SR 20-2: Frequently Asked Questions on the Tailoring Rules

SR 20-2: Frequently Asked Questions on the Tailoring Rules

BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

DIVISION OF
SUPERVISION AND REGULATION

SR 20-2
January 13, 2020

Revised August 11, 2020

In August 2020, this letter was revised to provide additional frequently asked questions in response to questions from institutions regarding the final rules to tailor certain prudential standards for large domestic and foreign banking organizations. The updated FAQs, together with the FAQs issued in January 2020, are attached to this letter.

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK

SUBJECT:

Frequently Asked Questions on the Tailoring Rules

Applicability: This guidance applies to bank holding companies, savings and loan holding companies, and U.S. intermediate holding companies with $100 billion or more in total consolidated assets as well as to certain depository institutions. For other banking organizations affected by the tailoring rules, this guidance may address their questions on applicability.

The Board of Governors of the Federal Reserve System (the Board) is issuing frequently asked questions (FAQs) in response to questions from institutions regarding the final rules to tailor certain prudential standards for large domestic and foreign banking organizations to more closely match their risk profiles (tailoring rules).1

This letter announces the initial set of FAQs on this topic, which are included in the attachment to this letter. The Board may periodically update the FAQs and, therefore, institutions are encouraged to check the Board's public website for new FAQs or revisions to a previously issued FAQ. The Federal Reserve will issue a letter to announce any subsequent additions or changes to these FAQs.

Questions related to the implementation of the tailoring rules may be sent to the following inbox: tailoring@frb.gov?subject=Tailoring Rules. In addition, questions may be sent via the Board's public website.2

signed by
Michael S. Gibson
Director
Division of
Supervision and Regulation

Attachments:

• Attachment A: Frequently Asked Questions on the Tailoring Rules (Effective January 13, 2020)
• Attachment B: Frequently Asked Questions on the Tailoring Final Rules (Effective August 11, 2020)

Notes:

1. 84 Fed. Reg. 59032 (November 1, 2019); 84 Fed. Reg. 59230 (November 1, 2019). In addition, the Board, together with the Federal Deposit Insurance Corporation, adopted a final rule to tailor resolution planning requirements in a manner consistent with the framework described in the tailoring rules. 84 Fed. Reg. 59194 (November 1, 2019). Return to text.
2. See http://www.federalreserve.gov/apps/contactus/feedback.aspx. Return to text.

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Attachment A to SR Letter 20-2
Attachment A: Frequently Asked Questions on the Tailoring Rules Effective January 13, 2020

1. If an advanced approaches banking organization expects to meet the definition of a
   Category III or Category IV banking organization on December 31, 2019, and plans to opt-out of the requirement to recognize Accumulated Other Comprehensive Income (AOCI) in regulatory capital, when should the banking organization make its election to opt-out of the requirement to recognize AOCI in regulatory capital?
   Section 22(b)(ii) of the capital rule provides that a Category III or Category IV banking
   organization must make its AOCI opt-out election during the first reporting period after the banking organization meets the definition of a Category III or Category IV banking organization. Accordingly, a banking organization that meets the definition of a Category III or Category IV banking organization as of December 31, 2019, would make its election during the first quarter of 2020 on the applicable reporting form -the call report or FR Y-9C, as applicable - with a March 31, 2020, as-of date. Such a banking organization would no longer be required to recognize elements ofAOCI in regulatory capital beginning January 1, 2020. A banking organization that was not eligible to make an AOCI opt-out election prior to the effective date ofthe tailoring rule must recognize elements ofAOCI in regulatory capital in its reporting forms filed as ofDecember 31, 2019.

2. Under the tailoring rules, a holding company that is a Category IV banking
   organization is not subject to the Liquidity Coverage Ratio (LCR) unless it has average weighted short-term wholesale funding of $50 billion or more. For purposes of initial transitions, when may a banking organization with average weighted short-term wholesale funding below $50 billion discontinue complying with LCR requirements? Is a holding company that is a Category IV banking organization required to disclose information required pursuant to 12 CFR 249.90 for the fourth quarter of 2019? A covered depository institution holding company that is subject to minimum liquidity standards under the LCR rule is required to publicly disclose information regarding its liquidity position each calendar quarter. A banking organization identified as a Category IV banking organization as ofDecember 31, 2019, that has average weighted short-term wholesale funding ofless than $50 billion will not be subject to the LCR rule. Accordingly, the banking organization would not be required to comply with disclosure requirements included in subpart J ofthe LCR rule.

3. A foreign banking organization with average combined U.S. assets of $100 billion or
   more must determine the category of its combined U.S. operations based on the FR Y￾15 filed as-of June 30, 2020. Standards applicable to the combined U.S. operations of a foreign banking organization with combined U.S. assets of $100 billion or more include FR 2052a reporting requirements and liquidity risk management and buffer requirements. A foreign banking organization with average combined U.S. assets of less than $100 billion is not subject to these requirements. For purposes of initial transitions, when may a foreign banking organization with less than $100 billion in average combined U.S. assets discontinue complying with these requirements? The final tailoring rule provides a delay in the initial categorization of, and changes in requirements applied to, the combined U.S. operations of foreign banking organizations. This is to account for foreign banking organizations filing the FR Y-15 on behalf of their combined U.S. operations for the first time as-ofJune 30, 2020. A foreign banking organization with average combined U.S. assets of less than $100 billion is not subject to a category of standards, including FR 2052a reporting requirements and liquidity risk management and buffer requirements. Accordingly, a foreign banking organization with average combined U.S. assets of less than $100 billion as of December 31, 2019, may discontinue FR 2052a reporting requirements and liquidity stress testing and buffer requirements beginning on December 31, 2019, including the FR 2052a report with a December 31, 2019, as-of date. For purposes of this answer and the final tailoring rule, average combined U.S. assets means the average of combined U.S. assets for the four most recent calendar quarters or, if the banking organization has not reported combined U.S. assets for each of the four most recent calendar quarters, the combined U.S. assets for the most recent calendar quarter or average of the most recent calendar quarters, as applicable. Combined U.S. assets is reported on the FR Y-7Q.

4. Under Category IV liquidity standards, the tailoring final rule reduces the required
   frequency of internal liquidity stress testing to at least quarterly, rather than monthly. For purposes of this requirement, should a holding company subject to Category IV standards interpret “quarterly” to mean once every three months, once in a quarter, or as of the end of each calendar quarter? Banking organizations subject to Category IV standards are required to conduct an internal liquidity stress test at least quarterly, or at least once every three months. In any case, a banking organization's internal liquidity stress test function is subject to governance requirementsin section 252.157(a)(7), 238.124(a)(7), or 252.35(a)(7), as applicable, and its internal liquidity stress testing must be tailored to the risk profile of the banking organization (See sections 252.157(a)(6); 238.124(a)(6); and 252.35(a)(6)).

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Attachment B to SR Letter 20-2
Attachment B: Frequently Asked Questions on the Tailoring Final Rules Effective August 11, 2020
1) How should a first-time filer of Form FR Y-15 report items that require averages
and what is the basis for the average calculation?
Response: The risk-based indicators - average cross-jurisdictional activity, average weighted short-term wholesale funding, size, average off-balance sheet exposure, and average non-bank assets - are calculated as the average of the amounts reported by the banking organization for the four most recent calendar quarters for which the banking organization has reported the indicator. If a banking organization has not reported a risk-based indicator for each of the four most recent calendar quarters, the banking organization must use either the amount from the most recent quarter (if the banking organization has not reported the risk-based indicator prior to that quarter) or the average of the most recent quarter and the previous quarters (if the banking organization has reported the risk-based based indicator for the previous two or three quarters), calculated consistent with the instructions of the applicable form. Banking organizations report information regarding risk-based indicators on the Form FR Y-15, Form FR Y-7Q, and Form FR Y-9LP. For a discussion of how to measure weighted short-term wholesale funding at a reporting date, see FAQ 2. In addition, certain line items in the Substitutability Category of Form FR Y-15 are flow variables with a reported value that is measured over a period of time (i.e., trading volume, underwriting and payments activity). The instructions to Form FR Y-15 require the use of a pro ￾rata approach for flow variables when a banking organization has less than 12 months of data. This approach applies a pro-rata annualized factor to each flow variable until the banking organization has 4 full quarters to provide an annual figure. 2.a.) Should the unweighted average amounts of elements ofshort-term wholesale funding reported for the combined U.S. operations of a foreign banking organization (FBO) as of June 30, 2020, be based on the average of daily or monthly observations across a full year (July 1, 2019 to June 30, 2020)? Response: The instructions for Schedule N ofForm FR Y-15 provide that an FBO that reported Form FR 2052a daily for the last twelve months must report each unweighted average value using daily data for the combined U.S. operations ofthe FBO. All other respondents must report the unweighted average values using monthly data (i.e., for each reported unweighted item provide the average ofthe twelve month-end balances within the last four quarters). Therefore, only an FBO that has submitted Form FR 2052a on a daily basis for one year is required to report each unweighted value for its combined U.S. operations on Form FR Y-15 using a 12-month daily average. If an FBO submitted Form FR 2052a on a monthly basis for all or part ofthe prior year, it must report each unweighted average value for its combined U.S. operations on Form FR Y-15 using the average ofthe prior 12 month-end values. Similarly, if an FBO subsequently transitions to submitting Form FR 2052a on a daily, T+2 basis, the FBO should [continuing
on to the next page]

continue reporting the average values for Schedule N of Form FR Y-15 using the average of the prior 12 month-end values until the FBO has accumulated the daily Form FR 2052a observations for twelve months. 2.b.) Similarly, should an FBO determine its applicable category of standards based on the reported wSTWF value as of June 30, 2020, or based on its history of previously submitted Form 2052a data? Response: A banking organization must determine its applicable category ofstandards based on risk-based indicators as reported on Form FR Y-15, Form FR Y-9LP, or Form FR Y-7Q. If a banking organization has not reported a risk-based indicator for each ofthe four most recent calendar quarters, the banking organization must use either the amount from the most recent quarter (ifthe banking organization has not reported the risk-based indicator prior to that quarter) or the average ofthe previous quarters (ifthe banking organization has reported the risk-based indicator for the previous two or three quarters), calculated consistent with the instructions ofthe applicable form. With respect to their combined U.S. operations, FBOs will begin reporting risk￾based indicators on Form FR Y-15 beginning with the form submitted with an as-of date ofJune 30, 2020. [Footnote 1

• IHCs have previously been required to submit Form FR Y-15 and beginning June 30, 2020, will begin reporting
  adjusted cross-jurisdictional claims on the Form. End of Footnote 1.]
  Accordingly, an FBO must determine the average wSTWF ofits combined U.S. operations based solely on information reported on Form FR Y-15 as ofJune 30, 2020, regardless ofits history offiling Form FR 2052a. A U.S. intermediate holding company subsidiary of an FBO (IHC) must determine its category ofstandards based on its risk-based indicators as reported on Form FR Y-15 for the four most recent calendar quarters. Ifthe IHC or the FBO on behalf ofits IHC has not reported risk-based indicators for the IHC for each ofthe four most recent calendar quarters, the IHC must use the average ofthe most recent quarter or quarters, as applicable.

3. For purposes of the cross-jurisdictional indicator as applied to FBOs, does the term
   “intercompany” have the same meaning as the term “inter-affiliate”? Do the terms intercompany and inter-affiliate include the foreign banking organization's banking and non-banking subsidiaries? Response: The term “intercompany” has the same meaning as the term “inter-affiliate”. An FBO may exclude from the cross-jurisdictional activity indicator all inter-affiliate (intercompany) liabilities and inter-affiliate (intercompany) claims to the extent that these claims are secured by financial collateral. Additionally, for the combined U.S. operations ofan FBO, the measure ofcross-jurisdictional activity would exclude all claims between the FBO's U.S. domiciled affiliates, branches, and agencies to the extent such items are not already eliminated in consolidation. For the IHC, the measure ofcross-jurisdictional activity would eliminate through consolidation all inter-affiliate (intercompany) claims and liabilities among subsidiaries ofthe IHC. The measure ofcross-jurisdictional activity for the IHC would include transactions with [continuing on to the next page]

U.S. affiliates, including subsidiaries of the foreign parent and U.S. branches and agencies, which are not consolidated subsidiaries of the IHC.
4) Should an FBO with no IHC file information for its non-branch assets using the
column under Form FR Y-15 that is designated for U.S. intermediate holding company information? Response: No, an FBO should only report IHC information on Form FR Y-15 ifthe foreign banking organization has a subsidiary IHC. An FBO with $100 billion or more in combined U.S. assets must report information regarding its non-branch assets using the column under Form FR Y-15 that is designated for information regarding the FBO's combined U.S. operations.
5) How should an FBO determine the scope of its combined U.S. operations?
Response: An FBO's combined U.S. operations include its U.S. branches and agencies and the U.S. subsidiaries ofthe foreign banking organization (excluding any section 2(h)(2) company), and subsidiaries of such U.S. subsidiaries. An FBO's U.S. subsidiaries include any company that is owned or controlled directly or indirectly by the FBO and that is incorporated in or organized under the laws ofthe United States, a state, or any territory or possession ofthe United States. See 12 CFR 252.2 and the definitions of “subsidiary” and “U.S. subsidiary” for additional details. In addition, a subsidiary of an IHC generally would be included in an FBO's combined U.S. operations even ifthe subsidiary was not itselfincorporated in or organized under the laws ofthe United States, any state, or any territory or possession ofthe United States. An FBO should calculate and report information on Form FR Y-15 as ifthe FBO were a consolidated entity according to the netting rules applicable to IHCs, BHCs, and SLHCs for that line item. [Footnote 2

• For purposes of average cross-jurisdictional activity, the FBO must apply additional adjustments. See Schedule L. End of Footnote 2.]
  Note that an FBO may report information on Form 2052a that extends beyond its combined U.S. operations. If an FBO reports information on Form FR 2052a for a material entity outside the United States that is managed from the United States, the reporting FBO should only include on Form FR Y-15 Schedule N the material entity managed from the United States to the extent that it falls within the scope ofthe FBO's combined U.S. operations.

6. How should an FBO calculate adjusted cross-jurisdictional claims for securities
   financing and repurchase transactions under the final rule?
   Response: The instructions to Schedule L ofForm FR Y-15 indicate that exposure amounts for claims with a foreign office reported should be calculated in accordance with the methodology for collateralized transactions in 12 CFR 217.37 ofthe capital rule and the definition offinancial collateral in 12 CFR 217.2 ofthe capital rule.

Specifically, with respect to a resale agreement or securities financing transaction included as a claim under Form FFIEC 009 and that meets the definition of a “repo-style transaction” under the capital rule, an FBO would calculate the adjusted value ofthe claim by determining the difference between the exposure and the collateral (E -C), and adding this amount to the product ofthe absolute value ofthe net position ofthe instrument and market price volatility haircut (Es x Hs), and the product ofthe absolute value ofthe net position ofthe instrument times the currency mismatch haircut (Efx x Hfx). Permitting the reduction of certain claims on non-U.S. affiliates ifthe collateral meets the definition offinancial collateral helps to ensure that the collateral is liquid, while the use of supervisory haircuts limits risk associated with price volatility and settlement currency mismatch. In addition, relying on the capital rule's definition offinancial collateral provides clarity regarding the types of collateral eligible to reduce the amount of cross-jurisdictional claims under this approach. In some cases, the value reported for an adjusted cross-jurisdictional claim may exceed the value reported on an FBO's balance sheet.
7) What are the liquidity risk management requirements under Board Regulation YY
for firms with greater than $250 billion in global assets and less than $100B in CUSO assets? Response: An FBO with average total consolidated assets of $250 billion or more and average combined U.S. assets ofless than $100 billion must report to the Board on an annual basis the results of an internal liquidity stress test for either the consolidated operations ofthe FBO or its combined U.S. operations that are consistent with Basel Committee principles for liquidity risk management and must incorporate 30-day, 90-day and one-year stress-test horizons. See 12 CFR 252.145(a). An FBO that does not comply with this annual requirement is subject to limits on the aggregate amount owed by the FBO's non-U.S. offices and its non-U.S. affiliates to the combined U.S. operations ofthe FBO. See 12 CFR 252.145(b).
8) Under the interagency tailoring rules, a banking organization that changes from
one category of applicable standards to another category generally is provided a transition period before it must comply with the requirements of the new category of standards. For purposes of transitions between categories, when is a banking organization deemed to qualify for a new category of standards? Response: A banking organization'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 ofsuch reported items. A banking organization meets the definition ofthe new category of applicable standards in the quarter in which the banking organization files the reporting form (e.g., Call Report, FR Y-9LP, or FR Y-15) demonstrating that the banking organization meets the definition ofthe new category. For example, a banking organization that is subject to Category IV standards in the first quarter and that subsequently files in the second quarter (as ofMarch 31 report date) meeting the criteria of $75 billion or more in average weighted short-term wholesale funding (based on its amount ofweighted short-term wholesale funding reported on the FR Y-15) would [continuing on to the next page]

be deemed to meet the definition ofa Category III banking organization in the second quarter. [Footnote 3

• Indicators, including average weighted short-term wholesale funding, are the average of the indicator for each of
  the four most recent calendar quarters, or, if a banking organization has not reported an indicator for each of the four most recent calendar quarters, the indicator for the most recent calendar quarter or average of the most recent calendar quarters, as applicable. End of Footnote 3.] In addition, any transition period provided under certain requirements continues to apply.

9. Section .30(d) of the LCR rule requires a banking organization whose outflow
   adjustment percentage increases to begin using the higher outflow adjustment percentage by the first day of the third calendar quarter after the increase; a banking organization whose outflow adjustment percentage decreases must continue using its previous higher outflow adjustment percentage until the first day of the first calendar quarter following the decrease. For purposes of these transition periods, when is a banking organization deemed to qualify for a new outflow adjustment percentage? Response: Section_ .30(c) ofthe LCR rule assigns outflow adjustment percentages to banking organizations based on their category and amount ofaverage weighted short-term wholesale funding. Section __.3 ofthe LCR rule generally defines “average weighted short-term wholesale funding” as the average ofthe weighted short-term wholesale funding for each ofthe four most recent calendar quarters as reported on the FR Y-15. As described in response to question 8 above, a banking organization is deemed to change categories during the quarter in which the banking organization files the reporting form demonstrating it meets the definition ofa new category. Similarly, a banking organization's average weighted short-term wholesale funding is deemed to change during the quarter in which the banking organization files the FR Y-15 demonstrating its level ofaverage weighted short ￾term wholesale funding triggers an increased or decreased outflow adjustment percentage under
   section __.30(c) ofthe LCR rule.
   Accordingly, the date on which the banking organization is deemed to be subject to a new outflow adjustment percentage is the date on which the relevant information (used to determine category eligibility or level ofaverage weighted short-term wholesale funding) is reported on the FR Y-15. For example, ifa banking organization subject to Category III standards and an 85 percent outflow adjustment percentage subsequently files an FR Y-15 during the first quarter ofa calendar year (representing a December 31 as-ofreport date) that reports an amount ofweighted 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 outflow adjustment percentage (100 percent) as ofthe first quarter and be required to comply with a 100 percent outflow adjustment percentage no later than the first day offourth quarter ofthat calendar year. Ifa Category III banking organization subject to an 85 percent outflow adjustment percentage submits an FR Y-15 during the first quarter (representing a December 31 as-ofdate) that demonstrates the organization meets the definition ofa Category [continuing on to the next page]

IV banking organization with $50 billion or more in average weighted short-term wholesale funding, the banking organization would be deemed to qualify for a lower outflow adjustment percentage (70 percent) as ofthe first quarter but be required to continue using the 85 percent adjustment percentage until the first day ofthe second quarter ofthe calendar year.