Annex 2: Principles for Assessing Eligibility for Alternative Liquidity Approaches (ALA)
| 1. This Annex presents a set of principles and criteria for assessing whether a currency is eligible for alternative treatment under the LCR (hereinafter referred to as the “Principles”). All of the Principles have to be satisfied in order to qualify for alternative treatment. Supplementary guidance is provided to elaborate on how a jurisdiction seeking alternative treatment should demonstrate its compliance with the Principles, including any supporting information (qualitative and quantitative) to justify its case. The Principles will be the main source of reference upon which self-assessments or independent peer reviews should be based. Unless otherwise specified, all references in the Principles are to the liquidity standard. | ||
| 2. The Principles may not, in all cases, be able to capture specific circumstances or unique factors affecting individual jurisdictions in respect of the issue of insufficiency in HQLA. Hence, a jurisdiction will not be precluded from providing any additional information or explaining any other factor that is relevant to its compliance with the Principles, even though such information or factor may not be specified in the Principles. | ||
| 3. Where a jurisdiction uses estimations or projections to support its case, the rationale and basis for those estimations or projections should be clearly set out. In order to support its case and facilitate independent peer review, the jurisdiction should provide information, to the extent possible, covering a long enough time series (eg three to five years depending on data availability). | ||
| Principle 1 | ||
| The use of alternative treatment under the LCR is only available to the domestic currency of a jurisdiction which can demonstrate and justify that an issue of insufficiency in HQLA denominated in that currency genuinely exists, taking into account all relevant factors affecting the supply of, and demand for, such HQLA. | ||
| 4. In order to qualify for alternative treatment, the jurisdiction must be able to demonstrate that there is “a true shortfall in HQLA in the domestic currency as relates to the needs in that currency” (see paragraph 55). The jurisdiction must demonstrate this with due regard to the three criteria set out below. | ||
| Criterion (a): The supply of HQLA in the domestic currency of the jurisdiction is insufficient, in terms of Level 1 assets only or both Level 1 and Level 2 assets, to meet the aggregate demand for such assets from banks operating in that currency. The jurisdiction must be able to provide adequate information (quantitative and otherwise) to demonstrate this. | ||
| 5. This criterion requires the jurisdiction to provide sufficient information to demonstrate the insufficiency of HQLA in its domestic currency. This insufficiency must principally reflect a shortage in Level 1 assets, although Level 2 assets may also be insufficient in some jurisdictions. | ||
| 6. To illustrate that a currency does not have sufficient HQLA, the jurisdiction will need to provide all relevant information and data that have a bearing on the size of the HQLA gap faced by banks operating in that currency that are subject to LCR requirements (“LCR banks”). These should, to the extent practicable, include the following information: | ||
| (i) | Supply of HQLA | |
| The jurisdiction should provide the current and projected stock of HQLA denominated in its currency, including: | ||
| • | the supply of Level 1 and Level 2 assets broken down by asset classes; | |
| • | the amounts outstanding for the last three to five years; and | |
| • | the projected amounts for the next three to five years. | |
| The jurisdiction may provide any other information in support of its stock and projection of HQLA. Should the jurisdiction feel that the true nature of the supply of HQLA cannot be simply reflected by the numbers provided, it should provide further information to sufficiently explain the case. | ||
| To avoid doubt, if the jurisdiction is a member of a monetary union operating under a single currency, debt or other assets issued in other members of the union in that currency is considered available for all jurisdictions in that union (see paragraph 55). Hence, the jurisdiction should take into account the availability of such assets which qualify as HQLA in its analysis. | ||
| (ii) | Market for HQLA | |
| The jurisdiction should provide a detailed analysis of the nature of the market for the above assets. Information relating to the market liquidity of the assets would be of particular importance. The jurisdiction should present its views on the liquidity of the HQLA based on the information presented. | ||
| Details of the primary market for the above assets should be provided, including: | ||
| • | the channel and method of issuance; | |
| • | the issuers; | |
| • | the past issue tenor, denomination and issue size for the last three to five years; and | |
| • | the projected issue tenor, denomination and issue size for the next three to five years. | |
| Details of the secondary market for the above assets should also be provided, including: | ||
| • | the trading size and activity; | |
| • | types of market participants; and | |
| • | the size and activity of its repo market. | |
| Where possible, the jurisdiction should provide an estimate of the amount of the above assets (Level 1 and Level 2) required to be in free circulation for them to remain genuinely liquid, as well as any justification for these figures. | ||
| (iii) | Demand for HQLA by LCR banks | |
| The jurisdiction should provide: | ||
| • | the number of LCR banks under its purview; | |
| • | the current demand (ie net 30-day cash outflows) for HQLA by these LCR banks65 for meeting the LCR or other requirements (eg collateral for intraday repo); | |
| • | the projected demand for the next three to five years based on banks’ business growth and strategy; and | |
| • | an estimate of the percentage of total HQLA already in the hands of banks. | |
| The jurisdiction should provide commentaries on cash flow projections where appropriate to improve their persuasiveness. The projections should take into account observed behavioural changes of the LCR banks and any other factors that may result in a reduction of their 30-day cash outflows. | ||
| (iv) | Demand for HQLA by other entities | |
| There are other potential holders of Level 1 and Level 2 assets that are not subject to the LCR, but will likely take up, or hold onto, a part of the outstanding stock of HQLA. These include: | ||
| • | banks, branches of banks, and other deposit-taking institutions which conduct bank-like activity (such as building societies and credit unions) in the jurisdiction but are not subject to the LCR; | |
| • | other financial institutions which are normally subject to prudential supervision, such as investment or securities firms, insurance or reinsurance companies, pension/superannuation funds, mortgage funds, and money market funds; and | |
| • | other significant investors which have demonstrated a track record of strategic ”buy and hold” purchases which can be presumed to be price insensitive. This would include foreign sovereigns, foreign central banks and foreign sovereign /quasi-sovereign funds, but not hedge funds or other private investment management vehicles. | |
| The jurisdiction may provide information on the demand for Level 1 and Level 2 assets by the above HQLA holders in support of its application. Historical demand for such assets by these holders is not sufficient. The alternate holders of HQLA must at least exhibit the following qualities: | ||
| • | Price inelastic: the holders of HQLA are unlikely to switch to alternate assets unless there is a significant change in the price of these assets. | |
| • | Proven to be stable: the demand for HQLA by the holders should remain stable over the next three years as they require these assets to meet specific purposes, such as asset-liability matching or other regulatory requirements. | |
| 7. The jurisdiction should be able to come up with a reasonable estimate of the HQLA gap faced by its LCR banks (current and over the next three to five years), based on credible information. In deriving the HQLA gap, the jurisdiction should first compare (i) the total outstanding stock of its HQLA in domestic currency with (ii) the total liquidity needs of its LCR banks in domestic currency. The jurisdiction should then explain the method of deriving the high quality liquid asset gap, taking into account all relevant factors, including those set out in criterion (b), which may affect the size of the gap. A detailed analysis of the calculations should be provided (eg in the form of a template), explaining any adjustments to supply and demand and justifications for such adjustments.66 The jurisdiction should demonstrate that the method of defining insufficiency is appropriate for its circumstances, and that it can truly reflect the HQLA gap faced by LCR banks in the currency. | ||
| Criterion (b): The determination of insufficiency in HQLA by the jurisdiction under criterion (a) should address all major factors relevant to the issue. These include, but are not limited to, the expected supply of HQLA in the medium term (eg three to five years), the extent to which the banking sector can and should run less liquidity risk, and the competing demand from banks and non-bank investors for holding HQLA for similar or other purposes. | ||
| 8. This criterion builds on the information provided by the jurisdiction under criterion (a), and requires the jurisdiction to further explain the manner in which the insufficiency issue is determined, by listing all major factors that affect the HQLA gap faced by its LCR banks under criterion (a). There should be a commentary for each of the factors, explaining why the factor is relevant, the impact of the factor on the HQLA gap, and how such impact is incorporated into the analysis of insufficiency in HQLA. The jurisdiction should be able to demonstrate that it has adequately considered all relevant factors, including those that may improve the HQLA gap, so as to ascertain that the insufficiency issue is fairly stated. | ||
| 9. On the supply of HQLA, there should be due consideration of the extent to which the insufficiency issue may be alleviated by estimated medium term supply of such assets, as well as the factors restricting the availability of HQLA to LCR banks. In the case of government debt, relevant information on availability can be reflected, for example, from the size and nature of other users of government debt in the jurisdiction; holdings of government debt which seldom appear in the traded markets; and the amount of government debt in free circulation for the assets to remain truly liquid. | ||
| 10. On the demand of HQLA, there should be due consideration of the potential liquidity needs of the banking sector, taking into account the scope for banks to reduce their liquidity risk (and hence their demand for HQLA) and the extent to which banks can satisfy their demand through the repo market (rather than through outright purchase of HQLA). Other needs for maintaining HQLA (eg for intraday repo purposes) may also increase banks’ demand for such assets. | ||
| 11. The jurisdiction should also include any other factors not mentioned above that are relevant to its case. | ||
| Criterion (c): The issue of insufficiency in HQLA faced by the jurisdiction is caused by structural, policy and other constraints that cannot be resolved within the medium term (eg three to five years). Such constraints may relate to the fiscal or budget policies of the jurisdiction, the infrastructural development of its capital markets, the structure of its monetary system and operations (eg the currency board arrangements for jurisdictions with pegged exchange rates), or other jurisdiction-specific factors leading to the shortage or imbalance in the supply of HQLA available to the banking sector. | ||
| 12. This criterion is to establish that the insufficiency issue is caused by constraints that are not temporary in nature. The jurisdiction should provide a list of such constraints, explain the nature of the constraints and how the insufficiency issue is affected by the constraints, as well as whether there is any prospect of change in the constraints (eg measures taken to address the constraints) in the next three to five years. To demonstrate the significance of the constraints, the jurisdiction should support the analysis with appropriate quantitative information. | ||
| 13. A jurisdiction may have fiscal or budget constraints that limit its ability or need to raise debt. To support this, the following information should, at a minimum, be provided: | ||
| (i) | Fiscal position for the past ten years: Consistent fiscal surpluses (eg at least six out of the past ten years or at least two out of the past three years)67 can be an indication that the jurisdiction does not need to raise debt (or a lot of debt). On the contrary, it is unlikely that jurisdictions with persistent deficits (eg at least six out of the past ten years) will have a shortage in government debt issued. | |
| (ii) | Fiscal position as % of GDP (ten-year average): This is another way of looking at the fiscal position. A positive ten-year average will likely suggest that the need for debt issuance is low. Similarly, a negative ten-year average will suggest otherwise. | |
| (iii) | Issue of government / central bank debt in the past ten years and the reasons for such issue (eg for market operations / setting the yield curve, etc.). This is to assess the level of, and consistency in, debt issuance. | |
| 14. The jurisdiction should also provide the ratio of its government debt to total banking assets denominated in domestic currency (for the past three to five years) to facilitate trend analysis of the government debt position versus a proxy indicator for banking activity (ie total banking assets), as well as comparison of the position across jurisdictions (including those that may not have the insufficiency issue). While this ratio alone cannot give any conclusive view about the insufficiency issue, a relatively low ratio (eg below 20%) may support the case if the jurisdiction also performs similarly under other indicators. | ||
| 15. A jurisdiction may have an under-developed capital market that has resulted in limited availability of corporate / covered bonds to satisfy market demand. Information to be provided includes the causes of this situation, measures that are being taken to develop the market, the expected effect of such measures, and other relevant statistics showing the state of the market. | ||
| 16. There may also be other structural issues affecting the monetary system and operations. For example, the currency board arrangements for jurisdictions with pegged exchange rates could potentially constrain the issue of central bank debt and cause uncertainty or volatility in the availability of such debt to the banking sector. The jurisdiction should explain such arrangements and their effects on the supply of central bank debt (supported by relevant historical data in the past three to five years). | ||
| Principle 2 | ||
| A jurisdiction which intends to adopt one or more of the options for alternative treatment must be capable of limiting the uncertainty of performance, or mitigating the risks of non-performance, of the option(s) concerned. | ||
| 17. This Principle assesses whether and how the jurisdiction can mitigate the risks arising from the adoption of any of the options, based on the requirements set out in the three criteria mentioned below. The assessment will also include whether the jurisdiction’s approach to adopting the options is in line with the alternative treatment set out in the Basel III liquidity framework (see paragraphs 55 to 62). | ||
| 18. To start with, the jurisdiction should explain its policy towards the adoption of the options, including which of the options will be used and the estimated (and maximum allowable) extent of usage by the banking sector. The jurisdiction is also expected to justify the appropriateness of the maximum level of usage of the options to its banking system, having regard to the relevant guidance set out in the Basel III liquidity framework (see paragraphs 63 to 65). | ||
| Criterion (a): For Option 1 (ie the provision of contractual committed liquidity facilities from the relevant central bank at a fee), the jurisdiction must have the economic strength to support the committed liquidity facilities granted by its central bank. To ensure this, the jurisdiction should have a process in place to control the aggregate of such facilities within a level that can be measured and managed by it. | ||
| 19. A jurisdiction intending to adopt Option 1 must demonstrate that it has the economic and financial capacity to support the committed liquidity facilities that will be granted to its banks.68 The jurisdiction should, for example, have a strong credit rating (such as AA-69) or be able to provide other evidence of financial strength, with no adverse developments (eg a looming crisis) that may heavily impinge on the domestic economy in the near term. | ||
| 20. The jurisdiction should also demonstrate that it has a process in place to control the aggregate facilities granted under Option 1 within a level that is appropriate for its local circumstances. For example, the jurisdiction may limit the amount of Option 1 commitments to a certain level of its GDP and justify why this level is suitable for its banking system. The process should also cater for situations where the aggregate facilities are approaching the limit, or have indeed breached, the limit, as well as how the limit interplays with other restrictions for using the options (eg maximum level of usage for all options combined). | ||
| 21. To facilitate assessment of compliance with requirements in paragraph 58, the jurisdiction should provide all relevant details associated with the extension of the committed facility, covering: | ||
| (i) | the commitment fee (including the basis on which it is charged,70 the method of calculation71 and the frequency of re-calculating or varying the fee). The jurisdiction should, in particular, demonstrate that the calculation of the commitment fee is in line with the conceptual framework set out in paragraph 58. | |
| (ii) | the types of collateral acceptable to the central bank for securing the facility and respective collateral margins or haircuts required; | |
| (iii) | the legal terms of the facility (including whether it covers a fixed term or is renewable or evergreen, the notice of drawdown, whether the contract will be irrevocable prior to maturity,72 and whether there will be restrictions on a bank’s ability to draw down on the facility);73 | |
| (iv) | the criteria for allowing individual banks to use Option 1; | |
| (v) | disclosure policies (ie whether the level of the commitment fee and the amount of committed facilities granted will be disclosed, either by the banks or by the central bank); and | |
| (vi) | the projected size of committed liquidity facilities that may be granted under Option 1 (versus the projected size of total net cash outflows in the domestic currency for Option 1 banks) for each of the next three to five years and the basis of projection. | |
| Criterion (b): For Option 2 (ie use of foreign currency HQLA to cover domestic currency liquidity needs), the jurisdiction must have a mechanism in place that can keep under control the foreign exchange risk of the holdings of its banks in foreign currency HQLA. | ||
| 22. A jurisdiction intending to adopt Option 2 should demonstrate that it has a mechanism in place to control the foreign exchange risk arising from banks’ holdings in foreign currency HQLA under this Option. This is because such foreign currency asset holdings to cover domestic currency liquidity needs may be exposed to the risk of decline in the liquidity value of those foreign currency assets should exchange rates move adversely when the assets are converted into the domestic currency, especially in times of stress. | ||
| 23. This control mechanism should, at a minimum, cover the following elements: | ||
| (i) | The jurisdiction should ensure that the use of Option 2 is confined only to foreign currencies that can provide a reliable source of liquidity in the domestic currency in case of need. In this regard, the jurisdiction should specify the currencies (and broad types of HQLA denominated in those currencies74) allowable under this option, based on prudent criteria. The suitability of the currencies should be reviewed whenever significant changes in the external environment warrant a review. | |
| (ii) | The selection of currencies should, at a minimum, take into account the following aspects: | |
| • | the currency is freely transferable and convertible into the domestic currency; | |
| • | the currency is liquid and active in the relevant foreign exchange market (the methodology and basis of assessment should be provided); | |
| • | the currency does not exhibit significant historical exchange rate volatility against the domestic currency;75 and | |
| • | in the case of a currency which is pegged to the domestic currency, there is a formal mechanism in place for maintaining the peg rate (relevant information about the mechanism and past ten-year statistics on exchange rate volatility of the currency pair showing the effectiveness of the peg arrangement should be provided). | |
| The jurisdiction should explain why each of the allowable currencies is selected, including an analysis of the historical exchange rate volatility, and turnover size in the foreign exchange market, of the currency pair (based on statistics for each of the past three to five years). In case a currency is selected for other reasons,76 the justifications should be clearly stated to support its inclusion for Option 2 purposes. | ||
| (iii) | HQLA in the allowable currencies used for Option 2 purposes should be subject to haircuts as prescribed under this framework (ie at least 8% for major currencies77). The jurisdiction should set a higher haircut for other currencies where the exchange rate volatility against the domestic currency is much higher, based on a methodology that compares the historical (monthly) exchange rate volatilities between the currency pair concerned over an extended period of time. | |
| Where the allowable currency is formally pegged to the domestic currency, a lower haircut can be used to reflect limited exchange rate risk under the peg arrangement. To qualify for this treatment, the jurisdiction should demonstrate the effectiveness of its currency peg mechanism and the long-term prospect of keeping the peg. | ||
| Where a threshold for applying the haircut under Option 2 is adopted (see paragraph 61), the level of the threshold should not be more than 25%. | ||
| (iv) | Regular information should be collected from banks in respect of their holding of allowable foreign currency HQLA for LCR purposes to enable supervisory assessment of the foreign exchange risk associated with banks’ holdings of such assets, both individually and in aggregate. | |
| (v) | There should be an effective means to control the foreign exchange risk assumed by banks. The control mechanism, and how it is to be applied to banks, should be elaborated. In particular, | |
| • | there should be prescribed criteria for allowing individual banks to use Option 2; | |
| • | the approach to assessing whether the estimated holdings of foreign currency HQLA by individual banks using Option 2 are consistent with their foreign exchange risk management capacity (re paragraph 59) should be explained; and | |
| • | there should be a system for setting currency mismatch limits to control banks’ maximum foreign currency exposures under Option 2. | |
| Criterion (c): For Option 3 (ie use of Level 2A assets beyond the 40% cap with a higher haircut), the jurisdiction must only allow Level 2 assets that are of a quality (credit and liquidity) comparable to that for Level 1 assets in its currency to be used under this option. The jurisdiction should be able to provide quantitative and qualitative evidence to substantiate this. | ||
| 24. With the adoption of Option 3, the increase in holdings of Level 2A assets within the banking sector (to substitute for Level 1 assets which are of higher quality but in shortage) may give rise to additional price and market liquidity risks, especially in times of stress when concentrated asset holdings have to be liquidated. In order to mitigate this risk, the jurisdiction intending to adopt Option 3 should ensure that only Level 2A assets that are of comparable quality to Level 1 assets in the domestic currency are allowed to be used under this option (ie to exceed the 40% cap). Level 2B assets should remain subject to the 15% cap. The jurisdiction should demonstrate how this can be achieved in its supervisory framework, having regard to the following aspects: | ||
| (i) | the adoption of higher qualifying standards for additional Level 2A assets. Apart from fulfilling all the qualifying criteria for Level 2A assets, additional requirements should be imposed. For example, the minimum credit rating of these additional Level 2A assets should be AA or AA+ instead of AA-, and other qualitative and quantitative criteria could be made more stringent. These assets may also be required to be central bank eligible. This will provide a backstop for ensuring the liquidity value of the assets; and | |
| (ii) | the inclusion of a prudent diversification requirement for banks using Option 3. Banks should be required to allocate its portfolio of Level 2 assets among different issuers and asset classes to the extent feasible in a given national market. The jurisdiction should illustrate how this diversification requirement is to be applied to banks. | |
| 25. The jurisdiction should provide statistical evidence to substantiate that Level 2A assets (used under Option 3) and Level 1 assets in the domestic currency are generally of comparable quality in terms of the maximum decline in price during a relevant period of significant liquidity stress in the past. | ||
| 26. To facilitate assessment, the jurisdiction should also provide all relevant details associated with the use of Option 3, including: | ||
| (i) | the standards and criteria for allowing individual banks to use Option 3; | |
| (ii) | the system for monitoring banks’ additional Level 2A asset holding under Option 3 to ensure that they can observe the higher requirements; | |
| (iii) | the application of higher haircuts to additional Level 2A assets (and whether this is in line with paragraph 62);78 and | |
| (iv) | the existence of any restriction on the use of Level 2A assets (ie to what extent banks will be allowed to hold such assets as a percentage of their liquid asset stock). | |
| Principle 3 | ||
| A jurisdiction which intends to adopt one or more of the options for alternative treatment must be committed to observing all of the obligations set out below. | ||
| 27. This Principle requires a jurisdiction intending to adopt any of the options to indicate expressly the jurisdiction’s commitment to observing the obligations relating to supervisory monitoring, disclosure, periodic self-assessment, and independent peer review of its eligibility for adopting the options, as set out in the criteria below. Whether these commitments are fulfilled in practice should be assessed in subsequent periodic self-assessments and, where necessary, in subsequent independent peer reviews. | ||
| Criterion (a): The jurisdiction must maintain a supervisory monitoring system to ensure that its banks comply with the rules and requirements relevant to their usage of the options, including any associated haircuts, limits or restrictions. | ||
| 28. The jurisdiction should demonstrate that it has a clearly documented framework for monitoring the usage of the options by its banks as well as their compliance with the relevant rules and requirements applicable to them under the supervisory framework. In particular, the jurisdiction should have a system to ensure that the rules governing banks’ usage of the options are met, and that the usage of the options within the banking system can be monitored and controlled. To achieve this, the framework should be able to address the aspects mentioned below. | ||
| Supervisory requirements | ||
| 29. The jurisdiction should set out clearly the requirements that banks should meet in order to use the options to comply with the LCR. The requirements may differ depending on the option to be used as well as jurisdiction-specific considerations. The scope of these requirements will generally cover the following areas: | ||
| (i) | Rules governing banks’ usage of the options | |
| The jurisdiction should devise the supervisory requirements governing banks’ usage of the options, having regard to the guidance set out in Annex 3. Any bank-specific requirements should be clearly communicated to the affected banks. | ||
| (ii) | Minimum amount of Level 1 asset holdings | |
| Banks using the options should be informed of the minimum amount of Level 1 assets that they are required to hold in the relevant currency. The jurisdiction is expected to set a minimum level for banks in the jurisdiction. This should complement the requirement under (iii) below. | ||
| (iii) | Maximum amount of usage of the options | |
| In order to control the usage of the options within the banking system, banks should be informed of any supervisory restriction applicable to them in terms of the maximum amount of alternative HQLA (under each or all of the options) they are allowed to hold. For example, if the maximum usage level is 70%, a bank should maintain at least 30% of its high quality liquid asset stock in Level 1 assets in the relevant currency. | ||
| The maximum level of usage of the options set by the jurisdiction should be consistent with the calculations and projections used to support its compliance with Principle 1 and Principle 2. | ||
| (iv) | Relevant haircuts for using the options | |
| The jurisdiction may apply additional haircuts to banks that use the options to limit the uncertainty of performance, or mitigate the risks of non-performance, of the options used (see Principle 2). These should be clearly communicated to the affected banks. | ||
| For example, a jurisdiction that relies heavily on Option 3 may observe that a large amount of Level 2A assets will be held by banks to fulfil their LCR needs, thereby increasing the market liquidity risk of these assets. This may necessitate increasing the Option 3 haircut for banks that rely heavily on these Level 2A assets. | ||
| (v) | Any other restrictions | |
| The jurisdiction may choose to apply further restrictions to banks that use the options, which must be clearly communicated to them. | ||
| Reporting requirements | ||
| 30. The jurisdiction should demonstrate that through its data collection framework (eg as part of regular banking returns), sufficient data can be obtained from its banks to ascertain compliance with the supervisory requirements as communicated to the banks. The jurisdiction should determine the reporting requirements, including the types of data and information required, the manner and frequency of reporting, and how the data and information collected will be used. | ||
| Monitoring approach | ||
| 31. The jurisdiction should also indicate how it intends to monitor banks’ compliance with the relevant rules and requirements. This may be performed through a combination of off-site analysis of information collected, prudential interviews with banks and on-site examinations as necessary. For example, an on-site review may be necessary to determine the quality of a bank’s foreign exchange risk management in order to assess the extent which the bank should be allowed to use Option 2 to satisfy its LCR requirements. | ||
| Supervisory toolkit and powers | ||
| 32. The jurisdiction should demonstrate that it has sufficient supervisory powers and tools at its disposal to ensure compliance with the requirements governing banks’ usage of the options. These will include tools for assessing compliance with specific requirements (eg foreign exchange risk management under Option 2 and price risk management under Option 3) as well as general measures and powers available to impose penalties should banks fail to comply with the requirements applicable to them. The jurisdiction should also demonstrate that it has sufficient powers to direct banks to comply with the general rules and/or specific requirements imposed on them. Examples of such measures are the power to issue directives to the banks, restriction of financial activities, financial penalties, increase of Pillar 2 capital, etc. | ||
| 33. The jurisdiction should also be prepared to restrict a bank from using the options should it fail to comply with the relevant requirements. | ||
| Criterion (b): The jurisdiction must document and update its approach to adopting an alternative treatment, and make that explicit and transparent to other national supervisors. The approach should address how it complies with the applicable criteria, limits and obligations set out in the qualifying principles, including the determination of insufficiency in HQLA and other key aspects of its framework for alternative treatment. | ||
| 34. The jurisdiction should demonstrate that it has a clearly documented framework that will be disclosed (whether on its website or through other means) upon the adoption of the options for alternative treatment. The document should contain clear and transparent information that will enable other national supervisors and stakeholders to gain a sufficient understanding of its compliance with the qualifying principles for adoption of the options and the manner in which it supervises the use of the options by its banks. | ||
| 35. The disclosure should cover, at a minimum, the following: | ||
| (i) | Assessment of insufficiency in HQLA: the jurisdiction’s self-assessment of insufficiency in HQLA in the domestic currency, including relevant data about the supply of, and demand for, HQLA, and major factors (eg structural, cyclical or jurisdiction-specific) influencing the supply and demand. This assessment should correspond with the self-assessment required under criterion 3(c) below; | |
| (ii) | Supervisory framework for adoption of alternative treatment: the jurisdiction’s approach to applying the alternative treatment, including the option(s) allowed to be used by banks, any guidelines, requirements and restrictions associated with the use of such option(s) by banks, and approach to monitoring banks’ compliance with them; | |
| (iii) | Option 1-related information: if Option 1 will be adopted, the terms of the committed liquidity facility, including the maturity of the facility, the commitment fee charged (and the approach adopted for setting the fee), securities eligible as collateral for the facility (and margins required), and other terms, including any restrictions on banks’ usage of this option; | |
| (iv) | Option 2-related information: if Option 2 will be adopted, the foreign currencies (and types of securities under those currencies) allowed to be used, haircuts applicable to the foreign currency HQLA, and any restrictions on banks’ usage of this option; | |
| (v) | Option 3-related information: if Option 3 will be adopted, the Level 2A assets allowed to be used in excess of the 40% cap (and the associated criteria), haircuts applicable to Level 2A assets (within and above the 40% cap), and any restrictions on banks’ usage of this option. | |
| 36. The jurisdiction should update the disclosed information whenever there are changes to the information (eg updated self-assessment of insufficiency in HQLA performed). | ||
| Criterion (c): The jurisdiction must review periodically the determination of insufficiency in HQLA at intervals not exceeding five years, and disclose the results of review and any consequential changes to other national supervisors and stakeholders. | ||
| 37. The jurisdiction should perform a review of its eligibility for alternative treatment every five years after it has adopted the options. The primary purpose of this review is to determine that there remains an issue of insufficiency in HQLA in the jurisdiction. The review should be in the form of a self-assessment of the jurisdiction’s compliance with each of the Principles set out in this Annex. | ||
| 38. The jurisdiction should have a credible process for conducting the self-assessment, and should provide sufficient information and analysis to support the self-assessment. The results of the self-assessment should be disclosed (on its website or through other means) and accessible by other national supervisors and stakeholders. | ||
| 39. Where the self-assessment reflects that the issue of insufficiency in HQLA no longer exists, the jurisdiction should devise a plan for transition to the standard HQLA treatment under the LCR and notify the Basel Committee accordingly. If the issue of insufficiency remains but weaknesses in the jurisdiction’s relevant supervisory framework are identified from the self-assessment, the jurisdiction should disclose its plan to address those weaknesses within a reasonable period. | ||
| 40. If the jurisdiction is aware of circumstances (eg relating to fiscal conditions, market infrastructure or availability of liquidity, etc.) that have radically changed to an extent that may render the issue of insufficiency in HQLA no longer relevant to the jurisdiction, it will be expected to conduct a self-assessment promptly (ie without waiting until the next self-assessment is due) and notify the Basel Committee of the result as soon as practicable. The Basel Committee may similarly request the jurisdiction to conduct a self-assessment ahead of schedule if the Committee is aware of changes that will significantly affect the jurisdiction’s eligibility for alternative treatment. | ||
| Criterion (d): The jurisdiction must permit an independent peer review of its framework for alternative treatment to be conducted as part of the Basel Committee’s work programme and address the comments made. | ||
| 41. The Basel Committee will oversee the independent peer review process for determining the eligibility of its member jurisdictions to adopt alternative treatment. Hence, any member jurisdiction of the Committee that intends to adopt the options for alternative treatment will permit an independent peer review of its eligibility to be performed, based on a self-assessment report prepared by the jurisdiction to demonstrate its compliance with the Principles. The independent peer review will be conducted in accordance with paragraphs 55 to 56 of the Basel III liquidity framework. The jurisdiction will also permit follow-up review to be conducted as necessary. | ||
| 42. The jurisdiction will be expected to adopt a proactive attitude to responding to the outcome of the peer review and comments made. | ||
65 Use QIS data wherever possible. Supervisors should be collecting data on LCR from 1 January 2012.
66 For HQLA that are subject to caps or haircuts (eg Level 2 assets), the effects of such constraints should be accounted for.
67 Some deficits during economic downturns need to be catered for. Moreover, the recent surplus/deficit situation is relevant for assessment.
68 This is to enhance market confidence rather than to query the jurisdiction’s ability to honour its commitments.
69 This is the minimum sovereign rating that qualifies for a 0% risk weight under the Basel II Standardised Approach for credit risk.
70 Paragraph 58 requires the fee to be charged regardless of the amount, if any, drawn down against the facility.
71 Paragraph 58 presents the conceptual framework for setting the fee.
72 Paragraph 58 requires the maturity date to at least fall outside the 30-day LCR window and the contract to be irrevocable prior to maturity.
73 Paragraph 58 requires the contract not to involve any ex-post credit decision by the central bank.
74 For example, clarification may be necessary in cases where only central government debt will be allowed, or Level 1 securities issued by multilateral development banks in some currencies will be allowed.
75 This is relative to the exchange rate volatilities between the domestic currency and other foreign currencies with which the domestic currency is traded.
76 For example, the central banks of the two currencies concerned may have entered into special foreign exchange swap agreements that facilitate the flow of liquidity between the currencies.
77 These currencies refer to those that exhibit significant and active market turnover in the global foreign currency market (eg the average market turnover of the currency as a percentage of the global foreign currency market turnover over a ten-year period is not lower than 10%).
78 Under paragraph 62, a minimum higher haircut of 20% should be applied to additional Level 2A assets used under this option. The jurisdiction should conduct an analysis to assess whether the 20% haircut is sufficient for Level 2A assets in its market, and should increase the haircut to an appropriate level if this is warranted in order to achieve the purpose of the haircut. The relevant analysis should be provided for independent peer review during which the jurisdiction should explain and justify the outcome of its analysis.