Question ID
2026_7716
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Liquidity risk
Article
460
Paragraph
1
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement
Article/Paragraph
23
Type of submitter
Competent authority
Subject matter
LCR treatment of issuances with automatic optionality/knock-out features
Question

What is the LCR treatment of issuances with automatic optionality/knock-out features (hereinafter: ‘auto-callable issuances’) whereby notes are automatically redeemed should the underlier meet a strike level on specified observation dates?

Background on the question

Applicable regulation does not specifically touch upon auto-callable issuances. However, neither a systematic exclusion nor a systematic inclusion would be appropriate as it depends on the knock-out events and the extent to which their trigger is consistent with the LCR stress scenario referred to in Article 5 LCR DR (e.g., increased market volatility).

Submission date
Final publishing date
Final answer

Issuances with automatic optionality/knock-out features are not explicitly covered in Delegated Regulation (EU) 2015/61 (LCR DR).

Provided that the events that are triggering the knock-out / early redemption by the credit institution, in line with Article 5 of the LCR DR, have not taken place at the date of the calculation of the LCR, such issuances should be considered in the scope of Article 23(1) of the LCR DR which is meant to cover products and services which are not referred to in Articles 27 to 31a of the LCR DR. In this regard, as referred to in Article 23(2) LCR DR, it is for competent authorities to determine the liquidity outflows to be assigned to such products provided the likelihood and potential volume of the liquidity outflows in relation to such products is material. When doing so, competent authorities should consider which trigger events may occur for the issuing credit institution under the stress scenario of the LCR as referred to in Article 5 of the LCR DR.

Provided that the events that are triggering the knock-out and early redemption have already taken place at the date of the calculation of the LCR and entail redemption within the next 30 calendar days, such issuances should be treated in accordance with Article 28(6) of the LCR DR.

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.

Disclaimer

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