On October 30, 2015, the Federal Reserve Board issued its notice of proposed rulemaking relating to U.S. bank holding companies which are G-SIBs and the intermediate holding companies of foreign banking organizations which are G-SIBs. Among other things, U.S. G-SIBs will be required to maintain a minimum amount of unsecured long-term debt and a minimum about of total loss-absorbing capital (“TLAC”).

For readers of this publication, we would point out in particular that eligible external long-term debt instruments would not include most types of structured notes that are currently issued by U.S. bank holding companies. This is due to the broad definition of “structured note” that has been proposed.

For purposes of these provisions, a “structured note” is a debt instrument that:

  • has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of a reference asset or embedded derivative;
  • has an embedded derivative that is linked to one or more reference assets;
  • does not specify a minimum principal amount due upon acceleration or early termination; or
  • is not classified as debt under U.S. GAAP.

As a result, the proposed limitation applies both to principal protected and to non-principal protected structured notes. However, the definition expressly excludes non-dollar dominated instruments, as well as some rate-linked notes, such as floating rate notes linked to LIBOR. (For example, a conventional fixed to floating rate note linked to LIBOR, which is not callable at the option of the issuer, would appear to be eligible for inclusion.)

Since the proposed rules apply at the bank holding company level only, these rules would not impact structured bank notes (issued by a bank subsidiary) or “structured CDs” issued by a bank subsidiary. One also could envision structured notes issued by subsidiaries of the bank holding company, if these are not guaranteed by the relevant bank holding company.

To see our more detailed November 1st client alert relating to these developments, please use the following link: http://www.mofo.com/~/media/Files/ClientAlert/2015/11/151101tlac.pdf