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Federal Register / Vol. 86, No. 5 / Friday, January 8, 2021 / Proposed Rules
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Question 1. Is allowing any amount of unsecured overnight deposits to qualify as highly liquid assets appropriate? If so, is the limitation to banks that are subject to the Federal Reserve Systems FR Y15 reporting requirements and have at least $250 billion in assets appropriate? Would greater or lesser restrictions be appropriate?
2. Non-Allowable Investments and Wrong-Way Risk The proposed rule intentionally limits Enterprise investment in non-mortgage related investments to those high quality liquid assets discussed above. In addition, certain assets that may be highly liquid under normal conditions could experience wrong-way risk and could become less liquid during a period of stress and would not be appropriate for consideration as high quality liquid assets. Wrong-way risk is commonly defined as the risk that occurs when exposure to a counterparty is adversely correlated with the credit quality of that counterparty. Securities issued or guaranteed by the Enterprises have been more prone to lose value and, as a result, become less liquid and lose value in times of liquidity stress due to the high correlation between the health of the Enterprises and the health of the housing markets generally. This correlation was evident during the 2008
financial crisis, as most Enterprise unsecured debt and Enterprise MBS
traded at significant discounts for a prolonged period. Because of this high potential for wrong-way risk, the proposed rule would exclude assets issued by the Enterprises from high quality liquid assets.
FHFA understands that most securities issued and guaranteed by the Enterprises consistently trade in very large volumes and generally have been highly liquid. However, the Enterprises remain privately owned corporations, and their obligations do not have the explicit guarantee of the full faith and credit of the United States. The U.S.
banking regulatory agencies have long held the view that obligations of the Enterprises should not be accorded the same treatment as obligations that carry the explicit guarantee of the U.S.
government and, under the U.S. banking regulatory agencies capital regulations, have currently and historically assigned a 20 percent risk weight to their obligations and guarantees, rather than the zero percent risk weight assigned to securities guaranteed by the full faith and credit of the United States.
Similarly, the proposed rule does not allow the Enterprises to lend cash through repurchase agreements secured by agency MBS even through strong
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counterparties, like the FICC. Enterprise MBS, even short-term repurchase agreements secured by agency MBS, that may be highly liquid under normal conditions can experience wrong-way risk and could become less liquid during a period of stress. FHFA does not think it would be appropriate to consider agency MBS, or repurchase agreements backed by agency MBS, to be included as a high quality liquid asset for the 30-day liquidity requirement for the Enterprises.
Question 2. Does the proposed exclusion of repurchase agreements secured by agency MBS appropriately address the concerns expressed above?
Are there other ways that FHFA could address those concerns, including wrong-way risk? If so, FHFA encourages commenters to provide historical evidence, including evidence during recent periods of market liquidity stress, of low bid-ask spreads, high trading volumes, a large and diverse number of market participants, and other factors.
3. Operational Requirements for High Quality Liquid Assets Under the proposed rule, to be eligible to be included as a high quality liquid asset, an asset would need to meet the following operational requirements. These operational requirements are intended to better ensure that an Enterprises high quality liquid assets can in fact be liquidated in times of stress. Several of these requirements relate to the monetization of an asset, by which FHFA means the receipt of funds from the outright sale of an asset or from the transfer of an asset pursuant to a repurchase agreement.
First, an Enterprise would be required to have the operational capability to monetize the high quality liquid assets.
This capability would be demonstrated by: 1 Implementing and maintaining appropriate procedures and systems to monetize the asset at any time in accordance with relevant standard settlement periods and procedures; and 2 Periodically monetizing a sample of high quality liquid asset that reasonably reflects the composition of the covered companys total high quality liquid asset portfolio, including with respect to asset type, maturity, and counterparty characteristics. This requirement is designed to ensure an Enterprises access to the market, the effectiveness of its processes for monetization, and the availability of the assets for monetization and to minimize the risk of negative signaling during a period of actual stress. FHFA would monitor the procedures, systems, and periodic
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sample liquidations through its supervisory process.
Second, an Enterprise would be required to implement policies that require all high quality liquid assets to be under the control of the management function of the Enterprise that is charged with managing liquidity risk.
To do so, an Enterprise would be required either to segregate the assets from other assets, with the sole intent to use them as a source of liquidity, or to demonstrate its ability to monetize the assets and have the resulting funds available to the liquidity risk management function without conflicting with another business or risk management strategy. This requirement is intended to ensure that a central function within the Enterprise has the authority and capability to liquidate high quality liquid asset to meet its obligations in times of stress without exposing the Enterprise to risks associated with specific transactions and structures. There were instances at specific firms during the 2008 financial crisis where unencumbered assets of the firms were not available to meet liquidity demands because the firms treasury functions were restricted or did not have access to such assets.
Third, an Enterprise would be required to implement and maintain policies and procedures that determine the composition of the assets in its high quality liquid asset portfolio on a daily basis by: 1 Identifying where its high quality liquid assets are held by legal entity, geographical location, currency, custodial or bank account, and other relevant identifying factors; and 2
Determining that the assets included as high quality liquid assets for liquidity compliance continue to qualify as high quality liquid assets under the proposed rule.
FHFA notes that assets that meet the criteria of high quality liquid assets and are held by an Enterprise as trading, available-for-sale, or held-tomaturity can be included as high quality liquid assets, regardless of such designations.
4. Cash Flows The proposed rule would require the Enterprises to meet the following cash flow-based metrics by holding high quality liquid assets as defined above that equal or exceed, under the seven stressed cash flow scenarios described below, the following:
30-day Requirement. The 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
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