent with this international framework.
Covered swap entities, the staff said, would be required to post and collect initial and variation margin for derivatives entered into with certain counterparties, and the rule specifies minimum “safekeeping standards” for initial margin required to be collected. To implement this risk-based approach, the presenter said, the proposed rule distinguishes among four types of swap counterparties: 1) covered swap entities; 2) financial end-users with material swap exposure; financial end-users without material swap exposure; and 4) other counterparties including non-financial end-users and multi-lateral development banks. He said these categories reflect the agencies’ belief that risk-based distinctions can be made among these types of counterparties.
The presenter explained that under the proposed rule, a covered swap entity would be required to calculate the initial margin required using one of two alternatives: 1) through the use of a standardized lookup table that specifies the minimum initial margin collection requirement as a percentage of a swap notional amount; or 2) through the use of an internal model that would require agency approval.
The types of collateral eligible to satisfy the initial margin requirement would be limited to immediately-available cash funds, obligations of or fully guaranteed by the United States, senior debt obligations of government sponsored entities, and other high-quality collateral, FDIC staff said. The rule would not apply retroactively to transactions prior to the effective date of the proposed rule, he stated.
Board Statements and Vote
FDIC Chairman Martin Gruenberg said the rules being considered today address three areas of systemic risk, and that taken together are an important step forward in addressing the risks posed by the largest systemically important financial institutions (SIFIs). He continued to say that establishing margin requirements for over-the-counter (OTC) derivatives is one of the most important reforms of Dodd-Frank, noting that before the financial crisis some institutions would enter into large OTC derivative positions without the prudent exchange of collateral on margin to support them. The margin in the proposed rule, he stated, would promote financial stability by reducing systemic leverage in the derivatives marketplace and promote the safety and soundness of banks by discouraging the excessive growth of risky positions.
Gruenberg offered four points he said were worth highlighting: 1) the proposed rulemaking is consistent with the Basel Committee and IOSCO proposed framework; 2) it does not require covered swap entities to collect initial margin or variation margin from commercial entities; 3) the rule would have little if any impact on community banks; and 4) the rule would not be applied retroactively.
FDIC Vice Chairman Thomas Hoenig expressed support for the proposed rulemaking but voiced concerns over the ability of companies to avoid designation by moving activities overseas and removing guarantees, thereby removing reporting requirements in some rules.
The staff member replied that the rule is structured to be consistent with sections 731 and 764, which provides the FDIC with authority to set regulations to collect and post margin for entities that have been designated as swap dealers or major swap participants. The Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) have this definitional authority over designation, he said, but if a foreign subsidiary does not meet the CFTC or SEC definition, then the guarantee is removed and the entity would not fall under the FDIC rule.
Comptroller of the Currency Thomas Curry noted that the swap margin requirements being discussed were originally put out for comment in 2011, and that while it has been a long time, the day’s actions represent significant progress. He recalled that one of the chief concerns from commenters was the call for international coordination in the development of rules, and said he is very pleased that U.S. regulatory staffs were active in leading to an international consensus.
CFPB Director Richard Cordray agreed with Curry’s sentiment that the regulation could have easily been implemented in the U.S. alone, and acknowledged the work done to ensure international coordination.
The board of directors voted unanimously to support the notice of proposed rulemaking.
The Liquidity Coverage Ratio Final Rule
Staff Presentation
FDIC staff pointed out that the liquidity coverage ratio (LCR) final rule implements standards generally consistent with the liquidity standards adopted by the Basel Committee and issued in January of 2013, and that the rule promotes the short-term resilience of banking organizations and improves the banking sector’s ability to withstand stress during a time of financial turmoil. The presenter said the LCR requirement will take effect on January 1, 2015, with a minimum requirement equaling 80 percent and increasing 10 percent a year until 2017.
The presenter broke down the two main components of the LCR. He explained that the numerator represents the covered company stock of high-quality liquid assets, which are broken into three categories: level 1, the most liquid, including securities issued or guaranteed by the U.S. government; level 2A, slightly less liquid and including certain claims issued by government-sponsored enterprises; and level 2B, which include certain corporate debt securities and common stocks. He explained that level 2A cannot exceed 40 percent of the total amount, and 2B cannot exceed 14 percent. The second component is the denominator, which the staff member explained represents the firms’ stress cash outflows and equals the largest daily cumulative difference between outflows and inflows over a 30-day stress period.
Board Statements and Vote
Gruenberg said he supports the final rule and pointed out that it would be the first quantitative liquidity requirement in the U.S. and an important step towards bolstering the liquidity position of large banking organizations, thereby strengthening the financial system.
Gruenberg noted that many commenters expressed concern about municipal securities being excluded from the high-quality liquid asset standard, but said it is his understanding that banks do not hold municipal securities for liquidity purposes, but rather as long-term investments. However, he said the FDIC will monitor the impact of the rule and consider adjustments if necessary.
FDIC Director Jeremiah Norton said the agencies must continue to monitor the effectiveness of the final rule. He also said they should be careful about substituting liquidity as a cover for capital, and called for a robust capital framework to be put in place. He also raised his concern with the categorization of other sovereign securities, saying the market would not evaluate the credit risk of certain sovereigns as such itself. Despite this, he stated that he would support the rule and that the agencies should give the LCR an opportunity to work.
Cordray acknowledged that he had already signed the final liquidity rule on behalf of the OCC and said the recent financial crisis taught regulators about the importance of liquidity to the financial system and individual banks. He said the final rule enhances supervisory efforts by regulators, and will help ensure that a banking organization will be able to support itself without taxpayer money to withstand short-term funding risks.
Hoenig said the LCR is necessary because firms remain highly leveraged and illiquid. He then raised the issue of whether municipal securities should have been included as high-quality liquid assets, noting that there has been much focus on them in recent days.
A FDIC staff member replied that most concerns were about how the pricing on municipal securities would be affected by the exclusion, and how it would affect the funding of small municipalities, but said the staff do not believe there will be any material impact on the market. He added though that staff is very sensitive to the issue and will closely monitor the impact of the rule and make adjustments if needed.
The board voted unanimously in favor of the final rule.
Supplementary Leverage Ratio Final Rule
Staff Presentation
FDIC staff said the proposed supplementary leverage ratio was proposed in April to be consistent with the revisions to the nominator measure for the Basel III leverage ratio. He explained that under the final rule, total leverage exposure for the supplementary leverage ratio would include on-balance sheet assets, potential future exposure associated with derivatives contracts, any cash collateral received from or posted to a counterparty derivative contract (except for cash variation margin to meet certain requirements), the notional amount of credit derivatives, or other similar instruments under which a banking organization provides credit protection.
Fourteen comments were received on the proposed rule, which the presenter said generally supported the fact that the proposed rule promotes international consistency. He said a number of the comments asked for clarity regarding certain aspects of the proposal, and some changes were made in response to these comments. The final rule will go into effect on January 1, 2015, with disclosure of the supplementary leverage ratio starting in the first quarter of 2015, however the standards would not become binding regulatory requirements until January 1, 2018.
Board Statements and Vote
Gruenberg said the final rule would apply to all advanced-approach banking organizations including the largest and most systemically important organizations that are subject to the enhanced supplementary leverage ratio standards. In contrast to the generally applicable leverage ratio that has long applied to U.S. insured depository institutions, he said, the supplementary leverage ratio includes certain off-balance sheet exposures in the denominator, which is important since the advanced-approach banking organizations tend to have large balances of off-balance sheet activities.
Curry expressed his support for the final rule, pointing out that the revisions are consistent with the ratio framework published by the Basel committee in January of 2014 and stating his belief that the changes will strengthen the supplemental leverage ratio and enhance the associated public disclosures.
Norton pointed out that one “has to search long and hard to find these levels of capital,” and noted that academic studies show that capital helps during crises. He said it is worth questioning whether regulators have gone far enough, but that, regardless, the financial system is in a better place than it was under pre-crisis requirements.
The board voted unanimously in support of the final rule.
For more information on this meeting, please click here.