BASEL III FRAMEWORK ON LIQUIDITY STANDARDS- LIQUIDITY COVERAGE RATIO
(Appendix to Sec. 145 on Liquidity Coverage Ratio [LCR], LCR Disclosure Requirements, and Sanctions)
Introduction
Part I. Liquidity Coverage Ratio (LCR) Framework
I. Definition of terms
For the purpose of the LCR standard, the following terms and phrases shall be understood as follows:
1. Beneficiary – refers to a legal entity that receives, or may become eligible to receive, benefits under will, insurance policy, retirement plan, annuity, trust, or other contract.
2. Cash management operation – refers to the provision of products and services intended to manage customers’ cash flows, assets and liabilities, and for the conduct of financial transactions necessary to the customer’s ongoing operations.
3. Clearing operation – refers to a service arrangement that enables customers to transfer funds (or securities) indirectly through direct participants in domestic settlement systems to final recipients.
4. Committed business facilities – are off- balance sheet facilities or funding commitments issued by covered banks to clients under explicit contractual agreements or obligations to extend funds at a future date that are contractually irrevocable (i.e., “committed”) or conditionally revocable. The terms governing the facility prohibit the covered bank from refusing to extend credit or funding to the counterparty, except where certain conditions specified by the terms of the facility- other than customary notice, administrative conditions, or changes in financial condition of the client-have been met.
5. Correspondent banking – refers to arrangements under which one (1) covered bank (correspondent) holds deposits owned by other covered banks (respondents) and provides payment and other services in order to settle foreign currency transactions (e.g., so-called nostro and vostro accounts used to settle transactions in a currency other than the domestic currency of the respondent covered bank for the provision of clearing and settlement of payments).
6. Current market value – refers to the value of liquid assets included in the stock of HQLA, measured in accordance with the existing guidelines on mark-to-market valuation under Appendix 28.
7. Custody operation – refers to the provision of safekeeping, reporting, processing of assets or the facilitation of the operational and administrative elements of related activities on behalf of customers in the process of their transacting and retaining financial assets.
8. Downgrade triggers – pertain to clauses or provisions in contracts governing derivatives and other transactions that require the posting of additional collateral, drawdown of contingent facilities, or early repayment of existing liabilities upon the covered bank’s downgrade by a recognized credit rating organization.
9. Financial corporates – refer to corporations, whether resident or non- resident, that are primarily engaged in financial intermediation or in auxiliary financial activities that are closely related to financial intermediation. These include non-bank financial institutions with quasi- banking functions, securities firms, and insurance companies, among others.
10. Financial stress – pertains to a condition where a covered bank cannot meet or has difficulty paying off its financial obligations as brought about by firm-specific and/or market-wide stress events. In such financial circumstance, the covered bank may be having difficulty accessing credit and financing facilities, and has no reasonable alternative other than to monetize its HQLA to the extent necessary to meet obligations such as but not limited to:
– Servicing of deposit withdrawals;
– Posting of additional collateral requirements;
– Servicing of unscheduled drawdowns on committed but unused credit lines and business facilities that are extended to clients;
– In the interest of mitigating reputational risk, buying back of debt, extending of funds to honor non- contractual obligations, or accommodation of any unexpected liquidity demand from counterparty.
11. Haircut – refers to a percentage by which the market value of an asset is reduced. A haircut is applied by a collateral taker as a risk control measure to protect itself from losses resulting from decline in the market value of an asset in the event that it needs to liquidate said collateral.
12. High-quality liquid asset (HQLA) – refers to an asset that can be converted easily and immediately into cash at little or no loss of value in private markets to meet the covered banks’s liquidity needs during times of stress. To qualify as HQLA, the liquid asset should possess the asset and market liquidity characteristics, and should satisfy the operational requirements for monetization prescribed under the LCR standard. HQLAs shall be categorized as either Level 1 or Level 2 assets. The stock of HQLA makes up the numerator of the LCR.
13. Inflow/Outflow rates – pertain to the various percentages that are designed to reflect the observed behavior and characteristics of different assets, funding sources, obligations, and commitments during periods of liquidity stress. Inflow rates provide the assumption at which assets or contractual receivables are expected to flow in during times of stress. Outflow rates assume the level at which funding sources, obligations, and commitments are expected to run off or be drawn down during stress periods.
14. LCR measurement date – refers to end-of-moth/quarter date which serves as the reference date for the calculation of the LCR.
15. LCR period – refers to the thirty (30)- calendar day period following the LCR measurement date, which serves as the standard horizon for HQLA availability and for total net cash outflows calculation.
16. Liquidity metrics – refer to a set of market-based indicators which enable assessment of the fundamental attributes of an asset that are generally found to be determinants of liquidity (i.e., measure of asset characteristics), and the essential aspects of the broader market structure within which the asset is traded (i.e., measure of market liquidity). These criteria provide guidance on which specific asset to qualify as liquid and readily marketable within an asset class.
17. Multilateral organizations – pertain to the Bank of International Settlements, the International Monetary Fund, the European Central Bank and European Community and the multilateral development banks (MDBs).
18. Non-financial corporates – refer to corporations, whether resident or non- resident, whose principal activity is the production of goods or non-financial services.
19. Non-HQLAs – pertain to debt securities and equity shares that are neither qualified as Level 1 nor Level 2 assets.
20. Operational deposit – refers to a deposit account maintained by a wholesale client for the primary purpose of obtaining a specific operational service from the covered bank as an independent third party intermediary, agent or administrator.
21. Operational service – refers to any of the following contractual services performed by the covered bank related to clearing, cash management operations, and custody (but excluding correspondent banking or brokering activities), which effectively facilitate the clients’ access and ability to use payment and settlement systems and otherwise make payments:
Clearing
a. Overnight financing and maintenance of post-settlement balances;
b. Transmission, reconciliation, and confirmation of payment orders;
c. Intraday overdraft;
d. Determination of intraday and final settlement positions;
Cash Management
e. Payment remittance;
f. Collection and aggregation of funds;
g. Payroll administration and control over disbursement of funds;
h. Administration of payments and cash flows related to the safekeeping of investment assets, not including the purchase or sale of assets;
Custody
i. Settlement of securities transactions;
j. Client subscriptions and redemptions;
k. Processing of collateral;
l. Transfer of contractual payments, including collection and payment of dividends and other income from financial assets under custodianship; and
m. Escrow, funds transfer, stock transfer, and agency services, including payment and settlement services (excluding correspondent banking), payment of fees, taxes, and other expenses
22. Other contingent funding obligations – refer to either contractual or non-contractual contingent funding obligations (excluding lending commitments) that are contingent upon a credit or other event that is not always related to the liquidity events simulated in the LCR stress scenario, but may nevertheless have the potential, especially out of reputation risk considerations, to cause significant liquidity drains to the covered bank in times of stress. Non-contractual contingent funding obligations are funding liabilities that are:
– associated with the issuance or sponsorship of products (including structured financial instruments) or provision of services that may require the funding support or extension of funds by the covered bank in times of stress; or
– embedded in financial products and instruments sold, sponsored, marketed or originated by the covered bank that might prompt the covered bank to repurchase said products and instruments from a customer in order to satisfy or manage the customer’s reasonable expectations about the liquidity and marketability of the product or instrument. Failure to do so would likely cause material reputational damage to the covered bank or otherwise impair its ongoing viability.
23. Philippine National Government (NG) – refers to the Philippine NG and its agencies such as departments, bureaus, offices, and instrumentalities, but excluding local government units (LGUs) and government-owned and controlled corporations (GOCCs).
24. Public Sector entities (PSE) – refer to entities which are regarded as such by a recognized banking supervisory authority in the country in which they are incorporated.
25. Rehypothecation and/or re-use of collateral – Rehypothecation refers to the right of financial intermediaries to sell, pledge, invest, or perform transactions with the client assets they hold, thereby allowing them to obtain funding using said client collateral. Re-use of collateral, on the other hand, usually covers a broader context where securities delivered in one transaction are used to collateralize another transaction, including own trades, borrowings or short sellings. The terms rehypothecation and re-use of securities are used interchangeably in this standard.
26. Retail deposits – refer to deposit liabilities raised by the covered bank from individual clients including sole proprietorships and partnerships, and those classified as micro and small enterprises (hereinafter called retail clients).
27. Securities financing transactions (SFTs) – these involve repurchase (repos), and reverse repurchase (reverse repos) agreements, securities lending and borrowing, or margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements.
28. Secured funding – refers to any liability and general obligation of the covered bank arising from securities transaction that is covered by collateral in the form of duly constituted mortgage, pledge, or lien on specifically designated asset owned by the covered bank or by its related party that gives the counterparty priority over said asset in case of bankruptcy, insolvency, liquidation, or resolution. This consists of repos, collateral swaps, collateral lending to customers to cover short positions and other similar secured funding arrangements. Forward repos and forward collateral swaps that start previous to and mature within the LCR horizon are included in this category.
29. Secured lending – refers to any securities transaction that is subject to a legally binding agreement that gives rise to a cash obligation of a counterparty to a covered bank that is secured under applicable law by a lien on specifically designated asset owned by the counterparty or by its related party, which gives the covered bank, as holder of the lien, priority over said asset in the event the counterparty enters into bankruptcy, insolvency, liquidation, receivership, resolution, or similar proceeding. This will include reverse repos, margin loans, and securities borrowing transactions. Forward reverse repos and forward collateral swaps that start previous to and mature within the LCR horizon are included in this category.
30. Special purpose entity (SPE) – as defined in the Basel II Framework, SPE is a corporation, trust, or other entity organized for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.
31. Total expected cash inflows – pertain to the various types of contractual receivables which outstanding balances as of the LCR measurement date are multiplied by relevant inflow rates. The total inflow amounts are capped at seventy-five percent (75%) of aggregated total expected cash outflows.
32. Total expected cash outflows – pertain to the various on- and off-balance sheet funding sources and commitments which outstanding balances as of the LCR measurement date are multiplied by relevant outflow rates. The outflow amounts are aggregated to determine the total expected cash outflows.
33. Total net cash outflows – pertains to the sum of the total expected outflow amounts less the sum of the total expected inflow amounts, with the inflow amounts limited to seventy-five percent (75%) of outflow amounts. The calculated amount makes up the denominator of the LCR, thereby establishing the amount of HQLA that a covered bank would be required to hold.
34. Trust and other fiduciary – refers to a legal entity or to a specifically designated business unit that is authorized to administer, hold or manage assets for the use or in behalf of a third party. These shall include trust entities as defined under Sec. 403, mutual funds, exchange-traded funds and other collective investment vehicles.
35. Unencumbered – means free of legal, regulatory, tax, accounting, contractual or other impediments or practical restrictions on the ability of the covered bank to liquidate, sell, transfer, or assign the asset. Liquid assets may also be considered unencumbered if the potential credit or funding for which the assets are pre-positioned, deposited with or pledged to the Bangko Sentral, to a clearing and settlement system, or to another financial entity is not currently extended to the covered bank or to any of its related parties2.
36. Unsecured wholesale funding – refers to liabilities and general obligations of the covered bank, other than deposits, to wholesale clients that are not collateralized by legal rights to specifically designated assets owned by the covered bank or by its related party. This includes deposit substitutes, unsecured loans and advances, unsecured notes, bonds and other debt securities, and other unsecured funding obligations.
37. Wholesale deposits – refer to deposit liabilities raised by the covered bank from legal entities (excluding sole proprietorships and partnerships and those entities classified as micro and small enterprises) (hereinafter called wholesale clients).
II. LCR Calculation
A. General Requirements
1. The LCR is designed to promote the short-term resilience of the liquidity risk profile of a covered bank. To meet funding obligations and draws on contingent liabilities over the next thirty (30) calendar days, the LCR requires the covered bank to hold a stock of unencumbered HQLA equal to or greater than total net cash outflows. Hence, the LCR is calculated as the:
| LCR | = | Stock of HQLA |
| Total net cash outflows over the next 30 calendar days |
2. The standard requires that, under normal situation, the value of the liquidity ratio be no lower than 100%3 on a daily basis because the stock of the unencumbered HQLA is intended to serve as a defense against potential onset of liquidity stress.
3. When calculating the LCR, the covered bank should maintain a consistent categorization of a given entity/counterparty across all HQLA, outflow and inflow categories.
4. To facilitate LCR monitoring and ongoing compliance, the covered bank must maintain a reliable system that has the ability to calculate liquidity positions on a day-to-day basis, regardless of the frequency of mandatory reporting to the Bangko Sentral.
It should capture, at a minimum, specific information related to the covered bank’s available unencumbered assets and collaterals, cash flows, and certain market and liquidity indicators prescribed in the standard. It must have the ability to deliver granular and time- sensitive information particularly during periods of stress.
B. Stock of HQLA
(1) HQLA eligibility criteria
5. Asset and market liquidity characteristics. To qualify as HQLA, assets should have a high potential to generate funds easily and immediately through outright sale or secured borrowing, during a stress scenario without incurring large discounts due to fire-sales. These assets must be liquid and readily-marketable.
6. The liquidity and ready-marketability of an asset is influenced both by its own specific features and by the characteristics of the broader market structure within which it is traded.
7. To assess the relative liquidity and ready-marketability of assets, particularly those that are classified as Level 2 under this Framework, liquidity metrics such as those set out in Annex A may be used. The metrics, including the analytical tools, guidelines and methodologies, data used, and the threshold levels shall be developed in coordination with the banking industry. These shall be subject to review and updating at least annually to reflect prevailing market liquidity conditions.
8. Operational requirements for monetization. Not all assets considered to be liquid and readily-marketable are immediately eligible for the stock as there are other operational restrictions on the availability of HQLA that can prevent timely monetization during a stress period. The immediate availability of the liquid assets for monetization in times of stress as well as the unrestricted use of the funds generated from outright sale or secured borrowing of said assets must also be established in order for the liquid assets to be appropriately considered as HQLA.
9. The following operational requirements are designed to ensure that the stock of HQLA is managed in such a way that the covered bank can, and is able to demonstrate that it can, immediately use the stock of assets as a source of contingent funds that is available for the covered bank to convert into cash through outright sale or repo, to fill funding gaps between cash inflows and outflows at any time during the thirty (30)-day stress period, with no restriction on the use of the liquidity generated:
a. Encumbrance and transferability of the liquid assets
i. The liquid asset must be unencumbered. It should neither be pledged, explicitly or implicitly, to secure, collateralize, or credit-enhance any transaction4.
ii. No operational constraint that may impede the monetization of the liquid asset must be attached to it, such as, but not limited to:
(1) Whether the monetization of the asset would directly conflict with another business or risk management strategy of the covered bank. For example, an asset should not be included in the stock if the sale of that asset, without replacement throughout the thirty (30)-day period, would remove a hedge that would create an open risk position to the covered bank in excess of internal limits;
(2) Potential differences in financial market conventions in other jurisdictions, where applicable (e.g., settlement period, processing time, etc.) that affect timely monetization of the asset; and
(3) Whether the asset is internally designated to cover operational costs (e.g., rents, salaries, facility maintenance, etc.).
iii. The liquid asset received, such as those in SFTs or as collateral for derivatives transaction that is not segregated, must not have been rehypothecated and is legally and contractually available for the covered bank’s use.
iv. Assets or liquidity generated from said assets, which have been received under right of rehypothecation or under brokering agreements, shall be excluded from the covered bank’s stock of HQLA if the beneficial owner has the contractual right to withdraw those assets during the LCR period.
b. Capability to monetize the HQLA
v. The covered bank must implement policies, procedures and appropriate systems that establish the proper authority and operational capacity of a liquidity management function (e.g., the treasurer) to monetize any HQLA at any point in the thirty (30)-day stress period. To ensure effective monetization from an operational perspective, said function must have:
(1) Continuous authority to invoke the contingency funding plan of the covered bank when deemed necessary;
(2) Access to all necessary information to execute monetization of any HQLA;
(3) Control to any HQLA at any time. Control must be evidenced either by maintaining the assets in a separate pool managed by the function with the sole intent for use as a source of contingent funds, or by demonstrating that the function can monetize the asset at any point in the thirty (30)-day stress period; and
(4) Access and control over the monetization proceeds such that the funds will be available to the function throughout the thirty (30)-day stress period without directly conflicting with another business or risk management strategy of the covered bank.
vi. The covered bank, as led by the liquidity management function, must demonstrate its operational capability to monetize the HQLA, through repo or outright sale to the market, by:
(1) Implementing policies that set out the approach to periodic monetization of its HQLA, which are consistent with existing regulatory standards and accounting principles;
(2) Establishing and maintaining appropriate procedures and systems to monetize any of the covered bank’s HQLA at any time in accordance with the relevant standard settlement periods and procedures for the asset class; and
(3) Periodically monetizing a sample of HQLA in order for the covered bank to test its access to the market, the effectiveness of its processes for monetization, the availability of the assets, and to minimize the risk of negative signaling during a period of actual stress.
Such periodic monetization may be carried out through the ordinary business activities of the covered bank or be done without reference to its day-to-day liquidity needs depending on the liquidity profile exhibited by the HQLA.
The asset must be monetized in varying amounts, at varying durations in case of repos, and in various related trading or financing markets in which the covered bank has access to. The cumulative effect of said periodic monetization over any twelve (12) month period must reasonably reflect a representative proportion of the minimum required HQLA, including with respect to asset type, maturity, and counterparty characteristics.
vii. The covered bank must implement policies and procedures and maintain systems that monitor the current market value, as well as the composition of the stock of HQLA as to:
(1) Identification by legal entity, location, currency, custodial account, or other relevant identifying factors;
(2) Appropriate diversification within asset classes (except for cash, government securities, and accounts with the Bangko Sentral) by asset type, counterparty, issuer, currency, borrowing capacity, or other factors associated with the liquidity risk of the assets; and
(3) Continuous qualification as eligible HQLA.
(2) Calculation and composition of HQLA
10. Two (2) categories of eligible assets5, which must be held by the covered bank on the first day of the thirty (30)-day stress test period irrespective of residual maturity, shall be included in the stock of HQLA. The highest quality liquid assets, the Level 1 assets, shall be included without limit, while other HQLA, the Level 2 assets, can only comprise up to forty percent (40%) of the stock.
11. The calculation of the stock of HQLA, specifically the forty percent (40%) cap on Level 2 assets, must take into account the required haircuts, as applicable, and the assumed unwinding of all short-term SFTs and collateral swap transactions maturing within thirty (30) calendar days that involve the exchange of HQLA. The details of the adjustment on calculation of the stock of HQLA are provided in Annex B.
12. The specific individual assets within an asset class that would be considered as liquid and readily-marketable shall be determined in accordance with the liquidity metrics. However, the designation of these specific individual assets as HQLA is not fixed and absolute as the liquidity characteristics and/or the liquidity derived from these assets that qualify them under this criterion may change over time.
13. If a liquid asset will no longer qualify as HQLA during the immediate LCR period, the covered bank shall be allowed to keep such liquid asset as HQLA during the said LCR period. This would give the covered bank additional time to adjust its stock of HQLA as needed or to replace the liquid asset.
14. For purpose of LCR, assets included in the stock of HQLA should be measured at its current market value6. However, in case the covered bank hedges the market risk associated with the eligible HQLA, the current market value of the HQLA must be reduced by the outflow amount that would arise if the hedge were to be closed out early (in the event of the asset being sold).
15. For purpose of computing the consolidated LCR, the qualifying HQLA that are held at the branch/es abroad of domestic covered banks or subsidiary level (where applicable) shall be counted towards the stock of HQLA in an amount up to the total net cash outflows of said branch or subsidiary that are included in the consolidated LCR: Provided, That the HQLA are freely available and transferrable (i.e., without any regulatory, legal, tax, accounting or other impediment) to the parent covered bank for monetization.
(a) Level 1 Assets
16. Level 1 assets shall not be subject to any haircut under the LCR. These are not limited to the following asset classes:
a. Cash on hand;
b. Covered bank reserves in the Bangko Sentral;
c. Overnight and term deposits7 with the Bangko Sentral, including reserve repos where the Bangko Sentral is the counterparty; and
d. Eligible securities representing claims on or guaranteed8 by –
i. The Philippine National Government (NG) and the Bangko Sentral9; or
ii. sovereigns, central banks, or PSEs of foreign countries, or by multilateral organizations, that are assigned a 0% risk weight under the Basel II Standardized Approach for credit risk, and are not an obligation by a covered bank or any of a covered bank’s financial allied undertakings10.
(b) Level 2 Assets
17. Specific haircuts shall be applied to each Level 2 asset held in the stock. Level 2 assets are limited to the following asset classes:
| Level 2 Asset | Haircut |
| a. Eligible securities representing claims on or guaranteed by LGUs, GOCCs, by sovereigns, central banks, or PSEs of foreign countries, or by MDBs, that are assigned with the following risk weight under the Basel II Standardized Approach for credit risk, and are not an obligation by a covered bank or any of a covered bank’s financial allied undertakings: | |
| i. Twenty percent (20%) | 15% |
| ii. Fifty percent (50%) | 50% |
| b. Eligible corporate debt securities (including commercial papers)11 that are assigned with the following long-term credit rating12 by a third party credit assessment agency recognized by the Bangko Sentral13, and are not issued by a covered bank or any of a covered bank’s financial allied undertakings: | |
| i. At least AA- or its equivalent | 15% |
| ii. Between A+ and BBB- or their equivalent | 50% |
| c. Eligible common equity shares that are included in the main index of an organized exchange, and are not issued by a covered bank or any of a covered bank’s financial allied undertakings. | 50% |
Further, the Level 2 assets shall meet the metrics set out in Annex A-1, except for securities representing claims on or guaranteed by sovereigns, central covered banks and MDBs.
C. Total Net Cash Outflows
18. The total net cash outflows, which should include interests and installments that are expected to be received and paid during the LCR period, are calculated as follows:
| Total net cash outflows over the next thirty (30) calendar days = Total expected cash outflows – Min {total expected cash inflows; seventy-five percent (75%) of the total expected cash outflows} |
19. The covered bank is not allowed to double count items in the calculation of the LCR. If a liquid asset is included as part of the stock of HQLA (which is the numerator), the cash inflows associated with that liquid asset should no longer count as part of the total expected cash inflows (which is part of the denominator).
20. Where there is potential that a liability or obligation could be counted in multiple outflow categories (e.g., committed business facilities granted to cover debt maturing within the thirty (30)-calendar day period), only such liability or obligation that will yield the maximum amount of expected cash outflow must be included in the calculation of total expected cash outflows, except when a specific outflow treatment is clearly prescribed herein.
21. Cash flows arising from purchase/ sale of non-HQLA that are executed but not yet settled at the LCR measurement date shall count towards other cash outflows/ inflows. Outflows and inflows of HQLA- type assets that are or will be excluded from the covered bank’s stock of HQLA due to operational requirements are treated like outflows or inflows of non-HQLA.
22. In calculating cash outflows and inflows, if considered to mature within the LCR period, the covered bank shall make the most conservative assumptions for determining the maturity or transaction date for an instrument or transaction:
a. In general, the maturity of an instrument or obligation that would result in an outflow amount must be assumed to occur on the earliest possible contractual maturity date or the earliest possible date the obligation could be fulfilled; while the maturity of an instrument or transaction that would result in an inflow amount must be assumed to occur on the latest possible contractual maturity date or the latest possible date the transaction could occur;
b. With respect to any option that would modify the maturity date, either explicit or embedded in the instrument or transaction, the covered bank shall assume that the option would be exercised at the earliest possible date in case of an outflow, and at the latest possible date in case of an inflow. In the event of an actual financial stress, however, the covered bank shall be allowed not to exercise the option and to treat the original maturity date of the instrument or transaction as the maturity for purpose of computing the LCR: Provided, That the decision not to exercise the option would not subject the covered bank to any legal or reputational risk;
c. If an option to adjust the maturity date is subject to a notice period, the covered bank must determine, for cash outflows, the earliest possible contractual maturity date regardless of the notice period; and for cash inflows, the latest possible contractual maturity date based on the borrower using the entire notice period;
d. In the absence of a specific maturity date, i.e., there is no defined maturity or is an open maturity, the covered bank must consider the instrument or transaction to mature within the LCR period for cash outflows calculation; and after the LCR period for cash inflows calculation.
(3) Cash Outflows
23. When the covered bank, at LCR measurement date and in accordance with trade rules or market conventions, has specifically pre-positioned or deposited cash or any asset with a clearing and settlement system or with another financial institution to cover an obligation or settle a transaction that is set to mature within the LCR period, the cash outflow related to the obligation or transaction shall be excluded from cash outflow calculation: Provided, however, That the cash or any asset pre- positioned or deposited is neither treated as cash inflow nor counted in the stock of HQLA.
24. Funds subject to special arrangements whereby cash balances are cleared and transferred into a main account, other than those maintained within the covered bank, at the end of each day or within the LCR period (e.g., the Treasury Single Account System) shall automatically receive a 100% outflow rate.
(a) Deposits
25. Regardless of maturity, all deposits, unless otherwise excluded under the cases specified in the succeeding paragraph, shall be included in the calculation of total expected cash outflows. These accounts are categorized either as retail or wholesale, with wholesale accounts classified as either operational or non-operational, with different outflow rates assigned accordingly. To capture the relative volatility of a deposit account during a period of stress, the outflow rates for retail deposits are calibrated on a per account basis. Wholesale operational and non-operational deposits, on the other hand, receive outflow rates that are based on the established operational relationship of the depositor with the covered bank.
26. A deposit account with residual maturity or withdrawal notice period of greater than thirty (30) calendar days may be excluded from the calculation of the total expected cash outflows under the following circumstances:
a. The deposit is contractually pledged to the covered bank as collateral to secure a credit facility or loan, where:
i. the loan will not mature or be settled during the LCR period; and
ii. the pledge or hold-out arrangement is subject to a legally enforceable contract disallowing withdrawal of the deposit before the loan is fully settled or repaid.
Said exclusion, however, does not apply to a deposit which is pledged against an undrawn facility, in which case the higher expected cash outflow between the undrawn facility or the pledged deposit shall be used; or
b. The depositor has no contractual or legal discretion to withdraw said deposit or pre- terminate the account within the thirty (30)-day horizon of the LCR (e.g., negotiable certificates of time deposits).
(i) Retail deposits: 5%, 10% or 15% run-off rate
27. Retail deposits shall be assigned with specific run-off rates depending on the outstanding balance per account:
| Outstanding Balance Per Account | Run-off Rate |
| P500,000 and below | 5% |
| P500,000.01 to P4,000,000 | 10% |
| Over P4,000,000 | 15% |
(ii) Wholesale deposits: Operational deposits: 30% run-off rate
28. Operational deposits, which are maintained by wholesale clients to avail the operational services offered by the covered bank, shall receive a thirty percent (30%) outflow rate.
29. For LCR calculation, all current and savings (CASA) accounts, including negotiable order of withdrawal (NOW) accounts, shall automatically be categorized as operational deposits considering that said accounts are generally characterized by the following:
a. The client is reliant on the covered bank as an independent third party that provides the operational service that will fulfill the client’s normal business operation, rendering it unlikely for the client to transfer its banking activity to another covered bank within thirty (30) days;
b. The funds held in this account are utilized for the operational needs of the client and no excess balance is assumed to be retained for the purpose of earning interest, or any economic incentive (i.e., rewards, rebates, reduction of fees or charges for other covered bank services, etc.) from the covered bank; and
c. The operational service is usually governed by a legally binding written agreement, which can only be terminated by the client either by giving prior notice of at least thirty (30) days or by paying significant switching costs (such as those related to transaction, information technology, early termination or legal costs) if the operational deposit is withdrawn before thirty (30) days.
30. In the case of the Philippine branch of a foreign covered bank, the amount of “Net Due To Head Office/Branches/Agencies Abroad” account shall be treated as operational deposit for LCR purpose. The “Due From” and “Due To” accounts are essentially clearing accounts through which the head office and branch transactions of the foreign bank are cleared, hence, for LCR purpose, the “Net Due To” balance shall be assumed as operational in nature. However, accumulated “Unremitted Profits” and “Losses in Operation” shall not be included in the LCR calculation considering that these balances are part of regulatory capital for purposes of computing risk-based capital adequacy ratio and adjusted net worth.
31. Deposits received specifically for clearing and settlement of foreign exchange transactions (e.g., amount of funding provided by the Philippine Domestic Dollar Transfer System [PDDTS] participants) shall be classified as operational accounts. These accounts are deemed maintained with the settlement/depository covered bank solely for effecting credits and debits arising from foreign exchange transactions, without having to go through a correspondent covered bank in the country where the foreign currency to be settled originated.
(iii) Wholesale deposits: Non-Operational deposits: 20%, 40% or 100% run-off rate
32. The covered bank shall apply a run-off rate of twenty percent (20%) on term and other deposits of wholesale clients not classified as operational, provided the outstanding balance is fully insured by the PDIC. Otherwise, said accounts shall be assigned with the following run-off rates:
| Outstanding Balance Per Account | Run-off Rate |
| Philippine NG; LGUs; GOCCs; Bangko Sentral; sovereigns, central banks, PSEs of foreign countries; MDBs | 40% |
| Non-financial corporates | 40% |
| Other entities not included in the prior categories | 100% |
33. Irrespective of outstanding balance, the term and other non-operational deposits provided by covered banks, financial corporates, trust and other fiduciaries, beneficiaries, conduits and special purpose vehicles (SPVs), and by affiliated entities of the covered bank shall receive a 100% run-off rate at all times.
(iv) Deposits received under correspondent banking and brokering services agreements
34. The criterion for an operational deposit where the client has a substantive dependency on the continued operation of the deposit account, which serves as a practical impediment to closing or moving such account to another covered bank, is not consistently the case with correspondent banking and brokering services activities. Thus, deposits arising from correspondent banking and brokering services will be treated as wholesale non-operational deposit accounts.
35. Customer cash balances arising from the provision of brokering services should be considered separate from any required segregated accounts related to client protection regimes, and should not be netted against other customer exposures included in this LCR standard.
(b) Unsecured wholesale funding
36. The expected cash outflow that will be calculated for other unsecured wholesale funding shall generally comprise of:
a. Any obligation or instrument issued by the covered bank that is not eligible as capital, and hence, treated as borrowings which the covered bank expects to fulfill within the LCR period;
b. All unsecured wholesale funding that is callable, or has an earliest contractual maturity date within the next thirty (30) calendar days; and
c. Unsecured wholesale funding with undetermined maturity.
37. A range of outflow rates is assigned to this wholesale fund depending on the assumed stability of the funding in times of stress, i.e., in consideration of the sensitivity of the fund providers to the rate offered and to the credit quality and solvency of the borrowing bank, the type of wholesale client and their level of sophistication. However, this category excludes:
a. Debt instruments issued by the covered bank exclusively in the retail market, such that those instruments cannot be bought and held by parties other than retail clients, which shall be treated appropriately under the retail funding category; and
b. Liabilities and obligations related to derivative contracts, which outflow calculation shall be taken up under the derivatives contracts category.
(i) Unsecured wholesale funding provided by the Philippine NG, LGUs, GOCCs, Bangko Sentral; by sovereigns, central banks, PSEs of foreign countries; by MDBs and by non-financial corporates: 40% outflow rate
38. The covered bank shall apply a cash outflow rate of forty percent (40%) on all unsecured funds received from the abovementioned entities.
(ii) Unsecured wholesale funding from covered banks, financial corporates and from other wholesale clients: 100% outflow rate
39. Unsecured funding provided by covered banks, financial corporates, trust and other fiduciaries, beneficiaries, conduits and SPVs, by affiliated entities of the covered bank, and by other entities not included in the prior category shall receive a 100% outflow factor.
(c) Secured funding
40. The cash outflow on secured funding shall be calculated based on the amount of funds raised through the transaction and not on the value of the underlying collateral. In case of collateral swaps or collateral lending transactions, the outflow amount shall be based on the current market value of the asset received.
41. The outflow rates to be applied to outstanding secured funding transactions maturing within the thirty (30)-calendar day period shall depend on the quality of the underlying collateral and/or the counterparty, as follows:
| Underlying Collateral and/or Counterparty | Outflow Rate |
| Level 1 assets OR funding provided by the Bangko Sentral | 0% |
| Level 2 assets with 15% haircut | 15% |
| Non-HQLA AND funding provided by the Philippine NG or by LGUs that are assigned with 20% credit risk weight or lower, or by MDBs | 25% |
| Level 2 assets without 50% haircut | 50% |
| All other maturing secured funding transactions not specified in the prior categories | 100% |
(d) Derivatives contracts
42. The covered bank shall calculate the expected contractual derivative cash inflows and outflows in accordance with existing valuation methodologies. A 100% outflow factor shall be assigned to the sum of all cash outflows arising from derivatives contracts maturing or expected to be preterminated within the LCR period.
43. For LCR purpose, expected derivatives cash flows shall be reported on gross amounts, i.e., the derivative contractual payments that the covered bank will make or deliver to a specific counterparty shall be included in the derivative cash outflow amount and the derivative contractual payments that the covered bank will receive from that counterparty shall be included in the derivative cash inflow amount, without any netting and subject to the LCR cap on total inflows. However, for contracts that inherently require net settlement (e.g., non-deliverable forward foreign exchange contract), the expected derivatives cash flows shall be reported on a net basis.
44. Where derivative payments are collateralized by HQLA, the cash outflows shall be calculated net of any corresponding cash payment or collateral inflows that would result, all other things being equal, from contractual obligations for cash payment or collateral to be posted to the covered bank: Provided, That the covered bank will be legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the collateral is received. This is in line with the principle that covered banks should not double count liquidity inflows and outflows.
45. In case of “in the money” options, said options shall be assumed to be exercised when they are “in the money” to the option buyer. Hence, any expected cash flows from contractual derivatives that are “in the money” (to the option buyer) shall count towards derivatives cash flows in the LCR.
46. Additional cash outflows14 for liquidity requirements resulting from contingent obligations embedded in derivative contracts, if any, shall be included in the calculation of total expected cash outflows, with outflow rates assigned as follows:
(i) Potential valuation changes on posted collateral securing derivative and other transactions: 20% outflow rate
47. When the mark-to-market exposure of a derivative position of the covered bank is secured by non-Level 1 HQLA, an additional outflow equivalent to twenty percent (20%) of the value of such posted collateral, net of collateral received on a counterparty basis: Provided, That the collateral received is not subject to restrictions on re-use or rehypothecation, shall be included in the calculation of total expected cash outflows. This twenty percent (20%) shall be calculated based on the amount required to be posted as collateral after applying the relevant haircut prescribed for Level 2 assets and as agreed for non-HQLA assets. Any collateral that is in a segregated margin account can only be used to offset outflows that are associated with payments that are eligible to be offset from that same account.
(ii) Market valuation changes on derivative or other transactions: 100% outflow rate
48. As covered bank faces potentially substantial liquidity risk exposures to the valuation changes of collaterals posted by the covered bank on its derivatives and other transactions, the increased liquidity needed to cover these market valuation changes should be included in the LCR. Using the historical look-back approach, the collateral outflows shall be based on the fluctuations in the total current market value amount of collaterals posted for all derivatives for each day within consecutive periods of thirty (30) days. The amount of additional expected cash outflows shall be equal to the largest difference between the highest and the lowest amount of accumulated collateral posted during any thirty (30)-day period in the last twenty four (24) months15 preceding the date of the LCR calculation. The collateral amounts pledged towards the covered bank shall not be taken into account.
(iii) Downgrade triggers embedded in financing transactions, derivatives and other contracts16: 100% outflow rate
49. For a contract where downgrade trigger exists, the covered bank shall assume that 100% of the additional collateral or contractual cash outflow required in the contract will have to be posted or funded for any downgrade up to and including a 3-notch downgrade of the covered bank’s long-term credit rating. Triggers linked to a covered bank’s short-term rating should be assumed to be triggered at the corresponding long-term rating in accordance with published ratings criteria. The covered bank should assess the impact of the downgrade on all types of margin collateral and contractual triggers which may change rehypothecation rights for non- segregated collateral.
(iv) Excess non-segregated collateral held by the covered bank: 100% outflow rate
50. An additional 100% cash outflow based on the market value of the collateral held must be calculated as part of the total expected cash outflows in cases where the covered bank holds a collateral that:
a. Can be contractually called at any time by the counterparty because the collateral posted exceeds the counterparty’s current collateral requirement under the contract;
b. Is not segregated from the covered bank’s other assets such that it cannot be rehypothecated; and
c. Is not already excluded as eligible HQLA by the covered bank.
(v) Contractually required collateral which are not yet posted: 100% outflow rate
51. For a collateral that is contractually due but the posting of which is not yet demanded by the counterparty, the covered bank shall increase the total expected cash outflows by an amount equivalent to 100% of the market value of the collateral.
(vi) Collateral substitution to non-HQLA or lower-quality HQLA17: 100% outflow rate
52. When a contract for a transaction that has not been segregated allows the received HQLA collateral to be substituted for other collateral without the consent of the covered bank, an additional 100% outflow shall be included in the calculation of the total expected cash outflows. If the potential substitute collateral is a non-HQLA, the outflow amount shall be based on the market value of the received HQLA collateral after applying the respective haircut in the LCR (i.e., in the case of Level 2 assets). For substitution for other HQLA collateral of a lower liquidity value, an outflow amounting to the market value of the received collateral multiplied by the difference between the haircuts of the received collateral and the potential substitute collateral should be applied.
(e) Loss of funding from structured financing instruments (SFIs)
(i) Asset-backed securities and other SFIs allowed under existing regulations: 100% outflow rate
53. Under the assumption that the funding required to refinance the bank- issued SFIs will not be available, the covered bank shall assign a 100% outflow rate to the total outstanding amount of these instruments maturing within the thirty (30)-day period.
(ii) Asset-backed commercial paper, conduits, securities investment vehicles (SIVs) and other such financing facilities allowed under existing regulations: 100% outflow rates
54. To take account of the potential liquidity risks pertaining to the covered bank’s own structured financing facilities that include the issuance of short-term asset-backed commercial paper, the covered bank shall assume that its ability to refinance the outstanding maturing instrument will be uncertain and shall include in the calculation of expected cash outflows 100% of the amount of the maturing debt.
55. In cases where the documentation associated with the financing arrangement contractually includes derivatives or derivative-like components that allow the “return” of assets, or that require the covered bank (as original asset transferor) to provide liquidity, effectively ending the financing arrangement (liquidity puts) within the thirty (30)-day period, the covered bank shall increase its expected cash outflows by another 100% based on the amount of assets that could potentially be returned, or on the liquidity required.
56. Where the structured financing activities of the covered bank are conducted through a special purpose entity (such as a special purpose vehicle, conduit or structured investment vehicle), the covered bank should look through to the maturity of the debt instruments issued by the entity and to any embedded options in financing arrangements that may potentially trigger the “return” of assets or the need for liquidity, irrespective of whether or not the SPV is consolidated.
(f) Drawdowns on committed business facilities
57. For LCR purpose, committed business facilities shall include: (a) lending commitments (e.g., Committed Credit Line for Commercial Paper Issued); (b) direct credit substitutes and transaction- related contingencies that are assigned 100% and fifty percent (50%) credit conversion factors under the Basel II Standardized Approach for credit risk, respectively; and (c) all other committed funding facilities extended by the covered bank excluding credit card lines and trade-related guarantees.
58. For purpose of expected cash outflows calculation, all committed obligations that are assumed to be drawn will remain outstanding at the amounts assigned throughout the duration of the stress test, regardless of maturity. The currently undrawn portion of each committed obligation shall be calculated net of HQLA collateral, if any18: Provided:
a. The covered bank is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the facility is drawn; and
b. There is no undue correlation between the probability of drawing the facility and the market value of the collateral.
The collateral can be netted against the outstanding amount of the committed obligation to the extent that this collateral is not already counted in the stock of HQLA.
59. To calculate the expected cash outflows, the covered bank shall assume the amount of contractual loan drawdowns from irrevocable committed obligations and the estimated drawdowns from conditionally revocable obligations within the thirty (30)-day period using the following drawdown rates against the undrawn portion of these committed obligations:
| Counterparties | Drawdown Rate |
| Retail clients | 5% |
| Philippine NG; LGUs; GOCCs; sovereigns, central banks, PSEs of foreign countries; MDBs | 10% |
| Non-financial corporates | 10% |
| Covered banks subject to prudential supervision | 40% |
| Financial corporates, trust and other fiduciaries, beneficiaries, SPEs conduits and SPVs (excluding covered bank’s own structured financing facilities) | 100% |
| Other entities not included in the prior categories | 100% |
(g) Other contractual obligations within a thirty (30)-day period
60. The covered bank shall calculate additional 100% cash outflows on each of the following contractual obligation to extend funds within the next thirty (30) calendar days:
a. Any contractual lending obligations to financial institutions not captured elsewhere in this standard;
b. If the total of all contractual obligations to extend funds to retail and non-financial corporates within the next thirty (30) calendar days (not captured in the prior categories) exceeds fifty percent (50%) of the total contractual inflows due in the next thirty (30) calendar days from these clients, the difference should be reported as a 100% outflow;
c. Forward reverse repos (with a binding obligation to accept) that start within and mature beyond the LCR period, where the cash outflow should be netted against the market value of the collateral received after deducting the applicable haircuts;
d. In case of forward collateral swaps, the net amount between the market values of the assets extended and received after deducting the haircuts applied to the respective assets in the LCR counts towards “other contractual outflows” or “other contractual inflows” depending on which amount is higher;
e. Any other contractual cash outflows such as outflows to cover unsecured collateral borrowings, uncovered short positions19, dividends or contractual interest payments, with explanation given as to what comprises this bucket. In case, however, the covered bank’s short position is being covered by a collateralized securities financing transaction, the covered bank should assume the short position will be maintained throughout the thirty (30)-day period and thus, will receive a 0% outflow rate.
61. Contractual obligations by the covered bank related to operating costs (such as rents, salaries, utilities, and other similar payments) are not included in the calculation of LCR.
(h) Other contingent funding obligations
62. These include products and instruments for which the client or holder has specific expectations regarding the liquidity and marketability of the product or instrument and for which failure to satisfy client expectations in a commercially reasonable manner would likely cause material reputational damage to the covered bank or otherwise impair ongoing viability.
63. Other contingent funding obligations referred to in this category shall consist, among others, of the following:
a. Unused portions of commitments to extend credit through credit cards;
b. Guarantees issued related to trade finance obligations directly underpinned by the movement of goods and/or the provision of services;
c. Unconditionally revocable “uncommitted” credit lines and business facilities;
d. Joint ventures or minority investments in entities which are not consolidated for financial reporting purposes but there is expectation that the covered bank will be the main liquidity provider when the entity is in need of funding; and
e. Non-contractual contingent funding obligations related to:
i. debt repurchases of the covered bank’s own debt or that of related conduits, SIVs and other such financing facilities;
ii. structured products where customers anticipate ready marketability;
iii. managed funds such as money market funds and other types of collective investment funds that are marketed by the covered bank with the objective of maintaining stable value20; and
iv. outstanding debt securities (unsecured and secured, term as well as short-term) having maturities greater than thirty (30) calendar days, where the covered bank (or its affiliated entity) is the issuer, the market maker or the dealer, or has acted as an originator, sponsor, marketing or selling agent, to cover the potential repurchase of such outstanding securities.
64. To account for the potential liquidity exposure to these contingent liabilities, a minimum of three percent (3%) drawdown based on the contracted amount, on the undrawn portion of the facility, or on the value of the fund or debt instruments, whichever is applicable, shall be calculated as additional expected cash outflows. However, when there is reasonable expectation based on the covered bank’s assessment that the contingent outflow will materialize within the LCR period, thereby rendering it necessary for the covered bank to provide funding support or to extend funds; or the Bangko Sentral has determined the covered bank’s systems and processes for identifying, measuring and monitoring contingent funding risks to be inadequate and ineffective in assessing the related risks that could potentially materialize, the full amount of the contingent funding obligation will receive a 100% outflow rate.
65. For non-contractual obligations where customer short positions are covered by other customers’ collateral that are not qualified as HQLA, a fifty percent (50%) run- off factor of the contingent obligations shall be calculated in the total cash outflows under the assumption that the covered bank may be obligated to find additional sources of funding for these positions in the event of client withdrawals.
66. To estimate the potential liquidity demand associated with these contingent funding obligations, the covered bank must have a robust framework (i.e., procedures, systems and tools) that at a minimum, allows assessment of contingent funding risks, as follows:
a. Identify the nature of the contingent obligation and credit worthiness of the counterparty, as well as the exposures to business and geographical sectors, as counterparties in the same sectors may be affected by stress at the same time;
b. Measure the normal level of cash outflows arising from the relevant off-balance sheet instruments under routine conditions and then estimate the scope of increase in these outflows during periods of stress;
c. Analyze the liquidity trigger events and the changes to underlying risk factors (e.g., changes in economic variables or conditions, credit rating downgrades, country risk issues, specific market disruptions and the alteration of contracts by governing legal, accounting, or tax systems and other similar changes) that would result to liquidity draws on these off- balance sheet positions. This analysis should include appropriate assumptions on the behavior of both the covered bank and its counterparties; and
(4) Cash inflows
67. Cap on total inflows. In order to prevent covered banks from relying solely on anticipated inflows to meet their liquidity requirement when there is a possibility that a portion of expected cash inflows may become unavailable in a short-term stressed environment, the amount of inflows that can offset outflows is capped at seventy five (75%) of total expected cash outflows. This requires that at a minimum, at least one- quarter of the total expected cash outflow amount should be covered by HQLA.
68. When considering available cash inflows, the covered bank should only include inflows (including interest payments and installments) from outstanding exposures that are contractually due within the LCR period, and are fully performing and for which the covered bank has no reason to expect a default within the LCR period.
69. For LCR purpose, the following shall not be counted as cash inflows:
a. Market value of assets that already qualify in the stock of HQLA;
b. Deposits held at other financial institutions for operational purposes, such as for clearing, custody, and cash management purposes, including funds provided for clearing and settlement of foreign exchange transactions (e.g., deposits placed to facilitate PDDTS transactions). These deposits are necessary for operational reasons, and are therefore not available to the depositing bank to repay other outflows.
c. Amount of “Net Due From Head Office/Branches/Agencies Abroad” account in case of the Philippine branch of a foreign bank;
d. Payments from loans, receivables and other assets that are considered past due, or that the covered bank has reason to expect will become non-performing exposure within the LCR period;
e. Potential or contingent inflows from committed credit lines, business or other funding facilities that the covered bank holds at other institutions for its own purposes;
f. Amounts related to non-financial revenues; and
g. Amounts payable to the covered bank with respect to any transaction that has no specific contractual maturity date, i.e., no defined maturity or is open maturity, or that matures after the LCR period.
(a) Secured lending, including reserve repos21 and securities borrowings
70. For secured lending maturing within the LCR period, the covered bank shall calculate the expected cash inflow using the following inflow rates applied to the outstanding amount of the secured lending transaction:
| Maturing Secured Lending Transactions Backed by the Following Asset Category | Inflow Rate |
| Level 1 assets | 0% |
| Level 2 assets with 15% haircut | 15% |
| Level 2 assets with 50% Haircut | 50% |
| Margin lending backed by all other collateral | 50% |
| All other collaterals | 100% |
71. If the collateral obtained through reverse repo, securities borrowing, or collateral swap, which matures within the LCR period, is re-used (i.e., rehypothecated) and is used to cover short positions that could be extended beyond thirty (30) days, the covered bank should assume that such reverse repo or securities borrowing arrangements will be rolled-over. To reflect the need to continue to cover the short position or to re-purchase the relevant securities, no cash inflow will be expected, hence a 0% inflow rate.
(b) Loans, receivables and other credit facilities
72. The covered bank shall be assumed to continue to extend and roll-over loans and other credits to clients, either secured or unsecured, at a certain level even during times of stress. In this view, all payments (including interest payments and installments) shall be assumed to be received by the covered bank at a net inflow rate, as follows:
| Counterparties | Inflow Rate |
| Retail clients | 50% |
| Philippine NG; LGUs; GOCCs; sovereigns, central banks, PSEs of foreign countries; MDBs | 50% |
| Non-financial corporates | 50% |
| Covered banks; financial corporates; trust and other fiduciaries; beneficiaries; Bangko Sentral; and central banks of foreign countries | 100% |
| Other entities not included in the prior categories | 100% |
73. For revolving credit facilities, the covered bank shall assume that the existing loan or financing is rolled over and that no principal or interest payment shall be received from the counterparty. However, in similar arrangements where the covered bank is not under obligation to extend credit and/or the covered bank reserves the right to revoke or withdraw the agreement and the facility in its sole and absolute discretion at any time, the principal and interest payments for the loan shall be assumed to be received by the covered bank at the foregoing net inflow rates.
74. In case of loans with no specific maturity, the covered bank shall include as cash inflows, at the rates prescribed above, the minimum payments of principal, fee or interest associated with the open maturity loan, Provided, That such payments are contractually due within the LCR period.
(c) Other cash inflows
75. The following instruments or transactions maturing within the LCR period shall receive a 100% inflow percentage:
a. Deposits held at other financial institutions for non-operational purposes;
b. Deposits pledged against an undrawn credit line or business facility;
c. Cash balances arising from the provision of brokering services and similar arrangements;
d. Cash balances released from segregated accounts held for the protection of customer trading assets, Provided, That these segregated balances are maintained in HQLA;
e. Cash inflows associated with non- HQLA, as well with HQLA-type assets that are or will be excluded from the covered bank’s stock of HQLA due to operational requirement;
f. Forward repos that start within and mature beyond the LCR period, where the cash inflow should be netted against the market value of the collateral extended after deducting the applicable haircuts; and
g. The sum of all cash inflows from derivatives transactions calculated in accordance with paragraphs 42 to 45 under Section III.C – Total Net Cash Outflows.
Part II. LCR Disclosure Requirements
1. In the quarterly published balance sheet, the covered bank, at a minimum, must publicly disclosed the: (i) total HQLA; (ii) total net cash outflows; and (iii) LCR ratio, based on the LCR position for the quarter.
2. On the covered bank’s website or in its other published reports, the disclosure must be presented in a format following a common template (Annex C), and must contain the following minimum requirements:
a. Data must be reported as simple averages of quarterly observations over the last twelve (12) months. The number of data points used in calculating the average figures in the template must also be disclosed.
b. Sufficient qualitative discussion around the LCR to facilitate understanding of the results and data must be provided. Where significant to the LCR, the covered bank should discuss:
i. the main drivers of the LCR results and the evolution of the contribution of inputs to the LCR’s calculation over time;
ii. intra-period changes as well as changes over time;
iii. the composition of HQLA;
iv. concentration of funding sources;
v. derivative exposures and potential collateral calls;
vi. currency mismatch in the LCR;
vii. a description of the degree of centralization of liquidity management and interaction between the covered bank’s units; and
viii. other inflows and outflows in the LCR calculation that are not captured in the LCR common template but which the covered bank considers to be relevant for its liquidity profile.
3. The covered bank may also present additional information relevant to its business model that may not be adequately captured by the LCR standard. Additional quantitative information shall allow market participants to better understand and analyze any LCR figures disclosed while additional qualitative discussion of LCR results and its related components shall enable them to gain a more thorough understanding of the covered bank’s internal liquidity risk management and positions. At the option of the covered bank, the following additional information may be provided:
a. Quantitative disclosures:
a. concentration limits on collateral pools and sources of funding (both products and counterparties);
b. liquidity exposures and funding needs at the level of individual legal entities, foreign branches and subsidiaries, taking into account legal, regulatory and operational limitations on the transferability of liquidity; and
c. balance sheet and off-balance sheet items broken down into maturity buckets and the resultant liquidity gaps.
b. Qualitative disclosures:
a. governance of liquidity risk management, including: risk tolerance; structure and responsibilities for liquidity risk management; internal liquidity reporting; and communication of liquidity risk strategy, policies and practices across business lines and with the board of directors;
b. funding strategy, including policies on diversification in the sources and tenor of funding, and whether the funding strategy is centralized or decentralized;
c. liquidity risk mitigation techniques;
d. an explanation of how stress testing is used; and
e. an outline of contingency funding plans.
4. The covered bank must also make available on its website, or through publicly available regulatory reports, an archive of all disclosure templates relating to prior reporting periods. Irrespective of the location of the disclosure, the minimum disclosure requirements must be presented in accordance with the format and template defined by this standard.
(Circular Nos. 996 dated 08 February 2018, 969 dated 22 August 2017, 930 dated 18 November 2016 and 905 dated 10 March 2016)
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Annex A
LIQUIDITY CHARACTERISTICS, CRITERIA AND METRICS
| Characteristics | Criteria | Examples of metrics/measures | |
| Asset characteristics | Asset quality | Probability of default |
Ratings |
| Spreads | |||
| Price drops during stress | |||
| Flight to quality (performance during distress) |
Performance relative to risk-free asset |
||
| Correlation with financial stress | |||
| Volatility | Implied and actual volatility | ||
| Duration/time to maturity | |||
| Transparency and standardization | Collateral eligibility | Eligible/haircuts at financial market infrastructures | |
| Across private counterparties | |||
| Standardization | Small number of standardized product types | ||
| Standardized risk modeling | |||
| Well-understood risk properties | |||
| Price transparency | Pre-trade pricing broadly available | ||
| Post-trade pricing broadly available | |||
| Market structure characteristics | Trading venues | Electronic (including hybrids) | |
| Exchange-traded | |||
| Active and sizeable market | Size | Volumes (number of trades and peso value) | |
| Outstandings | |||
| Related financing markets | Repo financing available | ||
| Other secured/forward financing | |||
| Related hedging markets | |||
| Market participation | Breadth of investors (low concentration) | ||
| Large number of active market maker | |||
| Market liquidity | Liquidity | Depth/price impact of trading | Amihud ratio (price changes relative to volume) |
| Autocorrelations of returns | |||
| Breadth | Effective bid-ask spreads (ex post) | ||
| Quoted bid-ask spreads (ex ante) | |||
| Immediacy | Average number of trades per day | ||
| Number of days with zero return/volume | |||
(Circular No. 905 dated 10 March 2016)
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Annex A-1
LIQUIDITY METRICS FOR LEVEL 2 ASSETS
(a) The security has a long term issuer rating that is investment grade or its equivalent;
(b) The security is traded in the secondary market with an ample number of market participants on both the buying and selling side of transactions; and
(c) There is a means to obtain market information on a security (i.e., bid, ask and done price). For peso securities, information on trade volume should also be available.
(Circular No. 996 dated 08 February 2019)
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Annex B
CALCULATION OF THE CAP ON LEVEL 2 ASSETS WITH REGARD TO SHORT-TERM SECURITIES FINANCING TRANSACTIONS
1. The formula for the calculation of the stock of HQLA is as follows:
| Stock of HQLA | = | Unadjusted Level 1 Assets + Unadjusted Level 2 Assets -Adjusted for 40% cap on Level 2 Assets |
| Where: | ||
| Adjustment for 40% cap | Max (Adjustment Stock of Level 2 Assets – 2/3 * Adjusted Stock of Level 1 Assets, 0) | |
| Adjusted Level 1 Assets | = | Unadjusted Level 1 Assets + Level 1 assets lent or placed as collateral under short term22 secured funding, secured lending or collateral swap transactions – Level 1 assets borrowed or received as collateral under short-term1 secured funding, secured lending or collateral swap transactions |
| Adjusted Level 2 Assets | = | Unadjusted Level 2 Assets + Level 2 assets lent or placed as collateral under short-term1 secured funding, secured lending or collateral swap transactions – Level 2 assets borrowed or received as collateral under short-term1 secured funding, secured lending or collateral swap transactions |
| Alternatively, the formula can be expressed as: | ||
| Stock of HQLA | = | Unadjusted Level 1 Assets + Unadjusted Level 2 Assets – Max (Adjusted Stock of Level 2 Assets – 2/3 * Adjusted Level 1 Assets, 0) |
2. The calculation of the forty percent (40%) cap on Level 2 assets should take into account the impact on the stock of HQLA of the amounts of Level 1 and Level 2 assets involved in secured funding, secured lending and collateral swap transactions maturing within thirty (30) calendar days. The maximum amount of adjusted Level 2 assets in the stock of HQLA is equal to two-thirds of the adjusted amount of Level 1 assets after haircuts have been applied.
3. The adjusted amount of Level 1 assets is defined as the amount of Level 1 assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 1 assets (including cash) that meet, or would meet if held unencumbered, the operational requirements for HQLA.
4. The adjusted amount of Level 2 assets is defined as the amount of Level 2 assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 2 assets that meet, or would meet if held unencumbered, the operational requirements for HQLA.
(Circular No. 905 dated 10 March 2016)
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Annex C
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1 Unweighted values must be calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).
2 Weighted values must be calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates (for inflows and outflows).
________________________________
1 Adjusted values must be calculated after the application of both: (i) haircuts (for Total HQLA) and inflow and outflow rates (for Total Net Cash Outflows); and (ii) applicable cap and ceiling (i.e., cap on Level 2 assets for HQLA and ceiling on inflows).
Footnotes
- The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by the central bank governors of the Group Ten countries in 1975. It consists of senior representatives of covered bank supervisory authorities and central banks from Argentina, Australia, Belgium, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxemborg, Mexico, the Netherlands, Russia, Saudi Arabia, Spain, Singapore, South Africa, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. It usually meets at the Bank for International Settlements in Basel, Switzerland where its permanent Secretariat is located.
- As defined under Sec. 131 on Policy Statement and Definition of Terms.
- The 100% threshold is the minimum requirement absent a period of financial stress, and after the phase-in arrangement are complete.
- If a covered bank has deposited, pre-positioned or pledged Level 1, Level 2 and other assets in a collateral pool and no specific securities are assigned as collateral for any transactions, it may assume that assets are encumbered in order of increasing liquidity value in the LCR, i.e., assets ineligible for the stock of HQLA are assigned first, followed by Level 2 assets, and finally Level 1.
- To qualify as HQLA, the assets must satisfy the asset and market liquidity characteristics, and the operational requirements for monetization eligibility criteria.
- Eligible HQLAs that are recognized at book value or at amortized cost such as securities designated as “held- to-maturity” must be included in the HQLA amount calculation at current market value.
- To the extent allowed to be drawn down in times of stress.
- Securities which are guaranteed by the Philippine NG but were issued and remain as liabilities of a covered bank will not qualify for the stock of HQLA. The only exception is when the covered bank also qualifies as a GOCC with the highest credit quality, in which case, the securities issued by said covered bank could qualify for Level 2 assets if all necessary conditions are satisfied.
- Issuances in foreign currencies shall be included in the stock to the extent of the covered bank’s net cash outflows in that specific foreign currency.
- For LCR purpose, a holding company shall only be deemed a financial corporate and/or a financial allied undertaking if the holding company is primarily engaged in financial intermediation or in auxiliary financial activities that are closely related to financial intermediation.
- Corporate debt securities (including commercial paper) in this respect include only plain-vanilla assets which valuation is readily available based on standard methods and does not depend on private knowledge, i.e., these do not include complex structured products or subordinated debt.
- In the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating shall be used. In case the security does not have a credit assessment by a recognized third party credit assessment agency, an internal rating equivalent to the probability of default corresponding to the required long-term credit rating shall be applied. In cases where there are two or more ratings which map into different risk weights, the higher of the two lowest risk weights should be used. External credit assessments for one entity within a corporate group cannot be used to proxy for the credit assessment of other entities within the same group. Such other entities should secure their own ratings.
- The list of third party credit assessment agencies and the mapping of ratings given by these rating agencies are in Part IV.C of Appendix 59.
- If a covered bank posted a pool of HQLA and non-HQLA collateral to secure derivative and other transactions, the covered bank shall compute the collateral requirement in the order of increasing liquidity value of said assets, consistent with the methodology set out in footnote 4 of this standard.
- The two (2)-year observation period consists of approximately 730 periods of thirty (30)-day, partly overlapping, rolling window.
- This applies to contracts governing derivatives and other transactions that have clauses that require the posting of additional collateral, drawdown of contingent facilities, or early repayment of existing liabilities upon the covered bank’s downgrade by a recognized credit rating organization. Contracts that include early termination agreements if a triggering event occurs (e.g., credit rating downgrade) shall not be covered by this requirement.
- This provision for additional liquidity requirement shall be applicable only when the received HQLA collateral actually counts toward the covered bank’s stock of HQLA, and its maturity value after applying the respective haircut is lower than the liquidity value of the potential collateral substitution.
- The HQLA in this case could have already been posted as collateral by the counterparty to secure the facility or is contractually obliged to be posted when the counterparty will draw down the facility.
- In the case of a covered bank’s short positions, if the short position is being covered by an unsecured security borrowing, the covered bank should assume the unsecured security borrowing of collateral from financial market participants would run-off in full, leading to a 100% outflow of either cash or HQLA to secure the borrowing, or cash to close out the short position by buying back the security.
- This excludes funds managed by the covered bank’s trust department.
- This excludes reverse repo transactions where the Bangko Sentral is the counterparty, as such is already treated as HQLA.
- Pertains to maturity date up to and including 30 calendar days.