Client Update U.S. Agencies Propose Net Stable Funding Ratio

Transcription

1 1 Client Update U.S. Agencies Prpse Net Stable Funding Rati NEW YORK Gregry J. Lyns Lee A. Schneider Clare K. Lascelles David L. Prtilla Chen Xu WASHINGTON, D.C. Satish M. Kini David A. Luigs On June 1, 2016, the Office f the Cmptrller f the Currency (the OCC ), Federal Depsit Insurance Crpratin (the FDIC ) and Bard f Gvernrs f the Federal Reserve System (the Federal Reserve, cllectively with the OCC and FDIC, the Agencies ) published a prpsed rule t implement the Net Stable Funding Rati (the NSFR ). 1 The prpsal wuld require large U.S. banking rganizatins t maintain what the Agencies have determined t be a stable funding prfile ver a ne-year hrizn. Cmments n the prpsed rule are due by August 5, The prpsed rule cmes apprximately ne and a half years after the Basel Cmmittee n Banking Supervisin (the Basel Cmmittee ) finalized its versin f the NSFR in Octber The Agencies intend the NSFR t cmplement the Liquidity Cverage Rati (the LCR ), finalized by the Agencies n September 3, While the LCR aims t prmte shrt-term liquidity resilience by requiring affected banking rganizatins t hld a minimum amunt f high-quality liquid assets ( HQLA ) t fund their liquidity needs ver a 30-day hrizn, the NSFR is designed t reduce funding risk ver a ne-year hrizn Net Stable Funding Rati: Liquidity Risk Measurement Standards and Disclsure Requirements, 81 Fed. Reg. 35,124 (June 1, 2016). Basel Cmmittee, Basel III: the Net Stable Funding Rati (Oct. 2014), available at see als Debevise & Plimptn, Client Update: Basel Cmmittee Adpts Net Stable Funding Rati: Hw Much Liquidity Is Enugh? (Dec. 4, 2014), available at Liquidity Cverage Rati: Liquidity Risk Management Standards, 79 Fed. Reg. 61,440 (Oct. 10, 2014); see als Debevise & Plimptn, Client Update: Questins and Answers n the Liquidity Cverage Rati (Sept. 17, 2014), available at

2 2 Bth the LCR and NSFR address perceived risks arising frm excessive dependence n unstable shrt-term funding. T mitigate these perceived risks, the LCR and NSFR impse quantitative funding requirements n banking rganizatins, thereby seeking t ensure that banking rganizatins have sufficient cash and cash equivalents t perate during times f significant stress and market dislcatin. We summarize key aspects f the NSFR in a series f questins and answers belw. Althugh the prpsed rule is largely cnsistent with the Basel Cmmittee s NSFR, it departs frm the Basel NSFR in several key respects. Cnsequently, we als highlight a number f cmparisn pints between the U.S. NSFR and the Basel NSFR.

3 3 Radmap t the NSFR and this Q&A Full NSFR. Fr each f the largest cvered U.S. banking rganizatins, described in mre detail in Sectin I.A belw, the NSFR wuld require an amunt f available stable funding ( ASF ) that is n less than the amunt f its required stable funding ( RSF ). ASF wuld be calculated by multiplying a banking rganizatin s liabilities and regulatry capital by the percentages, r factrs, assigned t them by the Agencies and then adding the weighted figures. RSF wuld be calculated by multiplying a banking rganizatin s assets, cmmitments and derivatives expsures by the factrs assigned t them by the Agencies and then adding the weighted figures. The NSFR wuld be expressed as a rati f a banking rganizatin s ASF t its RSF. In frmulaic terms, fr each banking rganizatin, the requirement is: Mdified NSFR. Smaller U.S. banking rganizatins, described in mre detail in Sectin I.A belw, wuld be subject t a mdified NSFR, whereby the banking rganizatin wuld be required t maintain a lwer minimum amunt f stable funding, equal t 70% f the amunt required fr banking rganizatins subject t the full NSFR. The mdified NSFR nly wuld apply t the tp-tier hlding cmpany, and nt t its subsidiary banks. In frmulaic terms, fr each banking rganizatin subject t the mdified NSFR, the requirement is: Freign Banks. Freign banking rganizatins ( FBOs ) withut a U.S. bank hlding cmpany ( BHC ), described in mre detail in Sectin I.A belw, wuld nt be subject t the prpsed NSFR, althugh FBOs with U.S. peratins with $50 billin r mre in cmbined U.S. assets likely will be subject t a future rulemaking in this area. U.S. subsidiaries f FBOs that are U.S. BHCs wuld be subject t the full r mdified NSFR t the same extent as a U.S. BHC. Sectin I prvides an verview f which banking rganizatins are subject t the prpsed rule and the rule s tiered applicatin. Sectin II breaks dwn the ASF, the numeratr in the NSFR. Sectin III breaks dwn the RSF, the denminatr in the NSFR. Sectin IV describes what happens when there is an NSFR shrtfall. Sectin V discusses the NSFR s disclsure requirements.

4 4 I. APPLICABILITY AND SCOPE A. T which entities des the NSFR apply? Identical t the LCR, the prpsed rule wuld impse a tw-tiered system f applicatin: (1) a mre stringent NSFR wuld apply t U.S. BHCs, savings and lan hlding cmpanies ( SLHCs ) withut significant cmmercial r insurance peratins, and depsitry institutins with $250 billin r mre in ttal cnslidated assets r $10 billin r mre in n-balance sheet freign expsure, and t such entities cnslidated subsidiary depsitry institutins with $10 billin r mre in ttal cnslidated assets; and (2) a less stringent mdified NSFR requirement wuld apply t BHCs and SLHCs with $50 billin r mre, but less than $250 billin, in ttal cnslidated assets, and als less than $10 billin in ttal n-balance sheet freign expsure. The entities subject t the NSFR are, cllectively, Cvered Cmpanies and each, a Cvered Cmpany. If the mdified NSFR applies at the hlding cmpany level, underlying subsidiary depsitry institutins wuld nt be subject t a separate NSFR requirement. Like the LCR, the NSFR wuld nt apply t an FBO, althugh if the FBO has a U.S. subsidiary that meets the requirements described in the abve paragraph, then that U.S. subsidiary wuld be subject t the same full r mdified NSFR as a U.S. banking rganizatin. If the FBO s U.S. subsidiary des nt meet thse requirements, then the NSFR wuld nt apply, but the Agencies indicated in the preamble t the NSFR that they anticipate implementing an NSFR requirement thrugh a future, separate rulemaking fr the U.S. peratins f FBOs with $50 billin r mre in cmbined U.S. assets. Basel NSFR Cmparisn: The Basel NSFR expressly applies t internatinally active banks n a cnslidated basis, but gives natinal regulatrs the discretin t tailr the scpe f applicability. Histrically, the Agencies have interpreted internatinally active banks t include banking rganizatins with $250 billin r mre in ttal cnslidated assets r $10 billin r mre in ttal n-balance sheet freign expsure. B. What is the implementatin time frame? Like the Basel NSFR, the U.S. NSFR wuld have an effective date f January 1, The Cvered Cmpanies that becme subject t the full NSFR after the effective date wuld have a ne-quarter transitin perid t cmply, meaning they wuld be required t cmply with the prpsed NSFR requirement beginning n April 1 f the fllwing year. The Cvered Cmpanies that becme subject t the mdified NSFR after the effective date wuld have a ne-year transitin perid after the date they meet the applicable threshlds.

5 5 C. Hw des the NSFR relate t U.S. GAAP? Unlike the LCR, the NSFR is a balance sheet metric. The NSFR s calculatins wuld generally be based n the carrying value, as determined under GAAP, f a Cvered Cmpany s assets, liabilities and equity. In particular, the Agencies prpsed a rule f cnstructin specifying that, unless therwise expressly prvided, a transactin r expsure that is nt recrded n the balance sheet f a Cvered Cmpany wuld nt be assigned an ASF r RSF factr (as described belw), and cnversely, a transactin r expsure that is recrded n the balance sheet f the Cvered Cmpany wuld be assigned an ASF r RSF factr (as further described belw). II. AVAILABLE STABLE FUNDING (NUMERATOR) A. What is the ASF framewrk? ASF wuld be cmpsed f liabilities and regulatry capital. Different categries f liabilities and regulatry capital wuld be multiplied by different assigned factrs, each f which wuld be assigned based n the stability f each categry ver the ne-year time hrizn f the NSFR. The prducts f the liability and regulatry capital categries with their assigned factrs wuld be added tgether t determine ASF. As described in mre detail in Table 1, the primary categries f liabilities and regulatry capital that make up ASF wuld include brrwings f different maturities and frm different surces and certain capital instruments. B. What are sme examples f liabilities relevant t banks that cnstitute ASF? As detailed in Table 1, liabilities relevant t banks that cnstitute ASF wuld include (i) stable retail depsits held at the Cvered Cmpany (regardless f maturity r cllateralizatin), 4 (ii) retail depsits (regardless f maturity r cllateralizatin) prvided by retail custmers and cunterparties ther than stable retail depsits r brkered depsits, (iii) reciprcal brkered depsits prvided by retail custmers and cunterparties where the entire amunt is cvered by depsit insurance, (iv) ther brkered depsits with maturities f ne year r mre which are nt held in transactinal accunts and (v) peratinal depsits placed at the Cvered Cmpany. 4 The NSFR wuld utilize definitins fund in the LCR. The LCR defines stable retail depsits as retail depsits fully cvered by depsit insurance which are held by the depsitr in a transactinal accunt r by ther depsitrs which have ther established relatinships with the Cvered Cmpany. See 12 CFR

6 6 Basel NSFR Cmparisn: Unlike the Basel NSFR, the U.S. NSFR explicitly includes varius types f brkered depsits. This inclusin f brkered depsits by the Agencies appears t be an effrt t synchrnize the LCR with the NSFR. C. What are sme examples f liabilities relevant t brker-dealers that cnstitute ASF? As detailed in Table 1, liabilities relevant t brker-dealers that cnstitute ASF wuld include (i) unsecured whlesale funding with maturities f six mnths r mre, but less than ne year, that are prvided by a financial sectr entity r a central bank and are nt securities issued by the Cvered Cmpany r peratinal depsits, (ii) secured funding with maturities f six mnths r mre, but less than ne year, that are nt cllateralized depsits that are peratinal depsits and where the cunterparty is a financial sectr entity r a central bank and (iii) securities issued by the Cvered Cmpany with maturities f six mnths r mre, but less than ne year. Fr example, bth a seven-mnth evergreen rep and a subrdinated lan pursuant t Securities and Exchange Cmmissin ( SEC ) Rule 15c3-1 (where the ASF factr wuld depend n the remaining term) wuld cnstitute a liability fr ASF purpses. D. Once a Cvered Cmpany has categrized apprpriate liabilities and capital, hw des it calculate ASF? T calculate ASF, a Cvered Cmpany s liabilities and capital wuld be assigned ne f five percentage factrs based n the stability f the funding ver the neyear time hrizn: 100%, 95%, 90%, 50% and 0%. Refer t Table 1 fr a list f liabilities and capital that fall int each percentage bucket. In particular, the liabilities and capital wuld be categrized based n three characteristics relating t the stability f the funding: the funding tenr, the funding type and the cunterparty type. Funding wuld be cnsidered t be less stable if there is a greater chance that a Cvered Cmpany wuld need t replace r repay the funding during the ne-year hrizn and thus wuld be assigned a lwer percentage weighting. After multiplying the Cvered Cmpany s liabilities and capital by their factrs, the weighted amunts wuld be added tgether t determine ASF.

7 7 III. REQUIRED STABLE FUNDING (DENOMINATOR) A. What is the RSF framewrk? RSF wuld be cmpsed f assets, undrawn amunts f a Cvered Cmpany s cmmitments and certain derivatives expsures. Like with ASF, different categries f assets, cmmitments and derivative expsures wuld be multiplied by different assigned factrs, each f which wuld be assigned based n the liquidity characteristics f each categry. The prducts f the assets, cmmitments and derivative expsure categries with their assigned factrs wuld be added tgether t determine RSF. As described in mre detail in Tables 2 and 3, the primary categries f assets that cmpse RSF wuld include currency and cin, securities, lans (e.g., t financial sectr institutins), the undrawn amunt f any cmmitted credit facility r cmmitted liquidity facility extended by the Cvered Cmpany and derivative assets. Under the LCR, banking rganizatins must maintain a minimum amunt f HQLA. Fr NSFR purpses, that HQLA cnstitutes assets that are subject t varying RSF factrs, depending n the level r quality f the particular HQLA. Fr example, U.S. Treasuries, as Level 1 HQLA, attract an RSF factr f 10%, while an equity security meeting the Level 2 HQLA test wuld attract an RSF factr f 50%. Accrdingly, any Cvered Cmpanies shuld prepare fr this tensin between what the LCR and NSFR each require. B. What are sme examples f assets relevant t banks that cnstitute RSF? As detailed in Tables 2 and 3, assets relevant t a bank that cnstitute RSF wuld include (i) lans made t different types f entities (e.g., financial institutins, central banks) with varied maturities and with assrted designatins under the Basel II Standardized Apprach fr credit risk and (ii) certain unencumbered retail mrtgages with maturities f ne year r mre. C. What are sme examples f assets relevant t brker-dealers that cnstitute RSF? As detailed in Tables 2 and 3, assets relevant t brker-dealers that cnstitute RSF wuld include (i) securities f all types held n the balance sheet, (ii) cash and (iii) unencumbered securities with a remaining maturity f ne year r mre. Margin lans, like the lans made by banks, wuld attract RSF, as wuld extensins f nn-purpse credit (which means the lan may be used t

8 8 purchase anything except ther securities). In additin, custmer free credit balances that are segregated in a brker-dealer s reserve accunt pursuant t SEC Rule 15c3-3 wuld be treated as assets fr RSF purpses. The preamble t the prpsed U.S. NSFR specifically ntes that cash that a Cvered Cmpany places n depsit with a third-party depsitry institutin in accrdance with segregatin requirements wuld be treated as a shrt-term lan t a financial sectr entity. The Agencies als prpsed a rule f cnstructin specifying that when a Cvered Cmpany, acting as a securities lender, receives cllateral in an asset exchange and des nt rehypthecate the cllateral, then the Cvered Cmpany wuld nt be required t assign an RSF factr t the cllateral it received and wuld nt be permitted t assign an ASF factr t any liability t return the cllateral. Because the prpsed rule wuld nt require stable funding fr the cllateral received, the prpsed rule wuld nt treat a Cvered Cmpany s bligatin t return the cllateral as stable funding and wuld nt assign an ASF factr t this bligatin. If a Cvered Cmpany sells r rehypthecates the cllateral, hwever, then it wuld be required t assign the apprpriate RSF factr(s) t the prceeds f the sale r, in the case f rehypthecatin where the cllateral remains n the Cvered Cmpany s balance sheet, t the cllateral itself. D. Once a Cvered Cmpany has categrized apprpriate assets, hw des it calculate RSF? Similar t liabilities and capital under ASF, a Cvered Cmpany s assets wuld be assigned a percentage factr based n the liquidity characteristics f the asset. There are eight RSF factrs: 0%, 5%, 10%, 15%, 50%, 65%, 85% and 100%. Refer t Tables 2 and 3 fr a list f assets that fall int each percentage bucket. After multiplying assets by their multipliers, the weighted amunts wuld be added t the derivatives RSF amunt t determine a Cvered Cmpany s RSF. The derivatives RSF amunt equals the sum f (i) the current derivative transactin values, (ii) the variatin margin prvided by the Cvered Cmpany, (iii) the excess variatin margin prvided by the Cvered Cmpany, (iv) the variatin margin received by the Cvered Cmpany, (v) ptential valuatin changes, (vi) cntributins t central cunterparty mutualized lss sharing arrangements and (vii) the initial margin prvided by the Cvered Cmpany. The methdlgy t calculate each f these items cmprising the derivatives RSF amunt is set ut in Table 4.

9 9 E. Are interdependent assets and liabilities assigned a 0% RSF factr and a 0% ASF factr, respectively? Nt under the prpsed U.S. framewrk. Under the Basel NSFR, at the discretin f the natinal regulatr, an interdependent asset and liability may be assigned a 0% RSF factr and a 0% ASF factr if the fllwing circumstances are met: the interdependence f the asset and liability must be established n the basis f cntractual arrangements; the liability cannt fall due while the asset remains n the balance sheet; the principal payment flws frm the asset cannt be used fr purpses ther than repaying the liability; the liability cannt be used t fund ther assets; the individual interdependent asset and liability must be clearly identifiable; the maturity and principal amunt f bth the interdependent liability and asset must be the same; the bank must be acting slely as a pass-thrugh unit t channel the funding received frm the liability int the crrespnding interdependent asset; and the cunterparties fr each pair f interdependent liabilities and assets must nt be the same. In the preamble t the U.S. NSFR, the Agencies cnsidered the interdependence f assets and liabilities and cncluded that a Cvered Cmpany des nt engage in transactins that wuld meet the cnditins required under the Basel NSFR. Fr example, the Agencies state that a securities brrwing transactin t facilitate a custmer shrt sale wuld nt appear t meet the Basel NSFR cnditins fr interdependent treatment because (i) the interdependence f the asset and liability may nt be established n the basis f cntractual arrangements, (ii) the liability culd fall due while the asset remained n the balance sheet and (iii) the maturity and principal amunt f bth the interdependent liability and asset may nt be the same. Basel NSFR Cmparisn: The Basel NSFR permits natinal regulatrs t recgnize interdependent assets and liabilities, but the Agencies have declined t d s.

10 10 IV. NSFR SHORTFALL A. What are the cnsequences f nncmpliance? The NSFR wuld require a Cvered Cmpany t ntify its apprpriate Federal regulatr f an NSFR shrtfall r ptential shrtfall n later than 10 business days fllwing the ccurrence f an event that has caused r wuld cause the Cvered Cmpany s NSFR t fall belw the apprpriate threshld. In the event f a shrtfall, the NSFR wuld require the Cvered Cmpany t develp a plan t remediate the shrtfall and submit said plan t the apprpriate Federal regulatr. The plan wuld be required t include an assessment f the Cvered Cmpany s liquidity prfile, the actins the Cvered Cmpany wuld take t cmply with the NSFR (including hw any peratinal r management issues wuld be fixed) and an estimated time frame fr remediatin. Further, the Cvered Cmpany wuld be required t prvide prgress reprts t the apprpriate Federal regulatr n at least a mnthly basis. The Agencies wuld retain the authrity t take supervisry actin against a nncmpliant Cvered Cmpany. Like the LCR, the NSFR wuld nt prescribe any particular supervisry respnse t a shrtfall, but rather prvide the regulatrs with the flexibility t respnd t each shrtfall as apprpriate given the circumstances f the situatin. V. QUANTITATIVE AND QUALITATIVE DISCLOSURE REQUIREMENTS A. T which entities d the disclsure requirements apply? Any Cvered Cmpanies that are BHCs r SLHCs ( Cvered Hlding Cmpanies ) wuld be required t disclse certain infrmatin, which wuld enable market participants t cmpare funding characteristics f the entities. The disclsure requirements wuld nt apply t any Cvered Cmpanies that are depsitry institutins, althugh the Agencies may develp a different r mdified reprting frm that wuld be required fr bth depsitry institutins and depsitry institutin hlding cmpanies. B. What items wuld need t be disclsed? A Cvered Hlding Cmpany wuld be required t disclse cmpnents f its ASF and RSF calculatins, in additin t its ASF amunt, its RSF amunt and the NSFR itself. Bth the unweighted (i.e., befre the applicatin f the ASF r RSF factr) and weighted ASF and RSF cmpnents wuld generally be required t be disclsed.

11 11 In additin t quantitative elements relating t the NSFR, a Cvered Hlding Cmpany wuld be required t prvide a qualitative discussin f its NSFR in rder t facilitate understanding f the numbers. Examples f cntent fr this discussin include hw the Cvered Hlding Cmpany s NSFR has changed ver time and the drivers f thse changes and where the Cvered Hlding Cmpany may have cncentratins f funding surces. Such qualitative discussin may be cmbined with the similar discussin required under the LCR. Basel NSFR Cmparisn: The U.S. NSFR wuld require disclsure f certain ASF categries that are nt separately brken ut under the Basel NSFR, like retail brkered depsits. The U.S. disclsure template wuld als differ frm the Basel Cmmittee template by requiring disclsure f additinal cmpnents that cmprise the ASF and RSF calculatins, like the ttal derivatives liabilities amunt. C. When wuld disclsures need t be made? A Cvered Hlding Cmpany wuld be required t prvide timely disclsures after each calendar quarter. Fr any Cvered Hlding Cmpanies that d nt have fiscal years r quarters crrespnding t a calendar quarter, the Agencies wuld cnsider disclsures made within 45 days f the end f the calendar quarter t be timely. * * * Please d nt hesitate t cntact us with any questins.

12 12 ASF Factr TABLE 1 Summary f Liability Categries and Assciated ASF Factrs Cmpnents f ASF Categry 100% Any capital elements in the Cvered Cmpany s cmmn equity Tier 1 capital, additinal Tier 1 capital and Tier 2 capital, with certain adjustments as specified in mre detail in the prpsed rule (such capital elements, NSFR regulatry capital elements ) Any liabilities r equity reprted n the Cvered Cmpany s balance sheet that are nt NSFR regulatry capital elements ( NSFR liabilities ), which have maturities f 1 year r mre, are nt NSFR liabilities wed t a retail custmer r cunterparty that are nt depsits and nt securities issued by the Cvered Cmpany, and are nt retail depsits r brkered depsits prvided by a retail custmer r cunterparty 95% Stable retail depsits held at the Cvered Cmpany (regardless f maturity r cllateralizatin) 90% Retail depsits (regardless f maturity r cllateralizatin) prvided by retail custmers and cunterparties ther than stable retail depsits r brkered depsits Reciprcal brkered depsits prvided by retail custmers and cunterparties where the entire amunt is cvered by depsit insurance Brkered sweep depsits prvided by retail custmers and cunterparties depsited in accrdance with a cntract between the retail custmer r cunterparty and the Cvered Cmpany, a cntrlled subsidiary f the Cvered Cmpany r a cmpany that is a cntrlled subsidiary f the same tp-tier cmpany f which the Cvered Cmpany is a cntrlled subsidiary, where the entire amunt f the depsit is cvered by depsit insurance Brkered depsits (ther than reciprcal brkered depsits and brkered sweep depsits) prvided by retail custmers and cunterparties with maturities f 1 year r mre which are nt held in transactinal accunts 50% Unsecured whlesale funding with maturities f less than 1 year that are nt prvided by a financial sectr entity, a cnslidated subsidiary f a financial sectr entity r a central bank and are nt securities issued by the Cvered Cmpany r peratinal depsits placed at the Cvered Cmpany Secured funding with maturities f less than 1 year that are nt cllateralized depsits that are peratinal depsits placed at the Cvered Cmpany and where the cunterparty is nt a financial sectr entity, a cnslidated subsidiary f a financial sectr entity r a central bank Unsecured whlesale funding with maturities f 6 mnths r mre, but less than 1 year that are prvided by a financial sectr entity, a cnslidated financial sectr entity r a central bank and are nt securities issued by the Cvered Cmpany r peratinal depsits Secured funding with maturities f 6 mnths r mre, but less than 1 year that are nt cllateralized depsits that are peratinal depsits and where the cunterparty is a financial sectr entity, a cnslidated subsidiary f a financial sectr entity r a central bank Securities issued by the Cvered Cmpany with maturities f 6 mnths r mre, but less than 1 year

13 13 ASF Factr TABLE 1 Summary f Liability Categries and Assciated ASF Factrs Cmpnents f ASF Categry Operatinal depsits placed at the Cvered Cmpany Brkered depsits prvided by a retail custmer r cunterparty that are nt therwise placed in the 90% r 0% categries Any ther NSFR liabilities with maturities f 6 mnths r mre, but less than 1 year which are nt therwise placed in a different categry 0% Trade date payables resulting frm a purchase by the Cvered Cmpany f a financial instrument, freign currency r cmmdity that is cntractually required t settle within the lesser f the market standard settlement perid fr the particular transactin and five business days frm the date f the sale Brkered depsits with maturities f less than 6 mnths prvided by a retail custmer r cunterparty that are nt reciprcal brkered depsits r brkered sweep depsits and which are nt held in a transactinal accunt NSFR liabilities wed t a retail custmer r cunterparty that are nt depsits and are nt securities issued by the Cvered Cmpany Securities issued by the Cvered Cmpany with maturities f less than 6 mnths NSFR liabilities with maturities f less than 6 mnths r pen maturities that are nt securities issued by the Cvered Cmpany r peratinal depsits placed at the Cvered Cmpany and where the cunterparty is a financial sectr entity, a cnslidated subsidiary r a central bank Any ther NSFR liabilities with maturities f less than 6 mnths that are nt therwise placed in a different categry The Cvered Cmpany s NSFR derivatives liability amunt (as set ut in Table 5 belw) The carrying value f NSFR liabilities in the frm f an bligatin t return initial margin r variatin margin received by the Cvered Cmpany

14 14 TABLE 2 Summary f Unencumbered Asset and Cmmitment Categries and Nnperfrming Asset Categries and Assciated RSF Factrs RSF Factr 0% Currency and cin Cash items in the prcess f cllectin Cmpnents f RSF Categry Reserve Bank balances r ther claims n a Reserve Bank with maturities f less than 6 mnths Claims n freign central banks with maturities f less than 6 mnths Trade date receivables due t the Cvered Cmpany arising frm its sales f financial instruments, freign currencies and cmmdities and which are required t settle within the lesser f the market standard settlement perid and five business days frm the date f the sale (and which have nt failed t settle during the required settlement perid) 5% Level 1 liquid assets, ther than Level 1 liquid assets described in the 0% RSF factr categry abve The undrawn amunt f any cmmitted credit facility r cmmitted liquidity facility extended by the Cvered Cmpany 10% Secured lending transactins with maturities f less than 6 mnths where the brrwer is a financial sectr entity (r cnslidated subsidiary theref) and the lan is secured against Level 1 assets, and where the Cvered Cmpany retains the right t rehypthecate the cllateral prvided by the cunterparty fr the duratin f the secured lending transactin 15% Level 2A liquid assets Secured lending transactins r unsecured whlesale lending where the assets have maturities f less than 6 mnths, the brrwer is a financial sectr entity (r cnslidated subsidiary theref), the asset is nt an peratinal depsit placed by the Cvered Cmpany at a financial sectr entity (r cnslidated subsidiary theref) and the asset is nt therwise described in the 10% RSF factr categry abve 50% Level 2B liquid assets Secured lending transactins r unsecured whlesale lending where the assets have maturities f 6 mnths r mre but less than 1 year, the brrwer is a financial sectr entity (r cnslidated subsidiary theref) r a central bank and the asset is nt an peratinal depsit placed by the Cvered Cmpany at a financial sectr entity (r cnslidated subsidiary theref) Operatinal depsits placed by the Cvered Cmpany at a financial sectr entity (r a cnslidated subsidiary theref) General bligatin securities issued by r guaranteed as t the timely payment f principal and interest by a public sectr entity and which are nt Level 2B liquid assets All ther assets nt described in the abve categries with maturities f less than 1 year, including: Secured lending transactins r unsecured whlesale lending where the brrwer is a whlesale custmer r cunterparty that is nt a financial sectr entity (r cnslidated

15 15 TABLE 2 Summary f Unencumbered Asset and Cmmitment Categries and Nnperfrming Asset Categries and Assciated RSF Factrs RSF Factr subsidiary theref) r a central bank; and Lans t retail custmers r cunterparties Cmpnents f RSF Categry 65% Retail mrtgages with maturities f 1 year r mre and with a risk weight f n greater than 50% under the standardized apprach fr determining risk-weighted assets Secured lending transactins, unsecured whlesale lending r lending t a retail custmer r cunterparty where the asset is nt described in any f the abve RSF categries r items, the asset has a maturity f 1 year r mre and the asset is assigned a risk weight f n greater than 20% under the standardized apprach fr determining risk-weighted assets, and where the brrwer is nt a financial sectr entity (r cnslidated subsidiary theref) 85% Retail mrtgages with maturities f 1 year r mre and with a risk weight f greater than 50% under the standardized apprach fr determining risk-weighted assets Secured lending transactins, unsecured whlesale lending r lending t a retail custmer r cunterparty where the asset is nt described in any f the abve RSF categries r items, the asset has a maturity f 1 year r mre and the asset is assigned a risk weight f greater than 20% under the standardized apprach fr determining risk-weighted assets, and where the brrwer is nt a financial sectr entity (r cnslidated subsidiary theref) Publicly traded cmmn equity that des nt qualify as HQLA Securities ther than cmmn equity shares with maturities f 1 year r mre and which d nt qualify as HQLA Cmmdities fr which derivative transactins are traded n a U.S. bard f trade, a cntract market r a swap executin facility 100% All ther assets nt described in the abve categries, including secured lending transactins r unsecured whlesale lending with maturities f 1 year r mre where the brrwer is a financial sectr entity (r cnslidated subsidiary theref) All assets that are past due by mre than 90 days r nnaccrual

16 16 TABLE 3 Summary f Rules t Determine RSF Factrs f Encumbered Assets and Off-Balance Sheet Rehypthecated Assets 5 Rule t Determine RSF Factr Fr an encumbered asset with less than 6 mnths remaining in the encumbrance perid, the same RSF factr is assigned t the asset as wuld be assigned if the asset were nt encumbered. Fr an encumbered asset with 6 mnths r mre, but less than 1 year, remaining in the encumbrance perid: If the asset wuld nrmally be assigned an RSF factr f 50% r less if the asset were nt encumbered (see Table 2 abve), then an RSF factr f 50% is assigned t the asset. If the asset wuld be assigned an RSF factr f greater than 50% if the asset were nt encumbered (see Table 2 abve), then the same RSF factr is assigned t the asset as wuld be assigned if it were nt encumbered. Fr an encumbered asset with 1 year r mre remaining in the encumbrance perid, an RSF factr f 100% is assigned t the asset. If an asset is encumbered fr an encumbrance perid lnger than the asset s maturity, the asset is assigned an RSF factr under ne f the abve rules in this Table 3 based n the length f the encumbrance perid. Fr an NSFR liability f the Cvered Cmpany that is secured by an ff-balance sheet asset r results frm the Cvered Cmpany selling an ff-balance sheet asset (fr instance, in the case f a shrt sale): If the Cvered Cmpany received the ff-balance sheet asset under a lending transactin, an RSF factr is assigned t the lending transactin as if it were encumbered fr the lnger f (A) the remaining maturity f the NSFR liability and (B) any ther encumbrance perid applicable t the lending transactin; If the Cvered Cmpany received the ff-balance sheet asset under an asset exchange, an RSF factr is assigned t the asset prvided by the Cvered Cmpany in the asset exchange as if the prvided asset were encumbered fr the lnger f (A) the remaining maturity f the NSFR liability and (B) any ther encumbrance perid applicable t the prvided asset; r If the Cvered Cmpany did nt receive the ff-balance sheet asset under a lending transactin r asset exchange, the ff-balance sheet asset is assigned an RSF factr as if it were included n the balance sheet f the Cvered Cmpany and encumbered fr the lnger f (A) the remaining maturity f the NSFR liability and (B) any ther encumbrance perid applicable t the ff-balance sheet asset. 5 Assets held in segregated accunts maintained pursuant t statutry r regulatry requirements fr the prtectin f custmer assets are nt cnsidered encumbered fr the purpses f Table 3 slely because such assets are held in segregated accunts.

17 17 TABLE 4 Methdlgy t Calculate Each Cmpnent f the NSFR Derivatives Amunt Item (i): Cmpnent Current derivative transactin values Calculatin The Cvered Cmpany s NSFR derivatives asset amunt (as set ut in Table 5 belw), multiplied by an RSF factr f 100%. Item (ii): Variatin margin prvided Item (iii): Excess variatin margin prvided Item (iv): Variatin margin received Item (v): Ptential valuatin changes Item (vi): Cntributins t central cunterparty mutualized lss sharing arrangements Item (vii): Initial margin prvided The carrying value f variatin margin prvided by the Cvered Cmpany under each derivative transactin nt subject t a qualifying master netting agreement ( QMNA ) and each QMNA netting set, t the extent the variatin margin reduces the Cvered Cmpany s derivatives liability value under the derivative transactin r QMNA netting set, multiplied by an RSF factr f 0%. The carrying value f variatin margin prvided by the Cvered Cmpany under each derivative transactin nt subject t a QMNA and each QMNA netting set in excess f the variatin margin prvided (as described in the rw immediately abve) fr each derivative transactin r QMNA netting set, multiplied by the RSF factr assigned t each asset cmprising the variatin margin pursuant t Tables 2 and 3 abve. The carrying value f variatin margin received by the Cvered Cmpany, multiplied by the RSF factr assigned t each asset cmprising the variatin margin pursuant t Tables 2 and 3 abve. An amunt equal t 20% f the sum f the grss derivative values f the Cvered Cmpany that are liabilities fr each f the Cvered Cmpany s derivative transactins nt subject t a QMNA and each f its QMNA netting sets, multiplied by an RSF factr f 100%. The fair value f the Cvered Cmpany s cntributin t a central cunterparty s mutualized lss sharing arrangement (regardless f whether the cntributin is included n the Cvered Cmpany s balance sheet), multiplied by an RSF factr f 85%. The fair value f initial margin prvided by the Cvered Cmpany fr derivative transactins (regardless f whether the initial margin is included n the Cvered Cmpany s balance sheet), which des nt include initial margin prvided by the Cvered Cmpany fr cleared derivative transactins with respect t which the Cvered Cmpany is acting as agent fr a custmer and the Cvered Cmpany des nt guarantee the bligatins f the custmer s cunterparty t the custmer under the derivative transactin (such initial margin wuld be assigned an RSF factr pursuant t Tables 2 and 3 abve t the extent the initial margin is included n the Cvered Cmpany s balance sheet), multiplied by an RSF factr equal t the higher f 85% r the RSF factr assigned t each asset cmprising the initial margin pursuant t Tables 2 and 3.

18 18 TABLE 5 Methdlgy t Calculate the NSFR Derivatives Asset and Liability Amunts Item NSFR derivatives asset amunt NSFR derivatives liability amunt Ttal derivatives asset amunt Ttal derivatives liability amunt Derivatives asset value Derivatives liability value Calculatin The Cvered Cmpany s NSFR derivatives asset amunt is the greater f: Zer; and The Cvered Cmpany s ttal derivatives asset amunt (as described in the rw immediately belw) less the Cvered Cmpany s ttal derivatives liability amunt (as described in the rw immediately belw). The Cvered Cmpany s NSFR derivatives liability amunt is the greater f: Zer; and The Cvered Cmpany s ttal derivatives liability amunt (as described in the rw immediately belw) less the Cvered Cmpany s ttal derivatives asset amunt (as described in the rw immediately belw). The Cvered Cmpany s ttal derivatives asset amunt is the sum f the Cvered Cmpany s derivatives asset values (as described in the rw immediately belw) fr each derivative transactin nt subject t a QMNA and each QMNA netting set. The Cvered Cmpany s ttal derivatives liability amunt is the sum f the Cvered Cmpany s derivatives liability values (as described in the rw immediately belw) fr each derivative transactin nt subject t a QMNA and each QMNA netting set. Fr each derivative transactin nt subject t a QMNA and each QMNA netting set: The derivatives asset value is equal t the asset value t the Cvered Cmpany, after taking int accunt certain variatin margin received 6 by the Cvered Cmpany. The derivatives liability value is equal t the liability value t the Cvered Cmpany, after taking int accunt any variatin margin prvided by the Cvered Cmpany. 6 This includes cash variatin margin received by the Cvered Cmpany that meets the cnditins f.10(c)(4)(ii)(c)(1) thrugh (7) f the supplementary leverage rati rule.