4.2.1.2 Treatment of Assets Issued by Financial Sector Entities

Any asset whose issuer is either a financial sector entity or a consolidated subsidiary of a financial sector entity are classified as non-HQLA assets and excluded from the stock of high quality liquid assets. These attributes are captured at the standard party level.

1. Identification and Treatment of Level 1 Assets

   The qualifying criteria for assets to be classified as level 1 assets is detailed below.

   Level 1 assets are fully included as part of the stock of high quality liquid assets provided they meet the HQLA eligibility criteria.

   The application identifies HQLA Level 1 Assets in the following manner:

   1. Federal Reserve Bank Balances: Balances held by the Federal Reserve banks include reserve balance requirements, excess balances and term deposits. Only excess balances and certain term deposits are included in the stock of level 1 assets. To be included in the stock, term deposits should be held pursuant to the terms and conditions that:
      • explicitly and contractually permit such term deposits to be withdrawn upon demand prior to the expiration of the term

        Or that,

      • permit such term deposits to be pledged as collateral for term or automatically-renewing overnight advances from a Federal Reserve Bank

      Reserve balance requirements are excluded from the stock as they have to be maintained with the Federal Reserve Bank at all times.

      Federal Reserve Bank balances include the central bank reserves held at a US Federal Reserve Bank directly by the bank or through a correspondent bank less any reserve balance requirement.

      Additionally, central bank term deposits held by a bank directly or through a correspondent bank are included provided they fulfill the following criteria:

      • It is withdrawn on demand prior to maturity

        Or

      • It is pledged as collateral for term or automatically-renewing overnight advances from a Federal Reserve Bank

      The value of eligible term deposits that is included is the amount net of any withdrawal penalty.

   2. Foreign Withdrawable Reserves: Reserves held in foreign central banks which have no transferability restrictions are included. Any reserves held by the bank in a foreign central bank that do not have restrictions on use i.e. freely withdrawable and denominated in the local currency of that foreign country are included as level 1 assets. The reserves include term deposits held at the central bank.
   3. United States Government Securities: Securities issued by or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S Department of the Treasury, are included. Additionally, securities issued by any other US government agency and explicitly guaranteed by the full faith and credit of the U.S. government, provided that they are liquid and readily-marketable.
   4. Certain Sovereign and Multilateral Organization Securities: Securities issued or guaranteed by a sovereign entity, a central bank, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and European Community, or a multilateral development bank are included if the securities fulfill the following conditions:
      • Are assigned a 0% risk weight
      • Should be liquid and readily marketable
      • Issued by an entity whose obligations have a proven record as a reliable source of liquidity in the repurchase or sales markets during stressed market conditions
      • Not an obligation of a financial entity or its consolidated subsidiary
   5. Certain Foreign Sovereign Debt Securities: Debt securities issued by a foreign sovereign entity with a non 0% risk weight if they fulfill the following conditions:
      • Are liquid and readily marketable
      • Are issued in the local currency of the foreign sovereign

        The legal entity holds the securities to cover its cash outflows in that jurisdiction.

2. Identification and Treatment of Level 2A Assets
   The application identifies HQLA Level 2A Assets in the following manner:

   1. U.S. GSE Securities: A security issued by, or guaranteed as to the timely payment of principal and interest by, a U.S. government-sponsored enterprise, that is investment grade under 12 CFR part 1 as of the calculation date, provided the claim is senior to preferred stock.
   2. Securities issued by or guaranteed by a US government sponsored entity (GSE) as they have been assigned a 20% risk weight.
   3. Securities issued by or guaranteed by a sovereign or multi-lateral development bank that is:
      • Not included in level 1 assets
      • Assigned a risk weight between 0% and 20%
      • Price has not decreased or haircut increased by > 10% during a 30-calendar day period of significant stress
      • Not an obligation of a financial entity or its consolidated subsidiary

        Note:

        The rule excludes covered bonds and securities issued by other PSE’s to be included in the stock even though they are assigned a 20% risk weight.
3. Identification and Treatment of Level 2B Assets
   The application identifies HQLA Level 2B Assets in the following manner:

   1. Publicly traded corporate debt securities that meet the following criteria:
      • Considered investment grade in accordance with the definition provided in 12 CFR part 1.
      • Issued or guaranteed by an entity whose obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions. Reliability is proven if price has not decreased or haircut increased by 20% over a 30-day stress period.
      • Not an obligation of a financial sector entity and not an obligation of a consolidated subsidiary of a financial sector entity.
   2. Publicly traded common equities that meet the following criteria:
      • Included in Russell 100 Index or an index that the bank’s supervisor in a foreign jurisdiction recognizes for inclusion in Level 2B assets if the share is held in that jurisdiction.
      • Issued in US Dollars or in the currency of the jurisdiction in which the bank operates and holds the common equity share to cover net cash outflows in that jurisdiction.
      • Issued by an entity whose publicly traded common equity shares have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions. Reliability is proven if price has not decreased or haircut increased by 40% over a 30-day stress period.
      • Not issued by a financial sector entity and not issued by a consolidated subsidiary of a financial sector entity
      • If held by a depository institution, is not acquired in satisfaction of a debt previously contracted (DPC)
      • If held by a consolidated subsidiary of the bank, it includes the publicly traded common equity share in its level 2B liquid assets only if the share is held to cover net cash outflows of its consolidated subsidiary in which the publicly traded common equity share is held.
   3. U.S. general obligation municipal securities that meet the following criteria:
      1. Is issued by, or guaranteed as to the timely payment of principal and interest by, a public sector entity.
      2. Is liquid and readily marketable.
      3. Considered investment grade in accordance with the definition provided in 12 CFR part 1.
      4. Is issued or guaranteed by an entity whose obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions. Reliability is proven if price has not decreased or haircut increased by 20% over a 30-day stress period.
      5. Is not an obligation of a financial sector entity and not an obligation of a consolidated subsidiary of a financial sector entity.

         Note:

         A public sector entity is defined as any state, local authority, or other governmental subdivision below the U.S. sovereign entity level.

         The maximum value of such securities issued by a single public sector entity than can be included in the stock of HQLA is the fair value up to two times the times the average daily trading volume during the previous four quarters of all general obligation securities issued by that public sector entity.

      The U.S. Municipal Securities can be included as Level 2B Asset only to the extent of 5% of the total stock of HQLA.