High Quality Liquid Assets (HQLA)

54. Assets that meet the conditions and requirements specified in the following paragraphs 7 to 15 are eligible to be considered as HQLA. Those assets are considered to be HQLA as they can be converted easily and immediately into cash at little or no loss of value. To qualify as HQLA, assets should be liquid in markets during a time of stress.

55. In determining whether or not the market for an asset can be relied upon to raise liquidity during a

time of stress, the following fundamental factors should be taken into account:

(a) low risk: high credit standing of the issuer and a low degree of subordination, low duration, low legal risk, low inflation risk, denomination in a convertible currency with low foreign exchange risk;

(b) ease and certainty of valuation;

(c) low correlation with risky assets, not subject to wrong-way risk; and

(d) listing on a developed and recognised exchange.

56. In assessing the reliability of a market for raising liquidity during a time of stress, the following market-related characteristics should be taken into account, though not limited to them:

(a) active and sizable market, including active outright sale or repo markets at all times. This can be demonstrated through:

(i) historical evidence of market breadth and market depth (low bid-ask spreads, high trading volumes, large and diverse number of market participants); or

(ii) existence of robust market infrastructure (presence of multiple committed market makers);

(b) low price volatility, including historical evidence of relative stability of market terms (e.g. prices and haircuts) and volumes during stressed periods; or

(c) flight to quality, i.e. that historically the market has shown a tendency to move into these types of high quality assets in a systemic crisis.

HQLA – general operational requirements

57. To be eligible as HQLA, assets in the portfolio of HQLA must be appropriately diversified in terms of type of assets, type of issuer and specific counterparty or issuer. To be eligible as HQLA, assets must meet the following requirements:

(a) the assets must be under the control of the specific function or functions charged with managing the liquidity of the Bank who must have the continuous authority and legal and operational capability to liquidate any asset in the stock; and

(b) a representative portion of the assets in the stock of HQLA must be liquidated periodically and at least annually by the Bank to test its access to the market, the effectiveness of its processes for liquidation, the availability of the assets, and to minimise the risk of negative signalling during a period of actual stress.

58. To be eligible as HQLA, an asset must also meet the following requirements:

(a) the asset must be unencumbered and free of legal, regulatory, contractual or other restrictions that affect the ability of the Bank to liquidate, sell, transfer, or assign the asset;

(b) the asset must not be pledged, either explicitly or implicitly, to secure, collateralise or credit- enhance any transaction, nor be designated to cover operational costs (such as rents and salaries); and

(c) an asset received in a reverse repo or securities financing transactions that is held at the Bank, is eligible for inclusion in the stock of HQLA only if the asset has not been

rehypothecated and is legally and contractually available for the Bank’s use.

59. These requirements in paragraphs above are intended to ensure that the stock of HQLA is managed in such a way that the Bank can, and is able to demonstrate that it can, immediately use the assets as a source of contingent funds that is available to convert into cash to fill funding gaps between cash inflows and outflows at any time during the 30-day stress period, with no restriction on the use of the liquidity generated. The control of the HQLA may be evidenced either by:

(a) maintaining assets in a separate pool managed by the identified liquidity management function (typically the treasurer) with the sole intent to use it as a source of contingent funds; or

(b) demonstrating that the relevant function can liquidate the asset at any point in the 30- day stress period and that the proceeds are available to the function throughout the 30- day stress period without directly conflicting with a stated business or risk management strategy.

60. Operational capability to liquidate assets referred to in paragraph 59 above, requires procedures and appropriate systems to be in place. This includes providing the liquidity management function with access to all necessary information to liquidate any asset at any time. Liquidation of the asset should be executable operationally within the standard settlement period for the asset class in the relevant jurisdiction.

Caps on different types of HQLA – calculation of LCR

61. Assets eligible to be included in the stock of HQLA for the purpose of the LCR calculation are classified under the following two categories:

(a) Level 1 HQLA, consisting of the highest quality and most liquid assets; and

(b) Level 2 HQLA, including Level 2A HQLA and Level 2B HQLA, consisting of other high quality liquid assets.

62. When calculating the total stock of HQLA, a Bank must apply the following caps in respect of each category of assets:

(a) Level 1 HQLA can be included in the total stock of HQLA without any limit (i.e. up to 100% of HQLA);

(b) Total Level 2 HQLA, including both Level 2A HQLA and Level 2B HQLA, can comprise only up to 40% of the total stock of HQLA; and

(c) Level 2B HQLA can comprise only up to 15% of the total stock of HQLA within the overall 40% limit on Level 2 HQLA in (b).

63. The caps on Level 2 HQLA and Level 2B HQLA must be determined after applying the haircuts required under paragraphs 22 & 23, and after unwinding the amounts of HQLA involved in short- term secured funding, secured lending and collateral swap transactions maturing within 30 calendar days that involve the exchange of HQLA.

64. The assets to be included in each category of HQLA must be restricted to assets being held or owned by the Bank on the first day of the stress period, irrespective of their residual maturity.

65. The following paragraphs illustrate how the caps on various types of HQLA, as specified in paragraphs 15 & 16 are to be applied in practice, for the calculation of LCR. The adjusted amounts of HQLA should be calculated as the amount of HQLA that would result after unwinding those short- term secured funding, secured lending and collateral swap transactions that involve the exchange of any HQLA for any other HQLA. The calculation of the stock of HQLA for paragraph 15 can be expressed as the following formula:

Stock of HQLA = Level 1 HQLA + Level 2A HQLA + Level 2B HQLA – Adjustment for 15% cap – Adjustment for 40% cap

Where:

(a) Adjustment for 15% cap = Max (Adjusted Level 2B HQLA – 15/85 x(Adjusted

Level 1 HQLA + Level 2A HQLA), Adjusted Level 2B HQLA - 15/60 x (Adjusted Level 1 HQLA, 0)

(b) Adjustment for 40% cap = Max ((Adjusted Level 2A HQLA + Adjusted Level 2B

HQLA – Adjustment for 15% cap) - 2/3 x Adjusted Level 1 HQLA, 0)

Level 1 HQLA

66. Level 1 HQLA must be valued at market value and it consists of:

(a) banknotes and coin;

(b) central bank reserves, to the extent that such reserves are capable of being drawn down immediately in times of stress

(c) marketable securities representing claims on or claims guaranteed by sovereigns, central banks, Public Sector Entities (PSEs), the Bank for International Settlements, the International Monetary Fund, the European Central Bank and European Commission or Multilateral Development Banks (MDBs), and that satisfy all of the following conditions:

(i) they are assigned a zero % risk-weight according to Chapter 4 and App4 of this Module;

(ii) they are traded in large, deep and active repo or cash markets characterised by a low level of concentration

(iii) they have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions; and

(iv) they are not an obligation of a financial institution or any of its associated entities

(d) in the case of sovereigns that are not eligible for zero % risk-weight, sovereign or central bank debt securities issued in domestic currencies by the sovereign or central bank in the country in which the Liquidity Risk is being taken or in the Bank’s home jurisdiction, where those securities satisfy all of the conditions in paragraph (c) (ii)(iii) and (iv) above;

(e) in the case of sovereigns that are not eligible for zero % risk-weight, domestic sovereign or central bank debt securities issued in foreign currencies, up to the amount of the Bank’s stressed net cash outflows in that specific foreign currency stemming from the Bank’s operations in the jurisdiction where the Bank’s Liquidity Risk is being taken, where those securities satisfy all of the conditions in paragraph

(c) (ii)(iii) and (iv) above; and

(f) any other types of assets approved by the AFSA under paragraph 24 as being eligible to be Level 1 HQLA.

Level 2A HQLA

67. Level 2A HQLA must be valued at market value and subject to a 15% haircut and it consists of:

(a) marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or MDBs that satisfy all of the following conditions:

(i) they are assigned a 20% risk-weight according to Chapter 4 and App4 of this Module;

(ii) they are traded in large, deep and active repo or cash markets characterised by a low level of concentration;

(iii) they have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (i.e. maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 10%); and

(iv) they are not an obligation of a financial institution or any of its associated entities.

(b) corporate debt securities (including commercial paper) and covered bonds that satisfy all of the following conditions:

(i) in the case of corporate debt securities: they must not be issued by a financial institution or any of its associated entities and must include only plain vanilla assets (i.e. not include complex structured products or subordinated debt) whose valuation is readily available based on standard methods and does not depend on private knowledge;

(ii) in the case of covered bonds: they must not be issued by the Bank itself or any of its associated entities

(iii) the assets must have a Credit Quality Grade of 1 from a recognised ECAI or, if the assets do not have a credit assessment by a recognised ECAI, they must be internally rated as having a probability of default (PD) corresponding to a Credit Quality Grade of 1;

(iv) they must be traded in large, deep and active repo or cash markets characterised by a low level of concentration; and

(v) they must have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (i.e. maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 10%); and

(c) any other types of assets approved by the AFSA under paragraph 24 as being eligible to be Level 2A HQLA.

Level 2B HQLA

68. Level 2B HQLA must be valued at market value and subject to an appropriate haircut, as specified in (2), for each type of asset and it consists of:

(a) residential mortgage backed securities that satisfy all of the following conditions, subject to a 25% haircut:

(i) they are not issued by, and the underlying assets have not been originated by, the Bank itself or any of its affiliated entities;

(ii) they have a Credit Quality Grade of 1 from a recognised ECAI;

(iii) they are traded in large, deep and active repo or cash markets characterised by a low level of concentration;

(iv) they have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, (i.e. maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 20%);

(v) the underlying asset pool is restricted to residential mortgages and does not contain structured products;

(vi) the underlying mortgages are “full recourse’’ loans (i.e. in the case of foreclosure the mortgage owner remains liable for any shortfall in sales proceeds from the property) and have a maximum loan-to- value ratio (LTV) of 80% on average at issuance; and

(vii) the securitisations are subject to “risk retention” regulations which require issuers to retain an interest in the assets they securitise;

(b) corporate debt securities (including commercial paper) that satisfy all of the following conditions, subject to a 50% haircut:

(i) they are not issued by a financial institution or any of its affiliated entities;

(ii) they have a Credit Quality Grade of 2 or 3 from a recognised ECAI or, in the case the assets do not have a credit assessment by a recognised ECAI, are internally rated as having a probability of default (PD) corresponding to a Credit Quality Grade of 2 or 3;

(iii) they are traded in large, deep and active repo or cash markets characterised by a low level of concentration; and

(iv) they have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, (i.e. maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 20%);

(c) equity shares that satisfy all of the following conditions, subject to a 50% haircut:

(i) they are not issued by a financial institution or any of its affiliated entities;

(ii) they are exchange traded and centrally cleared;

(iii) they are a constituent of the major stock index in the home jurisdiction, or where the Liquidity Risk is taken, as decided by the supervisor in the jurisdiction where the index is located;

(iv) they are denominated in the domestic currency of a Bank’s home jurisdiction or in the currency of the jurisdiction where a Bank’s Liquidity Risk is taken;

(v) they are traded in large, deep and active repo or cash markets characterised by a low level of concentration; and

(vi) they have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, (i.e. maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 40%); and

(d) any other types of assets approved by the AFSA under paragraph 24 as being eligible to be Level 2B HQLA.

Approval of other types of HQLA

69. The AFSA may approve other types of assets (in addition to those specified in this section of Chapter 9 of BPG) as being eligible to be included in the stock of HQLA for the purposes of the calculation of the LCR. In such cases, the AFSA will also specify whether they are to be classified as Level 1 HQLA or Level 2 HQLA and the haircut, if any, to be applied to them. In such cases, the AFSA may also define the conditions that the assets must satisfy to be treated as HQLA.

Other provisions relating to LCR calculation

70. For the purpose of calculating the LCR, if an eligible asset within HQLA becomes ineligible (e.g. due to a rating downgrade), a Bank is allowed to keep the asset in its stock of HQLA for an additional 30 calendar days to allow time to adjust its stock as needed or replace the asset.

71. For the purpose of calculating a consolidated LCR for a Financial Group, where applicable, qualifying HQLA held to meet statutory liquidity requirements at a legal entity or sub-consolidated level may be included in the stock at the consolidated level only to the extent that the related risks are also reflected in the consolidated LCR. Any surplus of HQLA held at the legal entity can be included in the consolidated stock of HQLA only if those assets would also be freely available to the consolidated parent entity in times of stress.

72. A Bank must be able to meet its liquidity needs in each currency in which it has a material exposure. The currencies of the stock of HQLA of a Bank must be similar in composition to its liquidity needs by currency.

Total Net Cash Outflow

73. A Bank must calculate its Total Net Cash Outflow over the following 30 calendar days in accordance with the following formula:

Total Net Cash Outflows over the next 30 calendar days

= total expected cash outflows – whichever is the lesser amount of total expected cash

inflows or 75% of total expected cash outflows

74. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance commitments by the rates at which they are expected to run off or be drawn down.

75. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in. To ensure a minimum level of HQLA holdings at all times, total cash inflows are subject to an aggregate cap of 75% of total expected cash outflows.

76. A Bank must not double-count items. That is, for assets included as part of the eligible stock of HQLA, the associated cash inflows arising from such assets must not be counted as cash inflows for the purpose of calculating the net cash outflows over the next 30 calendar days.

Cash Outflows

77. The following table specifies, for each of the various categories or types of liabilities and off-balance sheet commitments, the rates at which they are expected to run off or be drawn down for the purpose of calculating the LCR.

78. The following paragraphs set out the AFSA’s views about how the table above defining the treatment of various cash outflows should be applied to different items.

Retail Deposits:

79. Retail deposits should include deposits from individuals placed with a Bank. Deposits from legal entities, sole proprietorships or partnerships should be included in wholesale deposit categories. Deposits may include demand deposits and term deposits, unless otherwise excluded. Deposits from individuals are divided under the Table into ‘stable’ and ‘less stable’ deposits. Stable deposits should include the portion of deposits that are fully covered by an effective deposit insurance scheme or by a public guarantee that provides equivalent protection and where:

(a) the depositor has other established relationships with the Bank that make deposit withdrawal highly unlikely; or

(b) the deposits are in transactional accounts (e.g. accounts where salaries are automatically credited).

80. If a Bank is not able to readily identify which retail deposits would qualify as “stable”, it should place the full amount in the “less stable” buckets. Less stable deposits should consist of the portion of deposits that do not meet the conditions in paragraph 34 above and also include types of deposits more likely to be withdrawn in a time of stress. These should include high-value deposits (i.e. deposits above any deposit insurance limit), deposits from customers who do not have established relationships with a Bank that make the deposit withdrawal unlikely, deposits from sophisticated or high net worth individuals, deposits where the internet is integral to the design, marketing and use of the account (on-line accounts) and deposits with promotional interest rates (i.e. that are heavily rate-driven).

81. Cash outflows related to retail term deposits with a residual maturity or withdrawal notice period of greater than 30 days should be excluded from total expected cash outflows only if the depositor has no legal right to withdraw deposits within the 30-day period of the LCR, or if early withdrawal results in a significant penalty that is materially greater than the loss of interest. If a Bank allows a depositor to withdraw such deposits despite a clause that says the depositor has no legal right to withdraw, the entire category of these funds should be treated as demand deposits.

82. Unsecured wholesale funding should consist of liabilities and general obligations raised from non- natural persons (i.e. legal entities, including sole proprietorships and partnerships) and not collateralised by legal rights to specifically designated assets owned by the Bank accepting the deposit in the case of bankruptcy, insolvency, liquidation or resolution. Obligations related to derivative contracts should be excluded from this category.

83. Unsecured wholesale funding provided by non-financial corporates and sovereigns, central banks, MDBs, and public sector enterprises comprises all deposits and other extensions of unsecured funding (other than those specifically for operational purposes) from:

(a) non-financial corporate customers (except small business customers); and

(b) domestic and foreign customers that are sovereigns, central banks, MDBs and public sector enterprises.

84. Unsecured wholesale funding provided by other legal entity customers consists of deposits and other funding (other than operational deposits) which do not qualify as Operational Deposits as defined in this Chapter, such as funding provided by:

(a) another financial institution; or

(b) a related party of the Bank.

85. All debt securities issued by the Bank are to be treated as unsecured wholesale funding provided by other legal entity customers regardless of the holder. However, securities that are sold exclusively in the retail market and held in retail accounts (or small business customer accounts) may be treated in the appropriate retail or small business customer deposit category. For securities to be treated in that way, there must be limitations preventing them being bought and held other than by retail or small business customers.

86. The wholesale funding included in the LCR should consist of all funding that is callable within the LCR’s period of 30 days or that has its earliest possible contractual maturity date within this period (such as maturing term deposits and unsecured debt securities), as well as funding with an undetermined maturity. This should include all funding with options that are exercisable at the investor’s discretion within the 30-day period.

87. Wholesale funding that is callable by the funds provider subject to a contractually defined and binding notice period longer than the 30-day period should not be included. Unsecured wholesale funding provided by small and medium-sized enterprise customers should be treated as deposits from individuals where:

(a) the deposits and other extensions of funds made by non-financial small and medium- sized enterprise customers are managed as retail accounts and are generally considered as having similar Liquidity Risk characteristics to retail accounts; and

(b) the total aggregated funding raised from a small and medium-sized enterprise customer is less than USD 1 million (on a consolidated basis where applicable).

Operational deposits

88. Operational deposits should consist of those deposits where customers place, or leave, deposits with a Bank to facilitate their access and ability to use payment and settlement systems and otherwise make payments. Balances can be included only if the customer has a substantive dependency on the Bank and the deposit is required for such activities. This condition would not be met if the Bank is aware that the customer has adequate back-up arrangements.

89. Qualifying activities in this context refer to clearing, custody or cash management activities where the customer is reliant on the Bank to perform these services as an independent third-party intermediary in order to fulfil its normal banking activities over the next 30 days. These services should be provided to institutional customers under a legally binding agreement and the termination of such agreements should be subject either to a notice period of at least 30 days or to significant switching costs to be borne by the customer if the operational deposits are moved before 30 days.

90. Qualifying operational deposits generated by such an activity should consist of deposits which are:

(a) by-products of the underlying services provided by the Bank;

(b) not offered by the Bank in the wholesale market in the sole interest of offering interest income; and

(c) held in specifically designated accounts and priced without giving an economic incentive to the customer to leave excess funds on these accounts.

91. Any excess balances that could be withdrawn without jeopardising these clearing, custody or cash management activities should not qualify as operational deposits. The Bank must determine how to identify such excess balances. If the Bank is unable to identify how much of a deposit is an excess balance, the Bank must assume that the entire deposit is excess and therefore not

operational.

92. The identification should be sufficiently granular to adequately assess the risk of withdrawal in an idiosyncratic stress situation. The method should take into account relevant factors such as the likelihood that wholesale customers have above-average balances in advance of specific payment needs, and should consider appropriate indicators (for example, ratios of account balances to payment or settlement volumes or to assets under custody) to identify customers that are not actively managing account balances efficiently.

93. The following paragraphs provide some guidance on the type of services that may give rise to operational deposits.

94. Clearing is a service that enables customers to transfer funds (or securities) indirectly through direct participants in domestic settlement systems to final recipients. Such services are limited to the following activities:

(a) transmission, reconciliation and confirmation of payment orders

(b) daylight overdraft, overnight financing and maintenance of post-settlement balances

(c) determination of intra-day and final settlement positions.

95. Custody is the provision of safekeeping, reporting and processing of assets, or the facilitation of the operational and administrative elements of related activities on behalf of customers in the process of their transacting and retaining financial assets. Such services are limited to the settlement of securities transactions, the transfer of contractual payments, the processing of collateral, and the provision of custody-related cash management services. Custody also includes the receipt of dividends and other income and client subscriptions and redemptions, and extends to asset and corporate trust servicing, treasury, escrow, funds transfer, stock transfer and agency services, (including payment and settlement services, but not correspondent banking), and depository receipts.

96. Cash management is the provision of cash management and related services to customers—that is, services provided to a customer to manage its cash flows, assets and liabilities, and conduct financial transactions necessary to its operations. Such services are limited to payment remittance, collection and aggregation of funds, payroll administration, and control over the disbursement of funds.

97. Correspondent banking is an arrangement under which a bank holds deposits owned by other banks, and provides payment and other services to settle foreign currency transactions. A deposit that arises out of correspondent banking, or from the provision of prime brokerage services, should not be treated as an operational deposit. Prime brokerage services is a package of services offered to large active investors, particularly institutional hedge funds. The services usually include:

● clearing, settlement and custody

● consolidated reporting

● financing (margin, repo or synthetic)

● securities lending

● capital introduction

● risk analytics.

98. Customers’ cash balances arising from the provision of prime brokerage services must be treated as separate from any balances required to be segregated under a statutory client protection regime, and must not be netted against other customer exposures. Such offsetting balances held in segregated accounts are to be treated as inflows and must not be counted as HQLA. Any part of an operational deposit that is fully covered by deposit insurance may be treated as a stable retail deposit.

99. An institutional network of cooperative banks is a group of legally separate banks with a statutory framework of cooperation with a common strategic focus and brand, in which certain functions are performed by a central institution or a specialised service provider. A qualifying deposit is a deposit by a member institution with the central institution or specialised central service provider:

(a) because of statutory minimum deposit requirements; or

(b) in the context of common task-sharing and legal, statutory or contractual arrangements (but only if both the depositor and the bank that receives the deposit participate in the network’s scheme of mutual protection against illiquidity and insolvency).

100. The following are not qualifying deposits:

(a) deposits resulting from correspondent banking activities;

(b) deposits placed at the central institution or a specialised service provider for any reason other than those defined as eligibility requirements for Qualifying Deposits in paragraph 57 above;

(c) deposits for the operational purposes of clearing, custody, or cash management.

Liquidity facilities

101. A liquidity facility should consist of any committed, undrawn back-up facility that would be used to refinance the debt obligations of a customer in situations where such a customer is unable to roll over that debt in financial markets. The amount of any commitment to be treated as a liquidity facility should consist of the amount of the outstanding debt issued by the customer (or proportionate share of a syndicated facility) maturing within a 30-day period that is backstopped by the facility. Any additional capacity of the facility should be treated as a committed credit facility. General working capital facilities for corporate entities (e.g. revolving credit facilities in place for general corporate or working capital purposes) should not be classified as liquidity facilities, but as credit facilities.

102. Notwithstanding paragraph 44 above, any facilities provided to hedge funds, money market funds and special purpose funding vehicles, or other vehicles used to finance a Bank’s own assets, should be captured in their entirety as a liquidity facility to a financial institution.

Treatment of deposits pledged as security

103. If a deposit is pledged as security for a credit facility:

(a) the facility will not mature or be settled within the relevant 30-calendar-day period; and

(b) the pledge is subject to a legally enforceable contract under which the deposit cannot be withdrawn before the facility is fully settled or repaid.

104. If no part of the facility has been drawn, the runoff rate is the higher of:

(a) the rate specified in Table 9A, that would apply to secured or unsecured funding, as the case maybe; and

(b) a rate equal to the rate applicable to Undrawn committed credit and liquidity facilities specified in Table 9 A.

105. However, if some part of the facility has been drawn, only that part of the deposit in excess of the outstanding balance of the facility is to be counted. The applicable runoff rate is the rate that applies to secured or unsecured funding, as the case maybe.

Treatment of maturing secured funding

106. The runoff rates for secured funding that matures within the relevant 30-calendar-day period are as set out in table 9A. Secured funding is a Bank’s liabilities and general obligations collateralised by the grant of legal rights to specific assets owned by the Bank. This scenario assumes that the Bank has lost its secured funding on short-term financing transactions. In this scenario, the Bank could continue to transact securities financing transactions only if the transactions were backed by HQLA or were with the Bank’s domestic sovereign, public sector enterprise or central bank.

107. Collateral swaps, and any other transactions of a similar form, are to be treated as repo or reverse repo agreements. Collateral lent to the Bank’s customers to effect short positions is to be treated as secured funding. The Bank must apply the factors to all outstanding secured funding transactions with maturities within 30 calendar days, including customer short positions that do not have a specified contractual maturity. The amount of outflow is the amount of funds raised through the transaction, and not the value of the underlying collateral.

Treatment of net derivative cash outflows

108. As specified in Table 9A, the runoff rate for net derivative cash outflows is 100%. The Bank must calculate those outflows in accordance with its usual valuation methods. The outflows may be calculated on a net basis by counterparty (that is, inflows offsetting outflows) only if a valid master netting agreement exists. From the calculation, the Bank must exclude liquidity needs that would result from increased collateral needs because of falls in the value of collateral lodged or market value movements. The Bank must assume that an option will be exercised if it is in the money.

109. If derivative payments are collateralised by HQLA, the cash outflows are to be calculated net of any corresponding cash or collateral inflows that would result, all other things being equal, from contractual obligations to lodge cash or collateral with the Bank. However, this condition applies only if, after the collateral were received, the Bank would be legally entitled and operationally able to re- hypothecate it.

110. The runoff rate for increased liquidity needs related to market valuation changes on derivative instruments is 100% of the largest absolute net collateral flow (based on both realised outflows and inflows) in a 30-calendar-day period during the previous 24 months. Market practice requires collateralisation of mark-to-market exposures on derivative instruments. Banks face potentially substantial Liquidity Risk exposures to changes in the market valuation of such instruments. Inflows and outflows of transactions executed under the same master netting agreement may be treated on a net basis.

Elevated liquidity needs related to downgrade triggers

111. The runoff rate for increased liquidity needs related to downgrade triggers in financing transactions, derivatives and other contracts is 100% of the amount of collateral that the Bank would be required to lodge for, or the contractual cash outflow associated with, any downgrade up to and including a 3-notch downgrade. A downgrade trigger is a contractual condition that requires a Bank to lodge additional collateral, draw down a contingent facility or repay existing liabilities early if an ECRA downgrades the Bank. Contracts governing derivatives and other transactions often have such conditions. The scenario therefore requires a Bank to assume that for each contract that contains downgrade triggers, 100% of the additional collateral or cash outflow will have to be lodged for a downgrade up to and including a 3-notch downgrade of the Bank’s long-term credit rating. The Bank must assume that a downgrade trigger linked to the Bank’s short-term rating will be triggered at the corresponding long-term rating.

Increased liquidity needs related to collateral

112. The runoff rate for increased liquidity needs related to possible valuation changes on collateral lodged by a Bank to secure derivatives and other transactions is 20% of the value of any lodged collateral that is not level 1 HQLA (net of collateral received on a counterparty basis, if the collateral received is not subject to restrictions on re-use or re-hypothecation). Most counterparties to derivative transactions are required to secure the mark-to- market valuation of their positions. If level 1 HQLA are lodged as collateral, no additional stock of HQLA need be maintained for possible valuation changes. However, if the Bank secures such an exposure with other collateral, 20% of the value of such lodged collateral will be added to the Bank’s required stock of HQLA to cover the possible loss of market value on the collateral.

113. The runoff rate for increased liquidity needs related to excess non- segregated collateral that is held by a Bank, and could contractually be recalled at any time by a counterparty, is 100% of the value of the excess collateral.

114. The runoff rate for increased liquidity needs related to contractually- required collateral, due from a Bank on transactions for which the counterparty has not yet demanded that the collateral be lodged, is 100% of the value of the collateral that is contractually due. This run-off rate applies to the following kinds of transaction:

(a) transactions where:

(i) a Bank holds HQLA collateral;

(ii) the counterparty has the right to substitute non-HQLA collateral for some or all of the HQLA collateral without the Bank’s consent; and

(iii) the collateral is not segregated;

(b) transactions where:

(i) a Bank has the right to receive HQLA collateral;

(ii) the counterparty has the right to deliver non-HQLA collateral instead of some or all of the HQLA collateral without the Bank’s consent; and

(iii) the collateral is not segregated.

115. The runoff rate for increased liquidity needs related to such a transaction is 100% of the value of HQLA collateral for which non-HQLA collateral can be substituted or delivered, as the case requires.

Treatment of loss of funding on structured finance transactions

1.The runoff rate for loss of funding on asset-backed securities and other structured financing instruments that mature within the relevant 30- calendar-day period is 100% of the maturing amount. The scenario assumes that there is no refinancing market for the maturing instruments.

2.The runoff rate for loss of funding on asset-backed commercial paper, conduits, structured investment vehicles and other similar financing arrangements that mature within the relevant 30- calendar-day period is 100% of the total of:

(a)the maturing amount;

(b)if the arrangement allows assets to be returnedwithin that period—the value of the returnable assets; and

(c)if under the arrangement the Bank could be obliged to provide liquidity within that period— the total amount of liquidity that the Bank could be obliged to provide.

3.Banks that use asset-backed commercial paper, conduits,structured investment vehiclesand other similar financing arrangements should fully consider the associated LiquidityRisk. The risks include being unable to refinance maturing debt or derivatives or derivative-like components that would allow the returnof assets, or require the Bank to provide liquidity, within the 30-calendar-day period.

4.If the Bank’s structured financing activities are carried out through a special purpose entity (such as a conduit or structured investment vehicle), the Bank should, in determining its HQLA requirements, look through to the maturity of the debt instruments issued by the entity and any embedded options in financing arrangements that could trigger the return of assets or the need for liquidity, regardless of whether the entity is consolidated.

Committed credit and liquidity facilities

120. The runoff rates for drawdowns on committed credit and liquidity facilities are set out in table 9A. A credit facility is a contractual agreement or obligation to extend funds in the future to a retail or wholesale counterparty. For this Rule, a facility that is unconditionally revocable is not a credit facility. Unconditionally revocable facilities (in particular, those without a precondition of a material change in the borrower’s credit condition) are included in Contingent funding obligations. A liquidity facility is an irrevocable, undrawn credit facility that would be used to refinance the debt obligations of a customer if the customer were unable to roll over the obligations in financial markets. General working capital facilities for corporate borrowers (for example, revolving credit facilities for general corporate or working capital purposes) are to be treated as credit facilities.

121. For a facility, the relevant runoff rate is to be applied to the undrawn part of it. The undrawn portion of a credit or liquidity facility is to be calculated net of any HQLA lodged or to be lodged as collateral if:

(a) the HQLA have already been lodged, or the counterparty is contractually required to lodge them when drawing down the facility;

(b) the Bank is legally entitled and operationally able to re-hypothecate the collateral in new cash- raising transactions once the facility is drawn down; and

(c) there is no undue correlation between the probability of drawing down the facility and the market value of the collateral.

122. The Bank may net the collateral against the outstanding amount of the facility to the extent that the collateral is not already counted in the Bank’s HQLA portfolio. The amount of a liquidity facility is to be taken as the amount of outstanding debt issued by the customer concerned (or a proportionate share of a syndicated facility) that matures within the relevant 30-calendar-day period and is backstopped by the facility. Any additional capacity of the facility is to be treated as a committed credit facility. The Bank must treat a facility provided to a hedge fund, money market fund or special purpose entity, or an entity used to finance the Bank’s own assets, in its entirety as a liquidity facility to a financial institution.

Other contractual obligations to extend funds within 30 calendar days

123. The runoff rate for other contractual obligations to extend funds within 30 calendar days is 100%. Other contractual obligations to extend funds within 30 calendar days covers all contractual obligations to extend funds within 30 calendar days that do not fall within any of the categories referred above in this section or in Table A. The runoff rate of 100% is to be applied to:

(a) for obligations owed to financial institutions—the whole amount of such obligations; and

(b) for obligations owed to customers that are not financial institutions—the difference between:

(i) the total amount of the obligations; and

(ii) 50% of the contractual inflows from those customers over the relevant 30-calendar- day period.

124. The runoff rates for other contingent funding obligations are as set out in table 9A. Contingent funding obligations covers obligations arising from guarantees, letters of credit, unconditionally revocable credit and liquidity facilities, outstanding debt securities with remaining maturity of more than 30 calendar days, and trade finance (see subRule (3)). It also covers non-contractual obligations, including obligations arising from any of the following:

(a) potential liquidity draws from joint ventures or minority investments in entities;

(b) debt-buy-back requests (including related conduits);

(c) structured products;

(d) managed funds;

(e) the use of customers’ collateral to cover other customers’ short positions.

125. Trade finance means trade-related obligations directly related to the movement of goods or the provision of services, such as the following:

(a) documentary trade letters of credit, documentary collection and clean collection, import bills, and export bills;

(b) guarantees directly related to trade finance obligations, such as shipping guarantees.

126. However, lending commitments, such as direct import or export financing for non-financial corporate entities, are to be treated as committed credit facilities. The runoff rate to be applied to other contractual cash outflows is 100%. Other contractual cash outflows includes outflows to cover unsecured collateral borrowings and uncovered short positions, and outflows to cover dividends and contractual interest payments, but does not include outflows related to operating costs.

Cash Inflows

127. When considering its available cash inflows, a Bank may include contractual inflows from outstanding exposures only if they are fully performing and there is no reasonable basis to expect a default within the 30-day period. Contingent inflows are not included in total net cash inflows. Where a Bank is overly reliant on cash inflows from one or a limited number of wholesale counterparties, the AFSA may set an alternative limit on the level of cash inflows that can be included in the LCR.

128. The AFSA may allow a Bank to recognise as cash inflow, access to a parent entity’s funds via a committed funding facility if the Bank is a subsidiary of a foreign bank. In such instances, the committed funding facility from the parent entity must meet both of the following criteria:

(a) the facility must be an irrevocable commitment and must be appropriately documented; and

(b) the facility must be quantified.

129. A committed funding facility from a parent entity referred to in (1) can be recognised as a cash inflow only from day 16 of the LCR scenario. The cash inflow from a parent entity can be sufficient in size to cover only net cash outflows against items with a maturity or next call date between days 16 and 30 of the LCR.

130. Total expected cash inflow over a period is calculated by, for each contractual cash inflow over the period, multiplying it by the applicable rate of inflows (giving the adjusted inflow), and then taking the total of all the adjusted inflows over the period. The following table 9B specifies, for each of the various categories and types of contractual receivables, the rates at which they are expected to flow in for the purpose of the calculation of the LCR:

131. The inflow rates provided in table 9B do not represent an assumption about the risk of a default— instead, it represents the likelihood that the relevant obligation will be rolled over (so that the Bank does not actually receive the cash) or that no cash will be received for some other reason. Inflows for which an inflow rate of 0% is specified are effectively treated as not being receivable.

132. A Bank calculating its cash inflows may include a contractual inflow from an exposure only if it is classified as performing or as “special mention” under BBR Rules, and there is no reason to expect a default within the relevant period. The Bank must not include any contingent inflows or any inflow that would be received from an asset in the Bank’s HQLA portfolio.

133. In a stressed situation, the assets in the Bank’s HQLA portfolio would already have been monetised. That is the purpose of those assets—to be monetised to provide liquidity. Consequently, in a scenario of liquidity stress, the contracted cash inflows from them would no longer be available to the Bank. The Bank may include, in cash inflows during a period, interest payments that it expects to receive during the period.

134. If the collateral backing a secured credit, including margin lending transactions, has been rehypothecated, then the applicable inflow rate would be 0%, for all categories of secured credit and not the rate mentioned in Table 9B.

135. The inflow rate for credit facilities and liquidity facilities provided to the Bank is 0%.

136. The inflow rate for operational deposits held by the Bank with other financial institutions or banks is 0%. Operational deposits for this purpose would have the same meaning as used in calculation of net cash outflows.

137. The inflow rate for net derivative cash inflows is 100%. The Bank must calculate those inflows in accordance with its usual valuation methods. The inflows may be calculated on a net basis by counterparty (that is, inflows offset outflows) only if a valid master netting agreement exists. From the calculation, the Bank must exclude liquidity needs that would result from increased collateral needs because of market value movements or falls in the value of collateral lodged.

138. The Bank must assume that an option will be exercised if it is in the money to the buyer. If derivative cash inflows are collateralised by HQLA, the inflows are to be calculated net of any corresponding cash or collateral outflows that would result from contractual obligations for the Bank to lodge cash or collateral. However, this condition applies only if, after the collateral were received, the Bank would be legally entitled and operationally able to re- hypothecate it.

Maturing secured lending, including reverse repos and securities borrowing

139. A Bank should assume that maturing reverse repurchase or securities borrowing agreements secured by Level 1 HQLA will be rolled over and will not give rise to any cash inflows (zero %). Maturing reverse repurchase or securities borrowing agreements secured by Level 2 HQLA should be modelled as cash inflows, equivalent to the relevant haircut for the specific assets. A Bank is assumed not to roll-over maturing reserve repurchase or securities borrowing agreements secured by non-HQLA assets and can assume it will receive 100% of the cash related to those agreements. Collateralised loans extended to customers for the purpose of taking leveraged trading positions, i.e. margin loans, should be modelled with a 50% cash inflow from contractual inflows made against non-HQLA collateral.

140. An exception to paragraph 50 above is the situation where, if the collateral obtained through reverse repo, securities borrowing or collateral swaps, which matures within the 30-day period, is re-used (i.e. rehypothecated) and is tied up for 30 days or longer to cover short positions. A Bank should then assume that such reverse repo or securities borrowing arrangements will be rolled over and will not give rise to any cash inflows (zero %), reflecting its need to continue to cover the short position or to repurchase the relevant securities.

141. A Bank should manage its collateral so that it is able to fulfil obligations to return collateral whenever the counterparty decides not to roll-over any reverse repo or securities lending transaction. This is especially the case for non-HQLA collateral, since such outflows are not captured in the LCR framework.

142. Lines of credit, liquidity facilities and other contingent funding facilities that a Bank holds at other institutions for its own purposes should be assumed to be able to be drawn and so such facilities should receive a 0 % inflow rate.

143. All inflows should be taken only at the latest possible date, based on the contractual rights available to counterparties. Inflows from loans that have no specific maturity should not be included, with the exception of minimum payments of principal, fee or interest associated with an open maturity loan.

144. Other contractual cash inflows should be included under this category. Cash inflows related to non- financial revenues should not be taken into account in the calculation of the net cash outflows for the purposes of the LCR. These items should receive an inflow rate of 100%.

145. The Bank must assume that inflows will be received at the latest possible date, based on the contractual rights available to counterparties. The following inflows are not to be included:

(a) inflows (except for minimum payments of principal, fee or interest) from loans that have no specific maturity;

(b) inflows related to non-financial revenues.

Other requirements for LCR

146. A Bank active in multiple currencies should:

(a) maintain HQLA consistent with the distribution of its liquidity needs by currency;

(b) assess its aggregate foreign currency liquidity needs and determine an acceptable level of currency mismatches; and

(c) undertake a separate analysis of its strategy for each currency in which it has material activities, considering potential constraints in times of stress.

147. In respect of the obligation to notify the AFSA about a real or potential breach of its LCR requirement, a Bank in its notification should clearly explain:

(a) the reasons for not meeting the limits;

(b) measures that have been taken and will be taken to ensure it meets its LCR Requirement; and

(c) its expectations regarding the potential duration of the situation.

148. The Bank should discuss with the AFSA what, if any, further steps it should take to deal with the situation, prior to making that notification.

Liquid assets buffer

149. A Bank must, except during periods when it experiences liquidity stress, maintain a buffer of HQLA over the minimum level of LCR required according to BBR Rule 9.12. The size of the HQLA buffer must be appropriate to the nature, scale and complexity of its operations and must also be in determined considering the Bank’s Liquidity Risk tolerance and the results of its liquidity stress tests. A Bank should conduct such liquidity stress tests to assess the level of liquidity it should hold beyond the minimum required under this section, and construct its own scenarios that could cause difficulties for its specific business activities. Such internal stress tests should incorporate longer periods than the ones required under Chapter 9 of the BBR. Banks are expected to share the results of these additional stress tests with the AFSA. The AFSA may require a Bank to maintain an additional buffer of liquid assets in cases where the AFSA assesses that the Bank has failed to carry out stress tests effectively.