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Federal Register / Vol. 86, No. 5 / Friday, January 8, 2021 / Proposed Rules
Maintenance of Liquidity and Reserves states that each Enterprise should establish a liquidity management framework, articulate liquidity risk tolerances; and establish a process for identifying, measuring, monitoring, controlling, and reporting its liquidity position and liquidity risk exposures. In addition, Standard 5 includes guidelines for conducting stress tests to identify sources of potential liquidity strain and guidelines for establishing contingency funding plans. The proposed rule amplifies that standard by setting forth detailed regulatory requirements.
Furthermore, FHFAs Corporate Governance regulation specifies obligations of Enterprise management and of the Board of Directors regarding, among other things, Enterprise risk management. See 1239.4a management of a regulated entity is by or under the direction of its Board of Directors, which is ultimately responsible for overseeing the management of the regulated entity.
The Board of Directors of each Enterprise is responsible for approving and maintaining an enterprise-wide risk management program that, among other things, addresses the Enterprises exposure to liquidity risk. See 1239.11a Each regulated entitys board of directors shall approve, have in effect at all times, and periodically review an enterprise-wide risk management program that establishes the regulated entitys risk appetite, aligns the risk appetite with the regulated entitys strategies and objectives . . ..
In developing and adopting this proposed rule, FHFA exercises general regulatory and supervisory authority under section 1311b of the Federal Housing Enterprises Financial Safety and Soundness Act Safety and Soundness Act providing that each regulated entity be subject to the supervision and regulation of the Agency. 12 U.S.C. 4511b. By establishing minimum liquidity requirements and a supervisory framework to address shortfalls and exigencies requiring temporary increases to the required minimum liquidity, the proposed rule supports FHFA in carrying out its duty under section 1313a of the Safety and Soundness Act to oversee the prudential operations of each regulated entity and to ensure that . . . each regulated entity operates in a safe and sound manner, including maintenance of adequate capital and internal controls. 12 U.S.C. 4513a FHFA
duties also include ensuring that the operations and activities of the
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Enterprises foster liquid national housing finance markets. Section 1313a of the Safety and Soundness Act provides maintenance of adequate capital as an example but does not limit the scope of FHFA oversight of Enterprise prudential operations solely to ensuring that the Enterprises maintain adequate capital. Lack of adequate liquidity is a safety and soundness concern in itself but could also affect Enterprise capital. FHFAs oversight of prudential operations necessarily includes oversight of Enterprise liquidity.
The proposed rule also supports FHFA oversight of Enterprise prudential management, including compliance with standards pertaining to adequacy and maintenance of liquidity and reserves. 12 U.S.C. 4513ba5. This regulation is an additional standard on that subject. By implementing FHFA
authority in a manner to permit, during market stress, temporary reductions in required minimum liquidity and, thus, to allow previously built-up liquidity to be deployed during periods of market stress, the proposed rule also supports Congressional intent for FHFA to maintain the continued ability of the Enterprises to accomplish their public missions. 12 U.S.C. 45012; see also 12
U.S.C. 1716 and 12 U.S.C. 1451 note Enterprise public mission includes providing ongoing assistance to the secondary market for residential mortgages . . . by increasing the liquidity of mortgage investments.
Current FHFA regulations do not require the Enterprises to meet a quantitative liquidity standard. Rather, FHFA evaluates the Enterprises methods for measuring, monitoring, and managing liquidity risk on a case-bycase basis in conjunction with its supervisory processes and guidance. On August 22, 2018, FHFA issued Advisory Bulletin AB 201806 titled Liquidity Risk Management. The Liquidity Risk Management AB incorporates liquidity risk management elements consistent with the Basel Liquidity Principles. The Liquidity Risk Management AB also emphasizes the central role of corporate governance, cash-flow projections, stress testing, ample liquidity resources, intra-day funding risk management, and formal contingency funding plans as necessary tools for effectively measuring and managing liquidity risk. However, as guidance, these FHFA
pronouncements are not quantitative and lack the force of a duly adopted regulation.
The proposed rule would enhance the supervisory efforts and liquidity risk management practices described in AB
201806, which are aimed at measuring
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and managing liquidity risk, by implementing four minimum quantitative liquidity requirements. The proposed rule would establish a minimum short-term liquidity requirement that would be similar to the LCR approved by the Office of the Comptroller of the Currency, Department of the Treasury OCC, Federal Reserve Board, and FDIC U.S.
banking regulators, with some modifications to reflect characteristics and risks of specific aspects of the Enterprises businesses, as described in this preamble.
FHFA notes that the U.S. banking regulators recently issued a final NSFR
rule NSFR final rule that was initially included in the Basel liquidity framework when it was first published in 2010. While the Basel III LCR is focused on measuring liquidity resilience over a short-term period of severe stress, the NSFR final rule is intended to promote resilience by creating additional incentives for banking organizations and other financial companies to fund their activities with more stable sources and encouraging a sustainable maturity structure of assets and liabilities.
Similarly, to encourage the Enterprises to issue appropriate amounts of longerterm debt and maintain a sustainable debt term structure, FHFA is proposing a 365-day intermediate term and two longer-term liquidity requirements to provide quantitative limits on the liquidity and funding risks of the Enterprises. A key objective of these liquidity and funding requirements is to ensure that the Enterprises have sufficient long-term funding to minimize rollover risk and fund lessliquid assets with longer-term debt and thus avoid having to sell such lessliquid assets into distressed markets.
B. Overview of the Proposed Rule FHFA is requesting comment on a proposed rule that would implement four liquidity and funding requirements.
The proposed rule would also require daily reporting to FHFA of the Enterprises liquidity positions and other information, as well as monthly disclosures to the public.
The short-term 30-day requirement is substantially similar to the U.S. banking regulators LCR final rule LCR final rule 3 and would require the Enterprises to maintain a liquidity portfolio composed of high quality liquid assets large enough to cover the 3 See 79 FR 61440 October 10, 2014 Liquidity Coverage Ratio: Liquidity Risk Measurement StandardsOCC 12 CFR part 50; Federal Reserve Board 12 CFR part 249; FDIC 12 CFR part 329.

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