15.2.2.2 Identification of 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 BIS. If an asset classified as HQLA meets all the relevant operational criteria it is identified as eligible HQLA and included in the stock of HQLA.

The application checks for the following operational criteria:

1. Operational Capability to Monetize HQLA.

   An asset is considered HQLA only if the bank has demonstrated the operational capability to monetize such an asset and has periodically monetized such an asset. The application captures this information for each asset as a flag

2. 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 i.e. the lowest quality collateral is marked as used first.

3. HQLA Under the Control of the Liquidity Management Function

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

4. Termination of Transaction Hedging HQLA

   If a 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 terminating the hedge while computing the stock of HQLA. The hedge termination cost is deducted from the market value of the asset and the difference is included in the stock of HQLA.

5. Transferability Restriction during Consolidation

   Surplus HQLA held by a subsidiary can be included in the stock of the parent company only if it is freely available to the parent during times of stress. The assets that have transfer restrictions are identified through a flag. The application only includes the restricted assets to the extent required to cover the subsidiary’s own net cash outflows while including the unrestricted assets fully into the consolidated stock of HQLA.

6. Exclusion of Certain Re-hypothecated 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.

7. Unsegregated Assets

   The application includes unsegregated assets, received as collateral under re-hypothecation rights, for derivative transactions, in the stock of HQLA. Conversely, it excludes all segregated assets from the stock of HQLA.