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Federal Reserve Board Adopts Final LCR Rules Implementing More Favorable Treatment of Unfunded Commitments to SPEs

September 3, 2014

This morning, the Federal Reserve Board adopted final regulations implementing the liquidity coverage ratio (LCR) requirement in the United States.

Unfunded Commitments to SPEs

Together with the FDIC and the OCC, the Federal Reserve Board 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, the Federal Reserve Board has 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 undrawn amounts under committed credit or liquidity facilities extended to SPEs that issue or have issued commercial paper or securities other than equity securities issued to a company of which the SPE is a consolidated subsidiary, 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.

High Quality Liquid Assets

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.  

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.  

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.

Conclusion

We will provide additional information and analysis upon further review of the adopting release and final rules.

For a copy of the adopting release, click here.

For a copy of the Federal Reserve Board's memorandum, click here.