Response to consultation on RTS to specify the highly liquid financial instruments in the reserve of assets under MiCAR
Question 1. Do respondents have any comment on the list of eligible highly liquid financial instruments provided under point (c) of Article 1(1) of these draft RTS?
The MiCAR regulatory approach to issuers of EMTs, both significant and non-significant, does call for more general comments regarding the basic regulatory principles of “same risks, same rules” and “technology neutrality”. According to these principles, EMTs should be subject to the same rules as traditional e-money as long as the associated risks are the same. In the absence of MiCAR, EMTs are subject to EMD2, as they meet the definition of electronic money in Article 2 (2) EMD2, and the same EMD2 prudential requirements would apply regardless as to whether or not the EMT were meeting the MiCAR significance criteria. Accordingly, Article 48 (2) MiCAR stipulates that EMTs “shall be deemed to be electronic money” and, as matter of principle, EMD2 does apply to non-significant EMTs. The difference between traditional e-money and EMTs is purely a difference in the underlying technology.
We are, of course, well aware that the EU-legislator, with the MiCAR level 1 text that has been adopted, deviated from these principles. Under MiCAR, much more stringent requirements apply to significant EMTs. Moreover, national competent authorities are afforded discretion to apply these more stringent requirements also to non-significant EMTs.
We appreciate that the EBA is bound by the level 1 text but would still urge, for its work on MiCAR level 2 instruments, to take into account as much as possible these two basics and unanimously agreed principles of “same risks, same rules” and “technology neutrality”. At a minimum, whenever relevant, the EBA should set out the reasons why the principles have not been adhered to. Full transparency is crucial in order to enable the industry to provide substantial input and participate in the consultation process with constructive comments informing a risk-based regulatory framework and risk-based and proportionate regulatory standards.
That said, we acknowledge the possibility that differences in technology can be the source of differences in risks and risk profiles. However, the brief discussion of “Liquidity risks related to the DLT infrastructure” in paragraph 19 of the CP does not set out in any way why the EBA believes these risks to be higher than the liquidity risks to which traditional e-money is exposed. There is no comparison of the respective liquidity risks, and the two sentences in this paragraph are far from offering a comprehensive and balanced analysis of the potential effects on the liquidity risk profile of EMTs of their operation in a DLT-based infrastructure.
Regarding the comparison to traditional e-money products, the EBA analysis should acknowledge that, as EMTs and as many other financial services, these products are technology-dependent and exposed to a wide range of technology-related operational risks including cyber-incidents. As for EMTs such incidents can undermine the full backing of issued e-money by safeguarded funds and, as other potential operational disruptions, can cause users’ loss of confidence triggering large-scale redemption requests. An analysis of cyber-events and other operational loss data or loss events and their respective relevance or not for EMTs as opposed to traditional e-money products is needed to justify the proposed significantly higher requirements regarding liquidity risks for EMTs.
Regarding a more balanced analysis of liquidity risks EMTs are exposed to the EBA analysis should take into account and discuss the potential advantages from their operation in a DLT-based infrastructure. Due to this infrastructure EMTs are benefiting from a potentially large ecosystem with significant network effects that allow EMT holders to address requests for exchange against funds - effectively redemption - not only to the issuer but also across the entire underlying ecosystem and all participating CASPs. In addition, the CASPs, since integrated into the ecosystem, may well provide better transparency and better access to information for EMT holders. CASPs will have a strong incentive for ongoing monitoring of EMT issuers and may well be acting as an additional line of defence by exercising in their own interest control over the soundness, risk profile and risk management of the issuers of EMTs they are offering. These unique aspects of operation in a DL T -based infrastructure and ecosystem are absent from traditional e-money products operating in strictly centralised infrastructures run by the issuer.
Question 2. Do respondents have any comment on the general and operational requirements to be met by highly liquid financial instruments provided under points (a) and (b) of Article 1(1) of these draft RTS? Please explain if some criteria is expected to be challenging to be met in practice.
See comments above.
Question 3. Do respondents find the treatment for hedging derivatives under Article 2 clear to be applied?
No.
Question 4. Do respondents think that the draft RTS create any impediment for issuers to ensure a good control of the correlation between the highly liquid financial instruments and the assets referenced? This is particularly relevant for the case of tokens referenced to assets other than official currencies.
No.
Question 5. Do respondents have any concern about the feasibility for issuers to have the minimum amount of reserve of assets considering the list of eligible highly liquid financial instruments, the one-to-one currency matching requirement in Regulation (EU) 2023/1114 and the concentration limits under Article 3 of these draft RTS? This is particularly relevant for tokens referenced to official currencies.
From the perspective of MiCAR’s ultimate objective to contain risks, including liquidity risks and eventually financial stability risks, we have serious concerns regarding the EBA’s general approach to its mandate and, more specifically, the major adverse consequences of the proposed RTS in the case of non-EUR denominated EMTs.
To illustrate the problem: Under the proposed draft RTS a USD-referencing EMT could only invest up to 35% of its reserve in US government bonds (or assets backed by such bonds). If non-significant, 30% of reserve assets of that EMT would have to be deposited with a credit institution. The remaining 35% of reserve assets could be either invested into covered bonds or deposited with credit institutions. This is an unusual position, as investing into covered bonds or bank deposits instead of government bonds (the latter representing level 1 assets according to Article 10 of Delegated Regulation (EU) 2015/61 since the safest and most liquid assets available in the financial system) exposes the EMT to significantly higher risks with, in the case of US government bonds, limited additional exposure to concentration risks, if at all. (N.B. in the case of a significant EMT the applicable percentages would depend upon whether or not the 60% de minimis threshold for bank deposits were retained).
To illustrate the problem: Under the proposed draft RTS a USD-referencing EMT could only invest up to 35% of its reserve in US government bonds (or assets backed by such bonds). If non-significant, 30% of reserve assets of that EMT would have to be deposited with a credit institution. The remaining 35% of reserve assets could be either invested into covered bonds or deposited with credit institutions. This is an unusual position, as investing into covered bonds or bank deposits instead of government bonds (the latter representing level 1 assets according to Article 10 of Delegated Regulation (EU) 2015/61 since the safest and most liquid assets available in the financial system) exposes the EMT to significantly higher risks with, in the case of US government bonds, limited additional exposure to concentration risks, if at all. (N.B. in the case of a significant EMT the applicable percentages would depend upon whether or not the 60% de minimis threshold for bank deposits were retained).
As it stands the draft RTS runs counter to the ultimate objective of MiCAR, and does not live up to its mandate. Article 38 (5) clearly stipulates that the EBA "shall take into account" the regulations referenced in the remainder of that provision. Article 38 (5) does not require a 1 to 1 read across. If that had been the intention of the EU-legislator, it would have referenced these regulations directly. Instead, the EU-legislator delegated supplementing regulation to the European Commission, drawing on the expertise of the EBA to develop RTS adjusting the referenced regulations as needed to deliver on MiCAR’s ultimate objective.
That objective is clearly expressed in provisions that must guide the EBA in delivering on its mandate. Article 36 (1) second sentence stipulates:
"... The reserve of assets shall be composed and managed in such a way that:
(a) the risks associated to the assets referenced by the asset-referenced tokens are covered; and
(b) the liquidity risks associated to the permanent rights of redemption of the holders are addressed."
In the above example of a US-denominated EMT, and with a view to the full range of risks referred to in Article 36 (1) (a) and (b), investment of the reserve of assets in US government bonds is clearly superior to investment in covered bonds or bank deposits.
In addition, well in line with the principle in Article 36 (1), Article 36 (6) second sentence requires: "... issuers shall ensure that the issuance and redemption of asset-referenced tokens is always matched by a corresponding increase or decrease in the reserve of assets." For issuance and redemption of US-denominated EMTs the required match is obviously best achieved by a corresponding increase and decrease of US government bonds in the reserve of assets.
Even closer to the EBA mandate in Article 38 (5), Article 38 (1) stipulates that "issuers ... shall only invest those assets in highly liquid financial instruments with minimal market risk, credit risk and concentration risk. The investments shall be capable of being liquidated rapidly with minimal adverse price effect." Also with regard to this principle and the full range of risks it refers to, investments in US government bonds are clearly superior to investments in covered bonds. For the EBA's draft RTS this principle must take precedence. Concerns regarding concentration risks, if there are any in relation to US government bonds, cannot justify a sub-optimal coverage of all other risks by forcing issuers to invest in covered bonds or bank deposits.
We urge the EBA to live up to its mandate and, based upon its expertise, provide in the proposed RTS the leeway needed to allow for investments of the reserve of assets best suited to deliver MiCAR’s objective as expressed in the corresponding principle specified in Article 36 (1) and 38 (1). As the EBA has done for other aspects of the regulations referenced in Article 38 (5) it should disapply limitations that force issuers to invest in covered bonds or bank deposits, which in all relevant respects increase risks that MiCAR is intended to contain.
Question 6. Do respondents have any concern about the operational feasibility of the look through approach envisaged in paragraph 3 of Article 3 of these draft RTS? If yes, please elaborate your answer and specify the reasons for the concerns.
See comments in our response to question 5.
Question 7. Do respondents have any comment with regards to the unwind mechanism proposed under Article 4 of these draft RTS and the related examples provided?
We would welcome clarification of the term “working days”. Does the term mean working day as in the primary market of the underlying currency, as in Target2, or is it any calendar day?
Question 8. Do respondents have any general comment about the interaction of these draft RTS with the business model and the continuity of the business of these activities?
See comments in our response to question 5. If retained the proposed limitations will obviously have a significant impact upon the investment of the reserve of assets, the underlying investment strategy and policy and, as a consequence, on issuers’ business model, especially for issuers of non-EUR denominated EMTs.
Question 9. Do respondents find any provision in these draft RTS confusing or difficult to understand?
Article 4 (c) of the draft RTS (Unwind mechanism) refers to the application of concentration limits by deposit counterparty established in Article 5 of the RTS to further specify the liquidity requirements of the reserve of assets under Article 36(4) MiCAR. However, Article 4 also highlights that e-money institutions issuing EMTs shall apply the approach only “where applicable”. We would welcome clarification as to how the limitations specified in Article 5 of the referenced R TS applies to significant vs. non-significant issuers, who are subject to the more stringent requirements applicable to significant issuers if national competent authorities exercise the related discretion afforded by MiCAR.
Question 10. Do respondent have any comment on the impact assessment provided?
No.