- Question ID
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2016_2828
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Liquidity risk
- Article
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421, 421, 422
- Paragraph
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1, 5, 2
- Subparagraph
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a
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement
- Article/Paragraph
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Part I, Paragraph 1(c)
- Type of submitter
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Competent authority
- Subject matter
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Treatment of cash provided as a collateral under issued guarantees and letters of credit
- Question
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Should cash provided as a collateral under issued guarantees and letters of credit be included for the calculation of the total expected cash outflows under the LCR according to CRR Articles 421(1)a, 421(5)(a) or 422(2)(a)? If included, then should this collateral be treated as retail term deposits (term is being considered as the expiry of the issued L/C)? What outflow rate should be applied for such deposits?
- Background on the question
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As normal practice cash collateral is provided by customers to secure their obligations towards the banks under guarantees issued following their applications. Due to legal specifications there is an established practice that cash as collateral is provided not in the form of a term deposit which is pledged to the bank for the whole maturity of the guarantee but handed over to the bank:
- the funds are transferred to the account opened in the name of the bank (issuing bank), i.e. the bank is the holder of account;
- Legal ownership/title of funds belongs to the bank during all validity of the guarantee, which is secured by these funds;
- Since the title of funds is transferred from the customer to the bank, no separate deposit agreements are concluded with the customer and no respective accrued interest is paid by the bank to the customer (neither respective premiums to State depositary for insurance of deposits placed with local banks).Funds provided as cash collateral are of the same amount and currency as guarantee to be issued - no exposure and currency risk. The customer cannot withdraw these funds until the expiry of the respective guarantee as there is a legal agreement on the issue of the guarantee clearly specifying and stating that during the validity of the guarantee, these funds belong to the bank (from an ownership perspective) and are placed in the account of which the bank is the holder. They are at the disposal of the bank and can be used to effect payments under the claims that might be presented under the corresponding guarantee.
When the guarantee is issued the withdrawal of funds as cash collateral can be triggered only by:
- Expiry of guarantee as consequence of its maturity (funds are paid back to the customer – applicant of the guarantee);
- Expiry of obligations of the issuing bank due to release from the beneficiary (funds are paid back to customer – applicant of the guarantee);
- Effecting payment under the guarantee following the claim received (to meets its obligations under the guarantee bank remits funds as collateral to beneficiary of the guarantee).Similar with guarantees as described above – cash collateral is provided to the bank by customers to secure their obligations towards the banks under Letters of credit (L/C) issued following their applications:
- These funds are transferred to the account opened in the name of the bank (issuing bank), i.e. the bank is the holder of account;
- Legal ownership/title of funds belongs to the bank until expiry of L/C, which is secured by these funds;
- These funds provided as cash collateral are of the same amount and currency as L./C (including tolerance of amount) to be issued - no exposure and currency risk;
- After receipt of L/C terms and conditions compliant docs – these funds are used by the bank to effect the payment under L/C to beneficiary.When the L/C is issued the withdrawal of funds as cash collateral can be triggered only by:
- Expiry of L/C validity as consequence of its maturity (funds are paid back to customer – applicant);
- expiry of obligations of the issuing bank due beneficiary’s refuse of its rights under L/C (funds are paid back to customer – applicant of the guarantee);
- receipt of L/C compliant documents with respective payment later on (the funds are remitted by issuing bank to beneficiary of L/C). - Submission date
- Final publishing date
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- Final answer
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The treatment of cash provided as collateral under issued guarantees and letters of credit (or under contracts other than contracts referred to in Article 21 of Commission Delegated Regulation (EU) 2015/61) is the following, depending on whether the cash collateral does or does not count as HQLA or as inflows:
(a) Cash collateral does not count as HQLA or as inflows
If the bank cannot dispose of the cash collateral transferred by the customers, it should not count towards its liquid assets or inflows in the LCR. In this case, there is also no cash outflow in the LCR at the moment when the cash collateral is restituted to the customer or is used to pay the beneficiary of the guarantee.
(b) Cash collateral counts as HQLA or as inflows
The bank may dispose of the cash collateral and count it toward liquid assets or inflows in the LCR. As the cash is expected to be effectively restituted to the customer or has to be paid or is expected to be paid to the beneficiary of the guarantee in the next 30 calendar days according to the contractual provisions (Article 31(10)a(1) of the Commission Delegated Regulation (EU) 2015/61 (DA)), it has to be considered as a 100% outflow. In all other cases (i.e. where payment or restitution is not contractually possible within 30 days and where the bank has no specific reason to expect the restitution or repayment within 30 days), Article 23 of Commission Delegated Regulation (EU) 2015/61) applies. - Status
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Final Q&A
- Answer prepared by
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Answer prepared by the EBA.
- Note to Q&A
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Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Commission Delegated Regulation (EU) No 2015/61.