Application to a Financial Group

152. For calculating a consolidated NSFR for a Financial Group, assets held to meet a Bank’s NSFR may be included in the parent entity’s stable funding only so far as the related liabilities are reflected in the parent entity’s NSFR. Any surplus of assets held at the Bank may be treated as forming part of the parent entity’s stable funding only if those assets would be freely available to the parent entity during a period of stress.

153. When calculating its NSFR on a consolidated basis, a cross-border banking group must apply the Rules of its home jurisdiction to all the legal entities being consolidated, except for the treatment of retail and small business deposits. Such deposits for a consolidated entity must be treated according to the Rules in the jurisdiction in which the entity operates. A cross-border banking group must not take excess stable funding into account in calculating its consolidated NSFR if there is reasonable doubt about whether the funding would be available during a period of stress.

154. Asset transfer restrictions (for example, ring-fencing measures, non-convertibility of local currency, foreign exchange controls) in jurisdictions in which a banking group operates would affect the availability of liquidity by restricting the transfer of assets and funding within the group. The consolidated NSFR should reflect the restrictions consistently with this Part. For example, assets held to meet a local NSFR requirement by a subsidiary that is being consolidated can be included in the consolidated NSFR to the extent that the assets are used to cover the funding requirements of that subsidiary, even if the assets are subject to restrictions on transfer. If the assets held in excess of the total funding requirements are not transferable, the Bank should not count that funding.

Determining maturity of liabilities

155. When a Bank is determining the maturity of an equity or liability instrument, it must assume that a call option will be exercised at the earliest possible date. In particular, if the market expects a liability to be exercised before its legal final maturity date, the Bank must assign the liability to the category that is consistent with the market expectation.

156. For long-dated liabilities, the Bank may treat only the part of cash flows falling at or beyond the 6- month and 1-year time horizons as having an effective residual maturity of 6 months or more and 1 year or more, respectively.

157. A Bank must calculate the value of a derivative liability based on the replacement cost for the derivative contract (obtained by marking to market) if the contract has a negative value. If there is a netting agreement with the counterparty that meets both of the conditions for the netting agreement and the other conditions referred in this and the following paragraph, the replacement cost for the set of exposures covered by the agreement is taken to be the net replacement cost. The conditions for the netting agreement are as follows:

(a) the Bank should have a claim to receive, or an obligation to pay, only the net amount of the mark-to-market values of the transactions if the counterparty were to fail to perform; and

(b) the agreement does not contain a walkaway clause.

158. The other conditions are as follows:

(a) the Bank holds a written, reasoned legal opinion that the relevant courts and administrative authorities would find the Bank’s exposure to be the net amount referred to in paragraph (8)

(a) above, under each of the following laws:

(i) the law of the jurisdiction in which the counterparty is established;

(ii) if a foreign branch of the counterparty is involved, the law of the jurisdiction in which the branch is located;

(iii) the law that governs the individual transactions;

(iv) the law that governs the netting agreement (and any other agreement necessary to effect the netting);

(a) the Bank has procedures to ensure that netting arrangements are kept under review in the light of possible changes in the relevant law;

(b) the AFSA is satisfied that the netting agreement is enforceable under all of the laws referred to in paragraph (a).

159. Collateral lodged in the form of variation margin in connection with derivative contracts, regardless of the asset type, must be deducted from the negative replacement cost amount.

160. When determining the maturity of an asset, a Bank must assume that any option to extend that maturity will be exercised. In particular, if the market expects the maturity of an asset to be extended, the Bank must assign the asset to the category that is consistent with the market expectation. For an amortising loan, the Bank may treat the part that comes due within 1 year as having residual maturity of less than 1 year.

Inclusion of assets in RSF calculation

161. When determining its RSF, a Bank:

(a) must include financial instruments, foreign currencies and commodities for which a purchase order has been executed; but

(b) must not include financial instruments, foreign currencies and commodities for which a sales order has been executed;

even if the transactions have not been reflected in the Bank’s balance- sheet under a settlement- date accounting model. This condition applies only if:

(a) the relevant transactions are not reflected as derivatives or secured financing transactions in the Bank’s balance-sheet; and

(b) the effects of the transactions will be reflected in the Bank’s balance-sheet when settled.

Treatment of securities financing transactions

162. When determining its RSF, a Bank must not include securities that the Bank has borrowed in securities financing transactions (such as reverse repos and collateral swaps) if the Bank does not have beneficial ownership. However, the Bank must include securities that it has lent in securities financing transactions if it retains beneficial ownership of them.

163. In addition, the Bank must not include securities that it has received through collateral swaps if those securities do not appear on the Bank’s balance- sheet. The Bank must include securities that it has encumbered in repos or other securities financing transactions, if the Bank has retained beneficial ownership of the securities and they remain on the Bank’s balance-sheet.

Netting of securities financing transactions with a single counterparty

164. When determining its RSF, a Bank may net securities financing transactions with a single counterparty only if all of the following conditions are met:

(a) the transactions have the same explicit final settlement date;

(b) the right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both currently in the normal course of business and in the event of default, insolvency or bankruptcy; and

(c) one of the following applies:

(i) the counterparties intend to settle net;

(ii) the counterparties intend to settle simultaneously;

(iii) the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement.

165. Functional equivalent of net settlement means that the cash flows of the transactions are equivalent to a single net amount on the settlement date. To achieve that equivalence, both transactions are settled through the same settlement system and the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day and that the linkages to collateral flows do not result in the unwinding of net cash settlement.

Calculating derivative assets

166. When determining its RSF, a Bank must calculate the value of a derivative asset first based on the replacement cost for the contract (obtained by marking to market) if the contract has a positive value. If there is a netting agreement with the counterparty that satisfies all the conditions in paragraphs 8 & 9 above, the replacement cost for the set of exposures covered by the agreement is taken to be the net replacement cost.

167. Collateral received in connection with a derivative contract does not offset the positive replacement cost amount, regardless of whether or not netting is permitted under the bank’s accounting or risk- based framework, unless the collateral is received in the form of cash variation margin, and all of the following conditions are met:

(a) either:

(i) the trades are cleared through a qualifying central counterparty; or

(ii) the cash received by the counterparty is not segregated;

(b) the variation margin is calculated and exchanged every day, based on mark-to-market valuation of the relevant positions;

(c) the variation margin is received in the same currency as the currency of settlement of the contract;

(d) the variation margin exchanged is the full amount that would be necessary to fully extinguish the mark-to-market exposure of the contract subject to the threshold and minimum transfer amounts applicable to the counterparty;

(e) derivative transactions and variation margins are covered by a single master netting agreement (MNA) between the counterparties;

(f) the MNA explicitly stipulates that the counterparties agree to settle net any payment obligations covered by the agreement, taking into account any variation margin received or provided if a credit event occurs involving either counterparty;

(g) the MNA is legally enforceable and effective in all the relevant jurisdictions, including in the event of default, bankruptcy or insolvency.

168. Any remaining balance-sheet liability associated with initial margin received or variation margin received that does not meet all of the conditions in the (a) to (g) of the previous paragraph, does not offset derivative assets and receives a 0% ASF factor.

169. For the purposes of this section, a qualifying central counterparty is an entity that is licensed to operate as a central counterparty in relation to the instruments concerned and the financial regulator that is responsible for its prudential supervision:

(a) has established Rules and regulations for central counterparties that are consistent with Principles for Financial Market Infrastructures, published by the International Organization of Securities Commissions in July 2011; and

(b) has publicly indicated that it applies those Rules and regulations to the entity on an ongoing basis.

Calculating ASF

170. The amount of a Bank’s ASF is calculated using the following steps:

(c) assign each of the Bank’s capital items and liabilities to 1 of the 5 categories set out in the following paragraphs 171 to 175;

(d) next, for each category add up the carrying values of all the capital items and liabilities assigned to the category;

(e) next, for each category multiply the total carrying values of the capital items and liabilities assigned to the category by the category’s ASF factor (also set out in paragraphs 171 to 175), giving the weighted amounts; and

(f) add up the weighted amounts.

171. The Category 1 liabilities and capital that receive a 100% ASF factor include:

(a) the total amount of the Bank’s regulatory capital (as set out BBR Chapter 3), excluding any Tier 2 instrument with residual maturity of less than 1 year, before the application of capital deductions;

(b) any other capital instrument that has an effective residual maturity of 1 year or more (except any instrument with an explicit or embedded option that, if exercised, would reduce the expected maturity to less than 1 year);

(c) the total amount of secured and unsecured borrowings and liabilities (including term deposits) with effective residual maturities of 1 year or more.

For (c) above, cash flows falling within the 1-year horizon but arising from liabilities with final maturity of more than 1 year do not qualify for the 100% ASF factor.

172. The Category 2 liabilities that receive 95% ASF factor include stable deposits (as defined in Section H of this Chapter 9 of BPG), with residual maturities of less than 1 year provided by retail and small- business customers.

173. The Category 3 liabilities that receive 90% ASF factor are the liabilities that receive a 90% ASF factor are less stable deposits (as defined in Section D of this Chapter 9 of BPG) with residual maturities of less than 1 year provided by retail and small-business customers.

174. The Category 4 liabilities that receive 50% ASF factor include the following:

(a) funding (secured and unsecured) with residual maturity of less than 1 year, from corporate customers that are not financial institutions;

(b) operational deposits (as defined in Section D of this Chapter 9 of BPG);

(c) funding with residual maturity of less than 1 year from sovereigns, public sector entities, MDBs and national development banks;

(d) other funding (secured or unsecured) not falling within the previous paragraphs (a) to (c), with residual maturity of between 6 months and 1 year, including funding from central banks and financial institutions.

175. The Category 5 liabilities that receive 0% ASF factor include the following:

(a) capital not included in Category 1 for this calculation;

(b) liabilities not included in Category 1 to 4 for this calculation;

(c) other liabilities without a stated maturity, except that:

(i) a deferred tax liability must be categorised according to the nearest possible date on which it could be realised; and

(ii) minority interest must be treated according to the term of the instrument, usually in perpetuity.

Funding from central banks and financial institutions with residual maturity of less than 6 months would fall within paragraph (b) above.

(d) NSFR derivative liabilities net of NSFR derivative assets, if NSFR derivative liabilities are greater than NSFR derivative assets;

Note For how to calculate NSFR derivative liabilities, please refer paragraphs 157 to 159 of this Chapter of the BPG. For how to calculate NSFR derivative assets, please refer paragraphs 167 to 169 of this Chapter of the BPG.

(e) trade-date payables arising from purchases of financial instruments, foreign currencies and commodities that:

(i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction; or

(ii) have failed to settle, but are still expected to do so.

176. Other liabilities without a stated maturity could include short positions, positions with open maturity and deferred tax liabilities. A liability referred to in paragraph 26 (c) above would receive either a 100% ASF factor if its effective maturity were 1 year or more, or a 50% ASF factor if its effective maturity were between 6 months and 1 year.

Calculating RSF

177. A Bank’s RSF is calculated following these steps, in the same sequence as they are listed below:

(a) assign each of the Bank’s assets to 1 of the 8 categories set out in paragraphs 178 to 185 of this Chapter of the BPG ;

(b) then, for each category add up the carrying values of all the assets assigned to the category;

(c) following that, for each category multiply the total carrying values of the assets assigned to the category by the category’s RSF factor (also set out in paragraphs 178 to 185), giving the weighted amounts;

(d) next, multiply the amounts of each of the Bank’s off-balance-sheet exposures by the exposure’s RSF factor (set out in paragraph 187), giving the OBS weighted amounts;

(e) finally, add the weighted amounts and the OBS weighted amounts.

178. The Category 1 assets that receive 0% RSF factor include the following, subject to the paragraphs

186 & 187, which pertain to certain encumbered assets:

(a) currency notes and coins immediately available to meet obligations;

(b) central bank reserves (including required reserves and excess reserves);

(c) claims on central banks with residual maturities of less than 6 months;

(d) trade-date receivables arising from sales of financial instruments, foreign currencies and commodities that:

(i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction; or

(ii) have failed to settle, but are still expected to do so.

179. The Category 2 assets that receive 5% RSF factor include the assets that receive a 5% RSF factor are unencumbered level 1 HQLA (except assets that receive a 0% RSF factor under paragraph 178.

180. The Category 3 assets that receive 10% RSF factor include unencumbered loans to financial institutions, with residual maturities of less than 6 months, that are secured against level 1 HQLA that the Bank can freely re- hypothecate during the loans’ life.

181. The Category 4 assets that receive 15% RSF factor include unencumbered level 2A HQLA and unencumbered loans to financial institutions, with residual maturities of less than 6 months, that do not fall within Category 3 assets as defined in paragraph 180.

182. The Category 5 assets that receive 50% RSF factor include the following:

(a) unencumbered level 2B HQLA;

(b) HQLA that are encumbered for between 6 months and 1 year;

(c) loans, with residual maturity of between 6 months and 1 year, to financial institutions and central banks;

(d) operational deposits (as defined in paragraphs 88 to 100 of the Chapter 9 of this BPG) at other financial institutions;

(e) all other non-HQLA with residual maturity of less than 1 year, including loans to non-financial corporate clients, loans to retail customers and small business customers, and loans to sovereigns and public sector entities.

183. The Category 6 assets that receive 65% RSF factor include unencumbered residential mortgages, with residual maturity of 1 year or more, that qualify for a risk weight of 35% or lower (according to Rules in Chapter 5 of BBR) and other unencumbered loans (except loans to financial institutions), with residual maturity of 1 year or more, that qualify for a risk weight of 35% or lower (according to Rules in Chapter 5 of BBR).

184. The Category 7 assets that receive 85% RSF factor include the following types of assets, subject to the paragraphs 186 & 187, which pertain to certain encumbered assets:

(a) cash, securities or other assets lodged as initial margin for derivative contracts, and cash or other assets provided to contribute to the default fund of a central counterparty;

(b) unencumbered performing loans (except loans to financial institutions), with residual maturity of 1 year or more, that do not qualify for a risk weight of 35% or lower, under Rules in Chapter 5 of BBR;

(c) unencumbered securities with residual maturity of 1 year or more;

(d) exchange-traded equities that are not in default and do not qualify as HQLA;

(e) physical traded commodities, including gold.

Despite (a) above, if securities or other assets lodged as initial margin for derivative contracts would otherwise receive a higher RSF factor than 85%, they retain that higher factor.

185. The Category 8 assets that receive 100% RSF factor include the following:

(a) assets that are encumbered for 1 year or more;

(b) NSFR derivative assets, net of NSFR derivative liabilities, if NSFR derivative assets are greater than NSFR derivative liabilities;

(c) all other assets not falling within categories 1 to 7 (including non- performing loans, loans to financial institutions with residual maturity of 1 year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and defaulted securities);

(d) 20% of derivative liabilities as calculated in accordance with this section E of BPG.

Treatment of encumbered assets

186. Assets encumbered for between 6 months and 1 year that would, if unencumbered, receive an RSF factor of 50% or lower receive a 50% RSF factor. Assets encumbered for between 6 months and 1 year that would, if unencumbered, receive an RSF factor higher than 50% receive that higher RSF factor. Assets encumbered for less than 6 months receive the same RSF factor as an unencumbered asset of the same kind.

187. The AFSA may direct a Bank that, for the purposes of calculating the Bank’s NSFR, assets that are encumbered for exceptional central bank liquidity operations receive a specified lower RSF factor than would otherwise apply. In general, exceptional central bank liquidity operations are considered to be non- standard, temporary operations conducted by a central bank to achieve its mandate at a time of market-wide financial stress or exceptional macroeconomic challenges. The RSF factors for off-balance-sheet exposures are as follows:

(a) irrevocable and conditionally revocable credit and liquidity facilities—5% of the undrawn portion;

(b) contingent funding obligations—as set out in table 9C.

Contingent funding obligations—RSF factors