Prudential Regulation Authority Rulebook

1.

Institutions shall report the following as liquid assets unless excluded by paragraph 2 and only if the liquid assets fulfil the conditions in paragraph 3:

1. (a) cash and exposures to central banks to the extent that these exposures can be withdrawn at any time in times of stress. As regards deposits held with central banks (including the Bank of England and a central bank of a third country), institutions must have regard to any common understanding or agreement reached between the competent authority and central bank regarding the extent to which minimum reserves can be withdrawn in times of stress;
2. (b) other transferable assets that are of extremely high liquidity and credit quality;
3. (c) transferable assets representing claims on or guaranteed by:
1. (i) the central government of the United Kingdom, a region with fiscal autonomy to raise and collect taxes, or of a third country in the domestic currency of the central or regional government, if the institution incurs a liquidity risk in the United Kingdom or third country that it covers by holding those liquid assets;
2. (ii) central banks and non-central government public sector entities in the domestic currency of the central bank and the public sector entity;
3. (iii) the Bank for International Settlements, the International Monetary Fund and multilateral development banks;
4. (iv) the European Financial Stability Facility and the European Stability Mechanism;
4. (d) transferable assets that are of high liquidity and credit quality;
5. (e) standby credit facilities granted by central banks within the scope of monetary policy to the extent that these facilities are not collateralised by liquid assets and excluding emergency liquidity assistance;
6. (f) if the credit institution belongs to a network in accordance with legal or statutory provisions, the legal or statutory minimum deposits with the central credit institution and other statutory or contractually available liquid funding from the central credit institution.

2.

The following shall not be considered liquid assets:

1. (a) assets that are issued by a credit institution unless they fulfil one of the following conditions:
1. (i) they are bonds eligible for the treatment set out in Article 129(4) or (5) or asset backed instruments if demonstrated to be of the highest credit quality as set out in Chapter 2 of the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook;
2. (ii) they are CRR covered bonds other than those referred to in point (i) of this point;
3. (iii) the credit institution has been set up by the central or a regional government of the United Kingdom and that government has an obligation to protect the economic basis of the institution and maintain its viability throughout its lifetime; or the asset is explicitly guaranteed by that government; or at least 90% of the loans granted by the institution are directly or indirectly guaranteed by that government and the asset is predominantly used to fund promotional loans granted on a non-competitive, not for profit basis in order to promote that government's public policy objectives;
2. (b) assets that are provided as collateral to the institution under reverse repo and securities financing transactions and that are held by the institution only as a credit risk mitigant and that are not legally and contractually available for use by the institution;
3. (c) assets issued by any of the following:
1. (i) an investment firm;
2. (ii) an insurance undertaking;
3. (iii) a financial holding company;
4. (iv) a mixed financial holding company;
5. (v) any other entity that performs one or more of the Annex 1 activities as its main business.

3.

In accordance with paragraph 1, institutions shall report assets that fulfil the following conditions as liquid assets:

1. (a) the assets are unencumbered or stand available within collateral pools to be used for obtaining additional funding under committed or, where the pool is operated by a central bank, uncommitted but not yet funded credit lines available to the institution;
2. (b) the assets are not issued by the institution itself, by its parent or subsidiary institutions, or by another subsidiary of its parent institution or parent financial holding company;
3. (c) the price of the assets is generally agreed upon by market participants and can easily be observed in the market or the price can be determined by a formula that is easy to calculate on the basis of publicly available inputs and that does not depend on strong assumptions, as is typically the case for structured or exotic products;
4. (d) the assets are listed on a recognised exchange or they are tradable by an outright sale or via a simple repurchase agreement on repurchase markets; those criteria shall be assessed separately for each market.

The conditions referred to in points (c) and (d) of the first subparagraph shall not apply to the assets referred to in points (a), (e) and (f) of paragraph 1.

5.

Shares or units in CIUs may be treated as liquid assets, up to an absolute amount of GBP 440 million or the equivalent amount in domestic currency, in the portfolio of liquid assets of each institution, provided that the requirements laid down in Article 132(3) are met and that the CIU only invests in liquid assets as referred to in paragraph 1 of this Article, apart from derivatives to mitigate interest rate or credit or currency risk.

The use or potential use by a CIU of derivative instruments to hedge risks of permitted investments shall not prevent that CIU from being eligible for the treatment referred to in the first subparagraph of this paragraph. Where the value of the shares or units of the CIU is not regularly marked to market by the third parties referred to in points (a) and (b) of Article 418(4) and where an institution has not developed robust methodologies and processes for such valuation as referred to in Article 418(4), shares or units in that CIU shall not be treated as liquid assets.

6.

Where a liquid asset ceases to comply with the requirement for liquid assets as set out in this Article, an institution may nevertheless continue to consider it a liquid asset for an additional period of 30 days. Where a liquid asset in a CIU ceases to be eligible for the treatment set out in paragraph 5, the shares or units in the CIU may nevertheless be considered a liquid asset for an additional period of 30 days, provided that those assets do not exceed 10% of the CIU's overall assets.

[Note: This rule corresponds to Article 416 of the CRR as it applied immediately before revocation by the Treasury.]