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Federal Register / Vol. 86, No. 5 / Friday, January 8, 2021 / Proposed Rules
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experienced during the 2008 financial crisis. During that period, some VRDB
auctions failed and the Enterprises had to step in and provide temporary liquidity under those guarantee arrangements.
The proposed rule would require that the Enterprise assume that there is a cash outflow equal to 100 percent of its existing liquidity facilities related to variable-rate demand bonds on Day 1.
g. Non-Bank Seller/Servicer Shortfalls The proposed rule would require that the Enterprises must assume that their five largest non-bank single-family seller/servicers i.e., those seller/
servicers that do not have funding from depositors by UPB fail to make scheduled principal, interest, tax, and insurance payments on the next scheduled remittance date, i.e., usually by the 18th of the month. Effectively, this reduces the expected cash inflows from the top-five non-bank seller/
servicers and requires that the Enterprises be able to fund such a shortfall using proceeds from the high quality liquid asset portfolio. Experience with the past financial crisis and in the recent COVID19-related stress suggest that non-bank seller/servicers can experience acute financial stress in periods of tight liquidity, which could impose significant losses or delays on Enterprise receipt of P&I and other payments with respect to acquired mortgage loans. The proposed rule would require the Enterprises to hold sufficient high quality liquid assets to ensure that one or more failures by these counterparties would not threaten the Enterprises ability to support housing finance markets through such periods.
This assumption applies only to the first month, as the servicing for these five non-bank servicers is assumed to be resolved in the second month. The proposed rule would allow the Enterprises to assume that such principal, interest, tax, and insurance is repaid by the original seller/servicer on day 61.
Question 9. For the 365-day requirement, should the proposed rule allow for the cash inflow on Day 61
related to the repayment by these five non-bank seller/servicers? Should the proposed rule assume a longer period before repayment?
Question 10. FHFA solicits commenters views on the seven stress scenarios discussed above, their proposed cash outflows and inflows, and the associated underlying assumptions for the proposed treatment.
Are there specific cash inflow or outflow assumptions for other types of transactions that have not been
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included, but should be? If so, please specify the types of transactions and the applicable inflow or outflow rates that should be applied and the reasons for doing so.
7. Unsecured Callable Debt The proposed rule does not require the Enterprises to maintain a liquidity portfolio large enough to fund the cash outflows associated with exercising the call option on all unsecured callable debt that was in-the-money at the close of business on Day 0. Because the Enterprises have the right to call, but not the obligation to call, certain callable debt instruments, the proposed rule would allow the Enterprises to assume that the cash outflow is at maturity of the callable debt and not the next call date.
During the 2008 financial crisis, the Enterprises did not efficiently exercise their right to call debt as the debt markets were not liquid enough for them to replace that debt with similar maturity debt instruments. Similarly, in March 2020 during the COVID19related financial market stress, the Enterprises did not exercise their right to call debt efficiently because they could not reissue similar longer-term debt. Subsequently, after the March 2020 COVID19 stress period, both Enterprises were able to exercise calls on the next available date and replace that called debt with similar callable debt or fixed rate debt at favorable terms.
Question 11. FHFA solicits commenters views on the proposed treatment for Enterprise callable debt.
Specifically, what are commenters views on the proposed provisions that would allow the Enterprises to not call their unsecured callable debt even if it was in-the-money at the close of business on Day 0?
8. Changes in Financial Condition Certain contractual clauses in derivatives and other transaction documents, such as material adverse change clauses and downgrade triggers, are aimed at capturing changes in the Enterprises financial condition and, if triggered, would require an Enterprise to post more collateral or accelerate demand features in certain obligations that require collateral.
The proposed rule would not require an Enterprise to count as an outflow any additional amounts that the Enterprise would need to post or fund as additional collateral under a contract as a result of a change in its financial condition. If the proposed rule did require such an assumption, an Enterprise could calculate this outflow
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amount by evaluating the terms of such contracts and calculating any incremental additional collateral that would need to be posted as a result of the triggering of clauses tied to a ratings downgrade or similar event, or change in the Enterprises financial condition.
Question 12. Should the proposed rule require that the Enterprises hold high quality liquid assets to cover potential increases in collateral needed assuming a significant change in their financial condition?
B. Long-Term Liquidity and Funding Requirements 1. Background The 2008 financial crisis exposed the vulnerability of the Enterprises to liquidity shocks. For example, before the crisis, the Enterprises and many banking organizations lacked robust liquidity risk management metrics and relied excessively on short-term wholesale funding to support less-liquid assets. In addition, the Enterprises and many banks did not sufficiently plan for longer-term liquidity risks, and the risk management and control functions of the Enterprises failed to challenge such decisions or sufficiently plan for possible disruptions to the Enterprises regular sources of funding. Instead, the risk management and control functions reacted only after demand for longer term agency unsecured debt evaporated.
During the crisis, the Enterprises and many banking organizations experienced severe contractions in the supply of funding. As access to longerterm funding became limited, many in the financial markets were forced to sell and as a result certain asset prices, including for private label securities PLS, fell significantly. When prices fell, the Enterprises and many banking organizations faced the possibility of significant capital losses and failure.
The threat this presented to the U.S.
financial system caused the U.S.
government to provide significant levels of support to the Enterprises and many U.S. banks to maintain global financial stability. This experience demonstrated a need to address these shortcomings at the Enterprises and banking organizations and to implement a more rigorous approach to identifying, measuring, monitoring, and limiting reliance on short-term sources of funding that results in additional debt rollover risk.
Since the 2008 financial crisis, FHFA
as noted above has developed qualitative standards focused on strengthening the Enterprises overall risk management, liquidity positions, and liquidity and funding risk
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