Question
In case securities borrowing contract has a clause for early termination how shall we consider the notification period vs cash outflow for the calculation of LCR? Ex: 2 days notification period for early termination of securities borrowing contract. a) Do you consider this clause as a restriction to liquidation? b) Unless the early termination clause is activated can we omit the securities borrowed from cash outflows within 30 days?
Background on the question
FBF master agreement for securities lending / borrowing that we intend to use for borrowing HQLA to our HO has a 2 days notification period for early termination. We are investigating on how to reflect these operations in our LCR declaration.
Answer
General and operational requirements that must be fulfilled by liquid assets to be included in the numerator of the LCR are specified in Articles 7 and 8 of the Commission Delegated Regulation (EU) No 2015/61 of 10 October 2014 on the LCR for credit institutions. If securities that have been borrowed fulfil all these requirements they can be included as liquid assets in the numerator of the LCR even though the securities borrowing contract has a clause for early termination within the 30-day period and provided the securities belong to the borrower at the reporting date (are available for the first day of the stress). If the transaction matures within the 30 day horizon, or where at the reporting date the early-termination clause has been activated (by the borrower or by the lender), and the notification period falls within the 30 day horizon, a 100% outflow rate should be applied to the assets borrowed on an unsecured basis unless the credit institution owns the securities and they do not form part of the credit institution'sliquidity buffer in accordance with Article 30(11)28(7) of the Commission Delegated Regulation (EU) No 2015/61. If the transaction matures beyond the 30 day horizon, and provided the early-termination clause has not been activated at the reporting date but can be exercised by the lender with a notification period shorter than 30 days, pursuant to Article 30(6) of the Commission Delegated Regulation (EU) No 2015/61 a 100% outflow rate should be reported by the borrowing institution.