Question ID:
2014_781
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Topic:
Liquidity risk
Article:
423
Paragraph:
4
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
NA
Disclose name of institution / entity:
No
Type of submitter:
Credit institution
Subject Matter:
Outlfows associated with shorts
Question:

Does Article 423(4) of Regulation (EU) No. 575/2013 only cover assets that the institution itself has sold short, or client short positions originated from an institution’s Prime Brokerage business, or both?

Background on the question:

Article 423(4) states that: “The institution shall add an additional outflow corresponding to the market value of securities or other assets sold short and to be delivered within the 30 days horizon unless the institution owns the securities to be delivered or has borrowed them at terms requiring their return only after the 30 day horizon and the securities do not form part of the institutions liquid assets.”

Date of submission:
28/01/2014
Final Answer:

According to Article 423(4) of Regulation (EU) No. 575/2013 (CRR) "the institution shall add an additional outflow corresponding to the market value of securities or other assets sold short and to be delivered within the 30 days horizon unless the institution owns the securities to be delivered or has borrowed them at terms requiring their return only after the 30 day horizon and the securities do not form part of the institutions liquid assets." This covers the assets that the institution itself has sold short.

For clients' short positions originated from an institution's Prime Brokerage business, in so far it can result in a contingent funding liability for the institution, Article 420(2) of the CRR should be applied, according to which "Institutions shall regularly assess the likelihood and potential volume of liquidity outflows during the next 30 days as far as products or services are concerned, which are not captured in Articles 422, 423 and 424, and which they offer or sponsor or which potential purchasers would consider to be associated with them, including but not limited to liquidity outflows resulting from any contractual arrangements such as other off-balance sheet and contingent funding obligations".

Following the assessment set out in Article 420(2) of the CRR, the competent authorities shall determine the outflow rate to be applied to client short positions originated from an institution's Prime Brokerage business.

This answer is without prejudice to further guidance which may be provided in the context of the delegated act on the liquidity coverage ratio.

Status:
Archive
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

Update 26.03.2021: This Q&A has been archived as the issue it deals with is explained or addressed in Article 30(11) of Delegated Regulation (EU) 2015/61.

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