Final TLAC Rule: Effect on U.S. GSIB Debt
December 15, 2016
On December 15, 2016 the Federal Reserve issued its final TLAC rule that, among other things, requires the holding companies for U.S. GSIBs (Covered BHCs) to maintain significant amounts of external long-term debt having specific terms (eLTD).
While the rule largely adopts the eLTD criteria outlined in the proposed TLAC rule, in a significant departure from U.S. capital markets practice, the rule introduces a 30-day cure period for non-payment of interest and principal prior to acceleration of eLTD. The rule also provides for grandfathering of Covered BHC debt issued prior to December 31, 2016 that meets certain criteria, which will allow significant amounts of existing debt to qualify as eLTD. The Federal Reserve asserts this grandfathering will reduce the estimated aggregate eLTD shortfall for the eight Covered BHCs from approximately $120 billion to approximately $70 billion.
This memorandum enumerates the eLTD requirements, discusses the potential effect of the rule on common provisions traditionally included in Covered BHC debt and describes the scope of the grandfathering.