06 Feb 2014

Refinements to LCR cashflow assumptions under the final APS 210

by Louise McCoach, Alex Chernishev

The cashflow assumptions in the final APS 210 basically adopt those in the Basel III liquidity framework, with some changes.

The cashflow assumptions in the final APS 210 basically adopt those in the Basel III liquidity framework, subject to certain minor modifications or clarifications which are summarised below.

  • Intermediated deposits: In the May draft of APS 210, APRA treated deposits sourced via an intermediary differently to deposits sourced directly from the retail market. Generally, the former category has a less favourable run-off rate assigned to it. In response to submissions APRA clarified that a deposit sourced via an intermediary is limited to a situation "where a natural person places funds with an intermediary, which then places those funds with an ADI".
  • 31-day notice period deposits: APRA has clarified that 31-day notice period deposits that are in a grace period (ie. a period of a few days in which a deposit can be withdrawn on demand before an ADI can roll it over) should be accounted for in the same manner as a demand deposit. Once an ADI has received notice that the 31-day notice period deposit will be withdrawn from the ADI upon its maturity, a 100 percent run-off rate is to be applied.
  • Financial institutions: APRA has further clarified that the definition of "financial institutions" as used in the final APS 210 includes money market corporations, finance companies, superannuation/pension funds, public unit trust/mutual fund cash management trusts and friendly societies. This definition is important in determining whether facilities have been provided to financial institutions or other entities in order to determine the relevant run-off rate for the LCR calculation. Depending on the nature of the liability the run-off rate could be more or less favourable if it is provided to a financial institution.
  • Collateral postings: When determining net cash outflows for LCR purposes, an ADI must consider collateral outflows during the 30-day stress test scenario as a result of adverse market valuations of collateralised positions. APRA has stated that it will give further consideration to the most appropriate treatment of currency-related collateral flows for LCR purposes. In particular, APRA will consider whether an alternative outflow treatment would be appropriate given the historical direction of currency movements during stress events.
  • Event-dependent commitments: When determining net cash outflows for LCR purposes, the undrawn portion of committed credit and liquidity facilities is subject to various run-off rates depending on the specific characteristics of the committed facility. APRA has confirmed that event-dependent commitments, under which the undrawn portion can only be drawn subject to satisfying specific contractual conditions that fall beyond the 30-day stress scenario time frame are not subject to run-off rate assumptions. APS 210 has therefore been amended to clarify that only the undrawn portion of committed facilities that can be contractually drawn within 30 days is to be included as outflow for LCR purposes.
  • FX derivative transactions: Some derivatives transactions are subject to master netting agreements which allow for payments to be netted in the event of a counterparty default. APS 210 allows for derivative amounts payable and receivable under such agreements to be accounted on a net basis by counterparties. Submissions were made to APRA asking for similar treatment, for LCR purposes, for foreign exchange transactions which are settled on a gross basis. However, APRA's position is that derivatives settled on a gross basis should not be accounted for on a net basis for the purposes of the LCR. Having said this the final liquidity rules allow APRA to give consideration to industry arrangements that permit central clearing of currency derivative flows where these arrangements materially reduce the liquidity risk involved in foreign exchange transactions which has been reflected in the final liquidity rules.
  • Head office funding: APRA has clarified that a deposit placed with a foreign bank branch by its head office on an overnight basis will be treated as equivalent to an at-call deposit placed by a financial institution, and therefore receives a 100 percent run-off rate in LCR calculations. However, if such deposit can only be withdrawn subject to a notice period of greater than 30 days, then the branch can assume the deposit will remain with it for the purposes of the LCR calculation.
  • Operational deposits: For LCR purposes operational deposits are those where customers place, or leave, deposits with an ADI in order to facilitate their access and ability to use payment and settlement systems and otherwise make payments. APRA has clarified that only the balance of any such deposits used for operational purposes is subject to the lower run-off rates.
  • Trade finance: Notwithstanding submissions to the contrary, APRA stated it will not specify a run-off rate for trade finance facilities but rather will maintain the requirement that ADIs use a modelling methodology based on actual experience. However, APRA has modified APS 210 to allow for the inclusion of trade finance inflows in the estimation of the net trade finance outflow rate.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.