Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions Text with EEA relevance

TITLE I

THE LIQUIDITY COVERAGE RATIO

Article 1

Subject matter

This Regulation lays down rules to specify in detail the liquidity coverage requirement provided for in Article 412(1) of Regulation (EU) No 575/2013.

Article 2

Scope and application

Where a group comprises one or more credit institutions, the EU parent institution, the institution controlled by an EU parent financial holding company or the institution controlled by an EU parent mixed financial holding company shall apply the obligations laid down in this Regulation on a consolidated basis in accordance with Article 11(3) of Regulation (EU) No 575/2013 and all the following provisions:

(a) third country assets held by a subsidiary undertaking in a third country may be recognised as liquid assets for consolidation purposes where they qualify as liquid assets under that third country's national law setting out the liquidity coverage requirement and they satisfy one of the following conditions: (i) the assets meet all the requirements laid down in Title II of this Regulation; (ii) the assets fail to meet the specific requirement laid down in Title II of this Regulation with respect to their issue size but meet all the other requirements laid down therein. The assets recognisable by virtue of point (ii) may only be recognised up to the amount of the stressed net liquidity outflows incurred in the particular currency in which they are denominated and arising from that same subsidiary undertaking;

(b) liquidity outflows in a subsidiary undertaking in a third country which are subject under the national law of that third country setting out the liquidity coverage requirement to higher percentages than those specified in Title III shall be subject to consolidation in accordance with the higher rates specified in the national law of the third country;

(c) liquidity inflows in a subsidiary undertaking in a third country which are subject under the national law of that third country setting out the liquidity coverage requirement to lower percentages than those specified in Title III shall be subject to consolidation in accordance with the lower rates specified in the national law of the third country;

(d) investment firms within the group shall be subject to Article 4 of this Regulation on a consolidated basis and to Article 412 of Regulation (EU) No 575/2013 in relation to the definition of liquid assets, liquidity outflows and inflows for both individual and consolidated purposes. Other than as specified in this point, investment firms shall remain subject to the detailed liquidity coverage ratio requirement for investment firms as laid down in the national law of Member States pending the specification of a liquidity coverage ratio requirement in accordance with Article 508 of Regulation (EU) No 575/2013;

(e) at a consolidated level the amount of inflows arising from a specialised credit institution referred to in Article 33 paragraphs (3) and (4) shall only be recognised up to the amount of the outflows arising from the same undertaking.

Article 3

Definitions

For the purposes of this Regulation, the following definitions shall apply:

(1) ‘level 1 assets’ means assets of extremely high liquidity and credit quality as referred to in the second subparagraph of Article 416(1) of Regulation (EU) No 575/2013;

(2) ‘level 2 assets’ means assets of high liquidity and credit quality as referred to in the second subparagraph of Article 416(1) of Regulation (EU) No 575/2013. level 2 assets are further subdivided into level 2A and 2B assets in accordance with Chapter 2 of Title II of this Regulation;

(3) ‘liquidity buffer’ means the amount of liquid assets that a credit institution holds in accordance with Title II of this Regulation;

(4) ‘reporting currency’ means the currency in which the liquidity items referred to in Titles II and III of Part Six of Regulation (EU) No 575/2013 must be reported to the competent authority in accordance with Article 415(1) of that Regulation;

(5) ‘asset coverage requirement’ means the ratio of assets to liabilities as determined for credit enhancement purposes in relation to covered bonds by the national law of a Member State or a third country;

(6) ‘SME’ means a micro, small and medium-sized enterprise as defined in Commission Recommendation 2003/361/EC (²);

(7) ‘net liquidity outflows’ means the amount which results from deducting a credit institution's liquidity inflows from its liquidity outflows in accordance with Title III of this Regulation;

(10) ‘personal investment company’ (‘PIC’) means an undertaking or a trust whose owner or beneficial owner, respectively, is a natural person or a group of closely related natural persons, which was set up with the sole purpose of managing the wealth of the owners and which does not carry out any other commercial, industrial or professional activity. The purpose of the PIC may include other ancillary activities such as segregating the owners' assets from corporate assets, facilitating the transmission of assets within a family or preventing a split of the assets after the death of a member of the family, provided these are connected to the main purpose of managing the owners' wealth;

(11) ‘stress’ means a sudden or severe deterioration in the solvency or liquidity position of a credit institution due to changes in market conditions or idiosyncratic factors as a result of which there is a significant risk that the credit institution becomes unable to meet its commitments as they fall due within the next 30 calendar days;

(12) ‘margin loans’ means collateralised loans extended to customers for the purpose of taking leveraged trading positions;

(13) ‘capital market-driven transaction’ means a capital market-driven transaction as defined in Article 192, point (3), of Regulation (EU) No 575/2013;

(14) ‘covered bond programme’ means a covered bond programme as defined in Article 3, point (2), of Directive (EU) 2019/2162 of the European Parliament and of the Council (³);

(15) ‘cover pool’ means a cover pool as defined in Article 3, point (3), of Directive (EU) 2019/2162;

(16) ‘cover pool liquidity buffer’ means the liquidity buffer composed of assets considered as liquid and held as part of the cover pool, in accordance with Article 16 of Directive (EU) 2019/2162.

Article 4

The liquidity coverage ratio

The detailed liquidity coverage requirement in accordance with Article 412(1) of Regulation (EU) No 575/2013 shall be equal to the ratio of a credit institution's liquidity buffer to its net liquidity outflows over a 30 calendar day stress period and shall be expressed as a percentage. Credit institutions shall calculate their liquidity coverage ratio in accordance with the following formula:

In addition, credit institutions shall separately calculate and monitor their liquidity coverage ratio for certain items as follows:

(a) for items that are subject to separate reporting in a currency other than the reporting currency in accordance with Article 415(2) of Regulation (EU) No 575/2013, credit institutions shall separately calculate and monitor their liquidity coverage ratio in that other currency;

(b) for items denominated in the reporting currency where the aggregate amount of liabilities denominated in currencies other than the reporting currency equals or exceeds 5 % of the credit institution's total liabilities, excluding regulatory capital and off-balance-sheet items, credit institutions shall separately calculate and monitor their liquidity coverage ratio in the reporting currency.

Credit institutions shall report to their competent authority the liquidity coverage ratio in accordance with Commission Implementing Regulation (EU) No 680/2014.

Article 5

Stress scenarios for the purposes of the liquidity coverage ratio

The following scenarios may be regarded as indicators of circumstances in which a credit institution may be considered as being subject to stress:

(a) the run-off of a significant proportion of its retail deposits;

(b) a partial or total loss of unsecured wholesale funding capacity, including wholesale deposits and other sources of contingent funding such as received committed or uncommitted liquidity or credit lines;

(c) a partial or total loss of secured, short-term funding;

(d) additional liquidity outflows as a result of a credit rating downgrade of up to three notches;

(e) increased market volatility affecting the value of collateral or its quality or creating additional collateral needs;

(f) unscheduled draws on liquidity and credit facilities;

(g) potential obligation to buy-back debt or to honour non-contractual obligations.

TITLE II

THE LIQUIDITY BUFFER

CHAPTER 1

General provisions

Article 6

Composition of the liquidity buffer

In order to be eligible to form part of a credit institution's liquidity buffer, the liquid assets shall comply with each of the following requirements:

(a) the general requirements laid down in Article 7;

(b) the operational requirements laid down in Article 8;

(c) the respective eligibility criteria for their classification as a level 1 or level 2 asset in accordance with Chapter 2.

Article 7

General requirements for liquid assets

The assets shall be a property, right, entitlement, or interest, that is held by the credit institution, or included in a pool as referred to in point (a), and is free from any encumbrance. For those purposes, an asset shall be deemed to be unencumbered where it is not subject to any legal, contractual, regulatory or other restriction preventing the credit institution from liquidating, selling, transferring, assigning or, generally, disposing of the asset via an outright sale or a repurchase agreement within the following 30 calendar days. The following assets shall be deemed to be unencumbered:

(a) assets included in a pool which are available for immediate use as collateral to obtain additional funding under committed but not yet funded credit lines available to the credit institution or, if the pool is operated by a central bank, under uncommitted and not yet funded credit lines available to the credit institution. This point shall include assets placed by a credit institution with the central institution in a cooperative network or institutional protection scheme. Credit institutions shall assume that assets in the pool are encumbered in order of increasing liquidity on the basis of the liquidity classification set out in Chapter 2, starting with assets ineligible for the liquidity buffer;

(b) assets that the credit institution has received as collateral for credit risk mitigation purposes in reverse repo or securities financing transactions and that the credit institution may dispose of.

Where liquid assets that are held in the cover pool liquidity buffer are not deemed to be unencumbered pursuant to paragraph 2a of this Article, they shall nonetheless be deemed to be unencumbered during the 30 calendar day stress period, laid down in Article 4, where all of the following conditions are met:

(a) the covered bond issuer is, by provisions of national law, required to have all its assets attached to covered bonds issuances;

(b) the liquid assets are attached as non-mandatory overcollateralisation to a covered bond issuance;

(c) the liquid assets meet all other requirements laid down in Title II of this Regulation;

(d) the amount of liquid assets deemed to be unencumbered under this paragraph does not exceed the total amount of net liquidity outflows, as calculated under Title III of this Regulation.

The assets shall not have been issued by any of the following:

(a) another credit institution, unless one or more of the following conditions is met: (i) the issuer is a public sector entity referred to in point (c) of Article 10(1) or in point (a) or (b) of Article 11(1); (ii) the asset is a covered bond referred to in point (f) of Article 10(1) or in point (c) or (d) of Article 11(1) or in point (e) of Article 12(1); (iii) the asset belongs to the category described in point (e) of Article 10(1);

(b) an investment firm;

(c) an insurance undertaking;

(d) a reinsurance undertaking;

(e) a financial holding company;

(f) a mixed financial holding company;

(g) any other entity that performs one or more of the activities listed in Annex I to Directive 2013/36/EU as its main business.

For the purposes of this Article, SSPEs and official export credit agencies in Member States shall be deemed not included within the entities referred to in the first subparagraph, point (g).

The assets shall be listed on a recognised exchange or tradable via active outright sale or via simple repurchase transaction on generally accepted repurchase markets. These criteria shall be assessed separately for each market. An asset admitted to trading in an organised venue which is not a recognised exchange, either in a Member State or in a third country, shall be deemed liquid only where the trading venue provides for an active and sizable market for outright sales of assets. The credit institution shall take into account the following as minimum criteria to assess whether a trading venue provides for an active and sizeable market for the purposes of this paragraph:

(a) historical evidence of market breadth and depth as proven by low bid-ask spreads, high trading volume and a large and diverse number of market participants;

(b) the presence of a robust market infrastructure.

The requirements laid down in paragraphs 5 and 6 shall not apply to:

(a) banknotes and coins referred to in point (a) of Article 10(1);

(aa) the exposures to central governments referred to in point (d) of Article 10(1);

(b) the exposures to central banks referred to in points (b) and (d) of Article 10(1) and in point (b) of Article 11(1);

(c) the restricted-use committed liquidity facility referred to in point (d) of Article 12(1);

(d) the deposits and other funding in cooperative networks and institutional protection schemes referred to in Article 16.

Article 8

Operational requirements

Competent authorities may impose specific restrictions or requirements on a credit institution's holdings of liquid assets to ensure compliance with the requirement set out in this paragraph. Any such restriction or requirement, however, shall not apply to:

(a) the following categories of level 1 assets: (i) banknotes and coins referred to in Article 10(1)(a); (ii) the exposures to central banks referred to in points (b) and (d) of Article 10(1); (iii) assets representing claims on or guaranteed by the multilateral developments banks and international organisations referred to in Article 10(1)(g);

(b) the categories of level 1 assets representing claims on or guaranteed by the central or regional governments, local authorities or public sector entities referred to Article 10(1)(c) and (d), provided that the credit institution holds the relevant asset to cover stressed net liquidity outflows incurred in the currency of the Member State or third country or the asset is issued by the central or regional governments, local authorities or public sector entities of the credit institution's home Member State;

(c) the restricted-use committed liquidity facility referred to in point (d) of Article 12(1).

Assets used to provide credit enhancement in structured transactions or to cover operational costs of the credit institutions shall not be deemed as readily accessible to a credit institution.

Assets held in a third country where there are restrictions to their free transferability shall be deemed readily accessible only insofar as the credit institution uses those assets to meet liquidity outflows in that third country. Assets held in a non-convertible currency shall be deemed readily accessible only insofar as the credit institution uses those assets to meet liquidity outflows in that currency.

Credit institutions shall ensure that their liquid assets are under the control of a specific liquidity management function within the credit institution. Compliance with this requirement shall be demonstrated to the competent authority either by:

(a) placing the liquid assets in a separate pool under the direct management of the liquidity function and with the sole intent of using them as a source of contingent funds, including during stress periods;

(b) putting in place internal systems and controls to give the liquidity management function effective operational control to monetise the holdings of liquid assets at any point in the 30 calendar day stress period and to access the contingent funds without directly conflicting with any existing business or risk management strategies. In particular, an asset shall not be included in the liquidity buffer where monetisation of the asset without replacement throughout the 30 calendar day stress period would remove a hedge that would create an open risk position in excess of the internal limits of the credit institution;

(c) a combination of options (a) and (b), provided that the competent authority has deemed such combination acceptable.

Credit institutions shall regularly, and at least once a year, monetise a sufficiently representative sample of their holdings of liquid assets by means of outright sale or simple repurchase agreement on a generally accepted repurchase market. Credit institutions shall develop strategies for disposing of samples of liquid assets which are adequate to:

(a) test the access to the market for those assets and their usability;

(b) check that the credit institution's processes for the timely monetisation of assets are effective;

(c) minimise the risk of sending a negative signal to the market as a result of the credit institution's monetising its assets during stress periods.

The requirement laid down in the first subparagraph shall not apply to level 1 assets referred to in Article 10, other than extremely high quality covered bonds, to the restricted-use committed liquidity facility referred to in subparagraph (d) of Article 12(1) or to the deposits and other liquidity funding in cooperatives networks and institutional protection schemes referred to in Article 16.

For liquid assets held in a cover pool liquidity buffer, the requirement laid down in the first subparagraph shall be considered as fulfilled, where the credit institution regularly, and at least once a year, monetises liquid assets that constitute a sufficiently representative sample of its holdings of assets in the cover pool liquidity buffer without having to be part of that buffer.

The requirement set out in paragraph 2 shall not prevent credit institutions from hedging the market risk associated with their liquid assets provided that the following conditions are met:

(a) the credit institution puts in place appropriate internal arrangements in accordance with paragraphs 2 and 3 to ensure that those assets continue to be readily available and under the control of the liquidity management function;

(b) the net liquidity outflows and inflows that would result in the event of an early close-out of the hedge are taken into account in the valuation of the relevant asset in accordance with Article 9.