The Fed’s Finalized Liquidity Reporting Requirements

On November 13^th, the Federal Reserve Board (FRB) finalized liquidity reporting requirements for large US financial institutions and US operations of foreign banks (FBOs). [1] The requirements were proposed last year and are intended to improve the FRB’s monitoring of the liquidity profiles of firms that are subject to the liquidity coverage ratio (LCR) [2] and their foreign peers, and to enhance the FRB’s view of liquidity across institutions.

1. No reprieve for US GSIBs and their foreign peers. The finalized requirements provide no relief for US firms that the FRB considers most risky (i.e., global systemically important banks, or GSIBs) and FBOs with large US operations. [3] These firms must still submit daily reports on a T+2 basis (i.e., two days after the as-of date of the report). Furthermore, under the final requirements these firms must submit their first daily reports on December 16, 2015, giving them only a month to prepare. This requirement is considerably more stringent than the proposed version, which provided a longer compliance window and an initial three-month period during which reporting would only have been needed once a month.
2. Relief provided for large non-GSIBs. While the final requirements generally retain the proposal’s level of reporting granularity, they provide some relief for large non-GSIBs with respect to reporting frequency and timing of submissions. Most notably, US firms with $250 to $700 billion in total assets (or foreign exposure of $10 billion or more) and their foreign peers of similar size [4] now have to submit their liquidity report on a monthly basis, rather than daily. The timing of these submissions has also changed from T+2 to T+15 for the first six months after the compliance date. Finally, these firms now have more time to prepare for compliance by 2017, as opposed to the proposal’s 2015 start date.
3. Smaller firms also given relief. In addition to their larger non-GSIB peers, submission timing has also been relaxed for smaller institutions—from T+2 to T+15 for the first six months after compliance and from T+2 to T+10 thereafter. Also, compliance is not required for these firms [5] until 2017 (as opposed to 2016).
4. Definitional changes require significant revisions to reporting templates. The final requirements come with improved instructions for calculating and reporting liquidity by clarifying definitions of certain assets, counterparty types, maturity buckets, and encumbrances (see the Appendix of the complete publication, available here, for a complete list of these revisions). However, this additional clarity brings additional cost, especially for the largest firms that have to rebuild reporting templates to account for the revised definitions by their December 16^th compliance deadline.
5. Compliance challenges are reduced by definitional alignment with the LCR. The final requirements’ definitions of certain assets align with the LCR regime. For example, investment grade general obligation US municipal securities, which were excluded under the proposed revisions, are now categorized as Level 2b liquid assets, in line with proposed changes to the LCR from earlier this year. This alignment meets the reporting requirements’ dual purpose—i.e., to provide the FRB with a consolidated view of liquidity within and across firms, and of compliance with the LCR. To make compliance easier, the FRB has also provided a “cheat sheet” that outlines the relationship between elements on the new reporting forms and the LCR. [6]
6. Final requirements strengthen the case for robust data infrastructure and models. Given the significant effort involved in meeting the final reporting requirements, firms may initially consider short-term, tactical data solutions. However, given the FRB’s rising bar on data granularity and accuracy in the context of other supervisory exercises (e.g., CCAR), firms should instead consider strategic solutions that can improve their overall data quality. This includes overhauling data infrastructure, enhancing data and model governance, and upgrading analytics capabilities. Larger firms have already received guidance around these efforts via the Basel Committee’s Principles of Effective Risk Data Aggregation and Risk Reporting that was issued in January 2013 with expected implementation by GSIBs in 2016. Smaller firms, although not within the scope of the Basel standard, should also consider adopting these principles given the likelihood of expectations “trickling down” in the future, as already evidenced in the FRB’s assessments of firms’ CCAR plans.
7. Nationality is not important under the FRB’s risk-based approach. The final requirements take another step toward bringing the FRB’s expectations of FBOs in line with those of US institutions. This is done mainly by categorizing US firms and FBOs based on the same indicators of systemic risk (e.g., total assets), as opposed to the proposed categorization criteria that included US broker-dealer assets for FBOs. This change is consistent with the FRB’s supervisory approach in other areas such as CCAR and market risk model approvals, and continues to send the message that FBOs should no longer assume deferential treatment by the FRB.
8. Action is delayed for nonbank SIFIs. Consistent with the FRB’s policy of tailoring its supervisory requirements for designated nonbank systemically important financial institutions (nonbank SIFIs), these firms are not yet subject to the final requirements. Instead, these institutions will likely become subject to specific liquidity reporting requirements at a later date, once the FRB issues and finalizes orders implementing enhanced prudential standards (EPS) and other regulations for nonbank SIFIs. Regardless, we recommend that nonbank SIFIs start assessing their liquidity risk aggregation and reporting capabilities to identify potential gaps. At a minimum, this will prepare them for developing detailed implementation plans when the EPS requirements do take shape.
9. The FRB will continue to pressure large non-GSIBs to improve their liquidity risk management processes. Reading between the lines of the FRB’s release, regulators appear to believe that they overestimated the efficacy of the liquidity risk management framework at the less systemically risky institutions. [7] Therefore, we expect that the FRB and other supervisors to leverage horizontal liquidity exercises such as the comprehensive liquidity assessment and review (CLAR) to focus on these firms’ data management and reporting processes.
10. Now is the time to get to work. While the final liquidity reporting requirements provide some relief to non-GSIBs, these institutions should not take much comfort in their now elongated compliance windows. We expect the FRB to issue several regulations over the next few months (including the long-awaited net stable funding ratio [8]). Along with upcoming compliance dates for EPS and LCR rules, these regulations will certainly require the immediate attention of affected firms. They should start planning their compliance approach to the new reporting requirements now, in order to have sufficient time to implement strategic, rather than tactical, compliance solutions.

The complete publication, including Appendix, is available here.

Endnotes:

[1] The affected reports are forms FR 2052a and FR 2052b.
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[2] See PwC’s First take: Liquidity coverage ratio (September 2014).
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[3] This group includes the eight US G-SIBs, as well as the consolidated US operations of Credit Suisse, Deutsche Bank, UBS, and Barclays.
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[4] These foreign peers are FBOs with US assets of $250 billion or more that are not subject to the FRB’s large institution supervision program (or LISCC).
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[5] These are US firms with total assets between $50 and $250 billion and FBOs with US operations of the same size that are not part of the LISCC program.
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[6] While the FRB advises firms to use this cheat sheet at their own discretion, it also makes clear that the information collected via the reports will be used to monitor compliance with the LCR, as well as to identify and analyze systemic and idiosyncratic liquidity risk issues at reporting firms and across the financial system.
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[7] These are firms that are not subject to the FRB’s LISCC program.
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[8] See PwC’s First take: Basel’s final NSFR (November 2014).
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