Friday afternoon, the Federal Reserve Board (“Board”) considered and approved in an open board meeting, proposed rules to implement the enhanced prudential standards and early remediation requirements of sections 165 and 166 of the Dodd-Frank Act for foreign banking organizations (“FBOs”), and those foreign nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision. The proposed rules will be out for public comment for 90 days following publication in the Federal Register.
The rules are more than 300 pages in length and, just as in the case with the other significant rule proposals (such as the Volcker Rules), there is a series of questions for which public comments are actively being sought by the Board. The 90-day comment period is unusually long, but evinces the Board’s interest in receiving robust, well-thought-out, and thorough comments, as well as the Board’s recognition of the complexity and significance of the rulemaking. Each of the Board members expressed interest in receiving quality comments and acknowledged the significance of the proposal.
The rules are designed to deal with the risks posed by FBOs to the U.S. financial sector, as well as their significance in the U.S. markets. The rules focus very much on according national treatment and equality of competitive opportunity between the U.S. operations of FBOs and U.S. banking firms. One of the key goals of the Board’s proposal is to harmonize bank capital and liquidity rules globally. Since capital and liquidity are major drivers of these rules, and since the current framework to regulating U.S. operations of FBOs was designed more than a decade ago, this rule rewrite is timely.
The proposed rules engraft much of the Board’s proposed enhanced regulatory rules, along with the capital and liquidity proposals in Basel III, into the supervision of FBOs. In addition, the strength of the supervision and vigor of the risk management, capital and liquidity requirements are calibrated to the FBOs' presence in the United States. Further, an intermediate holding company is being proposed for certain FBOs. That holding company would generally serve as a U.S. top-tier holding company for the U.S. subsidiaries. The proposal also includes an early remediation framework along the lines of Title II of Dodd-Frank for large FBOs to minimize damage to the U.S. financial system and economy in the event an FBO fails.
This is an important set of rules for the 107 FBOs with total global consolidated assets of $50 billion or more. To date, no foreign nonbank financial company has been designated as subject to the U.S. enhanced prudential supervision rules. Reed Smith is available to help in responding to this important set of proposed rules for FBOs. Please contact your Reed Smith relationship contact if you would like such support.