Finalized NSFR: Could Have Been Better, Could Have Been a Lot Worse

Key Takeaways on Final NSFR Rule

  • Implementation date is July 21, 2021
  • Increased harmonization with Basel Standard and parts of EU implementation of the NSFR
  • Recognized the substitutability of Level 1 HQLA securities and cash throughout the regulation and consistent with long standing U.S. banking policies
  • Reduced the gross derivatives add-on
  • Improved treatment of reverse repo involving Level 1 HQLA securities
  • Enriched the treatment of variation margin
  • Acknowledged the durability of affiliated sweep deposits
  • Incorporated changes to the application of the NSFR based on the final tailoring rules
  • Finalized and extending exclusion of the MMLF and PPPLF from the LCR and the NSFR


The Banking Agencies finalized the Net Stable Funding Ratio (NSFR) rule on October 20, 2020 – four years after being proposed in the U.S. and 11 years after its original proposal in Basel.

The NSFR is intended to act as a compliment to the Liquidity Coverage Ratio (LCR) 30-day stress metric and to promote durable funding and liquidity over a one year period. Firms will be required to calculate the ratio and meet the minimum calculation by July 21, 2021 with public reporting beginning in 2023. The U.S. Agencies are expected to propose changes for regulatory reporting in the near term.

Since the original Basel proposal through the final rule, SIFMA has been actively promoting a reasoned implementation of the NSFR to address the burdensome treatment on capital markets products and wholesale funding instruments. SIFMA has questioned the need for the NSFR given the implementation of other U.S. regulations which equally promote stable funding and liquidity such as the G-SIB surcharge, Regulation YY and TLAC.  Recently, SIFMA pushed for greater harmonization with the Basel Standard and, importantly, the European implementation of the rule where a number of departures from the Basel standards could result an uneven playing field for U.S. banks. We believe these actions resulted in a rule which better recognizes – for some products – a more accurate approach and calibration of liquidity and funding risks.

Overview of the Final Rule

Generally, the final rule included some positive refinements, resulting in an NSFR which is not grossly objectionable, although we continue to question the need for the regulation. Some of the material positive adjustments to the final rule:

  • Recognition of Level One HQLA securities as substitutable with cash which reduced the RSFs to 0% for U.S. Treasuries (UST) held in inventory and in reverse repo transactions.
  • For variation margin, the final rule included level 1 HQLA securities as permissible forms of variation margin and removed the same currency requirements for recognition of VM and permitted partial VM reduction of derivative asset values.
  • Reduction of the Gross Derivative Liability (GDL) add-on to 5% consistent with EU implementation and Basel national discretion.
  • Refined the treatment of trade date receivables which are accorded a 0% RSF to permit “market standard” settlement periods instead of fixed date settlement periods recognizing various products settle with different timelines & added a 5 business day grace period for failures to settle without a penalty.
  • Recognized the stability of affiliated sweep deposits by increasing ASFs for those deposit types to 95% and 90% depending on how they meet qualifying criteria.
  • Acknowledged that retail brokerage payables had greater durability than what was represented in the NPR and upwardly revised the ASF to 50%.
  • Revised frequency of public reporting from quarterly to semiannually and amended disclosure of a firm’s NSFR to a simple daily average instead of its period end NSFR.

There remain some areas where we believe the U.S. Agencies failed to appropriately calibrate funding and liquidity risks particularly with regards to the economics of capital markets transactions. The areas where the Agencies came to suboptimal outcomes are described below:

  • The final rule excluded any framework for the identification of linked transactions and more importantly, specifically and individually countered arguments supporting the linking of transactions regarding initial margin funding of hedge securities and client short covering.
  • The treatment of securities financing transactions involving Level 2A securities where the NSFR maintained the Basel treatment of a 15% RSF whereas the EU adopted only a 5% RSF.
  • The treatment of deposits where the final rule:
    • Precluded non-regulated fund deposits from the definition of “operational deposits” and maintained a 50% ASF;
    • Did not assign a 100% ASF to broker retail deposits greater than one year and rather maintained a 90% ASF;
    • Continued to assign a 50% ASF to brokered transactional accounts with maturities between 6 months and one year; and;
    • Providing no improvement to ASF calibration for nonaffiliated brokered sweep deposits subject to contractual prioritization, however, the rule did state that the treatment of sweep deposits would be reviewed in the future.
  • Failed to reduce the RSF factors for segregated client assets.
  • Continued to treat off balance sheet collateral as “on balance sheet” if such collateral is rehypothecated.
  • Failed to consider remaining maturity in the calibration of long term funding requirements, and;
  • Did not reduce the 85% RSF for riskless principle cleared derivatives transactions.

Application of the NSFR

The US agencies relied on the Fed’s recent tailoring rule and the interagency rule on the application of liquidity and capital requirements to apply the NSFR.  As expected, Category I and II banks are expected to meet the full NSFR requirements. With regards to Category III banks, the agencies used the short term wholesale funding as the determining factor in scaling the NSFR. For Category III firms which maintain short term wholesale funding in excess of $75B, the full NSFR requirement will apply. For those Category III firms whose short term wholesale funding is between $50B and $75B, the NSFR requirement would be modified to 85%.  For Category IV banks with greater than $50B in short term wholesale funding, the NSFR requirement would be modified to 70%. For other firms the NSFR would not apply, however IDIs of Category I-III firms that have greater than $10B in assets would additionally need to meet the NSFR.

Coryann Stefansson is Managing Director and Head of Prudential Capital & Liquidity Policy at SIFMA.