New OCC rule passed to fuck the large financial institutions out of using derivatives to pass their tests.

Author Source
u/laflammaster Reddit

DD 👨‍🔬

u/leisure_rules has pointed me to the OCC - something that I should have been taking a look at since the beginning of my journey into the workings of the Fed.

So I decided to look deeper. OP: https://www.reddit.com/r/Superstonk/comments/ocfcfi/occ_rule_in_effect_7121_net_stable_funding_ratio/

TLDR start - and this is not short, as the document is close to 10k pages, with this section of 102 pages alone;

After the recent test, it looks like the Fed shat themselves. A new rule was rushed to be introduced by the self-regulating fucks for the banks and split NFSR into 4 categories of application. Despite the rule having been in plan since 2016 and kind of in play, but has a ton of mentions of ‘08 crash.

r/Superstonk - New OCC rule passed to fuck the large financial institutions out of using derivatives to pass their tests.

the Fed looking back at the ‘08 crash - I’ll fucking do it again!

Only the Category II of the banks have submitted a comment that the fucks in Category II will have a fire sale with such strict requirements. Rule passed for more stringent reporting just after the Fed passed the stress test for the banks, allowing them to buy back shares ($12Bn worth, likely the $12Bn that they got from gouging their customers on overdraft fees - no joke ($11Bn in 2019)).

Because it is instituted on July 1st, 2021 - allowing the banks to have 10 business days to provide a response/plan on how to deal with their shitty NFSR ratio - we are likely looking at a few weeks if the NFSR ration is rated as bad in some of the banks. But we can expect some movement in the market next week - real movement.

Now these agencies are no longer going to count derivatives towards a positive ASF (Available Stable Funding) factor. Further, RSF (Required Stable Funding) factor is set to 100% for the derivatives. This is a double-banana worthy of Rick!

Look at the equation (sauce to u/leisure_rules) :

r/Superstonk - New OCC rule passed to fuck the large financial institutions out of using derivatives to pass their tests.

NSFR Ratio calculation

What is ASF:

Here’s the chart of proposed ASF factors: https://www.federalregister.gov/d/2020-26546/p-363

What is RSF:

Here’s the chart of the RSF factors: https://www.federalregister.gov/d/2020-26546/p-481

TLDR end;

I’d like to put together a summary of what the fuck is going on - its all in plain English, and I suggest to read it yourself to gain more wrinkles:

Introduction

The OCC, the Fed, and OCC (agencies) are looking into a 2016 rule to establish NSFR (net stable funding ratio) for any institution with >=$10Bn of consolidated assets.

Another two proposals that were being looked into are:

Background

In the ‘08 crash, the banks had issues with risk management, specifically how the banks managed their liabilities to fund their assets.

Further, there was an overreliance on short-term, less-stable funding - no shit, they were leveraged to shits.

In response, Basel Committee on Banking Supervision (BCBS) created 2 liquidity standards:

  1. Liquidity Coverage Ratio (LCR) - for high net cash outflows in a period of stress

  2. NFSR - for banks to not be taking handies behind Wendy’s after using their credit cards to play the casino

Part of the LCR rule was for the banks to hold a specific amount of unencumbered high-quality liquid assets (HQLA) that can be easily converted into cash to meet payments for a 30-day stress period.

Along with the “poorly done” Dodd-Frank Act, the board (Fed) decided to adopt an “enhanced prudential standards rule, which established general risk management, liquidity risk management, and stress testing requirements for certain bank holding companies and foreign banking organizations.”

PROBLEM: The framework never addressed the relationship between a banking organization’s funding profile and its composition of assets and off-balance commitments. NO SHIT!

ANOTHER PROBLEM: The fucking rule was passed AFTER the recent stress test!

Here’s where the margin debt comes in - being 2x that of ‘00 and ‘08 crashes. Coupled with u/Criand DD - means the OCC is realizing how big of a shitshow it has become, and was never dealt with until Retail started making money and exposing their shit.

r/Superstonk - New OCC rule passed to fuck the large financial institutions out of using derivatives to pass their tests.

Margin Debt w/ S&P500

Overview of the Proposed Rule and Proposed Scope of Application

  1. In June ‘16, comments were invited on the rule

  2. Rule was generally consistent with the Basel NSFR, but has some characteristics of U.S. market

  3. Proposed rule: maintaining ratio of ASF equal or greater than the minimum funding needs (RSF) over a 1 year horizon to be minimum 1.0.

The Final Rule

Application of the final rule.

The agencies have decided to break down the application/companies into 4 categories:

NFSR Requirements by Category

  1. Category I: 100%

  2. Category II: 100%

  3. Category III: 85%

  4. Category IV: 70%

Short Sales - I SUGGEST YOU READ THE WHOLE SECTION (IT IS GOLD) (https://www.federalregister.gov/d/2020-26546/p-810)