basel 3 framework: outstanding issues on basel iii standards and processes 1… · 2019-12-19 ·...
TRANSCRIPT
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
2
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
3
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.
4
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
5
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.
6
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).
7
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
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).
9
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
10
An
ne
x 1
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
Sy
ste
mic
Ris
k a
nd
In
ter
co
nn
ec
ted
ne
ss
H
1
. In
tro
du
ctio
n o
f
reg
ula
tory
in
itia
tiv
es
to
de
fin
e c
ap
ita
l st
ruct
ure
s
•
Se
ek
cl
ari
ty
on
h
ow
v
ari
ou
s re
gu
lato
ry
init
iati
ve
s
rela
tin
g t
o s
yst
em
ica
lly
im
po
rta
nt
firm
s a
nd
re
cov
ery
an
d
reso
luti
on
w
ill,
to
ge
the
r w
ith
B
ase
l 3
, co
me
tog
eth
er
to i
nfo
rm h
ow
fir
ms
de
fin
e t
he
ir r
eg
ula
tory
cap
ita
l st
ruct
ure
s (a
nd
in
de
ed
th
eir
to
tal
cap
ita
l
stru
ctu
res)
(B
CB
S 1
89
pa
ra 3
2 –
33
)
•
Op
en
•
Se
ctio
n 2
(a
bo
ve
)
Cy
cli
ca
lity
of
Min
imu
m R
eq
uir
em
en
ts
H
2
. In
tera
ctio
n o
f f
urt
he
r
mic
ro p
rud
en
tia
l
me
asu
res
wit
hin
th
e
Ba
sel
3 f
ram
ew
ork
•
Se
ek
cla
rity
as
to w
he
the
r th
e C
om
mit
tee
wil
l co
nsu
lt
furt
he
r o
n h
ow
th
e c
ap
ita
l co
nse
rva
tio
n b
uff
er
an
d
cou
nte
rcy
clic
al
bu
ffe
r in
tera
ct w
ith
mic
ro p
rud
en
tia
l
me
asu
res
tha
t a
dd
ress
cy
clic
ali
ty
thro
ug
h
ad
just
me
nts
to
th
e
pro
ba
bil
ity
o
f d
efa
ult
in
th
e
Inte
rna
l R
ati
ng
s B
ase
d a
pp
roa
che
s, S
tre
sse
d V
ar
an
d
Str
ess
ed
EP
E
•
Op
en
•
Se
ctio
n 2
(a
bo
ve
)
Fo
rw
ar
d L
oo
kin
g P
ro
vis
ion
ing
M
3.
Fo
rwa
rd l
oo
kin
g
pro
vis
ion
ing
: V
alu
ati
on
•
No
te
tha
t IA
SB
/F
AS
B
rece
ntl
y
issu
ed
‘F
ina
nci
al
Inst
rum
en
ts:
Imp
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
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)
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)
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
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
)
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
)
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
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
)
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
)
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
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)
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)
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
)
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
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
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
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
)
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
)
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
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
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
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).
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
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.
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
.
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.
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”).
37
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
38
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).
39
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.
40
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