Regulatory reporting elements of new proposed rules on physical commodities and capital planning

Although large banking organizations are likely aware of the Federal Reserve Board’s (FRB) recent proposed rules to impose prudential requirements and limitations on certain physical commodity activities1 and modify the capital planning and stress testing rules for “large and noncomplex” firms,2 they may not have paid sufficient attention to the regulatory reporting components of the proposals.

Importantly, these two proposals would make changes to the following reports:

  • FR Y-9C, which collects consolidated financial statements for holding companies;
  • FR Y-9LP, which collects parent-only financial statements for large holding companies; and
  • FR Y-14A/Q/M series related to capital assessments and stress testing.

In addition to understanding the impact of the FRB’s proposals on their businesses, covered US and foreign banking organizations should carefully review the proposed changes to these key regulatory reports and understand what actions are required in order to comply.

Commodities

In order to improve transparency related to the physical commodities activities of financial holding companies (FHCs), the FRB proposes to add a new Schedule HC-W, Physical Commodities and Related Activities, to the FR Y-9C that would collect detailed information about such holdings.  Among other things, FHCs would be required to report the total fair value of categories of their petroleum, natural gas, coal, and uranium holdings, as well as holdings of “all other physical commodities.”  The new schedule would also require disclosure of infrastructure assets held under section 4(o) of the Bank Holding Company Act and investments in covered commodity merchant banking investments.

In addition, the proposal would add data items to Schedule HC-R, Part II, Risk-Weighted Assets, which would report the risk-weighted asset amounts associated an FHC’s engagement in covered physical commodity activities.

Notably, the FRB proposes to make the information reported publicly available, but would allow an FHC to request confidential treatment if it believes that disclosure would result in substantial harm to its competitive position.

As the FRB considers a final rule, it will consider public comment until December 22, 2016 on (1) to what extent the proposed regulatory reporting amendments would improve transparency, (2) how well the proposed changes capture FHCs’ physical commodities activities, and (3) what other information, if any, it should consider collecting for public reporting purposes to “enhance market discipline and public understanding of FHCs’ physical commodities or merchant banking activities.”3

To the extent firms have commodities and meet the criteria to report, firms should ensure that the data are available to meet the FRB reporting requirements. For example, questions that should be asked include: does the data for these contracts fit into the definitions outlined in the proposal, and are these data available across legal entities that meet the FRB reporting requirements?

Capital planning and stress testing

FR Y-9LP

In connection with its proposal to modify the Comprehensive Capital Analysis and Review (CCAR) and stress testing programs for the 2017 cycle by removing a new category of firms (i.e., large and noncomplex firms (LNFs)) from the qualitative assessment of CCAR, the FRB proposes to amend the FR Y-9LP to include a new line item for purposes of identifying these firms.

Specifically, the proposal defines LNFs as a bank holding company or an intermediate holding company of a foreign banking organization with total assets of between $50 billion and $250 billion, on-balance sheet foreign exposure of less than $10 billion, and total nonbank assets of less than $75 billion.

Although the FRB already has regulatory reports that address the first two thresholds, it proposes adding a line item on the FR Y-9LP to identify total nonbank assets.  The FRB also notes that, although the FR Y-9LP collects another measure of nonbank assets (line item 15 of the PC-B Memoranda), the proposal differs in several ways, including by (1) excluding assets of an insured industrial bank, federal savings association, federal savings bank, or thrift institution; (2) including assets of an Edge or Agreement Corporation designated as “nonbanking”; and (3) including the fair value of an investment in an unconsolidated nonbank company that is held directly by the holding company.

Importantly, the FRB seeks comment on whether a daily, weekly, or monthly average “would be most appropriate for this calculation.”4 For these data, firms should consider the difficulty of the calculation of nonbank assets, particularly the availability of intercompany balances.

The proposed addition would be effective as of March 31, 2017.

FR Y-14s

The proposed rule would also reduce burdens associated with reporting the FR Y-14 schedules for LNFs by raising materiality thresholds for specific portfolios on the FR Y-14Q and FR Y-14M, reducing the scope of the data collection on these firms’ stress test results, and reducing supporting documentation requirements. Firms should continue to monitor potential proposed changes to the FR Y-16 report with respect to possible changes to the documentation requirements for smaller firms,

Among other things, the definition of a “material portfolio” would be revised to mean a portfolio with asset balances of greater than either (1) $5 billion or (2) 10 percent of tier 1 capital, which would allow LNFs to exclude certain portfolios from reporting (in some cases, they may not be required to report certain schedules at all).

In addition, LNFs would no longer be required to complete several elements of the FR Y-14A Schedule A.

Next steps

The proposals are both subject to public comment periods before they can be finalized, ending on November 25, 2016 and December 22, 2016, respectively.  Impacted banks should analyze the proposals and submit comments, either individually or through industry trade associations, as appropriate.

As further developments occur, Deloitte Advisory will issue additional updates as appropriate.

Posted by Dmitry Gutman, Advisory Managing Director, Deloitte & Touche LLP, Irena Gecas-McCarthy, Advisory Principal, Deloitte & Touche LLP, David Wright, Advisory Managing Director, Deloitte & Touche LLP, Chris Spoth, Executive Director of the Deloitte Center for Regulatory Strategy, Deloitte & Touche LLP, Ken Lamar, Independent Senior Advisor to Deloitte & Touche LLP, and Alex LePore, Advisory Senior Consultant, Deloitte & Touche LLP on October 12, 2016


1 Federal Reserve System,“Risk-based Capital and Other Regulatory Requirements for Activities of Financial Holding Companies Related to Physical Commodities and Risk-based Capital Requirements for Merchant Banking Investments,” (September 23, 2016), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160923a2.pdf
2 Federal Reserve System, “Amendments to the Capital Plan and Stress Test Rules,” (September 26, 2016), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160926a1.pdf
3 Commodities, at 53.
4 Capital planning, at 41.

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