1. Liquidity Risk Regulatory Calculations for European Banking Authority User Guide
  2. Liquidity Coverage Ratio Calculation as Per Delegated Act
  3. Process Flow
  4. Identifying Eligible HQLA

4.3.2 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.