On December 19, the Federal Reserve published a final rule[i] implementing public disclosure requirements for bank holding companies subject to the liquidity coverage ratio (the “LCR”)[ii] that will require them to publicly disclose quantitative and qualitative information regarding their respective LCR calculations on a quarterly basis.  The final rule adopts the quantitative components of the LCR disclosure as proposed,[iii] but includes certain changes from and clarifications to the proposed rule with respect to the required qualitative disclosures that were suggested by industry commenters,[iv] including:

• clarifying that a covered company may, in determining which items are “significant” to its LCR for purposes of providing qualitative discussion, assess such items based on their materiality;
• eliminating the requirement to provide a discussion of any “significant changes” occurring during the time between the end of the most recent quarter and the disclosure for that period; and
• clarifying that a covered company will not be required to include any information that is proprietary or confidential in its qualitative disclosures.

The final rule also extends the implementation timeline by nine months such that a covered company will be required to make the required public disclosures approximately five calendar quarters following the requirement to submit liquidity information to the Federal Reserve via the FR 2052a report.[v]  In the supplementary information accompanying the final rule (the “Supplementary Information”), the Federal Reserve explains—in retaining the requirement that disclosures be made quarterly rather than more or less frequently—that a covered company’s medium-term liquidity position “in most cases is a better indication of the overall strengths and weaknesses of a company’s liquidity position” than short-term swings in a company’s liquidity position.

Scope of Applicability

Consistent with the proposed rule and the LCR rule itself, the final rule applies to:

• all bank holding companies (“BHCs”) and certain savings and loan holding companies (“SLHCs”) that are subject to the full LCR requirement—that is, those having $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, which are the standards for advanced approaches BHCs;
• BHCs and certain SLHCs that are subject to the modified LCR requirement—that is, those having $50 billion or more in total consolidated assets but that do not meet the thresholds for the advanced approaches (the LCR as applied to such institutions, the “Modified LCR”);[vi] and
• systemically important nonbank financial companies designated by the Financial Stability Oversight Council to which the Federal Reserve has applied the LCR by order (collectively, “covered companies”).

As under the proposed rule, depository institution subsidiaries of advanced approaches BHCs and SLHCs are not required to disclose separately their own LCR data, even though they may be subject to the LCR at the depository institution level.

Qualitative Description

The final rule largely adopts as proposed the requirement to include a qualitative discussion of factors that a covered company considers “significant” or “relevant” to its LCR; however, the final rule departs from the proposal by:

• Providing that in determining which items are “significant” to the LCR for purposes of providing a qualitative discussion, a covered company may assess such items based on their materiality. In “agreeing with commenters” that qualitative disclosures should be based on materiality, the Supplementary Information provides that information will be regarded as “material” for purposes of the disclosure requirements if the omission or misstatement of the information in question “could change or influence the assessment or decision of a user relying on that information for the purpose of making investment decisions.”[vii]  This approach is consistent with concept of materiality informing disclosures made under the Federal Reserve’s risk-based capital rules.[viii]
• Eliminating the proposed requirement that a covered company provide a discussion of any significant changes that have occurred since the end of the most recent quarter that would cause its quantitative disclosures to no longer reflect its liquidity profile. The Federal Reserve explains in the Supplementary Information that, while not the intended result, “this proposed requirement could have been interpreted to require a covered company to disclose information about . . . short-term volatility of [its] LCR” with “potentially adverse effects on a covered company [that could] precipitate or accelerate a significant liquidity event during times of idiosyncratic or market stress.”[ix]  The Federal Reserve further explains that such a requirement would contradict the final rule’s requirement that disclosed amounts be calculated as quarterly averages and disclosed several weeks after the end of the quarter in order to “include a lag that provides market participants with a broad understanding of a firm’s medium-term liquidity position without causing the release of current liquidity data that could potentially negatively affect the firm.”[x]
• Clarifying that a covered company will not be required to provide a qualitative discussion of proprietary or confidential information. Where qualitative disclosures might otherwise implicate proprietary or confidential financial information, a covered company will only be required to disclose “general information about those subjects” accompanied by an explanation of why more specific information has not been disclosed.
• Clarifying that a discussion of the causes of changes to a covered company’s LCR over time should be included if the changes are significant. The Federal Reserve revised the final rule to make explicit that in discussing any significant changes in the “main drivers of its LCR” over time, a covered company must include a discussion of the causes of any such changes.  The Supplementary Information provides examples of the type of significant causes that should be discussed, including changes in risk management strategies or macroeconomic conditions.
• Eliminating from the illustrative list of potentially “significant” items for qualitative discussion “other inflows and outflows in the LCR that are not specifically identified by the required quantitative disclosures, but that the covered company considers to be relevant to facilitate an understanding of its liquidity risk profile.” The Federal Reserve states in the Supplementary Information that it now considers this item redundant in light of the general requirement in the final rule that a covered company provide a qualitative discussion of its LCR.[xi]

Common Template for Quantitative Disclosures

The final rule retains the standardized template for quantitative disclosures with the same level of granularity as proposed, to “allow market participants to better assess potential liquidity vulnerabilities” at covered companies than would a less granular form for quantitative disclosures.[xii]

• This tabular format is largely consistent with the LCR common disclosure template developed by the Basel Committee on Banking Supervision (the “BCBS”),[xiii] retaining certain modifications included in the proposed rule that reflect the differences between the U.S. LCR rule and the Basel III liquidity framework.
• Consistent with the proposed rule, the final rule will require disclosure of both the average unweighted and average weighted amounts of secured wholesale funding (for example, repurchase agreements) and asset exchange outflows.

Compliance Dates

In response to industry comments, the final rule extends the implementation timeline by nine months but otherwise retains the proposed rule’s timeline for compliance based on the size of the covered company and whether or not it is currently subject to the LCR.  For covered companies currently subject to the LCR, disclosures will be required beginning on:

• April 1, 2017 for covered companies with $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody (such that the first public disclosures are made for the second quarter of 2017);
• April 1, 2018 for other covered companies, other than covered companies subject to the Modified LCR (such that the first public disclosures are made for the second quarter of 2018); or
• October 1, 2018 for covered companies subject to the Modified LCR (such that the first public disclosures are made for the fourth quarter of 2018).

For covered companies that become subject to the LCR after the effective date of the final rule, disclosures will be required:

• three months after the date that the covered company becomes subject to the LCR rule;[xiv] or
• 18 months after the date that the covered company becomes subject to the Modified LCR.

Timing and Placement of Disclosure

The final rule maintains the quarterly disclosure requirement as proposed, whereby a “timely” public disclosure after each calendar quarter will require disclosure to be made:

• for calendar quarters that do not correspond to a covered company’s fiscal year-end, within 45 days of the end of the calendar quarter (provided that the Federal Reserve indicated in the Supplementary Information that it will consider disclosure for the first quarter for which a covered company is subject to the disclosure requirement timely if the disclosure is made within 60 days of the quarter end); and
• for the end of a calendar quarter that corresponds to a covered company’s fiscal year-end, no later than the applicable SEC disclosure deadline for the corresponding annual report on Form 10-K. Where a covered company’s fiscal year-end does not coincide with the end of a calendar quarter, the Federal Reserve would consider the timeliness of disclosures on a case-by-case basis.

The final rule also retains the requirement that covered companies publish their required disclosures in a “direct and prominent manner” on their public internet sites or in their public financial or other regulatory reports, and that disclosures remain available for at least five years from the time of initial disclosure.

ENDNOTES

[i] Federal Reserve System, Liquidity Coverage Ratio:  Public Disclosure Requirements; Extension of Compliance Period for Certain Companies to Meet the Liquidity Coverage Ratio Requirements (Dec. 19, 2016), available at https://www.‌federalreserve.‌gov/‌newsevents/‌press/‌bcreg/‌bcreg‌20161219a1.‌pdf (the “Final Rule Release”).

[ii] See 12 C.F.R. Part 249 (Federal Reserve System); 12 C.F.R. Part 50 (Office of the Comptroller of the Currency) and 12 C.F.R. Part 329 (Federal Deposit Insurance Corporation) for the final rules adopted by the federal banking agencies to implement a quantitative liquidity requirement for certain banking organizations.  See also our memorandum to clients on the Federal Reserve’s final rule implementing the LCR in the United States, Basel III Liquidity Framework – Federal Reserve Approves Final Rule Implementing Basel III Liquidity Coverage Ratio for Large U.S. Banks (Sept. 9, 2014), available at https://www.sullcrom.com/basel-iii-liquidity-framework-federal-reserve-approves-final-rule-implementing-basel-iii-liquidity-coverage-ratio-for-large-us-banks.

[iii] See 80 Fed. Reg. 75010 (Dec. 1, 2015).  For a discussion of the proposed rules, see our memorandum to clients, Bank Liquidity Requirements – Federal Reserve Proposes Public Disclosure Requirements for the Liquidity Coverage Ratio (Dec. 4, 2015), available at http://sullcrom.com/bank-liquidity-requirements-federal-reserve-board-proposes-public-disclosure-requirements-for-the-liquidity-coverage-ratio.

[iv] See, e.g., The Clearing House Association, the American Bankers Association, the Securities Industry and Financial Markets Association and the Financial Services Roundtable, Comment Letter Regarding Notice of Proposed Rulemaking – Liquidity Coverage Ratio Public Disclosure Requirements (Feb. 2, 2016), available at https://www.‌theclearinghouse.‌org/‌-/media/‌action%‌20line/‌documents/‌volume%20vii/20160202‌%‌‌2‌0‌tc‌h%20‌commen‌ts‌%20to%20fed‌%20on%20lcr%20disclosures.pdf.

[v] The FR 2052a Complex Institution Liquidity Monitoring Report collects quantitative information for institutions supervised by the Federal Reserve on selected assets, liabilities, funding activities and contingent liabilities on a consolidated basis and by material entity subsidiary as part of the Federal Reserve’s supervisory surveillance program in its liquidity risk management area.  The FR 2052a is intended to provide timely information on firm-specific liquidity risks during periods of stress and detailed information on the liquidity risks within different business lines to enable the Federal Reserve to monitor an individual organization’s overall liquidity profile.

[vi] 12 C.F.R. Part 249, Subpart G.  This subpart applies to a covered depository institution holding company domiciled in the United States that has total consolidated assets equal to $50 billion or more, based on the average of the Board-regulated institution’s four most recent FR Y-9Cs (or, if a savings and loan holding company is not required to report on the FR Y-9C, based on the average of its estimated total consolidated assets for the most recent four quarters, calculated in accordance with the instructions to the FR Y-9C) and does not meet the applicability criteria set forth in 12 C.F.R. § 249.1(b).

[vii] Final Rule Release, at 16-17.

[viii] Consistent with this Final Rule Release for LCR disclosures, this materiality concept is not set forth in the actual rule text for the risk-based capital rules (12 C.F.R. Part 217, Subpart D (standardized approach) and Subpart E (advanced approaches)), but is instead discussed in the supplementary information accompanying the releases of the final rules (78 Fed. Reg. 62018, 62129 (standardized approach) and 72 Fed. Reg. 69288, 69385 (advanced approaches)).  For the risk-based capital rules, the materiality concept applies to the disclosure requirements generally—both quantitative and qualitative.  In contrast, for the LCR disclosures, the materiality concept applies only to qualitative disclosures because the final rule requires quantitative disclosures in a standardized template.

[ix] Final Rule Release, at 17.

[x] Final Rule Release, at 12.

[xi] Final Rule Release, at 18.

[xii] Final Rule Release, at 12.

[xiii] BCBS, Liquidity coverage ratio disclosure standards (Jan. 2014, rev. Mar. 2014), available at http://www.bis.org/publ/bcbs272.pdf.

[xiv] Because a covered company that becomes subject to the LCR rule after September 30, 2014 is required to calculate its LCR on a monthly (rather than daily) basis from April 1 to December 31 in the year in which it becomes subject to the LCR rule, a covered company will be required to calculate all disclosed amounts as simple averages of the components used to calculate its monthly LCR over the quarter during that time period.

This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “Federal Reserve Finalizes Public Disclosure Requirements for Liquidity Coverage Ratio,” dated December 22, 2016, and available here.