BASEL III: LIQUIDITY STANDARDS

Transcription

1 BASEL III: LIQUIDITY STANDARDS Issued under BPRD circular # 08 dated June 23, 2016 BANKING POLICY & REGULATIONS DEPARTMENT STATE BANK OF PAKISTAN

2 This page is left blank intentionally BPRD circular # 08 dated June 23, 2016

3 TEAM NAME DESIGNATION/ CONTACT Syed Irfan Ali Executive Director - Banking Policy & Regulations Group Shaukat Zaman Director - Banking Policy & Regulations Department Ahsin Waqas Senior Joint Director ahsin.waqas@sbp.org.pk Mohammed Uzair Ashfaq Assistant Director uzair.ashfaq@sbp.org.pk

4 This page is left blank intentionally BPRD circular # 08 dated June 23, 2016

5 Contents Introduction Basel III Liquidity Standards... 1 Part 1: The Liquidity Coverage Ratio (LCR) Scope of Application... 2 A. Transitional Arrangements... 2 B. Reporting Requirements... 3 C. Notification Requirement Definition of the LCR Stock of High Quality Liquid Assets (HQLA) the numerator of LCR... 3 A. Level 1 assets... 5 B. Level 2 assets... 6 Level 2A assets... 6 Level 2B assets Total net cash outflows the denominator of LCR Reporting Template of LCR (LR-1) LCR Disclosure Requirements LCR Disclosure Template (LR- II) for financial statements Part 2: Net Stable Funding Ratio Introduction Scope of Application A. Reporting Requirements Objective of the NSFR and Minimum Requirement A. Calibrations of ASF and RSF - Assumptions B. Definition of Available Stable Funding C. Required Stable Funding Off-balance sheet exposures Reporting Template of NSFR (LR-VIII) NSFR Disclosure Requirements NSFR Disclosure Template (LR- IX) for financial statements Part 3: Monitoring Tools A.Reporting Requirements I. Contractual maturity mismatch II. Concentration of Funding... 44

6 III. Available unencumbered assets IV. LCR by significant currency V. Market-related Monitoring Tools Annexure A (Calculation of cap on level 2 assets) Annexure B (Charesteristics of HQLA) Annexure C (Operational requirements of HQLA) Annexure D (Criteria for operational deposits generated by Clearing, Custody and Cash Management activities)... 56

7 1. Introduction Basel III Liquidity Standards In response to the global financial crises, the Basel Committee on Banking Supervision (BCBS) has introduced two liquidity standards under its Basel III reforms i.e. Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). These two minimum standards aim to achieve two separate but complementary objectives. The objective of LCR is to promote the short-term resilience of the liquidity risk profile of banks by ensuring that they have an adequate stock of unencumbered high-quality liquid assets (HQLA) to survive a significant stress scenario lasting for 30 calendar days. Part-1 of the document is focused on the calculation of this measure (LCR) and its disclosure in the financial statements. The objective of second liquidity standard i.e. NSFR is to reduce funding risk over a longer time horizon by requiring banks to fund their activities with sufficiently stable sources of funding on an ongoing basis. The details regarding NSFR are covered in Part-2 of this document. Additionally, BCBS has supplemented the liquidity standards with the set of five monitoring tools for monitoring the liquidity risk exposures of banks. These monitoring tools include (1) Contractual maturity mismatch; (2) Concentration of funding; (3) Available unencumbered assets; (4) LCR by significant currency; and (5) market related monitoring tools. Accordingly, Part-3 of the document provides details on supplementary tools for ongoing monitoring of the liquidity risk exposures. As part of Basel III implementation in Pakistan, SBP intends to implement above mentioned standards & monitoring tools from 2017 broadly in line with the BCBS timelines. Page 1

8 Part 1: The Liquidity Coverage Ratio (LCR) 1. Scope of Application 1.1. The Liquidity Coverage Ratio (LCR) is a quantitative requirement which aims to ensure that a bank maintains an adequate level of unencumbered high quality liquid assets which can easily be converted into cash at little or no loss of value in private markets, to withstand an acute liquidity stress scenario over a 30-day horizon at both the entity and consolidated level Primarily, the LCR (Part 1) and monitoring tools requirements (Part-3) would be applicable for all banks on standalone level including overseas branch operations. However, after full implementation of LCR in Dec 2018, banks shall be encouraged to meet the LCR framework at consolidated level For foreign banks branches, the LCR framework would be applied on their Pakistan operations When calculating the LCR, a bank shall apply the rules and parameters as specified in this document to its local as well as overseas operations, except for foreign operations in a jurisdiction which has implemented the Basel III LCR. In such cases, a bank shall apply the host jurisdiction s parameters to their operations in the following areas when calculating its LCR: i. Run-off rate of insured retail and small business deposits; ii. Eligible assets recognized by the host jurisdiction as prescribed under the BCBS Basel III LCR rules While the LCR is expected to be met and reported in a Pak Rupees, banks must also estimate their liquidity needs in each currency and maintain high quality liquid assets (HQLA) consistent with the distribution of their liquidity needs by currency, however no minimum requirement has been prescribed The LCR measure would further be supplemented by detailed assessments of other aspects of the bank s liquidity risk management framework in line with the use of the monitoring tools included in Part-3 of these instructions. A. Transitional Arrangements 1.7. A bank shall hold, at all times, an adequate stock of HQLA such that it maintains a minimum of the following LCR levels in accordance with the timeline below. March 31, 2017 December 31, 2017 December 31, 2018 Minimum LCR 80% 90% 100% 1.8. By the end of the transition period, all banks will be required to maintain the LCR at 100% on an on-going basis SBP may, however, require any bank to adopt more stringent standards or parameters, based on the assessment of bank s systemic importance, its liquidity risk management framework and liquidity risk profile. Page 2

9 B. Reporting Requirements Banks are required to submit their LCR statements on monthly frequency to SBP The return is required to be submitted within fourteen (14) working days from the close of the calendar month. C. Notification Requirement In periods of stress, banks may be allowed to use their stock of HQLA which may result in a LCR of below 100%. In such circumstances, Banks should immediately report to SBP (Offsite Supervision & Enforcement Department with a copy endorsed to Banking Policy and Regulation Department) with an explanation of the following: Factors leading to non-compliance; Measures which will be taken to restore the LCR position including Contingency Funding Plan; and Magnitude and expected duration of the LCR remaining below the minimum prescribed level Based on an assessment of the bank- and market-specific factors, the State Bank shall provide exemption from meeting the minimum level of the HQLA stock. SBP may further impose any penalty/ condition or specific actions to be taken by the bank to reduce its exposures to liquidity risk. 2. Definition of the LCR 2.1. With effect from Dec 31, 2018 (i.e. after the phase-in arrangements are complete), the LCR requirement shall be 100% for banks. The LCR is to be calculated in the following manner: Stock of High Quality Liquid Assets (HQLA) 100% Total net cash outflows over the next 30 calendar days 2.2. The LCR has two components: a. Value of the stock of HQLA in stressed conditions; and b. Total net cash outflows, calculated according to the stress scenario for which a bank would need sufficient liquidity on hand to survive for up to 30 days A bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems. Banks should be aware that the LCR is calculated based on a stress scenario which does not cover expected or unexpected intraday liquidity needs The format of Basel III liquidity return (to be submitted monthly) is given in section 5 of this document. 3. Stock of High Quality Liquid Assets (HQLA) the numerator of LCR 3.1. The numerator of the LCR is the Stock of High Quality Liquid Assets (HQLA). Assets are considered to be high quality liquid assets if they can be readily sold or used as collateral to obtain funds at little or no loss of value under the stress scenario. Page 3

10 3.2. The LCR standard prescribes that a bank must hold stock of unencumbered HQLA (without legal, regulatory or operational impediments) to cover the total net cash outflows over a 30-day period In order to qualify as HQLA, assets should be liquid in private markets during a time of stress and ideally be central bank eligible for intraday liquidity needs and overnight liquidity facilities. In case of Pakistan, the central bank eligibility is limited to extremely narrow list of assets; therefore SBP has allowed non-central bank eligible assets as level 2B (defined below) that meet the qualifying criteria Based on the price volatility and other factors, eligible stock of HQLA is categorized into level 1 and level 2 assets with further subdivision of Level 2 assets into level 2A and level 2B assets subject to the following limits: Asset Level 1 Level 2A & 2B Level 2B Limit No Limit In aggregate, up to 40% of the stock of HQLA held Up to 15% of the stock of HQLA held 3.5. Assets to be included in each category must be those that the bank is holding on the first day of the stress period (i.e. LCR reporting date), irrespective of their residual maturity The 40% cap on Level 2 assets and the 15% cap on Level 2B assets should be determined after the application of required haircuts and after taking into account the unwinding of short term secured funding, secured lending (e.g. securities financing transactions) and collateral swap transactions maturing within 30 calendar days that involve the exchange of HQLA. In this context, short term transactions are transactions with a maturity date up to and including 30 calendar days Accordingly, the calculations of the stock of HQLA require computation of adjusted Level 1 and Level 2 assets by reversing the transactions maturing within 30 days. Adjusted level 1 assets are, therefore, calculated by adding back the amount of cash lent (e.g. under reverse repo) and by subtracting the amount of cash borrowed (e.g. repo of govt. paper) up to 30 days. The similar process is to be repeated to arrive at adjusted level 2A and 2B assets The details of the calculation methodology pertaining to CAP on level 2 assets are provided at Annexure - A. The formula for the calculation of the stock of HQLA is as follows: Stock of HQLA = Level1 + Level2A + Level2B adjustment for 15% cap adjustment for 40% cap 3.9. The fundamental characteristic of HQLA include: low credit & market risk, ease & certainty of valuation, low correlation with risky assets etc. The market related characteristics include: active and sizable private market, presence of committed market markers, low volatility and flight to quality. Detailed characteristics of HQLA assets have been provided as Annexure B All assets in the stock of HQLA are subject to operational requirements mentioned at Annexure C. The purpose of operational requirements is to recognize that not all assets outlined under level 1 and level 2 that meet the asset class, risk weighting and credit rating criteria should be eligible for inclusion in the stock of HQLA as other Page 4

11 operational restrictions that can prevent timely monetization of such assets during a stress period While the LCR is expected to be met and reported in a single currency, banks are expected to be able to meet their liquidity needs in each currency and maintain HQLA consistent with the distribution of their liquidity needs by currency. The bank should be able to use the stock to generate liquidity in the currency and jurisdiction in which the net cash outflows arise. In managing foreign exchange liquidity risk, the bank should take into account the risk that its ability to swap currencies and access the relevant foreign exchange markets may erode rapidly under stressed conditions. It should be aware that sudden, adverse exchange rate movements can sharply widen existing mismatched positions and alter the effectiveness of any foreign exchange hedges in place In order to mitigate cliff effects that could arise, if an eligible liquid asset became ineligible (e.g. due to rating downgrade), a bank is permitted to keep such assets in its stock of liquid assets for an additional 30 calendar days (from the date of LCR reporting i.e. if an asset becomes ineligible for inclusion in HQLA in January, a bank may include it as HQLA for calculating the LCR for February only) The stock of HQLA should be well diversified within the assets classes themselves (except for sovereign debt of the bank s home jurisdiction). Banks should have policies in place in order to avoid concentration with respect to asset types, issue and issuer types and currency within assets classes. A. Level 1 assets Level 1 assets of bank 1 would comprise of the following assets 2 which can be included in the stock of liquid assets at 100 percent of their market value. i. Cash & treasury balances (including balances held with SBP); ii. iii. iv. Unencumbered investments in Pakistan Government securities (e.g. Treasury bills, Pakistan investment bonds etc.) excluding Held to Maturity (HTM) instruments; Government of Pakistan Ijara Sukuks; Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, or multilateral development banks 3 that satisfy all of the following conditions: assigned a 0% risk-weight under the Basel II Standardized Approach for credit risk; 1 Assigned Capital held under section 13 (2) of BCO by foreign bank branches is not eligible for level 1 HQLA 2 A security may not be included in HQLA by virtue of it being eligible for Statutory Liquidity Reserve (SLR) requirement of the SBP. A Bank will have to ensure that the security complies with the eligibility criteria stipulated in this document. 3 The Bank for International settlements, the International Monetary fund, the European Central Bank or European Community, The World Bank Group comprised of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the European Investment Bank (EIB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IDB), and the Council of Europe Development Bank (CEDB) Page 5

12 traded in large, deep and active repo or cash markets characterized by a low level of concentration; have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions; and Not an obligation of any bank/ financial institution, NBFC or any of its affiliated entities. v. Where the sovereign has a non-0% risk weight, sovereign or central bank debt securities issued in domestic currencies by the sovereign or central bank in the country in which the liquidity risk is being taken or bank s home country 4 ; and vi. Where the sovereign has a non-0% risk weight, domestic sovereign or central bank debt securities issued in foreign currencies are eligible up to the amount of the bank s stressed net cash outflows in that specific foreign currency stemming from the bank s operations in the jurisdiction where the bank s liquidity risk is being taken 5. B. Level 2 assets Level 2 assets (Level 2A and Level 2B) can comprise up to 40% of the overall HQLA stock after haircuts have been applied. Within level 2 assets, level 2B assets should not comprise of more than 15% of the total stock of HQLA. Level 2A assets A 15% haircut is applied to the current market value of Level 2A asset held in the stock of HQLA. Level 2A assets are limited to the following: i. Marketable securities representing claims on Public sector Entities (PSEs), foreign sovereigns or multilateral development banks that are assigned a 20% risk weight under Basel II standardized approach for credit risk and satisfy all of the following conditions: Traded in large, deep and active repo or cash markets characterized by a low level of concentration; Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions; Not an obligation of a bank, financial institution, NBFC or any of its affiliated entities; Maximum decline of price not exceeding 10% during a 30-day period of significant liquidity stress. 4 For example, Bangladesh Government Securities held by Pakistani bank (where bank is operating in form of subsidiary or branch mode) with operations in Bangladesh. 5 For example, bonds or sukuk issued by the Government of Pakistan denominated in USD. Further, the amount of non-0% risk-weighted sovereign/central bank debt issued in foreign currencies included in Level 1 assets is strictly limited to the foreign currency exposure in the jurisdiction of the issuing sovereign/central bank. Page 6

13 Level 2B assets Level 2B assets are limited to the following assets for the purpose of LCR. Banks need to establish appropriate systems and measures to monitor and control the potential risks (e.g. credit and market risks) that banks may be exposed to in holding these assets. i. Corporate debt securities (e.g. TFCs, Sukuks & commercial papers) that satisfy the following conditions, Not issued by a financial institution or any of its affiliated entities; Traded in large, deep and active repo or cash markets characterized by a low level of concentration; Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions. Maximum decline of price not exceeding 10% during a 30-day period of significant liquidity stress. a. subject to 15% haircut, where the securities have a long-term credit rating of at least AA- or a short term equivalent rating by a recognized ECAI; b. subject to 50% haircut, where the securities have a long-term credit rating of at least A+ to BBB- or a short term equivalent rating by a recognized ECAI; ii. Common equity shares that satisfy all of the following conditions subject to 50% haircut: Not issued by a financial institution or any of its affiliated entities Exchange traded and centrally cleared A constituent of the Pakistan stock exchange s KSE-100 index or main index of jurisdiction where the liquidity risk is taken 6 Denominated in PKR or in the currency of the jurisdiction where a bank s liquidity risk is taken Traded in large, deep and active repo or cash markets characterized by a low level of concentration Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions i.e. a maximum decline of share price not exceeding 40% over a 30-day period of significant liquidity stress. 4. Total net cash outflows the denominator of LCR 4.1. The term total net cash outflows 7 is defined as the total expected cash outflows minus total expected cash inflows in the stress scenario for the subsequent 30 calendar days. 6 For exposure by a bank s operations in foreign jurisdiction (where the liquidity risk is being taken) equity shares will only be included as allowed under local LCR requirements in that jurisdiction. If the jurisdiction has not adopted the LCR regime, inclusion of equity shares won t be allowed for LCR calculation purposes. 7 Where applicable, cash inflows and outflows should include interest that is expected to be received and paid during the 30-day time horizon. Page 7

14 4.2. Under the scenario, total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or be drawn down Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in (under the stress scenario) up to an aggregate cap of 75% of total expected cash outflows. Total net cash outflows over the next 30 calendar days = Total expected cash outflows Min {total expected cash inflows; 75% of total expected cash outflows} 4.4. Bank shall not be permitted to double count items, i.e. if an asset is included in the stock of HQLA (i.e. the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e. part of the denominator) Where there is potential that an item could be counted in multiple outflow categories, the bank should apply the maximum run-off rate to capture the contractual outflow for that item. Cash Outflows (i) Retail deposit run-off 4.6. Retail deposits are defined as deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories. Retail deposits subject to LCR include all retail demand deposits and all retail term deposits, whether denominated in PKR or any other currencies Cash outflows related to retail term deposits with a residual maturity or withdrawal notice period of greater than 30 days will be excluded from total expected cash outflows if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR, or if early withdrawal results in a significant penalty that is materially greater than the loss of interest. In case of Pakistan, generally the term deposits do not fulfill these conditions; hence the entire category of term deposits is to be treated as demand deposits for the purpose of LCR For deposits that are contractually pledged to a bank as collateral to secure a credit facility or loan granted by the bank that will not mature or be settled in the next 30 days, the pledged deposit may be excluded from the LCR calculation only if the following conditions are met: The loan will not mature or be settled in the next 30 days; The pledge arrangement is subject to a legally enforceable contract disallowing withdrawal of the deposit before the loan is fully settled or repaid; and Page 8

15 The amount of deposit to be excluded cannot exceed the outstanding balance of the loan (which may be the drawn portion of a credit facility) The above treatment does not apply to a deposit which is pledged against an undrawn facility, in which case the higher of the outflow rate applicable to the undrawn facility or the pledged deposit applies The retail deposits are divided into stable and less stable portions of funds as described below, with minimum run-off rates listed for each category. Stable retail deposits (run-off rate = 5%) Stable retail deposits are the amount of the retail deposits that are fully insured by an effective deposit insurance scheme (up to the maximum coverage limit) or by a public guarantee that provides equivalent protection; and fulfils either one of the following conditions: the deposits are in transactional accounts (e.g. accounts where salaries are automatically deposited); or The depositors have other established relationships with the bank that make deposit withdrawal highly unlikely (e.g. a loan whereby depositor is contractually bound to maintain relationship with the bank). Less stable deposits (run-off rate = 10%) All retail deposits that do not fulfill the conditions of stable deposits are to be considered as less stable deposits. These retail deposits shall also include any amounts in excess of the maximum coverage limit by the deposit insurance scheme. In case a bank is not able to readily identify/ bifurcate retail deposits into stable or less stable according to the above definition, it should place the full amount in the less stable category. (ii) Unsecured wholesale funding run-off For the purposes of the LCR, "unsecured wholesale funding is defined as those deposits, liabilities and general obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships) and are not collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution. Obligations related to derivative contracts are explicitly excluded from this definition The wholesale funding includes: a. All liabilities (such as maturing term deposits and unsecured debt securities) which are expected to be fulfilled by the bank within the LCR s horizon of 30 days, notwithstanding its contractual maturity; b. All funding that is callable (either at the investor s discretion or the bank s discretion) or has contractual maturity within the next 30 calendar day horizon. c. Funding with an undetermined maturity Wholesale funding which is callable by the fund provider subject to a contractually defined and binding notice surpassing the 30 day horizon is not included. Page 9

16 4.16. For the purpose of LCR, a bank shall divide its unsecured wholesale funding based on the: i. Profile of the funds provider (i.e. small business customers, non-financial corporates, sovereigns, central banks, multilateral development banks, PSEs and other legal entity customers). ii. Operational relationship with the bank a) Unsecured wholesale funding provided by small business customers (run-off rate = 5% and 10%) Unsecured wholesale funding provided by small business customers is treated the same way as retail deposits for the purposes of this standard, effectively distinguishing between "stable" (run-off rate = 5%) and less stable (run-off rate = 10%) portions of funding provided by small business customers. The same bucket definitions and associated run-off factors apply as for retail deposits. Small business customers are defined as follows: Where the bank has credit exposure on small business customers: The definition of retail exposure as given under SBP Basel II instructions (amended vide BSD Circular No. 05 of February 14, 2008) shall be applicable provided the total aggregate funding 8 raised from one small business customer is less than Rs. 75 million (on consolidated basis where applicable). Where the bank does not have any exposure on a small business customer: The bank may include such a deposit in this category provided that the total aggregate funding raised from the customer is less than Rs. 100 million (on a consolidated basis where applicable) and the deposit is managed as a retail deposit Term deposits from small business customers should be treated in accordance with the treatment for term retail deposits as outlined previously in this document. b) Operational deposits generated by clearing, custody and cash management activities (Run-off rate = 25%) Certain activities lead to financial and non-financial customers needing to place deposits with a bank in order to facilitate their access and ability to use payment and settlement systems and otherwise make payments. These funds may receive a 25% run-off factor only if the customer has a substantive dependency with the institution and the deposit is required for such activities Qualifying activities in this context refer to clearing, custody or cash management activities where the customer is reliant on the bank to perform these services. In order to qualify for 25% run-off factor, the detailed criteria for the qualifying operational deposits/ activities are given at Annexure D. 8 Aggregate funding means the gross amount (i.e. not netting any form of credit extended to the legal entity) of all forms of funding (e.g. deposits or debt securities for which the counterparty is known to be a small business customer). In addition, applying the limit on a consolidated basis means that where one or more small business customers are affiliated with each other, they may be considered as a single creditor such that the limit is applied to the total funding received by the bank from this group of customers. Page 10

17 4.21. Any excess balances that could be withdrawn without jeopardizing these clearing, custody or cash management activities do not qualify as operational deposits. Correspondent Banking arrangements (e.g. deposit held in vostro accounts) would be treated as non-operational deposits The portion of qualifying operational deposit which is fully covered under the deposit protection fund can be treated as stable retail deposit. c) Unsecured wholesale funding provided by non-financial corporate customers, sovereigns, central banks, multilateral development banks and PSEs (excluding deposits specifically held for operational purpose) - Run-off rate = 40% This category comprises all deposits and other extensions of unsecured funding from non-financial corporate customers (that are not categorized as small business customers) and (both domestic and foreign) sovereign, central bank, multilateral development bank, and PSE customers that are not specifically held for operational purposes (as defined above). The run-off factor for these funds is 40%. d) Unsecured wholesale funding provided by other legal entity customers: (Run-off rate = 100%) This category consists of all deposits and other funding from other institutions (including banks, securities firms, insurance companies, etc), fiduciaries 9, beneficiaries 10, conduits and special purpose vehicles, affiliated entities of the bank and other entities that are not specifically held for operational purposes (as defined above) and not included in the prior mentioned categories. The run-off factor for these funds is 100% All notes, bonds and other debt securities issued by the bank are included in this category regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts (including small business customer accounts treated as retail), in which case the instruments can be treated in the appropriate retail or small business customer deposit category. (iii) Secured wholesale funding run-off For the purposes of this standard, secured funding is defined as those liabilities and general obligations that are collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution. For calculating the cash outflow it will only include outstanding secured funding transaction with maturities within 30 calendar day stress horizon Loss of secured funding on short-term financing transactions: In stress scenario, the ability to continue to transact repurchase, reverse repurchase, collateral swaps and other securities financing transactions is limited to transactions backed by HQLA or 9 Fiduciary is a legal entity that is authorized to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles. 10 Beneficiary is a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract. Page 11

18 with the bank s domestic central bank. Additionally, collateral lent to the bank s customers 11 to affect short positions should be treated as a form of secured funding. A bank shall apply the following factors to all outstanding secured funding transactions with maturities within the 30 calendar day stress horizon, including customer short positions that do not have a specified contractual maturity. The amount of outflow is calculated based on the amount of funds raised through the transaction, and not the value of the underlying collateral. Categories for Outstanding maturing secured funding transactions Run off rate for Cash Outflows Backed by level 1 assets or with central banks 0% Backed by Level 2A assets 15% Secured funding transactions backed by non-level 1 or non-level 2 assets, with domestic sovereigns, multilateral development banks, or domestic PSEs as counterparty that have a 20% or lower risk weight 25% Backed by Level 2B assets 50% All others 100% (iv) Additional requirements (Other On &Off-Balance Sheet items) a) Drawdown from Committed Credit & Liquidity facilities For the purpose of this standard, credit and liquidity facilities are defined as explicit contractual agreements or obligations to extend funds at a future date to retail or wholesale counterparties. These facilities only include contractually irrevocable ( committed ) or conditionally revocable (e.g. a precondition of a material change in the credit condition of the borrower) agreements to extend funds in the future 12. Moreover, it is assumed that in a stressed environment, the customers drawing these facilities will not be able to pay back the outstanding within 30 days regardless of maturity Credit facilities: A credit facility shall refer to any contractually irrevocable or conditionally revocable agreements to extend funds in the future (unscheduled draws in the future). General working capital facilities for corporate entities (e.g. revolving credit facilities in place for general corporate or working capital purposes) will not be classified as liquidity facilities, but as credit facilities. A bank shall apply the following drawdown rates on the undrawn portion of the committed credit facilities: 11 Typically, such a transaction is conducted to enable a bank s customers to cover their short positions. A customer short position in this context describes a transaction where a bank s customer sells a security it does not own, and the bank subsequently obtains the same security from internal or external sources to make delivery into the sale. Internal sources include the banks own inventory of collateral as well as re-hypothecatable collateral held in other customer margin accounts. External sources include collateral obtained through a securities borrowing, reverse repo, or like transactions 12 Excluding unconditionally revocable and unconditionally cancellable facilities, which are covered under Contingent Funding Obligations Page 12

19 Counterparty Drawdown rate of credit facility (% of undrawn portion) Retail and small business customers 5% Non-financial corporate, sovereigns and central banks, PSEs and multilateral development banks 10% Banks subject to prudential supervision 40% Other financial institutions including securities firms, insurance companies, fiduciaries and beneficiaries 40% Other legal entities (including SPEs, conduits and special purpose vehicles, and other entities not included in the prior categories) 100% In case the counterparty has already posted HQLA to secure the facility or the posting of collateral (in the form of HQLA) is contractually required for the counterparty to draw down the facility, the bank shall calculate the undrawn portion of such facilities net of any HQLA posted, if the bank is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the facility is drawn, and there is no undue correlation between the probability of drawing the facility and the market value of the collateral. The collateral shall be netted against the undrawn portion of the facility only if the collateral is not already counted in the stock of HQLA to avoid double counting Liquidity facilities: A liquidity facility is defined as any committed, undrawn back-up facility that would be utilized to refinance the debt obligations of a customer in situations where such a customer is unable to rollover that debt in financial markets (e.g. pursuant to a commercial paper program, secured financing transactions, obligations to redeem units, etc). This shall include facilities provided to hedge funds, money market funds and special purpose funding vehicles, for example SPEs or conduits, or other vehicles used to finance the banks own assets, should be captured in their entirety as a liquidity facility to other legal entities. The portion of a liquidity facility that is backing debt that does not mature within the 30-day window is excluded from the scope of the definition of a liquidity facility. The amount of the commitment to be treated as a liquidity facility is the amount of the currently outstanding debt issued by the customer (or proportionate share, if a syndicated facility) maturing within a 30 day period that is backstopped by the facility. To calculate the expected cash outflows from the liquidity facility, a bank shall multiply this amount of outstanding debt issued with the following drawdown rates: Drawdown rate of Counterparty credit facility (% of undrawn portion) Retail and small business customers 5% Non-financial corporate, sovereigns and central banks, PSEs and multilateral development banks 30% Banks subject to prudential supervision 40% Other financial institutions including securities firms, insurance companies, fiduciaries and beneficiaries 100% Other legal entities (including SPEs, conduits and special purpose vehicles, and other entities not included in the prior categories) 100% Page 13

20 b) Contingent Funding Obligations: For calculating LCR, a bank shall calculate the expected cash outflows for liquidity calls arising from contingent funding obligations 13 as per the following outflow rates (at national 5%). However, going forward bank needs to estimate historical behavior to accurately determine appropriate outflow. Category Outflow rate Unconditionally revocable (uncommitted) credit and liquidity facilities 0% Contingent funding obligation related to trade finance 5% of trade finance (e.g. documentary trade LCs, documentary and clean collection, import/ obligations export bills, guarantees related to trade finance obligations) Guarantees and letter of credit unrelated to trade finance obligations Non-contractual contingent funding obligation related to potential liquidity draws from subsidiaries, minority investments in entities, joint ventures (which are not consolidated and where there is expectation that the bank will be the main liquidity provider when the entity is in need to liquidity) Potential requests for debt repurchases of the bank s own debt, or outstanding debt securities having maturity greater than 30 calendar days whereby the bank or its affiliate is a dealer or marker maker Non contractual obligations where bank has internally matched customer short positions by other customer s collateral, where the collateral does not qualify as Level 1 or Level 2 assets and the bank may be obligated to find additional sources of funding for these positions in the event of client withdrawals Any other contingent funding obligation (not covered above) c) Derivatives Cash outflows 5% of the obligation amount 5% of investment value 5% of the total outstanding amount 50% of the collateral amount used to cover customer s short position 5% of the total outstanding amount The sum of all net cash outflows should receive a 100% factor. Banks should calculate, in accordance with their existing valuation methodologies, expected contractual derivative cash inflows and outflows. Cash flows may be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. Banks should exclude from such calculations those liquidity requirements that would result from increased collateral needs due to market value movements or falls in value of collateral posted. Options should be assumed to be exercised when they are in the money to the option buyer Cash flows arising from foreign exchange derivative transactions that involve a full exchange of principal amounts on a simultaneous basis (or within the same day) may be reflected in the LCR as a net cash flow figure Where derivative payments are collateralized by HQLA, cash outflows should be calculated net of any corresponding cash or collateral inflows that would result i.e. if the bank is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the collateral is received. Where the corresponding cash or collateral inflow has been received, the bank should only include the asset either as part of its stock of HQLA or by netting the amount against its expected derivative cash flows to ensure that there is no double-counting of liquidity inflows and outflows. 13 Lending commitments such as import or export facilities are excluded from this treatment and bank shall apply draw-down rates specified in section Drawdown from committed facilities. Page 14

21 Collateral Outflows: A bank shall include all contractually due or potential collateral outflows in the calculation of its expected cash outflows based on the contractual triggers and outflow rates as mentioned below: Increased liquidity needs related to downgrade triggers embedded in financing transactions, derivatives and other contracts: Often, contracts governing derivatives and other transactions have clauses that require the posting of additional collateral, drawdown of contingent facilities, or early repayment of existing liabilities upon the bank s downgrade by a recognized credit rating organization. Where such downgrade triggers exist, a bank shall include 100% of additional collateral or cash that would be posted, in the calculation of total expected cash outflows for any downgrade up to and including a 3-notch downgrade of the bank s long-term credit rating Increased liquidity needs related to the potential for valuation changes on posted collateral securing derivate and other transactions: Most counterparties to derivatives transactions typically are required to secure the mark-to-market valuation of their positions and that this is predominantly done using Level 1 liquid asset securities like cash or govt. securities etc. When these Level 1 asset securities are posted as collateral the framework does not require that an additional stock of HQLA be maintained for potential valuation changes. However, if counterparties are securing mark-to-market exposures with other forms of collaterals, to cover the potential loss of market value on such non-level-1 HQLA collaterals, then such collaterals are to be treated as cash outflow and a run off rate of 20% will be applied. This 20% will be calculated based on the notional amount required to be posted as collateral after applying haircuts applicable to the collateral category, and net of collateral received (provided that such collateral received is not subject to restrictions on reuse/ re-hypothecation) Increased liquidity needs related to excess non-segregated collateral held by the bank that could contractually be called at any time by the counterparty: Where a bank holds non-segregated collateral in excess of the counterparty s current collateral requirements and the collateral can be contractually called at any time by the counterparty, the bank shall include 100% of the excess non-segregated collateral in the calculation of total expected cash outflows Increased liquidity needs related to contractually required collateral on transactions for which the counterparty has not yet demanded the collateral be posted: A bank shall include 100% of the value of any collateral which is contractually due to a counterparty in the calculation of total expected cash outflows, even if the counterparty has not yet demanded the collateral to be posted Increased liquidity needs related to contracts that allow collateral substitution to non-hqla assets or Lower Quality HQLAs: In cases where a bank enters into a contract which allows collateral received to be substituted to non-hqla assets without the bank s consent, the bank shall include 100% of the collateral amount received in the calculation of total expected cash outflows if the collateral received is not segregated and can be used to secure another transaction. Page 15

22 If HQLA collateral (eg Level 1 assets) may be substituted for other HQLA collateral (eg Level 2A assets), an outflow amounting to the market value of the received collateral multiplied by the difference between the haircuts of the received collateral and the potential substitute collateral should be applied. If the substituted collateral can be of different liquidity value in the LCR, the bank should assume that the potential substitute collateral with the lowest liquidity value will be posted Increased liquidity needs related to market valuation changes on derivative or other transactions: As market practice requires collateralization of mark-to-market exposures on derivative and other transactions, banks face potentially substantial liquidity risk exposures to these valuation changes. Inflows and outflows of transactions executed under the same master netting agreement can be treated on a net basis. Any outflow generated by increased needs related to market valuation changes should be included in the LCR calculated by identifying the largest absolute net 30-day collateral flow 14 realized during the preceding 24 months. The absolute net collateral flow is based on both realized outflows and inflows Loss of funding from asset-backed commercial paper, securities investment vehicles and other such financing facilities: Banks having structured financing facilities that include the issuance of short-term debt instruments, such as asset backed commercial paper, should fully consider the potential liquidity risk arising from these structures. These risks include, but are not limited to: a. The inability to refinance maturing debt - Bank shall include 100% of the amount of the structured finance instrument maturing within the next 30 calendar days in its expected cash outflows. b. The existence of derivatives or derivative-like components - which may allow the return of assets to a bank or require the bank (asset originator) to provide liquidity are contractually written into the documentation associated with the structured financing facility, the bank shall include 100% of the amount of assets that could potentially be returned, or the liquidity required, in its expected cash outflows. In applying the requirements set out in paragraphs (a) and (b) above, a bank shall look through to the maturity of the debt instruments issued by a SPV (such as a special purpose vehicle, conduit or structured investment vehicle - SIV) and any embedded options in financing arrangements that may potentially trigger the return of assets or the need for liquidity, irrespective of whether the SPV issuing the structured finance instrument is consolidated. d) Other contractual Cash flows Any contractual lending obligations/ contractual cash outflows (e.g. dividends or contractual interest payments etc.) within the next 30 calendar days, not captured elsewhere in this document, shall be assigned a 100% outflow rate. Outflows related to operating costs, however, are not included in this standard. 14 The largest absolute net 30-day collateral flow is the largest aggregated cumulative net collateral outflow or inflow at the end of all 30-day periods during the preceding 24 months. For this purpose, bank have to consider all 30-day periods during the preceding 24 months. Page 16

23 Cash Inflows The Cash inflows are capped at 75% of total expected cash outflows as per this standard When considering available cash inflows, the bank should only include contractual inflows (including interest payments) from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon. Further, inflows should only be taken at the latest possible date, based on the contractual rights available to counterparties. Contingent inflows are not included in total expected cash inflows. a) Loans and other credit facilities For all fully performing loans & other credit facilities, either secured or unsecured, the inflow rate shall be determined by counterparty, as follows: Counterparty Inflow Rate Retail and small business customers 50% Non-financial corporate, sovereigns, multilateral development banks, and PSEs 50% Financial Institutions 15 & central banks 100% For revolving credit facilities (including Running Finance), the bank shall assume that existing loan is rolled over and no principal payment is received. However, minimum payments of principal, fee or interest associated with such loans, provided that such payments are contractually due within 30 days may be captured as inflows at the rates prescribed above. b) Secured lending, including reverse repos and securities borrowing A bank shall assume that maturing reverse repurchase, securities borrowing or collateral swap transactions will be rolled over and will not give rise to any cash inflows (zero per cent). Maturing reverse repurchase or securities lending agreements secured by Level 2 HQLA will lead to cash inflows equivalent to the relevant haircuts for the specific assets subject to condition that the collateral obtained is not used or rehypothecated In other cases, where the collateral obtained from secured lending transactions is not used to cover the bank s short position, a bank shall apply the following inflow rates from maturing reverse repurchase or securities borrowing agreements based on the type of asset securing the transaction. Maturing secured lending transactions backed Inflow rate (if collateral is not used) by the following asset category Level 1 assets 0% Level 2A assets 15% Level 2B assets 50% Margin lending backed by all other collaterals 50% Other collaterals 100% 15 Bankers acceptance held by the bank that mature within 30 days may also be included. Page 17