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tkelley on DSKBCP9HB2PROD with PROPOSALS

Federal Register / Vol. 86, No. 5 / Friday, January 8, 2021 / Proposed Rules b. Spread Duration of Unsecured Debt To Spread Duration of Assets Requirement The proposed rule would include a second long-term requirement that measures the ratio of the spread duration of an Enterprises unsecured debt to the spread duration of its retained portfolio assets. FHFA
recognizes that effective duration is often defined as the percentage change in the price of financial instruments with embedded options from a 100-basis point change in interest rates. Financial instruments with positive duration increase in value as interest rates decline. Conversely, financial instruments with negative duration increase in value as interest rates rise.
FHFA also recognizes that spread duration is often defined as the percentage change in the price of financial instruments from a change in spread over the benchmark interest rates. Unlike effective duration, spread duration is typically calculated by discounting of an instruments cashflows, and not by the affecting a change of the underlying cashflows themselves due to optionality. This discounting impact creates a measure that is typically positive, where the instrument increases in value as spreads decline and decrease in value as spreads widen.
Under the proposed rule, the numerator of the ratio is the threemonth moving average of the daily spread duration of all Enterprise unsecured debt. The denominator of the ratio is the three-month moving average of the daily spread duration of all Enterprise retained portfolio assets. The proposed rule would require that this ratio exceed 0.6 or 60 percent.
The numerator is the three-month moving average of the daily spread duration of all Enterprise unsecured debt. The daily spread duration of all Enterprise unsecured debt on a particular day equals the weighted average of the individual spread duration for each unsecured debt instrument weighted by the product of the UPB and the market price for the unsecured debt instrument for that day.
Determining the spread duration for all unsecured debt requires that an appropriate estimate be made for each unsecured debt instrument. In addition, using a three-month moving average for the weighted balance sheet spread durations reduces potential impact of daily fluctuations on compliance management. The three-month moving average of the daily spread duration of all Enterprise unsecured debt is equal to the sum of the daily spread duration for
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all Enterprise unsecured debt for each business day over the three-month period preceding the calculation date divided by the total number of business days during the three-month period.
The denominator is the three-month moving average of the daily spread duration of all Enterprise retained portfolio assets. The daily spread duration of all Enterprise assets on a particular day equals the weighted average of the individual spread duration for each asset weighted by the product of the UPB and the market price for the retained portfolio asset for that day. The three-month moving average of the daily spread duration of all Enterprise retained portfolio assets is equal to the sum of the daily spread duration for all Enterprise assets for each business day over the three-month period preceding the calculation date divided by the total number of business days during the three-month period.
The proposed rule would provide additional assumptions that the Enterprises are to use in the calculation of this long-term liquidity and funding requirement. The proposed rule would allow the Enterprises to make the following adjustments to the spread duration of specific retained portfolio assets and unsecured debt:
For callable unsecured debt, the proposed rule would allow the Enterprises to use the maturity of the callable debt rather than the actual spread duration of the callable debt because the Enterprise does not have the obligation to call the debt early and can, in a liquidity event, decide not to call the bond.
For certain single-family and multifamily loans in the securitization pipeline, the proposed rule would allow the spread duration to be adjusted to better reflect the expected holding period of the loans before securitization and sale of these loans. For example, provided that the actual experience of the Enterprise can support these pipeline securitization assumptions, the proposed rule would allow a singlefamily loan in the securitization process to be assigned a two-month spread duration, and a multifamily loan in the securitization pipeline to be assigned a six-month spread duration. FHFA
supervision teams will evaluate the underlying support for key assumptions, like this spread duration assumption, as part of ongoing supervisory activities.
For certain trust structures, like those that are consolidated for GAAP
purposes or credit risk transfer related trusts, the proposed rule would allow certain trust related assets to be excluded, as the trust structures are not funded by unsecured corporate debt but
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rather by debt issued by the trust and backed by the assets in the trust. In essence, the debt issued by MBS trusts and the loans in the MBS trusts that secure the debt are closely matched and the Enterprise does not have funding risk and thus these assets and liabilities are not included in this spread duration requirement. Similarly, certain credit risk transfer trusts, created by Fannie Mae Connecticut Avenue Securities Credit-Linked Notes and Freddie Mac Structured Agency Credit Risk CreditLinked Notes are not included in this spread duration requirement. For the original credit risk transfers that did not include a credit-linked note structure, the Enterprises are required to include those as they represent unsecured debt issued by the corporation.
The proposed rule would allow the Enterprises to exclude high quality liquid assets held in the liquidity portfolio from the denominator of the calculation because these assets are deemed to be liquid securities that do not require term funding and can be readily liquidated into cash. Similarly, the collateral used to post as initial margin is excluded from the spread duration asset calculation for this requirement.
Question 14. FHFA requests comment on whether the spread duration requirement appropriately addresses the concerns noted above, or whether there are alternative approaches to do so?
Does the value of including the spread duration requirement exceed the costs and complexity of the calculation?
c. Funding From Stockholders Equity Under the two longer-term proposed requirements, the Enterprises would be required to identify the maturity of unsecured debt instruments based on their contractual maturity. Other balance sheet sources of funds, like stockholders equity, typically do not have a contractual maturity. In the case of stockholders equity, the proposed rule treats these funding sources as short-term funding substitutes and does not attribute any maturity to these sources of funds beyond one year.
Question 15. FHFA requests comment on whether some portion of stockholders equity should be considered as a longer-term funding source for the long-term liquidity and funding requirements? If so, why? If so, what analytics would support this assumption?
C. Temporary Reduction of Liquidity Requirements FHFA recognizes that during periods of economic dislocation or market stress, it may be necessary for an
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