On April 1, 2016, the Federal Reserve Board (Board) issued a final rule that expands eligible “high-quality liquid assets” (HQLA) for the Basel III liquidity coverage ratio (LCR). This final rule allows investment grade, general obligation US state and municipal bonds to be included as Level 2B HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. (For a description of those criteria, please refer to our earlier Legal Update.)

Notably, the final rule did not adopt the Board’s previously proposed limitations on:

  1. the amount of permissible municipal bonds with the same CUSIP number (but it retains the proposed 2x trading volume per issuer limit and the 5 percent of overall HQLA cap); and
  2. inclusion of insured municipal bonds (however, under the final rule the underlying municipal bond must meet the rule’s requirements for inclusion without regard to the insurance).

The Board’s final rule applies only to Board-supervised covered institutions that are subject to the LCR (i.e., generally US bank holding companies with at least $50 billion in assets), and it is not clear whether the OCC and FDIC will adopt similar rules.