Prudential Regulation Authority Rulebook

Chapter 3 of the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook specifies the conditions for the application of the derogations referred to in Article 419(2) of CRR concerning currencies with constraints on the availability of liquid assets.

[Note: This rule corresponds to Article 1 of Regulation (EU) No 2016/709 as it applied immediately before revocation by the Treasury]

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An institution shall be deemed to have justified needs for liquid assets for the purposes of Article 419(3) of CRR only where the following conditions are met:

1. (a) it has reduced, by sound liquidity management, the need for liquid assets in the full range of business conducted by the institution;
2. (b) its holdings of liquid assets are consistent with the availability of those assets in the relevant currency.

[Note: This rule corresponds to Article 3 of Regulation (EU) No 2016/709 as it applied immediately before revocation by the Treasury]

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An institution shall take all reasonable steps to fulfil the liquidity coverage requirement set out in Article 412 of CRR before applying the derogation provided for in Article 419(2)(a) of CRR.

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An institution shall ensure that it is at all times able to operationally identify the liquid assets used to meet foreign currency liquidity coverage requirements and the liquid assets held as a result of the application of the derogation provided for in Article 419(2)(a) of CRR.

3.

An institution shall ensure that its foreign exchange risk management framework meets the following conditions:

1. (a) currency mismatches resulting from the use of the derogation provided for in Article 419(2)(a) of CRR are adequately measured, monitored, controlled and justified;
2. (b) liquid assets inconsistent with the distribution by currency of liquidity outflows after the deduction of inflows can be liquidated in pounds Sterling whenever necessary;
3. (c) historical evidence relating to stress periods supports the conclusion that the institution is able to promptly liquidate the assets referred to in point (b).

4.

An institution which uses liquid assets in a currency other than pounds Sterling to cover liquidity needs in pounds Sterling shall apply a haircut of 8% to the value of those assets in addition to any haircut applied in accordance with Article 418 of CRR.

Where the liquid assets are denominated in a currency that is not actively traded in global foreign exchange markets, the additional haircut shall be the higher of 8% and the largest monthly exchange rate movement between both currencies in the 10 years prior to the relevant reporting reference date.

[Note: This rule corresponds to Article 4 of Regulation (EU) No 2016/709 as it applied immediately before revocation by the Treasury]

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An institution shall take all reasonable steps to fulfil the liquidity coverage requirement set out in Article 412 of CRR before applying the derogation provided for in Article 419(2)(b) of CRR.

2.

An institution shall obtain from the central bank in respect of the currency with constraints on the availability of liquid assets a credit line which complies with the following conditions:

1. (a) the credit line specifies that the institution has a legally binding entitlement to access the credit facilities and that entitlement is set out in a written agreement;
2. (b) following the decision to provide a credit line, access to the credit facilities is not subject to a credit decision by the central bank;
3. (c) the credit facilities can be drawn on by the institution without delay and no later than 1 day after giving notice to the central bank;
4. (d) the credit line is at all times available for a period exceeding the 30 day-period of the liquidity coverage requirement specified in Article 412(1) of CRR.

3.

An institution shall fully post collateral at the central bank, which, after being subject to any haircut applied by the central bank, shall at all times be equal to or greater than the maximum amount that may be drawn on the credit line.

[Note: This rule corresponds to Article 5 of Regulation (EU) No 2016/709 as it applied immediately before revocation by the Treasury]

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An institution shall pay a fee established by the central bank. The fee shall be made up of two components for the credit line referred to in Article 5(2) and shall ensure that there is no economic advantage or disadvantage arising from the application of the derogation provided for in Article 419(2)(b) of CRR, when compared to institutions which do not apply the derogation.

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The fee to be paid by an institution for the credit line shall be the sum of the following components:

1. (a) an amount which is based on the amount of the credit line drawn down;
2. (b) an amount which approximates the difference between the following:
1. (i) the yield on the assets used to secure the credit line;
2. (ii) the yield on a representative portfolio of assets of the type provided for in points (a) to (d) of Article 416(1) of CRR.

The amount referred to in point (b) of the first subparagraph may be adjusted to take into account any material differences in credit risk between the sets of assets referred to in that point.

[Note: This rule corresponds to Article 6 of Regulation (EU) No 2016/709 as it applied immediately before revocation by the Treasury]

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