Financial Markets Atlas: Foreign Bank in the US

Where a Client’s Business Books: Branch, IHC and Affiliate

One client, three sets of books: the US subsidiary of a Japanese manufacturer takes a revolving credit, operating accounts and an FX hedging program from the New York branch, and a bond underwriting from the securities affiliate; the branch sends its risk and its funding to Tokyo, the affiliate draws its capital from the IHC, and the Fed reads the whole map in the resolution plan. The branch is the parent bank in New York; the IHC is the American subsidiary group with capital of its own.

• The licenses: a federal branch (OCC) or a state branch (the New York DFS, the usual choice in New York), under the International Banking Act of 1978, which gave the Fed its umbrella role; an agency may lend but not take deposits; a branch takes wholesale deposits without FDIC insurance (the few grandfathered insured branches aside); the Fed’s finding that the home supervisor exercises comprehensive consolidated supervision is a condition of the license.
• The IHC rule (Regulation YY, 2014): a foreign bank with USD 50,000,000,000 or more of US non-branch assets must hold them under one intermediate holding company, capitalized and supervised like a US bank holding company (capital rules, capital plan and stress tests, liquidity rules, a US risk committee and a US chief risk officer); the branches stay outside the IHC and inside the parent’s legal entity, the structural choice the rule made.
• What may book where: the branch lends, takes wholesale deposits, deals FX and bank-eligible securities and clears dollars; the securities affiliate underwrites and deals in all securities as a FINRA member; swaps book in whichever entity is the registered swap dealer (often the parent bank itself, dealing through the branch) or in a separately registered affiliate; futures clear through an affiliate FCM or a third-party FCM.
• The Japanese corporate desk: the US subsidiaries of the parent’s Japanese clients are the anchor of the branch’s franchise (operating accounts, trade finance, FX, working capital), handled by relationship managers who coordinate with the client’s main bank team in Tokyo; the US corporate and institutional businesses were built on top of it.

Risk Transfer to Head Office: a Client Swap Booked Back to Back

A US corporate’s 10-year swap dealt through the New York branch, with the parent bank as swap dealer: the client faces the branch, the branch books an internal trade with the group’s USD rates book in Tokyo, Tokyo hedges in the market, and the revenue, the risk and the margin are split between the two by the booking policy and the transfer price. The internal trade is inside one legal entity, so it is a booking, not a swap; the supervisors on both sides read it anyway.

• Swap dealer registration: a foreign bank’s swaps with US persons count toward the de minimis threshold wherever they book, so most large foreign banks registered the parent bank itself with the CFTC; the swaps dealt through the US branch with US clients carry the full transaction-level rules (reporting, confirmation, portfolio reconciliation, business conduct, mandatory clearing and SEF trading where they apply); swaps dealt from Tokyo with non-US clients carry the home rules under substituted compliance.
• Margin: the prudential regulators’ uncleared margin rules apply to a swap dealer that is a bank, the US branch of a foreign bank included (the OCC for a federal branch, the Fed for a state branch): initial and variation margin with financial counterparties, no mandatory margin with a commercial end user, physically settled FX forwards and swaps exempt; the CSA still governs what the client posts.
• Interbranch bookings: a trade between the branch and the head office is inside one legal entity, so it is not a swap, not cleared, not reported and not margined; it is an accounting entry governed by the group’s booking policy and transfer pricing, and by tax (the branch’s profit for US tax is attributed as if it were a separate enterprise, under the treaty’s authorized OECD approach).
• What the supervisors ask: the Fed’s attention to booking practices and the PRA’s to booking arrangements ask the same questions of every global bank: is the risk managed where it is booked, can the hedging entity absorb it, are the agreements documented, and does the resolution plan explain how the client-facing entity is made whole if the parent fails.

The Follow-the-Sun Book: Tokyo, London, New York

The group’s FX book passed around the clock: Tokyo opens it with the positions New York left, trades the Asian hours and hands over to London; London trades the European hours and hands over to New York; New York trades the US afternoon, funds the group’s dollars, settles through CLS and closes the global day at 17:00 ET. One book in one risk system, each trade booked in the entity that dealt it, three regulators reading three sets of books.

• Follow-the-sun versus regional books: a global bank runs some products as one book passed around the clock (FX, the major rates curves) and others as regional books with their own traders (credit, local markets); the follow-the-sun model needs one risk system, one set of marks and a booking policy that fixes where each trade sits; the regional model needs less coordination and more capital.
• Where a trade books: in the entity whose desk dealt it, which is the entity the client faces and whose regulator supervises the trade; the New York branch’s trades fall under the CFTC and the prudential rules, London’s under UK EMIR and the FCA, Tokyo’s under the JFSA; the same book passed around the world is dealt under three rule books in one day.
• Settlement: FX settles by currency through the accounts the group holds in each: the New York branch’s Fed account and CHIPS membership for dollars, the head office’s BOJ-NET account for yen, the London branch’s CHAPS access for sterling, with CLS netting the eligible pairs across them; the New York branch is the dollar paying agent for the whole group, which makes it a critical operation in the resolution plan.
• The 17:00 ET close: the FX market’s day rolls at 17:00 New York (the value date changes, the overnight swap points roll), so the global book’s end of day and the group’s daily P&L are struck in New York hours and reach Tokyo at its morning; Tokyo’s consolidated position for its own day is one day behind for the Americas, a timing gap every Japanese bank’s reporting lives with.

Dollars Through the FX Swap and the Cross-Currency Basis

How the yen deposit base in Tokyo becomes dollar loans in New York: group treasury swaps yen for dollars in the FX swap market, the dollars settle through CLS into the New York branch’s Fed account and fund the branch as a placement from head office, the Americas treasury charges the businesses the swap-implied dollar rate, and the swap is rolled every three months at the basis of the day. The Bank of Japan’s dollar operations on the Fed swap line are the backstop.

• The cross-currency basis: the forward points of a USD/JPY swap should reflect the two interest rates alone (covered interest parity); since 2008 they carry an extra charge for dollars, the basis, because the banks that would arbitrage it away face balance sheet and capital costs; it widens at quarter and year ends and in every dollar stress, and the Japanese banks are among its largest payers.
• The due to head office: a branch’s funding from its parent is an interbranch balance, not a deposit; the FFIEC 002 reports the net due to or due from head office and related institutions, and the Fed watches the sign (a branch that funds its parent exports dollars; a branch funded by its parent imports them); the liquidity rules treat the balance as a maturing liability in the stress test.
• Term funding: the group diversifies away from short-dated swaps with cross-currency basis swaps (5 to 10 years), Yankee CDs and CP (see CDs, CP and Deposits), corporate and institutional deposits, senior dollar bonds issued by the parent or the holding company (which also serve as TLAC), and the IHC’s own issuance; the mix is a group treasury decision reported to the JFSA and the Fed.
• The backstops: the Bank of Japan’s USD funds-supplying operations against pooled collateral, funded by its standing swap line with the Fed (unlimited since 2013, used heavily in 2008 and 2020); the Fed’s discount window for the branch; the FIMA repo facility for the Bank of Japan itself; none is a substitute for a funding plan the supervisors accept.

Yankee CDs, CP and Wholesale Deposits

The branch’s own dollar funding from US investors: Yankee CDs sold to prime money market funds through an issuing and paying agent in DTC’s money market instruments program, commercial paper from the parent’s US program, and the wholesale deposits of corporates and Japanese subsidiaries, uninsured and USD 250,000 and above. Reported to the Fed weekly, daily and quarterly, laddered to keep the roll small, and gone the week the parent is downgraded.

• Yankee CDs: negotiable CDs issued by US branches of foreign banks, in DTC’s money market instruments program through an issuing and paying agent, settled same day against payment; the largest buyers are the prime money market funds, corporate treasuries and the securities lending cash collateral pools; the CD is an obligation of the whole bank, booked in the branch.
• The deposit rules: an uninsured branch may accept deposits of USD 250,000 and above (the standard insurance amount) from anyone, and smaller deposits only from the categories in the OCC’s and the Fed’s rules (foreign persons and governments, the bank’s own staff, deposits incidental to a credit); the FDIC insures only the grandfathered insured branches; the Fed’s FR 2900 still collects the deposit data weekly.
• Money fund investors: a prime fund may hold 5% of its assets in one issuer and must keep 25% in weekly liquid assets, with a weighted average maturity of 60 days; it buys the CDs, CP and time deposits of the highest-rated banks, which makes the foreign banks’ ratings the gate; the 2014 and 2023 reforms shrank the prime funds and with them this source.
• Commercial paper: issued by a US finance subsidiary with the parent’s guarantee or by the parent itself under a US program, sold to the same investors through the CP dealers and settled in the DTC money market instruments program; the bank also issues bank notes and, through the holding company in Tokyo, senior dollar bonds that count as TLAC.

Fed Funds, Reserves and the Fed’s Facilities

The branch’s day at the Fed: a master account whose balance earns the interest on reserves, fed funds borrowed overnight from the Federal Home Loan Banks a few basis points below it (the arbitrage a branch can run because it pays no FDIC assessment), repo against the Treasury book, the discount window as the first backstop and the standing repo facility through the primary dealer next door, and the FR 2420 every morning from which the Fed computes the rate the branch just paid.

• Fed accounts for branches: the Monetary Control Act of 1980 made US branches and agencies of foreign banks depository institutions for the Fed’s purposes, with reserve requirements, access to Fedwire and the discount window and a master account; most large New York branches hold one, and the group’s dollar settlement runs through it (see USD Clearing for the Group).
• The fed funds market today: with reserves abundant, the market is the FHLBs lending their surplus to banks that want to earn the interest on reserves; foreign branches are the main borrowers because they pay no FDIC assessment (levied since 2011 on a domestic bank’s assets) and because their parents measure leverage differently; the FR 2420 the branches file is where the effective fed funds rate comes from.
• The discount window: primary credit at a rate at the top of the target range, against pre-pledged collateral, available to a branch on the same terms as to a domestic bank; the 2023 bank failures led the regulators to ask banks to be operationally ready to borrow and to count the window in their liquidity plans; the stigma is the practical obstacle.
• The standing repo facility and the primary dealers: the Fed’s overnight repo facility (from 2021) lends against Treasuries and agency MBS to the primary dealers and to the banks that sign up; the securities affiliate as a primary dealer is a counterparty; the facility caps the repo rate and is the group’s second dollar backstop after the discount window.

USD Payments for the Group: CHIPS, Fedwire and the Nostros

The New York branch as the dollar clearer for a bank in Tokyo: the group’s branches and correspondents instruct their dollar payments overnight, the branch screens them against the US lists at its opening, releases them through CHIPS or Fedwire, settles with the beneficiary banks, debits the nostros and sends the statements, and receives the group’s incoming dollars all day. One Fed account, one CHIPS membership and one sanctions filter for the whole bank.

• CHIPS and Fedwire: CHIPS (The Clearing House) is the private system that nets most of the world’s cross-border dollar payments among some forty participants, many of them foreign banks’ New York branches, settling continuously against prefunded balances at the Fed; Fedwire is the Fed’s own real-time gross settlement system, final at once in central bank money; a payment hub routes by rule between them.
• Nostro accounts: the group’s other branches and the parent hold their dollar accounts with the New York branch (a “due to related institutions” on the FFIEC 002); third-party correspondent banks hold theirs too, which makes the branch a correspondent bank under the BSA with the due diligence that requires; the daily statements (MT950, camt.053) are what every branch reconciles its dollar position to.
• Time zones: Asia instructs during its day, which is New York’s night; the payments execute when New York opens and the Asian branches see the result the next morning; a same-day dollar payment from Tokyo must be instructed before Tokyo’s afternoon to reach New York in time; the cut-offs (CHIPS 17:00 ET, Fedwire 19:00 ET for bank-to-bank) are the group’s dollar deadlines.
• Sanctions and AML at the dollar clearer: processing dollars through New York subjects the payment to US sanctions law wherever it originated, and the branch’s screening is the control the US authorities rely on; the enforcement cases of the 2010s (stripped originator details, weak monitoring) produced the DFS’s Part 504 certification and a decade of monitors in foreign banks’ New York branches.

Intraday Liquidity and the Fed Account

The dollar clearer’s working capital through one day: the Fed account balance and the forecast at 06:00, the CHIPS prefunding before 09:00, the queue released by priority through CHIPS and Fedwire, the daylight overdraft watched against a net debit cap set on a share of the parent’s capital, the afternoon squaring in fed funds and repo, the CHIPS close at 17:00 and the position to Tokyo, and the intraday metrics the Fed collects.

• The net debit cap: the Fed’s payment system risk policy allows a depository institution a daylight overdraft up to a multiple of its capital; for a US branch of a foreign bank the capital measure is a fraction of the parent’s worldwide capital, so the cap is smaller than a comparable domestic bank’s; collateralized overdrafts are free, uncollateralized ones carry a fee, and an overnight overdraft is a breach.
• CHIPS prefunding: each participant funds its CHIPS position at the Fed before the opening (an initial requirement set by CHIPS from the participant’s payment history), CHIPS releases payments against the balance through a continuous netting algorithm, and the queue left at the close is settled by a final multilateral netting and supplemental funding; a participant that cannot fund is removed from the netting.
• The Basel intraday liquidity tools: the daily maximum intraday liquidity usage, the available intraday liquidity at the start of the business day, the total payments, the time-critical obligations, the value of payments made on behalf of correspondent customers and the intraday credit lines extended to them; the Fed collects them for the largest firms; a dollar clearer’s numbers are dominated by the group and the correspondents.
• Stress: the 2008 experience of correspondents withholding payments to protect their own liquidity, the 2011 Tokyo earthquake and the 2012 hurricane closing centers, and the operational failures of payment systems themselves are the scenarios in the branch’s contingency plan; the mitigants are reserves at the Fed, Treasuries for repo, the discount window collateral in place and the ability to run the clearing from the group’s other centers.

Syndicated Loan Participation

The branch as a lender in a US syndicated revolver: invited by the lead arranger, approved in New York within Tokyo’s limits, a lender of record under New York law, funding its share of each draw through the agent by Fedwire from the head office account at the funds transfer price, trading its participation through ClearPar, reviewing the credit yearly, and rated once for every lender by the Shared National Credit program.

• Approval authority: a foreign branch lends under delegated authority from the parent; the New York credit committee decides within its limits, the Americas CRO and the parent’s credit division above them; the group’s exposure to one obligor is measured consolidated in Tokyo under the home large exposure rules and in the US under the SCCL for the combined US operations; the credit memo travels in two languages.
• The syndicated market: the lead arrangers (the large US and European banks) structure, underwrite and sell down; the foreign branches are reliable participants in the investment grade revolvers and the term loans, often invited because of a relationship with the borrower or with its Japanese partners; the leveraged market is funded by the CLOs the group also arranges (see CLOs).
• The Shared National Credit program: the agencies’ joint review since 1977 of credits of USD 100,000,000 or more shared by three or more regulated institutions, US branches of foreign banks included; one rating for the credit applied by every lender, which saves each examiner rating the same loan; the results are published yearly and drive the industry’s classified loan levels.
• Funding a loan book without deposits: the branch funds its loans from the head office account (the FX swap), its CDs and wholesale deposits and the fed funds market; the loan spread must cover the basis and the liquidity premium the funds transfer price carries, so a foreign branch’s hurdle on the same loan is higher than a US bank’s with core deposits; the branches concentrate on relationship credits and the sectors the group knows for that reason.

Project Finance: an LNG Export Terminal

The branch as lead arranger of a USD 6,000,000,000 non-recourse financing: the sponsors and the offtaker are the group’s relationships, JBIC lends a tranche and NEXI insures part of the banks’, the branch underwrites and sells down, signs under New York law, funds the monthly construction draws from the head office account, holds the project accounts and the cash waterfall for twenty years, and reports the credit to Tokyo, where the ECA cover lowers the parent’s capital charge.

• Non-recourse lending: the lenders look only to the project’s cash flows and assets; the structure is the contracts (offtake, construction, supply, operations), the security over all of them, the cash waterfall through accounts the lenders control, the reserve accounts and the covenants on the coverage ratios; the lead arranger’s structuring is the product.
• The export credit agencies: JBIC (the Japan Bank for International Cooperation) co-finances projects with Japanese interests, NEXI (Nippon Export and Investment Insurance) insures the commercial lenders’ political and commercial risk; the cover reduces the risk weight of the insured tranche and extends the tenor the banks can offer; the US Ex-Im Bank and the European ECAs play the same role for their exporters.
• Tenor and funding: a 15 to 20-year dollar loan cannot be funded by a three-month FX swap; the group matches it with cross-currency basis swaps, the parent’s and the holding company’s dollar bonds and the IHC’s issuance, and charges the business the term funds transfer price; the liquidity rules’ net stable funding ratio measures the match.
• The pipeline: US LNG export terminals, renewables, transmission and the Japanese utilities’ offtake have made the US the largest project finance market and the Japanese banks among the largest lenders in it; the branch’s project finance team works with the group’s in Tokyo, London and Singapore on the same sponsors across regions.

Trade Finance: the Letter of Credit

A documentary credit from Tokyo to New York: the Japanese importer applies, the head office issues by MT700, the branch advises and confirms to the US exporter with its own undertaking under New York law, examines the shipping documents under UCP 600 and screens the trade, pays at sight by Fedwire, claims reimbursement from its own head office as a book entry, and reports the contingent on the FFIEC 002.

• UCP 600: the ICC’s rules for documentary credits, incorporated by reference in almost every letter of credit; the banks deal in documents, not goods, and the standard for examination is compliance on their face; the issuing bank’s undertaking is independent of the sales contract; the confirming bank adds its own undertaking and takes the issuing bank’s risk, here its own head office.
• The messages: MT700 issues the credit, MT707 amends it, MT710 advises a credit issued by a third bank, MT730 acknowledges, MT734 advises a refusal, MT740 authorizes a reimbursing bank, MT742 claims reimbursement, MT752 authorizes payment against discrepant documents, MT754 advises payment or acceptance; the trade finance system generates and reads them.
• Variants: a usance credit (payment at 90 days after sight, which the branch may discount for the exporter), a standby letter of credit (a guarantee in LC form, the US practice, used for the Japanese subsidiaries’ obligations to US landlords, suppliers and bonding companies), a bank acceptance, supply chain finance for the Japanese manufacturers’ US suppliers, and the ECA-backed buyer credits of the project finance business.
• Compliance in trade finance: the vessel and its track, the ports, the goods (dual-use lists, embargoed origins), the parties and the price are screened; over- and under-invoicing and circular shipments are the trade-based money laundering patterns the examiners expect the branch to detect; the Wolfsberg trade finance principles are the industry standard the Fed and the DFS test against.

The Japanese Subsidiaries: Cash Management and FX

The branch’s anchor clients: the US subsidiary of a Japanese manufacturer runs its operating accounts, payments and working capital line at the branch on the strength of its parent’s relationship with the head office; a dividend to Osaka is converted by the New York FX desk and paid in yen by the head office through BOJ-NET or Zengin, two legs in two countries inside one bank; the parent’s treasury sees it all through the group’s statements and the Tokyo relationship team.

• The main bank: a Japanese company’s house bank, historically a shareholder and the lender of last resort, today the primary lender and cash management bank; the relationship is managed in Tokyo and extends to the subsidiaries abroad, so each megabank’s New York branch has a Japanese corporate banking division with staff on secondment from the relationship teams at home.
• The deposit rules and the subsidiaries: a US subsidiary is a US person whose deposits are uninsured at a foreign branch; the USD 250,000 threshold is no obstacle for an operating company; the deposits are operational deposits in the liquidity rules (a lower run-off than the money funds’ CDs), the best funding the branch has, and the reason the desk is protected in every strategy review.
• Payments between the two countries: dollars settle in New York (Fedwire, CHIPS, ACH), yen settle in Tokyo (BOJ-NET for large value, the Zengin system for retail and corporate transfers, with its 24-hour More Time system since 2018); the bank is on both sides, so a USD/JPY payment between the subsidiary and the parent never leaves the group’s books; the time difference sets the deadlines.
• FX for corporates: spot and forwards, options for the larger exposures, the hedging policy set by the parent’s treasury; the branch deals under the bank’s FX terms of business or an ISDA; the business conduct rules of the CFTC apply to swaps but not to spot and physically settled forwards, which are the bulk of the flow; the FX Global Code is the conduct standard.

Client Hedging: the Project Swap and the Importer’s Target Redemption Forward

Two external clients ask the branch for a derivative: the LNG project company, whose credit agreement requires the floating debt hedged, executes an amortizing 15-year swap with its lenders at financial close, secured on the project; a US importer of Japanese machinery asks for a better yen rate than the forward and is shown a target redemption forward with a knock-out and a 2x leverage. The branch faces both, Tokyo prices and hedges both, the CFTC’s business conduct rules govern the sale, the end-user exception and the security replace margin on the first, a credit line carries the second, and the accounting separates them.

• The project swap: the hedging covenant sets the share, the tenor and the deadline; the hedge providers share the security with the lenders through the intercreditor agreement (the swap termination value ranks with the debt in the waterfall, with the voting and the standstill rules the agreement sets), so there is no CSA; an amortizing and accreting notional follows the drawdowns and the repayments; a deal-contingent swap lets a sponsor fix the rate during the bid, with the premium in the rate and no payment if the deal does not close; a refinancing triggers the breakage cost in the waterfall.
• The target redemption forward: a strip of forwards at a strike better than the market, paid for by the knock-out when the client’s accumulated gain reaches the target and by the leverage (twice the amount, sometimes more) when the fixing is on the wrong side; the hedge disappears when it is needed least and doubles when it hurts; the corporate losses on these structures in Asia (the KIKO contracts of 2008, the CNH TARFs of 2014 and 2015) are the reference the product committees and the supervisors cite; a plain forward or a bought option hedges the same exposure without the asymmetry.
• The business conduct rules: Part 23 subpart H of the CFTC’s rules for a swap dealer facing a counterparty: verification of the eligible contract participant status, the disclosure of material risks, characteristics and incentives, the daily mark, the pre-trade mid-market mark, the scenario analysis on request for a bilateral swap, the institutional suitability duty on a recommendation with the safe harbor of the client’s own representation, and the stricter regime for a special entity (a municipality, a pension plan, an endowment), which needs an independent adviser; physically settled FX forwards and swaps are outside the swap definition for most of these rules, options, NDFs and the TARF are inside.
• The home side: the JFSA’s 2010 supervisory guidance on derivative sales to companies followed the losses of Japanese SMEs on currency structures sold during the yen’s rise, with the Japanese Bankers Association’s dispute resolution for the claims; the group’s product rules apply the stricter of the Tokyo and the US standards to the New York desk, and the Tokyo books carry the hedges under the Volcker rule’s hedging exemption with the correlation analysis on file.

Primary Dealer: the Auction, the Fed and FICC

The securities affiliate as one of the Fed’s primary dealers: customer and own bids through TAAPS for a 10-year note auction, the award at the stop-out yield delivered by Fedwire Securities, secondary market making on the interdealer and customer platforms with the group’s own treasury as a large customer, clearing at FICC and financing in repo, the Fed’s open market operations and repo facility through the dealer, and the weekly FR 2004, TRACE and FOCUS reports.

• Primary dealers: the counterparties the New York Fed trades with in the open market and expects to bid at every auction, make markets and report; about two dozen firms, roughly half of them the US affiliates of foreign banks, the Japanese houses among them; the Fed’s standards cover capital, participation and a clean compliance record, and the Fed reviews them yearly.
• The auction: the Treasury sells by single-price auction through TAAPS, with competitive bids at a yield and non-competitive bids filled at the stop-out; the primary dealers must bid for their pro rata share and may bid for customers; the 35% limit caps one bidder’s award; the when-issued market trades the security from the announcement to the issue date and settles on it.
• FICC and the clearing mandate: the government securities division clears the dealers’ cash and repo trades by novation and netting; the SEC’s 2023 rule requires the clearing of eligible secondary cash trades by December 2026 and of repo by June 2027, bringing the dealers’ customer trades into FICC through the sponsored, agent and done-away models; the margin at FICC is a liquidity need the IHC must fund.
• FR 2004: the weekly reports primary dealers file with the New York Fed on their positions, transactions, financing and fails by security type, the basis of the Fed’s published dealer statistics; with the FOCUS report to FINRA and the TRACE reporting of Treasury trades, the affiliate is one of the most reported entities in the group.

CLO Arranging and the Japanese Bid

The CLO chain inside one group: the branch lends the warehouse in which the manager ramps the leveraged loans, the securities affiliate structures the deal and markets the AAA to the Japanese investors who anchor the market (the group’s own treasury among them), the notes settle through DTC and Euroclear and repay the warehouse, the trustee runs the quarterly waterfall, and the Japanese holder hedges the dollar coupon into yen with the group’s basis desk.

• CLOs: securitizations of broadly syndicated leveraged loans, actively managed for a reinvestment period, financed by rated floating-rate notes and an equity tranche; the arranger structures, warehouses and places, the manager selects and trades the loans, the trustee runs the waterfall; the US CLO market funds most of the leveraged loan market and the Japanese banks are among the top arrangers in it.
• The Japanese bid: the Japanese banks, the cooperative banks and the life insurers are the largest buyers of AAA CLO tranches, for the dollar floating-rate yield over Treasuries; their demand depends on the hedged yield in yen, so the cross-currency basis and the yen curve move the CLO AAA spread; the JFSA’s 2019 rule asks the investor to confirm the originator’s retention or the quality of the underwriting, and the supervisors watch the concentration.
• Risk retention: the US rule no longer applies to open-market CLO managers since the 2018 court decision; the EU and UK rules (5% retention by the originator, sponsor or original lender) and Japan’s 2019 rule still bind the European and Japanese investors, so an arranger selling to them structures a retention vehicle or documents the underwriting; the manager’s fees and the equity are where the retention sits.
• The warehouse: the branch’s loan to the issuer during the ramp, secured on the loans bought, with the manager’s equity as first loss and mark-to-market triggers; the risk is a market that closes before the CLO prices (2008, March 2020), leaving the lender with a loan portfolio; the group earns the warehouse spread, the arranging fee and the AAA coupon, and carries the chain’s risk at each step.

USD/JPY and the Cross-Currency Basis for a Life Insurer

A Japanese life insurer hedging USD 5,000,000,000 of dollar bonds into yen: Tokyo sales prices the forwards or the cross-currency swap off the basis, New York hedges the dollar leg in the interdealer market and manages the funding it implies, the legs settle through CLS from the branch’s Fed account and the head office’s BOJ-NET account, and the hedge rolls every three months at the basis of the day. The insurer lending dollars forward and the bank borrowing them are two sides of one price.

• The cross-currency basis: the deviation from covered interest parity in the FX swap market, a premium paid by borrowers of the scarcer currency (dollars) since 2008; driven by the dollar demand of non-US banks and investors, the supply from US money funds and the balance sheet cost of the dealers who could arbitrage it; the USD/JPY basis is one of the widest and most traded.
• The Japanese investors: the life insurers hold dollar bonds against yen liabilities and hedge most of the currency with short forwards; the hedged yield (the dollar yield less the differential less the basis) decides whether they buy Treasuries, US credit or JGBs, and their hedge ratio is a market variable; the pension fund, the banks’ securities portfolios and the retail accounts add to the flow.
• Margin and clearing: FX forwards and swaps settled physically are exempt from the US margin rules; cross-currency swaps carry variation and initial margin on everything but the principal exchanges, and are not cleared (the CCPs have not taken the principal exchange); the Japanese rules mirror the US ones for the insurer; the collateral is JGBs and yen cash on one side, Treasuries and dollar cash on the other.
• The group’s own funding: the bank is a dollar borrower through the same market (see Dollar Funding), so the client flow that lends dollars forward partly offsets the group’s need; group treasury treats the basis desk and the funding desk as one problem; a basis desk that intermediates the Japanese investors is a funding asset in itself.

Japanese Securities for US Investors: the 15a-6 Chain

A US asset manager buying a Tokyo-listed stock: the order goes to the US affiliate, which passes it to the group’s Tokyo securities company under Rule 15a-6 and chaperones the trade; Tokyo executes on the exchange, the US affiliate confirms in the US morning, the global custodian settles through a sub-custodian in Japan at JASDEC on T+2 against yen through BOJ-NET; the ADR at DTC on T+1 and the JGB on T+1 are the alternatives; two regulators read two sets of records.

• Rule 15a-6: a foreign broker-dealer may deal with US institutional investors without SEC registration only through a registered US broker-dealer that takes part in the trades and keeps the records (the chaperoning arrangement), may send research to major US institutions, and may execute unsolicited orders; the group’s US affiliate is that broker-dealer for its Tokyo and other foreign affiliates.
• The Japanese market: the Tokyo Stock Exchange (the prime, standard and growth markets) with a morning and an afternoon session, JASDEC as the CSD for equities and corporate bonds (T+2 since 2019), BOJ-NET for JGBs (T+1 since 2018) and for the yen; the trust banks and the megabanks’ custody arms as sub-custodians for the global custodians; the Japanese withholding tax on dividends reduced by the US-Japan treaty.
• ADRs: receipts issued by a US depositary bank against Japanese shares it holds in Tokyo, traded and settled in New York in dollars at DTC on T+1, with the depositary converting the dividends; the sponsored programs of the large Japanese companies are the way most US investors hold them; the arbitrage between the ADR and the Tokyo line is a business for the group’s desks in both cities.
• The mirror image: the group sells Treasuries, agency MBS and CLOs to Japanese investors through the New York affiliate as a primary dealer and arranger, and Japanese equities and JGBs to US investors through the Tokyo affiliate; the US affiliate is the chaperone in one direction and the dealer in the other, which is what a global securities affiliate is for.

The Branch Has No Capital: the Asset Pledge and the Home Capital

How a branch without capital is supervised: the parent’s Basel III ratios in Tokyo stand behind it, the licensor holds a pledge of US assets and may require asset maintenance, the Fed relies on its finding that the JFSA consolidates and reads the parent’s own FR Y-7 reports, the branch’s FFIEC 002 and examination produce its ROCA rating, and a weakening parent brings higher maintenance, restrictions and in the end the seizure of the US assets.

• The asset pledge and asset maintenance: New York’s banking law requires a licensed branch to pledge eligible assets with a US custodian for the superintendent (a percentage of third-party liabilities, between a floor and a cap) and allows an asset maintenance requirement (eligible assets in the US against third-party liabilities); the OCC’s equivalent is the capital equivalency deposit; both exist to pay US creditors in a liquidation.
• Home capital: the parent’s Basel III ratios under the JFSA (the internationally active banks on the full framework, the finalized rules since 2024), the leverage ratio, the G-SIB surcharge for the three megabanks and the TLAC requirement at the holding company; the Fed reads them on the FR Y-7Q and expects the parent to be well capitalized and well managed for its US financial holding company status.
• Comprehensive consolidated supervision: the finding the Fed makes about the home supervisor before approving a foreign bank’s US branch (the 1991 Foreign Bank Supervision Enhancement Act, after BCCI); Japan has had it for decades; the finding is the basis of the home-host division of labor, with the Fed supervising the US operations and relying on the JFSA for the whole.
• Ratings and consequences: the ROCA rating of each branch, the combined US operations rating of the foreign bank, the LFI rating of the IHC; a 3 or worse brings supervisory actions, higher asset maintenance and limits on growth; the strength of the parent, measured through the FR Y-7 and the supervisory dialogue, is a factor in all of them.

The IHC: Capital, Stress Tests, TLAC and the SCCL

The intermediate holding company as the Fed’s American foothold in a foreign bank: capitalized like a US bank holding company, allocating capital to the securities affiliate and the other subsidiaries, issuing internal TLAC to its parent that the Fed can convert, submitting a capital plan and the FR Y-14 data for the stress test, governed by a US risk committee and CRO, limited by the SCCL, reported on the FR Y-9C and FR Y-15, and paying dividends to Tokyo only within its plan.

• The tailoring categories: the 2019 rules sort the foreign banks’ combined US operations (branches included) into Categories II to IV by size and by the systemic indicators (cross-jurisdictional activity, short-term wholesale funding, nonbank assets, off-balance sheet exposure); the category decides the frequency of the stress test, whether the LCR and NSFR apply in full or reduced, and the liquidity reporting frequency; the IHC may be in a different category from the combined operations.
• Internal TLAC: the covered IHCs of foreign G-SIBs must hold loss-absorbing capacity issued to the parent (not to the market), with a contractual trigger that lets the Fed convert it if the IHC is in danger of default; the design supports the parent’s single point of entry resolution: the IHC is recapitalized from within the group and never enters US bankruptcy; the amounts are 16% or 18% of RWA depending on the home resolution strategy, plus a leverage measure and a long-term debt minimum.
• The stress test: the supervisory scenarios (severely adverse) applied to the IHC’s balance sheet and trading book through the Fed’s models, with the FR Y-14 data; the stress capital buffer replaces the fixed conservation buffer; the global market shock applies to the IHCs with large trading books; the results and the capital plan decide what the IHC may pay its parent.
• The SCCL: the single-counterparty credit limits implement the Dodd-Frank concentration limit: 25% of tier 1 capital to any one counterparty for the IHC and for the combined US operations, 15% between a major bank and another; intragroup exposures are exempt, and the exposure to an outside counterparty is counted across the IHC and the branches; the FR 2590 is the quarterly report.

Liquidity: the Buffers, the Stress Tests and FR 2052a

The liquidity rules on a foreign bank’s US operations: a 14-day buffer in the branch network and a 30-day buffer with an LCR in the IHC, both held in the US; monthly internal stress tests inside the parent’s own dollar stress test for the JFSA; the FR 2052a maturity ladder to the Fed daily or monthly; the contingency funding plan with the discount window ready; and the transfer pricing that passes the cost of the buffers to the businesses whose liabilities need them.

• Regulation YY liquidity for foreign banks: internal stress tests and a buffer for the combined US operations (the IHC for 30 days, the branch network for 14, both held in the US), a contingency funding plan, liquidity limits, intraday monitoring and a cash flow projection, governed by the US risk committee and the US CRO; the LCR and the NSFR apply to the IHC by category; the branches are not subject to the LCR themselves, the parent’s home LCR covers them.
• The home rules: Japan applies the Basel LCR and NSFR to the internationally active banks consolidated, monitors the LCR by significant currency and, since the JFSA’s foreign currency liquidity guidance, expects the megabanks to stress their dollar funding, hold dollar liquid assets against it and limit the maturity mismatch of the FX swap funding; the Bank of Japan’s dollar operations are the backstop the plan may name.
• FR 2052a: the Fed’s liquidity monitoring report, the maturity ladder of every asset, liability and off-balance sheet item by product, counterparty type, currency and maturity bucket; the foreign banks report the combined US operations as one, with the interbranch and parent balances identified; daily reporting for the largest firms means the Fed sees the branch’s dollar position every morning.
• The cost: liquid assets held against stressed outflows earn less than the loans they replace, and the funds transfer pricing allocates that cost to the businesses whose liabilities need them; for a branch funded by money fund CDs and interbranch placements the cost is high, which pushes the funding toward operational deposits and term debt and the lending toward relationship credits that carry it.

Resolution: the 165(d) Plan, Ring-Fencing and the Home Strategy

How a Japanese bank’s US operations are meant to come apart, or not: the parent’s single point of entry strategy at the Tokyo holding company, the US plan under 165(d) for the IHC and its subsidiaries, the internal TLAC the Fed can convert, the branch resolved with the parent under Japanese law with the US ring-fence of its assets in reserve, the dollar clearing as the critical operation that must not stop, the shared services kept alive, and the crisis management group where the two sides reconcile their plans.

• Single point of entry: losses anywhere in the group are passed up to the holding company, whose TLAC is written down or converted while the operating entities keep running; the subsidiaries abroad are recapitalized from within through internal TLAC; Japan’s regime (the Deposit Insurance Act’s specified measures, the holding company TLAC rules) follows the FSB’s key attributes, and the three megabanks have been on the G-SIB list since it began.
• The US plan: section 165(d) of Dodd-Frank requires the large foreign banks to file a plan for the rapid and orderly resolution of their US operations under the Bankruptcy Code; the agencies review it for deficiencies and may impose higher capital or restrictions until they are fixed; the 2019 tailoring set the cycle at three years and the content by category; the plans describe a single point of entry at the IHC, supported by the parent.
• Ring-fencing: the International Banking Act and New York’s banking law let the OCC or the superintendent take possession of a failed foreign bank’s branch and apply its US assets to the claims of the branch’s creditors before anything goes to the home liquidator; the pledged assets and the asset maintenance exist for this; the rule protects US creditors and complicates a home resolution that wants the branch to stay open, so the home-host coordination matters.
• Critical operations and FMI access: the plan maps the financial market infrastructures the group’s US operations depend on (CHIPS, Fedwire, CLS, FICC, DTC, the CCPs) and the infrastructures’ rules for a member in resolution; the continuity of the dollar clearing, the derivatives stays under the ISDA protocols and the shared services agreements are what the plan has to show; the FDIC and the Fed test them in the resolvability reviews.

The Regulatory Reporting Calendar: Branch, IHC and Affiliate

What the US operations file and when: the branch’s FR 2420 every morning and FR 2900 every week, the affiliate’s TRACE, CAT, FR 2004 and FOCUS, the FFIEC 002 and FR Y-7Q every quarter, the IHC’s FR Y-9C, FR Y-15 and FR Y-14, the TIC and BEA statistics, the parent’s FR Y-7 and the resolution and capital plans every year, Form 1120-F and the branch profits tax, and the reporting team that reconciles all of it to one ledger.

• The branch family: the FFIEC 002 (the quarterly balance sheet and memoranda of a US branch or agency, with the FFIEC 002S for the managed non-US branches), the FFIEC 019 (country exposure), the FR 2900 (weekly deposits), the FR 2420 (daily money market rates), the FR 2644 (the weekly balance sheet for the selected panel); the branch does not file a Call Report or a Y-9C.
• The holding company family: the FR Y-9C (the IHC’s consolidated financials), the FR Y-9LP (the parent-only), the FR Y-15 (the systemic risk indicators of the combined US operations, which set the tailoring category), the FR Y-14A, Q and M (the stress test data), the FR 2590 (the SCCL), the FR 2052a (liquidity); plus the foreign bank’s own FR Y-7, FR Y-7Q and FR Y-7N.
• The statistical and tax returns: the Treasury International Capital system (the TIC B forms for banks and brokers, the TIC S for securities transactions) and the BEA surveys measure the cross-border flows; Form 1120-F reports the bank’s effectively connected income and the branch profits tax (the treaty rate for a Japanese bank), with the interest allocation rules of section 882 and the treaty’s attribution of profits to the permanent establishment.
• Controls: the reporting hub draws from the data warehouse and the general ledger with a documented lineage; each report has an owner, a reconciliation to the ledger and to the related reports, a review and an attestation; the Fed’s edit checks and the examiners’ transaction testing look for inconsistencies across the family; the regulatory reporting function reports to the Americas CFO and to the parent’s.

Reporting to Tokyo: Two Ledgers and the March Year-End

How the branch’s numbers reach the group: a US GAAP ledger in dollars for the US authorities and a group ledger in yen for Tokyo, reconciled monthly; the daily P&L and risk at the New York close arriving in Tokyo’s morning; the monthly close, conversion, eliminations and consolidation submission; the March 31 fiscal year against the December 31 US calendar; the parent’s auditor’s US firm; the transfer pricing of the interbranch dealings for two tax authorities; and the matrix of control functions reporting both ways.