Single Counterparty Credit Limits Rule

Market update on SCCL: Implementation challenges and moving forward (2/28/2020)

Since the Federal Reserve Board (FRB) issued final rules on June 18, 2018, to establish the Single Counterparty Credit Limit (SCCL) Rule, the in-scope bank has been busy implementing capabilities to comply with the calculation, reporting, and monitoring requirements. On November 20, 2019, the FRB published the final Instructions for the preparation of the FR 2590 Single-Counterparty Credit Limits Reporting Form, which will be effective in March 2020. Be on the lookout for an upcoming publication on the final release of FR 2590.

On October 10, 2019, FRB published final rules that tailor its regulations for domestic and foreign banks to more closely match their risk-based profile categories. The final rules introduced the below changes on banks’ SCCL compliance requirements:

• Application of SCCL requirements for intermediate holding companies (IHCs) of foreign banking organizations (FBOs) is now based on the risk profile of the US IHCs instead of the risk profile of the foreign bank’s combined US operations (CUSO). For some FBOs, this has removed the formal compliance requirements, though given the relevance to overall risk management capabilities there is interest at some FBOs in continuing to move forward with key aspects of implementation.

• The final rules extend the compliance date for US IHCs with less than $250 billion in assets that are subject to Category II or III standards from January 1, 2020, to January 1, 2021. This extension provided additional time for the covered US IHCs to enhance their capabilities to comply with the monitoring and reporting requirements.
  

On November 8, 2019, the FRB proposed to amend the final SCCL rule to extend the initial compliance dates for the CUSO of FBOs by 18 months. The proposed initial compliance dates applicable to the CUSO of an FBO would be July 1, 2021 for an FBO that has the characteristics of a global systemically important bank and January 1, 2022, for any other FBO. The initial SCCL compliance dates applicable to any US IHC of an FBO were not extended. Any US IHC of an FBO is expected to be in compliance with the final SCCL rule as of January 1, 2020, or by July 1, 2020, as applicable per the final SCCL rule.

Reporting requirements for single counterparty credit limits (11/14/2018)

On June 14, 2018, the Federal Reserve Board (FRB) unanimously voted to pass the final rule to establish single-counterparty credit limits (SCCL) for covered large US bank holding companies (BHCs), foreign banking organizations (FBOs), and Intermediate Holding Companies (IHCs), complementing overall capital requirements, which are generally based on the size and nature of a bank’s assets and do not address the risks of concentrated exposures to specific borrowers or counterparties.

In conjunction with the final SCCL rule, the FRB proposed a new report (FR 2590). Comments on the forms and instructions were due by October 5. For institutions that are covered by the SCCL rule, the new FR 2590 collects data each quarter to monitor compliance with the rule. Depending on the size of the reporting institution, the institution may be required to ensure compliance daily. The FR 2590 requires reporters to provide data at a broad, instrument level that is used to calculate the firm’s gross credit exposure and net credit exposure to each of the firm’s top 50 counterparties. The report requires that each filing contain a certification from a CFO on the data integrity of the FR 2590. The FR 2590 is confidential and will not be made available to the public.

This not the first data collection of credit exposure at the counterparty level. Currently, global, systemically important banks (G-SIBs) are reporting a data template with top counterparty data to meet the Financial Stability Board’s (FSB) Data Gaps Phase One requirements, which collects GSIB’s largest counterparties along major risk dimensions. G-SIBs in G-20 countries submit these same data to their home country supervisor. These data are, in turn, sent to the Bank of International Settlements Data Hub which anonymizes these reports to identify significant exposures to a counterparty and sector. It is unclear how the FR 2590 will impact the FSB data collection more broadly for the US G-SIBs.

The first data collection is proposed to be March of 2020 for US and foreign G-SIBs. For other reporters, reporting would start with the third quarter of 2020.

Federal Reserve Board announces final rule to establish SCCL for US BHCs and FBOs (6/21/2018)

The rule represents the first instance of the FRB applying the new enhanced prudential standard (EPS) thresholds to specific classes of institutions as prescribed in the recently passed regulatory relief legislation (S.2155, Economic Growth, Regulatory Reform, and Consumer Protection Act).

Below are the key takeaways from the final rule:

• Regulatory relief legislation thresholds: Consistent with the regulatory relief legislation, the limits in the final rule will apply to all US GSIBs and US BHCs with consolidated assets of at least $250 billion in assets. FBOs with global consolidated assets of greater than $250 billion in assets will be subject to limits as will any of their intermediate holding company subsidiaries (IHCs) that have $50 billion or more in assets. The FRB will consider, at a future date, the extent to which EPS should apply to and be tailored for US BHCs and FBO parents with total consolidated assets between $100 billion and $250 billion. US BHCs and FBOs with less than $100 billion in consolidated assets are excluded from SCCL (Please see the applicability table below).

• US BHCs: Consistent with the proposed rule, US BHCs will be limited to a credit exposure of no more than 25 percent of their Tier 1 capital to a single counterparty. US BHCs considered GSIBs also face a stricter 15 percent of their Tier 1 capital limit on their aggregate net credit exposure to another GSIB or to any nonbank financial company supervised by the FRB (“major counterparty”).

• FBOs: FBOs with more than $250 billion in total consolidated assets at the parent bank level will face a combined US operations (CUSO) limit to a single counterparty equal to 25 percent of the FBO’s Tier 1 capital. IHCs with total consolidated assets (CA) over $50 billion will face a limit for exposures to any counterparty equal to 25 percent of the IHC’s total capital, whereas IHCs with CA between $250 billion and $500 billion will be subject to a limit equal to 25 percent of the IHC’s Tier 1 capital. FBOs considered GSIBs and IHCs with CA greater than $500 billion will also be subject to a stricter limit equal to 15 percent of their respective Tier 1 capital for exposures to major counterparties. Exemption of application of standards at the CUSO level can be received by certifying that comparable standards are being applied by home country supervisors.

• Focus on larger institutions: The rule reinforces the FRB’s practice of establishing heightened standards for domestic and foreign institutions with more than $250 billion in consolidated assets. It is worth noting that the originally proposed threshold criteria of $10 billion in foreign exposures have been dropped in the final rule.

• Credit exposure calculation: The final rule will allow firms to use valuation approaches for certain derivatives and securities financing that have been approved for capital calculation purposes, generally leading to lower values.

• Reporting form 2590: Reporting form FR 2590 will capture the credit exposures of a respondent organization to its top 50 counterparties on a quarterly basis.

• Simplification of exposure limits application: The final rule reflects the principles of simplicity and transparency by defining the firms and counterparties that are scoped into the rule-based on clear and well-understood accounting standards.

• Signals commitment to international standards: FRB’s finalization of this rule is in line with maintaining an alliance with international standards (although the final Basel Committee on Banking Supervision (BCBS) large exposure framework’s compliance date is January 1, 2019).

• Effective date: The US and foreign GSIBs to comply by January 1, 2020, and all other covered companies and covered foreign entities to comply by July 1, 2020.

Contact us