By Electronic Mail

January 11, 2024

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

Chief Counsel’s Office
Attention: Comment Processing
Office of the Comptroller of the Currency
400 7th Street, SW, Suite 3E-218
Washington, DC 20219

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

Re: Notice of Proposed Rulemaking: Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions; Federal Reserve Docket No. R–1815, RIN
7100–AG66; OCC Docket ID OCC-2023-0011; FDIC RIN 3064-AF86

Ladies and Gentlemen,

The Securities Industry and Financial Markets Association (“SIFMA”),1 together with the Asset Management Group of SIFMA (“SIFMA AMG”),2 appreciates the opportunity to comment on the above-captioned proposal to extend long-term debt (“LTD”) and clean holding company requirements to non-GSIB large banking organizations (“LBOs”), certain intermediate holding companies (“IHCs”) of foreign banking organizations (“FBOs”), and large insured depository institutions (“covered IDIs,” and collectively with LBOs and IHCs, “covered entities”) issued by the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC,” and collectively with the Federal Reserve and the OCC, the “agencies”).3

Executive Summary

SIFMA and SIFMA AMG support efforts to ensure there is adequate loss-absorbing capacity in the U.S. banking system. However, the agencies’ LTD proposal threatens to materially impede investor demand for LTD securities, while simultaneously increasing the supply of these instruments to the market. As a result, the proposal as currently written would have significant adverse effects on bank funding costs and on the liquidity of bank funding markets. We recommend that the agencies consider and address the following issues before finalizing the proposal:

I. LTD Minimum Denomination: The agencies should not introduce the proposed minimum denomination requirement for newly issued eligible debt securities, as it would change the industry’s current LTD issuance practices in ways that reduce the diversity of the institutional investor base and liquidity in LTD markets. If, however, the agencies continue to believe that a mechanism is necessary to maintain low direct ownership of LTD securities by retail investors, they should consider using other, less disruptive approaches that would maintain the current industry practice of primarily issuing directly to institutional investors.

The agencies propose amending the term “eligible debt security” in the proposal to specify that new LTD must be issued in minimum denominations of $400,000 to be considered eligible external LTD in an effort to disincentivize retail investors from directly investing in LTD. We are concerned that this proposed change to the definition of eligible debt security will drastically reduce the institutional investor base for bank debt, given the current standard for issuance is a $2,000 denomination. As proposed, this change will not only exclude the few retail investors that may invest directly in these types of securities,4 but also large swathes of institutional investors in both the primary and secondary LTD markets. The reduced size of the institutional investor base would, in turn, reduce the depth of liquidity in the markets for bank-issued LTD at a time when covered entities may have to increase their external LTD issuances. Decreased liquidity would increase costs for issuers.

We strongly recommend that the minimum denomination requirement be eliminated from the final rule. A minimum denomination at any level above the current industry standard could have significant, unintended consequences for LTD markets. While SIFMA and SIFMA AMG do not believe that the agencies need to consider any alternative approaches in light of the very small number of direct retail investors in the LTD markets, we would welcome the opportunity to discuss less disruptive approaches with the agencies should they deem action necessary, including through supplementary materials that may be shared after the closing date for comments on this proposal. Such approaches would be designed to preserve the current state of low direct retail holdings of LTD.

II. Interaction with the Basel III Endgame and Other Proposals: The proposal does not account for the impact of the Basel III Endgame proposal on the amount and costs of LTD that covered entities would need to issue. A final version of the proposal should consider the effects of the final Basel III Endgame rule—and the impact of other outstanding proposals—on the amount and costs of LTD.

The proposal over-calibrates the LTD requirement for covered entities, in part because of its interaction with the far-reaching risk-based capital reforms that the agencies have proposed in their Basel III Endgame proposal.5 The Basel III Endgame proposal would significantly increase risk-weighted assets (“RWAs”) for covered entity banking organizations, which would “lead mechanically to increased requirements for LTD under the LTD proposal.”6 Yet the agencies acknowledge that their estimates of the LTD needs and costs presented in the proposal do not account for the impact of the Basel III Endgame proposal.7 Until the agencies can fully consider the relationship between the two proposals, they should refrain from finalizing any new LTD requirements.

In addition, there are a number of other outstanding proposals that may impact the LTD proposal, including the GSIB surcharge and resolution planning proposals.8 The plethora of proposals that are currently under review make it difficult to assess with certainty how they may interact and compound on one another. The agencies should therefore remain receptive to receiving supplemental comments on the LTD proposal as these impacts become more apparent. The agencies should further wait to finalize the LTD proposal until they and the industry can take into account how the final version of the Basel III Endgame rule—as well as the other proposals noted above—will impact the amount and cost of LTD that will need to be issued by covered entities.

III. Internal LTD Requirement: The proposed “internal LTD” requirement would significantly contribute to the over-calibration of the “external LTD” requirement, which would increase bank funding costs and negatively impact firms’ ability to provide credit and capital markets services. The agencies should therefore not adopt an internal LTD requirement, and instead permit covered holding companies to comply with any LTD requirement at either the holding company or insured depository institution (“IDI”) level. If, however, the agencies believe internal LTD is necessary, the agencies should recalibrate it downwards and allow it to be satisfied through other loss-absorbing instruments and exempt certain firms. The agencies should also retain the exemption from the internal LTD requirement for U.S. GSIBs contained in the proposal and extend it to foreign GSIB IHCs and non-GSIB LBO retail broker-dealers.

The creation of an “internal LTD” requirement applicable at the IDI level is also a major driver of the over-calibration of the proposed LTD requirement. Internal LTD would create a two-level LTD requirement for covered entity holding companies—one at the holding company level and one at the IDI level—which would force many covered entities to issue significantly larger volumes of “external LTD” than reflected in the agencies’ estimates in the proposal. In the aggregate, this requirement would lead to levels of LTD that are far greater than needed to ensure adequate loss-absorbing capacity and could prove difficult for the markets to absorb in a short period of time.

Given these issues with the internal LTD requirement, the agencies should not adopt it as a requirement in the final LTD rule, and instead should permit a covered holding company or IHC to comply with any LTD requirement at either the holding company level (which would allow for flexible deployment of resources where needed) or the IDI level. If, however, the agencies believe an internal LTD requirement is necessary, they should recalibrate the requirement for those firms that remain subject to it to more appropriately reflect the impact it will have on holding company liquidity requirements and its broader impacts on market capacity. The agencies should specifically consider replacing the internal LTD requirement with a more flexible internal “gone-concern loss-absorbing capacity” requirement that could be met through various types of internal loss-absorbing resources and re-calibrating the internal requirement to at a minimum 2 percent of total RWAs (and revise any leverage-based LTD requirements commensurately). A lower calibration of the internal LTD requirement for Categories III and IV holding companies would also be appropriate and consistent with the letter and spirit of the requirement to tailor enhanced prudential standards under the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”).9

Even under a recalibrated approach, the internal LTD requirement would be inappropriate for many firms. We support the agencies retaining an exclusion for the IDIs of U.S. GSIBs from this requirement. As the agencies acknowledge, U.S. GSIBs are already subject to both total loss absorbing capacity (“TLAC”) and external LTD requirements and have in place resolution frameworks for maintaining and then distributing internal loss-absorbing resources to their material subsidiaries. An exemption would also be appropriate for IDIs of foreign GSIB IHCs, given that the foreign parent and U.S. IHC of such institutions are subject to robust home jurisdiction and U.S. resolution planning requirements that are substantively similar to U.S. GSIBs and TLAC (or similar) requirements. In addition, we believe the agencies should further exempt from the proposed internal LTD requirement for IDIs of non-GSIB LBOs that operate primarily as retail broker-dealers, given the low-risk profiles of the consolidated firm and that they are already subject to enhanced prudential standards, can be resolved effectively under existing frameworks and would be subject to external LTD at the full “capital refill” calibration.

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation, and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association.

2 SIFMA AMG brings the asset management community together to provide views on policy matters and to create industry best practices. SIFMA AMG’s members represent U.S. and multinational asset management firms whose combined global assets under management exceed $45 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, UCITS and private funds such as hedge funds and private equity funds.

3 See Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation, Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions, 88 Fed. Reg. 64524 (Sept. 19, 2023).

4 Only about 1 percent of U.S. households directly invest in debt securities of any kind. See Board of Governors of the Federal Reserve System, Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances (Sept.2020), https://www.federalreserve.gov/publications/files/scf20.pdf.

5 See Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation, Regulatory Capital Rule: Large Banking Organizations and to Banking Organizations with Significant Trading Activity, 88 Fed. Reg. 64028 (Sept. 18, 2023).

6 88 Fed. Reg. 64524, 64551 n.97.

7 Id.

8 See Board of Governors of the Federal Reserve System, 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); Federal Deposit Insurance Corporation, Resolution Plans Required for Insured Depository Institutions With $100 Billion or More in Total Assets; Informational Filings Required for Insured Depository Institutions With at Least $50 Billion But Less Than $100 Billion in Total Assets, 88 Fed. Reg. 64579 (Sept. 19, 2023); Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation, Guidance for Resolution Plan Submissions of Domestic Triennial Full Filers, 88 Fed. Reg. 64626 (Sept. 19, 2023); Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation, Guidance for Resolution Plan Submissions of Foreign Triennial Full Filers, 88 Fed. Reg. 64641 (Sept. 19, 2023).

9 See Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, sec. 401, 132 Stat. 1296 (2018).