January 16, 2024

Via Electronic Filing: https://www.regulations.gov

Chief Counsel’s Office
Attn: Comment Processing, Office of the Comptroller of the Currency
400 7th Street SW
Suite 3E–218
Washington, D.C. 20219

Ann E. Misback
Secretary, Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, D.C. 20551

James P. Sheesley
Assistant Executive Secretary
Attn: Comments/Legal OES (RIN 3064–AF29), Federal Deposit Insurance Corporation
550 17th Street NW
Washington, D.C. 20429

Re: Regulatory Capital Rule: Large Banking Organizations and Banking Organizations with Significant Trading Activity (RINs 1557-AE78, 7100-AG64, 3064-AF29) and Regulatory Capital Rule: Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies (RIN 7100-AG65)

Ladies and Gentlemen:

The Securities Industry and Financial Markets Association Asset Management Group (SIFMA AMG)1 appreciates the opportunity to comment on the proposal of the Office of the Comptroller of the Currency (the OCC), the Board of Governors of the Federal Reserve System (the Federal Reserve), and the Federal Deposit Insurance Corporation (the FDIC and, collectively with the OCC and the Federal Reserve, the Agencies) to modify the regulatory capital requirements applicable to large banking organizations and banking organizations with significant trading activity,2 which would implement the final components of the Basel III capital standards known as the Basel III endgame (the Basel III Proposal).3 In addition, this letter includes SIFMA AMG’s comments on the Federal Reserve’s proposal (the GSIB Surcharge Proposal, and collectively with the Basel III Proposal, the Proposals) to make certain adjustments to the calculation of the capital surcharge (the GSIB Surcharge) for the U.S. global systemically important bank holding companies (U.S. GSIBs).4

I. Executive Summary

SIFMA AMG members support measures to ensure the resiliency and stability of the U.S. financial markets as they execute investment and hedging strategies in support of client goals including saving for college, buying a home and planning for retirement. Our members are concerned, however, with the potential far-reaching, adverse effects that the Proposals may have on pricing, transaction costs, the availability of services and market liquidity.5

We offer our comments to highlight the downstream effects the Proposals would have on ordinary investors and end-users, who are our members’ clients. While we appreciate the Agencies’ policy objectives to bolster the safety and soundness of the U.S. banking system, we do not believe the requirements under the Proposals strike the right balance and we are gravely concerned that their impacts would be disproportionate to the potential risk being addressed, erode the capacity for individual investors to achieve desired outcomes, and seriously compromise the buy-side’s ability to hedge investment, market and counterparty risks – and thereby create the unintended consequence of a much more systemically risky environment within the U.S. capital markets.

In particular, the Proposals could make it more difficult for asset managers to meet their clients’ investment targets or mitigate risks in their portfolios, as banking organizations abandon or curtail their offerings in certain products or services, reduce their provision of liquidity in markets that are no longer commercially viable or become more selective as to their customers and counterparties.

For example, consider an exchange-traded fund (ETF) and a mutual fund that have similar investment strategies and that pose nearly identical credit risks to a banking organization. The Basel III Proposal would impose different capital requirements for liquidity facilities and other exposures to ETFs (which have publicly traded securities outstanding, a criterion for preferential capital treatment under the proposal) and mutual funds (which do not). The downstream effect of such disparate capital treatment would inevitably lead banking organizations to impose different terms, including credit extension and pricing, for transactions with an ETF compared to a similarly situated mutual fund notwithstanding nearly identical investment risks.

In addition to unjustified differences in credit and pricing, such capital treatment may also hinder the ability of investment advisers to efficiently trade on a block basis for ETFs and mutual funds (and other clients with a common strategy), thereby indirectly increasing transactions fees and costs for our members and their clients. Our members may also face concentration of risk and market volatility in the event that banking organizations consolidate and/or limit access to products as a result of the effects of the Proposals.

While SIFMA AMG members recognize that stability and resilience are the intended goals of the Proposals, any such potential benefits must be considered in the context of the significant regulatory reforms enacted since the Global Financial Crisis of 2007 – 2008 (GFC) addressing both prudential and market risks and enhancing the strength and resiliency of entities including banks, broker-dealers, fund managers and investment funds. In particular, regulators have implemented a series of reforms to improve the strength and resiliency of banking organizations, including strengthened capital requirements,6 liquidity requirements,7 stress testing requirements8 and more. Meanwhile, other post-GFC regulatory reforms have transformed the functioning of U.S. capital markets, significantly improving both their transparency and resiliency.

Since the GFC, regulatory reforms have transformed the functioning of U.S. capital markets, significantly improving both their transparency and resiliency. Reforms enacted in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act have transformed derivatives markets through the mandated reporting, clearing, exchange trading, and margining of swaps and security-based swaps. With banks being the most significant liquidity provider for the derivatives market, these reforms have had a profound effect on mitigating market risk with respect to banks.

In addition, the Securities and Exchange Commission (SEC) has promulgated regulations to promote transparency (and thereby the ability to mitigate risks) to each of market participants, the public, and regulators including, but not limited to, (i) money market fund reforms requiring additional disclosure in each of 2010, 2014 and 2023;9 (ii) shareholder reporting requirements for mutual funds and ETFs;10 and (iii) additional disclosure related to the holdings of cash and cash equivalents to provide more comprehensive access into the liquidity risks of investment companies registered under the Investment Company Act of 1940 (the ’40 Act) (registered investment companies or RICs).11

Moreover, the SEC has promulgated regulations to promote resiliency for both market participants and the market generally, such as (i) multiple reforms to generally increase liquidity and capital requirements for money market funds;12 (ii) increased oversight of the use of derivatives by RICs;13 and (iii) required liquidity risk management programs for open-ended funds.14 In sum, securities markets have evolved considerably since the GFC through a wide range of regulatory reforms.

The collective existing reforms have significantly addressed market risks identified in the GFC and thereafter and should be recognized for the risk-mitigating effect they have had on all market participants, including banking organizations. Given the much more resilient market generally, we recommend that the Agencies should reconsider aspects of the Proposals given the limited incremental risk mitigation to be achieved against the significant downside risk of the compromised, if not frustrated, effect on investment options and the hedging of risk likely to be experienced by our members’ clients – the investing public.

We encourage the Agencies to consider revisions to the Proposals in light of existing reforms that have been made to the U.S. financial system and broader goals related to systemic risk that some aspects of the Proposals may frustrate. For instance, financial regulators have consistently highlighted the policy benefits of encouraging central clearing, including decreasing the overall amount of counterparty credit risk and contagion risk, furtherance of the prompt and accurate clearance and settlement of transactions through increased multilateral netting, and enhanced regulatory visibility.15 As discussed below, the Basel III Proposal’s lack of a carve-out for cleared transactions from certain capital requirements would seem to run counter to the broader goal of encouraging central clearing.

1 SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $62 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, undertakings for collective investment in transferable securities (UCITS) and private funds such as hedge funds and private equity funds.

2 12 C.F.R. Parts 3 (OCC), 217 (Federal Reserve) and 324 (FDIC) (collectively, the “capital rules”). For convenience, citations in this letter to the currently effective capital rules reflect the Federal Reserve’s capital rules (e.g., 12 C.F.R. § 217.2). To distinguish the currently effective capital rules from the Proposed Rule, citations to sections of the Proposed Rule are formatted as in the following example: Proposed Rule § _.110.

3 Regulatory Capital Rule: Large Banking Organizations and Banking Organizations with Significant Trading Activity, 88 Fed. Reg. 64028 (Sept. 18, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-09-18/pdf/2023-19200.pdf.

4 Regulatory Capital Rule: Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies; Systemic Risk Report (FR Y–15), 88 Fed. Reg. 60385 (Sept. 1, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-09-01/pdf/2023-16896.pdf.

5 MORGAN STANLEY RESEARCH & OLIVER WYMAN, INTO THE GREAT UNKNOWN 11 (2023) (“The significant divergence in impact on specific products could redefine who participates in certain wholesale banking activities and the cost and quality of capital, liquidity, and broader services that corporate and institutional clients receive.”).

6 See Regulatory Capital Rules, 78 Fed. Reg. 62018 (Oct. 11, 2013), available at https://www.govinfo.gov/app/details/FR-2013-10-11/2013-21653.pdf.

7 See Liquidity Coverage Ratio, 79 Fed. Reg. 61440 (Oct. 10, 2014), available at https://www.govinfo.gov/content/pkg/FR-2014-10-10/pdf/2014-22520.pdf; Net Stable Funding Ratio, 86 Fed. Reg. 9120 (Feb. 11, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-02-11/pdf/2020-26546.pdf.

8 See Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations, 79 Fed. Reg. 17240 (Mar. 27, 2014), available at https://www.govinfo.gov/content/pkg/FR-2014-03-27/pdf/2014-05699.pdf.

9 See Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to N–CSR and Form N–1A, 88 Fed. Reg. 51404 (Oct. 3, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-10-03/pdf/FR-2023-10-03.pdf; Money Market Fund Reform; Amendments to Form PF, 79 Fed. Reg. 47736 (Aug. 14, 2014), available at https://www.govinfo.gov/content/pkg/FR-2014-08-14/html/2014-17747.htm; Money Market Fund Reform, 75 Fed. Reg. 10060 (Mar. 4, 2010), available at https://www.govinfo.gov/link/fr/75/10117.

10 See Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, 87 Fed. Reg. 72758 (Nov. 25, 2022), available at https://www.govinfo.gov/content/pkg/FR-2022-11-25/pdf/2022-23756.pdf.

11 See Investment Company Liquidity Disclosure, 83 Fed. Reg. 31859 (July 10, 2018), available at https://www.govinfo.gov/app/details/FR-2018-07-10/2018-14366.

12 See Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to N–CSR and Form N–1A, 88 Fed. Reg. 51404 (Oct. 3, 2023), available athttps://www.govinfo.gov/content/pkg/FR-2023-10-03/pdf/FR-2023-10-03.pdf; Money Market Fund Reform; Amendments to Form PF, 79 Fed. Reg. 47736 (Aug. 14, 2014), available at https://www.govinfo.gov/content/pkg/FR-2014-08-14/html/2014-17747.htm; Money Market Fund Reform, 75 Fed. Reg. 10060 (Mar. 4, 2010), available at https://www.govinfo.gov/link/fr/75/10117.

13 See Use of Derivatives by Registered Investment Companies and Business Development Companies, 85 Fed. Reg. 83162 (December 21, 2020), available at https://www.govinfo.gov/app/details/FR-2020-12-21/2020-24781.

14 See Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting, 87 Fed. Reg. 77172 (Dec. 16, 2022), available at https://www.govinfo.gov/app/details/FR-2022-12-16/2022-24376/summary.

15 See, e.g., Standards for Covered Clearing for U.S. Treasury Securities and Application of the Broker-Dealer Consumer Protection Rule with Respect to U.S. Treasury Securities, at 15-19 (Dec. 13, 2023) (to be codified at 17 C.F.R. § 240), available at https://www.sec.gov/rules/2022/09/standards-covered-clearing-agencies-us-treasury-securities-and-application-broker#34-99149.