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Federal Register / Vol. 86, No. 123 / Wednesday, June 30, 2021 / Proposed Rules COVID19 pandemic.38 For example, in March 2020, Commercial paper CP and Certificate of deposit CD markets both became stressed.39 Under normal market conditions, secondary trading volume in CP and CD markets is limited as most investors purchase and hold these short-dated instruments to maturity. However, in March 2020, as some market participants, including money market mutual funds and others, may have sought secondary trading, they experienced a frozen market. For liquidity purposes, both secondary trading and new issuances of CP and CD
halted for a period of time during the pandemic.40
FCAs existing definition of marketable in 615.5134d makes an exception for money market instruments. Specifically, 615.5134d4 exempts money market instruments from the requirement that investments in the liquidity reserve must be easily bought and sold in active and sizeable markets without significantly affecting prices.
Additionally, money market instruments are not subject to FCAs investment portfolio diversification requirements and are not limited in the liquidity reserve requirement.41 To evaluate the type of instruments and definitions allowed under the FCA
liquidity framework, we are seeking comment to determine if we should align the instruments in FCAs liquidity reserve requirement with the FBRAs HQLA framework.
13. Given the risks of money market instruments and diversified investment funds and that the FBRAs do not consider these instruments to be high quality liquid assets, why should FCA
continue to permit these instruments to be included in an FCS banks liquidity reserve? If you believe that we should continue to allow money market instruments and diversified investment funds in the liquidity reserve requirement, how could FCA mitigate the risks they pose?
14. What factors should FCA consider in evaluating the risk of money market instruments and diversified investment funds in the context of the total liquidity reserve requirement?
15. Should FCA consider limiting money market instruments and
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38 See
79 FR 61440, 61465 October 10, 2014 and Financial Stability Boards COVID19 Pandemic:
Financial Stability Impact and Policy Responses;
Report submitted to the G20. November 17, 2020.
39 Both CP and CD are included in FCAs definition of money market instruments.
40 See SECs Division of Economic and Risk Analysis U.S. Credit Markets Interconnectedness and the Effects of the COVID19 Economic Shock.
October 2020.
41 See 615.5133f3iii.

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diversified investment funds included in specific levels in the liquidity reserve to mitigate concentration risk? Please explain your reasoning.
FCAs Liquidity Reserve and HighQuality Liquid Assets in Liquidity Coverage Ratio The FBRAs HQLA allowed in the LCR differ from liquid assets allowed in FCAs liquidity regulation. FCAs regulation allows certain instruments to qualify as liquid assets even though they are excluded from the LCR, such as investment company shares mutual funds and money market funds.
However, the LCR allows certain instruments to be included in HQLA
that are excluded from FCAs liquidity regulation, such as municipal obligations and certain corporate bonds.42 There are also certain instruments in HQLA that System banks do not have the authority to purchase.43
FCAs regulation also differentiates liquid assets by tenor while the LCR
does not. Additionally, the LCR applies more substantial discounts or haircuts to HQLA than FCAs liquidity regulation applies to the same assets.
The FRBAs also limit certain assets to a percentage of the total eligible HQLA
amount, whereas FCA does not. To evaluate this further, we are seeking comment to determine if we should consider aligning FCAs existing requirements for liquid assets with the LCRs HQLA.
16. Should FCA consider expanding the instruments eligible under the liquidity reserve to more closely align with the HQLA framework of the FBRAs? If so, which instruments should be considered and how would including the instruments add strength to the existing liquidity framework?
17. Should FCA consider reviewing tenor requirements in its existing liquidity regulations? If so, which instruments should be considered and how would the requirements add strength to the existing liquidity framework?
18. Should FCA consider changing discount values assigned to assets held for liquidity to more closely align with those applied under the LCRs HQLA
framework?
19. Should FCA consider limiting certain assets included in the liquidity reserve to mitigate concentration risk? If 42 System banks can purchase certain municipal securities and corporate bonds under 615.5140a1iiAnon-convertible senior debt securities.
43 Investments such as publicly traded common equity, certain corporate debt securities, and certain other securities are included in the LCR but are not eligible investments under 615.5140.

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so, what assets should be limited and what percent should they be allowed to count towards the reserve requirement?
Liquidity and COVID19
FCS banks withstood the recent economic and financial turmoil from COVID19 with their liquidity intact.
However, both the FCA and FCS
continue to gain insights into the effects that sudden and severe stress have on liquidity at individual FCS institutions and in the entire financial system. For example, in March of 2020, financial markets experienced a flight to cash where demand for cash and the highest quality cash like instruments dramatically increased, while demand and thus prices for less liquid instruments declined.44 System banks are required to adopt a CFP to ensure sources of liquidity are sufficient to fund normal operations under a variety of stress events.45 Such stress events include, but are not limited to market disruptions, rapid increase in loan demand, unexpected draws on unfunded commitments, difficulties in renewing or replacing funding with desired terms and structures, requirements to pledge collateral with counterparties, and reduced market access.
As addressed above, we are reviewing our regulatory and supervisory approaches towards liquidity so that System institutions are in a better position to withstand whatever future crises may arise. As part of our ongoing efforts to limit the adverse effect of rapidly changing economic, financial, and market conditions on the liquidity of any FCS bank, we are seeking comment to determine if we should make updates to our regulations to better prepare for future liquidity crises.
20. How should FCA further incorporate the demand for cash and highly liquid U.S. Treasury securities during times of crisis into the System banks liquidity reserve requirement?
21. What type of updates should FCA
consider to the CFP requirements in 615.5134f?
B. Applicability of the Liquidity Coverage Ratio and Net Stable Funding Ratio System Banks and the LCR and NSFR
For the reasons discussed above, the FCA is exploring whether, and to what extent, the LCR and NSFR should apply to System banks now that the FBRAs 44 See Bank for International Settlements Bulletin No 14 US dollar funding markets during the Covid19 crisisthe money market fund turmoil.
May 12, 2020.
45 See 615.5134f.

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