2        Liquidity Coverage Ratio Calculation as Per Delegated Act

The EBA Delegated Act (DA) Liquidity Coverage Ratio calculations cater to the guidelines on liquidity coverage requirement for Credit Institutions that were published by the European Commission in October 2014 as a supplement to Regulation (EU) 575/2013. The Commission proposed several adjustments to reflect the Union specificities, most notably for certain covered bonds and securitized assets.

The liquidity coverage ratio addresses the short-term liquidity needs of an institution during a stressful situation. It estimates whether the stock of high-quality liquid assets is sufficient to cover the net cash outflows under stress situations over a specified future period, in general, lasting 30 calendar days (or LCR horizon). The liquidity coverage ratio is calculated at the legal entity level, on a standalone and consolidated basis.

Topics:

·        Inputs

·        Process Flow

·        Preconfigured Regulatory LCR Scenario

Inputs

The application requires the following inputs for LCR calculation:

·        Liquidity haircut for each asset level, which is provided through business assumption with assumption category as valuation change and assumption subcategory as the haircut.

·        The business assumption that defines the outflow percentage. It is defined through appropriate business assumptions. For example, retail deposit Run-off is defined through business assumption with category as incremental cash flow and subcategory as Run-off.

·        The business assumption that defines the inflow percentage. It is defined through appropriate business assumptions. For example, Rollover Reverse Repo is defined through business assumption with category as cash flow movement and subcategory as a Rollover.

·        Liquidity Horizon is specified as the Runtime parameter.

Process Flow

This section provides a high-level LCR Calculation Process Flow (Under EBA Delegated Act).

Topics:

·        Identifying Asset Levels

·        Identifying Eligible HQLA

·        Calculating Stock of HQLA

·        Determining Maturity of Cash Flows

·        Classifying Operational Amount

·        Calculating Operational Amount

·        Calculating Deposit Insurance

·        Identifying Deposit Stability

·        Consolidation

·        Cash Flow Aggregation

·        Business Assumption

·        Calculating Contractually Required Collateral

·        Calculating Excess Collateral

·        Calculating Downgrade Impact Amount

·        Calculating Net Derivative Cash Inflows and Outflows

·        Calculating Twenty-Four Month Look-back Amount

·        Calculating Operational Amount

·        Calculating HQLA Transferability Restriction

·        Calculating Cash Inflows and Outflows

·        Alternative Liquidity Approaches

·        Home-Host Configuration

·        Interdependent Cash Flows (LCR)

·        Calculating of Liquidity Coverage Ratio

The application supports a ready-to-use delegated act LCR calculation that has the regulatory scenarios with associated HQLA haircuts, inflow, and outflow rates preconfigured in the form of business assumptions as prescribed by the European Banking Authority as part of the Commission Delegated Regulation (EU) 2015/61.

Identifying Asset Levels

High quality liquid assets are assets that can be easily sold or used as collateral to obtain funds at little or no loss of value even under stress scenarios. All assets, whether owned by the bank or received from counterparties as collateral, that meet the high quality liquid asset criteria specified by BIS, are classified as follows:

·        Level 1 Assets

·        Level 2A Assets

·        Level 2B Assets

Level 1 assets excluding covered bonds can be included without limit, Level 1 covered bonds can only include 70% of the stock of Level 1 assets and Level 2 assets can only include 40% of the stock of HQLA. Of this, Level 2B assets can only include 15% of the stock of HQLA. Any asset not classified as an HQLA is considered an Other Asset.

NOTE:   

1.      The application assigns relevant regulatory haircuts to each asset classified as HQLA as part of the preconfigured regulatory scenario. This haircut can be modified by the user for stress testing.

2.      The value included in the stock of HQLA is net of any hedge termination cost or gain, as applicable.

Topics:

·        Identifying and Treating Level 1 Assets 

·        Identifying and Treating Level 2A Assets 

·        Identifying and Treating Level 2B Assets 

Identifying and Treating Level 1 Assets

The application identifies the following assets as HQLA Level 1 assets:

1.     Cash which includes coins, banknotes, and restricted cash. The value included in the stock of HQLA is the cash balance Central bank reserves, to the extent that the central bank policies allow them to be drawn down in times of stress. These include bank’s overnight deposits and term deposits that can be withdrawn immediately Central bank reserves, include the balance held by a bank with the central bank directly, or through a correspondent bank less any minimum reserve requirement. The value of eligible term deposits that are included in the amount net of any withdrawal penalty.

2.     Assets issued or guaranteed by one of the following:

§       European Central Bank

§       The Central Bank of a Member State

§       The Central Government of a Member State

3.     Assets which satisfy the following conditions:

§       Issuer type or guarantor type is one of the following:

—    Central Bank

—    Central Government

§       The party, that is issuer or guarantor, belongs to a third country.

§       The party is assigned a minimum of a credit quality step 1 credit assignment.

4.     Assets which satisfy the following conditions:

§       Issuer type or guarantor type is one of the following:

—    Regional Government

—    Local Authority

—    Public Sector Entity

§       The exposure to the party is treated similarly to the exposure to its respective central government, whether belonging to a Member State or a third country.

5.     Assets which satisfy the following conditions:

§       Issuer type or guarantor type is one of the following:

—    Central Bank

—    Central Government

§       The party, that is issuer or guarantor, belongs to a third country.

§       The party is not assigned a credit quality step 1 credit assessment.

Such assets are included in the stock of HQLA only up to the extent of the bank’s net stressed cash outflows in that currency arising from the bank’s operations in that foreign jurisdiction.

6.     Assets which satisfy the following conditions:

§       Issuer type or guarantor type is one of the following:

—    International Organization

—    Multilateral Development Bank

§       The party is assigned a credit quality step 1 credit assessment.

7.     Assets issued by credit institutions which satisfy the following criteria:

§       The institution is backed by a Member State central government, regional government or local authority.

§       The exposure to the regional government or local authority is treated similarly to the exposure to its respective central government.

§       The backing authority is obligated to ensure the financial viability of the institution.

8.     Assets issued by credit institutions which satisfy the following criteria:

§       The institution is a promotional lender.

§       90% of its loan is guaranteed a Member State central government, regional government or local authority.

§       The exposure to the regional government or local authority is treated similarly to the exposure to its respective central government.

9.     Covered bonds which satisfy the following criteria:

§       Are subject to special supervision which protects bondholders and whose proceeds are invested in a manner that enables the issuer to pay claims on the bonds when they arise.

§       Have an issue size of at least EUR 500 million.

§       Are assigned a minimum of credit quality step 1 credit assessment or a risk weight of <=10%.

§       Not more than  15% of the outstanding issue of covered bond is collateralized by assets issued by institutions assigned a credit quality Step 1.

§       The institution and issuer meet the transparency requirements which accord preferential treatment to covered bonds.

§       The underlying asset pool is more than 2% of the outstanding amount of the covered bond.

10.  Sight deposits of the credit institution, which belongs to an institutional protection scheme or a cooperative network, maintained with the central institution of the network, where the central credit institution is legally required to invest the deposit amount in liquid assets of a specified level. The amount included in the stock of Level 1 assets is that portion of the deposit which is invested in Level 1 assets.

11.  Assets issued by credit institutions which satisfy the following conditions:

§       Guarantor type is one of the following:

—    Central Government

—    Regional Government

—    Local Authority

§       The guarantor belongs to a Member State.

§       The exposure to the guarantor is treated similarly to the exposure to its respective central government.

§       The guarantee was given before 30 June 2014.

§       The guarantee is direct, explicit, irrevocable, and unconditional and covers the failure to pay principal and interest when due.

The amount included in the stock of HQLA is only to the extent guaranteed before 30 June 2014.

12.  Senior bonds issued by member state-sponsored impaired assets management agencies of the following countries:

§       Ireland

§       Spain

§       Slovenia

Such bonds are included in the stock of HQLA only till 31 December 2023.

13.  Investments in Collective Investment Units (CIUs) which satisfy the following criteria:

§       The following information relating to the CIU is published:

—    The categories of assets in which the CIU is authorized to invest.

—    if investment limits apply, the relative limits and the methodologies to calculate them.

—    the business of the CIU on an annual basis.

§       The underlying assets of the CIU are liquid assets which are classified as Level 1 assets. This is classified by the application.

—    Should not be self-issued.

—    The issuer is subject to special supervision and it ensures sufficient cooperation with the competent authority.

NOTE:   

The maximum value of the investment in CIUs by a particular entity included in the stock of HQLA is EUR 500 million across all CIUs held by the entity.

The application assigns and applies a 0% haircut to all assets classified as Level 1 except covered bonds and CIU’s. Covered bonds classified as Level 1 assets are assigned a haircut of 7%.

CIUs classified as Level 1 assets, are assigned haircuts as follows:

·        0% on coins, banknotes, and exposures to central banks.

·        12% on covered bonds.

·        5% on other levels 1 assets.

Identifying and Treating Level 2A Assets

The application identifies the following assets as HQLA Level 2A assets:

1.     Assets which satisfy the following conditions:

§       Issuer type or guarantor type is one of the following:

—    Regional Government

—    Local Authority

—    Public Sector Entity

§       The party, that is issuer or guarantor, belongs to a Member State

§       The exposure is assigned a risk weight of less than or equal to 20%.

2.     Assets which satisfy the following conditions:

§       Issuer type or guarantor type is one of the following:

—    Central Bank

—    Central Government

—    Regional Government

—    Local Authority

—    Public Sector Entity

§       The party, that is issuer or guarantor, belongs to a third country.

§       The exposure is assigned a risk weight of less than or equal to 20%.

3.     Covered bonds which satisfy the following criteria:

§       Are subject to special supervision which protects bondholders and whose proceeds are invested in a manner that enables the issuer to pay claims on the bonds when they arise.

§       Have an issue size of at least EUR 250 million.

§       Are assigned a minimum of credit quality step 2 credit assessment or a risk weight of <=20%.

§       Not more than  15% of the outstanding issue of covered bond is collateralized by assets issued by institutions assigned a credit quality step 1.

§       The institution and issuer meet the transparency requirements which accord preferential treatment to covered bonds.

§       The underlying asset pool is more than 7% of the outstanding amount of the covered bond when the issue size is greater than or equal to 500 EUR million.

§       The underlying asset pool is more than 2% of the outstanding amount of the covered bond when the issue size is greater than or equal to 250 and less than 500 EUR million provided the bonds are assigned a minimum credit quality step 1 credit assessment or risk weight of less than or equal to 10%.

4.     Covered bonds issued by credit institutions in third countries which satisfy the following criteria:

§       Are subject to special supervision, in the third country, which protects bondholders and whose proceeds are invested in a manner that enables the issuer to pay claims on the bonds when they arise.

§       Have an issue size of at least EUR 250 million.

§       Are assigned a minimum of credit quality step 1 credit assessment or a risk weight of less than or equal to 10%.

§       Not more than  15% of the outstanding issue of covered bond is collateralized by assets issued by institutions assigned a credit quality step 1.

§       The institution and issuer meet the transparency requirements which accord preferential treatment to covered bonds.

§       The underlying asset pool is more than 7% of the outstanding amount of the covered bond when the issue size is greater than or equal to 500 EUR million and 2% of the outstanding amount when the issue size is greater than or equal to 250 and less than 500 EUR million.

§       Backed by a pool of assets of one or more of the following types mentioned:

—    Debt securities issued or guaranteed by third country’s central government or central bank or multilateral development bank or international organization that are assigned a minimum of credit quality step 1.

—    Debt securities issued or guaranteed by third country’s public sector entity or regional government or local authority bank that are assigned a minimum of credit quality step 1, and the exposure is assigned a minimum of credit quality step 2.

—    Residential loans having a maximum loan-to-value (LTV) ratio of 80% and assigned a risk weight <= 35%.

—    Loans secured by commercial immovable property having a maximum LTV ratio of 60%.

—    Maritime loans having a maximum LTV ratio of 60%.

5.     Corporate debt securities which satisfy the following conditions:

§       Are assigned a rating of credit quality step 1 or risk weight less than or equal to 20%.

§       The issue size is greater than or equal to EUR 250 million.

§       The time to maturity when the security was issued was less than or equal to 10 years.

6.     Sight deposits of the credit institution, which belongs to an institutional protection scheme or a cooperative network, maintained with the central institution of the network, where the central credit institution is legally required to invest the deposit amount in liquid assets of a specified level. The amount included in the stock of Level 2A assets is that portion of the deposit which is invested in Level 2A assets.

The application assigns and applies a 15% haircut to all assets classified as Level 2A except CIUs.

7.     Investments in Collective Investment Units (CIUs) which satisfy the following criteria:

§       The following information relating to the CIU is published:

—    the categories of assets in which the CIU is authorized to invest.

—    if investment limits apply, the relative limits and the methodologies to calculate them.

—    the business of the CIU on an annual basis.

§       The underlying assets of the CIU are liquid assets which are classified as Level 2A assets. This is classified by the application.

§       Should not be self-issued.

§       The issuer is subject to special supervision and it ensures sufficient cooperation with the competent authority.

NOTE:   

The maximum value of the investment in CIUs by a particular entity included in the stock of HQLA is EUR 500 million across all CIUs held by the entity.

Identifying and Treating Level 2B Assets

The application identifies the following assets as HQLA Level 2B assets:

1.     Asset-backed security meeting the following criteria:

§       Has a rating of at least credit quality step 1 or risk weight up to 20%.

§       Are Senior bonds.

§       The underlying asset is one of the following types:

—    First, lien residential loan having either maximum Loan-To-Value ratio (LTV) of 80% or maximum Loan-To-Income ratio (LTI) of 60%.

—    Fully Guaranteed Residential Loans.

—    Commercial Loans or Leases or Credit Facilities.

—    Auto Loans or Leases.

—    Personal Loans or Credit Facilities.

—    Are not self-issued.

Asset-backed securities fulfilling above criteria are assigned haircuts as follows:

§       25% on first-lien residential loans, fully guaranteed residential loans, and auto loans and leases.

§       35% on commercial loans, leases, credit facilities, or personal loans.

2.     Corporate debt securities which satisfy the following conditions:

§       Are assigned a minimum rating of credit quality step 3 or risk weight >= 20% and <=100%.

§       The issue size is >= EUR 250 million.

§       The time to maturity when the security was issued was <=10 years.

The application assigns and applies a 50% haircut to all corporate debt securities classified as Level 2B.

3.     Shares which satisfy the following conditions:

§       Are a component of a major stock index.

§       Issuer type is not a financial institution or its affiliated entities.

§       Price has not decreased, or haircut has not increased by more than 40% over a 30-day period during a relevant period of significant liquidity stress which is specified by the bank.

§       Are denominated in the domestic currency of the legal entity’s home jurisdiction. If denominated in a foreign currency, they are included in the stock of HQLA as Level 2B assets only to the extent of the bank’s net stressed cash outflows in that currency arising from bank’s operations in that foreign jurisdiction.

4.     Restricted-use committed liquidity facility provided by the following:

§       European Central Bank.

§       Central Bank of a Member State.

§       Central Bank of a third country.

§       The application assigns and applies a 0% haircut to all restricted-use committed liquidity facilities classified as Level 2B.

5.     Exposures in the form of extremely high quality covered bonds meeting the following criteria:

§       Issue size of at least EUR 250 million.

§       Institution periodically receives information about the pool, geographical distribution, maturity structure, loan percentage more than 90 days past due.

§       The underlying asset pool is more than 10% of the outstanding amount of the covered bond.

§       National law to protect bondholders supervises issuer and the covered bonds. The laws of third countries are at least equal to respective union laws.

§       Backed exclusively by a pool of assets having the following asset types fulfilling accompanying criteria:

—    A debt security issued or guaranteed by member state’s central government or central bank or ECB or public sector entity or regional government or local authority.

—    Residential loan having maximum Loan-To-Value ratio (LTV) of 80% and risk weight up to 35%.

—    The residential loan fully guaranteed by eligible credit protection provider having maximum Loan-To-Income ratio (LTI) of 33%.

The application assigns and applies a 30% haircut to all covered bonds classified as Level 2B.

6.     Sight deposits of the credit institution, which belongs to an institutional protection scheme or a cooperative network, maintained with the central institution of the network, meeting one of the following criteria:

§       The central credit institution is legally required to invest the deposit amount in liquid assets of a specified level and has invested the deposit amount in Level 2B liquid assets. In this case, the amount included in the stock of Level 2B assets is that portion of the deposit which is invested in Level 2B assets.

§       The central credit institution has no obligation to invest the deposit amount in liquid assets

7.     Liquidity Facility provided by the central institution of an institutional network of cooperative banks or institutional protection schemes. Considered as Level 2B up to the portion of funding not collateralized by any specific liquid asset.

The application assigns and applies a 25% haircut such liquid facilities classified as Level 2B.

8.     A non-interest bearing asset which satisfies the following conditions:

§       Issuer type or guarantor type is one of the following:

—    Central Bank

—    Central Government

—    Regional Government

—    Local Authority

—    Public Sector Entity

§       The party, that is issuer or guarantor, belongs to a third country.

§       The exposure is assigned a minimum rating of credit quality step 5 or risk weight of <=100%.

§       Is not an obligation of a financial institution or any of its affiliated entities.

The application assigns and applies a 50% haircut to all non-interest bearing assets classified as Level 2B.

9.     Asset-backed security meeting the following criteria:

§       Has a rating of at least credit quality step 1 or risk weight up to 20%.

§       Is Senior bond.

§       Underlying asset pool is First lien residential loan having maximum Loan-To-Value ratio (LTV) of > 80% and maximum Loan-To-Income ratio (LTI) of > 45%.

§       Are not self-issued.

§       Asset-backed security issue date greater than or equal to 1-Oct-2015 meets the following criteria:

—    Underlying of Asset Based Security is not subject to Loan-to-Income Ratio.

—    Underlying Loan is issue date less than 1-Oct-2015.

—    Such Asset-backed security are included in the stock of HQLA only till 1-October-2025

10.  Investments in Collective Investment Units (CIUs) which satisfy the following criteria:

§       The following information relating to the CIU is published:

—    the categories of assets in which the CIU is authorized to invest.

—    if investment limits apply, the relative limits and the methodologies to calculate them.

—    the business of the CIU on an annual basis.

§       The underlying assets of the CIU are liquid assets which are classified as Level 2B assets. This is classified by the application.

§       Should not be self-issued.

§       The issuer is subject to special supervision and it ensures sufficient cooperation with the competent authority.

NOTE:   

The maximum value of the investment in CIUs by a particular entity included in the stock of HQLA is EUR 500 million across all CIUs held by the entity.

CIUs classified as Level 2B assets are assigned haircuts as follows:

·        30% on Level 2B securitizations backed by residential and auto loans.

·        35% on Level 2B covered bonds.

·        40% on Level 2B securitizations backed by commercial and personal loans.

·        55% on Level 2B corporate bonds, shares and non-interest Bearing assets.

Identifying Eligible HQLA

The application identifies whether a bank’s asset or a mitigant received under re-hypothecation rights meets all the operational requirements prescribed by the regulator. If an asset classified as HQLA meets all the relevant general requirements and operational criteria it is identified as eligible HQLA and included in the stock of HQLA. The application checks for the following general requirements and operational criteria:

·        Unencumbered

The application looks at the encumbrance status and includes only those assets in the stock which are unencumbered. If partially encumbered, then the portion of the asset that is unencumbered is considered as HQLA and included in the stock. If an asset is pledged to the central bank or a PSE but is not used, the unused portion of such an asset is included in the stock. The application assigns the usage of a pledged asset in the ascending order of asset quality. The lowest quality collateral is marked as used first.

·        Exclusion of Certain Rehypothecated Assets

Any asset that a bank receives under a re-hypothecation right is not considered eligible HQLA if the counterparty or beneficial owner of the asset has a contractual right to withdraw the asset at any time within 30 calendar days.

·        Operational Capability to Monetize HQLA

An asset is considered HQLA only if the bank has ready access to their liquid asset holdings, demonstrated the operational capability to monetize such an asset, and has periodically monetized such an asset via outright sale or repurchase agreement. The application captures this information for each asset as a flag.

·        HQLA Under the Control of the Liquidity Management Function

To be considered eligible HQLA the asset is required to be under the control of the management function of the bank that manages liquidity. The application captures this information for each asset as a flag.

·        Termination of Transaction Hedging HQLA

If an HQLA is hedged by a specific transaction, then the application considers the impact of closing out the hedge to liquidate the asset that is, the cost of or gain from terminating the hedge while computing the stock of HQLA. The hedge termination cost or gain is adjusted to the market value of the asset for inclusion in the stock of HQLA.

·        Exclusion of Certain Issuers

An asset issued by the institution, its parent, subsidiaries, or affiliates does not qualify to be included in the stock of HQLA. The application identifies the self-issued flag based on the issuer of the asset and excludes self-issued assets from the stock of HQLA. Similarly, certain assets issued by financial institutions are excluded from the stock of HQLA.  This is addressed during the classification of an asset as an HQLA.

·        Liquid and readily marketable

The application checks the following criteria for determining whether an asset is liquid and readily marketable:

§       Availability of timely and observable market prices

§       Listed on a recognized exchange

§       High trading volumes

§       Presence of active secondary market

§       Presence of a two-way market

This is addressed during the classification of an asset as an HQLA.

·        Transferability Restriction during Consolidation

Assets held in a third country, where there are restrictions to their free transferability, are included in the stock of HQLA only to the extent required to meet liquidity outflows in that third country. Assets held in a nonconvertible currency are included in the stock of HQLA only to the extent required to meet liquidity outflows in that currency. The application identifies such restrictions and includes them in the stock of HQLA appropriately during the consolidation process.

Calculating Stock of HQLA

All unencumbered assets classified as Level 1, 2A, or 2B, which meet the HQLA eligibility criteria, are included in the Stock of High-Quality Liquid Assets (SHQLA). The formula for calculating SHQLA is as follows:

Where:

The application applies the relevant liquidity haircuts to the market value of each eligible HQLA based on the haircuts specified as part of a business assumption. The sum of haircut adjusted market value of all assets which are not other assets and which are classified as eligible HQLA includes the stock of HQLA. The stock includes the bank’s assets which are unencumbered, that is not placed as collateral; as well assets received from counterparties where the bank has a re-hypothecation right and where such assets are not rehypothecated.

NOTE:   

All calculations are based on the market value of assets.

The following steps are involved in computing the stock of HQLA:

Topics:

·        Calculating Stock of Liquid Assets

·        Identifying Eligible HQLA on Unwind

·        Unwinding of Transactions Involving Eligible HQLA

·        Calculating Adjusted Stock of HQLA

·        Calculating Excess Liquid Asset Amount

Calculating Stock of Liquid Assets

This section explains the calculation of stock of liquid assets.

1.     Calculating Stock of Level 1 Assets

The stock of Level 1 assets equals (1-haircut percent) of the market value of all Level 1 liquid assets held by the bank as of the calculation date that is eligible HQLA, less the amount of the minimum/mandatory reserves less hedge termination costs (if any), less withdrawal penalty on time deposits (if any).

2.     Calculating Stock of Level 2A Assets

The stock of Level 2A liquid assets equals (1-haircut percent) of the market value of all Level 2A liquid assets held by the bank as of the calculation date that are eligible HQLA, less hedge termination costs (if any).

3.     Calculating Stock of Level 2B Assets

The stock of Level 2B liquid assets equals (1-haircut percent) of the market value of all Level 2B liquid assets held by the bank as of the calculation date that are eligible HQLA, less hedge termination costs (if any).

Identifying Eligible HQLA on Unwind

The application identifies the assets placed as collateral which are eligible HQLA if they are not encumbered. Placed collateral is marked as eligible HQLA on unwinding if it fulfills all of the following criteria:

·        Asset Level is Level 1, 2A or 2B asset.

·        Meets HQLA Operational Requirements on Unwind.

Unwinding of Transactions Involving Eligible HQLA

The application identifies all transactions maturing within the LCR horizon where HQLA is placed or received. These transactions include repos, reverse repos, secured lending transactions, collateral swaps, and so on. Such transactions are unwound that is, the original position is reversed and the cash or stock of HQLA has adjusted accordingly. This is done to avoid including any asset in the stock that should be returned to its owner before the end of the LCR horizon. The unwinding of transactions results in adjustments to the stock of HQLA, such as additions to or deductions from the stock of HQLA.

Calculating Adjusted Stock of HQLA

1.     Adjusted Stock of Level 1 Assets

The formula for calculating adjusted stock of Level 1 assets is as follows:

NOTE:   

Adjustments relate to the cash received or paid and the eligible Level 1 asset posted or received as collateral or underlying assets as part of secured funding, secured lending, and asset exchange transactions.

2.     Adjusted Stock of Level 2A Assets

The formula for calculating adjusted stock of Level 2A assets is as follows:

NOTE:   

Adjustments relate to eligible Level 2A assets posted or received as collateral or underlying assets as part of secured funding, secured lending, and asset exchange transactions.

3.     Adjusted Stock of Level 2B Assets

The formula for calculating adjusted stock of Level 2B RMBS assets is as follows:

NOTE:   

Adjustments relate to eligible Level 2B RMBS assets posted or received as collateral or underlying assets as part of secured funding, secured lending, and asset exchange transactions.

Calculating Excess Liquid Asset Amount

The regulation requires banks to maintain the composition of the stock of HQLA as follows:

·        A minimum of 60 % should include Level 1 assets.

·        A minimum of 30 % should include Level 1 assets excluding extremely high quality covered bonds.

·        A maximum of 15% should include Level 2B assets.

The Level 1 covered bonds, Level 2A, and 2B assets more than the composition prescribed by the regulator are excluded from the stock of HQLA. The application computes the excess liquid asset amounts as per the following procedure:

1.     Excess Level 1 Covered Bonds Liquid Asset Amount

The formula for calculating excess Level 1 covered bonds liquid asset amount is as follows:

Where,

Post-Cap Adjusted Level 1 Covered Bonds = Minimum [Adjusted Level 1 Covered Bonds, (Adjusted Level 1 Assets Excluding Covered Bonds *70/30)]

2.     Excess Level 2A Liquid Asset Amount

The formula for calculating excess Level 2A liquid asset amount is as follows:

Where,

Post-Cap Adjusted Level 2A Assets = Minimum [Adjusted Level 2A Assets, {(Adjusted Level 1 Assets Excluding Covered Bonds + Post-Cap Adjusted Level 1 Covered Bonds)*40/60}, Maximum {(Adjusted Level 1 Assets Excluding Covered Bonds*70/30) – Post-Cap Adjusted Level 1 Covered Bonds, 0}]

·        Excess Level 2B Liquid Asset Amount

The formula for calculating excess Level 2B liquid asset amount is as follows:

Where,

Post-Cap Adjusted Level 2B Assets = Minimum [Adjusted Level 2B Assets, (Adjusted Level 1 Assets Excluding Covered Bonds + Post-Cap Adjusted Level 1 Covered Bonds + Post-Cap Adjusted Level 2A Assets)*15/85, Maximum {(Adjusted Level 1 Assets Excluding Covered Bonds + Post-Cap Adjusted Level 1 Covered Bonds)*40/60 – Post-Cap Adjusted Level 2A Assets,0}, Maximum {(70/30*Adjusted Level 1 Assets Excluding Covered Bonds) – Post-Cap Adjusted Level 1 Covered Bonds – Post-Cap Adjusted Level 2A Asset),0}]

Determining the Maturity of Cash Flows

To calculate the Liquidity Coverage Ratio, the application identified the maturity of certain transactions as follows:

1.     For liabilities having embedded optionality, such as callable features, that reduces the maturity of the account, the application considers the earliest date, which is the first call date, as the revised maturity date.

2.     For assets having embedded optionality that reduces the maturity of the account, where the collateral received is not rehypothecated, the application considers the earliest date, which is the first call date, plus notice period as the revised maturity date.

3.     For derivatives having embedded optionality that reduces the maturity of the account, where the collateral received is not rehypothecated, the application considers the earliest date, which is the first call date, as the revised maturity date.

4.     For assets or derivatives, where the collateral received has been rehypothecated for a period greater than the maturity of the asset itself, the application considers the maturity date of the liability, against which the collateral received is rehypothecated, as the revised maturity of the asset.

5.     For assets or derivatives having embedded optionality that reduces the maturity of the account, where the collateral received has been rehypothecated for a period greater than the first call date plus notice period but less than the original maturity of the asset itself, the application considers the maturity date of the liability, against which the collateral received is rehypothecated, as the revised maturity of the asset.

6.     For derivatives having embedded optionality that reduces the maturity of the account, where the collateral received has been rehypothecated for a period greater than the first call date but less than the original maturity of the asset itself, the application considers the maturity date of the liability, against which the collateral received is rehypothecated, as the revised maturity of the asset.

7.     For assets having embedded optionality that reduces the maturity of the account, where the collateral received has been rehypothecated for a period less than the first call date plus notice period, the application considers the first call date plus notice period as the revised maturity of the asset.

8.     For derivatives having embedded optionality that reduces the maturity of the account, where the collateral received has been rehypothecated for a period less than the first call date plus notice period, the application considers the first call date as the revised maturity of the asset.

9.     For assets and derivatives which do not have embedded optionality that reduces the maturity of the account, where the collateral received has been rehypothecated for a period less than the maturity of the asset itself, the application considers the original maturity date of the asset, as the revised maturity of the asset.

10.  For assets and derivatives which do not have embedded optionality that reduces the maturity of the account, where the collateral received has not been rehypothecated, the application considers the original maturity date of the asset, as the revised maturity of the asset.

NOTE:   

The revised maturity is computed by the application as per regulatory expectation and is used for the calculation of LCR.

Classifying Operational Account

Operational deposits are those deposits placed by customers with a bank or balances kept by the bank with other financial institutions to meet their payment and settlement needs and other operational requirements. The application classifies accounts as operational if they meet the following criteria: 

1.     They are held in specifically designated accounts, which is held as operational accounts, at or with the depositing institution.

2.     They arise out of a clearing, custody, or cash management relationship with the bank.

3.     They do not arise out of correspondent banking services or in the context of prime brokerage services.

4.     The termination of such agreements requires a minimum notice period of 30 days.

5.     If the agreement can be terminated within 30 days, the customer must pay significant switching or termination costs to the depositing institution.

Calculating Operational Amount

The application supports a new methodology to compute the operational portion of the EOP balance of deposits and balances with banks classified as operational deposits. The regulation requires banks to apply the preferential rate only on that portion of the operational deposit balance that is truly held to meet operational needs.

The following steps are involved in computing the operational balance:

1.     All deposits and balances with banks classified as operational as per regulatory guidelines are identified. This is a separate process in LRM.

2.     The EOP balances of eligible operational accounts are obtained over a user-defined historical window including the As of Date. To identify historical observations, the f_reporting_flag must be updated as Y for one execution of the Run per day in the LRM Run Management Execution Summary UI. The application looks up the balance for such accounts against the Run execution for which the Reporting Flag is updated as Y for each day in the past.

The historical window is captured in the Setup Master as part of the parameter named DAYS_HIST_OPER_BAL_CALC_UPD.

3.     A rolling 5-day average is calculated for each account over the historical window.

4.     The average of the 5-day rolling averages computed in Step 3 is calculated.

5.     The operational balance is calculated as follows:

6.     The non-operational balance is calculated as follows:

7.     The operational insured balance is calculated as follows:

The insured and uninsured balances are calculated as part of a separate process, for example the insurance allocation process, which is explained in detail in the relevant section under each jurisdiction.

8.     The operational uninsured balance is calculated as follows:

9.     The non-operational insured balance is calculated as follows:

10.  The non-operational uninsured balance is calculated as follows:

The operational deposit computation process is illustrated in the following table, assuming a 15-day historical window instead of 90-days and for the As of Date 28th February 2017. The historical balances for 15-days including the As of Date are provided as follows.

The rolling averages and cumulative average are computed as follows:

The operational and non-operational balances are computed as follows:

NOTE:   

·        Negative historical balances are replaced by zero for this computation.

·        For operational accounts that have an account start date greater than or equal to 90 historical days including the As of Date, missing balances are replaced by previously available balance.

·        For operational accounts that have an account start date less than 90 historical days including the As of Date:

1.      Missing balances between the account start date and As of Date are replaced by previously available balance.

2.      The rolling average is calculated only for the period from the account start date to the As of Date.

Calculating Deposit Insurance

Deposit insurance calculations in LRRCEBA is performed at a Legal Entity and Insurance Scheme - Customer combination.

Multiple schemes in different currencies can be defined per Legal Entity. During Run execution, the deposit amounts, scheme limits, and other relevant amounts are converted into the reporting currency. Additionally, all the comparisons and calculations are performed in the reporting currency.

For every Legal Entity - Insurance Scheme - Customer combination, the application compares the total deposit balance with the scheme limit. After comparison, LRRCEBA determines the following:

·        Insured Amount

§       If the total deposit amount is greater or equal to the scheme limit, then:

Insured amount = Scheme limit amount

§       If the total deposit amount is lesser than the scheme limit, then:

Insured amount = Total deposit amount

After the insured amount is calculated, the application computes the uninsured amount.

·        Uninsured amount = Total deposit balance - Insured amount

After these computations are performed at the higher granularity, the application allocates these amounts back to the account level.

Temporary High Balance

Some countries in Europe provide additional insurance for temporary increases in deposit balances. Such increases can be due to benefits payable on retirement, marriage or civil partnership, compensation claims, real estate dealings, and so on. These events are referred to as Temporary High Balance (THB) events. When such events occur, the deposit balances increase, and the insurance provider offers additional coverage for the amounts.

LRRCEBA supports the inclusion of additional insured amounts in the calculation of the total insured amount for an account. After the insurance allocation is complete at the account level (see the section Deposit Insurance Calculation), the application calculates the total additional insured amount due to temporary high balances.

For every account, the application calculates the insured amount as follows:

New Insured amount = Original insured amount + Additional insured amount due to Temporary High Balance

New Uninsured amount = EOP Balance of account - New insured amount

In case of no additional insured amount due to Temporary High Balance event, the new insured amount is the same as the one computed from the insurance calculation and allocation process as described in section Deposit Insurance Calculation.

Verifying whether the new insured amount must be less than or equal to the EOP balance of the account is included as part of the validations to ensure an accurate representation of data. The following process flow describes the calculation of temporary high balance.

Figure 1: Process Flow - Temporary High Balance

In the European Economic Area (EEA) countries, specific events result in a temporary increase in the balance, for which an additional insurance limit is allocated to the account. An Absolutely Entitled Account (AEA) refers to any account where the depositor is absolutely entitled to the sums held in an account. The following events are considered as Temporary High Balance (THB) events, for the Absolutely Entitled Account (AEA) ownership category as per EBA guidelines.

·        Earmarked for Purchase of Private Residential Property

·        Proceeds from Sale of Private Residential Property

·        Paid on Separation, Divorce, or Dissolution of Civil Union

·        Benefits Payable on Retirement

·        Claim for Compensation for Unfair Dismissal

·        Claim for Compensation for Redundancy

·        Benefits Payable for Death or Bodily Injury

·        Claim for Compensation for Wrongful Conviction

NOTE:   

The application allows you to add any new events as per the jurisdictional requirement by adding data in the tables mentioned in the LRRCEBA Download Specification.

Not Absolutely Entitled Account (non-AEA) refers to any account where the depositor is not absolutely entitled to the sums held in an account. For accounts in the non-AEA ownership category, the deposit limit is unlimited. The application does not consider these accounts for Temporary High Balance insurance coverage.

The application first checks if the Legal Entity falls under an EEA country, and then checks if the Branch is domiciled in an EEA country. The application considers the following cases for THB:

·        Both the Legal Entity and Branch Domicile is located in an EEA country: The Branch and the Legal Entity are eligible for the THB coverage.

·        The Legal Entity is domiciled in an EEA country, and Branch is not Domiciled in an EEA country: The Legal Entity is eligible for the THB coverage and the Branch is not eligible for the THB coverage.

·        The Legal Entity is not domiciled in an EEA country, but the branch is domiciled in an EEA country: The Branch and the Legal Entity are not eligible for the THB coverage.

The application achieves this by the following two flags:

·        Entity Domicile European Economic Area Country Flag: The flag f_entity_eea_country_flag, identifies whether the Legal Entity domicile country is considered to be a member state of the European Economic Area (EEA). The flag is set to YES if the Legal Entity is domiciled in an EEA Country otherwise the value of the flag is NO.

·        Branch Domicile European Economic Area Country Flag: The flag f_branch_eea_country_flag, identifies whether the branch domicile country is considered to be a member state of the European Economic Area. The flag is set to YES if the branch is domiciled in an EEA Country otherwise the value of the flag is NO.

For example, in the following illustration for Legal Entity 1, Branch 1 and Branch 2 have Legal Entity and Branch domiciled, in an EEA country, and therefore are considered for the coverage. However, Branch 3 has the Legal Entity domiciled in an EEA country, but the Branch is domiciled in a non-EEA country, and thus is not considered for the coverage.

Eligibility of the Deposits to be Covered by Insurance

The application considers accounts under the following Standard Product Types for insurance coverage:

·        Savings Account with a balance greater than 0

·        Current Account with a balance greater than 0

·        Term Deposits

·        Credit Cards with a credit balance

·        Overdraft with a credit balance

·        Certificate of Deposit issued to an individual, which existed on or before July 2nd, 2014.

The application excludes the following deposits from insurance coverage:

·        Deposits by non-individuals such as:

§       Bank

§       Hedge Fund Investment Firm

§       Investment Company

§       Personal Investment Company

§       Private Equity Investment Firm

§       Real Estate Investment Trust

§       Small Business Investment Companies

§       Trust and investment company

§       Mutual Funds

§       Government-Sponsored Insurance Entity

§       Insurance Entity

§       Reinsurance Firm

§       Collective Investment Undertaking

§       Employee Pension Fund

§       Social Security Fund Management Company

§       Sovereign

·        Deposit by individuals:

§       Individuals involved in financial activities

§       Deposits arising out of transactions in connection with which there has been a criminal conviction for money laundering as defined in Article 1(2) of Directive 2005/60/EC. The application uses the following flag to handle this scenario:

—    Frozen Account Due to Anti-money Laundering Event Flag: The flag f_frozen_for_aml_event_flag stores the Frozen Account indicator due to an anti-money laundering event.

Insurance Allocation

This section provides the steps involved in insurance allocation.

Topics:

·        Identifying Insurance Eligible Accounts

·        Allocation of Deposit Insurance

Identifying Insurance Eligible Accounts

The identification of insurance eligible accounts involves looking at the inclusion as well as the exclusion criteria. The application requires users to provide the following inclusion criteria:

1.     Ownership Category

OFS LRRCEBA allocates the insurance limit separately for each ownership category level. Ownership categories include Absolutely Entitled Account and Non-Absolutely Entitled Account.

2.     Product Type

This is a list of product types that are covered under the respective jurisdiction’s deposit insurance scheme. The insurance limit is allocated to only those customer accounts whose product types match those covered by the deposit insurance. In the case of EBA, all types of deposits such as current accounts, savings accounts, and term deposits are covered, which must be provided as inputs.

3.     Product Type Prioritization

The sequence in which the insured amount is to be allocated to each product type is captured. For instance, product prioritization may be specified as a current account, savings account, and term deposit. This indicates that the insured amount is allocated first to a current account held by the customer. After current accounts have been fully covered, the remaining amount is allocated to savings accounts and finally to term deposits.

NOTE:   

The application allows the prioritization of insurance allocation to be done at a Bank Product level or Product Type level. If no prioritization is provided, the application allocates the amount to all insured accounts in equal priority.

4.     Currency Eligibility for Insurance

This is a list of currencies in which the accounts are denominated that are eligible for insurance coverage under a deposit insurance scheme. Some jurisdictions cover foreign currency deposits under their deposit insurance schemes. If eligible currencies are specified for insurance, then the insured balance is allocated to all accounts belonging to the particular legal entity which have the associated attributes required for assigning the insured balance. For instance, EBA insures only in terms of Euro denominated deposits. The eligible currency against the EBA insurance scheme should be provided as Euros.

Deposits denominated in all currencies are covered by the EBA Deposit Guarantee Scheme. However, the payout will be in the insurance limit currency.

Allocating Deposit Insurance

As part of the EBA Run, the application allocates the deposit insurance to accounts based on the guidelines specified by the EBA. The insurance limit captured against each deposit insurance scheme is allocated to the insurance eligible accounts under that scheme based on the ownership category and the depositor combination.

The insurance limit, which is the maximum deposit balance covered by an insurance scheme per customer, is captured against each insurance scheme – ownership category combination. Customers having an account in multiple legal entities get a separate deposit insurance limit per legal entity. In the case of the EBA Deposit Guarantee scheme, the limit amount must be provided in the Stage Insurance Scheme Master Table at the granularity of the insurance scheme.

NOTE:   

In case the event is eligible for a THB coverage, the insurance limit will be first utilized to cover the entire balance on account of a THB event, and the remaining balance will get covered if there is any unused limit left under the deposit guarantee scheme.

The insurance limit is allocated to accounts as per the following procedure:

1.     The application identifies the established relationship flag at a customer level.

2.     The accounts are sorted by the specified product type prioritizations.

3.     The insurance allocation is done based on the principal balance from the highest to the least, in the order of product type prioritization.

4.     The insurance limit available is allocated to account 1 to n – 1 as per the following formula:

Where,

Insurance Limit Available:  Limit available post allocation to previous accounts

                      =            Insurance Limit Available x-1 – Insured Amount x-1

X:  Number of accounts up to the current account to which the insured amount is to be allocated

n:  Total number of accounts of a customer which are eligible for insurance coverage under a given ownership category 

The remaining available insurance is allocated to the last account that is account n for which insurance was not allocated.

5.     If the insurance limit is available after allocating to the principal balances, it is allocated to the accrued interest from the highest to the least in the order of Product Type prioritization.

The following is an illustration of this procedure. It considers an insurance limit of 100,000 EUR for each depositor combination under each ownership category for each legal entity. The inputs to this calculation, including account details and customer details, are as follows.

Illustration: Conversion of Eligible Balances to Limit Currency

The application allocates the insurance limit to all eligible accounts as follows:

Insurance Allocation for Customer A

Insurance Allocation for Customer B

Insurance Allocation for Customer C

Identifying Deposit Stability

A stable deposit is a deposit whose outstanding balance is either fully or partially covered by the deposit insurance provided by the relevant national deposit insurance organization satisfying one of the following conditions:

·        It is held in a transactional account by the depositor.

Or

·        The depositor has an established relationship with the reporting legal entity.

·        The first step in identifying deposit stability is to allocate deposit insurance limit at an account level.

After the insurance limit is allocated at an account level, the application determines the deposit stability as follows:

1.     High Run-off Deposits

Two additional stability criteria are supported for the deposit balances that are subject to higher outflows, if they meet the regulatory criteria for such higher rates. The application identifies the less stable deposits that meet the higher outflow rate criteria as specified by the regulator and classifies them into the following two types:

§       High Run-off Deposits Category 1, which meet the criteria for receiving a higher outflow rate of 15%

§       High Run-off Deposits Category 2, which meet the criteria for receiving a higher outflow rate of 20%

Deposits fulfilling the following criteria are classified as High Run-off Deposits Category:

Criteria A. Total deposit of the customer is greater than EUR 500,000

Criteria B. Is an internet-only account

Criteria C. Interest rate on deposits exceeds the average interest rate

Criteria D. Interest rate on deposits is derived from the market variable flag

Criteria E. Depositor is a resident of a third country, or the deposit is denominated in a currency other than Euro, or the domestic currency of a member state

—    Deposits fulfilling criteria A or any two criteria from B to E are classified as High Run-off Deposits Category 1.

—    Deposits fulfilling criteria A and any other criteria from B to E or fulfilling any three criteria from A to E are classified as High Run-off Deposits Category 2.

2.     Stable Deposits

A stable deposit is that portion of a deposit which is fully covered by deposit insurance provided by an effective deposit insurance scheme or a public guarantee that provides equivalent protection and satisfies one of the following conditions:

a.     It is held in a transactional account by the depositor.

Or

b.     The depositor has an established relationship with the reporting legal entity, which makes a withdrawal unlikely.

Stable deposits receive a 5% Run-off rate unless they meet additional deposit criteria.

3.     Highly Stable Deposits

All stable deposits identified as per the criteria specified in High Run-off Deposits are classified as meeting additional insurance criteria, if the insurance scheme under which they are covered satisfies the following conditions:

a.     Has available financial means, raised ex ante by contributions made by members at least annually.

b.     Has adequate means of ensuring ready access to additional funding in the event of a large call on its reserves, including access to extraordinary contributions from member credit institutions and adequate alternative funding arrangements to obtain short-term funding from public or private third parties.

c.     Ensures a seven working day repayment period from the date of application of the 3% outflow.

Such deposits receive a 3% Run-off rate.

4.     Less Stable Deposits

All insured and uninsured deposit balances that do not meet the stable deposits criteria specified earlier are classified as less stable deposits: This includes:

a.     Insured balance of deposits meeting stable deposits criteria but denominated in ineligible foreign currencies.

b.     Uninsured balance of deposits meeting stable deposits criteria.

c.     Insured balance of deposits which are not transactional account and the customer has no established relationship with the bank.

d.     Deposit balance where the insurance coverage status is Uninsured.

Such deposits receive a 10% Run-off rate.

NOTE:   

All the deposit type amount is calculated only on unencumbered EOP balance. Encumbered EOP balance or blocked amount is not considered if it is blocked/encumbered beyond the LCR horizon.

Consolidation

The approach to consolidation as per LCR approach followed by OFS LRRCEBA is as follows:

Identification and Treatment of Unconsolidated Subsidiary

The application assesses whether a subsidiary is a consolidated subsidiary or not by checking the regulatory entity indicator against each legal entity. The application consolidates the cash inflows and outflows of a subsidiary and computes the consolidated LCR, only if the subsidiary is a regulatory consolidated subsidiary. If the entity is an unconsolidated subsidiary, the cash inflows and outflows from the operations of such subsidiaries are ignored (unless otherwise specifically included in the denominator of LCR per regulations) and only the equity investment in such subsidiaries is considered as the bank’s asset and appropriately taken into the numerator or denominator based on the asset level classification.

For instance, legal entity 1 has 3 subsidiaries, legal entity 2, legal entity 3, and legal entity 4. The regulatory consolidated flag for legal entity 4 is No. In this case, legal entity 4 is treated as a third party for consolidation and its assets and cash flows are completely excluded from calculations. Legal entity 1’s interest in legal entity 4 including common equity of legal entity 4 and assets and liabilities where legal entity 4 is the counterparty will not be eliminated as legal entity 4 is considered a third-party during consolidation.

1.     HQLA Consolidation by Subsidiary Type

The process of consolidating HQLA differs slightly based on whether the subsidiary is a material entity that is expected to report LCR separately from the parent or not. This is done to ensure consistency in the results when consolidating at a parent level and when calculating the LCR at the material subsidiary level as well. Broadly 2 methods of consolidating HQLA are followed, which are detailed as follows:

a.     For material subsidiaries subject to individual LCR requirements, consolidation is done as follows:

—    The application identifies whether the subsidiary is a consolidated subsidiary.

—    If condition (a) is fulfilled, it identifies whether the consolidated subsidiary is subject to LCR requirement that is, whether the subsidiary in question is a regulated entity.

—    If condition (b) is fulfilled, then it calculates the net cash outflow by eliminating inter-company transactions at the level of the consolidated subsidiary.

—    The application consolidates post-haircut restricted HQLA to the extent of the consolidated subsidiary’s net cash outflow that is, to the extent required to satisfy minimum LCR requirements of that subsidiary as part of the covered company’s HQLA.

—    It consolidates the entire amount of post-haircut unrestricted HQLA held at the consolidated subsidiary as part of the covered company’s HQLA.

—    It consolidates all cash inflows and outflows which are part of the net cash flow calculation.

b.     For subsidiaries not subject to individual LCR requirements, consolidation is done as follows:

—    The application identifies whether the subsidiary is a consolidated subsidiary.

—    If condition (a) is fulfilled, it identifies whether the consolidated subsidiary is subject to minimum LCR requirement that is, whether the subsidiary in question is a regulated entity.

—    If condition (b) is not fulfilled, it eliminates all inter-company transactions until the level of the immediate parent of the consolidated subsidiary and then calculates the net cash outflow.

—    The application consolidates post-haircut restricted HQLA to the extent of the consolidated subsidiary’s net cash outflow and the entire amount of post-haircut unrestricted HQLA as part of the covered company’s HQLA.

—    It consolidates all cash inflows and outflows which are part of the net cash flow calculation.

2.     Consolidated LCR Calculation

Consolidation is done on a step-by-step basis based on each level of the organization structure starting from the most granular level. This means that intercompany transactions are eliminated at each sub-consolidation level till the final level of the consolidation (generally BHC) is reached. The Consolidated HQLA calculated at the level of the immediate subsidiary of the BHC is added to the HQLA held by the BHC. All intercompany cash flows are eliminated and the LCR is calculated per the LCR approach.

For instance, a bank’s organizational structure is as follows:

Figure 2 Bank's Organization Structure

In this case, at the first level of consolidation, calculation of net cash outflows and HQLA is done on a solo basis for legal entities 6, 7, 8, 9, and 10 as they do not have any subsidiaries. For regulated entities, such as material entities, intercompany transactions are not eliminated; whereas for non-regulated entities, intercompany transactions are eliminated to the next level of consolidation that is, legal entities 3 and 5. The restricted HQLA from entities 6 and 7 are consolidated to the extent of their net cash outflows, while the unrestricted HQLA is transferred fully to legal entity 3. The cash inflows and outflows are consolidated to the full extent.

At the second level of consolidation that is, legal entity 3, intercompany transactions are eliminated till legal entity 1, if LE 3 is a non-regulated entity. The HQLA is calculated as a sum of the consolidated restricted and unrestricted HQLA of entities 6 and 7 and the HQLA of legal entity 3. The net cash outflow is calculated based on the cash flows of entities 3, 6, and 7, post-elimination of intercompany transactions if applicable. The consolidated HQLA is calculated based on the procedure detailed in Step 2.

This process continues in a step-by-step manner till the highest parent level which is the bank holding company in this example.

Cash Flow Aggregation

Cash Flow aggregation is based on a list of LRM dimensions which users can choose using the Application preference option under LRM applications. See the Application Preferences section in the OFS Liquidity Risk Measurement and Management User Guide for more information.

Business Assumption

A list of preconfigured business Assumptions as per the regulatory requirement is provided as ready-to-use. For EBA specific business assumptions, see Preconfigured Regulatory LCR Scenarios.

Calculating Contractually Required Collateral

Contractually required collateral is the amount of collateral that is contractually due from one party to the other based on the current exposure and collateral position. This amount must be paid to the party soon and results in outflow for the party owing the collateral and inflow to the party to whom the collateral is due. It can be of two types based on the direction of the exposure, Excess Collateral Due or Excess Collateral Receivable.

Topics:

·        For Derivatives 

·        For Other Assets and Liabilities 

For Derivatives

This section details the calculation of contractually due collateral and contractually receivable collateral for derivatives.

Topics:

·        Calculating Contractually Due Collateral

·        Calculating Contractually Receivable Collateral

 Calculating Contractually Due Collateral

The application computes the value of the collateral that a bank is required to post contractually to its derivative counterparty as follows, if one of the following conditions are met:

1.     If Secured Indicator is No, then the contractually due collateral is 0.

2.     If Secured Indicator is Yes and CSA Type is One way, then the contractually due collateral is 0.

3.     If Secured Indicator is Yes, CSA Type is Two way and Gross Exposure is greater than or equal to 0, then the contractually due collateral is 0.

4.     If Secured Indicator is Yes, CSA Type is Two way and Gross Exposure is less than 0, the application computes the contractually due collateral as follows:

Where,

Threshold is the unsecured exposure that a party to a netting agreement is willing to assume before making collateral calls.

The contractually due collateral is assumed to be posted and therefore receives the relevant outflow rate specified by the regulator as part of the preconfigured business assumptions for LCR calculations.

Calculating Contractually Receivable Collateral

The application computes the value of the collateral that a derivative counterparty is required to post contractually to the bank as follows, if one of the following conditions are met:

1.     If Secured Indicator is No, then the contractually receivable collateral is 0.

2.     If Secured Indicator is Yes and Gross Exposure is less than or equal to 0, then the contractually receivable collateral is 0.

3.     If Secured Indicator is Yes and Gross Exposure is greater than 0, then the application computes the contractually receivable collateral as follows:

The contractually receivable collateral does not receive a pre-specified inflow rate from the regulator and is, therefore, excluded from the LCR calculations. However, the application computes this to generate reports.

For Other Assets and Liabilities

This section details the calculation of contractually due collateral and contractually receivable collateral for other assets and liabilities.

Topics:

·        Calculating Contractually Due Collateral

·        Calculating Contractually Receivable Collateral

 Calculating Contractually Due Collateral

The application calculates contractually due collateral for other assets and liabilities as follows, if one of the following conditions are met:

1.     If Balance Sheet Category is Asset, then the contractually due collateral is 0.

2.     If Balance Sheet Category is Liability, and Secured Indicator is N, then the contractually due collateral is 0.

3.     If Balance Sheet Category is Liability, and Secured Indicator is Y, then the application computes the contractually due collateral as follows:

Calculating Contractually Receivable Collateral

The application calculates contractually receivable collateral for other assets and liabilities as follows, if one of the following conditions are met:

1.     If Balance Sheet Category is Liability, then the contractually due collateral is 0.

2.     If Balance Sheet Category is Asset, and Secured Indicator is N, then the contractually due collateral is 0.

3.     If Balance Sheet Category is Asset, and Secured Indicator is Y then the application computes the contractually due collateral as follows:

Calculating Excess Collateral

Excess collateral is the value of collateral posted or received that is more than the collateral required based on the current levels of exposure and collateral position. This amount can be withdrawn by the party which has provided the collateral over its exposure and results in outflow to the party holding the excess collateral and an inflow to the party who has provided the excess collateral. It can be of two types, Excess Collateral Due or Excess Collateral Receivable.

Topics:

·        For Derivatives 

·        For Other Assets and Liabilities

For Derivatives

This section details the calculation of excess collateral due and excess collateral receivable for derivatives.

Topics:

·        Calculating Excess Collateral Due 

·        Calculating Excess Collateral Receivable

Calculating Excess Collateral Due

The application computes the value of the collateral that a derivative counterparty has posted to the bank, over the contractually required collateral, and therefore can be withdrawn by the counterparty, as follows:

1.     If Secured Indicator is No, then the excess collateral due is 0.

2.     If Secured Indicator is Y and Gross Exposure are less than or equal to 0, the application computes the excess collateral due as follows:

Where,

Adjusted collateral received: Collateral received from the counterparty less customer withdrawable collateral

Customer withdrawable collateral: Collateral received under re-hypothecation rights that can be contractually withdrawn by the customer within the LCR horizon without a significant penalty associated with such a withdrawal.

3.     If Secured Indicator is Y and Gross Exposure are greater than 0, the application computes the excess collateral due as follows:

The excess collateral due is assumed to be recalled by the counterparty and therefore receives the relevant outflow rate specified by the regulator as part of the preconfigured business assumptions for LCR calculations.

Calculating Excess Collateral Receivable

The application computes the value of the collateral that the bank has posted to its derivative counterparty, over the contractually required collateral, and therefore can be withdrawn by the bank, as follows:

1.     If Secured Indicator is No, then the excess collateral receivable is 0.

2.     If Secured Indicator is Y and Gross Exposure are greater than or equal to 0, the application computes the excess collateral receivable as follows:

Where,

Adjusted collateral posted: Collateral posted by the bank less firm withdrawable collateral.

Firm withdrawable collateral: Collateral provided under re-hypothecation rights that can be contractually withdrawn by the bank within the LCR horizon without a significant penalty associated with such a withdrawal.

3.     If Secured Indicator is Y and Gross Exposure are less than 0, the application computes the excess collateral receivable as follows:

The excess collateral receivable does not receive a pre-specified inflow rate from the regulator and is, therefore, excluded from the LCR calculations. However, the application computes this to report.

For Other Assets and Liabilities

This section details the calculation of excess collateral due and excess collateral receivable for other assets and liabilities.

Topics

·        Calculating Excess Collateral Due 

·        Calculating Excess Collateral Receivable

Calculating Excess Collateral Due

The application calculates the excess collateral due for other assets and liabilities as follows, if one of the following conditions are met:

1.     If Balance Sheet Category is Liability, then the contractually due collateral is 0.

2.     If Balance Sheet Category is Asset, and Secured Indicator is N, then the contractually due collateral is 0.

3.     If Balance Sheet Category is Asset, and Secured Indicator is Y, then the application computes the contractually due collateral as follows:

Calculating Excess Collateral Receivable

The application calculates the excess collateral receivable for other assets and liabilities as follows, if one of the following conditions are met:

1.     If Balance Sheet Category is Asset, then the contractually due collateral is 0.

2.     If Balance Sheet Category is Liability, and Secured Indicator is N, then the contractually due collateral is 0.

3.     If Balance Sheet Category is Liability, and Secured Indicator is Y,  then the application computes the contractually due collateral as follows:

Calculating Downgrade Impact Amount

This section explains the calculation of downgrade impact amount.

Topics:

·        Calculating Downgrade Impact Amount for Derivatives 

·        Calculating Downgrade Impact Amount for Other Liabilities 

Calculating Downgrade Impact Amount for Derivatives

The application calculates the downgrade impact amount for derivatives as follows, if one of the following conditions are met:

1.     If a downgrade trigger does not exist for the derivatives contract or netting agreement, the downgrade impact amount is 0.

2.     If Net Exposure greater than 0, the downgrade impact amount is 0.

3.     If Net Exposure less than or equal to 0, the downgrade impact amount is calculated as follows:

Calculating Downgrade Impact Amount for Other Liabilities

The application calculates the downgrade impact amount for other liabilities, including annuities, that have an associated downgrade, derivatives as follows, if one of the following conditions are met:

1.      If a downgrade trigger does not exist for the liability account, the downgrade impact amount is 0.

2.     The downgrade impact amount for liabilities other than derivatives and securitizations is calculated as follows:

NOTE:   

Any liability account that is triggered due to a particular level of rating downgrade has an outflow corresponding to a pre-specified percentage of the downgrade impact amount. For instance, if a 3-notch downgrade is specified, then the downgrade impact amount will outflow only for those accounts that have a trigger of 1-notch, 2-notches, and 3-notches. If a 2-notch downgrade is specified, then the downgrade impact amount will outflow only for those accounts that have a trigger of 1-notch and 2-notches. The rating downgrade and the outflow percentage as specified by the regulator are part of the preconfigured business assumptions for LCR calculations.

Calculating Net Derivative Cash Inflows and Outflows

This section explains the calculation of net derivative cash inflows and outflows.

Topics:

·        Cash Flow Netting at Derivative Contract Level 

·        Cash Flow Netting at Netting Agreement Level 

Cash Flow Netting at Derivative Contract Level

Cash flows from each derivative contract are netted as follows:

1.     When cash inflows and outflows are denominated in the same currency and occur at the same time bucket:

a.     The cash inflows and outflows are summed up and the net value is computed as follows:

b.     When net cash flow is positive and there is no netting agreement associated with the derivative contract, the value is treated as net derivative cash outflow.

c.     If the net cash flow is negative and there is no netting agreement associated with the derivative contract, the value is treated as net derivative cash inflow.

2.     When cash inflows and outflows are denominated in different currencies but settle within the same day:

a.     The cash inflows and outflows are summed up after being converted to the reporting currency and the net value is computed.

b.     If the net cash flow is positive and there is no netting agreement associated with the derivative contract, the value is treated as net derivative cash outflow.

c.     If the net cash flow is negative and there is no netting agreement associated with the derivative contract, the value is treated as net derivative cash inflow.

3.     When cash inflows and outflows are denominated in different currencies and do not settle within the same day:

a.     The cash outflows from each derivative contract without an associated netting agreement are summed up and treated as net derivative cash outflows.

b.     The cash inflows from each derivative contract without an associated netting agreement are summed up and treated as net derivative cash inflow.

NOTE:   

If a derivative contract has a netting agreement associated with it, the cash flow is further netted across contracts at the netting agreement level.

Cash Flow Netting at Netting Agreement Level

For derivative contracts which have a netting agreement associated with them, the net cash flows computed at the derivative contract level are further netted across multiple contracts under the same netting agreement as follows:

1.     For derivative contracts, that belong to a single netting agreement, whose payment netting agreement flag is Yes:

a.     The cash inflows and outflows occurring in each time bucket, denominated in each currency, are summed up across all contracts whose payment netting agreement flag is Yes, and the net value is computed.

b.     If the net cash flow is positive, the value is treated as net derivative cash outflow.

c.     If the net cash flow is negative, the value is treated as net derivative cash inflow.

2.     For derivative contracts, that belong to a single netting agreement, whose payment netting agreement flag is No:

a.     The cash outflows occurring in each time bucket, denominated in each currency, are summed up separately for each derivative contract whose payment netting agreement flag is No and treated as net derivative cash outflow.

b.     The cash inflows occurring in each time bucket, denominated in each currency, are summed up separately for each derivative contract whose payment netting agreement flag is No and treated as net derivative cash inflow.

NOTE:   

Cash flow netting for netting agreements is done separately for each currency. Cash flows are not netted across currencies. Instead, the inflows and outflows converted into the reporting currency are summed up separately to report the net derivatives cash inflow and net derivatives cash outflow at an entity level.

Calculating Twenty-Four Month Look-back Amount

The application computes the 24-month look-back amount, to define outflows due to increased liquidity needs related to market valuation changes on derivatives as follows:

·        The Mark-to-Market (MTM) value of collateral outflows and inflows due to valuation changes on derivative transactions are captured at a legal entity level. The values over a 24-month historical time window from the As of Date are identified.

·        The application computes the largest 30-day absolute net collateral flow occurring within each rolling 30-day historical time window as follows:

a.     The net Mark-to-Market collateral change is computed for each day within a particular 30-day historical time window as follows:

b.     The cumulative net Mark-to-Market collateral change is computed for each day within a particular 30-day historical time window as follows:

Where,

i: Each day within a particular 30-day historical time window

n: Each 30-day historical time window

c.     The absolute net Mark-to-Market collateral change is computed for each day within the rolling 30-day historical time window as follows:

d.     The largest 30-day absolute net collateral flow occurring within the rolling 30-day historical time window is identified as follows:

NOTE:   

Steps (a) to (d) are repeated for each rolling 30-day historical time window.

e.     The 24-month look-back amount is calculated as follows:

NOTE:   

1.      This calculation is done for each legal entity separately.

2.      The largest 30-day absolute net collateral flow is computed in 30-day blocks on a rolling basis. For example, the first 30-day block is As of Date to As of Date - 29; the second 30-day block is As of Date - 1 to As of Date - 30 and so on.

3.      The 24-month look-back amount is computed as the maximum of the largest absolute net collateral flow during all rolling 30-day periods in every 24 months.

The 24-month look-back calculations are illustrated in the following table considering a 34-day historical time window instead of 24-months. This results in 5 rolling 30-day windows.

The largest 30-day absolute net collateral flow for each rolling 30-day period and the 24-month look-back value (in this example, the 34-day look-back value) is computed as follows.

Calculating Operational Amount

The regulator-prescribed lower outflow rate for operational deposits should be applied only to the portion of the EOP balance that is truly held to meet operational needs. The application supports a new methodology to compute the operational portion of the EOP balance of operational deposits. The following steps are involved in computing the operational balance:

1.     All deposits classified as operational as per regulatory guidelines are identified. This is a separate process in LRM.

2.     The EOP balances of eligible operational accounts are obtained over a 90-day historical window including the As of Date, for example, As of Date – 89 days. To identify historical observations, the f_reporting_flag must be updated as Y for one execution of the Run per day in the LRM Run Management Execution Summary UI. The application looks up the balance for such accounts against the Run execution for which the Reporting Flag is updated as Y for each day in the past.

NOTE:   

The historical time window is captured as a parameter in the SETUP_MASTER table. The default value is 90 days which can be modified by the user. To modify this value, update the value under the component code DAYS_HIST_OPER_BAL_CALC_UPD.

3.     A rolling 5-day average is calculated for each account over the historical window.

4.     The average of the 5-day rolling averages computed in Step 3 is calculated.

5.     The operational balance is calculated as follows:

NOTE:   

The calculation of the operational balance can be either a direct download from the staging tables or through the historical balance approach.

NOTE:   

The operational balance calculation based on historical lookback is optional. You can choose to compute the operational balances using this method or provide the value as a download. To provide the value as a download, update the value in the SETUP_MASTER table under the component code HIST_OPERATIONAL_BAL_CALC_UPD as N. If the value is Y then the value would be calculated through historical balance approach.

6.     The non-operational balance is calculated as follows:

7.     The operational insured balance is calculated as follows:

The insured and uninsured balances are calculated as part of a separate process, for example the insurance allocation process which is explained in detail in the relevant section under each jurisdiction.

8.     The operational uninsured balance is calculated as follows:

9.     The non-operational insured balance is calculated as follows:

10.  The non-operational uninsured balance is calculated as follows:

The operational deposit computation process is illustrated in the following table, assuming a 15-day historical window instead of 90-days and for the As of Date 28th February 2017. The historical balances for 15-days including the As of Date are provided as follows.

The rolling averages and cumulative average are computed as follows.

The operational and non-operational balances are computed as follows.

NOTE:   

·        Negative historical balances are replaced by zero for this computation.

·        For operational accounts that have an account start date is greater than or equal to the historical days including the As of Date, missing balances are replaced by previously available balance.

·        For operational accounts that have an account start date is less than the historical days including the As of Date:

1.      Missing balances between the account start date and As of Date are replaced by previously available balance.

2.      The rolling average is calculated only for the period from the account start date to the As of Date.

·        The methodology to compute operational balance is optional. This can be turned On or Off using the Setup master table, where component code = HIST_OPERATIONAL_BAL_CALC_UPD. The option to provide the operational balance as a download is supported by the application.

Calculating HQLA Transferability Restriction

Regulators across jurisdictions recognize the existence of liquidity transfer restrictions, for banks that operate in multiple jurisdictions. Such transfer restrictions have implications for the group-wide consolidated LCR calculations and hence require to be treated appropriately. OFS LRM, in the LCR consolidation process, includes the restricted HQLA from a subsidiary in the consolidated stock of HQLA only to the extent of that subsidiary’s liquidity needs that is its net cash outflow, per the regulatory requirements. The treatment of transferability restriction during consolidation is done separately for the following three scenarios:

·        Accounts Domiciled in Third Countries with Transfer Restrictions 

·        Accounts Denominated in Non-convertible Currencies 

·        Accounts Denominated in Currencies with Operational Restrictions 

Accounts Domiciled in Third Countries with Transfer Restrictions

The HQLA transferability restriction for accounts domiciled in third Countries with transfer restrictions is calculated as follows:

1.     The net cash outflows are computed for accounts domiciled in a third country. The consolidation entity is the subsidiary itself in this case. If the subsidiary is a leaf level entity, then the net cash outflow is calculated on a standalone basis.

2.     The restricted and unrestricted stock of Level 1, Level 2A, and Level 2B is computed for accounts domiciled in the third country, before applying HQLA caps. OFS LRM captures the HQLA transferability restriction at an account level through the flag F_TRANSFERABILITY_RESTRICTION.

3.     The application computes the consolidated HQLA amount in the third country with restrictions (TCR) as follows:

4.     The application computes the restricted HQLA in the third country with restrictions as follows:

5.     The application assigns the restricted HQLA amount in the third country with restrictions in the following order:

a.     First by asset level starting from least to highest, that is, Level 2B to Level 1.

b.     Next by haircut values within an asset level starting from the highest to least.

6.     The application verifies if the legal entity has exposure to any restricted third country.

7.     The application calculates the total restricted HQLA amount for each legal entity as the sum of the restricted HQLA due to currency operational restriction, non-convertible currency restriction and third-country restriction at each asset level.

8.     The application calculates net cash outflows at the legal entity level.

9.     The application calculates stock of Level 1, Level 2A, Level 2B assets at the legal entity level.

10.  It calculates the unrestricted stock of Level 1, Level 2A, and Level 2B assets at the legal entity level by deducting the restricted amount for each asset level. The restricted amount is excluded from the stock calculation.

11.  The application transfers the unrestricted stock of Level 1, Level 2A, and Level 2B assets to the immediate parent.

12.  Steps 7 to 12 are repeated for each sub-consolidation level within the organization structure of the consolidation entity until the consolidation entity itself.

NOTE:   

The allocation of restricted assets is done in the descending order of asset quality to maximize the stock of HQLA.

This calculation is part of the LCR consolidation process. To get a complete view of the process, see the Consolidation section.

Accounts Denominated in Non-convertible Currencies

The HQLA transferability restriction for accounts denominated in non-convertible currencies is calculated as follows:

1.     The net cash outflows are computed for accounts in the non-convertible currency. The consolidation entity is the subsidiary itself in this case. If the subsidiary is a leaf level entity, then the net cash outflow is calculated on a standalone basis.

2.     The restricted and unrestricted stock of Level 1, Level 2A, and Level 2B assets in non-convertible currency is computed, before applying HQLA caps. The application captures the HQLA transferability restriction at an account level through the flag F_TRANSFERABILITY_RESTRICTION.

3.     The application computes the consolidated HQLA amount in the non-convertible currency (NCC) as follows:

4.     The application computes the restricted HQLA in NCC as follows:

5.     The application assigns the restricted HQLA amount in the non-convertible currency in the following order:

a.     First by asset level starting  from least to highest, that is, Level 2B to Level 1.

b.     Next by haircut values within an asset level starting from the highest to least.