FR Y-15 Reporting Changes Important Implications for Tailoring and Capital Surcharge

FR Y-15 reporting changes Important implications for tailoring and capital surcharge

The Federal Reserve uses the Banking Organization Systemic Risk Report (FR Y-15) to monitor the systemic risk profile of the financial institutions which are subject to enhanced prudential standards under section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, the FR Y-15 is used to

1. facilitate the implementation of the surcharge for global systemically important banks (G-SIBs), 2. identify other institutions which may present significant systemic risk, and 3. analyze the systemic risk implications of proposed mergers and acquisitions 4. determine regulatory requirements, the macroprudential Tailoring Rules for US bank holding companies (BHCs) and intermediate holding companies (IHCs)

The FR Y-15 quarterly report collects systemic risk data from US BHCs, covered savings and loan holding companies (SLHCs),1 and foreign banking organizations (FBOs) with $100 billion or more in combined US assets,2 and any US BHC designated as a global systemically important bank (G-SIB). Note: Thresholds have been revised based on the Tailoring Rule as discussed below. The FR Y 15 is not treated as confidential and is available quarterly from Board of Governors of the Federal Reserve System (the Board).

On September 10, 2019, the Board published a notice requesting public comment on proposed revisions of the FR Y-15.3 The comment period for this notice expires on November 12, 2019. In addition to these changes, the Board has issued the final tailoring rule4 for US BHCs and FBOs. The rule included changes to several reports, including the FR Y-15, to implement the Tailoring Rule. With one exception, the final rule was substantively the same as the draft rule.

FRY-15 revisions from the Tailoring Rule:5

• Removing firms with less than $100 billion from the overall reporting panel • Extending scope of the FR Y-15 to FBOs combined US operations (CUSO). • Adding three memo items to i) Schedule A and H (Total Consolidated Assets (M4), ii) Total Off-Balance Sheet Exposures (M5), and iii) Total Nonbank Assets (M6). Items M4 and M6 will pre-populated from the FR Y 9C and FR Y9LP, respectively, for BHCs and IHCs. For the combined CUSO view, these data will reported by the FBO (see FBO reporting below). • Adding new schedules H through N for FBOs to file the FR Y 15. These schedules mostly replicate schedules A through G • Adding a 2-column format to schedules H and N to capture the IHC and CUSO separately. • For FBOs: • Revising the cross-jurisdictional schedule by adding a new item to capture the number of claims and liabilities of non-US affiliates secured by eligible collateral • Excluding the reporting of average risk weighted assets from the Schedule N for the CUSO.

The Board, in response, has provided a transition period and these changes will be effective with the June 30, 2020 report. Since much of the data is available from other regulatory reports or regulatory requirements, the most significant impact and challenges for building the reporting capability will be for the FBOs to obtain and calculate the FR Y-15 for CUSOs.

Banking organizations will be required to first determine their category under this final rule (using March 31, 2019, June 30, 2019, September 30, 2019, and December 31, 2019 FR Y-15 data). Accordingly, an FBO would be required to comply with the category of standards applied to its CUSO beginning on October 1, 2020. Until that time, IHCs should determine their category under the tailoring framework consistent with the cross-jurisdictional activity schedule on the FR Y-15 that previously applied to them.

Timeline for initial categorizations and reporting under the final Tailoring Rule4

Reporting unit

Combined US US BHC Covered SLHCs US IHC operations

Date for first Submission date of categorization Effective date of Effective date of Effective date of FR Y-15 as-of June under Tailoring final rule final rule final rule 30, 2020 Rule

June 30, 2020 (Top-tier FBO will report the First as-of date for June 30, 2020 June 30, 2020 FR Y-15 on behalf of their US IHC and amended FR Y-15 CUSOs.)

The September proposal contains additional changes to those finalized with the FR Y-15 tailoring changes, which, as proposed, would be for the December 2019 reporting data. Some of the specific proposed changes (effective to the FR Y-15 reports) are: • Adding a four-quarter cumulative amount of all purchases and sales of securities by security type (see table below). These data inputs would include a firm’s own account and purchases and sales from customer accounts. • The proposal adds derivatives to cross-jurisdictional schedule thus significantly increasing the cross- border positions reported What is being changed?6 Proposals to FR Y-15 out Additional details Is the data element reported for public comment somewhere else? 1 Schedule C – These items will include: Potential limited leveragability of Trade Substitutability Indicators • Purchases and sales Reporting and Compliance Engine (TRACE) Adding securities traded in of these securities The FINRA Rule 6700 Series (TRACE) sets the last 4 quarters to the • Purchases and sales forth member trade reporting obligations for memo section for the holding securities that meet the definition of companies own “TRACE-Eligible Security” as defined in Rule Reported in 4 categories: account and 6710(a). customer accounts • Securities issued by • Unless an exception applies, firms are public entities required to report to TRACE their Excludes: • Other fixed income transactions in TRACE-eligible securities Intercompany accounts Securities during the period of time • Listed equities • Committee on prescribed by the rule. • Other securities Uniform Securities • To comply with this requirement, firms Identification must have a process in place to Procedures (CUSIP) determine when a transaction in a netting TRACE-eligible Security has occurred. 2 Schedule D – Complexity Aligns the report with FFIEC 002 - Report of Assets and Liabilities Indicators Account Standard Updates of US Branches and Agencies of Foreign Adding an item for non- (ASU) ASU 2016-017 and Banks trading equity securities the FR Y 9C8 Schedule Q Item 1 with readily available fair values FFIEC 031 and 041 - Consolidated Reports of Condition and Income Schedule RC- Balance Sheet Item2.c 3 Schedule E – Cross- The addition of these No – net new jurisdictional Activity items will significantly Indicators increase the amount cross Adding memo section with jurisdictional positions 5 items. reported on the FR Y15 Foreign derivative claims The item M.1 can come Schedule C, Part II, collects information on on an ultimate risk basis directly from the FFIEC the reporter’s claims on an ultimate-risk (M.1) 009 basis and memorandum items providing additional details related to those claims. But the claims are not segregated to provide details for only derivatives Total cross-jurisdictional M.2 is derived from items M.2 is derived from items on the FR Y-15 claims (M.2) on the FR Y-15 Foreign derivative liabilities Since derivatives are No – net new on an immediate reported on an ultimate counterparty basis (M.3) risk basis on the FFIEC 009, M.3 will require a new reporting process to determine the immediate counterparty. This could cause difficulty since some liabilities may be included M.1 as part of the netting process. Foreign liabilities on an Item M.4 comes directly Column 1-5 Part I of FFIEC009, collects immediate from the FFIEC 009 information on the cross-border claims on counterparty basis (M.4) an “immediate-counterparty” basis. Total cross-jurisdictional Item M.5 is derived from Item M.5 is derived from items on the FR Y liabilities (M.5) items on the FR Y 15 15 Increasing importance

FR Y-15 data is available publicly and increasingly utilized for evaluation of systemic risk factors – both for regulators and for peer analysis. The report has evolved from a report used to monitor systemic risk of individual institutions to now being used more broadly to identify systemic risk in specific markets given the granularity of this reporting. Much of the data also extends financial data into risk and operational data.

Given the significant number of new and unique data elements that have been added, the data flows via the FR Y-15 provided to regulators should be prioritized by chief data officers (CDOs), Finance, Risk and other key stakeholders in a firm who have responsibility for data management and risk and operational data. Review and analysis of this report should be reviewed broadly with senior management and certain key elements with the board.

Reporting elements used for risk-based indicators

The table below shows the specific data elements that are used as risk-based indicators.

Reporting entity

US intermediate Combined US US bank holding holding companies operations (CUSO) companies (IHCs of foreign of foreign banking (BHCs) banking organizations organizations (FBOs)) (FBOs)

FR Y-15, Schedule A, FR Y-15, Schedule H, FR Y-15, Schedule H, Size Line Item M4 Line Item M4, Column A Line Item M4, Column B

Cross- jurisdictional FR Y-15, Schedule E, FR Y-15, Schedule L, FR Y-15, Schedule L, activity Line Item 5 Line Item 4, Column A Line Item 4, Column B

FR Y-15, Schedule A, FR Y-15, Schedule H, FR Y-15, Schedule H, Nonbank assets Line Item M6 Line Item M6, Column A Line Item M6, Column B

Short-term FR Y-15, Schedule G, FR Y-15, Schedule N, FR Y-15, Schedule N, wholesale funding Line Item 6 Line Item 6, Column A Line Item 6, Column B

Off-balance sheet FR Y-15, Schedule A, FR Y-15, Schedule H, FR Y-15, Schedule H, exposure Line Item M5 Line Item M5, Column A Line Item M5, Column B Key takeaways and potential implications on booking model and G-SIB score

• Most of the data collected on the FR Y–15 is made public unless a specific request for confidentiality is submitted by the reporting entity, either on the FR Y–15 or on the form from which the data item is obtained; therefore, this should increase comparability of data across firms that have been tentatively earmarked according to the Tailoring Rule’s “categories” • Increased regulatory focus on cross-jurisdictional booking flows emphasizes board and senior management focus on transparent and well-defined booking models that described what is originated, booked, and risk-managed across legal entities • With continued focus on reviewing G-SIB scores, these new data elements will make the calculation more complex and incorporate elements from multiple sources. • Addition of specific memo items (M.1, M.4) in Schedule E as shown in the table above could result in understanding financial impacts across the US Large Financial Institutions portfolios (LFIs)9 that are monitored by the Board: 1. LFIs that include US BHCs have consolidated cross-jurisdictional claims which increased from $3.4 trillion to $3.6 trillion as of 2019Q1 due to addition of $195 billion foreign derivative claims on an ultimate risk basis (as reported in E16 to show in cross border exposure) in Schedule E of FRY-15 report. 2. Incorporation of total cross-border claims on an “immediate-counterparty” basis (excluding claims from the fair value of derivative products) may require an addition of $3.4 trillion in derivative exposures to the foreign cross-jurisdictional exposures. 3. Monitoring these flows will be important to understand current shifts in the G-SIB score as it carries a weight of 10 percent to calculate the total G-SIB score. Eventually, the change may require the entities to hold additional capital as a higher loss absorbency (HLA) requirement, the amount of which depends on their score.

Proposed cross jurisdictional impact

Limitations in Serial Published Impact understanding and No data applicability 1 E16 The E.1610 (aggregated data from the Federal It is unclear how local Financial Institutions Examination Council (FFIEC) liabilities will be impacted 009) shows cross border exposure for derivatives to for netting or how the be $200 billion (adjusted for US exposure). These impact from netting data are report net of any FIN 39 effect and only on liabilities and claims an ultimate risk basis. should be treated and is subject to more clarification

2 TIC D The Treasury International Capital (TIC) data The report does not allow (aggregate from the TIC D report) which is reported netting and these are on a locational basis (only US offices) and includes reported on an immediate FBOs show $1.7 trillion and $1.8 trillion in the cross- counterparty basis. border exposure respectively for the negative and positive fair value of derivatives. Additionally, TIC data could be used as proxy and the 81% reduction could be applied to show gross and net estimated positions (see below). 3 Call The Call Report data shows that both gross positive N/A Report and negative fair value of derivatives to be $1.9 trillion. These data are consolidated at the bank level and excludes nonbanking entities. These data also include US and cross border and Office of the Comptroller of the Currency (OCC) confirmed that impact of netting reduces these positions by 81%. Despite tailoring, reporting increases

The changes proposed by the regulators will require financial institutions having holding companies (BHCs, SLHCs, and FBOs) with total consolidated assets of $100 billion or more to restructure some of their current reporting process in order to source the required new data: Several of the proposed changes cover information already being collected for other key regulatory reports like the FR Y-9C and the FFIEC 009. However, there are some new requirements such as the addition of trading volume of securities or foreign derivative liabilities on an immediate counterparty basis, which will require financial institutions to define and identify additional data elements and develop new data sourcing processes.

The FR Y-15 report preparation process remains fairly manual across many organizations due to limited capability of extracting information from multiple sources inside the organization. Institutions are still on the journey to continuously improve the report preparation process and subject matter expertise for this particular report is scarce. Given the complex nature of this report, coupled with the new information being requested, proper planning and allocation of resources and time will be required.

Considerations and next steps

Viewing the FR Y-15 reporting process in the same light as some of the core regulatory reports (e.g., FR Y-9C) can help enable the organization to prepare for likely additional scrutiny on data quality and build quality assurance process that include regulatory interpretation and methodology documentation, testing, and monitoring of changes as a result of operating model or product changes.

A dynamic capability is required to assess impacts of reported data that will be utilized to compare actual versus the “thresholds” that are cross-referenced in the Tailoring Rule, as well as changes that could impact a G-SIB score, necessitates understanding sources of data, monitoring their changes and applying strict data governance. This should leverage industry data quality processes that require close partnership between finance, treasury, liquidity, and operations.

Endnotes

1. US bank holding companies and covered savings and loan holding companies more than $100 billion in total consolidated assets. Covered SLHCs are those that are not substantially engaged in insurance or commercial activities. https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-fr-notice-20191010a2.pdf 2. Requires a foreign banking organization to report information described in the FR Y-15 separately for its (i) US intermediate holding company, if any; and (ii) combined US operations https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-fr-notice-20191010a2.pdf 3. FR Y-15 Comment Request: https://www.federalregister.gov/documents/2019/09/10/2019-19522/proposed-agency-information- collection-activities-comment-request 4. FRB”s Tailoring rule: https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-fr-notice-20191010a1.pdf 5. https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-fr-notice-20191010a2.pdf 6. FR Y-15 Schedule post tailoring rule changes: https://www.federalreserve.gov/reportforms/formsreview/FR_Y- 15%20Form%20Revisions%20Tailoring%20Final%2010-10.pdf 7. ASU 2016-01: “Recognition and Measurement of Financial Assets and Financial Liabilities” 8. FR Y-9C: Consolidated Financial Statements for Holding Companies 9. The LFI rating system provides a supervisory evaluation of whether a covered firm possesses sufficient financial and operational strength and resilience to maintain safe-and-sound operations through a range of conditions, including stressful ones https://www.federalreserve.gov/supervisionreg/srletters/SR1903a1.pdf 10. Statistical Releases E.16 Country Exposure Lending Survey and Country Exposure Information Report: https://www.ffiec.gov/E16.htm 11. Some additional resources to consider FBO Landscape: https://www2.deloitte.com/us/en/pages/regulatory/articles/fbo-peer- landscape-for-year-three-of-enhanced-prudential-standards.html; OCC and FRB’s key insights and priorities: https://www2.deloitte.com/us/en/pages/regulatory/articles/frb-occ-semiannual-supervision-risk-regulation-report.html Contacts:

Irena Gecas-McCarthy Richard Rosenthal FSI Director, Center for Regulatory Strategy Senior Manager | Deloitte Risk & Financial Principal | Deloitte Risk & Financial Advisory Advisory Deloitte & Touche LLP Deloitte & Touche LLP [email protected] [email protected]

Dmitriy Gutman Pranav Shanghvi Managing Director | Deloitte Risk & Financial Senior Manager| Deloitte Risk & Financial Advisory Advisory Deloitte & Touche LLP Deloitte & Touche LLP [email protected] [email protected]

Ken Lamar Prateek Saha Independent senior advisor Senior Solution Advisor | Deloitte Risk & Deloitte & Touche LLP Financial Advisory [email protected] Deloitte & Touche LLP [email protected]

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