4.3.1.1 Identifying and Treating Level 1 Assets

The application identifies the following as HQLA Level 1 Assets:

• Cash in all currencies, including deposits and reserves at Central Banks.
• Central Bank reserves (including required reserves), to the extent that the Central Bank policies allow them to be drawn down in times of stress. These include the following:
  1. Banks’ overnight deposits with the Central Bank.
  2. Term deposits with the central bank that satisfy the following conditions:
     • They are explicitly and contractually repayable on notice from the depositing bank.
     • They constitute a loan against which the bank can borrow on a term basis or overnight but automatically renewable basis (only where the bank has an existing deposit with the relevant Central Bank).
• Marketable debt securities that are issued or guaranteed by a Sovereign, Central Bank, Public Sector entity, relevant international organization, or multilateral development bank. These securities should also satisfy the following criteria:
  1. It qualifies, in the calculation of credit risk under the standardized (credit risk) approach, for 0% risk weight.
  2. It is traded in large, deep and active markets, characterized by a low level of concentration, and where debt securities of that type can be monetized through direct sale or repo-style transactions.
  3. It has a proven record as a reliable source of liquidity in those markets, even during a period of financial stress.
  4. It is not an obligation of a financial institution or an associated entity of a financial institution.
• Marketable debt securities that are issued by the Sovereign or Central Bank of a country and denominated in the local currency of that country, which, under the standardized (credit risk) approach which does not qualify for 0% risk-weight. These securities should also satisfy the following criteria:
  1. The Category 1 institution holding the debt security is incorporated in that country, or carries on a banking business, through a branch or subsidiary, in that country.
• Marketable Debt Securities that are issued by the Sovereign or Central Bank of a country and denominated in a currency that is not the local currency of that country and which do not, under the standardized (credit risk) approach, qualify for 0% risk-weight as laid out in the Capital Rules. These securities should also satisfy the following criteria:
  1. It is issued by the Sovereign or Central Bank of a country in which the Category 1 institution holding the Debt Security is incorporated or carries on a banking business through a branch or subsidiary.
  2. The amount of the Category 1 institution’s holding in the Debt Security that may be eligible for inclusion in the institution’s HQLA does not exceed the amount of total net cash outflows in the currency of the debt security arising from the institution’s banking business in the country in which the debt security is issued.

Note:

The process of identifying the value to be included in the stock of HQLA up to the extent of a bank stressed net cash outflows in a particular currency is documented in the Account Country Liquidity Risk Flag section.

Account Country Liquidity Risk Flag:

1. The flag identifies the existence of a bank’s operations in a particular jurisdiction. If the bank holds either liabilities or non-marketable assets in that jurisdiction, the application assumes that the bank has operations in that specific jurisdiction. This is identified in a country and currency combination.
2. The application then identifies whether the asset is held to meet the bank’s net stressed cash outflows in that currency arising from the bank’s operations in that specific jurisdiction by checking the following conditions:
   • Is the issuer’s country is the same as the account country.
   • If the issuer’s country is the same as the country in which local operations are present in a particular jurisdiction as identified in Step 1.
   • If the account currency is the same as the currency in which local operations are present in a particular jurisdiction as identified in Step 1.
   If all the criteria are met, the account country's liquidity risk flag is updated as Yes. This indicates that the particular asset is held to meet the net cash outflows in a particular jurisdiction.
3. Finally, the application identifies the amount to be included in the stock of HQLA when the Account Country Liquidity Risk flag = Yes using the following calculation:

Figure 3-1 Amount to be Included in Stock Due to Local Operations Related Restrictions

Assets classified as HQLA Level 1, which are denominated in HKD, are assigned a 0% haircut under the regulatory scenario as prescribed by HKMA. Level 1 securities denominated in other currencies are applied haircuts as follows:

Table 3-3 Haircuts Applied to Level 1 Securities Denominated in Other Currencies

Currency	Haircut
USD	2%
Euro/ JPY/ GBP	8%
Others	10%