| (a) | Specified minimum requirements |
As a minimum, in order to promote the short-term resilience of a bank's liquidity risk profile and ensure that the bank continuously maintains an adequate level of unencumbered level one and level two high-quality liquid assets (HQLA) that can be converted into cash at limited or no loss of value, to meet the bank's expected total net cash outflows and/or any related liquidity needs during a 30 calendar day time horizon under a significantly severe liquidity stress scenario, whatever the source, a bank shall calculate and maintain a Liquidity Coverage Ratio (LCR) in accordance with the relevant requirements specified in this subregulation (12), provided that—
| (i) | in addition to the relevant requirements specified in this subregulation (12), a bank shall comply with such further or other conditions or requirements related to LCR as may be specified in writing by the Registrar; |
| (ii) | [Regulation 26(12)(a)(ii) deleted by section 7(d) of Notice No. 724, GG44003, dated 18 December 2020 - subsequent paragraphs have been renumbered] |
| (A) | a bank shall have in place policies, processes and procedures— |
| (i) | to capture any relevant liquidity transfer restrictions; |
| (ii) | to monitor the rules and regulations in the jurisdictions in which the group operates, and to assess the liquidity implications for the group as a whole; |
| (B) | when the bank assesses whether assets or instruments are freely transferable, the banks shall duly consider all relevant factors that may impact transferability, including regulatory, legal, tax, accounting or other relevant impediments, provided that— |
| (i) | when calculating its consolidated LCR, a bank or controlling company shall not recognise any excess liquidity in any relevant cross-border entity when there is reasonable doubt regarding the availability of such liquidity or the transferability of high-quality liquid assets, which availability, transferability or flow of funds, for example, may be affected by liquidity transfer restrictions such as ring-fencing measures, non-convertibility of local currency or foreign exchange controls, that is, any surplus of high-quality liquid assets held at a legal entity level shall be included in the consolidated portfolio of high-quality liquid assets only if those assets are freely available to the consolidating entity in times of stress; |
| (ii) | assets or instruments held in legal entities without market access, or with restricted market access, shall be included only to the extent that they can be freely transferred to other relevant entities that could monetise the assets or instruments; |
| (iii) | the bank shall exclude from its relevant portfolio of high-quality liquid assets any asset or instrument when an impediment to sale, such as large fire-sale discounts which would cause it to breach minimum solvency requirements, or requirements to hold such assets, including statutory minimum inventory requirements for market making, exists; |
| (C) | any relevant qualifying high-quality liquid asset or instrument that is held to meet any statutory liquidity requirement at a legal entity or sub-consolidation level shall only be included at the consolidated level to the extent that the related risks, as measured by the relevant legal entity or sub-consolidated group in its relevant calculated amount of net cash outflows for LCR, are also incorporated into the consolidated LCR; |
| (D) | subject to the provisions of item (E) below, when a bank calculates the LCR on a consolidated basis, the bank shall apply the respective liquidity parameters specified in this subregulation (12) to all relevant legal entities being consolidated; |
| (E) | in the case of consolidation or solo reporting of relevant entities, subject to the prior written approval of and such conditions as may be specified in writing by the Registrar, a bank may apply the rules and/or regulations of relevant host supervisors in respect of the treatment of retail or small business deposits of relevant entities operating in those jurisdictions; |
| (F) | notwithstanding the provisions of item (E) above, in the case of consolidation or solo reporting of relevant legal entities, including any relevant branch of such entities, operating in a host jurisdiction, the bank shall apply the relevant liquidity parameters specified in this subregulation (12) in respect of any relevant retail or small business deposits of such entities operating in a host jurisdiction when— |
| (i) | the host supervisor has not yet specified the relevant requirements for retail and small business deposits in that particular jurisdictions; |
| (ii) | the entity conducts business in a host jurisdiction that has not yet implemented the LCR framework; or |
| (iii) | in the Registrar' s opinion, the relevant liquidity parameters specified in this subregulation (12) in respect of any relevant retail or small business deposits are more appropriate or more strict than the host requirements; |
| (G) | the bank shall ensure that the currencies in which the bank's portfolios of high-quality liquid assets are denominated are materially similar in composition to the bank' s operational needs; |
| (H) | in all relevant cases the bank shall actively monitor and control its liquidity risk exposures and funding needs at the level of each material individual legal entity, foreign branch or subsidiary, and the group as a whole, taking into account any relevant legal, regulatory or operational limitation that may affect the transferability of liquidity; |
| (ii) | for purposes of this subregulation (12), unencumbered means free of legal, regulatory, contractual or other restriction on the ability of the bank to liquidate, sell, transfer, or assign the asset, and the asset or instrument is not pledged, either explicitly or implicitly, to secure, collateralise or credit-enhance any transaction, or designated to cover operational costs, such as rents and salaries, or is not otherwise subject to any further commitment, provided that— |
| (A) | assets or instruments received in reverse repo, resale and/or securities financing transactions— |
| (i) | that are held at the bank; |
| (ii) | that have not been rehypothecated; and |
| (iii) | that are legally and contractually available for the bank's use, |
may be included in the bank's relevant portfolio of high-quality liquid assets;
| (B) | assets or instruments qualifying as high-quality liquid assets that have been deposited with or pledged to a central bank or a public sector entity to secure facilities shall not be regarded as pledged except to the extent that such assets or instruments are required to secure facilities actually utilised; |
| (C) | unless specifically otherwise provided, when a bank has deposited, pre-positioned or pledged level one, level two and any other assets in a collateral pool, and no specific instruments or securities are assigned as collateral for any transactions, the bank may assume that assets are encumbered in order of increasing liquidity value in the LCR, that is, assets not qualifying as high-quality liquid assets shall be assigned first, followed by level 2B assets, then level 2A assets and finally level one high-quality liquid assets; |
| (D) | a bank may hedge the market risk associated with ownership of the relevant assets or instruments, and still include the assets or instruments in the relevant pool of high-quality liquid assets, provided that when the bank chooses to hedge the market risk, the bank shall, in determining the relevant market value applied to each relevant asset or instrument, take into account the cash outflow that would arise if the hedge was to be closed out early, that is, in the event of the asset, for example, being sold; |
| (iii) | even when assets or instruments comply with the aforesaid requirements and criteria related to unencumbered assets or instruments, a bank shall for purposes of this subregulation (12) exclude from its portfolio of qualifying high-quality liquid assets or instruments any asset or instrument in respect of which the bank does not have the operational capability to monetise the asset or instrument to meet outflows during the aforementioned 30-day period of stress, |
| (A) | which operational capability to monetise assets or instruments, as a minimum, means— |
| (i) | the bank has in place procedures and appropriate systems to execute monetisation of any relevant asset or instrument at any time; |
| (ii) | the function responsible for managing the bank's liquidity, which is typically the bank's treasurer, has access to all relevant, required or necessary information to execute monetisation of any relevant asset or instrument at any time; |
| (B) | which monetisation of assets or instruments shall from an operational perspective be executable in the standard settlement period for the relevant asset or instrument class in the relevant jurisdiction; |
| (iv) | the bank shall not include in its portfolio of high-quality liquid assets any asset, or liquidity generated from an asset, that the bank has received under right of rehypothecation, if the beneficial owner has the contractual right to withdraw that asset during the aforementioned 30-day stress period; |
| (v) | the bank may include in its portfolio of high-quality liquid assets any assets received as collateral for derivative transactions that are not segregated and are legally available to be rehypothecated, provided that the bank shall record an appropriate outflow for the associated risks in accordance with the relevant requirements specified in paragraph (d) below; |
| (vi) | the bank shall manage its business in such a manner that a least sixty per cent of the bank's portfolio of qualifying high-quality liquid assets consists of level one high-quality liquid assets, that is, the bank's portfolio of qualifying high-quality liquid assets may consist of between sixty and one hundred per cent of level one high-quality liquid assets, but the aggregate amount of level two high-quality liquid assets shall in no case exceed forty per cent of the bank's aggregate amount of level one and level two high-quality liquid assets, provided that the bank shall manage its business in such a manner that— |
| (A) | the bank's portfolio of level two high-quality liquid assets is as far as possible well diversified in terms of type of assets, type of issuer related to, for example, the economic sector in which it participates, and any specific counterparty or issuer; |
| (B) | the aforesaid limits are adhered to and maintained after all relevant haircuts have been applied; |
| (vii) | while the bank has to report its LCR in Rand on a solo and consolidated basis, the bank shall continuously meet its liquidity needs in each relevant currency, and the bank shall therefore maintain high-quality liquid assets consistent with the distribution of the bank's liquidity needs by currency, that is— |
| (A) | the bank shall ensure that it is able to generate the required liquidity in the currency and jurisdiction in which the relevant net cash outflows may arise; |
| (B) | the bank shall monitor and report to its senior management the bank's LCR by currency to ensure that all relevant currency mismatches are duly managed; |
| (C) | the bank shall take into account the risk that its ability to swap currencies and access the relevant foreign exchange markets may erode rapidly under stressed conditions, and that sudden, adverse exchange rate movements may sharply widen existing mismatched positions and alter the effectiveness of any foreign exchange hedges that the bank may have in place; |
| (D) | since foreign exchange may constitute a material component of a bank's exposure to liquidity risk, and in order to duly monitor and manage the bank's overall level and trend of currency exposure, a bank shall separately assess the impact on its LCR of each significant currency, provided that the bank shall on request submit to the Registrar in writing all relevant LCR calculations and assessments in respect of each significant currency; |
| (viii) | the bank shall have in place sufficiently robust policies, processes and procedures— |
| (i) | the bank manages all relevant mismatches within the aforesaid 30-day period; |
| (ii) | the bank has sufficient level one and level two high-quality liquid assets available to meet any potential cashflow mismatches throughout the said 30-day period; |
| (iii) | the assets that the bank includes in each relevant category of high-quality liquid assets are only those assets that the bank is holding on the first day of the relevant 30-day stress period, irrespective of the residual maturity of the said assets; |
| (iv) | the bank monitors and controls the potential risks, including any relevant credit or market risk, that the bank may be exposed to as a result of the bank's investment in or holding of the assets or instruments envisaged in this subregulation (12), particularly the potential risks arising from the bank's investment in or holding of any level 2B asset or instrument envisaged in subregulation (12)(b)(iii); |
| (v) | the bank maintains a sufficiently diversified portfolio of high-quality liquid assets and avoids undue concentration with respect to any relevant asset type, issue and issuer type, and currency, consistent with the distribution of net cash outflows by currency, within all relevant asset classes; |
| (vi) | the bank has in place and is able to enforce internally specified limits to avoid undue concentrations in respect of asset types, issue and issuer types, and currency related to its portfolio of high-quality liquid assets, consistent with the distribution of the bank's net cash outflows by currency, within all relevant asset classes; |
| (vii) | the bank actively manages its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions; |
| (viii) | the bank's internal stress tests also cover time horizons longer than the 30 calendar day time horizon envisaged in this subregulation (12); |
| (i) | that the scenario and assumptions underlying the net cash outflows envisaged in this subregulation (12) are adequate for the bank's specific business activities; |
| (ii) | the level of liquidity the bank may have to maintain beyond the level of high-quality liquid assets envisaged in this subregulation (12); |
| (C) | to monitor the legal entity and physical location where collateral is held, and how the collateral may be mobilised in a timely manner, that is, as a minimum, the bank's policies, processes and procedures shall be sufficiently robust— |
| (i) | to identify the legal entities, geographical locations, currencies and specific custodial or bank accounts where its high-quality liquid assets are held; |
| (ii) | to determine whether any such assets or instruments should be excluded for operational reasons; |
| (iii) | to determine the composition of its relevant portfolio of high-quality liquid assets or instruments on a daily basis; |
| (ix) | only assets or instruments that can be easily and immediately converted into cash at limited or no loss of value and that comply with specified fundamental and market-related characteristics shall qualify as high-quality liquid assets, which assets or instruments typically— |
| (A) | constitute eligible instruments for intraday liquidity needs and overnight liquidity facilities from the Central Bank, provided that Central Bank eligibility does not in itself mean that an asset or instrument qualify as a high-quality liquid asset; |
| (B) | raise confidence in the safety and soundness of liquidity risk management in the relevant bank, and the banking system; |
| (x) | the aforesaid fundamental characteristics, as a minimum, mean— |
| (A) | low risk, that is, for example— |
| (i) | assets or instruments that are less risky tend to have higher liquidity; |
| (ii) | a high credit standing of an issuer and a low degree of subordination increase an asset or instrument's liquidity; and |
| (iii) | low duration, which measures the price sensitivity of a fixed income security to changes in interest rate, low legal risk, low inflation risk and denomination in a convertible currency with low foreign exchange risk, all of which characteristics enhance an asset or instrument's liquidity; |
| (B) | ease and certainty of valuation, that is, for example— |
| (i) | an asset or instrument's liquidity increases if market participants are more likely to agree on its valuation; |
| (ii) | assets or instruments with more standardised, homogenous and simple structures tend to be more fungible, promoting liquidity; |
| (iii) | the pricing formula of the asset or instrument does not contain strong assumptions and is relatively easy to calculate; and |
| (iv) | the relevant inputs into the pricing formula are publicly available; |
| (C) | low correlation with risky assets or instruments, that is, for example, the asset or instrument is not subject to wrongway risk, that is, highly correlated risk; |
| (D) | the asset or instrument is listed on a developed and recognised exchange, which characteristic therefore also increases the asset or instrument's transparency; |
| (xi) | the aforesaid market-related characteristics, as a minimum, mean— |
| (A) | the existence of an active and sizable market, which may be evidenced by factors such as— |
| (i) | the existence of active outright sale or repo markets at all times; |
| (ii) | historical evidence of market breadth and market depth, which may in turn be evidenced by low bid-ask spreads, high trading volumes, and a large and diverse number of market participants, the latter characteristic therefore reducing any potential market concentration and increasing the reliability of the liquidity in the market; |
| (iii) | the existence of a robust market infrastructure, that is, the presence of multiple committed market makers is likely to increase the liquidity of all relevant instruments; |
| (B) | low volatility, that is, assets or instruments whose prices and/or spreads remain relatively stable, and are therefore less prone to sharp price declines over time, are likely to have a lower probability of triggering forced sales to meet liquidity requirements, which is typically evidenced by historic data of relative stability of market terms, such as prices and haircuts, and volumes during periods of financial stress. |
Normally volatility of traded prices and spreads are simple proxy measures of market volatility.
| (C) | evidence of historic flight to quality, that is, historically, the market has shown tendencies to move into these types of assets or instruments during a systemic crisis, which may be evidenced by the correlation between the proxies of market liquidity and banking system stress; |
| (xii) | all high-quality liquid assets or instruments— |
| (A) | shall be managed as part of a portfolio of assets or instruments— |
| (i) | that is at all times available for the bank to convert into cash either through outright sale or by way of a repurchase agreement to fill any funding gap that may arise between cash inflows and cash outflows during the said period of stress; |
| (ii) | of which a representative proportion is periodically monetised through repurchase agreement or outright sale, in order to test the bank's access to the market, the effectiveness of the bank's processes for monetisation, the availability of the assets, and to minimise the risk of negative signalling during a period of actual stress; |
| (iii) | that is unencumbered; |
| (iv) | that is not co-mingled with or used as hedges on trading positions, designated as collateral or as credit enhancements in structured transactions or to cover operational costs, such as rents or salaries; |
| (v) | with the clear and sole intent for use as a source of contingent funds; |
| (B) | shall be under the control of the function responsible for managing the bank's liquidity, which is typically the bank's treasurer— |
| (i) | which function shall have continuous authority, and legal and operational capability, to monetise any relevant asset or instrument in the said portfolio of high-quality liquid assets or instruments; |
| (ii) | which control shall be evidenced either by maintaining assets or instruments in a separate pool managed by that function with the sole intent for use as a source of contingent funds, or by demonstrating that the function can monetise the assets or instruments at any point in time during the 30-day stress period, and that the related proceeds are available to the function throughout the 30-day stress period without directly conflicting with a stated business or risk management strategy, that is, no asset or instrument shall be included in the portfolio of high-quality liquid assets or instruments if the sale of that asset or instrument, without replacement throughout the 30-day period, would, for example, remove a hedge that would create an open risk position in excess of the bank's internal limits; |
| (xiii) | in order to allow a bank time to adjust its portfolio of qualifying high-quality liquid assets, when a qualifying asset or instrument is subsequently disqualified, for example, as a result of a rating downgrade, the bank may retain the asset or instrument in its portfolio of qualifying high-quality liquid assets for 30 calendar days following the date that the asset or instrument became so disqualified. |
