Response to consultation on RTS further specifying the liquidity requirements of the reserve of assets under MiCAR
Question 1. Do respondents have any comment about the calibration of the percentages of reserve assets with specific maximum maturities as suggested in Article 1 and Article 2 of the draft RTS?
The calibration done by EBA is based on deposit run-offs in banks (see the paragraph below in quotations), which I believe might not be as relevant for Article 2, which deals with assets related to tokens that do not reference official currencies. Let's say there is an ART ("NewART") that references LTC (a crypto-asset); then the reserves are (30% LTC, 60% CRO, and 10% OKX). These reserves result from the issuer getting 60% CRO and 10% OKX through the sale of the NewART (which appears to be currently allowed as the issuer is not required to have 100% of the reserves in the same referenced asset). Let's say CRO drops by 80% in one day as people discover fraud related to CRO. That will be a good reason for anyone who bought NewART to try to get back LTC by redeeming NewART or selling NewART for LTC in the market. I am not sure EBA has considered this scenario. Though, I am not sure I will call this a run-off. Run-offs should be prevented by proper risk measures.
Page 8 – “20. The EBA has based its proposed calibration of the relevant percentages of reserve assets that need to mature within the following 1 and 5 working days, on the recent evidence of deposit run-offs in bank related to crypto related activities and the comparable money market funds Regulation.”
Question 2. Do respondents consider that the requirements in Article 1 and Article 2 related to the 1 and 5 working days maximum maturity could create excessive pressure in the repo market, taking into account the minimum required amount of deposits in credit institutions in the case of tokens referenced to official currencies?
Not sure.
Question 3. Do respondents have any comment on the proposed approach in Article 3 of the draft RTS to not increase the minimum amount of deposits from 30% (or 60% if the token is significant) of the asset referenced in each official currency?
No
Question 4. Do respondents have any comment with the definition of the requirement of a minimum liquidity soundness and creditworthiness in the deposits with credit institutions as proposed in Article 4 of the draft RTS?
No
Question 5. Do respondents have any comment about the definition of the requirement of a maximum concentration limit of deposits with credit institutions by counterparty in Article 5 of these draft RTS? And about the definition of the general limit considering, in addition to deposit with a bank, also the covered bonds issued by and unmargined OTC derivatives with the same bank counterparty?
Yes, regarding the total exposure of the reserves to one credit union (see paragraph below in quotations), I believe 25% is too high. The exposure of the reserves to one credit union should be at most 15%.
Page 18 - “3. The amount of the deposits in a credit institution referred to in paragraphs 1 and 2 together with the market value of highly liquid financial instruments in the form of securities or money market instruments issued or guaranteed by the same credit institution, as well as the risk exposure to that credit institution in unmargined OTC derivatives, as envisaged in Article 38(1) of Regulation (EU) 2023/1114, shall not exceed 25% of the market value of the reserve of assets referred to the same tokens.”
Question 6. Do respondents have any concern about compliance with these concentration limits in Article 5, considering in particular paragraph 14 of the cost/benefit analysis in relation to the potential operational burden and risk of a wrong direction diversification, linked to the minimum required liquidity soundness and creditworthiness of deposits with banks, and taking into account the minimum amount required of deposits with credit institutions by MiCAR for tokens referenced to official currencies?
No
Question 7. Do respondents have any comment about the definition of the mandatory over-collateralisation in Article 6 of these draft RTS and the rationale for it? Do respondents find it challenging from an operational perspective, in particular with respect to envisaging 5 days windows rather than 1 day windows for observation periods of the market value of the assets referenced versus the reserve of assets and over the previous 5 years? Please elaborate your response with detailed reasoning.
I could see how the formula in Article 6 for mandatory over-collateralisation could be applicable to e-money tokens or to an ART that references only many official currencies. However, the problem with this formula is that it looks backwards and not into the future. Unfortunately, sometimes there is a lot of misinformation and only a few with the right information (or the proper risk analysis) benefit or can avoid major losses. Hence, I think there should also be ratings and haircuts (based on ongoing risk analysis) applied for over-collateralisation purposes.
Also, this over-collateralisation formula is totally irrelevant for an ART that does not reference fiat currencies (e.g., an ART that references a crypto-assets) and where its reserve is composed of other crypto-assets where many are not the referenced crypto-asset. For example, let's say there is an ART ("NewART") that references LTC (a crypto-asset); then the reserves are (30% LTC, 60% CRO, and 10% OKX). These reserves result from the issuer getting 60% CRO and 10% OKX through the sale of the NewART (which appears to be currently allowed as the issuer is not required to have 100% of the reserves in the same referenced asset). Let's say that one point proper risk analysis of CRO indicates the business model of CRO is no longer sustainable. However, this is not known in the market. Then, as most of the market is not aware of this, CRO continues to trade with a market cap of, let's say, $1 billion. However, after many months of CRO trading at $1 billion in market cap, eventually, this knowledge of the unsustainability of CRO's platform business model spread quickly, and within one day, let's say the price of CRO dropped by 90%. Then how will the over-collateralization formula in Article 6 be of any help? Hence, the over-collateralization formula in Article 6 is too backward-looking. Risk analysis/ratings are, on the other hand, forward-looking. This is why third-independent rating/risk scores for crypto-assets should be required, and these should be public. Then, the issuers can use the ratings/risk scores to take haircuts on the crypto-asset for over-collateralization purposes.
Question 8. Do respondent think that any provision in the draft RTS is confusing and that some clarification would be necessary?
No