Final TLAC Rule: Federal Reserve Responses to FBO Comments

On December 15, 2016, the Federal Reserve Board (the Board) issued its final rule regarding Total Loss-Absorbing Capacity (TLAC).

The rule, among other things, imposes TLAC and long-term debt (LTD) requirements on the U.S. intermediate holding companies of non-U.S. global systemically important banks (Covered IHCs).

The rule is largely consistent with the Board’s proposal, but does address some of the comments of foreign banking organizations (FBOs) on key issues, including by permitting Covered IHCs of “multiple point of entry” (MPOE) firms to issue TLAC and eligible external long-term debt (eLTD) to third parties and by slightly reducing the LTD requirements applicable to Covered IHCs.

The rule retains the proposal’s requirement that eligible internal LTD (iLTD) include a contractual provision permitting its conversion into common equity outside insolvency proceedings. However, in response to industry comments, the Board revised the rule in ways that that should support the characterization of iLTD as debt, rather than equity, for U.S. tax purposes. Any uncertainty lingering overnight regarding the tax characterization of iLTD was eliminated this morning by companion guidance issued by the Internal Revenue Service (the IRS) clarifying that the IRS will treat iLTD as debt.

This memorandum summarizes the FBOs’ comments on the Board’s TLAC proposal and the relevant provisions of the Board’s rule.