The applicant provides securities or cash to be used as collateral to support intraday liquidity requirements for Target 2 purposes. The securities provided for this purpose are held in a segregated Bundesbank account at Euroclear, which will be separate from the securities portfolio held for the purposes of meeting the Liquid Assets Buffer (LAB) requirements. The securities in the dedicated collateral account will be utilised on an intraday basis in respect of the Target 2 requirements, and may not be used for any other purpose during the day. However, assets securing intra-day liquidity from the Bundesbank for Target 2 purposes are only be encumbered during the day (intraday) and would therefore be unencumbered on an overnight basis for end of day reporting purposes, as these assets are free of any legal, contractual or other restriction preventing the applicant from disposing of such asset at day end.

A concern has been raised that the intra-day position that assets are subject to restrictions on use “taints” the end of day position on the basis while DR (EU) 2015/61 Art 7(2) provides: “The following assets shall be deemed to be unencumbered: assets included in a pool which are available for immediate use as collateral to obtain additional funding under committed but not yet funded credit lines available to the credit institution. This shall include assets placed by a credit institution with the central institution in a cooperative network or institutional protection scheme…….” However, Article 8(2) provides “the assets of the Liquid Assets Buffer must remain available at any time during the 30 days stress period”

The applicant is seeking the confirmation of EBA that, for the purposes of end of day reporting and consequently for the purposes of determining whether assets are available for inclusion in HQLA calculations, the cash or securities used as collateral used to support the Target 2 requirements is appropriately included in the LCR calculations, on the basis that at the end of each business day it will be free of any legal, contractual, regulatory or other restriction preventing the applicant from disposing of such asset via active outright sale or repurchase agreement and that Article 8(2) does not apply in construing whether assets may be treated as unencumbered, on the basis that, while such assets are encumbered intra-day, they cease to be encumbered at the end of day and may be withdrawn overnight and otherwise are available for immediate use until clearing activity starts the following day.

The applicant’s view is that any usage of cash during the day (intra-day) which carries over to end of day would be automatically reflected as a reduced cash balance. Similarly any usage of securities as collateral during the day which carries to the end of day will be reflected as unencumbered security against which funding has been sourced on balance sheet. At the end of day, the cash or collateral used during intra-day would be free of any encumbrance, unless it reflected carried over liquidity usage and was therefore monetised as at end of day to generate required liquidity.

Free securities or cash as at end of a business day would only be used the next business day to support future intra-day liquidity usage (i.e. anticipated liquidity requirements) and are therefore deemed as available as of end of day on that particular business day. The liquidity requirements or liquidity outflows for next business day (based on end of day balance sheet position) are already captured as part of the LCR net outflow calculations (in the denominator). Therefore excluding the amount of HQLA which could be used in anticipation of net liquidity outflow requirements for next business day would mean double counting the liquidity requirements, once because this would be shown as net outflow (thus flowing through to the denominator) and on the other hand by also excluding them from the amount of HQLA (numerator). This concept is also reflected in CRR (Liquidity Coverage Requirement) Regulation Article 7(2)(a) referred to above.