basel 3 framework: outstanding issues on basel iii standards and processes 1… · 2019-12-19 ·...

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4 th February 2011 Mr Nout Wellink Chairman of the Basel Committee Basel Committee on Banking Supervision Basel Committee of International Settlements Basel, Switzerland Basel 3 framework: outstanding issues on Basel III standards and processes 1. Opening remarks 1.1.1. The Global Financial Markets Association (“GFMA”) members support the efforts of the Basel Committee on Banking Supervision (“the Committee”) to establish a macro- and micro-prudential framework that details global regulatory standards on bank capital and liquidity. We acknowledge that the new standards will help protect financial stability and promote market confidence. 1.1.2. The publication of the global regulatory standards on bank capital adequacy - Basel III: A global regulatory framework for more resilient banks and banking systems (“BCBS 189”) - and liquidity standards - Basel III: International framework for liquidity risk measurement, standards and monitoring (“BCBS 188”) - on 16 December 2010 and the Annex to BCBS 189 on 13 January 2011 (together “Basel III package”) helps to provide some more certainty for banks and their stakeholders. It will also serve as a platform for the supervisory and banking communities to take the necessary steps towards realising consistent and rigorous new capital and liquidity regimes. 1.1.3. We would like to use this opportunity to offer our remarks on the emerging prudential framework in relation to the Basel III package – Section 2 - and highlight where we are seeking clarity on the issues relating to the new Basel III measures and processes – Section 3. 1.1.4. Our remarks are supported by four detailed Annexes. GFMA members have been tracking the progress of the Committee’s work and have analysed, for clarity of content and process, the Basel III package against the issues we have been monitoring. The outcome of this analysis is an updated list of industry issues in relation to the Basel III package. This list is provided in Annex 1 in the form of tables. Annex 2 provides further detail on the questions we have on the calculation of the Liquidity Coverage Ratio (“LCR”), while in Annex 3 we return to the outcomes of the Net Stable Funding Ratio (“NSFR”) that we have already raised with the Committee in our previous letters. Annex 4 provides a view of some of the regulatory initiatives that will inform the emerging prudential framework. 1.1.5. GFMA members would also welcome clarification on any further work that the Committee is planning to undertake in relation to the Basel III package. It is unclear whether and to what extent the Committee will be developing more detail on the standards. We support and encourage the Committee to stay closely involved with the Basel III package as it is implemented to ensure international consistency. Although the main elements of the package have been finalised by the Committee, banks need clarification on important points of detail – in consultation with the industry as necessary - before Basel III enters into local legislative processes where interpretation may lead to divergences in

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Page 1: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

4th February 2011

Mr Nout Wellink

Chairman of the Basel Committee

Basel Committee on Banking Supervision

Basel Committee of International Settlements

Basel, Switzerland

Basel 3 framework: outstanding issues on Basel III standards and processes

1. Opening remarks

1.1.1. The Global Financial Markets Association (“GFMA”) members support the efforts

of the Basel Committee on Banking Supervision (“the Committee”) to establish a

macro- and micro-prudential framework that details global regulatory standards

on bank capital and liquidity. We acknowledge that the new standards will help

protect financial stability and promote market confidence.

1.1.2. The publication of the global regulatory standards on bank capital adequacy -

Basel III: A global regulatory framework for more resilient banks and banking

systems (“BCBS 189”) - and liquidity standards - Basel III: International

framework for liquidity risk measurement, standards and monitoring (“BCBS 188”)

- on 16 December 2010 and the Annex to BCBS 189 on 13 January 2011 (together

“Basel III package”) helps to provide some more certainty for banks and their

stakeholders. It will also serve as a platform for the supervisory and banking communities to take the necessary steps towards realising consistent and

rigorous new capital and liquidity regimes.

1.1.3. We would like to use this opportunity to offer our remarks on the emerging

prudential framework in relation to the Basel III package – Section 2 - and

highlight where we are seeking clarity on the issues relating to the new Basel III

measures and processes – Section 3.

1.1.4. Our remarks are supported by four detailed Annexes. GFMA members have been

tracking the progress of the Committee’s work and have analysed, for clarity of

content and process, the Basel III package against the issues we have been monitoring. The outcome of this analysis is an updated list of industry issues in

relation to the Basel III package. This list is provided in Annex 1 in the form of tables. Annex 2 provides further detail on the questions we have on the

calculation of the Liquidity Coverage Ratio (“LCR”), while in Annex 3 we return to the outcomes of the Net Stable Funding Ratio (“NSFR”) that we have already

raised with the Committee in our previous letters. Annex 4 provides a view of some of the regulatory initiatives that will inform the emerging prudential

framework.

1.1.5. GFMA members would also welcome clarification on any further work that the Committee is planning to undertake in relation to the Basel III package. It is

unclear whether and to what extent the Committee will be developing more detail on the standards. We support and encourage the Committee to stay closely

involved with the Basel III package as it is implemented to ensure international consistency. Although the main elements of the package have been finalised by

the Committee, banks need clarification on important points of detail – in consultation with the industry as necessary - before Basel III enters into local

legislative processes where interpretation may lead to divergences in

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international application. In a similar vein, we also encourage the Committee to publish its response to the issues raised by GFMA in the attached Annexes in a

dedicated FAQ section on its website, consulting with the industry as necessary.

1.1.6. We would like to work with the Committee on the continued development of the

Basel III standards, particularly where these are being monitored before

implementation.

2. Clarifying the emerging prudential framework

2.1.1. The work to introduce minimum global standards for measuring and controlling liquidity risk; raise the quality of the capital base; build greater buffers into the

banking sector to withstand severe shocks; and ensure that high quality capital is present to absorb losses, has been completed. However, the Basel III package,

albeit an important element, is only one of several elements of the Committee’s overall reform programme.

2.1.2. Elements of the Committee’s overall reform programme are still in progress and

the end goal is unclear to the industry. The reform package includes initiatives

relating to CCPs and the development of a macro prudential tool kit. There are

also a number of initiatives aimed at the regulation and supervision of

systemically important banks, where the Committee (in coordination with the

FSB and other bodies – as summarised by Annex 4) is reviewing the appropriate

capital and liquidity treatment of systemic banks, including whether an

additional SIFI buffer is required. Also on-going is the work on permitting the

countercyclical buffer (or any wider SIFI buffer) to be met with other fully loss

absorbing capital beyond Common Equity Tier 1 and the form it would take (i.e.

contingent capital in its broadest sense1). Our members are still debating the

contribution contingent capital can make, although we are aware that a number

of national regulators believe that there is indeed scope for such instruments. We

would therefore urge the Committee to engage with the industry on this, which in

turn should help to clarify the uncertainty concerning the components of non-

qualifying Tier 1 and Tier 2 capital when the rights of conversion are exercised:

potentially significant components of a bank’s regulatory capital structure remain

unclear, as does the operation of that structure2.

2.1.3. Our members are concerned that a holistic approach to the creation of an overall

prudential framework, in which the initiatives being brought forward will

dovetail, is not being actively pursued by the regulatory community. The package

of measures that will together form the overall prudential framework has a number of moving parts, so its cumulative impact is yet unknown. Absence of a

prudential framework that takes into consideration prudential implications of

other parts of the Committee’s reform programme has the potential to hamper

the efficient functioning of banks and the markets with which they interface and

to foster further uncertainty at early stages of economic recovery.

2.1.4. Of particular concern to our members is the lack of any clarity regarding the

interaction of the proposed reforms to the treatment of exposures to central

clearing counterparties, contained in BCBS 190 Capitalisation of bank exposures to

central counterparties (“CCPs”), with those supervisory regimes that have Pillar 1 or Pillar 2 requirements and limits for large exposures. Our members believe that

1 We suggest that there is a need to adopt a common language to ensure that the industry and the regulators avoid any confusion

when discussing financial instruments with contingent features

2 Although our members may not agree with many points of detail of the 30 September 2010 Swiss Final report of the Commission of

Experts for limiting the economic risks posed by large companies, the document offers a clear view of how instruments with contingent

capital features might be considered within a bank’s regulatory capital structure - the basis on which a bank (or indeed other

financial and non-financial firms) may be deemed systemic - and how that structure operates

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banks’ concentrated exposures to CCPs (such concentration resulting from various legal and regulatory initiatives) should be permanently exempt from the

large exposure limit and concentration risk capital requirements, so long as the applicable CCP is a Qualifying CCP and thus complies with the current and

forthcoming CPSS-IOSCO recommendations for CCPs. Failure to adopt such an

approach in the treatment of large exposures to CCPs would undermine the

incentive effect that is otherwise being pursued. Given this public policy

direction, it is an important component of the incentive structure that market participants should be able to rely upon CCPs and not be constrained by

regulatory dictated limits on their necessarily concentrated exposures to them in such a way as to constrain their use.

2.1.5. There are also unanswered questions in relation to how large institutions will be regulated on a cross border basis, and the resolution frameworks that will apply

to them, as well as how the Committee will link these with current work being

undertaken in the US and in the EU on crisis management.

2.1.6. We therefore urge the Committee to provide further clarity on the work that is

still being carried out by the Committee and other bodies (such as the FSB), as

well as the broader framework in which this work is just one, albeit key, part. At

this time, members would also welcome an assessment of the Basel III package in

the context of the initiatives for wider reform so as to take account of the total

impact on liquidity and capital requirements.

3. Clarification of key capital framework issues

3.1 Opening remarks 3.1.1. This section focuses on key capital issues that we wish to highlight as a result of

our analysis of the Basel III package. We concentrate here on selected issues that are particularly important to the industry. Details relating to these and associated

issues are itemised in Annex 1 (Table 1).

3.2. Definition of capital

Grandfathering

3.2.1. BCBS 189, in reference to the definition of capital, makes a number of important

clarifications. Of particular importance are the grandfathering arrangements agreed for regulatory capital instruments. Although this clarification helps to

create some certainty for banks, we remain unclear of the implications of the

agreed arrangements and their interaction with parallel regulatory regimes at

the national level. This is an area where we would like to see the Committee

promote consistency.

Loss absorbency at the point of non-viability

3.2.2. We welcome the Committee’s 13 January 2011 Annex, which is aimed at ensuring that non-common Tier 1 and Tier 2 instruments are loss absorbing. However, we

seek clarity on the two alternative scenarios the Committee seeks to describe in paragraph 1 (scope and post trigger instrument) of the Annex.

3.2.3. Under one of the scenarios (“Scenario 1”), non-common Tier 1 and Tier 2

regulatory capital instruments issued are not required to include a contractual

provision - that requires the instrument, at the option of the relevant authority,

to be written off or converted due to trigger event - because the governing

jurisdiction of the bank has the requisite laws in place that ensure that (i) these

instruments will be written off at the point where the firms is non-viable; or (ii)

these instruments are required to fully absorb losses before taxpayers are

exposed.

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3.2.4. The alternative scenario (“Scenario 2”) refers to those instances where contractual provisions in regulatory instruments are required because the

requisite laws (described above) are not in place.

3.2.5. However, given that Scenario 2 requires the relevant authority to have the

authority to exercise the option embedded in the contractual provision, it would

appear that it effectively requires the relevant authorities to have the same

powers as the authorities in Scenario 1.

3.2.6. It is important that the distinction the Committee wishes to draw between the two scenarios is clarified. This will help to enable banks identify which scenario

applies to them.

3.2.7. In addition, further engagement with the industry will be important on how and

by who ‘peer group reviews’ would be undertaken to confirm that a jurisdiction has in place the necessary laws. We assume that the peer review process referred

to in the 13 January 2011 Annex is linked to the FSB’s resolution initiatives

identified in Annex 4.

3.3. Leverage ratio (LR)

3.3.1. The Committee’s measure of leverage risk is just one method of measuring this

risk. We support the transitional arrangements the Committee has put in place to assess the currently proposed design and calibration in reference to the full

business cycle and different business models. We would encourage the Committee to treat leverage risk as a Pillar 2 risk to help minimise the effects of

perverse incentives, which are inherent to a risk sensitive measure, and promote an informed dialogue between banks and supervisors on the nature of leverage

risk.

3.3.2. Our members are concerned that disclosure of the leverage ratio is to be required before the parallel run is complete. We are concerned that any changes in a

bank’s leverage ratio associated with changes in the design and / or calibration, or indeed changes in bank specificities, introduced over the parallel run, may not

be well understood by the market and other stakeholders. Disclosure may also in practice have the effect of restricting the capacity to make any changes

considered to be necessary given lessons learnt in the parallel run: this would clearly be undesirable.

3.4. Counterparty measures - CVA

3.4.1. We acknowledge that the treatment of CVA has been clarified for the purposes of

the Basel III standards, and we are aware that CVA is being discussed as part of the wider trading book review being undertaken through the Committee’s

working groups. We therefore seek clarification as to the process for

implementing any changes and for taking into account the cumulative impact of

the trading book review. In Annex 1 we list some of our CVA specific issues

noting that this work is being led by ISDA.

3.5. Capital buffers

3.5.1. We welcome the Committee’s clarification on the operation and timelines with

respect to the capital conservation buffer (as per BCBS 189), as well as the

publication of a separate Guidance for national authorities operating the

countercyclical capital buffer. The latter clarified a number of questions in

relation to the countercyclical buffer’s objectives and release, and set out

principles aimed at ensuring international consistency of its operation.

3.5.2. We note the Committee’s view that the countercyclical buffer is only one in the

suite of macro-prudential tools. However, our members would welcome further

articulation of the full range of macro-prudential tools and how they would be

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used, including the possible use of additional buffers for SIFIs and the use of contingent capital. We believe that more work needs to be done to evaluate

alternative tools and the interaction of the countercyclical buffer with these tools.

3.5.3. We would like further clarification and assessment of the interaction between the

countercyclical buffer and other parts of the Basel III framework (in particular

but not limited to forward looking provisioning, use of through the cycle and

downturn parameters in credit and market risk models in Pillar 1). Whilst we

support the Committee’s desire to protect the banking system from potential future losses by providing it with an additional buffer of capital we are

nevertheless concerned about potential duplication of capital requirements.

3.5.4. We seek further clarity on the manner in which credit exposures are to be

aggregated. Any approach adopted will give rise to potentially significant infrastructure requirements for banks (please see Annex I for further details),

which may be unnecessary given other changes being introduced to address the

procyclicality issue.

4. Clarification of key liquidity framework issues

4.1. Opening remarks

4.1.1. This section focuses on key liquidity issues that we wish to highlight as a result of our analysis of the Basel 3 standards. Again, as in section 3, these issues are only

a short list of selected issues that are particularly important to the industry. Details relating to these and associated issues are itemised in Annexes 1 (Table

2), 2 and 3.

4.1.2. We recognise that the Committee has taken steps to address several of the issues

we have raised in our letters to the Committee over the past year. Notable among

these is a definition of liquidity lines and the inclusion - for a further 30 days - in the liquidity buffer of those assets that become ineligible owing to, for example, a

ratings downgrade. We also appreciate the inclusion of transitional arrangements for the standards.

4.1.3. However, given the number of open issues we highlight below and in Table 2 - some of which are new and some of which remain unclear to us - we hope that

the Committee will use the observation period to engage with the industry on these liquidity issues.

4.2. Liquidity Coverage Ratio (LCR)

4.2.1. Our members have arrived at an understanding of how to compute the LCR both

in terms of the calculation of the buffer in relation to the cap on the buffer and net outflows. A detailed exposition is contained in Annex 2 and central to this

exposition is an understanding that (i) the computation of the cap is independent

of the buffer calculation; (ii) the computation of the buffer is based on assets that

can be realised on ‘day one’; and (iii) computation of the net outflows is based on

the sum of these flows over the next 30 days. If our interpretation of the relevant

BCBS 188 text is correct we would like to further discuss with the Committee

what (as per Sections 2 – 4 of Annex 2) behaviours may arise as a result of the

LCR’s design, the treatment of collateral swaps and the deterioration of the

market value under asset received as collateral under a reverse repo.

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Implications of the LCR for non-level 1 and non-level 2 assets

4.2.2. We are keen to understand the Committee’s views on the potential economic

impact of not recognising the marketability of assets such as equities or gold as part of the LCR’s liquidity buffer (LCR’s numerator) or their contribution to a

firms liquidity as inflows particularly that a cap has been put in place on inflows.

The current approach implies that for all assets outside the narrow liquidity

buffer, as currently defined, it is not possible to generate any liquidity value

within a 30 day time horizon, and that any associated financing requirements (e.g. equity repo) would have to be fully covered by liquidity buffer eligible

assets. Our members are concerned that BCBS 188 treatment might drive the funding of such assets outside the banking sector, and reduce market liquidity in

these asset classes.

Liquidity buffer operational requirements

4.2.3. We also request clarification from the Committee that where high quality assets

are held by a trading business, but do not necessarily satisfy the additional

operational requirements for the liquidity buffer, then inflows from such assets

could be recognised to offset any associated funding outflows. An example would

be where a government security is held to hedge an interest rate position, but

such security could be financed on a secured basis without any adverse impact on

the market risk hedge.

4.2.4. One of the implications of the operational requirements that has become clear to

us is that a much greater proportion of corporate deposits will fall in the 75%

run-off category than those that are typically managed by professional

treasurers. This definition of operational relationship seems to relate to a

disintermediated (banking) model and does not correspond to the way the

banking industry engages with corporates in many jurisdictions. Moreover, the

50% roll-over rate for credit becomes inconsistent with a 75% run-off rate for

deposits. We ask the Committee to let us know whether this difficulty is

something that has been identified.

Cap on inflows

4.2.5. A new feature of the LCR is the cap on the inflows a bank can use to offset the

outflows in the LCR’s denominator. It is stated that the aim of the cap restricts

banks from relying solely on anticipated inflows to meet their liquidity

requirement (BCBS 188 para 107). We would like to understand why inflows are

not regarded as having the same liquidity value as the ability to transform certain assets in cash and why such a low limit (75% rather than, say, 90%) was placed

on the reliance on inflows.

4.2.6. Moreover, we suggest that some transaction types should be excluded from this

rule, such as project finance and other kinds of business.

4.3. Net Stable Funding Ratio (NSFR) design and calibration

4.3.1. We appreciate that the transitional arrangements applying to the NSFR (with

final revisions to be implemented by mid-2016) will allow the Committee time to

adjust the NSFR’s design so that this standard addresses the Committee’s

objectives and concerns but also gives a fair representation of the funding

requirements of a bank’s assets and funding provided by its liabilities. We ask the

Committee to engage with industry on the design and calibration of the NSFR in a

manner similar to that adopted by the Committee’s Risk Management

Measurement Group (RMMG) when it engaged with the industry on Credit

Valuation Adjustment (CVA).

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4.3.2. We are encouraged that the Committee will be addressing the cliff effects associated with the NSFR and evaluating the issues of matched term funding and

providing incentives for term funding within a year. We continue to be concerned with the treatment of secured funding. For example, consider covered bonds

when the available funding provided by these bonds drops to zero from 100%

once the covered bond falls below one year, but the Required Stable Funding

(RSF) for underlying mortgages require 65% - 100% funding. We seek

confirmation that in the case of highly liquid assets used as collateral, as in the case of a public covered bond, with a maturity of less than a year, they would

require an RSF of 5-20%. These issues are included in Annex 1 (Table 2) along with a number of design issues relating to the treatment of derivatives, repos and

reverse repos under the NSFR.

4.3.3. On the issue of unintended consequences arising from the NSFR’s design, we note

that BCBS 188 continues to produce the same outcomes we discussed under the

GFMA / BBA / ISDA Joint Industry response to BCBS 165. These examples and

outcomes are illustrated in the attached Annex 3.

4.4. Harmonised liquidity reporting framework

4.4.1. GFMA continues to suggest that an international liquidity framework should be based on the development of a harmonised liquidity reporting framework. This is

of particular concern given the same is implied for other liquidity monitoring tools presented in BCBS 188 and multiple reporting templates for multiple

monitoring tools across multiple jurisdictions.

5. Concluding remarks

5.1.1. Our membership would welcome the opportunity to discuss with the Committee

any of the issues highlighted in this letter. Our members continue to analyse and

discuss the Basel III package, so we expect further issues to be identified as our

work and thoughts progress. We hope to have a constructive dialogue on these as

well.

Yours sincerely,

Anita Millar

Managing Director

AFME (member of GFMA)

Association for Financial Markets in Europe

St Michael’s House

1 George Yard

London EC3V 9DH

Tel: +44 (0) 20 7743 9300 www.afme.eu

Sent via email to: [email protected] and [email protected]

Cc: Basel Secretariat

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The Association for Financial Markets in Europe (AFME) represents a broad array of European

and global participants in the wholesale financial markets, and its 197 members comprise all

pan-EU and global banks as well as key regional banks, brokers, law firms, investors and other

financial market participants. AFME was formed on 1st November 2009 by the merger of the

London Investment Banking Association and the European operations of the Securities Industry

and Financial Markets Association.

The Global Financial Markets Association (GFMA) joins together the common interests of

hundreds of financial institutions across the globe. GFMA’s mission is to develop policies and

strategies for global policy issue in the financial markets, thereby promoting coordinated

advocacy efforts across its partner associations. GFMA is partnered with the Association for

Financial Markets in Europe (AFME), the Asian Securities and Financial Markets Association

(ASIFMA), and, in the United States, the Securities Industry and Financial Markets Association

(SIFMA).

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Annex 1: GFMA Position table on Basel III issues updated for BCBS 188 and 189

The Global Financial Markets Association (“GFMA”) is pleased to attach our latest position

tables updated for the Committee’s 10 December 2010 publication of Basel III: A global

regulatory framework for more resilient banks and banking systems (“BCBS 189”); Basel III:

International framework for liquidity risk measurement, standards and monitoring (“BCBS

188”); and the 13 January 2011 Annex to BCBS 189.

The order of the tables in Annex 1 is as follows:

• Table 1: Positions on capital

• Table 2: Position on liquidity

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air

me

nt’

, a

su

pp

lem

en

t to

th

e

ex

po

sure

d

raft

o

n

am

ort

ise

d

cost

a

nd

im

pa

irm

en

t.

Wo

uld

be

in

tere

ste

d t

o k

no

w t

he

ex

ten

t to

wh

ich

th

e

tre

atm

en

t p

rop

ose

d m

ee

ts t

he

Co

mm

itte

e’s

aim

s in

the

are

a o

f p

rov

isio

nin

g

Op

en

No

pre

vio

us

refe

ren

ce

Page 11: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

11

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

M

4.

Fo

rwa

rd l

oo

kin

g

pro

vis

ion

ing

: In

cen

tiv

es

Se

ek

cl

ari

ty

on

th

e

ince

nti

ve

s th

e

Co

mm

itte

e

is

ad

dre

ssin

g

to

sup

po

rt

stro

ng

er

pro

vis

ion

ing

in

th

e

reg

ula

tory

fra

me

wo

rk (

BC

BS

18

9 p

ara

23

- 2

5)

Op

en

GF

MA

16

Ap

ril

20

10

resp

on

se t

o B

CB

S 1

64

(p

ag

e

55

)

De

fin

itio

n o

f C

ap

ita

l

H

5.

Ca

pit

al:

No

n-V

iab

ilit

y

trig

ge

rs -

No

n-C

om

mo

n

Tie

r 1

an

d 2

inst

rum

en

ts

Se

ek

cla

rity

(in

re

ga

rd t

o t

he

13

Ja

nu

ary

20

11

An

ne

x

pu

bli

she

d b

y t

he

Co

mm

itte

e)

on

th

e d

isti

nct

ion

th

e

Co

mm

itte

e

is

see

kin

g

to

de

scri

be

in

re

ga

rd

to

the

po

we

rs o

f th

e a

uth

ori

tie

s o

utl

ine

d.

Th

e f

irst

of

the

se

sce

na

rio

s b

ein

g w

he

re t

he

go

ve

rnin

g j

uri

sdic

tio

n o

f

the

ba

nk

ha

s su

ffic

ien

t p

ow

ers

to

wri

te d

ow

n n

on

-

com

mo

n

Tie

r 1

a

nd

2

in

stru

me

nts

. T

he

se

con

d

of

the

se

be

ing

w

he

re

the

se

po

we

rs

are

n

ot

de

em

ed

suff

icie

nt

an

d c

on

tra

ctu

al

pro

vis

ion

s (t

ha

t a

mo

un

t to

an

e

mb

ed

de

d

op

tio

n

tha

t is

to

be

tr

igg

ere

d

by

th

e

rele

va

nt

au

tho

rity

) a

re r

eq

uir

ed

in

th

ese

in

stru

me

nts

.

Th

e

ab

ilit

y o

f th

e r

ele

va

nt

au

tho

rity

to

ex

erc

ise

a

n

em

be

dd

ed

o

pti

on

in

a

re

gu

lato

ry

inst

rum

en

t a

lso

req

uir

es

tha

t th

ey

ha

ve

th

e a

uth

ori

ty t

o d

o s

o.

Th

e

po

we

rs r

eq

uir

ed

in

th

e s

eco

nd

sce

na

rio

ap

pe

ar

to b

e

no

dif

fere

nt

fro

m t

he

fir

st

Up

da

te

AF

ME

1 O

ct 2

01

0 r

esp

on

se

to B

CB

S 1

74

(h

igh

lig

hts

th

e

ke

y i

ssu

es

rela

tin

g t

o

reg

ula

tory

ca

pit

al

inst

rum

en

ts w

ith

no

n-

via

bil

ity

tri

gg

ers

an

d i

n

pa

rtic

ula

r se

e p

ara

13

to

17

)

Se

ctio

n r

efe

ren

ce 3

.2

H

6.

Ca

pit

al:

No

n-v

iab

ilit

y

Ne

ed

fo

r in

form

ati

on

on

ho

w a

nd

by

wh

o p

ee

r g

rou

p

rev

iew

s w

ill

be

un

de

rta

ke

n t

o c

on

firm

th

at

a

juri

sdic

tio

n h

as

the

ne

cess

ary

la

ws

in p

lace

to

all

ow

the

re

cog

nit

ion

of

no

n-c

om

mo

n T

ier

1 a

nd

Tie

r 2

inst

rum

en

ts (

BC

BS

’s 1

3 J

an

ua

ry 2

01

1 A

nn

ex

, pa

ra 1

(b))

Ne

w

Se

ctio

n r

efe

ren

ce 3

.2

H

7.

Ca

pit

al:

Gra

nd

fath

eri

ng

Ne

ed

fo

r cl

ari

ty o

n h

ow

th

e p

rov

isio

ns

rela

tin

g t

o t

he

ph

asi

ng

ou

t o

f in

stru

me

nts

no

lo

ng

er

qu

ali

fyin

g

as

Op

en

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(p

ara

2.1

.3 a

nd

fo

otn

ote

2)

Page 12: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

12

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

no

n-c

om

mo

n T

ier

1 o

r T

ier

2

(BC

BS

18

9 p

ara

94

g)

inte

ract

wit

h c

urr

en

t p

rov

isio

ns

in o

the

r ju

risd

icti

on

s.

Fo

r e

xa

mp

le,

the

g

ran

dfa

the

rin

g

pro

vis

ion

s b

ein

g

en

vis

ag

ed

fo

r C

RD

4

g

ive

n

tha

t th

e

gra

nd

fath

eri

ng

pro

vis

ion

s in

CR

D 2

pro

vis

ion

s e

xte

nd

to

31

De

c 2

04

0

in r

esp

ect

to

in

stru

me

nts

iss

ue

d b

efo

re 3

1 D

ec

20

10

H

8.

Ca

pit

al:

Gra

nd

fath

eri

ng

- C

ut-

off

da

te

Ad

dit

ion

al

Tie

r 1

or

Tie

r 2

wil

l b

e p

ha

sed

ou

t fr

om

1

Jan

20

13

(B

CB

S 1

89

pa

ra 9

4 g

an

d J

an

20

11

An

ne

x)

Clo

sed

GF

MA

15

Oct

20

10

le

tte

r

(pa

ra 8

)

H

9.

Ca

pit

al:

Ca

pit

al

am

ort

isa

tio

n o

f n

on

-

con

form

ing

Tie

r 2

inst

rum

en

ts

Se

ek

cla

rifi

cati

on

as

to w

he

the

r th

e r

ed

uct

ion

in

th

e

cap

on

no

n-q

ua

lify

ing

ca

pit

al

sho

uld

be

ca

lcu

late

d o

n

a

stra

igh

t-li

ne

b

asi

s o

r u

sin

g

a

dif

fere

nt

ap

pro

ach

(BC

BS

18

9 p

ara

94

(g

))

Ne

w

GF

MA

1 O

ct 2

01

0 l

ett

er

(pa

ra 2

7)

H

10

. C

ap

ita

l: C

ap

ita

l

gra

nd

fath

eri

ng

of

form

er

de

du

ctio

ns

fro

m

cap

ita

l

Se

ek

cla

rifi

cati

on

as

to w

he

the

r g

ran

dfa

the

rin

g w

ill

ap

ply

to

1

25

0%

ri

sk

we

igh

t tr

ea

tme

nt

for

ite

ms

(in

clu

din

g c

ert

ain

se

curi

tiza

tio

ns)

th

at

un

de

r B

ase

l II

we

re d

ed

uct

ed

50

% f

rom

Tie

r 1

an

d 5

0%

fro

m T

ier

2

(BC

BS

18

9 p

ara

90

)

Ne

w

No

pre

vio

us

refe

ren

ce

M

11

. C

ap

ita

l: M

ino

rity

inte

rest

Se

ek

:

An

ex

ten

sio

n o

f th

e s

imp

le i

llu

stra

tiv

e e

xa

mp

le o

n t

he

tre

atm

en

t o

f m

ino

rity

in

tere

sts.

T

he

tr

ea

tme

nt

of

min

ori

ty

inte

rest

s (B

CB

S

18

9

pa

ra

62

6

5)

is

com

ple

x, s

o m

ore

co

mp

lex

ex

am

ple

s w

ou

ld b

e h

elp

ful.

Su

ch e

xa

mp

les

sho

uld

in

clu

de

th

e t

rea

tme

nt

of

oth

er

leg

al

en

titi

es

in t

he

gro

up

(in

clu

din

g n

on

-ba

nk

s a

nd

tho

se w

hic

h a

re n

ot

reg

ula

ted

on

a s

tan

d-a

lon

e b

asi

s

bu

t a

re

stil

l su

bje

ct

to

con

soli

da

ted

su

pe

rvis

ion

a

s

pa

rt

of

the

w

ide

r g

rou

p),

re

cog

nit

ion

o

f ca

pit

al

surp

luse

s b

etw

ee

n s

ub

sid

iari

es

(i.e

. su

bsi

dia

rie

s a

t th

e

loca

l le

ve

l),

an

d w

he

re t

he

su

bsi

dia

ry i

s in

corp

ora

ted

Up

da

te

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.2.1

– 2

.2.2

pa

ge

3)

Page 13: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

13

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

in a

ju

risd

icti

on

wh

ich

ha

s n

ot

imp

lem

en

ted

th

e B

ase

l

III

sta

nd

ard

s

M

12

. C

ap

ita

l: I

nv

est

me

nts

in

fin

an

cia

l in

stit

uti

on

s –

Un

de

rwri

tin

g e

xp

osu

res

Un

de

rwri

tin

g p

osi

tio

ns

he

ld f

or

fiv

e w

ork

ing

da

ys

or

less

(re

ga

rdle

ss i

f th

e b

an

k o

we

s m

ore

th

an

10

% o

f

the

iss

ue

d c

om

mo

n s

ha

re)

are

ex

clu

de

d (

BC

BS

pa

ra

80

an

d 8

4)

Clo

sed

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.2.2

, pa

ge

4)

M

13

. C

ap

ita

l: I

nv

est

me

nts

in

fin

an

cia

l in

stit

uti

on

s –

Ow

n s

ha

res

All

ba

nk

’s i

nv

est

me

nts

in

its

ow

n c

om

mo

n s

ha

res

wil

l

be

de

du

cte

d,

(BC

BS

18

9 p

ara

78

), a

lth

ou

gh

we

no

te

tha

t n

o r

efe

ren

ce i

s m

ad

e t

o s

yn

the

tic

po

siti

on

s so

it

is

ass

um

ed

th

at

the

tre

atm

en

t o

f th

ese

po

siti

on

s w

ill

be

left

to

th

e l

oca

l su

pe

rvis

or

Clo

sed

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.2.3

)

M

14

. C

ap

ita

l: I

nv

est

me

nts

in

fin

an

cia

l in

stit

uti

on

s -

Ho

ldin

gs

in b

an

kin

g

bo

ok

an

d t

rad

ed

bo

ok

Ov

era

ll, t

he

sta

nd

ard

s a

re n

ow

sp

eci

fie

d b

ut

we

be

lie

ve

th

ey

are

no

w o

ve

rly

co

mp

lex

an

d s

ho

uld

be

sim

pli

fie

d

Fu

rth

erm

ore

, un

til

ad

dit

ion

al

cla

rity

is

pro

vid

ed

, th

e

rule

s m

ay

re

pre

sen

t a

ma

teri

al

cha

ng

e t

o t

he

De

cem

be

r 2

00

9 p

ack

ag

e. W

e q

ue

stio

n w

he

the

r th

is

wa

s th

e i

nte

nti

on

of

the

Co

mm

itte

e a

nd

be

lie

ve

an

ad

dit

ion

al

QIS

ex

erc

ise

ma

y b

e w

arr

an

ted

to

un

de

rsta

nd

th

e i

mp

act

, de

pe

nd

ing

on

th

e c

lari

ty

pro

vid

ed

.

In p

art

icu

lar,

we

se

ek

cla

rity

re

lati

ng

to

:

- T

he

ex

ten

t to

wh

ich

lo

ng

an

d s

ho

rt p

osi

tio

ns

can

be

ne

tte

d f

or

the

pu

rpo

se o

f co

mp

uti

ng

th

e r

eg

ula

tory

ad

just

me

nts

ap

ply

ing

to

in

ve

stm

en

ts i

n b

an

kin

g,

fin

an

cia

l a

nd

in

sura

nce

en

titi

es

bo

th w

he

re t

he

ba

nk

do

es

no

t o

wn

mo

re t

ha

n 1

0%

an

d w

he

re i

t

do

es

ow

n m

ore

th

an

10

% (

BC

BS

18

9 p

ara

80

an

d

84

)

- C

an

sh

ort

po

siti

on

s in

in

dic

es

tha

t a

re h

ed

gin

g l

on

g

Ne

w

No

pre

vio

us

refe

ren

ce

Page 14: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

14

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

cash

or

syn

the

tic

po

siti

on

s b

e d

eco

mp

ose

d t

o

pro

vid

e r

eco

gn

itio

n o

f th

e h

ed

ge

fo

r ca

pit

al

pu

rpo

ses?

Wh

at

va

lue

sh

ou

ld b

e a

ttri

bu

ted

wh

en

loo

kin

g t

hro

ug

h a

sy

nth

eti

c o

r a

n i

nd

ex

se

curi

ty, f

or

the

pu

rpo

ses

of

calc

ula

tin

g w

ith

th

e l

on

g o

r sh

ort

com

po

ne

nt

of

the

“n

et

lon

g p

osi

tio

n”.

Fo

r e

xa

mp

le,

sho

uld

de

lta

-eq

uiv

ale

nts

be

use

d f

or

no

n-l

ine

ar

pro

du

cts?

- W

he

the

r C

DS

an

d T

RS

as

syn

the

tic

po

siti

on

s co

un

t

as

the

sa

me

am

ou

nt

of

ho

ldin

gs

in c

ap

ita

l

inst

rum

en

ts a

s o

utr

igh

t ca

sh p

osi

tio

ns?

Ma

rke

t

va

lue

of

no

tio

na

l to

be

use

d?

Wh

ich

of

the

fo

llo

win

g

sho

uld

be

use

d:

ma

rke

t v

alu

e o

f n

oti

on

al,

co

ntr

act

no

tio

na

l, c

on

tra

ct n

oti

on

al

ad

just

ed

fo

r m

ark

-to

-

ma

rke

t m

ov

es

of

the

co

ntr

act

or

oth

er?

- H

ow

to

de

term

ine

ma

turi

ty o

f sh

ort

po

siti

on

wh

ere

sho

rt p

osi

tio

n i

s fu

nd

ed

by

re

v r

ep

o?

Is m

atu

rity

sett

lem

en

t p

eri

od

(e

.g. T

+3

) o

r th

e t

erm

of

the

re

v

rep

o o

r so

me

thin

g e

lse

?

- C

ash

eq

uit

y p

osi

tio

n h

as

ind

ete

rmin

ate

ma

turi

ty s

o

ho

w c

an

a s

ho

rt p

osi

tio

n h

av

e t

he

sa

me

ma

turi

ty

such

th

at

off

set

can

be

ach

iev

ed

?

M

15

. C

ap

ita

l: I

nv

est

me

nts

in

fin

an

cia

l in

stit

uti

on

s –

Ma

rke

t m

ak

ing

Se

ek

an

ex

em

pti

on

fo

r p

osi

tio

ns

in f

ina

nci

al

en

titi

es

tha

t a

re h

eld

te

mp

ora

rily

fo

r m

ark

et

ma

kin

g

Clo

sed

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.2.4

)

M

16

. C

ap

ita

l: I

nv

est

me

nts

in

fin

an

cia

l in

stit

uti

on

s –

Co

mp

uta

tio

n o

f

de

du

ctio

ns

Tw

o l

imit

ed

re

cog

nit

ion

ca

ps

on

th

resh

old

de

du

ctio

n

ite

ms

ha

ve

be

en

pu

t in

pla

ce

Bo

th c

ap

s o

pe

rate

on

(i)

sig

nif

ica

nt

inv

est

me

nts

in

com

mo

n s

ha

res

of

un

con

soli

da

ted

fin

an

cia

l

inst

itu

tio

ns,

as

we

ll a

s (i

i) m

ort

ga

ge

s se

rvic

ing

rig

hts

,

Clo

sed

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.2.5

– 2

.2.6

)

Page 15: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

15

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

an

d (

iii)

de

ferr

ed

ta

x a

sse

ts t

ha

t a

rise

fro

m

tem

po

rari

ly d

iffe

ren

ces.

Th

e f

irst

ca

p s

et

at

10

% o

f a

ba

nk

’s C

ET

1 p

rov

ide

s fo

r li

mit

ed

re

cog

nit

ion

of

the

ab

ov

e t

hre

e i

tem

s. T

he

se

con

d c

ap

co

nce

rns

the

de

du

ctio

n t

ha

t a

pp

lie

s w

he

n i

n a

gg

reg

ate

th

e t

hre

e

ite

ms

ex

cee

d 1

5%

of

its

CE

T1

. Th

e a

mo

un

t o

f th

e

thre

e i

tem

s n

ot

de

du

cte

d f

rom

CE

T a

re r

isk

we

igh

ted

at

25

0%

(B

CB

S 1

89

pa

ra 8

7 –

89

)

M

17

. C

ap

ita

l: I

nv

est

me

nts

in

fin

an

cia

l in

stit

uti

on

s –

15

% c

om

mo

n e

qu

ity

lim

it

We

lco

me

th

e c

lari

fica

tio

n o

f th

e l

imit

str

uct

ure

(B

CB

S

18

9 p

ara

87

– 8

9)

bu

t se

ek

- F

urt

he

r cl

ari

fica

tio

n o

f th

e r

ati

on

ale

of

the

ca

p o

f

15

% (

BC

BS

18

9 p

ara

88

) th

at

ap

pli

es

to t

hre

e

un

con

ne

cte

d i

tem

s –

in

ve

stm

en

ts i

n u

nco

nso

lid

ate

d

fin

an

cia

l in

stit

uti

on

s, m

ort

ga

ge

se

rvic

e r

igh

ts a

nd

de

ferr

ed

ta

x a

sse

ts -

- C

on

firm

ati

on

of

ou

r u

nd

ers

tan

din

g (

BC

BS

18

9 p

ara

94

c) t

ha

t th

is a

gg

reg

ate

am

ou

nt

ab

ov

e t

he

15

% i

s to

be

de

du

cte

d f

rom

CE

T1

by

1 J

an

ua

ry 2

01

8

- F

urt

he

r cl

ari

fica

tio

n o

n t

he

pro

po

rtio

ns

req

uir

ed

to

be

de

du

cte

d i

n t

he

ev

en

t th

at

the

ag

gre

ga

te 1

5%

ha

s

be

en

ex

cee

de

d b

ut

ind

ivid

ua

l co

mp

on

en

ts a

re l

ess

tha

n 1

0%

(e

.g. 9

% D

TA

an

d 8

% M

SR

)

Se

ek

fro

m t

he

Co

mm

itte

e f

urt

he

r e

xa

mp

les

wit

h

dif

fere

nt

pe

rmu

tati

on

s to

min

imis

e p

oss

ible

inte

rpre

tati

on

s o

f th

e t

ex

t

Up

da

te

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.2.7

)

Le

ve

rag

e R

ati

o (

LR

)

H

18

. L

R:

Ince

nti

vis

ing

be

tte

r

risk

ma

na

ge

me

nt

Th

e B

CB

S m

ea

sure

of

lev

era

ge

ris

k i

s ju

st o

ne

me

tho

d

of

me

asu

rin

g t

his

ris

k (

BC

BS

18

9 p

ara

s 1

53

-16

7).

We

sup

po

rt t

he

tra

nsi

tio

na

l a

rra

ng

em

en

ts t

he

Co

mm

itte

e

Op

en

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 4

.1.1

– 4

.1.3

)

Page 16: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

16

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

ha

s p

ut

in p

lace

to

ass

ess

th

e c

urr

en

tly

pro

po

sed

de

sig

n a

nd

ca

lib

rati

on

in

re

fere

nce

to

th

e f

ull

bu

sin

ess

cycl

e a

nd

dif

fere

nt

bu

sin

ess

mo

de

ls.

Se

ek

cla

rifi

cati

on

as

to w

he

the

r th

e C

om

mit

tee

wil

l b

e

rev

iew

ing

th

e L

R m

ea

sure

as

on

e p

oss

ible

me

asu

re o

f

lev

era

ge

ris

k i

n a

Pil

lar

2 c

on

tex

t. A

Ask

wh

eth

er

the

Co

mm

itte

e i

s re

vie

win

g t

he

mig

rati

on

of

the

LR

me

asu

re t

o P

illa

r 1

in

20

18

H

19

. L

R:

Ex

po

sure

me

asu

re -

Re

gu

lato

ry b

ala

nce

she

et

No

te t

ha

t B

CB

S s

tate

s th

at

the

ex

po

sure

me

asu

re f

or

the

le

ve

rag

e r

ati

o s

ho

uld

“g

en

era

lly

fo

llo

w”

the

acc

ou

nti

ng

me

asu

re o

f e

xp

osu

re (

BC

BS

18

9 p

ara

15

7),

an

d (

i) s

ee

k c

lari

fica

tio

n r

eg

ard

ing

th

e t

rea

tme

nt

of

ite

ms

wh

ere

acc

ou

nti

ng

tre

atm

en

t is

no

t p

oss

ible

(e

.g.

off

ba

lan

ce s

he

et

ite

ms)

(ii

) s

ug

ge

st t

ha

t th

e

ap

pro

ach

be

clo

sely

mo

nit

ore

d d

uri

ng

th

e t

ran

siti

on

pe

rio

d f

or

an

y u

nin

ten

de

d c

on

seq

ue

nce

s

Lin

ke

d t

o i

ssu

e #

26

Up

da

te

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 4

.1.3

)

H

20

. L

R:

Ex

po

sure

me

asu

re –

Ne

ttin

g o

f lo

an

s a

nd

de

po

sits

Se

ek

cla

rifi

cati

on

of

the

ra

tio

na

le o

f n

ot

all

ow

ing

th

e

ne

ttin

g o

f lo

an

s a

nd

de

po

sits

(B

CB

S1

89

pa

ra 1

57

)

wh

ilst

all

ow

ing

ne

ttin

g f

or

de

riv

ati

ve

s (B

CB

S p

ara

16

1)

an

d r

ep

urc

ha

se a

gre

em

en

ts a

nd

se

curi

tie

s

fin

an

ce (

BC

BS

18

9 p

ara

15

9)

Ne

w

No

pre

vio

us

refe

ren

ce

H

21

. L

R:

Ex

po

sure

me

asu

re –

Ne

ttin

g o

f re

po

an

d

rev

ers

e r

ep

os

Se

ek

cla

rifi

cati

on

as

to h

ow

re

po

ne

ttin

g s

ho

uld

be

calc

ula

ted

fo

r th

e p

urp

ose

s o

f th

e l

ev

era

ge

ca

lcu

lati

on

Th

e s

tan

da

rds

ind

ica

te t

ha

t a

cco

un

tin

g m

ea

sure

s o

f

ex

po

sure

sh

ou

ld b

e u

sed

to

wh

ich

ne

ttin

g r

ule

s b

ase

d

on

Ba

sel

II s

ho

uld

be

ap

pli

ed

(B

CB

S 1

89

pa

ra 1

59

)

Se

ek

cla

rifi

cati

on

as

to w

he

the

r th

is i

ncl

ud

es

the

cre

dit

ris

k m

itig

ati

on

ru

les

(i.e

. th

at

all

ow

ba

nk

s to

off

set

a s

ing

le r

ep

o’s

ca

sh a

nd

se

curi

tie

s le

gs)

, or

can

Ne

w

No

pre

vio

us

refe

ren

ce

Page 17: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

17

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

ba

nk

s o

nly

ne

t th

e c

ash

le

g o

f o

ne

re

po

ag

ain

st t

he

cash

le

g o

f a

no

the

r re

ve

rse

re

po

, wh

ere

bo

th a

re

cov

ere

d u

nd

er

a s

ing

le n

ett

ing

ag

ree

me

nt

wit

h t

ha

t

cou

nte

rpa

rty

?

Se

ek

cla

rifi

cati

on

wh

eth

er

this

me

an

s re

po

s w

he

re

bo

th l

eg

s a

re s

ecu

riti

es

are

ig

no

red

in

th

e l

ev

era

ge

rati

o

H

22

. L

R:

Ow

n f

un

ds

me

asu

res

- C

ali

bra

tio

n

tra

de

-off

We

lco

me

th

e c

lari

fica

tio

n t

ha

t th

e d

efi

nit

ion

of

ow

n

fun

ds

is b

ase

d o

n t

he

ne

w d

efi

nit

ion

of

Tie

r 1

ca

pit

al

(BC

BS

18

9 p

ara

15

4)

pa

ras

52

-56

) a

nd

th

at

da

ta w

ill

be

co

lle

cte

d b

y t

he

Co

mm

itte

e d

uri

ng

th

e t

ran

siti

on

pe

rio

d t

o t

rack

th

e i

mp

act

of

usi

ng

to

tal

reg

ula

tory

cap

ita

l a

nd

CE

T1

Clo

sed

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(An

ne

x 1

pa

ra 1

.2.7

)

H

23

. L

R:

Lin

ka

ge

s to

oth

er

ele

me

nts

of

the

fra

me

wo

rk

Re

com

me

nd

th

at

the

fra

me

wo

rk t

ak

es

into

acc

ou

nt

inte

rlin

ka

ge

s a

nd

th

at:

- T

he

ex

po

sure

s to

ce

ntr

al

cou

nte

rpa

rtie

s a

nd

liq

uid

ass

ets

in

th

e n

um

era

tor

of

the

LC

R b

e e

xcl

ud

ed

fro

m

the

le

ve

rag

e r

ati

o

Up

da

te

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 4

.1.7

)

H

24

. L

R:

Dis

clo

sure

an

d b

asi

s

of

calc

ula

tio

n

We

lco

me

cla

rifi

cati

on

ha

s b

ee

n p

rov

ide

d o

n

dis

clo

sure

, pro

cess

es

an

d t

ime

lin

es

(BC

BS

18

9 p

ara

16

6),

bu

t co

nti

nu

e t

o u

nd

erl

ine

th

at

dis

clo

sure

sh

ou

ld

no

t b

e r

eq

uir

ed

be

fore

th

e e

nd

of

the

pa

rall

el

run

.

Re

ma

in c

on

cern

ed

th

at

an

y c

ha

ng

es

in a

ba

nk

’s

lev

era

ge

ra

tio

ass

oci

ate

d w

ith

ch

an

ge

s in

th

e d

esi

gn

an

d /

or

cali

bra

tio

n, o

r in

de

ed

ch

an

ge

s in

ba

nk

spe

cifi

c a

rra

ng

em

en

ts, i

ntr

od

uce

d o

ve

r th

e p

ara

lle

l

run

ma

y n

ot

be

we

ll u

nd

ers

too

d b

y t

he

ma

rke

t a

nd

oth

er

sta

ke

ho

lde

rs

Up

da

te

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(pa

ra 4

.1.6

an

d A

nn

ex

1

1.2

.9)

GF

MA

15

Oct

20

10

le

tte

r

(pa

ra 1

5)

M

25

. L

R:

Re

po

s a

nd

se

cure

d

tra

nsa

ctio

ns

We

lco

me

th

e c

lari

fica

tio

n o

n t

he

re

gu

lato

ry n

ett

ing

for

rep

os

an

d s

ecu

red

tra

nsa

ctio

ns

(BC

BS

18

9 p

ara

Clo

sed

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(An

ne

x 1

pa

ra 1

.1.1

)

Page 18: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

18

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

15

9)

M

26

. L

R:

Cli

en

t m

on

ey

an

d

ass

ets

Co

nti

nu

e t

o s

ee

k c

lari

fica

tio

n t

ha

t cl

ien

t m

on

ey

or

ass

ets

are

ex

clu

de

d a

s th

ese

are

rin

g f

en

ced

ass

ets

an

d

wo

uld

be

re

turn

ed

to

th

eir

ow

ne

rs i

n t

he

ev

en

t o

f

fail

ure

(in

th

e e

ve

nt

tha

t th

e L

R e

xp

osu

re c

om

pu

tati

on

is b

ase

d o

n a

n a

cco

un

tin

g b

ala

nce

sh

ee

t)

Op

en

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(An

ne

x 1

pa

ra 1

.1.4

)

M

27

. L

R:

Se

curi

tisa

tio

n

Su

gg

est

th

at

it i

s in

ap

pro

pri

ate

to

bri

ng

all

secu

riti

sati

on

tra

nsa

ctio

ns

ba

ck o

n t

he

ba

lan

ce s

he

et

in t

he

ev

en

t th

at

the

LR

ex

po

sure

co

mp

uta

tio

n i

s

ba

sed

on

an

acc

ou

nti

ng

ba

lan

ce s

he

et)

No

te t

ha

t th

e a

cco

un

tin

g a

nd

re

gu

lato

ry t

rea

tme

nts

for

secu

riti

zati

on

are

dif

fere

nt

in E

uro

pe

bu

t th

e s

am

e

in t

he

US

(in

re

fere

nce

to

BC

BS

18

9 p

ara

15

9 w

hic

h

do

es

no

t m

en

tio

n s

ecu

riti

zati

on

s)

Op

en

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(An

ne

x 1

pa

ra 1

.1.5

)

M

28

. L

R:

Cla

rifi

cati

on

on

th

e

ap

pli

cati

on

of

reg

ula

tory

ne

ttin

g o

f

de

riv

ati

ve

s

We

lco

me

th

e c

lari

fica

tio

n o

n t

he

ap

pli

cati

on

of

reg

ula

tory

ne

ttin

g o

f d

eri

va

tiv

es

(BC

BS

18

9 p

ara

16

1)

Clo

sed

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(An

ne

x 1

pa

ra 1

.2.1

– 1

.2.6

)

M

29

. L

R:

Off

ba

lan

ce s

he

et

cre

dit

co

nv

ers

ion

fact

ors

(‘C

CF

’)

No

te t

ha

t fo

r th

e p

urp

ose

of

calc

ula

tin

g t

he

le

ve

rag

e

rati

o B

CB

S s

tate

s th

at

a 1

00

% C

CF

sh

ou

ld b

e a

pp

lie

d

to o

ff-b

ala

nce

sh

ee

t it

em

s a

nd

a 1

0%

CC

F s

ho

uld

be

ap

pli

ed

to

un

con

dit

ion

all

y c

an

cell

ab

le i

tem

s (B

CB

S

18

9 p

ara

16

2 –

pa

ra 1

64

)

Se

ek

cla

rifi

cati

on

as

to w

hy

a b

roa

de

r ra

ng

e o

f C

CF

s

ha

ve

no

t b

ee

n i

ncl

ud

ed

alo

ng

th

e l

ine

s o

f th

e C

CF

s se

t

ou

t in

BC

BS

10

7 (

Ba

sel

II)

pa

ras

82

-87

Qu

est

ion

th

e a

pp

rop

ria

ten

ess

of

10

% C

CF

fo

r

com

mit

me

nts

th

at

are

un

con

dit

ion

all

y c

an

cell

ab

le a

t

an

y t

ime

an

d r

eco

mm

en

d t

ha

t th

e C

om

mit

tee

re

vis

e

the

CC

F i

n l

ine

wit

h t

he

tre

atm

en

t u

nd

er

Ba

sel

II

Up

da

te

GF

MA

6 S

ep

t 2

01

0 l

ett

er

(An

ne

x 1

pa

ra 1

.2.8

)

Page 19: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

19

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

(BC

BS

10

7, p

ara

83

)

Co

un

ter

pa

rty

Ris

k M

ea

su

re

s

M

30

. C

pty

ris

k:

CV

A –

Ch

oic

e

of

mo

de

ls

Th

e B

ase

l II

I C

VA

sta

nd

ard

s d

o n

ot

pro

vid

e s

cop

e f

or

firm

s u

sin

g P

D m

od

els

to

ca

lcu

late

CV

A:

the

pu

bli

she

d

CV

A c

ha

rge

s fo

r e

ach

co

un

terp

art

y a

re b

ase

d o

n o

ne

of

the

tw

o f

orm

ula

e. T

he

fir

st (

BC

BS

18

9 p

ara

98

)

ap

pli

es

to b

an

ks

wit

h t

he

ne

cess

ary

re

gu

lato

ry m

od

el

ap

pro

va

ls a

nd

th

e s

eco

nd

(B

CB

S 1

89

pa

ra 1

04

)

ap

pli

es

to a

ll o

the

r b

an

ks.

Th

e f

orm

er

incl

ud

es

EE

,

cre

dit

sp

rea

d a

nd

LG

D p

ara

me

ters

ba

sed

on

ma

rke

t

inst

rum

en

ts w

hil

e t

he

la

ter

incl

ud

es

EA

D a

nd

ex

tern

al

rati

ng

s

Giv

en

th

at

CV

A i

s b

ein

g d

iscu

sse

d u

nd

er

the

wid

er

tra

din

g b

oo

k r

ev

iew

, we

ask

wh

eth

er

the

acc

om

mo

da

tio

n o

f P

D m

od

els

wil

l b

e c

on

sid

ere

d

Op

en

No

pre

vio

us

refe

ren

ce

M

31

. C

pty

ris

k:

CV

A –

Div

ers

ific

ati

on

be

ne

fit

As

pa

rt o

f th

e w

ide

r tr

ad

ing

bo

ok

re

vie

w, r

eco

mm

en

d

tha

t fu

rth

er

con

sid

era

tio

n i

s g

ive

n t

o c

alc

ula

tin

g

div

ers

ific

ati

on

be

ne

fits

in

ca

lcu

lati

ng

th

e C

VA

ma

rke

t

risk

ch

arg

e a

nd

th

at

CV

A c

ha

rge

s a

re n

ot

calc

ula

ted

on

a s

tan

d-a

lon

e b

asi

s

Ne

w

No

pre

vio

us

refe

ren

ce

M

32

. C

pty

ris

k:

CV

A –

Imp

act

s o

n c

orp

ora

te

ex

po

sure

s

As

pa

rt o

f th

e w

ide

r tr

ad

ing

bo

ok

re

vie

w, r

eco

mm

en

d

furt

he

r co

nsi

de

rati

on

of

the

im

pa

ct o

f C

VA

on

corp

ora

tes

giv

en

th

at:

– R

eg

ard

less

of

the

wh

eth

er

corp

ora

te e

xp

osu

res

are

he

dg

ed

or

no

t, t

he

in

cre

ase

d c

ap

ita

l ch

arg

e w

ill

resu

lt i

n i

ncr

ea

sed

co

sts

to t

he

co

rpo

rate

cli

en

t

– T

he

im

pa

ct o

f C

VA

is

mo

re p

ron

ou

nce

d f

or

mid

-siz

e

corp

ora

tes

an

d S

ME

s a

s th

ey

are

no

t a

ble

to

pu

t u

p

coll

ate

ral

to t

he

sa

me

ex

ten

t a

s la

rge

fin

an

cia

l fi

rms

Op

en

Cu

rre

ntl

y u

nd

er

dis

cuss

ion

wit

h t

he

Ba

sel

Co

mm

itte

e’s

Ris

k M

an

ag

em

en

t M

od

ell

ing

Gro

up

(R

MM

G)

AF

ME

10

De

cem

be

r 2

01

0

lett

er

to t

he

Co

mm

issi

on

issu

e x

xx

i

Page 20: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

20

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

M

33

. C

pty

ris

k:

CV

A –

Ma

x

loss

ca

p

Sim

ila

r to

th

e m

ax

lo

ss c

on

cep

t a

do

pte

d i

n B

ase

l 2

.5,

for

cla

rifi

cati

on

pu

rpo

ses

we

re

com

me

nd

sp

eci

fica

lly

inco

rpo

rati

ng

a c

ap

to

co

un

terp

art

y c

red

it r

isk

ca

pit

al

req

uir

em

en

ts s

uch

th

at

the

re

qu

ire

d c

ap

do

es

no

t

ex

cee

d m

ax

imu

m l

oss

Ne

w

No

pre

vio

us

refe

ren

ce

Ca

pit

al

Bu

ffe

rs

H

34

. C

ap

ita

l b

uff

ers

: C

ap

ita

l

con

serv

ati

on

bu

ffe

r -

Op

era

tio

n

We

lco

me

th

e c

lari

fica

tio

n o

f th

e o

pe

rati

on

of

the

cap

ita

l co

nse

rva

tio

n b

uff

er

(BC

BS

18

9 p

ara

12

9 –

pa

ra

13

1)

Clo

sed

AF

ME

/ I

SD

A 2

5 N

ov

em

be

r

resp

on

se t

o E

U C

on

sult

ati

on

on

co

un

terc

ycl

ica

l b

uff

ers

(pa

ge

16

)

H

35

. C

ap

ita

l b

uff

ers

:

Co

un

terc

ycl

ica

l b

uff

ers

– L

ev

el

of

cycl

ica

lity

We

lco

me

th

e t

ran

siti

on

al

arr

an

ge

me

nts

pu

t in

pla

ce

for

the

co

un

terc

ycl

ica

l b

uff

er

reg

ime

alt

ho

ug

h

arg

ua

bly

th

e n

ine

ye

ar

tra

nsi

tio

n p

eri

od

fa

lls

sho

rt o

f

a f

ull

bu

sin

ess

cy

cle

on

wh

ich

th

e c

ou

nte

rcy

clic

al

bu

ffe

r sh

ou

ld b

e c

alc

ula

ted

(B

CB

S 1

89

pa

ra 1

50

)

Clo

sed

AF

ME

/ I

SD

A 2

5 N

ov

em

be

r

resp

on

se t

o E

U C

on

sult

ati

on

on

co

un

terc

ycl

ica

l b

uff

ers

(pa

ge

2)

H

36

. C

ap

ita

l b

uff

ers

:

Co

un

terc

ycl

ica

l b

uff

ers

– M

acr

o-p

rud

en

tia

l

too

lbo

x

We

lco

me

th

e s

ep

ara

te d

ocu

me

nt

“Gu

ida

nce

fo

r

na

tio

na

l a

uth

ori

ties

op

era

tin

g t

he

cou

nte

rcyc

lica

l

cap

ita

l b

uff

er”

(BC

BS

18

7 p

ag

e 5

) a

nd

in

pa

rtic

ula

r

Pri

nci

ple

5 t

ha

t h

igh

lig

hts

th

at

the

co

un

terc

ycl

ica

l

bu

ffe

r co

uld

be

de

plo

ye

d i

n t

an

de

m w

ith

oth

er

ma

cro

pru

de

nti

al

too

ls

Re

qu

ire

fu

rth

er

cla

rity

on

th

e i

nte

ract

ion

wit

h a

nd

op

era

tio

n o

f a

dd

itio

na

l m

acr

op

rud

en

tia

l to

ols

at

dis

po

sal

to t

he

re

gu

lato

rs

Up

da

te

AF

ME

/ I

SD

A 2

5 N

ov

em

be

r

resp

on

se t

o E

U C

on

sult

ati

on

on

co

un

terc

ycl

ica

l b

uff

ers

(pa

ge

2)

H

37

. C

ap

ita

l b

uff

ers

:

Co

un

terc

ycl

ica

l b

uff

ers

– I

nte

ract

ion

wit

h o

the

r

pa

rts

of

the

fra

me

wo

rk,

incl

ud

ing

Pil

lar

2

Co

nti

nu

e t

o r

eco

mm

en

d t

ha

t a

n a

sse

ssm

en

t b

e

un

de

rta

ke

n o

f h

ow

co

un

terc

ycl

ica

l b

uff

ers

wil

l

op

era

te i

n c

on

jun

ctio

n w

ith

oth

er

mic

rop

rud

en

tia

l

me

asu

res

be

ing

co

nsi

de

red

(e

.g. f

orw

ard

lo

ok

ing

pro

vis

ion

ing

, th

rou

gh

th

e c

ycl

e a

nd

do

wn

tu

rn

Op

en

AF

ME

/ I

SD

A 2

5 N

ov

em

be

r

resp

on

se t

o E

U C

on

sult

ati

on

on

co

un

terc

ycl

ica

l b

uff

ers

(pa

ge

2)

Page 21: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

21

Ta

ble

1:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n C

ap

ita

l (u

pd

ate

d f

or

BC

BS

18

9 a

nd

13

Ja

n 2

01

1 A

nn

ex

)

Pr

iori

ty

Ra

tin

g

(H /

M /

L)

Iss

ue

na

me

GF

MA

po

sit

ion

Is

su

e s

tatu

s

Cro

ss r

efe

ren

ce

Cro

ss

refe

re

nc

e t

o p

re

vio

us

co

rr

es

po

nd

en

ce

pa

ram

ete

rs i

n c

red

it a

nd

ma

rke

t ri

sk m

od

els

in

Pil

lar

1 )

H

38

. C

ap

ita

l b

uff

ers

:

Co

un

terc

ycl

ica

l b

uff

ers

– I

nte

rna

tio

na

l

con

sist

en

cy

We

lco

me

th

e s

tate

me

nt

tha

t th

e a

im o

f th

e

cou

nte

rcy

clic

al

bu

ffe

r (B

CB

S 1

87

, pa

ge

1 s

ect

ion

2)

is

to e

nsu

re t

ha

t th

e b

an

kin

g s

ect

or

in a

gg

reg

ate

ha

s th

e

cap

ita

l o

n h

an

d t

o h

elp

ma

inta

in t

he

flo

w o

f cr

ed

it i

n

the

eco

no

my

Qu

est

ion

th

e d

eg

ree

of

its

eff

ect

ive

ne

ss a

s a

mo

de

rati

ng

eff

ect

on

th

e c

red

it c

ycl

e, g

ive

n t

ha

t th

e

op

era

tio

n o

f th

e b

uff

er

do

es

no

t m

an

ag

e d

em

an

d a

nd

ba

nk

s a

re n

ot

the

on

ly p

rov

ide

rs o

f cr

ed

it

Up

da

te

AF

ME

/ I

SD

A 2

5 N

ov

em

be

r

resp

on

se t

o E

U C

on

sult

ati

on

on

co

un

terc

ycl

ica

l b

uff

ers

(pa

ge

3)

H

39

. C

ap

ita

l b

uff

ers

:

Co

un

terc

ycl

ica

l b

uff

ers

– P

ract

ica

lity

/

ap

pli

cati

on

Se

ek

fu

rth

er

cla

rity

on

th

e m

an

ne

r in

wh

ich

cre

dit

ex

po

sure

s a

re t

o b

e a

gg

reg

ate

d. A

ny

ap

pro

ach

ad

op

ted

wil

l g

ive

ris

e t

o p

ote

nti

all

y s

ign

ific

an

t

infr

ast

ruct

ure

re

qu

ire

me

nts

fo

r b

an

ks.

Co

nsi

de

r a

UK

ba

nk

le

nd

ing

th

rou

gh

its

Pa

ris

bra

nch

to

an

Iri

sh

bo

rro

we

r to

fu

nd

th

e p

urc

ha

se o

f a

ho

use

in

Sp

ain

. Is

it e

nv

isa

ge

d t

ha

t (B

CB

S 1

89

pa

ra 1

38

) th

e e

xp

osu

re

wil

l b

e c

on

sid

ere

d, f

or

ex

am

ple

, to

ari

se i

n S

pa

in

wh

ere

th

e p

rop

ert

y i

s lo

cate

d, o

r in

Ire

lan

d w

he

re t

he

bo

rro

we

r d

eri

ve

s th

eir

in

com

e o

r in

Pa

ris

wh

ere

it

is

bo

ok

ed

or

the

UK

wh

ere

re

gu

lato

ry c

ap

ita

l

req

uir

em

en

ts a

re a

pp

lie

d

Up

da

te

AF

ME

/ I

SD

A 2

5 N

ov

em

be

r

resp

on

se t

o E

U C

on

sult

ati

on

on

co

un

terc

ycl

ica

l b

uff

ers

(pa

ge

3)

H

40

. C

ap

ita

l b

uff

ers

:

Co

un

terc

ycl

ica

l b

uff

ers

– R

ele

ase

of

the

bu

ffe

r

We

lco

me

th

e i

ncl

usi

on

of

Pri

nci

ple

4 i

n B

CB

S 1

87

(pa

ge

4)

an

d n

ote

th

at

it s

tate

s th

at

pro

mp

tly

rele

asi

ng

th

e b

uff

er

in t

ime

s o

f st

ress

ca

n h

elp

to

red

uce

th

e r

isk

of

the

su

pp

ly o

f cr

ed

it b

ein

g

con

stra

ine

d b

y r

eg

ula

tory

ca

pit

al

req

uir

em

en

ts

Clo

sed

AF

ME

/ I

SD

A 2

5 N

ov

em

be

r

resp

on

se t

o E

U C

on

sult

ati

on

on

co

un

terc

ycl

ica

l b

uff

ers

(pa

ge

3)

Page 22: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

22

An

ne

x 1

(c

on

tin

ue

d)

Ta

ble

2:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n l

iqu

idit

y (

up

da

ted

fo

r B

CB

S 1

88

)

Pr

iori

ty

Ra

tin

g

(H /

M

/ L

)

Iss

ue

na

me

GF

MA

po

siti

on

Is

su

e s

tatu

s

Cr

os

s r

efe

re

nc

e t

o p

rev

iou

s

co

rr

es

po

nd

en

ce

Co

mm

on

Is

su

es

to

Bo

th S

tan

da

rd

s a

nd

/o

r O

ne

or

Mo

re

Mo

nit

or

ing

To

ols

H

41

. R

ep

ort

ing

in

the

ob

serv

ati

on

pe

rio

d:

Ba

sis

Se

ek

co

nfi

rma

tio

n t

ha

t re

po

rtin

g f

or

the

LC

R a

nd

NS

FR

(B

CB

S 1

88

pa

ra

19

7)

is t

o b

e, l

ike

th

e Q

IS, o

n a

‘be

st e

ffo

rts’

ba

sis,

ra

the

r th

an

on

a

‘ma

teri

all

y a

ccu

rate

’ ba

sis.

Ou

r m

em

be

rs a

cce

pt

tha

t th

ey

wil

l n

ee

d t

o

ma

ke

sig

nif

ica

nt

inv

est

me

nt

firm

s in

th

eir

re

po

rtin

g s

yst

em

s, b

ut

are

con

cern

ed

ab

ou

t th

e n

ee

d t

o i

nv

est

in

co

nti

nu

all

y c

ha

ng

ing

te

mp

late

s

ov

er

the

mo

nit

ori

ng

pe

rio

d. F

urt

he

rmo

re:

– a

sk i

f th

e C

om

mit

tee

mig

ht

pro

du

ce a

n o

ffic

ial

Ba

sel

III

tem

pla

te

tha

t g

oe

s b

ey

on

d t

he

lin

e i

tem

s o

f th

e Q

IS

– c

on

tin

ue

to

su

gg

est

th

at

the

cre

ati

on

of

a c

ross

-bo

rde

r su

pe

rvis

ory

fra

me

wo

rk f

or

liq

uid

ity

ris

k s

ho

uld

be

ba

sed

on

th

e d

ev

elo

pm

en

t o

f

ha

rmo

nis

ed

liq

uid

ity

re

po

rtin

g f

ram

ew

ork

Ne

w

No

pre

vio

us

refe

ren

ce

H

42

. R

ep

ort

ing

in

the

ob

serv

ati

on

pe

rio

d:

Fre

qu

en

cy o

f

rep

ort

ing

Se

ek

cla

rity

on

th

e f

req

ue

ncy

of

rep

ort

ing

in

th

e o

bse

rva

tio

na

l p

eri

od

for

the

LC

R a

nd

NS

FR

an

d w

he

the

r it

is

ex

pe

cte

d t

ha

t th

e L

CR

is

to b

e

rep

ort

ed

mo

nth

ly (

or

ev

en

da

ily

in

str

ess

ed

sit

ua

tio

ns)

an

d t

he

NS

FR

qu

art

erl

y (

BC

BS

18

8 p

ara

18

6)

ov

er

the

ob

serv

ati

on

al

pe

rio

d

Giv

en

th

e t

rad

e-o

ffs

tha

t a

rise

be

twe

en

fre

qu

en

cy a

nd

acc

ura

cy;

we

wo

uld

lik

e t

o u

nd

ers

tan

d t

he

Co

mm

itte

e’s

vie

ws

on

th

is t

rad

e-o

ff i

n

rela

tio

n t

o r

ep

ort

ing

re

qu

ire

me

nts

Ne

w

No

pre

vio

us

refe

ren

ce

Liq

uid

ity

Co

ve

ra

ge

Ra

tio

(L

CR

)

H

43

. L

CR

: C

en

tra

l

ba

nk

eli

gib

ilit

y

crit

eri

a

Re

cog

niz

e t

ha

t th

e B

CB

S w

ish

es

to a

vo

id s

tan

da

rds

tha

t p

ut

cen

tra

l

ba

nk

s in

th

e p

osi

tio

n t

ha

t th

ey

are

le

nd

ers

of

firs

t re

sort

, bu

t

ne

ve

rth

ele

ss n

ote

th

at

the

BC

BS

ha

s st

ate

d t

ha

t h

igh

qu

ali

ty a

sse

ts

sho

uld

als

o i

de

all

y b

e c

en

tra

l b

an

k e

lig

ible

fo

r in

tra

da

y l

iqu

idit

y n

ee

ds

Clo

sed

Up

da

te t

o G

FM

A 1

6 A

pri

l

20

10

re

spo

nse

to

BC

BS

16

4 a

nd

16

5 (

pa

ge

75

)

Page 23: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

23

Ta

ble

2:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n l

iqu

idit

y (

up

da

ted

fo

r B

CB

S 1

88

)

Pr

iori

ty

Ra

tin

g

(H /

M

/ L

)

Iss

ue

na

me

GF

MA

po

siti

on

Is

su

e s

tatu

s

Cr

os

s r

efe

re

nc

e t

o p

rev

iou

s

co

rr

es

po

nd

en

ce

an

d o

ve

rnig

ht

faci

liti

es

in a

dd

itio

n t

o b

ein

g l

iqu

id i

n m

ark

ets

in

stre

sse

d p

eri

od

s (B

CB

S 1

88

pa

ra 2

0 (

a)

pa

ra 3

8 a

nd

fo

otn

ote

8)

an

d, a

s

such

, ce

ntr

al

ba

nk

eli

gib

ilit

y d

oe

s d

riv

e l

iqu

idit

y i

n c

ert

ain

in

stru

me

nts

H

44

. C

alc

ula

tio

n

of

the

LC

R:

Co

mp

uta

tio

n

of

liq

uid

ity

bu

ffe

r v

s.

com

pu

tati

on

of

ad

just

ed

Le

ve

l 1

an

d

Le

ve

l 2

ass

ets

In r

efe

ren

ce t

o A

nn

ex

2,

see

k c

on

firm

ati

on

of

ou

r u

nd

ers

tan

din

g o

f

ho

w t

o c

om

pu

te t

he

LC

R b

oth

in

te

rms

of

the

ca

lcu

lati

on

of

the

bu

ffe

r

in r

ela

tio

n t

o t

he

ca

p o

n t

he

bu

ffe

r a

nd

ne

t o

utf

low

s:

– S

ee

k c

on

firm

ati

on

th

at

(i)

the

co

mp

uta

tio

n o

f th

e c

ap

is

ind

ep

en

de

nt

of

the

bu

ffe

r ca

lcu

lati

on

; (i

i) t

he

co

mp

uta

tio

n o

f th

e b

uff

er

is b

ase

d

on

ass

ets

th

at

can

be

re

ali

sed

on

‘da

y o

ne

’; a

nd

(ii

i) c

om

pu

tati

on

of

the

ne

t o

utf

low

s is

ba

sed

on

th

e s

um

of

the

se f

low

s o

ve

r th

e n

ex

t 3

0

da

ys

– I

f th

e C

om

mit

tee

ca

n c

on

firm

th

e a

bo

ve

, wo

uld

lik

e t

o d

iscu

ss t

he

be

ha

vio

urs

th

at

ma

y a

rise

as

a r

esu

lt o

f th

e L

CR

’s d

esi

gn

, th

e

tre

atm

en

t o

f co

lla

tera

l sw

ap

s a

nd

th

e d

ete

rio

rati

on

of

the

ma

rke

t

va

lue

un

de

r a

sse

ts r

ece

ive

d a

s co

lla

tera

l u

nd

er

a r

ev

ers

e r

ep

o

Ne

w

No

pre

vio

us

refe

ren

ce

H

45

. L

CR

:

De

fin

itio

n o

f

the

bu

ffe

r –

Le

ve

l 1

vs.

Le

ve

l 2

liq

uid

ass

ets

Se

ek

cla

rity

on

:

the

pro

cess

th

e C

om

mit

tee

wil

l b

e a

do

pti

ng

ov

er

the

ob

serv

ati

on

pe

rio

d t

o t

est

th

e r

ati

ng

s cr

ite

ria

an

d q

ua

lita

tiv

e a

nd

qu

an

tita

tiv

e

crit

eri

a t

ha

t is

be

ap

pli

ed

to

Le

ve

l 2

ass

ets

(B

CB

S 1

88

42

- 4

3);

th

e p

roce

ss b

ein

g a

do

pte

d t

o f

urt

he

r d

efi

ne

su

bje

ctiv

e L

ev

el

1 c

rite

ria

,

pa

rtic

ula

rly

‘tr

ad

ed

in

de

ep

an

d a

ctiv

e r

ep

o o

r ca

sh m

ark

ets

cha

ract

eri

zed

by

a l

ow

le

ve

l o

f co

nce

ntr

ati

on

’ is

als

o f

air

ly s

ub

ject

ive

(BC

BS

18

8 4

0 c

);

wh

eth

er

the

an

aly

sis

of

(i)

an

d (

ii)

an

d/

or

de

sig

na

tio

n o

f L

ev

el

1 a

nd

Le

ve

l 2

ass

ets

wil

l b

e u

nd

ert

ak

en

by

th

e C

om

mit

tee

in

co

nju

nct

ion

wit

h l

oca

l s

up

erv

iso

rs;

or

so

lely

re

gio

na

l a

nd

/ o

r n

ati

on

al

sup

erv

iso

rs;

an

d /

or

wh

eth

er

thir

d p

art

ies

wil

l b

e i

nv

ite

d;

an

d /

or

if

ba

nk

s w

ill

be

ask

ed

to

un

de

rta

ke

th

e a

sse

ssm

en

t o

f (i

i)

Up

da

te

GF

MA

3 S

ep

t 2

01

0 A

nn

ex

Page 24: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

24

Ta

ble

2:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n l

iqu

idit

y (

up

da

ted

fo

r B

CB

S 1

88

)

Pr

iori

ty

Ra

tin

g

(H /

M

/ L

)

Iss

ue

na

me

GF

MA

po

siti

on

Is

su

e s

tatu

s

Cr

os

s r

efe

re

nc

e t

o p

rev

iou

s

co

rr

es

po

nd

en

ce

H

46

. L

CR

:

Re

cog

nit

ion

of

a w

ide

r

ran

ge

of

ass

ets

Re

ma

in d

isa

pp

oin

ted

th

at

the

Co

mm

itte

e h

as

no

t a

llo

we

d a

wid

er

ran

ge

of

ass

ets

[w

ith

pro

ve

n l

iqu

idit

y]

(e.g

. go

ld a

nd

eq

uit

ies)

in

th

e

liq

uid

ity

bu

ffe

r b

ey

on

d t

he

Le

ve

l 1

an

d L

ev

el

2 a

sse

ts i

de

nti

fie

d i

n

BC

BS

18

8 o

r a

llo

w t

he

m t

o b

e r

eco

gn

ize

d i

n t

he

co

mp

uta

tio

n o

f n

et

ou

tflo

ws

Ke

en

to

ob

tain

cla

rity

on

th

e C

om

mit

tee

’s v

iew

s o

n t

he

po

ten

tia

l

imp

act

of

this

ex

clu

sio

n o

f a

wid

er

ran

ge

of

ass

ets

in

th

e l

iqu

idit

y b

uff

er

giv

en

th

e (

i) i

mp

act

th

is e

xcl

usi

on

mig

ht

ha

ve

on

th

ese

ass

ets

in

te

rms

of

dri

vin

g t

he

ir f

un

din

g o

uts

ide

of

the

ba

nk

ing

se

cto

r a

nd

(ii

) th

e

req

uir

em

en

t (B

CB

S 1

88

pa

ra 4

1)

tha

t a

ny

in

stit

uti

on

sh

ou

ld b

e w

ell

div

ers

ifie

d i

n t

erm

s o

f a

sse

ts, t

yp

e o

f is

sue

, an

d s

pe

cifi

c co

un

terp

art

y

or

sect

or

Up

da

te

GF

MA

16

Ap

ril

20

10

resp

on

se t

o B

CB

S 1

64

an

d

16

5 (

reco

mm

en

da

tio

n x

,

pa

ge

75

- 8

0)

H

47

. L

CR

: L

ev

el

2

liq

uid

ass

ets

an

d c

ov

ere

d

bo

nd

s

Re

min

d t

he

Co

mm

itte

e o

f o

ur

pro

po

sed

ap

pro

ach

fo

r a

sse

ssin

g

liq

uid

ity

of

cov

ere

d b

on

ds

(as

ou

tlin

ed

th

e G

FM

A 3

Se

pte

mb

er

lett

er

to

the

GH

OS

). I

t is

sim

ila

r to

th

e a

pp

roa

ch u

sed

by

th

e E

CB

an

d w

e w

ou

ld

ex

ten

d t

he

de

fin

itio

n o

f co

ve

red

bo

nd

s to

str

uct

ure

d c

ov

ere

d b

on

ds

No

te t

ha

t th

e i

ncl

usi

on

of

Fa

nn

ie M

ae

an

d F

red

die

Ma

c p

ap

er

in t

he

de

fin

itio

n o

f P

SE

, as

a L

ev

el

1 a

sse

t, g

ive

s su

pp

ort

to

th

e U

S m

ort

ga

ge

ma

rke

t. I

n c

on

tra

st, t

he

EU

co

ve

red

bo

nd

ma

rke

t is

on

ly r

eco

gn

ize

s a

s a

Le

ve

l 2

ass

et

so i

t is

no

t su

pp

ort

ed

in

eq

uiv

ale

nt

ma

nn

er

As

a f

urt

he

r re

ma

rk i

n r

ela

tio

n t

he

de

fin

itio

n o

f P

SE

, we

un

de

rsta

nd

th

e

de

fin

itio

n o

f P

SE

s to

be

as

cov

ere

d b

y B

CB

S 1

07

pa

ra 5

8 –

58

an

d

foo

tno

tes

22

– 2

3 a

nd

se

ek

co

nfi

rma

tio

n t

ha

t th

is d

efi

nit

ion

wil

l a

pp

ly

to t

he

Ba

sel

III

fra

me

wo

rk

Up

da

te

GF

MA

3 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.3.3

– 2

.3.5

an

d

An

ne

x 1

in

clu

din

g

reco

mm

en

da

tio

n b

ox

at

the

en

d o

f p

ara

1.2

.10

)

H

48

. L

CR

: A

sse

t

he

ld a

s

fun

din

g a

t

less

th

an

30

da

ys

Se

ek

cla

rifi

cati

on

, wit

h r

efe

ren

ce t

o B

CB

S 1

88

pa

ra 8

5, w

he

the

r fo

r th

e

pu

rpo

ses

of

the

LC

R -

(a

s it

ap

pe

ars

to

be

th

e c

ase

fo

r th

e N

SF

R (

BC

BS

18

8 p

ara

13

2)

alt

ho

ug

h d

efi

ne

d i

n t

erm

s o

f le

ss t

ha

n a

ye

ar)

-

tha

t

wh

en

th

e r

esi

du

al

ma

turi

ty o

n a

pu

bli

c co

ve

red

bo

nd

(o

r si

mil

ar

secu

red

fu

nd

ing

tra

nsa

ctio

n o

n a

po

ol

of

coll

ate

ral

ass

ets

in

th

e f

orm

of

tra

de

d s

ecu

riti

es)

dro

ps

to l

ess

th

an

30

da

ys

(co

un

tin

g a

s a

n o

utf

low

Ne

w

No

pre

vio

us

refe

ren

ce

Page 25: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

25

Ta

ble

2:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n l

iqu

idit

y (

up

da

ted

fo

r B

CB

S 1

88

)

Pr

iori

ty

Ra

tin

g

(H /

M

/ L

)

Iss

ue

na

me

GF

MA

po

siti

on

Is

su

e s

tatu

s

Cr

os

s r

efe

re

nc

e t

o p

rev

iou

s

co

rr

es

po

nd

en

ce

un

de

r th

e L

CR

), t

ha

t th

e a

sse

ts h

eld

as

coll

ate

ral

in t

he

co

ve

red

po

ol

can

be

in

clu

de

d i

n t

he

liq

uid

ity

bu

ffe

r su

bje

ct t

o t

he

fa

cto

rs g

ive

n i

n

BC

BS

18

8 p

ara

87

, an

d t

ha

t th

e a

sse

ts s

ati

sfy

th

e c

rite

ria

in

BC

BS

pa

ra

40

an

d 4

2 r

esp

ect

ive

ly.

In t

he

ca

se o

f o

the

r a

sse

ts h

eld

as

coll

ate

ral

(e.g

. mo

rtg

ag

e l

oa

ns

coll

ate

rali

sin

g a

mo

rtg

ag

e c

ov

ere

d b

on

d)

we

ass

um

e t

ha

t in

flo

ws

are

co

nsi

de

red

in

th

e d

en

om

ina

tor

as

pe

r p

ara

10

5, c

on

sid

eri

ng

th

e r

esp

ect

ive

ro

ll-o

ff f

act

ors

giv

en

by

BC

BS

18

8 p

ara

11

3 -

11

4

H

49

. L

CR

:

Op

era

tio

na

l

req

uir

em

en

t

s –

rest

rict

ion

s

We

lco

me

th

e c

lari

ty o

n t

he

op

era

tio

na

l re

qu

ire

me

nts

re

lati

ng

to

th

e

LC

R b

ut

rem

ain

dis

ap

po

inte

d b

y t

he

re

stri

ctio

n t

ha

t ‘t

he

sto

ck o

f li

qu

id

ass

ets

sh

ou

ld n

ot

be

co

-min

gle

d w

ith

or

use

d a

s h

ed

ge

s […

] a

nd

sh

ou

ld

be

ma

na

ge

d w

ith

th

e c

lea

r a

nd

so

le i

nte

nt

for

use

as

a s

ou

rce

of

con

tin

ge

nt

fun

ds”

(B

CB

S 1

88

pa

ra 2

6, 2

8 a

nd

33

). T

he

ap

pa

ren

t

imp

lica

tio

n o

f th

is r

est

rict

ion

is

tha

t u

ne

ncu

mb

ere

d a

sse

ts i

n t

he

tra

din

g b

oo

k a

t d

ay

en

d a

re n

ot

eli

gib

le f

or

incl

usi

on

in

th

e b

uff

er

(or

ev

en

as

in t

he

LC

R d

en

om

ina

tor)

an

d w

e w

ou

ld l

ike

co

nfi

rma

tio

n t

ha

t

this

is

the

ca

se

Se

ek

cla

rifi

cati

on

th

at

the

ro

ll-o

ve

r a

ssu

mp

tio

ns

for

ass

ets

fin

an

ced

on

a s

ecu

red

ba

sis

are

de

term

ine

d w

ith

re

fere

nce

to

th

e u

nd

erl

yin

g a

sse

t

qu

ali

ty o

nly

, an

d n

ot

ad

dit

ion

all

y l

ink

ed

to

th

e b

roa

de

r o

pe

rati

on

al

req

uir

em

en

ts o

f th

e l

iqu

idit

y b

uff

er

(e.g

. a s

ov

ere

ign

bo

nd

re

po

th

at

is

pa

rt o

f th

e t

rad

ing

bu

sin

ess

)

We

lco

me

th

e c

lari

fica

tio

n t

ha

t a

ba

nk

is

pe

rmit

ted

to

he

dg

e p

rice

ris

ks

ass

oci

ate

d w

ith

th

e s

tock

of

liq

uid

ass

ets

an

d w

hil

e w

e r

eco

gn

ise

th

at

the

ca

sh o

utf

low

ass

oci

ate

d w

ith

a h

ed

ge

sh

ou

ld b

e t

ak

en

in

to a

cco

un

t,

we

se

ek

cla

rity

as

to t

ha

t th

e i

nfl

ow

s fr

om

th

e h

ed

ge

ca

n b

e c

ou

nte

d

(BC

BS

18

8 p

ara

28

)

Up

da

te

GF

MA

3 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.3.1

– 2

.3.2

)

H

50

. L

CR

:

Op

era

tio

na

l

req

uir

em

en

t

Ex

pre

ss c

on

cern

th

at

on

e o

f th

e i

mp

lica

tio

ns

of

the

op

era

tio

na

l

req

uir

em

en

ts i

s th

at

a m

uch

gre

ate

r p

rop

ort

ion

of

corp

ora

te d

ep

osi

ts

wil

l fa

ll i

n t

he

75

% r

un

-off

ca

teg

ory

th

an

th

ose

th

at

are

ty

pic

all

y

Ne

w

No

pre

vio

us

refe

ren

ce

Page 26: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

26

Ta

ble

2:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n l

iqu

idit

y (

up

da

ted

fo

r B

CB

S 1

88

)

Pr

iori

ty

Ra

tin

g

(H /

M

/ L

)

Iss

ue

na

me

GF

MA

po

siti

on

Is

su

e s

tatu

s

Cr

os

s r

efe

re

nc

e t

o p

rev

iou

s

co

rr

es

po

nd

en

ce

s -

corp

ora

tes

ma

na

ge

d b

y p

rofe

ssio

na

l tr

ea

sure

rs. T

his

de

fin

itio

n o

f o

pe

rati

on

al

rela

tio

nsh

ip s

ee

ms

to r

ela

te t

o a

dis

inte

rme

dia

ted

(b

an

kin

g)

mo

de

l a

nd

do

es

no

t co

rre

spo

nd

to

th

e w

ay

th

e b

an

kin

g i

nd

ust

ry e

ng

ag

es

wit

h

corp

ora

tes

in m

an

y j

uri

sdic

tio

ns.

Mo

reo

ve

r, t

he

50

% r

oll

-ov

er

rate

fo

r

cre

dit

be

com

es

inco

nsi

ste

nt

wit

h a

75

% r

un

-off

ra

te f

or

de

po

sits

H

51

. L

CR

: C

ap

Se

ek

cla

rity

as

to w

hy

in

flo

ws

are

no

t re

ga

rde

d a

s h

av

ing

th

e s

am

e

liq

uid

ity

va

lue

as

the

ab

ilit

y t

o t

ran

sfo

rm c

ert

ain

ass

ets

in

to c

ash

an

d

wh

y s

uch

a l

ow

lim

it (

75

% r

ath

er

tha

n, s

ay

90

%)

wa

s p

lace

d o

n t

he

reli

an

ce o

n i

nfl

ow

s (B

CB

S 1

88

pa

ra 5

0)

Su

gg

est

th

at

som

e t

ran

sact

ion

ty

pe

s sh

ou

ld b

e e

xcl

ud

ed

fro

m t

his

ru

le,

such

as

pro

ject

fin

an

ce a

nd

oth

er

kin

ds

of

bu

sin

ess

es

Ne

w

No

pre

vio

us

refe

ren

ce

H

52

. L

CR

:

Tre

atm

en

t o

f

liq

uid

ity

lin

es

Vie

w a

s u

nre

ali

stic

th

e 1

00

% d

raw

n f

act

or

to b

e a

pp

lie

d t

o u

nd

raw

n

com

mit

ted

liq

uid

ity

fa

cili

tie

s to

no

n-f

ina

nci

al

corp

ora

tes

an

d a

re

con

cern

ed

ab

ou

t th

e i

mp

act

on

th

e c

ap

aci

ty o

f th

ese

co

rpo

rate

s to

refi

na

nce

Co

nti

nu

e t

o m

on

ito

r h

ow

de

fin

itio

n o

f th

e l

iqu

idit

y l

ine

(w

hic

h w

e

we

lco

me

) w

ill

op

era

te i

n t

he

ob

serv

ati

on

al

pe

rio

d (

BC

BS

18

8 p

ara

93

95

)

Up

da

te

GF

MA

3 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.2.6

– 2

.2.1

0)

M

53

. L

CR

:

Tre

atm

en

t o

f

op

era

tio

na

l

ba

lan

ces

No

te t

he

asy

mm

etr

ic t

rea

tme

nt

of

op

era

tio

na

l b

ala

nce

s (2

5%

ou

tflo

w

fact

or

ap

pli

ed

to

de

po

sits

an

d 0

% i

nfl

ow

ass

um

pti

on

fo

r th

e d

ep

osi

tin

g

ba

nk

), a

nd

we

lco

me

th

e a

cco

mm

od

ati

on

of

de

po

sits

wit

h s

erv

ice

pro

vid

ers

in

th

e f

ram

ew

ork

, an

d s

ee

k c

lari

ty o

n h

ow

th

e d

ete

rmin

ati

on

of

serv

ice

pro

vid

ers

wil

l b

e m

ad

e (

BC

BS

18

8 p

ara

72

– 7

8)

Up

da

te

GF

MA

3 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.2.2

)

L

54

. L

CR

:

Juri

sdic

tio

ns

wit

ho

ut

suff

icie

nt

lev

el

1 a

sse

ts

We

lco

me

th

e 2

6 J

uly

20

10

an

no

un

cem

en

t th

at

the

Ba

sel

Co

mm

itte

e

wo

uld

be

de

ve

lop

ing

sta

nd

ard

s fo

r ju

risd

icti

on

s w

ith

in

suff

icie

nt

Le

ve

l

1 a

sse

ts

In o

rde

r to

ke

ep

le

ve

l p

lay

ing

fie

ld a

cro

ss j

uri

sdic

tio

ns

an

d t

o a

vo

id t

he

mu

ltip

le s

ide

eff

ect

s o

f th

e b

uil

din

g o

f h

ug

e g

ov

ern

me

nt

bo

nd

po

rtfo

lio

s in

ba

nk

ba

lan

ce s

he

ets

, we

en

cou

rag

e t

he

Co

mm

itte

e t

o

Up

da

te

GF

MA

3 S

ep

t 2

01

0 l

ett

er

(pa

ra 2

.3.4

)

Page 27: Basel 3 framework: outstanding issues on Basel III standards and processes 1… · 2019-12-19 · 1.1.3. We would like to use this opportunity to offer our remarks on the emerging

27

Ta

ble

2:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n l

iqu

idit

y (

up

da

ted

fo

r B

CB

S 1

88

)

Pr

iori

ty

Ra

tin

g

(H /

M

/ L

)

Iss

ue

na

me

GF

MA

po

siti

on

Is

su

e s

tatu

s

Cr

os

s r

efe

re

nc

e t

o p

rev

iou

s

co

rr

es

po

nd

en

ce

ad

op

t O

pti

on

1 (

BC

BS

18

8 p

ara

47

) Ne

t S

tab

le F

un

din

g R

ati

o (

NS

FR

)

M

55

. N

SF

R

de

sig

n:

Co

un

ter-

intu

itiv

e

ou

tco

me

s

Co

nti

nu

e t

o s

ee

k e

ng

ag

em

en

t o

n t

he

de

sig

n a

nd

ca

lib

rati

on

of

the

NS

FR

no

tin

g t

ha

t th

at

BC

BS

18

8 (

see

Ap

pe

nd

ix I

II)

do

es

no

t a

dd

ress

th

e

cou

nte

r in

tuit

ive

ou

tco

me

s p

rod

uce

d b

y t

he

Co

mm

itte

e’s

De

cem

be

r

20

10

pro

po

sal

BC

BS

16

5

Op

en

GF

MA

3 S

ep

t 2

01

0 l

ett

er

(pa

ra 3

.1.2

– 3

.2.5

)

GF

MA

16

Ap

ril

20

10

resp

on

se t

o B

CB

S 1

64

an

d

16

5 (

pa

ge

85

an

d 8

6)

An

ne

x 3

M

56

. N

SF

R d

esi

gn

:

Cli

ff e

ffe

cts

Alt

ho

ug

h t

he

Co

mm

itte

e i

s se

ek

ing

to

ev

alu

ate

th

e t

rea

tme

nt

of

ma

tch

fun

de

d a

sse

ts a

nd

lia

bil

itie

s a

nd

is

see

kin

g t

o p

rov

ide

in

cen

tiv

es

for

term

fu

nd

ing

wit

hin

a y

ea

r (B

CB

S 1

88

pa

ra 1

34

), t

he

cli

ff e

ffe

cts

ass

oci

ate

d w

ith

th

e N

SF

R r

em

ain

a c

on

cern

fo

r o

ur

me

mb

ers

Se

ek

co

nfi

rma

tio

n t

ha

t in

th

e c

ase

of

hig

hly

liq

uid

ass

ets

use

d a

s

coll

ate

ral

as

in t

he

ca

se o

f a

pu

bli

c co

ve

red

bo

nd

, wit

h a

ma

turi

ty o

f

less

th

an

a y

ea

r, t

he

y w

ou

ld r

eq

uir

e a

n R

SF

of

5-2

0%

(B

CB

S 1

88

pa

ra

13

2)

Up

da

te

GF

MA

3 S

ep

t 2

01

0 l

ett

er

(pa

ra 3

.2.2

)

M

57

. N

SF

R d

esi

gn

:

Tre

atm

en

t o

f

rep

os

an

d

rev

ers

e

Se

ek

cla

rity

on

th

e t

rea

tme

nt

of

rep

os

an

d r

ev

ers

e r

ep

os.

It

wo

uld

ap

pe

ar

tha

t re

po

s w

ill

att

ract

an

RS

F o

f th

e u

nd

erl

inin

g a

sse

t re

ceiv

ed

at

the

ma

turi

ty o

f th

e t

ran

sact

ion

wh

ile

re

ve

rse

s w

ill

att

ract

0%

as

cash

is r

ece

ive

d (

BC

BS

18

8 p

ara

13

1)

Op

en

GF

MA

/ B

BA

/ I

SD

A j

oin

t

ind

ust

ry r

esp

on

se t

o B

CB

S

16

4 a

nd

16

5 (

pa

ge

88

)

M

58

. N

SF

R d

esi

gn

:

Lo

an

secu

red

by

a

rev

ers

e r

ep

o

Se

ek

cla

rity

( i

n r

ela

tio

n t

o t

he

co

mp

on

en

ts o

f th

e 0

% R

SF

fa

cto

r) a

s to

the

me

an

ing

of

‘un

en

cum

be

red

se

curi

tie

s h

eld

wh

ere

in

stit

uti

on

ha

s a

n

off

sett

ing

re

ve

rse

re

pu

rch

ase

tra

nsa

ctio

n w

he

n t

he

se

curi

ty o

n e

ach

tra

nsa

ctio

n h

as

the

sa

me

un

iqu

e i

de

nti

fie

r (B

CB

S 1

88

Ta

ble

2)

Ne

w

No

pre

vio

us

refe

ren

ce

M

59

. N

SF

R d

esi

gn

:

Tre

atm

en

t o

f

de

riv

ati

ve

s

Se

ek

cla

rity

on

th

e t

rea

tme

nt

of

de

riv

ati

ve

s a

nd

su

gg

est

th

at

an

y

rev

iew

of

the

de

sig

n o

f th

e N

SF

R r

eq

uir

es

a f

ull

dis

cuss

ion

– I

t w

ou

ld a

pp

ea

r th

at

un

de

r th

e N

SF

R d

eri

va

tiv

es

fall

in

to t

he

‘all

oth

er

lia

bil

itie

s’ 0

% A

SF

bu

cke

t a

nd

‘all

oth

er

ass

ets

’ 10

0%

RS

F

bu

cke

t im

ply

ing

th

at

the

y h

av

e n

o v

alu

e a

s a

so

urc

e o

f st

ab

le

Op

en

GF

MA

/ B

BA

/ I

SD

A j

oin

t

ind

ust

ry r

esp

on

se t

o B

CB

S

16

4 a

nd

16

5 (

pa

ge

88

)

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28

Ta

ble

2:

GF

MA

Ba

se

l II

I

Po

sit

ion

s o

n l

iqu

idit

y (

up

da

ted

fo

r B

CB

S 1

88

)

Pr

iori

ty

Ra

tin

g

(H /

M

/ L

)

Iss

ue

na

me

GF

MA

po

siti

on

Is

su

e s

tatu

s

Cr

os

s r

efe

re

nc

e t

o p

rev

iou

s

co

rr

es

po

nd

en

ce

fun

din

g a

nd

re

qu

ire

10

0%

su

pp

ort

– S

ug

ge

st t

ha

t th

ere

is

a n

ee

d t

o d

iffe

ren

tia

te b

etw

ee

n d

iffe

ren

t ty

pe

s

of

de

riv

ati

ve

tra

nsa

ctio

ns

– S

ee

k c

lari

ty a

s to

wh

eth

er

the

fu

ll n

ett

ing

of

ma

rke

t v

alu

es

is

all

ow

ed

as

ind

ica

ted

in

th

e C

om

mit

tee

’s 1

8 M

ay

20

10

Fre

qu

entl

y

ask

ed q

ues

tio

ns

on

th

e q

ua

nti

tati

ve i

mp

act

stu

dy

an

d a

llo

we

d u

nd

er

the

LC

R (

BC

BS

18

8 p

ara

88

)

M

60

. N

SF

R d

esi

gn

:

Ne

w

cou

nte

rpa

rty

gro

up

s

Se

ek

cla

rity

in

re

lati

on

to

th

e a

dd

itio

na

l co

un

terp

art

ies

tha

t a

re n

ow

incl

ud

ed

in

th

e R

SF

ca

teg

ory

of

50

% w

he

the

r o

ve

rnig

ht

de

po

sit

faci

liti

es

wil

l a

ttra

ct a

50

% R

SF

(B

CB

S 1

88

Ta

ble

2)

Ne

w

No

pre

vio

us

refe

ren

ce

Mo

nit

or

ing

To

ols

M

61

. C

on

tra

ctu

al

mis

ma

tch

:

Ca

ptu

rin

g

ne

t o

utf

low

s

> 3

0 d

ay

s

an

d <

1 y

ea

r

Se

ek

cla

rity

as

to w

he

the

r th

e C

om

mit

tee

wil

l re

com

me

nd

tim

e b

an

ds

for

wh

ich

co

ntr

act

ua

l m

ism

atc

h i

nfo

rma

tio

n i

s re

po

rte

d t

ha

t co

nsi

de

rs

po

ten

tia

l b

an

k o

utf

low

s o

ccu

rrin

g b

etw

ee

n 3

0 d

ay

s a

nd

un

de

r 1

-ye

ar

(i.e

. th

e L

CR

alr

ea

dy

ta

ke

s in

to a

cco

un

t o

utf

low

s L

CR

un

de

r 3

0 d

ay

s

an

d t

he

NS

FR

is

con

cern

ed

wit

h c

ha

ng

es

in f

un

din

g 1

-ye

ar

an

d

be

yo

nd

)

Ne

w

No

pre

vio

us

refe

ren

ce

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29

Annex 2: Computation of the LCR and issues arising

The Global Financial Markets Association (“GFMA”) is pleased to attach examples

illustrating our understanding of how the Liquidity Coverage Ratio (“LCR”) is to be

computed. These examples raise a number of issues and are based on our

interpretation of the Committee’s 10 December 2010 Basel III: International

framework for liquidity risk measurement, standards and monitoring (“BCBS 188”).

Annex 2 is organised as follows:

• Introduction to Sections

• Section 1: Interpretation of LCR and cap calculations applying to repo / reverse

repos on a case-by-case basis

• Section 2: Interpretation of LCR and cap calculations applying to repo / reverse repos on a portfolio basis

• Section 3: Interpretation of LCR and cap calculations applying to repo / reverse

repos for collateral swaps

• Section 4: Interpretation of the treatment of a deterioration in the market value

of an asset received as collateral under a reverse repo

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30

Annex 2

Introductory remarks – overview (following comments in Annex 1 Issue #43)

Based on our interpretation of BCBS 188 GFMA has constructed a series of examples

that look at the computation of the LCR. All paragraph references in this Annex refer

to BCBS 188 unless stated otherwise.

We have used a building block approach to help illustrate the calculations that

require confirmation and also outline questions we would like to raise directly with

the Committee for discussion. Our simple illustrative calculations are embedded

within this Annex and split into four sections. In general terms:

• Section 1 looks at sixteen independent repo and reverse repo computations and

the calculation of the LCR (in terms of its components and the cap on the buffer).

• Section 2 utilises the cases identified in Section 1 and considers the LCR in terms

of a changing portfolio of assets

• Section 3 again utilising the cases set out in Section 1 considers the treatment of

collateral swaps

• Section 4 looks at the particular question of how to deal with the deterioration of

an asset received as collateral under a reverse repo for a secured funding

transaction of less than 30 days

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31

Se

ctio

n 1

– i

n d

eta

il

Se

ctio

n 1

co

ve

rs s

ixte

en

in

de

pe

nd

en

t ca

se s

tud

ies

de

ve

lop

ed

to

ob

tain

co

nfi

rma

tio

n f

rom

th

e C

om

mit

tee

of

ou

r u

nd

ers

tan

din

g o

f th

e L

CR

ca

lcu

lati

on

(in

te

rms

of

its

com

po

ne

nts

an

d t

he

ca

p o

n t

he

bu

ffe

r) i

n r

ela

tio

n t

o s

imp

le r

ep

o a

nd

re

ve

rse

re

po

tra

nsa

ctio

ns.

Se

ctio

n 1

lo

ok

s a

t th

e c

alc

ula

tio

n o

f th

e:

Ass

ets

in

liq

uid

ity

bu

ffe

r th

at

can

be

re

ali

sed

on

da

y 1

(p

ara

39

– 4

2);

Cu

mu

lati

ve

ne

t ca

sh f

low

s o

ve

r n

ex

t 3

0 d

ay

s (

pa

ra 8

5-

87

an

d p

ara

10

8 -

10

9);

Ad

just

ed

le

ve

l 1

an

d l

ev

el

2 a

sse

ts d

ete

rmin

ing

th

e c

alc

ula

tio

n o

f th

e c

ap

(p

ara

35

– 3

7 a

nd

pa

ra 4

1).

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32

Each case study is numbered in column A and, as mentioned above, is independent

of the other. All sixteen cases, however, are conceptually the same and follow the

same approach so we only take a close look at case 1 (and a high level view of case

2) noting that, where it is relevant, column B identifies the corresponding mirror

case (where appropriate); for example, the mirror of case 2 is case 9.

Case 1 – Counterparty A:

• The buffer computation

o At the start, counterparty A has 100 units of level 1 assets on its books

o Then on day 1, counterparty A enters into a repo agreement under which it

receives 100 units of cash (Column C) and delivers level 1 assets worth 100

to counterparty B (Column D)

o In terms of the buffer, prior to this transaction, Counterparty A level 1

assets of 100 (Column F, as per para 40) and after the transaction this is

replaced with 100 of cash (Column G – numerator). This post-transaction

amount is what will be included in the numerator of the LCR calculation

• Net cash outflows:

o Over the next 30 days the cash outflows amount to zero (Column H –

denominator) as the repo is in relation to a level 1 asset (i.e. 100 x 0% is

added to the cash outflows as per para 86 and 87)

• Adjusted level 1 and level 2 assets:

o If the transaction was unwound, then counterparty A would be left with 100

units of level 1 assets as recorded in Column I. Columns I and J track

adjusted level 1 and level 2 assets used in the calculation of the 40% cap

(para 36 – 37) but not the buffer

Case 1 – Counterparty B:

• Columns L, M, N, O and P show the corresponding position for Counterparty

B in relation to the liquid buffer asset, total net cash flows over the next 30

calendar days (para 108–109) and adjusted level 1 and 2 assets (para 37)

Case 2 – Counterparty A

• Case 2 is like Case 1 except that counterparty A starts with 100 units of level

2 assets on its books. This leaves it with a buffer (Column F) of 85 (para 42)

to start. On day 1 it then repos out the level 2 assets for cash, leaving it with a

buffer of 100 (Column G). Net cash outflows amount to 15 over 30 days on

the returning level 2 asset (para 86 - 87). The adjusted level 2 assets is 85

(para 37) and the haircut applied under para 42

Cases 3,7,11 – roll-over assumptions

• We draw your attention to cases 3, 7 and 11. Currently the adjusted level 1

and 2 assets (Columns I and J) for these cases are shown in our example as

being zero because we were unclear on the roll-over assumptions applying

for the purposes of calculating the cap

• We would like to discuss the underlying treatment with the Committee

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Se

ctio

n 2

– i

n d

eta

il

Se

ctio

n 2

no

w l

oo

ks

at

the

LC

R a

nd

its

ca

p i

n t

erm

s o

f a

po

rtfo

lio

of

ass

ets

an

d c

ha

ng

es

to t

ha

t

Se

ctio

n 1

in

co

nju

nct

ion

wit

h o

utr

igh

t p

osi

tio

ns

an

d d

ea

ls o

n t

he

Th

e p

urp

ose

of

this

se

ctio

n i

s to

sh

ow

th

e p

ote

nti

al

inco

nsi

ste

nt

tre

atm

en

t o

f a

sse

ts i

n t

he

LC

R s

tan

d

Init

iall

y,

Ca

se 9

is

com

bin

ed

wit

h d

ea

ls o

n t

he

bo

ok

an

d

lev

el

2 a

sse

ts.

Th

e p

ort

foli

o i

s m

od

ifie

d b

y b

rin

gin

g i

n C

ase

8:

ba

nk

en

ters

in

to a

re

po

tra

nsa

ctio

n u

sin

g s

tock

of

illi

qu

id a

sse

ts i

t h

old

s o

utr

igh

t o

n t

he

ba

lan

ce s

he

et

33

LC

R a

nd

its

ca

p i

n t

erm

s o

f a

po

rtfo

lio

of

ass

ets

an

d c

ha

ng

es

to t

ha

t p

ort

foli

o,

wh

ilst

bri

ng

ing

in

Se

ctio

n 1

in

co

nju

nct

ion

wit

h o

utr

igh

t p

osi

tio

ns

an

d d

ea

ls o

n t

he

ex

isti

ng

bo

ok

.

tia

l in

con

sist

en

t tr

ea

tme

nt

of

ass

ets

in

th

e L

CR

sta

nd

-alo

ne

co

mp

uta

tio

n a

nd

th

e c

ap

.

de

als

on

th

e b

oo

k a

nd

ou

trig

ht

po

siti

on

s o

f 1

00

un

its

of

illi

qu

id a

sse

ts,

20

0 u

nit

s o

f le

ve

l 1

ass

ets

an

d 1

00

un

its

ba

nk

en

ters

in

to a

re

po

tra

nsa

ctio

n u

sin

g s

tock

of

illi

qu

id a

sse

ts i

t h

old

s o

utr

igh

t o

n t

he

ba

lan

ce s

he

et

po

rtfo

lio

, w

hil

st b

rin

gin

g i

n C

ase

s 8

an

d 9

ou

tlin

ed

in

alo

ne

co

mp

uta

tio

n a

nd

th

e c

ap

.

10

0 u

nit

s o

f il

liq

uid

ass

ets

, 2

00

un

its

of

lev

el

1 a

sse

ts a

nd

10

0 u

nit

s o

f

ba

nk

en

ters

in

to a

re

po

tra

nsa

ctio

n u

sin

g s

tock

of

illi

qu

id a

sse

ts i

t h

old

s o

utr

igh

t o

n t

he

ba

lan

ce s

he

et.

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34

Th

e i

mp

act

of

rep

oin

g o

ut

the

ill

iqu

id s

ecu

riti

es

for

a l

ev

el

1 a

sse

t is

an

in

cre

ase

in

liq

uid

ity

bu

ffe

r o

f 1

00

an

d c

ash

ou

tflo

w o

f 1

00

. T

his

re

sult

s in

th

e

liq

uid

ity

bu

ffe

r in

cre

asi

ng

to

47

0 (

fro

m 3

70

) a

nd

ne

t ca

sh o

utf

low

s in

cre

asi

ng

to

38

5 (

fro

m 2

85

) re

sult

ing

in

LC

R i

mp

rov

ing

to

11

1%

, b

rin

gin

g i

t in

lin

e w

ith

th

e r

eg

ula

tory

sta

nd

ard

fro

m t

he

po

siti

on

of

bre

ach

of

93

%.

Th

is a

dv

an

tag

eo

us

tre

atm

en

t h

as

occ

urr

ed

as

cha

ng

es

to t

he

nu

me

rato

r a

nd

de

no

min

ato

r d

o n

ot

ha

ve

an

eq

ua

l im

pa

ct o

n t

his

ra

tio

. Ho

we

ve

r, t

he

ca

p -

at

28

% -

re

ma

ins

un

cha

ng

ed

wit

h t

he

ad

dit

ion

of

Ca

se 8

to

th

e p

ort

foli

o.

Se

ctio

n 3

– i

n d

eta

il

Se

ctio

n 3

co

nsi

de

rs t

he

tre

atm

en

t o

f co

lla

tera

l sw

ap

s. B

CB

S 1

88

do

es

no

t e

xp

lici

tly

dis

cuss

ho

w t

o t

rea

t co

lla

tera

l sw

ap

s, a

lth

ou

gh

th

ey

ap

pe

ar

to b

e

all

ow

ed

(p

ara

85

). T

he

ta

ble

ab

ov

e s

ets

up

th

e t

rea

tme

nt

of

a c

oll

ate

ral

swa

p t

ran

sact

ion

in

vo

lvin

g t

wo

ass

ets

as

two

eco

no

mic

all

y e

qu

iva

len

t 'p

lain

va

nil

la' s

ecu

red

le

nd

ing

tra

nsa

ctio

ns

(Ex

am

ple

s 1

an

d 2

). O

nce

sp

lit

into

th

ese

tra

nsa

ctio

ns,

we

re

fer

to h

ow

th

ey

are

co

mp

ute

d u

nd

er

Se

ctio

n 1

(C

ase

s

2, 4

, 5, 6

, 9 a

nd

12

). W

e s

ee

k c

on

firm

ati

on

th

at

this

ap

pro

ach

is

corr

ect

.

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35

Se

ctio

n 4

– i

n d

eta

il

Fin

all

y,

Se

ctio

n 4

de

als

wit

h d

ete

rio

rati

on

in

th

e m

ark

et

va

lue

of

an

ass

et

rece

ive

d a

s co

lla

tera

l u

nd

er

a r

ev

ers

e r

ep

o d

uri

ng

th

e l

ife

tim

e o

f a

se

cure

d

len

din

g t

ran

sact

ion

(le

ss t

ha

n 3

0 d

ay

s).

We

ha

ve

id

en

tifi

ed

th

ree

po

ssib

le a

lte

rna

tiv

es

to a

cco

un

t fo

r th

is d

ete

rio

rati

on

in

th

e a

sse

ts:

1)

Wri

te d

ow

n t

he

liq

uid

ass

et

bu

ffe

r (1

0%

ha

ircu

t) b

y t

he

am

ou

nt

of

the

de

teri

ora

tio

n i

n t

he

ass

et

rece

ive

d

2)

Wri

te d

ow

n t

he

liq

uid

ass

et

bu

ffe

r (1

0%

ha

ircu

t) b

y t

he

am

ou

nt

of

the

de

teri

ora

tio

n i

n t

he

ass

et

rece

ive

d, b

ut

als

o r

eco

gn

ise

th

e n

et

cash

-flo

w

tha

t w

ill

occ

ur

on

th

e m

atu

rity

of

the

tra

nsa

ctio

n

3)

Re

pre

sen

ts a

n a

rra

ng

em

en

t w

he

reb

y t

he

co

un

terp

art

y i

s a

ble

to

ca

ll m

arg

in t

o c

ov

er

the

de

teri

ora

tio

n i

n t

he

ma

rke

t v

alu

e o

f th

e a

sse

t, a

nd

th

is

ma

rgin

is

ad

de

d t

o t

he

re

du

ced

le

ve

l o

f th

e l

iqu

id a

sse

t b

uff

er.

We

wo

uld

lik

e t

o d

iscu

ss t

he

se a

lte

rna

tiv

e t

rea

tme

nts

wit

h t

he

Co

mm

itte

e.

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36

Annex 3: NSFR outcomes

The Global Financial Markets Association (“GFMA”) is pleased to attach several

examples of outcomes produced by the design of the Net Stable Funding Ratio

(“NSFR”), as published in the Committee’s 10 December 2010 Basel III: International

framework for liquidity risk measurement, standards and monitoring (“BCBS 188”).

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Annex 3

In the GFMA / BBA / ISDA 16 April 2010 joint industry response we drew the

Committee’s attention to several outcomes produced by the proposed design of the NSFR that we questioned.

Our review of BCBS 188 indicates that these outcomes remain.

In reference to Tables 1, 2, 3 and Annex 2 of BCBS 188, we reiterate these examples,

updating as appropriate and clarifying where we thought it was helpful.

1. A corporate bond rated AA and financed with a three month commercial paper sold to a non-financial corporate has an NSFR of 250% (50% available stable

funding (ASF) for commercial paper/ 20% RSF for the corporate bond), while

the same asset financed with a nine month repo has an NSFR of 0% (0% /20%

RSF for the corporate bond). Consequently, the NSFR makes it more

advantageous for a bank to finance an AA-rated corporate bond with the sale of

three month commercial paper than nine month securities repo, while the

commercial paper can be sold back and the repo cannot be unwound early. It is counter-intuitive that locked-in funding is treated more harshly.

2. A blue chip equity security requires more stable funding (50% for non-

financials 100% for financials) than an equivalently sized unsecured nine month loan to a hedge fund (0%). This result is counter-intuitive as the

treatment appears unaligned to the risks associated with these assets.

3. A renewable nine month unsecured loan to a hedge fund (which the bank has an

irrevocable right to call) is assigned a 0% RSF while an identically termed loan secured with blue chip equities attracts either a 50% RSF or 100% RSF

(depending on whether they are a non-financial or a financial firm). As a consequence of the treatment of collateral, a financial services firm may find

that it prefers to extend the loan to the hedge fund over the secured loan, although a secured loan is more prudent from a credit and financing risk

management perspective.

4. It appears that secured borrowings of less than one years (i.e. repos) are

penalised attracting an ASF of 0% (for the cash borrowed by the firm) and an

RSF ranging from 5% (for governments, i.e. level 1 assets), to 20% for qualifying

corporate and covered bonds, i.e. level 2 assets, to 100% (for most non-

government assets, i.e. non level 1 and 2 assets) for the securities lent to finance

the borrowing. This treatment could mean the end of secured borrowing of less

than one year as it ignores the true stability of funding offered by certain types

of secured borrowing and overstates the stickiness of many assets that are regularly liquidated in the normal course of business.

5. Unencumbered marketable securities (representing claims or governments or

alike) with residual maturity of 1 year or more attracts a required stability

factor (RSF) of 5%, whereas a mortgage with say 7 years left on it would attract

a 100% RSF (as it would fall into the ‘all other assets category’). Thus, it appears

that the securities dealing business is favoured over straight retail lending

which requires more stable funding. The result is the same for commercial

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lending where the securities dealing business also appears to be favoured. This indicates to us that precise calibration is important and required.

The examples above point to a number of possible outcomes. Namely, funding will

be available from fewer sources/counterparties; less prudent credit activity will be

incentivised; secured borrowing could disappear; and, in some instances investment

banking will be encouraged over retail or commercial banking although retail

deposits are favoured from a stability of funding perspective (i.e. as retail deposits of

< 1 year are treated more favourably than wholesale funding).

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Annex 4: FSB, BCBS and related regulatory initiatives timeline

The Global Financial Markets Association (“GFMA”) is pleased to attach a timeline

representation of Financial Stability Board (FSB), BCBS and related regulatory

initiatives that will inform the emerging prudential framework.

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A

nn

ex

4

20

10

20

11

Capital / Liquidity /

Loss AbsorbencyQ

4H

1H

22

01

2Resolution

Strengthening SIFI

Supervision

Strengthening Core

Financial Market

Infrastructures

Peer Review of G-

SIFI Policies

Mid-2011: BCBS –Study on additional loss

absorbency

Mid-2011: FSB / Members –Assessment of

issues relating to contractual and statutory bail-ins

Dec: FSB / BCBS –Recommendations on additional

degree of loss absorbency and instruments

March: FSB Members –Assessment of SIFI

resolvability and needed legal and regulatory reforms

Mid-2011: FSB / Others –Formulation of resolvability

criteria and key attributes of effective resolution regimes

End 2011: FSB Members –Assessment on the basis

of resolvability criteria and key attributes of needed

changes of national resolution regimes and policies

Dec: FSB / BCBS CBRG –

Thematic peer review on

key attributes of effective

resolution regimes

Mid-2011: FSB Working Group –Recommendations on the

legal / operational aspects of contractual and statutory bail-ins

End-2011: Home / Host G-SIFI authorities –Institution-

specific cross-border cooperation agreements for G-SIFIs

End-2011: FSB CBCM –Report on progress on institution-

specific recovery and resolution plans for G-SIFIs

Mid-2011: FSB Members –Self-assessments

against relevant ICPs on effective supervision

End-2011: FSB –Status report on implementation of SIFI

supervisory Intensity and Effectiveness Recommendations

Early-2012: FSB Members –Self assessments

against relevant ICPs on effective supervision

End-2012: BCBS / IAIS / IOSCO –Review of relevant core principles

relating to supervisory powers, mandates and consolidated supervision

End-2012: BCBS / IAIS / IOSCO –Report

on improvements of supervisory colleges

Early 2011: CPSS / IOSCO –Review of standards for

financial market infrastructure (consultative report)

End 2011: CPSS / IOSCO –Review of standards

for financial market infrastructure (final report)

March: FSB OTC Derivatives WG –Assessment of progress on

implementation of FSB OTC Derivatives WG Recommendations

Dec: BCBS –Provisional

methodology for assessing

systemic importance (draft)

Early 2011: BCBS –Provisional methodology for

assessing systemic importance (finalised)

Mid-2011: FSB / National authorities / Others –

Determination of those institutions to which FSB

G-SIFI recommendations will initially apply

End 2011: FSB / Standard setters –

Evaluation framework for G-SIFI policies

End 2011: FSB –Establishment of Peer

Review Council (PRC)

Dec: FSB PRC –

Initial assessment

of G-SIFI policies

End 2010: FSB / BCBS –

Macroeconomic impact

assessment using Basel 3

framework (final report)

Source: FSB “Reducing the moral hazard posed by systemically important financial institutions”June: EC –CRD4

proposal expected