Office of the Superintendent of Financial Institutions
Subsections 485(1) and 949(1) of the Bank Act (BA) and subsection 473(1) of the Trust and Loan Companies Act (TLCA) require banks, bank holding companies and trust and loan companies, respectively, to maintain adequate and appropriate forms of liquidity.
The LAR Guideline is not made pursuant to subsection 485(2) or 949(2) of the BA or subsection 473(2) of the TLCA. However, the liquidity metrics set out in this guideline provide the framework within which the Superintendent assesses whether a bank, a bank holding company or a trust and loan company maintains adequate liquidity pursuant to the Acts. For this purpose, the Superintendent has established two minimum standards: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). These standards – in conjunction with additional liquidity metrics where OSFI reserves the right to apply supervisory requirements as needed, including the net cumulative cash flow (NCCF), the operating cash flow statement (OCFS), the liquidity monitoring tools and the intraday liquidity monitoring tools – when assessed as a package, provide an overall perspective of the liquidity adequacy of an institution. The LAR Guideline should be read together with the Basel Committee on Banking Supervision's (BCBS) Principles for Sound Liquidity Risk Management and Supervision and OSFI's Guideline B-6: Liquidity Principles. As such, OSFI will conduct detailed supervisory assessments of both the quantitative and qualitative aspects of an institution's liquidity risk, as presented in the LAR Guideline and Guideline B-6. Notwithstanding that a bank, a bank holding company or a trust and loan company may meet the aforementioned standards, the Superintendent may by order direct a bank or bank holding company to take actions to improve its liquidity under subsection 485(3) or 949(3), respectively, of the BA or a trust and loan company to take actions to improve its liquidity under subsection 473(3) of the TLCA.
OSFI, as a member of the BCBS, participated in the development of the international liquidity framework, including Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013), Basel III: the Net Stable Funding Ratio (October 2014) and Monitoring tools for intraday liquidity management (April 2013). This domestic guidance is based on the Basel III framework – now integrated in the December 2019 “Basel Consolidated Framework” – supplemented to include additional OSFI-designed measures to assess the liquidity adequacy of an institution.
Where relevant, the Basel Consolidated Framework paragraph numbers are provided in square brackets at the end of each paragraph referencing material from the Basel Consolidated framework. Some chapters include boxed-in text (called OSFI Notes) that set out how certain requirements are to be implemented by Canadian banks, bank holding companies and trust and loan companies, collectively referred to as “institutions”.
The Liquidity Adequacy Requirements (LAR) for banks, bank holding companies and trust and loan companies are set out in seven chapters, each of which has been issued as a separate document. This document, which contains Chapter 3 – Net Stable Funding Ratio, should be read together with other LAR chapters which include:
This chapter is drawn from the Basel Committee on Banking Supervision's (BCBS) Basel III framework, Basel III: The Net Stable Funding Ratio and the BCBS's Frequently Asked Questions on Basel III's Net Stable Funding Ratio framework (February 2017). For reference, the Basel Consolidated Framework text paragraph numbers that are associated with the text appearing in this chapter are indicated in square brackets at the end of each paragraphFootnote 1.
The BCBS has developed the Net Stable Funding Ratio (NSFR) to promote a more resilient banking sector. The NSFR requires institutions to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. A sustainable funding structure is intended to reduce the likelihood that disruptions to an institution's regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability.
The NSFR is a key component of OSFI's supervisory approach to liquidity risk, and will be supplemented by detailed supervisory assessment of other aspects of an institution's liquidity risk management framework in line with the BCBS Sound PrinciplesFootnote 2 and OSFI's Guideline B-6:Liquidity principlesFootnote 3, the other liquidity monitoring tools (Chapters 4 and 6), and the Liquidity Coverage Ratio (LCR) (Chapter 2). In addition, OSFI may require an institution to adopt more stringent requirements or parameters to reflect its liquidity risk profile and OSFI's assessment of its compliance with the BCBS Sound Principles and OSFI's Guideline B-6.Footnote 4
The NSFR applies to DSIBs and to Category I institutions with significant reliance on wholesale funding as described in OSFI's Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions Guideline. Annex 1 of this chapter outlines the methodology for Category I institutions to calculate the wholesale funding reliance threshold related to possible NSFR application and the parameters related to such institutions' migration in and out of scope of application of the NSFR standard.
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. This ratio should be equal to at least 100% on an ongoing basis. "Available stable funding" is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of such stable funding required ("Required stable funding") of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet (OBS) exposures.
Available amount of stable funding
Required amount of stable funding
[Basel Framework, NSF 20.2]
The NSFR consists primarily of internationally agreed-upon definitions and calibrations. Some elements, however, remain subject to national discretion to reflect jurisdiction-specific conditions. [Basel Framework, NSF 10.1]
The amounts of available and required stable funding are calibrated to reflect the degree of stability of liabilities and liquidity of assets. [Basel Framework, NSF 30.1]
The calibration reflects the stability of liabilities across two dimensions:
[Basel Framework, NSF 30.2]
In determining the appropriate amounts of required stable funding for various assets, the following criteria were taken into consideration, recognising the potential trade-offs between these criteria:
[Basel Framework, NSF 30.3]
Additional stable funding sources are also required to support at least a small portion of the potential calls on liquidity arising from OBS commitments and contingent funding obligations. [Basel Framework, NSF 30.4]
NSFR definitions mirror those outlined in the LCR, unless otherwise specified. All references to LCR definitions in the NSFR refer to the definitions in the LCR standard published by the BCBS and reproduced in Chapter 2 of this Guideline. [Basel Framework, NSF 10.2]
The amount of available stable funding (ASF) is measured based on the broad characteristics of the relative stability of an institution's funding sources, including the contractual maturity of its liabilities and the differences in the propensity of different types of funding providers to withdraw their funding. The amount of ASF is calculated by first assigning the carrying value of an institution's capital and liabilities to one of six categories as presented below. The amount assigned to each category is then multiplied by an ASF factor, and the total ASF is the sum of the weighted amounts. Carrying value represents the amount at which a liability or equity instrument is recorded before the application of any regulatory deductions, filters or other adjustments, as defined in section 2.3 of the Capital Adequacy Requirements (CAR) GuidelineFootnote 5. [Basel Framework, NSF 30.5, 30.6]
When determining the maturity of an equity or liability instrument, investors are assumed to redeem a call option at the earliest possible date. For equity and liability instruments with options exercisable at the institution's discretion, institutions are expected to reflect the exercise of such call options if, on measurement date, their internal economic forecasts anticipate market conditions and other factors favourable to an exercise of the call option. Similarly, where market participants expect certain liabilities to be redeemed before their legal final maturity date, such behaviour should be assumed for the purpose of the NSFR and these liabilities should be included in the corresponding ASF category. In addition, institutions should consider reputational factors that may limit their ability not to exercise an option on their equity or liability instruments as doing so may imply they are under stress. Such circumstances should be discussed with the institution's Lead Supervisor and may result in an effective maturity on the call date. For long-dated liabilities, only the portion of cash flows falling at or beyond the six-month and one-year time horizons should be treated as having effective residual maturity of six months or more and one year or more, respectively. [Basel Framework, NSF 30.7]
Derivative liabilities are calculated first based on the replacement cost for derivative contracts (obtained by marking to market) where the contract has a negative value. When an eligible bilateral netting contract is in place that meets the conditions as specified in paragraph 103 of Chapter 7 of OSFI's CAR Guideline, the replacement cost for the set of derivative exposures covered by the contract will be the net replacement cost. [Basel Framework, NSF 30.8]
In calculating NSFR derivative liabilities, collateral posted in the form of variation margin (VM) in connection with derivative contracts, regardless of the asset type, must be deducted from the negative replacement cost amountFootnote 6,Footnote 7. [Basel Framework, NSF 30.9]
For Over-the-Counter (OTC) transactions, any fixed independent amount an institution was contractually required to post at the inception of the derivatives transaction should be considered as initial margin (IM), regardless of whether any of this margin was returned to the institution in the form of VM payments. If the IM is formulaically defined at a portfolio level, the amount considered as IM should reflect this calculated amount as of the NSFR measurement date, even if, for example, the total amount of margin physically posted to the institution's counterparty is lower because of VM payments received. For centrally cleared transactions, the amount of IM should reflect the total amount of margin posted less any mark-to-market losses on the applicable portfolio of cleared transactions. [Basel Framework, NSF 30.24]
Liabilities and capital instruments receiving a 100% ASF factor comprise:
[Basel Framework, NSF 30.10]
Liabilities receiving a 95% ASF factor comprise "stable" (as defined in LAR Chapter 2, paragraphs 56 to 59) non-maturity (demand) deposits and/or term deposits with residual maturities of less than one year provided by retail and small business customersFootnote 10. [Basel Framework, NSF 30.11]
Deposits maturing in less than one year, or which can be withdrawn early without a significant penalty, i.e. materially greater than the loss of interest, that are classified as stable retail term deposits in the LCR should, for purposes of the NSFR, be classified as stable. Retail term deposits maturing over one year and which cannot be withdrawn early without significant penalty are subject to a 100% ASF. [Basel Framework, NSF 30.11]
Liabilities in this category comprise "less stable" (as defined in LAR Chapter 2, paragraph 60-61) non-maturity (demand) deposits and/or term deposits with residual maturities of less than one year provided by retail and small business customers. Each sub-category of less stable deposits outlined in Chapter 2 is assigned a corresponding ASF factor:
are assigned a 90% ASF factor;
are assigned a 80% ASF factor;
[Basel Framework, NSF 30.12]
Deposits maturing in less than one year, or which can be withdrawn early without a significant penalty, i.e. materially greater than the loss of interest, that are classified as less stable retail term deposits in the LCR should, for purposes of the NSFR, be classified as less stable. Retail term deposits maturing over one year and which cannot be withdrawn early without significant penalty are subject to a 100% ASF. [Basel Framework, NSF 30.12]
Liabilities receiving a 50% ASF factor comprise:
[Basel Framework, NSF 30.13]
Stamped bankers' acceptances (BA) liabilities issued by an institution with a residual maturity of less than six months will receive a 35% ASF factor, irrespective of the counterparty holding the BA.
Liabilities receiving a 0% ASF factor comprise:
These liabilities would then be assigned either a 100% ASF factor if the effective maturity is one year or greater, or 50%, if the effective maturity is between six months and less than one year;
[Basel Framework, NSF 30.14]
Table 1 below summarises the components of each of the ASF categories and the associated maximum ASF factor to be applied in calculating an institution's total amount of available stable funding.
[Basel Framework, NSF 99.1]
The amount of required stable funding is measured based on the broad characteristics of the liquidity risk profile of an institution's assets and OBS exposures. The amount of required stable funding is calculated by first assigning the carrying value of an institution's assets to the categories listed. The amount assigned to each category is then multiplied by its associated required stable funding (RSF) factor, and the total RSF is the sum of the weighted amounts added to the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor. Definitions mirror those outlined in the LAR Chapter 2, unless otherwise specified.Footnote 15,Footnote 16 Regardless of whether an institution uses the Internal Ratings-Based (IRB) approach to credit risk, the Standardised Approach risk weights in CRE20 must be used to determine the NSFR treatment. [Basel Framework, NSF 30.15]
The RSF factors assigned to various types of assets are intended to approximate the amount of a particular asset that would have to be funded, either because it will be rolled over, or because it could not be monetised through sale or used as collateral in a secured borrowing transaction over the course of one year without significant expense. Under the standard, such amounts are expected to be supported by stable funding. [Basel Framework, NSF 30.16]
Assets should be allocated to the appropriate RSF factor based on their residual maturityFootnote 17 or liquidity value. When determining the maturity of an instrument, the institution's clients should be assumed to exercise any option to extend maturity. For assets with options exercisable at the institution's discretion, OSFI will take into account reputational factors that may limit an institution's ability not to exercise the option.Footnote 18 In particular, where the market expects certain assets to be extended in their maturity, institutions should and OSFI will assume such behaviour for the purpose of the NSFR and include these assets in the corresponding RSF category. For amortising loans and other amortising claims, the portion that comes due within the one-year horizon can be treated in the less-than-one-year residual matiurity category. In the case of exceptional central bank liquidity absorbing operations, claims on central banks may receive a reduced RSF factor. For those operations with a residual maturity equal to or greater than six months, the RSF factor must not be lower than 5%. When applying a reduced RSF factor, OSFI will closely monitor the ongoing impact on institutions' stable funding positions arising from the reduced requirement and take appropriate measures as needed. Also, as further specified in paragraph 31, assets that are provided as collateral for exceptional central bank liquidity providing operations may receive a reduced RSF factor equal to the RSF factor applied to the equivalent asset that is unencumbered. In both cases, OSFI will discuss and agree on the appropriate RSF factor with the relevant central bank. [Basel Framework, NSF 30.17, 30.18]
Unless explicitly stated otherwise in this standard, assets should be allocated to maturity buckets according to their contractual maturity. However, this should take into account embedded optionality, such as put or call options, which may affect the actual maturity date as described in paragraphs 12 and 27. [Basel Framework, NSF 30.16]
For assets with a contractual review date provision granting the institution the option to determine whether a given facility or loan is renewed or not, OSFI will authorize, on a case by case basis, institutions to use the next review date as the maturity date. In doing so, OSFI will consider the incentives created and the actual likelihood that such facilities/loans will not be renewed. In particular, options by an institution not to renew a given facility should generally be assumed not to be exercised when there may be reputational concerns. [Basel Framework, NSF 30.17]
For purposes of determining its required stable funding, an institution should (i) include financial instruments, foreign currencies and commodities for which a purchase order has been executed, and (ii) exclude financial instruments, foreign currencies and commodities for which a sales order has been executed, even if such transactions have not been reflected in the balance sheet under a settlement-date accounting model, provided that (i) such transactions are not reflected as derivatives or secured financing transactions in the institution's balance sheet, and (ii) the effects of such transactions will be reflected in the institution's balance sheet when settled. [Basel Framework, NSF 30.19]
Assets on the balance sheet that are encumberedFootnote 19 for one year or more receive a 100% RSF factor. Assets encumbered for a period of between six months and less than one year that would, if unencumbered, receive an RSF factor lower than or equal to 50% receive a 50% RSF factor. Assets encumbered for between six months and less than one year that would, if unencumbered, receive an RSF factor higher than 50% retain that higher RSF factor. Where assets have less than six months remaining in the encumbrance period, those assets may receive the same RSF factor as an equivalent asset that is unencumbered. In addition, for the purposes of calculating the NSFR, assets that are encumbered for exceptionalFootnote 20 central bank liquidity operations may receive the RSF factor applied to the equivalent asset that is unencumbered. [Basel Framework, NSF 30.20]
The treatment of excess over-collateralisation (OC), i.e. an amount higher than the legal OC requirement, will depend on the ability of the institution to issue additional covered bonds against the collateral or pool of collateral, which may depend on the specific characteristics of the covered bond issuance programme. If collateral is posted for the specific issuance of covered bonds and it is thus an intrinsic characteristic of a particular issuance, then the excess collateral committed for the issuance cannot be used to raise additional funding or be taken out of the collateral pool without affecting the characteristics of the issuance, and should be considered encumbered for as long as it remains in the collateral pool. If, however, the covered bonds are issued against a collateral pool that allows for multiple issuance, subject to OSFI's discretion, the excess collateral (which would actually represent excess issuance capacity) may be treated as unencumbered for the purpose of the NSFR, provided it can be withdrawn at the issuer's discretion without any contractual, regulatory, reputational or relevant operational impediment (such as a negative impact on the institution's targeted rating) and it can be used to issue more covered bonds or mobilise such collateral in any other way (e.g. by selling outright or securitising). A type of operational impediment that should be taken into account includes those cases where rating agencies set an objective and measureable threshold for OC (i.e. explicit OC requirements to maintain a minimum rating imposed by rating agencies), and to the extent that not meeting such requirements could materially impact the institution's targeted rating of the covered bonds, thus impairing the future ability of the institution to issue new covered bonds. In such cases, OSFI may specify an OC level below which excess collateral is considered encumbered. [Basel Framework, NSF 30.20]
Assets held in segregated accounts to satisfy statutory requirement for the protection of customer equity in margined trading account should be reported in accordance with the underlying exposure, whether or not the segregation requirement is separately classified on the institution's balance sheet. However, those assets should also be treated according to paragraph 31 . That is, they could be subject to a higher RSF factor depending on the term of encumbrance, i.e. whether the institution can freely dispose or exchange such assets and the term of the liability to the institution's customer that generate the segregation requirement. [Basel Framework, NSF 99.5]
For secured funding arrangements, use of balance sheet and accounting treatments should generally result in institutions excluding, from their assets, securities which they have borrowed in securities financing transactions (such as reverse repos and collateral swaps) where they do not have beneficial ownership. In contrast, institutions should include securities they have lent in securities financing transactions where they retain beneficial ownership. Institutions should also not include any securities they have received through collateral swaps if those securities do not appear on their balance sheets. Where institutions have encumbered securities in repos or other securities financing transactions, but have retained beneficial ownership and those assets remain on the institution's balance sheet, the institution should allocate such securities to the appropriate RSF category. [Basel Framework, NSF 30.21]
Securities financing transactions with a single counterparty may be measured net when calculating the NSFR, provided that the netting conditions set out in Paragraph 53(i) of OSFI's Leverage Requirements GuidelineFootnote 21 are met. [Basel Framework, NSF 30.22]
Amounts receivables and payable under securities financing transactions such as repos or reverse repos should generally be reported on a gross basis, meaning that the gross amount of such receivables and payables should be reported on the RSF side and ASF side respectively. The only exception is for securities financing transactions with a single counterparty as per paragraph 35. [Basel Framework, NSF 30.22]
Collateral maturing in less than one year but pledged in a repo operation with remaining maturity of one year or longer should be considered encumbered for the term of the repo or secured transaction, even if the actual maturity of the collateral is shorter than one year as the collateral pledged would have to be replaced once it matures. [Basel Framework, NSF 30.21]
When a loan is partially secured, the specific characteristics of the secured and unsecured portions of loans should be taken into account for the calculation of the NSFR and assigned the corresponding RSF factor. If it is not possible to draw the distinction between the secured and unsecured part of the loan, the higher RSF factor should apply to the whole loan. [Basel Framework, NSF 99.4]
Securities financing transactions (i.e. repos, reverse repos, securities lending and borrowing, and collateral swaps) can be considered "matched" from an NSFR perspective and assigned a 0% RSF factor and a 0% ASF factor provided they meet all of the following criteria:
For clarity, SFT liabilities that meet criteria b) cannot be used to offset SFT assets that meet criteria c), and vice versa. In addition, the amount of eligible SFT assets that meet criteria b) cannot exceed the amount of eligible SFT liabilities that meet criteria b). Similarly, the amount of eligible SFT assets that meet criteria c) cannot exceed the amount of eligible SFT liabilities that meet criteria c).
Derivative assets are calculated first based on the replacement cost for derivative contracts (obtained by marking to market) where the contract has a positive value. When an eligible bilateral netting contract is in place that meets the conditions as specified in paragraph 103 of Chapter 7 of OSFI's CAR Guideline, the replacement cost for the set of derivative exposures covered by the contract will be the net replacement cost. [Basel Framework, NSF 30.23]
In calculating NSFR derivative assets, collateral received in connection with derivative contracts may not offset the positive replacement cost amount, regardless of whether or not netting is permitted under the institution's operative accounting or risk-based framework, unless it is received in the form of either Level 1 HQLA or cash VM that meets the following conditions:
Any remaining balance sheet liability associated with (a) variation margin received that does not meet the criteria above or (b) initial margin received, may not offset derivative assets and should be assigned a 0% ASF factor. [Basel Framework, NSF 30.24]
For OTC transactions, any fixed independent amount an institution was contractually required to post at the inception of the derivatives transaction should be considered as initial margin, regardless of whether any of this margin was returned to the institution in the form of variation margin payments. If the initial margin is formulaically defined at a portfolio level, the amount considered as initial margin should reflect this calculated amount as of the NSFR measurement date, even if, for example, the total amount of margin physically posted to the institution's counterparty is lower because of VM payments received. For centrally cleared transactions, the amount of initial margin should reflect the total amount of margin posted less any mark-to-market losses on the applicable portfolio of cleared transactions. [Basel Framework, NSF 30.24]
The existence of minimum thresholds of transfer amounts for exchange of collateral in derivative contracts does not automatically preclude an offsetting of collateral received (in particular regarding the daily calculation and exchange of variation margins). [Basel Framework, NSF 30.24]
Assets assigned a 0% RSF factor comprise:
[Basel Framework, NSF 30.25, 30.26]
Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against Level 1 assets as defined in LAR Chapter 2, paragraph 43, and where the institution has the ability to freely rehypothecate the received collateral for the life of the loan. [Basel Framework, NSF 30.27]
Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against non-Level 1 assets, and where the institution has the ability to freely rehypothecate the received collateral for the life of the loan.
Assets assigned a 15% RSF factor comprise:
[Basel Framework, NSF 30.28]
Assets assigned a 50% RSF factor comprise:
[Basel Framework, NSF 30.29]
Assets assigned a 65% RSF factor comprise:
[Basel Framework, NSF 30.30]
Assets assigned an 85% RSF factor comprise:
[Basel Framework, NSF 30.31]
Assets assigned a 100% RSF factor comprise:
[Basel Framework, NSF 30.32]
Table 2 summarises the specific types of assets to be assigned to each asset category and their associated RSF factor.
[Basel Framework, NSF 99.2]
Certain asset and liability items will be deemed by OSFI to be interdependent and as such will have their RSF and ASF factors adjusted to 0%. Interdependency will be determined on the basis of contractual arrangements, which assure that the liability cannot fall due while the associated asset remains on the balance sheet, the principal payment flows from the asset cannot be used for something other than repaying the liability, and the liability cannot be used to fund other assets. In addition, in making a determination as which items are deemed interdependent, OSFI will apply the following criteria:
Based on an assessment against these requirements, the following transactions are designated as interdependent and, as such, institutions may adjust their RSF and ASF factors, for assets and liabilities, respectively, to 0%:
[Basel Framework, NSF 30.35]
Many potential OBS liquidity exposures require little direct or immediate funding but can lead to significant liquidity drains over a longer time horizon. The NSFR assigns an RSF factor to various OBS activities in order to ensure that institutions hold stable funding for the portion of OBS exposures that may be expected to require funding within a one-year horizon. [NSF 30.33]
Consistent with the LCR, the NSFR identifies OBS exposure categories based broadly on whether the commitment is a credit or liquidity facility or some other contingent funding obligation. Table 3 identifies the specific types of OBS exposures to be assigned to each OBS category and their associated RSF factor.
[Basel Framework, NSF 30.34]
For purposes of the threshold calculation related to the scope of application for Category I institutions, wholesale funding is defined as the sum of several liability data points in OSFI's Balance Sheet return (M4), less amounts from small business customer deposits (from LCR data). This amount is then considered against an institution's total on-balance assets in calculating its proportion of wholesale funding reliance.
The threshold above which an institution is deemed to have significant reliance on wholesale funding is set at 40%.
Wholesale funding balances include the sum of the following data point addresses (DPAs) found on the M4 regulatory return:
From the sum of these data points, institutions may remove the amounts that consist of small business customer deposits, defined as the total of the following DPAs found on OSFI's LCR (LA) regulatory return:
Total on-balance sheet assets is represented by DPA 1045 on OSFI's Balance Sheet (M4) regulatory return.
Category I institutions are responsible for calculating and tracking their wholesale funding ratio against the 40% threshold. At the end of each fiscal quarter, Category I institutions must calculate their ratio of wholesale funding reliance using data from the trailing five fiscal quarters.
If, at the end of any fiscal quarter, the previous five quarterly periods moving average ratio of wholesale funding reliance is greater than the 40% threshold, the institution must:
It is recommended that an institution engage early with its Lead Supervisor where the institution forecasts that the threshold will be exceeded.
When a Category I institution that is subject to the NSFR falls below the wholesale funding reliance threshold for a given five quarter moving average period, it is still required to continue to adhere to the NSFR minimum standard and report its NSFR position to OSFI. If the institution continues to be below the wholesale funding reliance threshold for four consecutive moving average periods, it must notify OSFI, and will no longer be subject to any NSFR requirements after receiving written confirmation from OSFI.
Following the format: [Basel Framework, XXX yy.zz].
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Per Principle 10 of OSFI's Guideline B-6, institutions are expected to incorporate liquidity costs, benefits and risks in the internal pricing for all significant business activities. However, given the NSFR's limited number of categories and corresponding factors, OSFI does not expect or require institutions to map the NSFR internal costs and benefits at a granular level such as at trading desk levels or individual products; rather the NSFR is calibrated to foster a diversified funding profile and asset mix on a consolidated basis.
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NSFR derivative liabilities = (derivative liabilities) – (total collateral posted as variation margin on derivative liabilities).
Return to footnote 6
To the extent that the institution's accounting framework reflects on balance sheet, in connection with a derivative contract, an asset associated with collateral posted as variation margin that is deducted from the replacement cost amount for purposes of the NSFR, that asset should not be included in the calculation of an institution's required stable funding to avoid any double-counting.
Return to footnote 7
Deposit liabilities resulting from foreign bank branches' Capital Equivalency Deposits (CEDs) should be categorized as liabilities with an effective maturity of one year or more until one of the following occurs: a) the institution is made aware that the depositing foreign bank branch has submitted an approval request for withdraw or termination of the CED to OSFI or, b) the depositing foreign bank branch provides a withdraw or termination notice related to the CED to the institution. Once either a) or b) occurs, the CED amount should be assigned a 0% ASF factor.
Return to footnote 8
On-balance sheet precious metals liabilities should receive the same ASF factors as other on-balance sheet (cash) funding. There is no difference between cash settlement and physical delivery in terms of application of ASF factors.
Return to footnote 9
Retail deposits are defined in LAR Chapter 2, paragraph 54. Small business customers are defined in LAR Chapter 2, paragraph 70 and 71.
Return to footnote 10
Deposit-taking entities (including banking entities), insurance entities, securities firms, investment managers (such as pension funds and collective investment vehicles), and their affiliates are considered financial institutions for the application of the NSFR standard. [Basel Framework, NSF 10.3]
Return to footnote 11
For clarity, central counterparties should be categorized as financial institutions under the NSFR.
Return to footnote 12
Derivative transactions with central banks arising from the latter's short term monetary policy and liquidity operations can be excluded from the reporting institution's NSFR computation and can offset unrealized capital gains and losses related to these derivative transactions from ASF. These transactions include foreign exchange derivatives such as foreign exchange swaps, and should have a maturity of less than six months at inception. As such, the institution's NSFR would not change due to entering a short-term derivative transaction with its central bank for the purpose of short-term monetary policy and liquidity operations. [Basel Framework, NSF 10.6]
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ASF = 0% x MAX ((NSFR derivative liabilities - NSFR derivative assets), 0).
Return to footnote 14
For the purposes of calculating the NSFR, HQLA are defined as all HQLA without regard to LCR operational requirements and LCR caps on Level 2 and Level 2B assets that may otherwise limit the ability of some HQLA to be included as eligible HQLA in calculation of the LCR. HQLA are defined in LAR Chapter 2, paragraph 12-47. Operational requirements are specified in LAR Chapter 2, paragraphs 16-31.
Return to footnote 15
Sovereign bonds issued in foreign currencies which are excluded from HQLA according to LAR Chapter 2 paragraph 43(e) because their amount exceeds the institution's stressed net cash outflows in that currency and country can be treated as Level 1 and assigned to the corresponding bucket. [Basel Framework, NSF 30.26]
Return to footnote 16
Open maturity secured financing transactions (including open maturity prime brokerage margin loans) can be treated as overnight maturity provided the institution can demonstrate to OSFI: i) that it can contractually and operationally collapse an open maturity trade on the next business day without incurring legal or reputational risk; and ii) that the trades are priced similarly to overnight trades.
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This could reflect a case where an institution may imply that it would be subject to funding risk if it did not exercise an option on its own assets.
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Encumbered assets include but are not limited to assets backing securities or covered bonds and assets pledged in securities financing transactions or collateral swaps. "Unencumbered" is defined in LAR Chapter 2, paragraph 19.
Return to footnote 19
In general, exceptional central bank liquidity operations are considered to be non-standard, temporary operations conducted by the central bank in order to achieve its mandate in a period of market-wide financial stress and/or exceptional macroeconomic challenges.
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The term "claims" includes but is not limited to "loans"; it also includes central bank bills and the asset account created on the institution's balance sheet by entering into repo transaction with central banks. [Basel Framework, NSF 30.25]
Return to footnote 22
Non-operational deposits held at other financial institutions should have the same treatment as loans to financial institutions, taking into account the term of the operation. [Basel Framework, NSF 99.6]
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Initial margin posted on behalf of a customer, where the institution does not guarantee performance of the third party, would be exempt from this requirement. This refers to the cases in which the institution provides a customer access to a third party (e.g. a CCP) for the purpose of clearing derivatives, where the transactions are executed in the name of the customer, and the institution does not guarantee the performance of this third party. [Basel Framework, NSF 30.31]
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To the extent that an institution's accounting framework reflects on balance sheet, in connection with a derivative contract, an asset associated with collateral posted as initial margin for purpose of the NSFR, that asset should not be counted as encumbered asset in the calculation of the institution's RSF to avoid any double-counting. [Basel Framework, NSF 30.24]
Return to footnote 25
Performing loans are considered to be those that are not past due for more than 90 days in accordance with CAR Chapter 4, paragraph 138. Conversely, non-performing loans are considered to be loans that are more than 90 days past due.
Return to footnote 26
On-balance sheet unsecured loans in precious metals extended by an institution or deposits in precious metals placed by an institution that are settled by cash payment should receive the same RSF factors as other (cash) deposits and loans depending on the relevant characteristics such as counterparty type, maturity and encumbrance. Where physical delivery is assumed, loans extended in precious metals and deposits placed in precious metals should be treated like physically traded commodities and are subject to a 85% RSF factor unless the loan (or deposit) is (i) extended to (or placed with) a financial counterparty and has a residual maturity of one year or greater or (ii) encumbered for a period of one year or more or (iii) non-performing, in which cases a 100% RSF factor should be applied. The assumed type of settlement should be determined in accordance with the approach to determine inflows applied in the LCR.
Return to footnote 27
RSF = 100% x MAX ((NSFR derivative assets – NSFR derivative liabilities), 0).
Return to footnote 28
The replacement cost amount of "settled-to-market" derivatives should be calculated as if no settlement payments and receipts had been made to account for the changes in the value of a derivative transaction or a portfolio of derivative transactions. [Basel Framework, NSF 30.32]
Return to footnote 29