US Agencies Adopt Rule on Treatment of Municipal Obligations as HQLAs

By Regulatory News

June 05, 2019

Basel III, Basel Liquidity Compliance

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 information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

Related Links

Effective Date: June 18, 2019

Press Release

Proposed Rule 1

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

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.

Related Links

Effective Date: July 05, 2019

Keywords: Americas, US, Banking, HQLA, EGRRCP Act, LCR, Municipal Obligations, US Agencies

Featured Experts

María Cañamero

Skilled market researcher; growth strategist; successful go-to-market campaign developer

Pierre-Etienne Chabanel

Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.

Nicolas Degruson

Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

PRA and FCA Issue Statement on Preparations for Transition from LIBOR

Nick Cook of FCA on Moving from Innovation Hub to Innovation Culture

News

BCBS Amends Guidelines on Sound Management of AML/CFT Risks

BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).

July 02, 2020 WebPage Regulatory News

News

US Agencies Finalize Amendments to Swap Margin Rule

US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) finalized changes to the swap margin rule to facilitate implementation of prudent risk management strategies at banks and other entities with significant swap activities.