FAQs Data survey on the Liquidity Coverage Ratio (LCR) as part of the implementation of Basel III (status: 15 March 2013) A. General questions 1. What accounting standard should be used when completing the survey? Wherever appropriate, the accounting standard employed for other reports should be used. Deviations from the lower of cost or market principle are permitted with regard to the market value of assets. 2. We compile our accounts using trade date accounting. Where the LCR is concerned, this has the disadvantage that it does not show the effective cash flows. Is it permissible to report the LCR using settlement date accounting and compile the accounts and other statistics using trade date accounting? Wherever possible, the LCR should be reported using settlement date accounting. 3. Should the outflow rates and haircuts stipulated in the Basel documents be taken into account when reporting the figures? No. Where Level 2 assets are concerned, for example, the actual market value must be entered in the reporting template, and not the value reduced by a 15% haircut. Similarly, outflows from retail or corporate clients must not be weighted using an outflow assumption; the full volume due must be reported. 4. Is 30 days the same as one month? No. The LCR explicitly observes payments within the next 30 calendar days. For example, if a loan with a term of one month is granted to a company on 31 March, this can be recorded as an inflow within 30 days in the reporting as of 31 March. If this loan is rolled over for another month on 30 April, it no longer constitutes an inflow within 30 days for the purposes of reporting by 30 April. Einsteinstrasse 2, 3003 Bern Phone +41 (0)31 327 91 00, Fax +41 (0)31 327 91 01 www.finma.ch /A619
5. Can all the liquid assets of a subsidiary that is itself required to meet the LCR be included in full, or can the consolidated LCR only report as liquid assets the amount that the subsidiary needs in order to meet an LCR of 100%? Can cash inflows be included in full even if they exceed 75% of the cash outflows from the subsidiary? The liquid assets of the subsidiary can normally be included for the consolidated perspective. The only exception is the situation in which, under the applicable legal standards and supervisory provisions, the subsidiary or branch is subject to liquidity transfer restrictions preventing the transfer of high quality liquid assets of the individual entity that exceed the net cash outflows. In this event, that part of the high quality liquid assets that exceeds the net cash outflows from the individual entity but cannot be transferred must be reported in line 47. The 75% rule at subsidiary level is irrelevant for the purposes of the consolidated perspective, so all inflows can be taken into account. B. Questions on the survey form B.1 Questions on the consolidated Liquidity Coverage Ratio (LCR) B.1.1 High quality liquid assets (Section A of the form) 1. How are debt securities issued by financial institutions to be recorded? Unsecured debt securities issued by financial institutions may not be recorded. Secured debt securities issued by financial institutions, however, must be recorded unless they were issued by the bank itself or by an entity affiliated to it. 2. Can covered bonds issued by financial institutions be taken into account? Although unsecured debt securities issued by other financial institutions may not be taken into account, covered bonds issued by other financial institutions can. They may not be bonds issued by the financial institution itself or any of its affiliated entities; the basic conditions for Level 1 and Level 2 assets (large, deep and active market) must also be satisfied. 3. How must Swiss covered bonds from the Limmat transactions be treated? Swiss covered bonds from the Limmat transactions do not satisfy the criterion of being traded on a large, deep and active market characterised by a low level of concentration. For this reason they may not be included. /A618 2/11
4. Is it correct to enter postal cheque account balances and balances held with the SECB (eurosic) in line 1 Coins and banknotes? No. Like demand deposits at other institutions, postal cheque account balances must not be recorded. The definition of liquid assets in FINMA Circular 08/2 Accounting banks does not apply here, and the expression coins and banknotes rather than liquid assets was deliberately chosen to reflect this. 5. Is it correct to list AAA-rated debt securities of the Oesterreichische Kontrollbank, which are guaranteed by the Republic of Austria in line 5? No. Since these debt securities have a risk weight of 20% rather than 0% under SA-BIS, they must be listed in line 17. The same applies by analogy to, for example, debt securities issued by KfW. NOTE: The recording of bonds issued by banks backed by a central government guarantee is still under discussion, as bank bonds per se cannot be recorded. 6. Is it correct to report debt securities issued by the AAA-rated supranational organisation Eurofima in line 19, issued or guaranteed by PSEs? No. Only debt securities issued by public law corporations as defined in the CAO and in margin number 242 of FINMA Circular 08/2 "Accounting banks may be recorded under issued or guaranteed by PSEs. NOTE: The treatment of Eurofima is still under discussion. Given that the sovereign guarantees are provided by states with different risk weights, we currently expect the bonds concerned to be classified under line 17. 7. Can precious metals holdings ever be included in the high quality liquid assets? No. Precious metals holdings cannot be included as liquid assets. 8. How is the SNB liquidity-shortage financing facility to be recorded? Facilities granted to the bank in exchange for collateral must not be recorded only the corresponding assets, to the extent that they have not been used to draw down the facility. 9. Normally, the relevant assets must be under the control of the Treasury function. However, line 49 requires all SNB repo eligible assets to be recorded. Does this mean that positions not under control of Treasury must also be included? Assets not under control of Treasury must also be included in the SNB repo eligible assets. /A618 3/11
10. Col. 1 of the FINMA reporting form requires the market value to be recorded. We believe that where bonds are concerned, the figure reported should include not only the market value but also the accrued broken-period interest. Do you share that view? The Basel rules do not offer definitive guidance on this. However, the liquidity-generating potential is positively influenced by broken-period interest, and for this reason it can be included in the current survey. 11. Can securities of financing companies (e.g. Nestlé Finance International, Roche Holdings Inc., etc.) that meet the other criteria be included in high quality liquid assets? They are not covered by the exclusion in footnote 2 of the instructions. As defined in the rules text, the term financial institutions includes only banks, insurance companies and securities firms. Since the majority of financing institutions do not hold a banking licence (exceptions include Siemens Bank and various automobile manufacturers), they do not normally fall within the Basel definition of financial institutions. The problems involved in categorising issuers such as Nestlé Finance International and Roche Holdings Inc., for example in Telekurs, will be discussed by the national working group. 12. Level 1 assets issued or guaranteed by the BIS, IMF, ECB, the European Community and multilateral development banks have to be reported in line 8 of the form. Line 20 refers to Level 2 assets issued or guaranteed by multilateral development banks (there is no mention here of the BIS, IMF or ECB). According to the Basel II capital requirements (CAO Appendix 2), claims against these institutions cannot count as Level 1 assets because their risk weight is not 0%. We therefore feel that line 8 is redundant. However, although line 30 no longer mentions the BIS, IMF or ECB, we will report claims against them here. The allocation should be based on SA-BIS and not SA-CH. The relevant appendix is therefore no. 3 and not no. 2. Accordingly, the BIS, IMF and multilateral development banks stipulated by FINMA (currently: World Bank Group including the International Bank for Reconstruction and Development (IBRD) and International Finance Corporation (IFC), Asian Development Bank (ADB), African Development Bank (AfDB), European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IADB), European Investment Bank (EIB), European Investment Fund (EIF), Nordic Investment Bank (NIB), Caribbean Development Bank (CDB), Islamic Development Bank (IDB), Council of Europe Development Bank (CEDB)) have a risk weight of 0% and can be entered in line 8. 13. Can a cantonal bank take into account bonds issued by the canton concerned, or is this regarded as an affiliated entity? Even if a cantonal bank is regarded as a public law corporation of a canton, bonds issued by that canton can be included as liquid assets. /A618 4/11
14. How should securities that were still repo eligible on the reporting reference date but ceased to be so before the report was submitted be treated in Section A.f)? Is the perspective based solely on the reference date? Only the reference date is relevant. 15. How are securities of financial sector positions that are partially backed by a government guarantee (cantonal banks) to be treated? They are not repo eligible, nor are they guaranteed by a sovereign in the strict sense, but presumably they enjoy a special status for liquidity outflow reasons. We believe this can also apply to other non-repo eligible securities that cannot be included in Level 1 and Level 2 assets because they do not have a recognised rating (e.g. power station bonds from companies in the Axpo Group that is itself 100% controlled by several cantons). Implicit guarantees cannot be recorded. The same applies to positions that are only partially secured. The Basel rules require a complete and explicit sovereign guarantee. 16. Are the securities recorded in lines 43 to 46 a sub-set of lines 1 to 24? No. Liquid assets excluded from the stock of high quality assets on the basis of Articles 31 to 34 and 38 to 40 must be reported in lines 43 to 46 only, and not in lines 1 to 24. 17. What is supposed to be recorded in line 16? Debt securities issued by sovereigns with a risk weight of more than 0% have already been recorded in lines 10 and 11. Debt securities with a risk weight of more than 0% are to be entered in line 10 if they were issued by the country of domicile (in the case of Switzerland, this applies only to banks that have a foreign subsidiary which holds such debt securities). Debt securities with a risk weight of more than 0% should be reported in line 11 insofar as they are used to cover a net outflow in the national currency concerned. For example, a bank with a net outflow in South African rand can enter South African government bonds in line 11). Line 16 is mainly relevant for reporting debt securities with a risk weight of 20% that are denominated in CHF. 18. Can a bank that does not use external company ratings when calculating its equity capital still include individual corporate bonds with a corresponding rating in Level 2 assets in line 21? Whether or not an institution takes account of ratings when calculating its capital underpinning is irrelevant for the LCR survey. The assets concerned can be included. /A618 5/11
19. With regard to the degree of eligibility of Level 1 / Level 2 assets not denominated in CHF (for each currency, the net cash outflows constitute the cap for the eligibility of Level 1 / Level 2 assets in that currency) should the formula from the Basel III rules text (limiting the sum of expected inflows to 75% of the expected outflows) be used to calculate the net cash outflows? The aim of limiting the eligible liquid assets to the currency in which the net outflow takes place is not the same as that of the 75% cap per se. The purpose of the 75% cap is to ensure that liquid assets are held in all cases; the restriction to assets in the currency concerned is designed to prevent liquidity generated from those assets having to be converted first into another currency when a stress event takes place. Using the 75% cap per currency may actually make this more likely. For example, if there are in any case more inflows than outflows in a given currency, a currency transaction must be carried out anyway. The fact that the 75% cap may encourage more liquid assets in this currency to be taken into account further increases the requirement for foreign exchange transactions. For the purposes of the pilot survey, the intention is that the 75% cap on assets that can be taken into account in a given currency should not be applied. B.1.2 Expected cash outflows (Section B.1 of the form) 1. What retail client deposits can be taken into account as deposits fully covered by deposit insurance? As far as Switzerland is concerned, privileged deposits can be reported as retail deposits covered by deposit insurance, up to the system ceiling of CHF 6 billion. Deposit insurance can be taken into account up to a limit of CHF 6 billion per institution when completing the form for the pilot survey. Up to the cap, it should be taken into account for small-volume retail client deposits first, and only then for corporate client deposits. With regard to deposits in foreign branches or subsidiaries, the deposit insurance scheme in the country concerned should be taken into account, insofar as it applies to that branch or subsidiary. If the country concerned has a deposit insurance scheme that guarantees 100% of deposits, deposits may be regarded as insured up to the depositor or institution ceiling. With regard to the breakdown of the deposit insurance, the insured deposits in transactional accounts (lines 70 and 71) should be taken into account first, followed by those in accounts where the client s relationship with the bank is non-transactional (lines 74 and 75), and only then line 76. 2. How should client deposits subject to withdrawal restrictions be recorded? The portion of the deposit that is subject to withdrawal restrictions need not be recorded if withdrawal is permitted only subject to payment by the client of a significant penalty that is materially greater than the loss of interest. NOTE: An operational definition of significant penalty that is materially greater than the loss of interest has not yet been arrived at. For now, a conservative assessment should be made as to whether the withdrawal restriction is such that the probability of the client withdrawing the deposits in the event of a stress situation affecting the institution would be markedly reduced. /A618 6/11
3. When reporting the assets in the lines relating to full coverage by deposit insurance in Section B Net cash outflows (group/single entity form), should the same logic be applied as with the supervisory reporting (AU008; line 07 / col. 02), or must it be possible to reconcile this information with the supervisory reporting in AU008? The figures can only be reconciled with AU008 line 07 / col. 02 to a limited extent, as only deposits that mature or can be withdrawn within 30 days are to be recorded for the LCR. A further exception relates to banks with offices abroad that hold deposits guaranteed by the deposit insurance scheme in the country concerned. 4. Can anything be entered in lines 94 and 95? Fully covered by deposit insurance implies an amount not exceeding 100,000. But that amounts to the same as < 1.5 million, and must therefore be reported in the small businesses category. From a deposit of, for example, CHF 1.8 million, CHF 100,000 (bearing in mind the system limit) can be entered in line 95 as covered by deposit insurance. Foreign deposit insurance schemes may also provide for different coverage limits. 5. How must metal accounts be treated? Metal accounts should normally be treated in the same way as normal savings or demand deposits. An exception is made where the metal accounts are settled physically, i.e. if the client issues a sale order in respect of a specified amount of the precious metal concerned, that client can only receive the corresponding cash payment or credit on a clearing account after the bank has sold the precious metal position, at the price achieved. This must not only be customary practice, and in addition the client may not in fact have any contractual entitlement to cash payment at the precious metal price fixed. In the case of such a deposit, we would assume that the liquidity risk has been transferred in full to the client. 6. Can cantonal banks take account of the cantonal guarantee when calculating the level of deposit insurance? No. In Switzerland, there is no provision for the cantonal guarantee to be taken into account, and in any case only guarantees from central governments are eligible for consideration. 7. In lines 107 and 110 Vested benefit funds / pillar 3a deposits, should all deposits of vested benefit funds or pillar 3a be recorded or only those where disbursement within 30 days is scheduled (e.g. as a result of retirement, emigration from Switzerland, becoming selfemployed, etc.)? All holdings where the contract stipulates that they may be withdrawn within 30 days must be reported, not just those that are actually scheduled for disbursement. This does not include balances that are pledged for more than 30 days (cf. 21). /A618 7/11
8. How should the obligation to make additional payments in respect of the Pfandbriefbank be taken into account? This should be reported in line 160 ( Undrawn committed credit and liquidity facilities to other legal entities ). Under Article 634a of the Swiss Code of Obligations, the board of directors determines the rules governing subsequent contributions. The power to decide on calls for subsequent contributions cannot be transferred to the AGM, which means that no delay caused by convening the AGM can arise that would shift the additional payment deadline beyond the 30-day time horizon. The resolution to convene the AGM does not need to be officially documented. 9. How should the obligation to make additional payments to the deposit insurance scheme be taken into account? This should be reported in line 160 ( Undrawn committed credit and liquidity facilities to other legal entities ). 10. What amount should be entered for liquidity and credit facilities? Only that part of the facility that is not currently being used should be entered. 11. Where should undertakings to take over a loan be recorded? Undertakings to take over a loan that are expected to lead to outflows within 30 days should be listed in lines 161ff, depending on the loan type. 12. Should line 162 ( Other contractual obligations to extend funds to retail clients ) be used only for new loans, or should rolled-over loans also be included? Both newly agreed and rolled-over loans should be recorded in line 162. Netting with inflows is not permitted. The fact that it is customary practice to roll over the loan is not relevant; what matters is whether the bank is obliged to do so. 13. What is the purpose of recording positions with a remaining maturity of more than 30 days? We assume these are not relevant for the LCR. The purpose of asking for this information is partly to ensure that positions with a remaining maturity of more than 30 days are not incorrectly entered in other lines. 14. With regard to the inclusion of derivatives, is it correct that the net amount of the replacement values (asset-liability) should be used? Where derivatives are concerned, you should enter the known cash flow, i.e. the cash flow derived from e.g. the notional amount, and not the replacement value. Payments that, on the basis of the current market situation, will take place within 30 days should be recorded. Netting is now limited to situations where there is an existing master netting agreement at counterparty level. /A618 8/11
15. As regards open credit facilities, we have specified notice periods for loans that are secured (by mortgage, pledged collateral, etc.) and other unsecured loans. We do not have any notice periods on our current accounts. Where and how should these open facilities be recorded? Credit facilities that can be terminated at any time or within a maximum of 30 days should be recorded in line 170; those where termination is permitted after more than 30 days, depending on the counterparty, in lines 151, 152, 153 or 157. 16. What retail bank holdings should be reported in line 76? Lines 68 to 71 and 72 to 75 should only be used to record amounts where the probability of withdrawal is low because the client has an established relationship with the bank (lines 72 to 75) or the account is used for transactional purposes (lines 68 to 71). For example a savings deposit of a client who only has that deposit with the bank, and therefore no established client relationship, should be entered in line 76. 17. Where should medium-term notes with a remaining term of less than 30 days be recorded? According to the rules text, they should be reported in line 119. However, it would not then be possible to distinguish by deposit insurance, client category, etc. Would it not therefore make more sense to record them in lines 74 and 75, or 88 and 89, respectively? Can medium-term notes with a remaining term of more than 30 days also be recorded in line 80 or 92? Medium-term notes with a remaining term of less than 30 days can be recorded in lines 74 to 78 depending on the counterparty (retail clients) or the corresponding lines under B.1.b) for corporate clients. Medium-term notes with a remaining term of more than 30 days can be recorded in the corresponding lines 80 or 92, depending on the counterparty. 18. Are loans from central mortgage bond institutions that are due within 30 days recorded in line 136? What procedure should be adopted for due loans from central mortgage bond institutions where an extension has already been agreed at the time when the LCR is being compiled? Correct. Extensions should only be taken into account if they are contractually guaranteed and irrevocable. 19. Must deposits of corporate clients that, owing to restrictions, cannot be withdrawn within 30 days be included? No. Deposits that are subject to withdrawal restrictions need not be recorded, irrespective of the type of counterparty, provided the restriction makes the withdrawal of the deposit sufficiently unlikely. (cf. 2) /A618 9/11
20. Is it obligatory to record pillar 3a / vested benefit funds in lines 107 and 110? If the account at the bank is in the name of the private individual and not the foundation, and withdrawal instructions can be issued only by the individual and not the foundation, the deposit should be allocated to retail client deposits and not reported in lines 107 and 110. 21. How should pledged pillar 3a / vested benefit funds be recorded? Pledged pillar 3a / vested benefit funds should not be recorded as outflows if they are tied for more than 30 days by the transaction (e.g. mortgage) underlying the pledge. 22. Insured deposits in which countries are subject to the 3% outflow assumption (lines 68, 69, 72 and 73)? Currently only the supervisory authorities of Brazil, Canada, Indonesia, Republic of Korea and the US allow for an outflow rate of 3%. Within the reporting the 3 % outflow rate should be restricted on deposits in these countries. B.1.3 Expected cash inflows (Section B.2 of the form) 1. Renewal of loans and term deposits: What is the procedure if an agreement that is due to expire and has a value date in the future has already been renewed in the old period? If the future value date is within the next 30 days, the inflow should be recorded in the line corresponding to the position (196 to 204) and the extension already agreed as an outflow in lines 161 to 165. 2. How is the term small business in line 197 defined? Is it the number of employees, as with the SNB s credit volume statistics (form KRED)? As with the Basel II definition (Basel II capital standard margin no. 231), and Appendix 4 to the Capital Adequacy Ordinance, loans that should be allocated to the small business category are limited to a maximum credit volume of CHF 1.5 million. 3. How are loans without a contractual due date recorded? Loans without a contractual due date cannot be recorded in the LCR as an inflow. 4. Should claims against clients that are secured by mortgage be reported in line 188? Mortgages due within 30 days should be recorded in lines 196 to 198, depending on the counterparty. This does not include transactions without an agreed term ( non-maturing ). Only secured transactions in which the counterparty is an institution should be entered in line 188. /A618 10/11
5. How should amounts receivable from clients in the form of current account overdrafts (no fixed term, callable asset) be taken into account? Overdraft payments can be recorded in accordance with the Basel rules, even though they have no fixed term. 6. Re line 207 ( Contractual inflows from securities maturing 30 days, not included anywhere above ): are all our financial assets that are due within 30 days recorded here? What does the text in Article 114 mean ( Level 1 and Level 2 assets with a remaining term not exceeding 30 days should be recorded in Section A )? Since Level 1 and Level 2 assets are already recorded as liquid assets, they cannot be recorded again when they mature; they should therefore be excluded in line 207. 7. Can due cash inflows (e.g. coupon payments, maturing bonds) from Level 1 or Level 2 assets be included in line 207? Repayments of assets recorded as Level 1 and Level 2 assets may not be recorded. This is to avoid double counting. The interest payment can be recorded, but only insofar as it is not already part of the value of the asset. If broken-period interest is recorded as part of the value of the asset as per A2.10, only the interest inflow in excess of this can be taken into account. B.2 Specific questions on the Liquidity Coverage Ratio (LCR) for the parent company Supplementing the LCR group or single entity data sheet, the LCR parent company data sheet can be used for an additional breakdown between inflows and outflows within the group, on the one hand, and inflows and outflows in respect of third parties on the other. Accordingly, the answers given under B.1 also apply to B.2. C. Information 1. Whom can I contact if I have additional questions? liquidity@finma.ch or phone +41 31 327 91 00. /A618 11/11