June 7, 2019

Via Electronic Mail
Chief Counsel’s Office
Office of the Comptroller of the Currency
400 7th Street, SW, Suite 3E-218
Washington, D.C. 20219

Ann E. Misback, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, D.C. 20551

Robert E. Feldman, Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington D.C. 20429

Re: Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations (Docket ID OCC–2018–0019 and RIN1557–AE38; FRB Docket No. R–1655 and RIN 7100 AF43; FDIC RIN 3064–AE79)

Ladies and Gentlemen:
The Bank Policy Institute, the Financial Services Forum and the Securities Industry and Financial Markets Association (the “Associations”)1 welcome the opportunity to comment on the agencies’ proposal2 addressing the regulatory capital treatment of advanced approaches firms’ investments in certain unsecured debt instruments of U.S. GSIBs, foreign GSIBs and the U.S. IHCs of foreign GSIBs (“Covered IHCs”), including debt that qualifies as total loss-absorbing capacity (“TLAC”) but does not qualify as regulatory capital (“TLAC-eligible debt”).

The Associations strongly support the maintenance of robust capital by all banking organizations as an essential tool for promoting safety and soundness. The Associations also appreciate the importance of the agencies’ objective of addressing risks that could arise from the failure of a GSIB, including interconnectedness risk. The proposal could, however, significantly constrain the ability of advanced approaches firms to make markets in TLAC-eligible debt and other debt instruments issued by U.S. GSIBs, foreign GSIBs and subsidiaries of foreign GSIBs, including Covered IHCs. Although the proposal would significantly expand the scope of instruments subject to the deductions framework, it would not recalibrate the general 10% threshold for non-significant investments. In addition, although the proposal includes a separate 5% threshold intended to facilitate market-making activity, the design and calibration of the threshold would prevent it from achieving its intended purpose. The absence of appropriately designed and calibrated thresholds for market-making activity would negatively affect the liquidity and (from the issuer’s perspective) price of TLAC-eligible debt, as well as market efficiency and GSIBs’ ability to issue TLAC-eligible debt quickly, including in times of financial stress. We are also concerned that the proposal would impose requirements on advanced approaches firms that would be complex and impracticable to implement and that the breadth of debt instruments subject to potential deduction could have the unintended consequence of interfering with ordinary interbank transactions.

Many aspects of the U.S. bank regulatory framework already address interconnectedness and other risks relating to a GSIB’s failure. The proposal would be only one of a number of regulatory requirements to do so. Among the other requirements are single counterparty credit limits, restrictions on default rights in qualified financial contracts, mandatory clearing requirements and margin requirements for uncleared swaps, as well as requirements relating to recovery and resolution planning, TLAC, capital (including the GSIB surcharge), liquidity and stress testing. These other requirements have contributed to substantial reductions in the risks the proposal is intended to address, and the agencies should take the broader regulatory framework into account when assessing the design and calibration of the proposed deductions.

We provide in this letter a number of recommendations that would allow the final rule to address interconnectedness and other risks relating to a GSIB’s failure more appropriately. Our recommendations would further the policy objectives of efficiency and simplicity in regulation.3 Our recommendations would also facilitate the ability of advanced approaches firms to engage in market-making activity, which supports the depth and liquidity of markets for TLAC-eligible debt. In particular, our recommendation regarding the proposed 5% threshold would mitigate the potential pro-cyclicality of the proposed deductions framework as it relates to the negative impact on liquidity of TLAC-eligible debt of the proposed deductions during periods of financial stress. During periods of financial stress, an advanced approaches firm’s capital may decline. Because the thresholds are based on a firm’s capital, a decline in capital would correspondingly reduce the size of the threshold and, therefore, the advanced approaches firm’s capacity to serve as a market maker. Market making is critical to the maintenance of orderly, deep and liquid markets during times of financial stress. Limiting an advanced approaches firm’s ability to serve as a market maker during periods of financial stress could exacerbate adverse market conditions.

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1 See Annex A for a description of each of the Associations.
2 84 Fed. Reg. 13814 (Apr. 8, 2019).
3 See, e.g., Federal Reserve, Supervision and Regulation Report (May 2019), at 1-2, available at https://www.federalreserve.gov/publications/files/201905-supervision-and-regulation-report.pdf.