Financial services

FR Y-15 reporting changes—important implications for tailoring and capital surcharge

The Federal Reserve uses the Banking Organization Systemic Risk Report (FR Y-15) to monitor the systemic risk profile of the financial institutions which are subject to enhanced prudential standards under section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, the FR Y-15 is used to:

• Facilitate the implementation of the surcharge for global systemically important banks (G-SIBs),
• Identify other institutions which may present significant systemic risk,
• Analyze the systemic risk implications of proposed mergers and acquisitions, and
• Determine regulatory requirements, the macroprudential tailoring rules for US bank holding companies (BHCs) and intermediate holding companies (IHCs)

The FR Y-15 quarterly report collects systemic risk data from US BHCs, covered savings and loan holding companies (SLHCs),¹ and foreign banking organizations (FBOs) with $100 billion or more in combined US assets² and any US BHC designated as a global systemically important bank (G-SIB). Note: Thresholds have been revised based on the tailoring rule as discussed below. The FR Y-15 is not treated as confidential and is available quarterly from the board of governors of the Federal Reserve System (the board).

On September 10, 2019, the board published a notice requesting public comment on proposed revisions of the FR Y-15.³ The comment period for this notice expires on November 12, 2019. In addition to these changes, the board has issued the final tailoring⁴ rule for US BHCs and FBOs. The rule included changes to several reports, including the FR Y-15, to implement the tailoring rule. With one exception, the final rule was substantively the same as the draft rule.

FR Y-15 revisions from the tailoring rule:⁵

• Removing firms with less than $100 billion from the overall reporting panel
• Extending scope of the FR Y-15 to FBOs combined US operations (CUSO).
• Adding three memo items to i) Schedule A and H (Total Consolidated Assets (M.4), ii) Total Off-Balance Sheet Exposures (M.5), and iii) Total Nonbank Assets (M.6). Items M.4 and M.6 will be pre populated from the FR Y-9C and FR Y-9LP, respectively, for BHCs and IHCs. For the combined CUSO view, these data will be reported by the FBO (see FBO reporting below).
• Adding new schedules H through N for FBOs to file the FR Y-15. These schedules mostly replicate schedules A through G
• Adding a two-column format to schedules H and N to capture the IHC and CUSO separately.
• For FBOs:
  • Revising the cross-jurisdictional schedule by adding a new item to capture the number of claims and liabilities of non-US affiliates secured by eligible collateral
  • Excluding the reporting of average risk-weighted assets from the Schedule N for the CUSO.

The board, in response, has provided a transition period and these changes will be effective with the June 30, 2020 report. Since much of the data are available from other regulatory reports or regulatory requirements, the most significant impact and challenges for building the reporting capability will be for the FBOs to obtain and calculate the FR Y-15 for CUSOs.

Banking organizations will be required to first determine their category under this final rule (using March 31, 2019; June 30, 2019; September 30, 2019; and December 31, 2019 FR Y-15 data). Accordingly, an FBO would be required to comply with the category of standards applied to its CUSO beginning on October 1, 2020. Until that time, IHCs should determine their category under the tailoring framework consistent with the cross-jurisdictional activity schedule on the FR Y-15 that previously applied to them.

Timeline for initial categorizations and reporting under the final tailoring rule⁴

The September proposal contains additional changes to those finalized with the FR Y-15 tailoring changes, which, as proposed, would be for the December 2019 reporting data. Some of the specific proposed changes (effective to the FR Y-15 reports) are:

• Adding a four-quarter cumulative amount of all purchases and sales of securities by security type (see table below). These data inputs would include a firm’s own account and purchases and sales from customer accounts.
• The proposal adding derivatives to cross-jurisdictional schedule, thus significantly increasing the cross-border positions reported.

What is being changed?⁶

Increasing importance

FR Y-15 data are available publicly and increasingly utilized for evaluation of systemic risk factors—both for regulators and for peer analysis. The report has evolved from a report used to monitor systemic risk of individual institutions to now being used more broadly to identify systemic risk in specific markets given the granularity of this reporting. Much of the data also extend financial data into risk and operational data.

Given the significant number of new and unique data elements that have been added, the data flows via the FR Y-15 provided to regulators should be prioritized by chief data officers (CDOs), Finance, Risk, and other key stakeholders in a firm who have responsibility for data management and risk and operational data. This report should be reviewed broadly with senior management and certain key elements with the board.

Reporting elements used for risk-based indicators

The table below shows the specific data elements that are used as risk-based indicators.

Key takeaways and potential implications on booking model and G-SIB score:

• Most of the data collected on the FR Y-15 are made public unless a specific request for confidentiality is submitted by the reporting entity, either on the FR Y-15 or on the form from which the data item is obtained; therefore, this should increase comparability of data across firms that have been tentatively earmarked according to the tailoring rule’s “categories.”
• Increased regulatory focus on cross-jurisdictional booking flows emphasizes board and senior management focus on transparent and well-defined booking models that describe what is originated, booked, and risk-managed across legal entities.
• With continued focus on reviewing G-SIB scores, these new data elements will make the calculation more complex and incorporate elements from multiple sources.
• Addition of specific memo items (M.1, M.4) in Schedule E as shown in the table above could result in understanding financial impacts across the US Large Financial Institutions portfolios (LFIs)⁹ that are monitored by the board:
  
  
  • LFIs that include US BHCs have consolidated cross-jurisdictional claims, which increased from $3.4 trillion to $3.6 trillion as of 2019Q1 due to addition of $195 billion foreign derivative claims on an ultimate risk basis (as reported in E16 to show in cross-border exposure) in Schedule E of FR Y-15 report.
  • Incorporation of total cross-border claims on an “immediate counterparty” basis (excluding claims from the fair value of derivative products) may require an addition of $3.4 trillion in derivative exposures to the foreign cross-jurisdictional exposures.
  • Monitoring these flows will be important to understand current shifts in the G-SIB score, as it carries a weight of 10 percent to calculate the total G-SIB score. Eventually, the change may require the entities to hold additional capital as a higher loss absorbency (HLA) requirement, the amount of which depends on their score.

Proposed cross-jurisdictional impact

Despite tailoring, reporting increases

The changes proposed by the regulators will require financial institutions having holding companies (BHCs, SLHCs, and FBOs) with total consolidated assets of $100 billion or more to restructure some of their current reporting process in order to source the required new data:

• Several of the proposed changes cover information already being collected for other key regulatory reports, like the FR Y-9C and the FFIEC 009. However, there are some new requirements, such as the addition of trading volume of securities or foreign derivative liabilities on an immediate counterparty basis, which will require financial institutions to define and identify additional data elements and develop new data sourcing processes.
• The FR Y-15 report preparation process remains fairly manual across many organizations due to limited capability of extracting information from multiple sources inside the organization. Institutions are still on the journey to continuously improve the report preparation process, and subject-matter expertise for this particular report is scarce. Given the complex nature of this report, coupled with the new information being requested, proper planning and allocation of resources and time will be required.

Considerations and next steps

Viewing the FR Y-15 reporting process in the same light as some of the core regulatory reports (e.g., FR Y-9C) can help enable the organization to prepare for likely additional scrutiny on data quality and build quality assurance processes that include regulatory interpretation and methodology documentation, testing, and monitoring of changes as a result of operating model or product changes.¹¹

A dynamic capability to assess impacts of reported data that will be utilized to compare actual versus the “thresholds” that are cross-referenced in the tailoring rule, as well as changes that could impact a G-SIB score, necessitates understanding sources of data, monitoring their changes, and applying strict data governance. This should leverage industry data quality processes that require close partnership between finance, treasury, liquidity, and operations.

Endnotes

¹ US bank holding companies and covered savings and loan holding companies more than $100 billion in total consolidated assets. Covered SLHCs are those that are not substantially engaged in insurance or commercial activities. 
https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-fr-notice-20191010a2.pdf

² Requires a foreign banking organization to report information described in the FR Y-15 separately for its (i) US intermediate holding company, if any; and (ii) combined US operations 
https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-fr-notice-20191010a2.pdf

³ FR Y-15 comment request:
 https://www.federalregister.gov/documents/2019/09/10/2019-19522/proposed-agency-information-collection-activities-comment-request

⁴ FRB”s tailoring rule: 
https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-fr-notice-20191010a1.pdf
https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-fr-notice-20191010a2.pdf

⁵ FR Y-15 schedule post–tailoring rule changes:
 https://www.federalreserve.gov/reportforms/formsreview/FR_Y-15%20Form%20Revisions%20Tailoring%20Final%2010-10.pdf

⁶ FR Y-15 R]revisions:
 https://www.federalreserve.gov/reportforms/formsreview/Y15%20OMB%20Supporting%20Statement.pdf

⁷ ASU 2016-01: “Recognition and Measurement of Financial Assets and Financial Liabilities”

⁸ FR Y-9C: Consolidated Financial Statements for Holding Companies

⁹ The LFI rating system provides a supervisory evaluation of whether a covered firm possesses sufficient financial and operational strength and resilience to maintain safe-and-sound operations through a range of conditions, including stressful ones
 https://www.federalreserve.gov/supervisionreg/srletters/SR1903a1.pdf

¹⁰ Statistical Releases E.16 Country Exposure Lending Survey and Country Exposure Information Report: https://www.ffiec.gov/E16.htm

¹¹ Some additional resources to consider FBO candscape:
 https://www2.deloitte.com/us/en/pages/regulatory/articles/fbo-peer-landscape-for-year-three-of-enhanced-prudential-standards.html
OCC and FRB’s key insights and priorities: 
https://www2.deloitte.com/us/en/pages/regulatory/articles/frb-occ-semiannual-supervision-risk-regulation-report.html

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