Monday January 14 2013 Top 10 Risk Compliance News Events

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Monday January 14 2013 Top 10 Risk Compliance News Events

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the weeks agenda, and what is nextDear Member,This was a difficult week. We had significantamendments to the Basel iii liquidity rules.And we needed 206 pages for this weeklynewsletter… Sorry, important thingshappen.1. The LCR will be introduced as planned on 1 January 2015, but theminimum requirement will begin at 60%, rising in equal annual steps of10 percentage points to reach 100% on 1 January 2019.This graduated approach is designed to ensure that the LCR can beintroduced without disruption to the orderly strengthening of bankingsystems or the ongoing financing of economic activity.2. During periods of stress it would be entirely appropriate for banks touse their stock of high quality liquid assets (HQLA), thereby fallingbelow the minimum. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |23. Banks will be able to count a much wider variety of liquid assetstowards their buffers, including some equities and high-qualitymortgage-backed securities.4. European and American banking stocks surged because they will incurmuch reduced costs due to the implementation of the relaxed rules.5. Banks in many other counties will have no benefit, as supervisors havealready asked for strict liquidity rules, and they are not willing to take itback.6. On the negative side, the main objective of Basel iii is to restoreinvestor confidence. The Basel Committee has developed the newframework as a response to the crisis, and has explained (time and timeagain, every month since November 2010) the need for these strict rules.Although it is true that Basel iii is an overreaction to the market crisis, it isway too late now to “ease” the rules and make (clever) investors happythe same time.This is simply a red flag for many investors, leading to the conclusion thatbanks could not comply with the rules.I agree with the Liquidity Coverage ratio (LCR) Basel iii amendment, butI cannot agree with the way it was presented.Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3Basel III - Group of Governors and Heads ofSupervision endorses revised liquiditystandard for banksThe Group of Governors and Heads of Supervision(GHOS), the oversight body of the Basel Committeeon Banking Supervision, met today to consider theBasel Committees amendments to the LiquidityCoverage Ratio (LCR) as a minimum standard.It unanimously endorsed them.Commissioner Michel BarnierThe impact of the latest BaselCommittee liquidity developments forCapital Requirements (CRD 4) in theEUIn the light of the Group of Governors and Heads of Supervision meetingand the Basel Committee on Banking Supervision press release dated 6January 2013Basel III: The LiquidityCoverage Ratio and liquidity risk monitoringtools, January 2013 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4Summary ResponsesTo the Commissions’Green Paper on ShadowBankingThe European Commissions consultation on shadow banking attractedhigh interest from stakeholders.The comments provided cover a broad range of issues and responded toall the questions raised by the European Commission Green Paper.The Commission received in total 140 contributions, of which 24 fromPublic Authorities; 47 from registered organisations; and, 64 fromindividual organisations.European Union: Financial SectorAssessment, Preliminary Conclusionsby the IMF StaffA Financial Sector Assessment Program (FSAP) team led by theMonetary and Capital Markets Department of the International MonetaryFund (IMF) visited the European Union (EU) during November27–December 13, 2012, to conduct a first-ever overall EU-wide assessmentof the soundness and stability of the EU’s financial sector (EU FSAP).European CybercrimeCentre (EC3) opens on 11January _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5As from 11 January the new European Cybercrime Centre (EC3) will beup and running to help protect European citizens and businesses fromcyber-crime.EU Commissioner for Home Affairs Cecilia Malmström will participatein the official opening of the Centre established at the European PoliceOffice, Europol in the Hague (the Netherlands).Sebastian von Dahlen and Goetz von PeterNatural catastrophes and global reinsurance –exploring the linkagesNatural disasters resulting in significant losses havebecome more frequent in recent decades,with 2011 being the costliest year in history.This feature explores how risk is transferred within and beyond the globalinsurance sector and assesses the financial linkages that arise in theprocess.Morten Bech, Todd KeisterOn the liquidity coverage ratio and monetarypolicy implementationBasel III introduces the first global framework for bankliquidity regulation.As monetary policy typically involves targeting the interest rateon interbank loans of the most liquid asset – central _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6bank reserves – it is important tounderstand how this newrequirement will impact theefficacy of current operationalframeworks.EIOPA – Risk DashboardSovereign risk – a world withoutrisk-free assetsPanel comments by Mr Patrick Honohan,Governor of the Central Bank of Ireland, atthe BIS Conference on “Sovereign risk – aworld without risk-free assets”, Basel, 8January 2013.What’s new about sovereign risk since thecrisis began?Conceptually, not so much, I would suggest – and nothing that cannot befully explained within standard models of finance. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7Basel III - Group of Governors and Headsof Supervision endorses revised liquiditystandard for banks6 January 2013The Group of Governors and Heads ofSupervision (GHOS), the oversight body of theBasel Committee on Banking Supervision, mettoday to consider the Basel Committeesamendments to the Liquidity Coverage Ratio (LCR) as a minimumstandard.It unanimously endorsed them.Todays agreement is a clear commitment to ensure that banks holdsufficient liquid assets to prevent central banks becoming the "lender offirst resort".The GHOS also endorsed a new Charter for the Committee, anddiscussed the Committees medium-term work agenda.The GHOS reaffirmed the LCR as an essential component of the BaselIII reforms.It endorsed a package of amendments to the formulation of the LCRannounced in 2010.The package has four elements:1. Revisions to the definition of high quality liquid assets (HQLA) and netcash outflows2. A timetable for phase-in of the standard _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |83. A reaffirmation of the usability of the stock of liquid assets in periods ofstress, including during the transition period4. An agreement for the Basel Committee to conduct further work on theinteraction between the LCR and the provision of central bank facilities.A summary description of the agreed LCR is in Annex 1.The changes to the definition of the LCR, developed and agreed by theBasel Committee over the past two years, include an expansion in therange of assets eligible as HQLA and some refinements to the assumedinflow and outflow rates to better reflect actual experience in times ofstress.These changes are set out in Annex 2.The GHOS agreed that the LCR should be subject to phase-inarrangements which align with those that apply to the Basel III capitaladequacy requirements.Specifically, the LCR will be introduced as planned on 1 January 2015, butthe minimum requirement will begin at 60%, rising in equal annual stepsof 10 percentage points to reach 100% on 1 January 2019.This graduated approach is designed to ensure that the LCR can beintroduced without disruption to the orderly strengthening of bankingsystems or the ongoing financing of economic activity.The GHOS agreed that, during periods of stress it would be entirelyappropriate for banks to use their stock of HQLA, thereby falling belowthe minimum.Moreover, it is the responsibility of bank supervisors to give guidance onusability according to circumstances.The GHOS also agreed today that, since deposits with central banks arethe most - indeed, in some cases, the only - reliable form of liquidity, the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9interaction between the LCR and the provision of central bank facilities iscritically important.The Committee will therefore continue to work on this issue over the nextyear.GHOS members endorsed two other areas of further analysis.First, the Committee will continue to develop disclosure requirements forbank liquidity and funding profiles.Second, the Committee will continue to explore the use of market-basedindicators of liquidity to supplement the existing measures based on assetclasses and credit ratings.The GHOS discussed and endorsed the Basel Committees medium-termwork agenda.Following the successful agreement of the LCR, the Committee will nowpress ahead with the review of the Net Stable Funding Ratio.This is a crucial component in the new framework, extending the scope ofinternational agreement to the structure of banks debt liabilities.This will be a priority for the Basel Committee over the next two years.Over the next few years, the Basel Committee will also:1. Complete the overhaul of the policy framework currently under way2. Continue to strengthen the peer review programme established in 2012to monitor the implementation of reforms in individual jurisdictions3. Monitor the impact of, and industry response to, recent and proposedregulatory reforms.During 2012 the Committee has been examining the comparability ofmodel-based internal risk weightings and considering the appropriate _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10balance between the simplicity, comparability and risk sensitivity of theregulatory framework.The GHOS encouraged continuation of this work in 2013 as a matter ofpriority.Furthermore, the GHOS supported the Committees intention to promoteeffective macro- and microprudential supervision.The GHOS also endorsed a new Charter for the Basel Committee.The new Charter sets out the Committees objectives and key operatingmodalities, and is designed to improve understanding of the Committeesactivities and decision-making processes.Finally, the GHOS reiterated the importance of full, timely and consistentimplementation of Basel III standards.Mervyn King, Chairman of the GHOS and Governor of the Bank ofEngland, said,"The Liquidity Coverage Ratio is a key component of the Basel IIIframework.The agreement reached today is a very significant achievement.For the first time in regulatory history, we have a truly global minimumstandard for bank liquidity.Importantly, introducing a phased timetable for the introduction of theLCR, and reaffirming that a banks stock of liquid assets are usable intimes of stress, will ensure that the new liquidity standard will in no wayhinder the ability of the global banking system to finance a recovery."Stefan Ingves, Chairman of the Basel Committee and Governor of theSveriges Riksbank, noted: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11"The amendments to the LCR are designed to ensure that it provides asound minimum standard for bank liquidity - a standard that reflectsactual experience during times of stress.The completion of this work will allow the Basel Committee to turn itsattention to refining the other component of the new global liquiditystandards, the Net Stable Funding Ratio, which remains subject to anobservation period ahead of its implementation in 2018."Annex 1Summary description of the LCRTo promote short-term resilience of a bank’s liquidity risk profile, theBasel Committee developed the Liquidity Coverage Ratio (LCR).This standard aims to ensure that a bank has an adequate stock ofunencumbered high quality liquid assets (HQLA) which consists of cashor assets that can be converted into cash at little or no loss of value inprivate markets to meet its liquidity needs for a 30 calendar day liquiditystress scenario.The LCR has two components:(a) The value of the stock of HQLA(b) Total net cash outflowsand is expressed as: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12High Quality Liquid AssetsThe numerator of the LCR is the stock of HQLA.Under the standard, banks must hold a stock of unencumbered HQLA tocover the total net cash outflows over a 30-day period under theprescribed stress scenario.In order to qualify as HQLA, assets should be liquid in markets during atime of stress and, in most cases, be eligible for use in central bankoperations.Certain types of assets within HQLA are subject to a range of haircuts.HQLA are comprised of Level 1 and Level 2 assets.Level 1 assets generally include cash, central bank reserves, and certainmarketable securities backed by sovereigns and central banks, amongothers.These assets are typically of the highest quality and the most liquid, andthere is no limit on the extent to which a bank can hold these assets tomeet the LCR.Level 2 assets are comprised of Level 2A and Level 2B assets and includecertain marketable government securities as well as corporate debtsecurities, residential mortgage backed securities and equities that meetcertain conditions.Level 2 assets (comprising Level 2A and Level 2B assets) are typically ofslightly lesser quality and may not in aggregate account for more than40% of a bank’s stock of HQLA.Level 2B assets may not account for more than 15% of a bank’s total stockof HQLA. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13Total net cash outflowsThe denominator of the LCR is the total net cash outflows.It is defined as total expected cash outflows, minus total expected cashinflows, in the specified stress scenario for the subsequent 30 calendardays.Total expected cash outflows are calculated by multiplying theoutstanding balances of various categories or types of liabilities andoff-balance sheet commitments by the rates at which they are expected torun off or be drawn down.Total expected cash inflows are calculated by multiplying the outstandingbalances of various categories of contractual receivables by the rates atwhich they are expected to flow in.Total cash inflows are subject to an aggregate cap of 75% of totalexpected cash outflows, thereby ensuring a minimum level of HQLAholdings at all times.Liquidity Coverage RatioThe standard requires that, absent a situation of financial stress, the valueof the ratio be no lower than 100% (ie the stock of HQLA should at leastequal total net cash outflows).Banks are expected to meet this requirement continuously and hold astock of unencumbered HQLA as a defence against the potential onset ofliquidity stress.During a period of financial stress, however, banks may use their stock ofHQLA, thereby falling below 100%.Important - The 100% threshold is the minimum requirement absent aperiod of financial stress, and after the phase-in arrangements arecomplete. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14References to 100% may be adjusted for any phase-in arrangements inforce at a particular time.Annex 2Complete set of agreed changes to the Liquidity Coverage RatioHIGH QUALITY LIQUID ASSETS (HQLA)Expand the definition of HQLA subject to a higher haircut and limit- Corporate debt securities rated A+ to BBB– with a 50% haircut- Certain unencumbered equities subject to a 50% haircut- Certain residential mortgage-backed securities rated AA or higher with a25% haircutAggregate of additional assets, after haircuts, subject to a 15% limit of theHQLARating requirement on qualifying Level 2 assets- Use of local rating scales and inclusion of qualifying commercial paperUsability of the liquidity pool- Incorporate language related to the expectation that banks will use theirpool of HQLA during periods of stressOperational requirements- Refine and clarify the operational requirements for HQLAOperation of the cap on Level 2 HQLA- Revise and improve the operation of the cap _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15Alternative liquid asset (ALA) framework- Develop the alternative treatments and include a fourth option forsharia-compliant banksCentral bank reserves- Clarify language to confirm that supervisors have national discretion toinclude or exclude required central bank reserves (as well as overnightand certain term deposits) as HQLA as they consider appropriateINFLOWS AND OUTFLOWSInsured deposits- Reduce outflow on certain fully insured retail deposits from 5% to 3%- Reduce outflow on fully insured non-operational deposits fromnon-financial corporates, sovereigns, central banks and public sectorentities (PSEs) from 40% to 20%Non-financial corporate deposits- Reduce the outflow rate for “non-operational” deposits provided bynon-financial corporates, sovereigns, central banks and PSEs from 75% to40%Committed liquidity facilities to non-financial corporates- Clarify the definition of liquidity facilities and reduce the drawdown rateon the unused portion of committed liquidity facilities to non-financialcorporates, sovereigns, central banks and PSEs from 100% to 30%Committed but unfunded inter-financial liquidity and credit facilities- Distinguish between interbank and inter-financial credit and liquidityfacilities and reduce the outflow rate on the former from 100% to 40%Derivatives _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16- Additional derivatives risks included in the LCR with a 100% outflow(relates to collateral substitution, and excess collateral that the bank iscontractually obligated to return/provide if required by a counterparty)- Introduce a standardised approach for liquidity risk related to marketvalue changes in derivatives positions- Assume net outflow of 0% for derivatives (and commitments) that arecontractually secured/collateralised by HQLATrade finance- Include guidance to indicate that a low outflow rate (0–5%) is expectedto applyEquivalence of central bank operations- Reduce the outflow rate on maturing secured funding transactions withcentral banks from 25% to 0%Client servicing brokerage- Clarify the treatment of activities related to client servicing brokerage(which generally lead to an increase in net outflows)OTHERRules text clarifications- Clearer guidance on the usability of HQLA, and the appropriatesupervisory response, has been developed to ensure that the stock ofliquid assets is available to be used when needed- A number of clarifications to the rules text to promote consistentapplication and reduce arbitrage opportunities (eg operational depositsfrom wholesale clients, derivatives cash flows, open maturity loans). Alsoincorporation of previously agreed FAQ _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17Internationally agreed phase-in of the LCR- The minimum LCR in 2015 would be 60% and increase by 10 percentagepoints per year to reach 100% in 2019 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18Basel Committee on Banking Supervision (BCBS) CharterJanuary 2013I. Purpose and role1. MandateThe BCBS is the primary global standard-setter for the prudentialregulation of banks and provides a forum for cooperation on bankingsupervisory matters.Its mandate is to strengthen the regulation, supervision and practices ofbanks worldwide with the purpose of enhancing financial stability.2. ActivitiesThe BCBS seeks to achieve its mandate through the following activities:(a) Exchanging information on developments in the banking sector andfinancial markets, to help identify current or emerging risks for the globalfinancial system;(b) Sharing supervisory issues, approaches and techniques to promotecommon understanding and to improve cross-border cooperation;(c) Establishing and promoting global standards for the regulation andsupervision of banks as well as guidelines and sound practices;(d) Addressing regulatory and supervisory gaps that pose risks tofinancial stability;(e) Monitoring the implementation of BCBS standards in membercountriesand beyond with the purpose of ensuring their timely, consistentand effective implementation and contributing to a "level playing field"among internationally-active banks;(f) Consulting with central banks and bank supervisory authorities whichare not members of the BCBS to benefit from their input into the BCBSpolicy formulation process and to promote the implementation of BCBS _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19standards, guidelines and sound practices beyond BCBS membercountries; and(g) Coordinating and cooperating with other financial sector standardsetters and international bodies, particularly those involved in promotingfinancial stability.3. Legal statusThe BCBS does not possess any formal supranational authority. Itsdecisions do not have legal force.Rather, the BCBS relies on its members commitments, as described inSection 5, to achieve its mandate.II. Membership4. BCBS membersBCBS members include organisations with direct banking supervisoryauthority and central banks.After consulting the Committee, the BCBS Chairman may invite otherorganisations to become BCBS observers.BCBS membership and observer status will be reviewed periodically.In accepting new members, due regard will be given to the importance oftheir national banking sectors to international financial stability.The Committee will make recommendations to its oversight body, theGroup of Governors and Heads of Supervision, for changes in BCBSmembership.The Secretariat will publish the list of BCBS members and observers onits website.5. BCBS members responsibilitiesBCBS members are committed to: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20(a) Work together to achieve the mandate of the BCBS;(b) Promote financial stability;(c) Continuously enhance their quality of banking regulation andsupervision;(d) Actively contribute to the development of BCBS standards, guidelinesand sound practices;(e) Implement and apply BCBS standards in their domestic jurisdictions2 within the pre-defined timeframe established by the Committee;(f) Undergo and participate in BCBS reviews to assess the consistencyand effectiveness of domestic rules and supervisory practices in relationto BCBS standards; and(g) Promote the interests of global financial stability and not solelynational interests, while participating in BCBS work anddecision-making.III. Oversight6. The Group of Governors and Heads of Supervision (GHOS)The GHOS is the oversight body of the BCBS.The BCBS reports to the GHOS and seeks its endorsement for majordecisions.In addition, the BCBS looks to the GHOS to:(a) Approve the BCBS Charter and any amendments to this document;(b) Provide general direction for the BCBS work programme(c) Appoint the BCBS Chairman from among its members. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21If the BCBS Chairman ceases to be a GHOS member before the end ofhis/her term, the GHOS will appoint a new Chairman.Until a new Chairman has been appointed, the Secretary General assumesthe Chairmans functions.IV. Organisation7. StructureThe internal organisational structure of the BCBS comprises:(a) The Committee(b) Groups, working groups and task forces(c) The Chairman(d) The Secretariat8. The CommitteeThe Committee is the ultimate decision-making body of the BCBS withresponsibility for ensuring that its mandate is achieved.8.1 ResponsibilitiesThe Committee is responsible for:(a) Developing, guiding and monitoring the BCBS work programmewithin the general direction provided by GHOS;(b) Establishing and promoting BCBS standards, guidelines and soundpractices;(c) Establishing and disbanding groups, working groups and task forces;approving and modifying their mandates; and monitoring their progress;(e) Recommending to the GHOS amendments to the BCBS Charter; and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22(f) Deciding on the organisational regulations governing its activities.8.2 Number of Committee meetingsThe Committee generally meets four times every year.However, the Chairman can decide to hold additional meetings asnecessary.8.3 Representation at Committee meetingsThe Chairman presides over Committee meetings.All BCBS members and observers are entitled to appoint onerepresentative to attend Committee meetings.BCBS representatives should be senior officials of their organisations andshould have the authority to commit their institutions.Representation at Committee meetings is expected to be, for example, atthe level of head of banking supervision, head of bankingpolicy/regulation, central bank deputy governor, head of financialstability department or equivalent.8.4 DecisionsDecisions by the Committee are taken by consensus among its members.8.5 Communication of decisionsCommittee decisions of public interest shall be communicated throughthe BCBS website.The Committee shall issue, when appropriate, press statements tocommunicate its decisions.9. Groups, working groups and task forcesThe BCBSs work is largely organised around groups, working groupsand task forces. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23The Secretariat will make publicly available the list of BCBS groups andworking groups.9.1 GroupsBCBS groups report directly to the Committee.They are composed of senior staff from BCBS members that guide orundertake themselves major areas of Committee work. BCBS groupsform part of the permanent internal structure of the BCBS and thusoperate without a specific deliverable or end date.9.2 Working groupsWorking groups consist of experts from BCBS members that support thetechnical work of BCBS groups.9.3 Task forcesTask forces are created to undertake specific tasks for a limited time.These are generally composed of technical experts from BCBS memberinstitutions.However, when these groupings are created by the Committee, theyconsist of BCBS representatives and deal with specific issues that requireprompt attention of the Committee. In such cases, they are calledhigh-level task forces.10. ChairmanThe Chairman directs the work of the Committee in accordance with theBCBS mandate.10.1 AppointmentThe Chairman is appointed by the GHOS for a term of three years thatcan be renewed once.10.2 ResponsibilitiesThe Chairmans main responsibilities are to: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24(a) Convene and chair Committee meetings.If the Chairman is unable to attend a Committee meeting, he or she candesignate the Secretary General to chair the meeting on his/her behalf;(b) Monitor the progress of the BCBS work programme and provideoperational guidance between meetings to carry forward the decisionsand directions of the Committee;(c) Report to the GHOS when appropriate; and(d) Represent the BCBS externally and be the principal spokesperson forthe BCBS.11. The SecretariatThe Secretariat is provided by the Bank for International Settlements(BIS) and supports the work of the Committee, the Chairman and thegroups around which the Committee organises its work.The Secretariat is staffed mainly by professional staff, mostly ontemporary secondment from BCBS members.11.1 ResponsibilitiesThe Secretariats main responsibilities are to:(a) Provide support and assistance to the Committee, the Chairman,groups, working groups and task forces;(b) Ensure timely and effective information flow to all BCBS members;(c) Facilitate coordination across groups, working groups and task forces;(d) Facilitate a close contact between BCBS members and non-memberauthorities;(e) Support the cooperation between the BCBS and other institutions; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25(f) Maintain the BCBS records, administer the BCBS website and dealwith correspondence of the BCBS; and(g) Carry out all other functions that are assigned by the Committee andthe Chairman.11.2 Secretary GeneralThe Secretary General reports to the Chairman and directs the work of theSecretariat.The Secretary General manages the financial, material and humanresources allocated to the Secretariat.He/she also assists the Chairman in representing the Committeeexternally.The Secretary General is selected by the Chairman on recommendation ofa selection panel comprising BCBS and/or GHOS members and a seniorrepresentative of the BIS.The term of appointment is typically three years with the potential to beextended.11.3 Deputy Secretaries GeneralDeputy Secretaries General report to and assist the Secretary General indischarging his/her duties.Deputy Secretaries General substitute for the Secretary General in case ofabsence, incapacity or as requested by the Secretary General.Deputy Secretaries General are selected by the Secretary General inconjunction with the Chairman.11.4 Location of the SecretariatThe Secretariat is located at the BIS in Basel. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26V. BCBS standards, guidelines and sound practices12. StandardsThe BCBS sets standards for the prudential regulation and supervision ofbanks.The BCBS expects full implementation of its standards by BCBSmembers and their internationally active banks.However, BCBS standards constitute minimum requirements and BCBSmembers may decide to go beyond them.The Committee expects standards to be incorporated into local legalframeworks through each jurisdictions rule-making process within thepre-defined timeframe established by the Committee.If deviation from literal transposition into local legal frameworks isunavoidable, members should seek the greatest possible equivalence ofstandards and their outcome.13. GuidelinesGuidelines elaborate the standards in areas where they are considereddesirable for the prudential regulation and supervision of banks, inparticular international active banks.They generally supplement BCBS standards by providing additionalguidance for the purpose of their implementation.14. Sound practicesSound practices generally describe actual observed practices, with thegoal of promoting common understanding and improving supervisory orbanking practices.BCBS members are encouraged to compare these practices with thoseapplied by themselves and their supervised institutions to identifypotential areas for improvement. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27VI. Consultation with non-member authorities15. Consultation with non-member authoritiesConsistent with the activities described under section 2, the BCBS iscommitted to consulting widely on its activities with non-memberauthorities through the following structures and mechanisms:15.1 The Basel Consultative Group (BCG)The BCG provides a forum for deepening the Committees engagementwith supervisors around the world on banking supervisory issues.It facilitates broad supervisory dialogue with non-member authorities onnew Committee initiatives early in the process by gathering seniorrepresentatives from various countries, international institutions andregional groups of banking supervisors that are not members of theCommittee.15.2 The International Conferences of Banking Supervisors (ICBS)The biennial ICBS provides a venue for supervisors around the world todiscuss issues of common interest.15.3 Participation in BCBS groups, working groups and task forcesBy participating as observers in BCBS bodies, non-member authoritiescontribute to the Committees policy development work.15.4 The Financial Stability Institute (FSI)The FSI is a joint initiative of the BCBS and the BIS to assist supervisorsaround the world in implementing sound prudential standards.The BCBS supports FSI activities, including in particular the BCBS-FSIHigh Level Meetings.These are targeted at senior policymakers within central banks andsupervisory authorities and provide a series of regional fora fordistributing information on BCBS standards, keeping participantsupdated on Committee work, sharing supervisory practices and concerns,and establishing and maintaining strong contacts. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 2815.5 Regional groups of banking supervisorsThe BCBS supports the work and activities of regional groups of bankingsupervisors worldwide.Secretariat staff may participate in meetings of such groups to exchangeideas and seek feedback on BCBS work.VII. Relationship with other international financial bodies16. International cooperationThe BCBS cooperates with other international financial standard settersand public sector bodies with the purpose of achieving an enhancedcoordination of policy development and implementation.In carrying out their responsibilities to support this cooperation, theChairman and the Secretariat will pay particular attention to the need tocomply with the BCBSs due process and governance arrangements.Together with other international financial standard setters, the BCBSsponsors the Joint Forum, where issues of common concern to thestandard setters can be addressed and recommendations for coordinatedaction can be developed.The BCBS is a member of the Financial Stability Board (FSB) andparticipates in the FSBs work to develop, coordinate and promote theimplementation of effective regulatory, supervisory and other financialsector policies.VIII. Public consultation process17. Public consultation process of draft BCBS standards, guidelinesand sound practicesIn principle, the BCBS seeks input from all relevant stakeholders onpolicy proposals. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29The consultation process will include issuing a public invitation tointerested parties to provide comments in writing to the Secretariat onpolicy proposals issued by the Committee, within a specified timeframe.The consultation period shall normally last 90 calendar days, but couldexceptionally be shorter or longer.As a general rule, responses to public invitations for comments shall bepublished on the BCBS website, unless confidential treatment isrequested by respondents.This process is compulsory for BCBS standards. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30Commissioner Michel BarnierThe impact of the latest BaselCommittee liquidity developments forCapital Requirements (CRD 4) in the EUIn the light of the Group of Governors and Heads of Supervision meetingand the Basel Committee on Banking Supervision press release dated 6January 2013"I welcome the unanimous agreement reached by the Basel Committeeon the revised liquidity coverage ratio and the gradual approach for itsphasing-in by clearly defined dates.This is significant progress which addresses issues already raised by theEuropean Commission.We now need to make full use of the observation period, and learn fromthe reports that the European Banking Authority will prepare on theresults of the observation period, before formally implementing in 2015the liquidity coverage ratio under EU law in line with the Baselstandards.The treatment of liquidity is fundamental, both for the stability of banksas well as for their role in supporting wider economic recovery.I now call upon the Parliament and the Council to successfully concludethe CRD 4 trilogue negotiations in the coming weeks."ContextThe Basel Committee on Banking Supervision (BCBS) has agreed apackage of LCR (liquidity coverage ratio) revisions unanimously as wellas its 2013 work plan.The LCR revisions include an expansion of eligible assets, a less severecalibration for certain cash flows and a phasing-in arrangement fromJanuary 2015 to 2019. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31The current Commission approach to liquidity in the CRD4 negotiations,namely first a reporting period followed by comprehensive EuropeanBanking Authority (EBA) Reports and subsequently a delegated act bythe Commission to define the detailed ratio remains fully valid.Background informationThe Commissions approach to liquidity in CRD 4 still remains valid inthe light of the latest Basel Committee approval of the revision of anumber of parameters and calibrations on liquidity (GHOS meeting of 6January).In the Basel Committee, the European Central Bank, the EuropeanCommission and various countries including from the EU had argued forsuch a revision.At the level of the Basel Committee, the final package of LCR revisionswill now be subject to an observation period with a Quantitative ImpactStudy (QIS) that will take place in 2013 together with some otherimportant work that still needs to be completed in the coming year.The EU needs to take full benefit of this observation period and learnfrom it, as this is the first time in history that regulators are definingglobally harmonized, quantitative liquidity standards.The EBA will make reports on the results of the observation period forEU banks before the end of 2013.Based on the evaluation of this work, the Commission will proposedefining the detailed LCR through a delegated act (i.e. legislationadopted by the Commission provided no objections are raised by the EPand the Council).Nevertheless, important work still remains to be completed at the globaland European levels.This includes the determination of alternative, market-based indicatorsfor the definition of High Quality Liquid Assets (HQLA); the treatmentof Central Bank facilities which could impact upon the definition ofHQLA and related cash flows; and the treatment of market valuationchanges on derivative cash flows. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32In this light, the best course continues to be rapid adoption of the CRD 4package while leaving the necessary flexibility to implement the finaldetailed LCR standard through a delegated act, taking into account theon-going work by Basel and the comprehensive EBA reports.Subject to this approach, the texts on the table now of the EuropeanParliament and Council should be adopted shortly, hopefully in thecoming weeks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33Basel III: The LiquidityCoverage Ratio and liquidity riskmonitoring tools, January 2013Introduction1. This document presents one of the BaselCommittee’s key reforms to develop a moreresilient banking sector: the LiquidityCoverage Ratio (LCR).The objective of the LCR is to promote theshort-term resilience of the liquidity risk profile of banks.It does this by ensuring that banks have an adequate stock ofunencumbered high-quality liquid assets (HQLA) that can be convertedeasily and immediately in private markets into cash to meet their liquidityneeds for a 30 calendar day liquidity stress scenario.The LCR will improve the banking sector’s ability to absorb shocksarising from financial and economic stress, whatever the source, thusreducing the risk of spillover from the financial sector to the realeconomy.This document sets out the LCR standard and timelines for itsimplementation.2. During the early “liquidity phase” of the financial crisis that began in2007, many banks – despite adequate capital levels – still experienceddifficulties because they did not manage their liquidity in a prudentmanner.The crisis drove home the importance of liquidity to the properfunctioning of financial markets and the banking sector. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34Prior to the crisis, asset markets were buoyant and funding was readilyavailable at low cost.The rapid reversal in market conditions illustrated how quickly liquiditycan evaporate, and that illiquidity can last for an extended period of time.The banking system came under severe stress, which necessitated centralbank action to support both the functioning of money markets and, insome cases, individual institutions.3. The difficulties experienced by some banks were due to lapses in basicprinciples of liquidity risk management.In response, as the foundation of its liquidity framework, theCommittee in 2008 published Principles for Sound Liquidity RiskManagement and Supervision (“Sound Principles”).The Sound Principles provide detailed guidance on the risk managementand supervision of funding liquidity risk and should help promote betterrisk management in this critical area, but only if there is fullimplementation by banks and supervisors.As such, the Committee will continue to monitor the implementation bysupervisors to ensure that banks adhere to these fundamental principles.4. To complement these principles, the Committee has furtherstrengthened its liquidity framework by developing two minimumstandards for funding liquidity.These standards have been developed to achieve two separate butcomplementary objectives.The first objective is to promote short-term resilience of a bank’s liquidityrisk profile by ensuring that it has sufficient HQLA to survive asignificant stress scenario lasting for one month.The Committee developed the LCR to achieve this objective. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35The second objective is to promote resilience over a longer time horizonby creating additional incentives for banks to fund their activities withmore stable sources of funding on an ongoing basis.The Net Stable Funding Ratio (NSFR), which is not covered by thisdocument, supplements the LCR and has a time horizon of one year.It has been developed to provide a sustainable maturity structure of assetsand liabilities.5. These two standards are comprised mainly of specific parameterswhich are internationally “harmonised” with prescribed values.Certain parameters, however, contain elements of national discretion toreflect jurisdiction-specific conditions.In these cases, the parameters should be transparent and clearly outlinedin the regulations of each jurisdiction to provide clarity both within thejurisdiction and internationally.6. It should be stressed that the LCR standard establishes a minimumlevel of liquidity for internationally active banks.Banks are expected to meet this standard as well as adhere to the SoundPrinciples.Consistent with the Committee’s capital adequacy standards, nationalauthorities may require higher minimum levels of liquidity.In particular, supervisors should be mindful that the assumptions withinthe LCR may not capture all market conditions or all periods of stress.Supervisors are therefore free to require additional levels of liquidity to beheld, if they deem the LCR does not adequately reflect the liquidity risksthat their banks face.7. Given that the LCR is, on its own, insufficient to measure alldimensions of a bank’s liquidity profile, the Committee has also _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 36developed a set of monitoring tools to further strengthen and promoteglobal consistency in liquidity risk supervision.These tools are supplementary to the LCR and are to be used for ongoingmonitoring of the liquidity risk exposures of banks, and incommunicating these exposures among home and host supervisors.8. The Committee is introducing phase-in arrangements to implementthe LCR to help ensure that the banking sector can meet the standardthrough reasonable measures, while still supporting lending to theeconomy.9. The Committee remains firmly of the view that the LCR is an essentialcomponent of the set of reforms introduced by Basel III and, whenimplemented, will help deliver a more robust and resilient bankingsystem.However, the Committee has also been mindful of the implications of thestandard for financial markets, credit extension and economic growth,and of introducing the LCR at a time of ongoing strains in some bankingsystems.It has therefore decided to provide for a phased introduction of the LCR,in a manner similar to that of the Basel III capital adequacy requirements.10. Specifically, the LCR will be introduced as planned on 1 January 2015,but the minimum requirement will be set at 60% and rise in equal annualsteps to reach 100% on 1 January 2019.This graduated approach, coupled with the revisions made to the 2010publication of the liquidity standards, are designed to ensure that theLCR can be introduced without material disruption to the orderlystrengthening of banking systems or the ongoing financing of economicactivity. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 3711. The Committee also reaffirms its view that, during periods of stress, itwould be entirely appropriate for banks to use their stock of HQLA,thereby falling below the minimum.Supervisors will subsequently assess this situation and will give guidanceon usability according to circumstances.Furthermore, individual countries that are receiving financial support formacroeconomic and structural reform purposes may choose a differentimplementation schedule for their national banking systems, consistentwith the design of their broader economic restructuring programme.12. The Committee is currently reviewing the NSFR, which continues tobe subject to an observation period and remains subject to review toaddress any unintended consequences.It remains the Committee’s intention that the NSFR, including anyrevisions, will become a minimum standard by 1 January 2018.13. This document is organised as follows:- Part 1 defines the LCR for internationally active banks and deals with application issues.- Part 2 presents a set of monitoring tools to be used by banks and supervisors in their monitoring of liquidity risks.Part 1: The Liquidity Coverage Ratio14. The Committee has developed the LCR to promote the short-termresilience of the liquidity risk profile of banks by ensuring that they havesufficient HQLA to survive a significant stress scenario lasting 30calendar days.15. The LCR should be a key component of the supervisory approach toliquidity risk, but must be supplemented by detailed supervisoryassessments of other aspects of the bank’s liquidity risk management _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38framework in line with the Sound Principles, the use of the monitoringtools included in Part 2, and, in due course, the NSFR.In addition, supervisors may require an individual bank to adopt morestringent standards or parameters to reflect its liquidity risk profile andthe supervisor’s assessment of its compliance with the Sound Principles.I. Objective of the LCR and use of HQLA16. This standard aims to ensure that a bank has an adequate stock ofunencumbered HQLA that consists of cash or assets that can beconverted into cash at little or no loss of value in private markets, to meetits liquidity needs for a 30 calendar day liquidity stress scenario.At a minimum, the stock of unencumbered HQLA should enable thebank to survive until Day 30 of the stress scenario, by which time it isassumed that appropriate corrective actions can be taken by managementand supervisors, or that the bank can be resolved in an orderly way.Furthermore, it gives the central bank additional time to take appropriatemeasures, should they be regarded as necessary.As noted in the Sound Principles, given the uncertain timing of outflowsand inflows, banks are also expected to be aware of any potentialmismatches within the 30-day period and ensure that sufficient HQLAare available to meet any cash flow gaps throughout the period.17. The LCR builds on traditional liquidity “coverage ratio”methodologies used internally by banks to assess exposure to contingentliquidity events.The total net cash outflows for the scenario are to be calculated for 30calendar days into the future.The standard requires that, absent a situation of financial stress, the valueof the ratio be no lower than 100% (ie the stock of HQLA should at leastequal total net cash outflows) on an ongoing basis because the stock ofunencumbered HQLA is intended to serve as a defence against the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39potential onset of liquidity stress.During a period of financial stress, however, banks may use their stock ofHQLA, thereby falling below 100%, as maintaining the LCR at 100%under such circumstances could produce undue negative effects on thebank and other market participants.Supervisors will subsequently assess this situation and will adjust theirresponse flexibly according to the circumstances.18. In particular, supervisory decisions regarding a bank’s use of itsHQLA should be guided by consideration of the core objective anddefinition of the LCR.Supervisors should exercise judgement in their assessment and accountnot only for prevailing macrofinancial conditions, but also considerforward-looking assessments of macroeconomic and financial conditions.In determining a response, supervisors should be aware that some actionscould be procyclical if applied in circumstances of market-wide stress.Supervisors should seek to take these considerations into account on aconsistent basis across jurisdictions.(a) Supervisors should assess conditions at an early stage, and takeactions if deemed necessary, to address potential liquidity risk.(b) Supervisors should allow for differentiated responses to a reportedLCR below 100%.Any potential supervisory response should be proportionate with thedrivers, magnitude, duration and frequency of the reported shortfall.(c) Supervisors should assess a number of firm- and market-specificfactors in determining the appropriate response as well as otherconsiderations related to both domestic and global frameworks andconditions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40Potential considerations include, but are not limited to:(i) The reason(s) that the LCR fell below 100%.This includes use of the stock of HQLA, an inability to roll over fundingor large unexpected draws on contingent obligations.In addition, the reasons may relate to overall credit, funding and marketconditions, including liquidity in credit, asset and funding markets,affecting individual banks or all institutions, regardless of their owncondition;(ii) The extent to which the reported decline in the LCR is due to afirm-specific or market-wide shock;(iii) A bank’s overall health and risk profile, including activities, positionswith respect to other supervisory requirements, internal risk systems,controls and other management processes, among others;(iv) The magnitude, duration and frequency of the reported decline ofHQLA;(v) The potential for contagion to the financial system and additionalrestricted flow of credit or reduced market liquidity due to actions tomaintain an LCR of 100%;(vi) The availability of other sources of contingent funding such as centralbank funding, or other actions by prudential authorities.(d) Supervisors should have a range of tools at their disposal to address areported LCR below 100%.Banks may use their stock of HQLA in both idiosyncratic and systemicstress events, although the supervisory response may differ between thetwo.(i) At a minimum, a bank should present an assessment of its liquidityposition, including the factors that contributed to its LCR falling below _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41100%, the measures that have been and will be taken and the expectationson the potential length of the situation.Enhanced reporting to supervisors should be commensurate with theduration of the shortfall.(ii) If appropriate, supervisors could also require actions by a bank toreduce its exposure to liquidity risk, strengthen its overall liquidity riskmanagement, or improve its contingency funding plan.(iii) However, in a situation of sufficiently severe system-wide stress,effects on the entire financial system should be considered.Potential measures to restore liquidity levels should be discussed, andshould be executed over a period of time considered appropriate toprevent additional stress on the bank and on the financial system as awhole.(e) Supervisors’ responses should be consistent with the overall approachto the prudential framework.II. Definition of the LCR19. The scenario for this standard entails a combined idiosyncratic andmarket-wide shock that would result in:(a) The run-off of a proportion of retail deposits;(b) A partial loss of unsecured wholesale funding capacity;(c) A partial loss of secured, short-term financing with certain collateraland counterparties;(d) Additional contractual outflows that would arise from a downgrade inthe bank’s public credit rating by up to and including three notches,including collateral posting requirements; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42(e) Increases in market volatilities that impact the quality of collateral orpotential future exposure of derivative positions and thus require largercollateral haircuts or additional collateral, or lead to other liquidity needs;(f) Unscheduled draws on committed but unused credit and liquidityfacilities that the bank has provided to its clients; and(g) The potential need for the bank to buy back debt or honournon-contractual obligations in the interest of mitigating reputational risk.20. In summary, the stress scenario specified incorporates many of theshocks experienced during the crisis that started in 2007 into onesignificant stress scenario for which a bank would need sufficientliquidity on hand to survive for up to 30 calendar days.21. This stress test should be viewed as a minimum supervisoryrequirement for banks.Banks are expected to conduct their own stress tests to assess the level ofliquidity they should hold beyond this minimum, and construct their ownscenarios that could cause difficulties for their specific business activities.Such internal stress tests should incorporate longer time horizons thanthe one mandated by this standard.Banks are expected to share the results of these additional stress testswith supervisors.22. The LCR has two components:(a) Value of the stock of HQLA in stressed conditions; and(b) Total net cash outflows, calculated according to the scenarioparameters outlined below. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43A. Stock of HQLA23. The numerator of the LCR is the “stock of HQLA”.Under the standard, banks must hold a stock of unencumbered HQLA tocover the total net cash outflows (as defined below) over a 30-day periodunder the prescribed stress scenario.In order to qualify as “HQLA”, assets should be liquid in markets duringa time of stress and, ideally, be central bank eligible.The following sets out the characteristics that such assets shouldgenerally possess and the operational requirements that they shouldsatisfy.1. Characteristics of HQLA24. Assets are considered to be HQLA if they can be easily andimmediately converted into cash at little or no loss of value.The liquidity of an asset depends on the underlying stress scenario, thevolume to be monetised and the timeframe considered.Nevertheless, there are certain assets that are more likely to generatefunds without incurring large discounts in sale or repurchase agreement(repo) markets due to fire-sales even in times of stress.This section outlines the factors that influence whether or not the marketfor an asset can be relied upon to raise liquidity when considered in thecontext of possible stresses.These factors should assist supervisors in determining which assets,despite meeting the criteria from paragraphs 49 to 54, are not sufficientlyliquid in private markets to be included in the stock of HQLA. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44(i) Fundamental characteristics- Low risk: assets that are less risky tend to have higher liquidity. High credit standing of the issuer and a low degree of subordination increase an asset’s liquidity. Low duration, low legal risk, low inflation risk and denomination in a convertible currency with low foreign exchange risk all enhance an asset’s liquidity.- Ease and certainty of valuation: an asset’s liquidity increases if market participants are more likely to agree on its valuation. Assets with more standardised, homogenous and simple structures tend to be more fungible, promoting liquidity. The pricing formula of a high-quality liquid asset must be easy to calculate and not depend on strong assumptions. The inputs into the pricing formula must also be publicly available. In practice, this should rule out the inclusion of most structured or exotic products.- Low correlation with risky assets: the stock of HQLA should not be subject to wrong-way (highly correlated) risk. For example, assets issued by financial institutions are more likely to be illiquid in times of liquidity stress in the banking sector.- Listed on a developed and recognised exchange: being listed increases an asset’s transparency.(ii) Market-related characteristics- Active and sizable market: the asset should have active outright sale or repo markets at all times. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45 This means that:- There should be historical evidence of market breadth and market depth. This could be demonstrated by low bid-ask spreads, high trading volumes, and a large and diverse number of market participants. Diversity of market participants reduces market concentration and increases the reliability of the liquidity in the market.- There should be robust market infrastructure in place.- The presence of multiple committed market makers increases liquidity as quotes will most likely be available for buying or selling HQLA.- Low volatility: Assets whose prices remain relatively stable and are less prone to sharp price declines over time will have a lower probability of triggering forced sales to meet liquidity requirements. Volatility of traded prices and spreads are simple proxy measures of market volatility. There should be historical evidence of relative stability of market terms (eg prices and haircuts) and volumes during stressed periods.- Flight to quality: historically, the market has shown tendencies to move into these types of assets in a systemic crisis. The correlation between proxies of market liquidity and banking system stress is one simple measure that could be used.25. As outlined by these characteristics, the test of whether liquid assetsare of “high quality” is that, by way of sale or repo, their liquidity -generating capacity is assumed to remain intact even in periods of severeidiosyncratic and market stress. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46Lower quality assets typically fail to meet that test.An attempt by a bank to raise liquidity from lower quality assets underconditions of severe market stress would entail acceptance of a largefire-sale discount or haircut to compensate for high market risk.That may not only erode the market’s confidence in the bank, but wouldalso generate mark-to-market losses for banks holding similarinstruments and add to the pressure on their liquidity position, thusencouraging further fire sales and declines in prices and market liquidity.In these circumstances, private market liquidity for such instruments islikely to disappear quickly.26. HQLA (except Level 2B assets as defined below) should ideally beeligible at central banks for intraday liquidity needs and overnightliquidity facilities.In the past, central banks have provided a further backstop to the supplyof banking system liquidity under conditions of severe stress.Central bank eligibility should thus provide additional confidence thatbanks are holding assets that could be used in events of severe stresswithout damaging the broader financial system.That in turn would raise confidence in the safety and soundness ofliquidity risk management in the banking system.27. It should be noted however, that central bank eligibility does not byitself constitute the basis for the categorisation of an asset as HQLA.2. Operational requirements28. All assets in the stock of HQLA are subject to the followingoperational requirements.The purpose of the operational requirements is to recognise that not allassets outlined in paragraphs 49-54 that meet the asset class, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47risk-weighting and credit-rating criteria should be eligible for the stock asthere are other operational restrictions on the availability of HQLA thatcan prevent timely monetisation during a stress period.29. These operational requirements are designed to ensure that the stockof HQLA is managed in such a way that the bank can, and is able todemonstrate that it can, immediately use the stock of assets as a source ofcontingent funds that is available for the bank to convert into cashthrough outright sale or repo, to fill funding gaps between cash inflowsand outflows at any time during the 30-day stress period, with norestriction on the use of the liquidity generated.30. A bank should periodically monetise a representative proportion of theassets in the stock through repo or outright sale, in order to test its accessto the market, the effectiveness of its processes for monetisation, theavailability of the assets, and to minimise the risk of negative signallingduring a period of actual stress.31. All assets in the stock should be unencumbered.“Unencumbered” means free of legal, regulatory, contractual or otherrestrictions on the ability of the bank to liquidate, sell, transfer, or assignthe asset.An asset in the stock should not be pledged (either explicitly orimplicitly) to secure, collateralise or credit-enhance any transaction, norbe designated to cover operational costs (such as rents and salaries).Assets received in reverse repo and securities financing transactions thatare held at the bank, have not been rehypothecated, and are legally andcontractually available for the banks use can be considered as part of thestock of HQLA.In addition, assets which qualify for the stock of HQLA that have beenpre-positioned or deposited with, or pledged to, the central bank or apublic sector entity (PSE) but have not been used to generate liquiditymay be included in the stock. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 4832. A bank should exclude from the stock those assets that, althoughmeeting the definition of “unencumbered” specified in paragraph 31, thebank would not have the operational capability to monetise to meetoutflows during the stress period.Operational capability to monetise assets requires having procedures andappropriate systems in place, including providing the function identifiedin paragraph 33 with access to all necessary information to executemonetisation of any asset at any time.Monetisation of the asset must be executable, from an operationalperspective, in the standard settlement period for the asset class in therelevant jurisdiction.33. The stock should be under the control of the function charged withmanaging the liquidity of the bank (eg the treasurer), meaning thefunction has the continuous authority, and legal and operationalcapability, to monetise any asset in the stock.Control must be evidenced either by maintaining assets in a separate poolmanaged by the function with the sole intent for use as a source ofcontingent funds, or by demonstrating that the function can monetise theasset at any point in the 30-day stress period and that the proceeds ofdoing so are available to the function throughout the 30-day stress periodwithout directly conflicting with a stated business or risk managementstrategy.For example, an asset should not be included in the stock if the sale ofthat asset, without replacement throughout the 30-day period, wouldremove a hedge that would create an open risk position in excess ofinternal limits.34. A bank is permitted to hedge the market risk associated withownership of the stock of HQLA and still include the assets in the stock.If it chooses to hedge the market risk, the bank should take into account(in the market value applied to each asset) the cash outflow that would _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49arise if the hedge were to be closed out early (in the event of the assetbeing sold).35. In accordance with Principle 9 of the Sound Principles a bank “shouldmonitor the legal entity and physical location where collateral is held andhow it may be mobilised in a timely manner”.Specifically, it should have a policy in place that identifies legal entities,geographical locations, currencies and specific custodial or bankaccounts where HQLA are held.In addition, the bank should determine whether any such assets shouldbe excluded for operational reasons and therefore, have the ability todetermine the composition of its stock on a daily basis.36. As noted in paragraphs 171 and 172, qualifying HQLA that are held tomeet statutory liquidity requirements at the legal entity or sub -consolidated level (where applicable) may only be included in the stock atthe consolidated level to the extent that the related risks (as measured bythe legal entity’s or sub-consolidated group’s net cash outflows in theLCR) are also reflected in the consolidated LCR.Any surplus of HQLA held at the legal entity can only be included in theconsolidated stock if those assets would also be freely available to theconsolidated (parent) entity in times of stress.37. In assessing whether assets are freely transferable for regulatorypurposes, banks should be aware that assets may not be freely available tothe consolidated entity due to regulatory, legal, tax, accounting or otherimpediments.Assets held in legal entities without market access should only beincluded to the extent that they can be freely transferred to other entitiesthat could monetise the assets.38. In certain jurisdictions, large, deep and active repo markets do notexist for eligible asset classes, and therefore such assets are likely to bemonetised through outright sale. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50In these circumstances, a bank should exclude from the stock of HQLAthose assets where there are impediments to sale, such as large fire-salediscounts which would cause it to breach minimum solvencyequirements, or requirements to hold such assets, including, but notlimited to, statutory minimum inventory requirements for marketmaking.39. Banks should not include in the stock of HQLA any assets, or liquiditygenerated from assets, they have received under right of rehypothecation,if the beneficial owner has the contractual right to withdraw those assetsduring the 30-day stress period.40. Assets received as collateral for derivatives transactions that are notsegregated and are legally able to be rehypothecated may be included inthe stock of HQLA provided that the bank records an appropriate outflowfor the associated risks as set out in paragraph 116.41. As stated in Principle 8 of the Sound Principles, a bank should activelymanage its intraday liquidity positions and risks to meet payment andsettlement obligations on a timely basis under both normal and stressedconditions and thus contribute to the smooth functioning of payment andsettlement systems.Banks and regulators should be aware that the LCR stress scenario doesnot cover expected or unexpected intraday liquidity needs.42. While the LCR is expected to be met and reported in a single currency,banks are expected to be able to meet their liquidity needs in eachcurrency and maintain HQLA consistent with the distribution of theirliquidity needs by currency.The bank should be able to use the stock to generate liquidity in thecurrency and jurisdiction in which the net cash outflows arise.As such, the LCR by currency is expected to be monitored and reported toallow the bank and its supervisor to track any potential currencymismatch issues that could arise, as outlined in Part 2. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51In managing foreign exchange liquidity risk, the bank should takeinto account the risk that its ability to swap currencies and access therelevant foreign exchange markets may erode rapidly under stressedconditions.It should be aware that sudden, adverse exchange rate movements couldsharply widen existing mismatched positions and alter the effectivenessof any foreign exchange hedges in place.43. In order to mitigate cliff effects that could arise, if an eligible liquidasset became ineligible (eg due to rating downgrade), a bank is permittedto keep such assets in its stock of liquid assets for an additional 30calendar days.This would allow the bank additional time to adjust its stock as needed orreplace the asset.3. Diversification of the stock of HQLA44. The stock of HQLA should be well diversified within the asset classesthemselves (except for sovereign debt of the bank’s home jurisdiction orfrom the jurisdiction in which the bank operates; central bank reserves;central bank debt securities; and cash).Although some asset classes are more likely to remain liquid irrespectiveof circumstances, ex-ante it is not possible to know with certainty whichspecific assets within each asset class might be subject to shocks ex-post.Banks should therefore have policies and limits in place in order toavoid concentration with respect to asset types, issue and issuer types,and currency (consistent with the distribution of net cash outflows bycurrency) within asset classes.4. Definition of HQLA45. The stock of HQLA should comprise assets with the characteristicsoutlined in paragraphs 24-27. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52This section describes the type of assets that meet these characteristicsand can therefore be included in the stock.46. There are two categories of assets that can be included in the stock.Assets to be included in each category are those that the bank is holdingon the first day of the stress period, irrespective of their residual maturity.“Level 1” assets can be included without limit, while “Level 2” assets canonly comprise up to 40% of the stock.47. Supervisors may also choose to include within Level 2 an additionalclass of assets (Level 2B assets - see paragraph 53 below).If included, these assets should comprise no more than 15% of the totalstock of HQLA.They must also be included within the overall 40% cap on Level 2 assets.48. The 40% cap on Level 2 assets and the 15% cap on Level 2B assetsshould be determined after the application of required haircuts, and aftertaking into account the unwind of short-term securities financingtransactions and collateral swap transactions maturing within 30 calendardays that involve the exchange of HQLA.In this context, short term transactions are transactions with a maturitydate up to and including 30 calendar days.The details of the calculation methodology are provided in Annex 1.(i) Level 1 assets49. Level 1 assets can comprise an unlimited share of the pool and are notsubject to a haircut under the LCR.However, national supervisors may wish to require haircuts for Level 1securities based on, among other things, their duration, credit andliquidity risk, and typical repo haircuts. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 5350. Level 1 assets are limited to:(a) Coins and banknotes;(b) Central bank reserves (including required reserves), to the extent thatthe central bank policies allow them to be drawn down in times of stress;(c) Marketable securities representing claims on or guaranteed bysovereigns, central banks, PSEs, the Bank for International Settlements,the International Monetary Fund, the European Central Bank andEuropean Community, or multilateral development banks, and satisfyingall of the following conditions:- assigned a 0% risk-weight under the Basel II Standardised Approach for credit risk;- traded in large, deep and active repo or cash markets characterised by a low level of concentration;- have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions; and- not an obligation of a financial institution or any of its affiliated entities.(d) where the sovereign has a non-0% risk weight, sovereign or centralbank debt securities issued in domestic currencies by the sovereign orcentral bank in the country in which the liquidity risk is being taken or inthe bank’s home country; and(e) where the sovereign has a non-0% risk weight, domestic sovereign orcentral bank debt securities issued in foreign currencies are eligible up tothe amount of the bank’s stressed net cash outflows in that specificforeign currency stemming from the bank’s operations in the jurisdictionwhere the bank’s liquidity risk is being taken. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54(ii) Level 2 assets51. Level 2 assets (comprising Level 2A assets and any Level 2B assetspermitted by the supervisor) can be included in the stock of HQLA,subject to the requirement that they comprise no more than 40% of theoverall stock after haircuts have been applied.52. A 15% haircut is applied to the current market value of each Level 2Aasset held in the stock of HQLA.Level 2A assets are limited to the following:(a) Marketable securities representing claims on or guaranteed bysovereigns, central banks, PSEs or multilateral development banks thatsatisfy all of the following conditions:- assigned a 20% risk weight under the Basel II Standardised Approach for credit risk;- traded in large, deep and active repo or cash markets characterised by a low level of concentration;- have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (ie maximum decline of price not exceeding 10% or increase in haircut not exceeding 10 percentage points over a 30-day period during a relevant period of significant liquidity stress); and- not an obligation of a financial institution or any of its affiliated entities.(b) Corporate debt securities (including commercial paper) and coveredbonds that satisfy all of the following conditions:- in the case of corporate debt securities: not issued by a financial institution or any of its affiliated entities; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. P a g e | 55- in the case of covered bonds: not issued by the bank itself or any of its affiliated entities;- either (i) have a long-term credit rating from a recognised external credit assessment institution (ECAI) of at least AA-21 or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or (ii) do not have a credit assessment by a recognised ECAI but are internally rated as having a probability of default (PD) corresponding to a credit rating of at least AA-;- traded in large, deep and active repo or cash markets characterised by a low level of concentration; and- have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions: ie maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 10%.(iii) Level 2B assets53. Certain additional assets (Level 2B assets) may be included in Level 2at the discretion of national authorities.In choosing to include these assets in Level 2 for the purpose of the LCR,supervisors are expected to ensure that such assets fully comply with thequalifying criteria.Supervisors are also expected to ensure that banks have appropriatesystems and measures to monitor and control the potential risks (egcredit and market risks) that banks could be exposed to in holding theseassets.54. A larger haircut is applied to the current market value of each Level 2Basset held in the stock of HQLA. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. P a g e | 56Level 2B assets are limited to the following:(a) Residential mortgage backed securities (RMBS) that satisfy all of thefollowing conditions may be included in Level 2B, subject to a 25%haircut:- not issued by, and the underlying assets have not been originated by the bank itself or any of its affiliated entities;- have a long-term credit rating from a recognised ECAI of AA or higher, or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating;- traded in large, deep and active repo or cash markets characterised by a low level of concentration;- have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, ie a maximum decline of price not exceeding 20% or increase in haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress;- the underlying asset pool is restricted to residential mortgages and cannot contain structured products;- the underlying mortgages are “full recourse’’ loans (ie 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- 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 allof the following conditions may be included in Level 2B, subject to a 50%haircut:- not issued by a financial institution or any of its affiliated entities; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  57. 57. P a g e | 57- either- (i) have a long-term credit rating from a recognised ECAI between A+ and BBB- or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or- (ii) do not have a credit assessment by a recognised ECAI and are internally rated as having a PD corresponding to a credit rating of between A+ and BBB-;- traded in large, deep and active repo or cash markets characterised by a low level of concentration; and- have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, ie a maximum decline of price not exceeding 20% or increase in haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress.(c) Common equity shares that satisfy all of the following conditions maybe included in Level 2B, subject to a 50% haircut:- not issued by a financial institution or any of its affiliated entities;- exchange traded and centrally cleared;- 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;- 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;- traded in large, deep and active repo or cash markets characterised by a low level of concentration; and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  58. 58. P a g e | 58- have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, ie a maximum decline of share price not exceeding 40% or increase in haircut not exceeding 40 percentage points over a 30-day period during a relevant period of significant liquidity.(iv) Treatment for jurisdictions with insufficient HQLA(a) Assessment of eligibility for alternative liquidity approaches(ALA)55. Some jurisdictions may have an insufficient supply of Level 1 assets(or both Level 1 and Level 2 assets) in their domestic currency to meet theaggregate demand of banks with significant exposures in this currency.To address this situation, the Committee has developed alternativetreatments for holdings in the stock of HQLA, which are expected toapply to a limited number of currencies and jurisdictions.Eligibility for such alternative treatment will be judged on the basis of thequalifying criteria set out in Annex 2 and will be determined through anindependent peer review process overseen by the Committee.The purpose of this process is to ensure that the alternative treatments areonly used when there is a true shortfall in HQLA in the domestic currencyrelative to the needs in that currency.56. To qualify for the alternative treatment, a jurisdiction should be ableto demonstrate that:- there is an insufficient supply of HQLA in its domestic currency, taking into account all relevant factors affecting the supply of, and demand for, such HQLA;- the insufficiency is caused by long-term structural constraints that cannot be resolved within the medium term; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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