Introduction – Date 5 February 2018
The European Commission published this consultation on 24 January 2018, with a closing date for comment of 21 February 2018. The intention of the Commission is to improve the practical application of the Liquidity Coverage Ratio (“LCR”) rules.
There are five substantive amendments proposed, of which the first may be of particular interest to ISLA members.
In summary, the five amendments are
- A change in the calculation of the expected liquidity outflows and inflows on repos, reverse repos and collateral swap transactions
- A change in the treatment of certain reserves with central banks and Non-EU Public Sector Entities
- A change to the waiver for minimum issue size for certain non-EU assets (consolidated application)
- A change in the application of the unwind mechanism for the calculation of the liquidity buffer
- Integration in the LCR of the new simple, transparent and standardizes (STS) criteria for securitisation
Detail of the key amendment for ISLA members
The most important amendment is that the calculation of the expected liquidity outflows and inflows on repos, reverse repos and collateral swaps transactions should be fully aligned with the international liquidity standard developed by the Basel Committee on Banking Supervision (“BCBS”).
Although the treatment of those transactions in the LCR Delegated Regulation followed that in the Capital Requirements Regulation (“CRR”) and had not been challenged during the many discussions preceding the adoption of the LCR Delegated Regulation, the request is that the cash outflows calculation should be directly linked to the prolongation rate of the transaction (aligned with the haircut on the collateral provided applied to the cash liability, as in the BCBS standard) rather than to the liquidity value of the underlying collateral.
This approach should also be followed for collateral swaps. Generally, for repos, reverse repos and collateral swaps the language should be more closely aligned with the BCBS standard. This change will ensure that outflows and inflows on the same transactions are symmetrical and will thereby facilitate efficient liquidity management, particularly by internationally active banks.
The consultation then follows in paragraph 1.3 to state “The impact of the change to outflows and inflows on repos, reverse repos and collateral swaps transactions should be relatively neutral or negligible since the substantive change is very minimal.”
The amendments may have an impact on repo market participants in relation to liquidity coverage calculations, although the Commission believes this will be negligible.
From a securities lending perspective, the consultation does not seem to have any impact, and ISLA has not received any comments or concerns from member firms.
Whilst it is likely that ISLA won’t respond to this consultation (unless member firms request it) ISLA will liaise with ICMA and fully support any response they feel is necessary.