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tkelley on DSKBCP9HB2PROD with PROPOSALS

Federal Register / Vol. 86, No. 5 / Friday, January 8, 2021 / Proposed Rules sum of: i The highest cumulative daily net cash outflows over 30 calendar days under certain specified stressed market assumptions, including a complete inability of the Enterprises to issue debt;
and ii An excess requirement in the amount of $10 billion.
The intermediate-term 365-day liquidity requirement is designed to promote intermediate-term management of liquidity risks and to encourage an appropriate amount of longer-term funding to reduce debt rollover risks. It is substantially similar to the 30-day requirement and based on similar stressed assumptions, except that certain stressed assumptions last 365
days. The proposed rule would require the Enterprises to maintain a portfolio of high quality liquid assets, together with mortgage-backed securities MBS
eligible to be pledged as collateral to the Fixed Income Clearing Corporation FICC subject to a haircut, large enough to cover the worst daily cumulative net cash outflow over 365
calendar days under those stress assumptions. FHFA proposes not to include an excess requirement in connection with the 365-day liquidity requirement.
The first long-term liquidity requirement is designed to encourage an appropriate amount of long-term unsecured debt to support less-liquid retained portfolio assets so that the Enterprises have the ability to hold such assets for at least a year without having to sell them into potentially distressed markets. Intended to be a simple, transparent metric, this requirement is conceptually similar to the NSFR
proposed rule, recently finalized, and would require the Enterprises to maintain a minimum ratio of long-term unsecured debt to less-liquid assets exceeding 120 percent.4
The second long-term requirement is also designed to encourage the Enterprises to issue an appropriate amount of longer-term unsecured debt to support all retained portfolio assets, not just less-liquid assets. This requirement sets a minimum ratio for the duration of an Enterprises unsecured agency debt over the duration of all its retained portfolio assets and requires that such ratio exceed 60 percent.
As described earlier, the proposed rules four quantitative minimum liquidity requirements build upon the U.S. banking supervision framework.
4 See Federal Register notice, Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements, Federal Reserve Board, October 20, 2020. Access at: https
www.federalreserve.gov/newsevents/pressreleases/
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These new liquidity and funding requirements also build upon existing Enterprise board liquidity risk limits and methodologies used by the Enterprises to assess exposures to contingent liquidity events but are more conservative than the Enterprises existing board risk limits. The proposed rule would also complement existing FHFA supervisory guidance provided in AB 201806, and add to FHFAs standards for safe and sound operations for the Enterprises as set forth in the PMOS.
Given that the Enterprises do not have access to the Federal Reserve Discount Window or a stable customer deposit base, FHFA proposes to define high quality liquid assets as: i Cash held in a Federal Reserve account; ii U.S.
Treasury securities; iii Short-term secured loans through U.S. Treasury repurchase agreements that clear through the FICC or are offered by the Federal Reserve Bank of New York; and iv A limited amount of unsecured overnight deposits with eligible U.S.
banks.
For purposes of the 365-day liquidity requirement only, FHFA proposes to allow the Enterprises to augment the high quality liquid asset portfolio discussed above with cash inflows from pledging FICC-eligible collateral using a repurchase agreement that clears through the FICC as a source of cash to meet the 365-day requirement.
The enterprise-wide cumulative net cash flows includes all daily inflows and outflows of cash from any corporate source and use as detailed below and includes, but is not limited to, mortgage operations that use cash, like MBS
payments to investors, repayment to servicers for advances of principal and interest P&I, advancement of P&I to MBS investors, the daily purchase of loans, and any other uses of cash and excludes any cash inflows from expected unsecured debt issuance.
As further described below, the measure of the enterprise-wide cumulative daily net cash flows is meant to include certain stress events experienced during the recent financial crisis, and to position the Enterprises to continue to provide mortgage market liquidity through such stresses. These stressed cash flow assumptions included in the proposed rule take into account the potential impact of idiosyncratic and market-wide shocks, including those that would result in: 1
A complete loss of the Enterprises ability to issue unsecured debt during the relevant period; 2 An increased cash outflow associated with additional daily single-family and multifamily cash window or whole loan conduit
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purchases to support the mortgage market, particularly small lenders, during a crisis; 3 A decreased cash inflow due to the assumed increase in the number of borrowers who fail to make their scheduled principal, interest, tax, and insurance payments to the servicers under a stressed economic environment; 4 An increased cash outflow requirement to fund delinquent loan buyouts under a stressed economic environment; 5 An increased cash outflow based on the Enterprises best estimate of the collateral needed to be posted to support FICC-related activities for the next month; 6 An increased cash outflow from unscheduled draws on committed liquidity facilities that the Enterprises have provided to their clients related to variable-rate demand bonds; and 7 A decreased cash inflow due to the assumed failure of the Enterprises five top non-bank servicers by unpaid principal balance UPB to make timely principal, interest, and tax, and insurance payments to the Enterprises during the next month under a stressed economic environment.
To determine decreased cash inflows and increased cash outflows due to higher numbers of delinquent borrowers and to higher loan buy-out from MBS
trusts, the proposed rule would require the Enterprises to formulate their projections assuming stressed conditions corresponding to the more severe of FHFAs Dodd-Frank Act Stress Test DFAST assumptions or other supervisory stress assumptions as ordered by FHFA.
The proposed rule also sets forth two long-term liquidity and funding requirements. The objective of these two liquidity and funding requirements is to reduce unsecured debt rollover risk, ensure that the Enterprises maintain sufficient long-term unsecured debt so they do not have to sell less-liquid assets into distressed markets, incent the Enterprises to issue an appropriate amount of long-term unsecured debt, and incent the Enterprises to reduce the amount of less-liquid assets funded by unsecured debt held within the retained portfolio that are not eligible collateral for the FICC.
The proposed rule, as described below, would require each Enterprise to report to FHFA its compliance with the four liquidity requirements daily, along with additional information regarding its liquidity position and assumptions as specified by FHFA. The Enterprises shall submit such reports at the close of each business day, treated as Day 0, reflecting the liquidity positions and other required information as of 6 p.m.
EST on Day 0. Such reports shall include, at a minimum, the key stress
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