Response to consultation on RTS further specifying the liquidity requirements of the reserve of assets under MiCAR
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?
We agree with and welcome the EBA’s decision to not set a higher minimum percentage of reserve assets which must be held as deposits in credit institutions, than what is set in the MiCAR Level 1 text. Given many European banks have limited appetite to offer safeguarding accounts or to be exposed to new market entrants which means opening bank accounts will be challenging for most issuers, it is crucial that issuers have optionality over reserve asset composition.
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?
We have concerns with the proposed concentration limits. Opening deposit and safeguarding accounts is a major hurdle today for many fintech, e-money issuers and even harder for crypto-asset firms (which EMT issuers will be), as many banks have been discouraged from, and have limited risk appetite to be exposed to, crypto-asset businesses and new market entrants. The EBA’s proposed concentration limits does not account for this reality. There are also increased operational risks presented by having to manage multiple counterparties.
The proposed 10% concentration limit combined with the MiCAR Article 36(1) requirement for at least 60% of reserve assets to be held in deposit accounts, means that an issuer of a significant EMT will need at least 6 banking partners. This increases to 20 banking partners if 100% of their reserve assets are held in deposit accounts when combined with the EBA’s proposed 5% concentration limit (for accounts held with non-large institutions). There is a chance that the number may be even higher as Article 5(4) of the draft RTS states that the limit “shall include those deposits placed with, instruments issued by or exposures to all other entities with whom that credit institution has close links.”
Although diversification of holdings is sensible, we need to balance contagion risk in the case of a crisis arising from the interconnectedness between crypto activities and the financial system, and the commercial burden and practicability of the proposal. As the current proposal is unachievable, a more practicable approach is for concentration limits to apply on a tiered basis. For example, if a significant EMT’s market capitalisation is below a certain threshold, the concentration limit could be 20%, and if its market capitalisation is above that threshold, the concentration limit could be 15%. Alternatively or in addition, there could be a phased approach with a change in concentration limit over time, if NCA’s deem appropriate at their discretion after considering the risk profile of a banking partner.
Further, there should be a removal or at least an increase of concentration limits afforded to issuers to enable EMT issuers to invest more than 35% (5% in the case of significant issuer) of its reserves in government bonds or assets backed by government bonds. These are safer and more liquid in many instances than covered bonds, which may carry both credit and market risk. This could therefore have the unintended consequence of pushing issuers into investing in higher risk assets than if the level of exposure to government bonds permitted were increased.
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?
We have concerns with the proposed concentration limits. Please refer to our comments at Question 5.
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.
The EBA’s proposal for mandatory over-collateralisation of reserve assets is unnecessary and should be removed.
We understand the rationale of the measure is to ensure that the market value of reserve assets always cover the market value of the ART / significant EMT for the purposes of meeting redemption requests. However, this objective is met through other MiCAR requirements, such as the requirement for issuers to hold reserve assets with little to no market or liquidity risk, and on a diversified basis. Further, issuers of ARTs/ significant EMTs are required to manage the reserve of assets to ensure that the market value of the reserve assets is at least equal at any time to the market value of the assets referenced.
As part of this obligation, any loss of value of the former relative to the latter will need to be covered by the issuer (under Article 38(4) of MiCAR). Accordingly, any shortfall will need to be covered by the issuer’s proprietary capital (and similarly any excess ‘swept out’ into the issuer’s proprietary accounts) on an intraday basis and by the end of each day. This makes the proposed permanent and mandatory over-collateralisation requirement redundant. Further, the own funds requirements of 2-3% is equivalent to over-collateralisation given the current restrictions/requirements for the reserve assets.
We note that the over-collateralisation obligation – beyond own funds capital requirements – does not exist under other comparable regimes, notably for e-money issuers who have the same obligation as ART/signification EMT issuers to meet redemption requests, on demand. Therefore applying this requirement to issuers is at odds with the principle of “same risk, same regulation”.