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From Banking and Finance Law Daily, June 27, 2014

Fed publishes FAQs on enhanced prudential standards

By Andrew A. Turner, J.D.

The Federal Reserve Board has issued responses to frequently asked questions to provide guidance on the implementation of Reg. YY—Enhanced Prudential Standards (12 CFR Part 252), which imposes enhanced prudential standards on foreign banking organizations (FBOs) with substantial U.S. operations. The FAQs are based on questions received by Fed staff during an industry outreach call and other questions received from FBOs. The questions have been grouped into categories: implementation plan, U.S. structure, regulatory reporting, capital adequacy, capital stress testing, risk management, and liquidity.

The Fed will respond to specific questions submitted by firms and may issue future FAQs. However, Fed staff does not anticipate issuing further guidance on the implementation plan.

Scope and level of detail. The Fed said that in its implementation plan, an FBO should assess the extent to which it is currently in compliance with the structural, capital, risk management, and liquidity requirements that come into effect on July 1, 2016; describe the actions that the FBO must take to come into compliance and provide a timeline for such actions; and identify any obstacles or impediments that may affect the FBO's ability to come into compliance, and discuss how the FBO plans to address those obstacles/impediments. For example, an FBO should:

  • discuss plans for the accretion, transfer, or raising of capital, if necessary to come into compliance with the final rule's requirements;

  • discuss plans to address any liquidity shortfalls, which may include actions to lengthen the term of third-party funding or of intra-company loans or plans for the FBO to contribute highly liquid assets to its U.S. operations;

  • discuss plans for development of management information systems that can aggregate risk metrics across the combined U.S. operations, such as liquidity data; and

  • describe the projected structure, roles, and responsibilities of the U.S. risk committee, including how that risk committee will interact with the larger global operations and how the firm will avoid potential conflicts of interest.

The plan should include detail that is sufficient to allow Fed staff to assess whether it is reasonable and achievable. The length of the plan will vary among firms, depending on several factors. Those factors include the structural and legal complexity of the FBO's combined U.S. operations, the number of exemption requests, the extent to which the FBO must take actions to come into compliance, and the number of obstacles that the FBO faces related to compliance.

FBOs should consider providing an executive summary for those areas of the plan that require a lengthy discussion and providing supporting documents and exhibits in order to facilitate review of the plan. Fed staff will review the FBO's implementation project plans through the normal supervisory process to ensure that FBOs are progressing toward full compliance.

Risk management. The plan should include a description of the proposed structure of the risk committee for the FBO's combined U.S. operations and the intermediate holding company (IHC) risk committee, a description of the proposed placement and responsibilities of the U.S. chief risk officer, and a description of how the FBO will come into compliance with the risk management requirements.

Regulatory reporting. Fed staff is in the process of developing a notice that would set forth the initial reporting period for all IHC required regulatory reports, including the Capital Assessments and Stress Testing (FR Y-14) reporting form series. The staff is also in the process of developing proposed changes to regulatory reports that would include new line items in reporting forms such as the Capital and Asset Report for Foreign Banking Organizations (FR Y-7Q) and the Annual Report of Foreign Banking Organizations (FR Y-7) reporting forms.

The Fed has not finalized reporting requirements for IHCs to support the supervisory stress test. However, IHCs should consider preserving information required to be reported on the Capital Assessments and Stress Testing (FR Y-14) reporting form with a data history to the extent that preserving this information may reduce the burden of providing such information in the future.

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