SAMA’s General Guidance Concerning Amended LCR

Treatment for Jurisdictions with insufficient HQLA 2 (a) Assessment of eligibility for alternative liquidity approaches (ALA) 55. Some jurisdictions may have an insufficient supply of Level 1 assets (or both Level 1 and Level 2 assets - Insufficiency in Level 2 assets alone does not qualify for the alternative treatment.) in their domestic currency to meet the aggregate demand of banks with significant exposures in this currency. To address this situation, the Committee has developed alternative treatments for holdings in the stock of HQLA, which are expected to apply to a limited number of currencies and jurisdictions, and subject to qualifying criteria set out in Annex 2 and will be determined through an independent peer review process overseen by the Committee. The purpose of this process is to ensure that the alternative treatments are only used when there is a true shortfall in HQLA in the domestic currency relative to the needs in that currency. (For member states of a monetary union with a common currency, that common currency is considered the “domestic currency”). (Refer to footnotes 24 and 25 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013 ) 56. To qualify for the alternative treatment, a jurisdiction should be able to demonstrate that: • There is an insufficient supply of HQLA in its domestic currency, taking into account all relevant factors affecting the supply of, and demand for, such HQLA; (The assessment of insufficiency is only required to take into account the Level 2B assets if the national authority chooses to include them within HQLA. In particular, if certain Level 2B assets are not included in the stock of HQLA in a given jurisdiction, then the assessment of insufficiency in that jurisdiction does not need to include the stock of Level 2B assets that are available in that jurisdiction) (Refer to footnote 26 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013 ) • The insufficiency is caused by long-term structural constraints that cannot be resolved within the medium term; • It has the capacity, through any mechanism or control in place, to limit or mitigate the risk that the alternative treatment cannot work as expected; and • It is committed to observing the obligations relating to supervisory monitoring, disclosure, and periodic self-assessment and independent peer review of its eligibility for alternative treatment. All of the above criteria have to be met to qualify for the alternative treatment. 57. Irrespective of whether a jurisdiction seeking ALA treatment will adopt the phase-in arrangement set out in paragraph 10 for implementing the LCR, the eligibility for that jurisdiction to adopt ALA treatment will be based on a fully implemented LCR standard (i.e. 100% requirement). (b) Potential options for alternative treatment 2 58. Option 1: A jurisdiction seeking to adopt Option 1 should justify in the independent peer review that the fee is suitably set in a manner as prescribed in this paragraph. Contractual committed liquidity facilities from the relevant central bank, with a fee: For currencies that do not have sufficient HQLA, as determined by reference to the qualifying principles and criteria, Option 1 would allow banks to access contractual committed liquidity facilities provided by the relevant central bank (i.e. relevant given the currency in question) for a fee. These facilities should not be confused with regular central bank standing arrangements. In particular, these facilities are contractual arrangements between the central bank and the commercial bank with a maturity date which, at a minimum, falls outside the 30-day LCR window. Further, the contract must be irrevocable prior to maturity and involve no ex-post credit decision by the central banks. Such facilities are only permissible if there is also a fee for the facility which is charged regardless of the amount, if any, drawn down against that facility