5.2.1.1 Identification and Treatment of Level 1 Assets

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

Cash including cash reserves in excess of required Cash Reserve Ratio (CRR). For banks incorporated, these also include:

• Excess reserves held with foreign central banks, where an international rating agency has assigned a 0% risk weight to the foreign sovereign.
• Excess reserves held with foreign central banks, where an international rating agency has assigned a non-0% risk weight to the foreign sovereign and a 0% risk weight has been assigned at national discretion under Basel II Framework, to the extent these balances cover the bank’s stressed net cash outflows in that specific currency.

Central Bank excess reserves include the balance held by a bank at the central bank directly or through a correspondent bank less any minimum reserve requirement. It also includes overnight deposits or term deposits held with the central bank that meet the regulatory criteria. The value of eligible term deposits that is included is the amount net of any withdrawal penalty.

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 section below. Government securities in excess of the minimum Statutory Liquidity Ratio (SLR) requirement.

Within the mandatory SLR requirement, government securities to the extent of 2% of Net Demand and Time Liability (NDTL) are currently allowed under Margin Standing Facility (MSF).

Marketable securities, assigned a 0% risk weight under both Basel and by international rating agencies, which satisfy the following conditions:

• Issuer type or guarantor type is a foreign sovereign
• Traded in large, deep and active repo or cash markets characterized by a low level of concentration
• Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions
• Not an obligation of a financial institution or any of its affiliated entities

Marketable securities, assigned a non-0% risk weight by international rating agencies and 0% risk weight at national discretion, which satisfy the following conditions:

• Issuer type is a foreign sovereign or issuer type is a domestic sovereign and account is denominated in a foreign currency
• Traded in large, deep and active repo or cash markets characterized by a low level of concentration
• Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions
• Not an obligation of a financial institution or any of its affiliated entities

Such marketable securities 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 bank’s operations in that foreign jurisdiction.

To meet this requirement the application identifies and updates the account country liquidity risk flag as follows:

1. The existence of bank’s operations in a particular jurisdiction is identified. 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 at a country and currency combination.
2. Next the application identifies whether the asset is held to meet the bank’s net stressed cash outflows in that currency arising from bank’s operations in that specific jurisdiction by checking the following conditions:
3. If the issuer’s country is the same as the account country.
4. 4. 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 (i) above.
5. If the account currency is the same as the currency in which local operations are present in a particular jurisdiction as identified in step (i) above.
6. If all of the above criteria are met, the account country liquidity risk flag is updated as “Yes” which indicates that the particular asset is held to meet the net cash outflows in a particular jurisdiction.
7. Finally, the application identifies the amount to be included in the stock of HQLA when account country liquidity risk flag = “Yes” as follows:

Figure 4-1 Stock to be included in Amount due to the Local Operations Related Restrictions

Assets classified as HQLA Level1 are assigned a 0% haircut under the regulatory scenario prescribed by RBI.