Question
Can Level 1 assets that are used for on demand secured lending transactions be considered as liquid assets for the Liquidity buffer?
Background on the question
It is not clear to us, how on demand secured lending positions shall be treated in the liquid asset section of LCR, in particular LCR DA Articles 7(2) and 8(2), e.g. in the case of Bank A giving Security 1 to Bank B in a secured lending transaction, but having the right to call the security back at any time.
Answer
In an on demand secured lending transaction the lender or the borrower can terminate the contract on any day in the future. A notice period typically needs to be given in advance to the counterparty.As per Article 7(2)(b) of Delegated Regulation (EU) 2015/61 the bank that has received the securities (the cash lender, Bank B in the example) is the one which will compute it as liquid assets if they meet the criteria in Articles 7 and 8 of Delegated Regulation (EU) 2015/61 and belong to any category of assets of Chapter 2. The bank that has posted the securities (the cash borrower, Bank A in the example) will only compute them as liquid assets once it holds them after the termination of the contract (first paragraph of Article 7(2)) and if the criteria in Articles 7, 8 and Chapter 2 are met.