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?
We would urge the EBA to revisit the restrictive list of highly liquid financial instruments, as these narrower definitions based on LCR guidelines might push issuers towards riskier assets, ignoring asset correlation and behavior that could mitigate volatility. While we acknowledge that the EBA has some statutory constraints, we believe they have more flexibility than employed and we would stress the importance of EMTs and ARTs being directly linked to their underlying assets, rather than through less stable means like unsegregated bank deposits or derivatives. Ensuring these tokens closely mirror the assets they represent would better serve issuers and uphold market stability.
Question 3. Do respondents find the treatment for hedging derivatives under Article 2 clear to be applied?
While we accept and understand the treatment for hedging derivatives, we find the statutory necessity to consider derivatives for hedging purposes to be concerning and incongruent with the spirit of capital preservation and liquidity.
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.
The approach, which among other things ties to requirements that reserves be in "financial instruments" may be inappropriate and increase risks depending on the asset referenced. For example, a gold backed token, such as Paxos' PaxGold, provides the holder with a legal interest in allocated physical gold. The buyer is purchasing the asset not as a proxy for the value of gold but for the ability to hold actual gold. Replacing the physical gold backing with ETFs or other unallocated interests replaces not only the value of the token but increases either the risks of the issuer securing such gold for redemption or of the holders.
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.
We are concerned by the minimum required reserves in depository institutions and the concentration limits per bank for both non-significant and significant issuers.
Historically it has been very difficult for even regulated industry participants to find banks willing to open either corporate or customer reserve accounts for industry participants. As a result, it is difficult to imagine that any firm would be able to secure the number of banking relationships proposed.
Even if firms were able to secure the necessary number of banking relationships the operational complexity of reserve management across these firms, likely in different countries, would increase complexity and risk.
We would urge the EBA to ensure that credit institutions understand, as long as an ART or EMT firm meets the credit institutions risk standards, they may not discriminate against issuers on the basis of their industry.
Given past experience, such as what we witnessed in the United States in early 2023, even if a single firm is capped as a percent of a depository firm’s deposits, it is likely that the depository would have an outsized exposure to industry participants and thus increase, rather than reduce, liquidity, market and systemic risk.
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.
While we understand and appreciate the reserve limits on government bonds, in the case of tokens tied to the Euro, they create unnecessary risks, including but not limited to operational and hedging risks, relative to backing tokens tied to currencies that are backed by a single currency.
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?
While we understand and appreciate the reserve limits on government bonds, in the case of tokens tied to the Euro, they create unnecessary risks, including but not limited to operational and hedging risks, relative to backing tokens tied to currencies that are backed by a single currency.