Is Article 30(6)(c) of the DR(EU) 2015/61 also applicable to Level 1 HQLA that can be substituted by Level 2 HQLA?
An institution has entered into a tri-party reverse repo or collateral swap. The institution receives collateral in a form of a pool of assets including non-liquid assets. In such a transaction, the composition of the pool may vary at any time.
The question is about the case of liquid assets of a pool of collateral (which comply with Articles 7 and 8 of the DR(EU) 2015/61 with regard to LCR) being substitutable with non-liquid assets and additional outflows must be calculated and on whether Article 30(6)(c) of the DR(EU) 2015/61 can also be applied to potential collateral substitution of HQLA for other HQLA collateral of a lower liquidity value.
In tri-party operations, institutions receive a pool of collateral. Depending on the contracts, assets of the pool may not be all commensurate with the “high quality” definition. The Basel Committee on Banking Supervision published a FAQ in which it states that “if HQLA collateral (eg Level 1 assets) may be substituted for other HQLA collateral (eg Level 2A assets), an outflow amounting to the market value of the received collateral multiplied by the difference between the haircuts of the received collateral and the potential substitute collateral should be applied”.
Article 30(6)(c) of the DR(EU) 2015/61 refers only to the substitution of HQLA for non-HQLA collateral. We wonder if it can also be applied to potential collateral substitution of HQLA for other HQLA collateral of a lower liquidity value.
Article 30(6)(c) of Commission Delegated Regulation (EU) 2015/61 applies to cases where assets that would qualify as liquid assets for the purposes of Title II of that Regulation can be substituted by assets that would not qualify as liquid assets for the purposes of that Title without the consent of the credit institution. Level 2 HQLA qualify as liquid assets for the purposes of that Title. Therefore, Article 30(6)(c) is not applicable to a situation where Level 1 HQLA assets are substituted by Level 2 HQLA assets.
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