US Agencies (FDIC, FED, and OCC) are jointly adopting as a final rule, without change, the interim final rule on treatment of municipal obligations as high-quality liquid assets (HQLAs). The interim final rule, published in August 2018, amended the agencies’ liquidity coverage ratio (LCR) rule to treat liquid and readily marketable, investment-grade municipal obligations as HQLAs. This treatment was mandated by section 403 of the Economic Growth, Regulatory Relief, and Consumer Protection (EGGRCP) Act. The final rule will be effective on July 05, 2019.
The agencies received nine comment letters addressing the interim final rule, including letters from trade associations, private-sector enterprises, and one individual. The respondents generally expressed support for the inclusion of certain municipal obligations as HQLA and the agencies’ implementation of section 403 of the EGRRCP Act through the interim final rule. Many respondents asserted that municipal obligations were a suitable asset class for HQLA eligibility, with qualities consistent with other level 2B liquid assets, and that the interim final rule effectively satisfied the underlying intent of section 403 of the EGRRCP Act. Some respondents suggested additional changes to the LCR rule for the agencies’ consideration, including changes that were not addressed or affected by section 403 of the EGRRCP Act.
The interim final rule added a definition to the agencies’ rule for the term “municipal obligations,” which, consistent with EGRRCP Act, means an obligation of a state or any political subdivision thereof, or any agency or instrumentality of a state or any political subdivision thereof. In addition, the interim final rule amended the HQLA criteria with respect to level 2B liquid assets by adding municipal obligations that, as of the LCR calculation date, are both liquid and readily marketable and investment-grade (under 12 CFR part 1) to the list of assets that are eligible for treatment as level 2B liquid assets. Consistent with section 403 of the EGRRCP Act, the interim final rule also amended the definition of “liquid and readily-marketable” in the FDIC’s and OCC’s rules so that the term has the same meaning given to it under 12 CFR 249.3 of the FED rule. The interim final rule also rescinded the FED's 2016 Amendments so that municipal obligations under the FED's rule are treated consistently with section 403 of the EGRRCP Act.
The interim final rule’s changes to the LCR rule provided covered companies greater flexibility in meeting the LCR rule’s minimum requirements by expanding the types of assets that are eligible as HQLA. For FDIC- and OCC-regulated institutions, the interim final rule’s changes marked the first time that such an institution could treat any municipal obligations as a HQLA. For FED-regulated institutions, the changes broadened the types of municipal obligations that could be included as HQLA. This final rule does not otherwise affect which assets can count as HQLA under the LCR rule.
Effective Date: July 05, 2019
Keywords: Americas, US, Banking, HQLA, EGRRCP Act, LCR, Municipal Obligations, US Agencies
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