Liquidity Adequacy Requirements (LAR) (2023) Chapter 5 – Operating Cash Flow Statement

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, respectively. 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”.

Liquidity Adequacy Requirements

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 that should be read together. Chapter 1 - Overview Chapter 2 - Liquidity Coverage Ratio Chapter 3 - Net Stable Funding Ratio Chapter 4 - Net Cumulative Cash Flow Chapter 5 - Operating Cash Flow Statement Chapter 6 - Liquidity Monitoring Tools Chapter 7 - Intraday Liquidity Monitoring Tools

Chapter 1 – Overview

1.1 Objective

Outlined below is an overview of liquidity adequacy requirements for banks, federally regulated trust or loan companies, and for bank holding companies incorporated or formed under Part XV of the Bank Act, collectively referred to as "institutions". Parts of this guideline draw on the Basel Committee on Banking Supervision's (BCBS) Basel III liquidity framework, which encompasses Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – published in January 2013, Basel III: the Net Stable Funding Ratio – published in October 2014, and Monitoring tools for intraday liquidity management – published in April 2013. For reference, the Basel text paragraph numbers that are associated with the text appearing in this guideline are indicated in square brackets at the end of each paragraph^{Footnote 1}. This guideline contains the methodologies underpinning a series of liquidity metrics that are used by OSFI to assess the liquidity adequacy of an institution. OSFI will evaluate the performance of an institution's liquidity metrics both as a package and individually when determining its overall assessment of an institution's liquidity adequacy. In addition, the liquidity metrics presented in this guideline will be supplemented by detailed supervisory assessments of other aspects of an institution's liquidity risk management framework in line with the BCBS Sound Principles^{Footnote 2} and OSFI's Guideline B-6: Liquidity Principles^{Footnote 3}.This is to ensure that the aspects of the OSFI's liquidity guidelines are well engrained in institutions' internal practices; for example that institutions should consider liquidity costs, benefits and risks in their internal pricing, in line with OSFI Principle 10 in Guideline B-6.

1.2 Scope of application

The scope of application of individual liquidity metrics differs whether an institution is a Domestic Systemically Important Bank (DSIB) or a Small and Medium-Sized Deposit Taking Institution (SMSB). Moreover, SMSBs are further segmented according to the methodology described in the Guideline Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions. The intraday liquidity monitoring tools outlined in Chapter 7 apply solely to DSIBs and SMSBs that are direct clearers. The liquidity standards, supervisory tools and monitoring tools outlined in this guideline apply on a consolidated basis and apply to all federally regulated financial institutions unless otherwise noted in the OSFI Notes box below. The consolidated entity includes all subsidiaries and branches except insurance subsidiaries, as set out in Section 1.1 of OSFI's Capital Adequacy Requirements (CAR) Guideline^{Footnote 4}. OSFI Notes Certain direct and indirect subsidiaries of OSFI-regulated deposit-taking institutions that are themselves OSFI-regulated deposit-taking institutions may be exempted from adhering to certain liquidity requirements outlined in this guideline on a sub-consolidated basis. This would include instances where the subsidiary is itself the parent of other subsidiaries. Specifically: Where the ultimate Canadian parent of such a subsidiary is a Global or Domestic Systemically Important Bank (GSIB or DSIB): The LCR standard is applicable to the subsidiary; The NCCF is not applicable to the subsidiary (i.e. the subsidiary does not need to report or separately adhere to the NCCF requirements); The NSFR is not applicable to the subsidiary; The liquidity monitoring tools outlined in Chapter 6 are not applicable to the subsidiary. Where the ultimate Canadian parent of such a subsidiary is not a GSIB or DSIB: The LCR is not applicable to the subsidiary; The NCCF is not applicable to the subsidiary; The NSFR is not applicable to the subsidiary; The liquidity monitoring tools outlined in Chapter 6 are not applicable to the subsidiary. In both a) and b) above, in order to be exempted, the subsidiary must operate strictly in Canada and such operations must be primarily Canadian dollar-related. In addition, this exemption will only apply where the OSFI-regulated parent of such an exempted subsidiary institution complies with the requirements outlined in paragraph 5 below, in particular the need to demonstrate that systems are in place to show the cash flow profiles of such legal entities and that such information can be provided to OSFI upon request. On an exception basis, OSFI may nonetheless require an otherwise exempted subsidiary to comply with provisions of the LAR Guideline (e.g. based on size or business model). In such cases, OSFI would notify the affected institution and provide sufficient lead-time for implementation of the relevant liquidity requirements. Regardless of the scope of application of the individual metrics, in keeping with Principle 6 of the BCBS's Sound Principles and Principle 4 of OSFI's Guideline B-6: Liquidity Principles, an institution should actively monitor and control liquidity risk exposures and funding needs at the level of individual legal entities, foreign branches and subsidiaries, and the group as a whole, taking into account legal, regulatory and operational limitations to the transferability of liquidity. [Basel Framework, LCR 10.3]

1.3 Overview of the individual liquidity metrics

This guideline covers multiple quantitative liquidity measures including the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) standards, the Net Cumulative Cash Flow (NCCF) and Operating Cash Flow Statement (OCFS) supervisory tools, and a suite of additional liquidity monitoring tools, including a set of intraday liquidity monitoring tools. Each of these liquidity measures offers a different perspective on the liquidity adequacy of an institution as no one measure can, on its own, present a comprehensive assessment of an institution’s liquidity adequacy. The Liquidity Coverage Ratio is a standard that aims to ensure that an institution has an adequate stock of unencumbered high-quality liquid assets (HQLA) that consists of cash or assets that can be converted into cash at little or no loss of value in private markets, to meet its liquidity needs for a 30 calendar day liquidity stress scenario. At a minimum, the stock of unencumbered HQLA should enable the institution to survive until Day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken by management and supervisors, or that the institution can be resolved in an orderly way. Furthermore, it gives the central bank additional time to take appropriate measures, should they be regarded as necessary. The Net Stable Funding Ratio is a standard that 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 aims to limit over-reliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability. In addition, the NSFR approach offsets incentives for institutions to fund their stock of liquid assets with short-term funds that mature just outside the LCR's 30-day horizon. [Basel Framework, NSF 20.1] The Net Cumulative Cash Flow (NCCF) is a supervisory tool that measures an institution's cash flows beyond the 30 day horizon in order to capture the risk posed by funding mismatches between assets and liabilities, after the application of assumptions around the functioning of assets and modified liabilities (i.e. where rollover of certain liabilities is permitted). The NCCF measures an institution's cash flow horizon both on the basis of the consolidated balance sheet as well as by major individual balance sheets and components. The metric helps identify gaps between contractual inflows and outflows for various time bands over and up to a 12 month time horizon, which indicate potential liquidity shortfalls an institution may need to address. The Operating Cash Flow Statement (OCFS) is a cash flow forecasting supervisory tool that factors in limited behavioural aspects captured by prescribed inflow and outflow rates. The metric provides data on an institution's stock of unencumbered liquid assets, contractual cash inflows, and contractual cash outflows over a one year horizon. A suite of additional liquidity monitoring tools, discussed in paragraphs 12 to 19, are utilized to capture specific information related to an institution's cash flows, balance sheet structure, available unencumbered collateral, and certain market indicators as well as an institution's intraday liquidity positions. The contractual maturity mismatch profile identifies the gaps between the contractual inflows and outflows of liquidity for defined time bands. These maturity gaps indicate how much liquidity an institution would potentially need to raise in each of these time bands if all outflows occurred at the earliest possible date. The NCCF, as described above and outlined in Chapter 4, provides such a maturity mismatch metric. This metric provides insight into the extent to which the institution relies on maturity transformation under its current contracts. [Basel Framework, SRP 50.6] The concentration of funding metrics are meant to identify those sources of wholesale funding that are of such significance that withdrawal of this funding could trigger liquidity concerns. The metric thus encourages the diversification of funding sources as recommended in the BCBS's Sound Principles and OSFI's Guideline B-6: Liquidity Principles. [Basel Framework, SRP 50.14] Metrics related to available unencumbered assets provide data on the quantity and key characteristics, including currency denomination and location, of institutions' available unencumbered assets. These assets have the potential to be used as collateral to raise additional HQLA or secured funding in secondary markets or are eligible at central banks and as such may potentially be additional sources of liquidity for the institution. [Basel Framework, SRP 50.27] The LCR by significant currency metric allows both the institution and OSFI to track potential currency mismatch issues that could arise. A currency is considered "significant" if the aggregate liabilities denominated in that currency amount to 5% or more of the institution's total liabilities. [Basel Framework, SRP 50.35, 50.37] The market-related monitoring tools provide OSFI with high frequency market data with little or no time lag which can be used as early warning indicators in monitoring potential liquidity difficulties at institutions. This includes the monitoring of data at the market-wide, financial sector, and institution-specific levels to focus on potential liquidity difficulties. [Basel Framework, SRP 50.40, 50.41] The Liquidity Activity Monitor (LAM) provides OSFI with timely balances of key accounts for select institutions, as determined by OSFI. Forecast of operational expenses and non-interest income will supplement other liquidity monitoring tools of non-DSIBs and help anticipate cash flows that may become relevant in a stress environment due to timing mismatches. Operational expenses and non-interest income forecasts do not flow into the calculation of the liquidity metrics (i.e., will be reported “below the line”) and as such will not impact the calculation of the LCR’s net outflows or the NCCF’s survival horizon. Nonetheless, non-DSIBs are expected to build up their forecasting capabilities such that a fair estimate of these amounts and their timing of occurrence can be projected for various time bands. The intraday liquidity monitoring tools enable OSFI and the Bank of Canada, as applicable (see Chapter 7), to better monitor an institution's management of intraday liquidity risk and its ability to meet payment and settlement obligations on a timely basis. Over time, the tools will also provide OSFI and the Bank of Canada with a better understanding of institutions' payment and settlement behaviour.

1.4 Requirements associated with the metrics

The LCR requires that, absent a situation of financial stress, the value of the ratio be no lower than 100% (i.e. the stock of HQLA should at least equal total net cash outflows over a 30 day horizon). Institutions subject to the LCR are expected to meet this requirement continuously and hold a stock of unencumbered HQLA as a defense against the potential onset of liquidity stress. During a period of financial stress, however, OSFI reaffirms the view of the BCBS that institutions are expected to use their stock of HQLA, thereby falling below 100%, as maintaining the LCR at 100% under such circumstances could produce undue negative effects on the institution and other market participants. OSFI will subsequently assess this situation and will adjust its response flexibly according to the circumstances, as described in Chapter 2, paragraph 6. [Basel Framework, LCR 20.5] The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. Institutions subject to the NSFR should maintain a ratio equal to at least 100% on an ongoing basis. The suite of liquidity monitoring tools described in paragraphs 12 to 18 are not standards and thus do not have defined minimum required thresholds. However, OSFI reserves the right to set supervisory requirements for any of the suite of liquidity tools, including the set of intraday liquidity tools, as required. OSFI could, for example, consider setting minimum requirements for the LCR by significant currency measure on an institution-specific basis based on an evaluation of the institution's ability to raise funds in foreign currency markets and the ability to transfer a liquidity surplus from one currency to another and across jurisdictions and legal entities. As a general rule, the LCR by significant currency ratio should be higher for currencies in which OSFI evaluates an institution's ability to raise funds in foreign currency markets or the ability to transfer a liquidity surplus from one currency to another and across jurisdictions and legal entities to be limited. [Basel Framework, SRP 50.38]

1.5 Frequency of calculation and regulatory reporting timeline

Each institution should use the applicable metrics on an ongoing basis to help monitor and control its liquidity risk. The time lag in reporting for each metric, as outlined below, should be considered the maximum time lag under normal conditions. OSFI reserves the right to accelerate the time lag in reporting where circumstances warrant (e.g. in market-wide or idiosyncratic stress). The ability to report on an accelerated timeline should be routinely tested along-side the contingency funding plan. Operational capacity may also be tested periodically by OSFI Supervision. The LCR should be reported to OSFI monthly. DSIBs should have the operational capacity to increase the reporting frequency to weekly or even daily in stressed situations at OSFI’s discretion, whereas non-DSIBs should have the operational capacity to increase the frequency of LCR return reporting to weekly, at OSFI’s discretion. The time lag in reporting should not surpass 14 calendar days for regular monthly reporting and three business days for reporting in stress situations [Basel Framework, LCR 20.7] OSFI Notes OSFI acknowledges that intra-period reporting may not be subject to the same rigour and control infrastructure as that of month-end and quarter-end reporting. Institutions should nonetheless have a framework in place that outlines their process to report intra-period LCRs. That process should regularly be tested to ensure it produces reasonable estimates in the three business day reporting time lag. Institutions should notify OSFI immediately if their LCR has fallen, or is expected to fall, below 100%. [Basel Framework, LCR 20.8] The NSFR should be reported to OSFI quarterly. The time lag in reporting should not surpass 30 calendar days. [Basel Framework, NSF 20.3] Institutions should notify OSFI immediately if their NSFR has fallen, or is expected to fall, below 100%. The NCCF should be reported to OSFI monthly. DSIBs should have the operational capacity to increase the frequency to weekly or even daily in stressed situations at OSFI’s discretion, whereas non-DSIBs should have the operational capacity to increase the frequency of NCCF return reporting to weekly, at OSFI’s discretion. Operational expenses and non-interest income described in paragraph 18 are to be reported together with the NCCF return. The time lag in reporting should not surpass 14 calendar days for regular monthly reporting and three business days for reporting in stress situations. OSFI Notes OSFI acknowledges that intra-period reporting may not be subject to the same rigour and control infrastructure as that of month-end and quarter-end reporting. Institutions should nonetheless have a framework in place that outlines their process to report intra-period NCCFs. That process should regularly be tested to ensure it produces reasonable estimates in the three business day reporting time lag. Institutions should notify OSFI immediately if their NCCF has fallen, or is expected to fall, below the supervisory-communicated level. The OCFS should be reported to OSFI monthly. The time lag in reporting should not surpass 14 calendar days. Institutions should notify OSFI immediately if their OCFS level has fallen, or is expected to fall, below the supervisory-communicated level. The concentration of funding, available unencumbered assets and LCR by significant currency monitoring metrics should be reported to OSFI monthly. The time lag in reporting should not surpass 14 calendar days for regular monthly reporting and 3 business days for reporting in stress situations. OSFI Notes OSFI will not require separate reporting of data related to the concentration of funding and available unencumbered assets monitoring tools. Rather, OSFI will utilize information submitted as part of other aspects of regulatory reporting (e.g. NCCF, H4 return, etc.) to assess the information elements requested under these monitoring tools. Institution-specific information related to the market-related monitoring tools should be provided to OSFI on a weekly basis. The time lag in reporting should not surpass three business days. For institutions asked to report the LAM, balances should be measured and reported on a timely basis (next day) and provided to OSFI as frequently as requested (up to daily). For select balances at institutions experiencing liquidity stress, OSFI may request intraday reporting through the LAM (up to three times per day) on a best efforts basis. The information contained in the monitoring tools for intraday liquidity management should be reported to OSFI and the Bank of Canada on a monthly basis. The time lag in reporting should not surpass 14 calendar days. OSFI Notes The scope of application for the intraday liquidity monitoring tools will be limited to OSFI- regulated direct clearers only. OSFI does not require that such institutions report on the suite of intraday liquidity monitoring tools at this time. However, OSFI will continue to review the applicable implementation date for these metrics and will discuss the proposed timing of rollout with affected institutions in advance of taking a final decision.

Footnotes

Footnote 1 Following the format: [Basel Framework, XXX yy.zz]. Return to footnote 1 referrer Footnote 2 http://www.bis.org/publ/bcbs144.htm. Return to footnote 2 referrer Footnote 3 https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b6-2020.aspx. Return to footnote 3 referrer Footnote 4 https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/CAR22_chpt1.aspx. Return to footnote 4 referrer

Chapter 2 – Liquidity Coverage Ratio

This chapter is drawn from the Basel Committee on Banking Supervision's (BCBS) Basel III framework, Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013 - Part 1, Liquidity Coverage Ratio), and the BCBS's Frequently Asked Questions on Basel III's January 2013 Liquidity Coverage Ratio framework (June 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 paragraph^{Footnote 1}. The Committee has developed the LCR to promote the short-term resilience of the liquidity risk profile of institutions by ensuring that they have sufficient high-quality liquid assets (HQLA) to survive a significant stress scenario lasting 30 calendar days. [Basel Framework, LCR 20.1] The LCR will be a key component of OSFI's supervisory approach to liquidity risk, and will be supplemented by detailed supervisory assessments of other aspects of an institution's liquidity risk management framework in line with the BCBS Sound Principles^{Footnote 2} and OSFI's Guideline B-6: Liquidity Principles^{Footnote 3}, the NSFR (Chapter 3), and the other liquidity monitoring tools (Chapter 4 and Chapter 6). 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 B-6 Guideline. OSFI Notes The LCR standard applies to DSIBs, Category I and Category II institutions, as described in OSFI's Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions Guideline. A subsidiary that is itself a FRFI may be exempted from adhering to and reporting its LCR provided it meets the criteria outlined in section 1.2 of Chapter 1 – Overview of this guideline. Furthermore, per section 6.4 of Chapter 6 – Liquidity Monitoring Tools, some institutions may have to monitor and report an LCR by significant currency.

2.1. Objective of the LCR and use of HQLA

This standard aims to ensure that an institution has an adequate stock of unencumbered HQLA that consists of cash or assets that can be converted into cash at little or no loss of value in private markets, to meet its liquidity needs for a 30 calendar day liquidity stress scenario. At a minimum, the stock of unencumbered HQLA should enable the institution to survive until Day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken by management and supervisors, or that the institution can be resolved in an orderly way. Furthermore, it gives the central bank additional time to take appropriate measures, should they be regarded as necessary. As noted in the BCBS Sound Principles and OSFI's Guideline B-6, given the uncertain timing of outflows and inflows, institutions are also expected to be aware of any potential mismatches within the 30-day period and ensure that sufficient HQLA are available to meet any cash flow gaps throughout the period. The LCR builds on traditional liquidity "coverage ratio" methodologies used internally by institutions to assess exposure to contingent liquidity events. The total net cash outflows for the scenario are to be calculated for 30 calendar days into the future. The standard requires that, absent a situation of financial stress, the value of the ratio be no lower than 100% (i.e. the stock of HQLA should at least equal total net cash outflows) on an ongoing basis because the stock of unencumbered HQLA is intended to serve as a defense against the potential onset of liquidity stress. During a period of financial stress, however, institutions should use their stock of HQLA, potentially falling below 100%, as maintaining the LCR at 100% under such circumstances could produce undue negative effects on the institution and other market participants. OSFI will subsequently assess this situation and will adjust its response flexibly according to the circumstances. [Basel Framework, LCR 20.5] In particular, OSFI's decisions regarding an institution's use of its HQLA will be guided by consideration of the core objective and definition of the LCR. OSFI will exercise judgment in its assessment and account not only for prevailing macro-financial conditions, but also consider forward-looking assessments of macroeconomic and financial conditions. In determining a response, OSFI will be aware that some actions could be procyclical if applied in circumstances of market-wide stress. OSFI will assess conditions at an early stage, and take actions if deemed necessary, to address potential liquidity risk. OSFI will allow for differentiated responses to a reported LCR below 100%, which will be proportionate with the drivers, magnitude, duration and frequency of the reported shortfall. OSFI will assess a number of institution- and market-specific factors in determining the appropriate response as well as other considerations related to both domestic and global frameworks and conditions. Potential considerations include, but are not limited to: The reason(s) that the LCR fell below 100%. This includes use of the stock of HQLA, an inability to roll over funding or large unexpected draws on contingent obligations. In addition, the reasons may relate to overall credit, funding and market conditions, including liquidity in credit, asset and funding markets, affecting an individual institution or all institutions, regardless of their own condition; The extent to which the reported decline in the LCR is due to an institution-specific or market-wide shock; An institution's overall health and risk profile, including activities, positions with respect to other supervisory requirements, internal risk systems, controls and other management processes, among others; The magnitude, duration and frequency of the reported decline of HQLA; The potential for contagion to the financial system and additional restricted flow of credit or reduced market liquidity due to actions to maintain an LCR of 100%; The availability of other sources of contingent funding such as central bank funding^{Footnote 4}, or other actions by prudential authorities. OSFI will have a range of tools at its disposal to address a reported LCR below 100%. Institutions may use their stock of HQLA in both idiosyncratic and systemic stress events, although the OSFI's response may differ between the two. At a minimum, an institution should present an assessment of its liquidity position, including the factors that contributed to its LCR falling below 100%, the measures that have been and will be taken and the expectations on the potential length of the situation. Enhanced reporting to OSFI should be commensurate with the duration of the shortfall. If appropriate, OSFI may also require actions by an institution to reduce its exposure to liquidity risk, strengthen its overall liquidity risk management, or improve its contingency funding plan. However, in a situation of sufficiently severe system-wide stress, effects on the entire financial system should be considered. Potential measures to restore liquidity levels should be discussed, and should be executed over a period of time considered appropriate to prevent additional stress on the institution and on the financial system as a whole. OSFI's responses will be consistent with its overall approach to the prudential framework. [Basel Framework, LCR 20.6]

2.2. Definition of the LCR

The scenario for the LCR standard entails a combined idiosyncratic and market-wide shock that would result in: the run-off of a proportion of retail deposits; a partial loss of unsecured wholesale funding capacity; a partial loss of secured, short-term financing with certain collateral and counterparties; additional contractual outflows that would arise from a downgrade in the institution's public credit rating by up to and including three notches, including collateral posting requirements; increases in market volatilities that impact the quality of collateral or potential future exposure of derivative positions and thus require larger collateral haircuts or additional collateral, or lead to other liquidity needs; unscheduled draws on committed but unused credit and liquidity facilities that the institution has provided to its clients; and the potential need for the institution to buy back debt or honour non-contractual obligations in the interest of mitigating reputational risk. [Basel Framework, LCR 20.2] In summary, the stress scenario specified incorporates many of the shocks experienced during the crisis that started in 2007 into one significant stress scenario for which an institution would need sufficient liquidity on hand to survive for up to 30 calendar days. This stress test should be viewed as a minimum supervisory requirement for institutions. Institutions are expected to conduct their own stress tests to assess the level of liquidity they should hold beyond this minimum, and construct their own scenarios that could cause difficulties for their specific business activities. Such internal stress tests should incorporate longer time horizons than the one mandated by this standard. Institutions are expected to share the results of these additional stress tests with OSFI. [Basel Framework, LCR 20.3] The LCR has two components: Value of the stock of HQLA in stressed conditions plus Eligible non-operational demand and overnight deposits; and Total net cash outflows, calculated according to the scenario parameters outlined below. [Basel Framework, LCR 20.4] Stock of HQLA+Eligible non-operational demand and overnight depositsTotal net cash outflows over the next 30 calendar days≥100%     OSFI Notes When calculating the LCR, institutions should maintain a consistent categorization of a given entity/counterparty across all HQLA, outflow and inflow categories.

2.2.A. Stock of HQLA

The numerator of the LCR is the "stock of HQLA". Under the standard, institutions must hold a stock of unencumbered HQLA to cover the total net cash outflows (as defined below) over a 30-day period under the prescribed stress scenario. In order to qualify as "HQLA", assets should be liquid in markets during a time of stress and, ideally, be central bank eligible. The following sets out the characteristics that such assets should generally possess and the operational requirements that they should satisfy^{Footnote 5}. [Basel Framework, LCR 30.1] 2.2.A.1. Characteristics of HQLA Assets are considered to be HQLA if they can be easily and immediately converted into cash at little or no loss of value. The liquidity of an asset depends on the underlying stress scenario, the volume to be monetised and the timeframe considered. Nevertheless, there are certain assets that are more likely to generate funds without incurring large discounts in sale or repurchase agreement (repo) markets due to fire-sales even in times of stress. This section outlines the factors that influence whether or not the market for an asset can be relied upon to raise liquidity when considered in the context of possible stresses. These factors should assist OSFI in determining which assets, despite meeting the criteria from paragraphs 42 to 47, are not sufficiently liquid in private markets to be included in the stock of HQLA. Fundamental characteristics Low risk: assets that are less risky tend to have higher liquidity. High credit standing of the issuer and a low degree of subordination increase an asset's liquidity. Low duration^{Footnote 6}, low legal risk, low inflation risk and denomination in a convertible currency with low foreign exchange risk all enhance an asset's liquidity. Ease and certainty of valuation: an asset's liquidity increases if market participants are more likely to agree on its valuation. Assets with more standardised, homogenous and simple structures tend to be more fungible, promoting liquidity. The pricing formula of a high-quality liquid asset must be easy to calculate and not depend on strong assumptions. The inputs into the pricing formula must also be publicly available. In practice, this should rule out the inclusion of most structured or exotic products. Low correlation with risky assets: the stock of HQLA should not be subject to wrong-way (highly correlated) risk. For example, assets issued by financial institutions are more likely to be illiquid in times of liquidity stress in the banking sector. Listed on a developed and recognised exchange: being listed increases an asset's transparency. Market-related characteristics Active and sizable market: the asset should have active outright sale or repo markets at all times. This means that: There should be historical evidence of market breadth and market depth. This could be demonstrated by low bid-ask spreads, high trading volumes, and a large and diverse number of market participants. Diversity of market participants reduces market concentration and increases the reliability of the liquidity in the market. There should be robust market infrastructure in place. The presence of multiple committed market makers increases liquidity as quotes will most likely be available for buying or selling HQLA. Low volatility: assets whose prices remain relatively stable and are less prone to sharp price declines over time will have a lower probability of triggering forced sales to meet liquidity requirements. Volatility of traded prices and spreads are simple proxy measures of market volatility. There should be historical evidence of relative stability of market terms (e.g. prices and haircuts) and volumes during stressed periods. Flight to quality: historically, the market has shown tendencies to move into these types of assets in a systemic crisis. The correlation between proxies of market liquidity and banking system stress is one simple measure that could be used. [Basel Framework, LCR 30.2, 30.6, 30.12] As outlined by these characteristics, the test of whether liquid assets are of "high quality" is that, by way of sale or repo, their liquidity-generating capacity is assumed to remain intact even in periods of severe idiosyncratic and market stress. Lower quality assets typically fail to meet that test. An attempt by an institution to raise liquidity from lower quality assets under conditions of severe market stress would entail acceptance of a large fire-sale discount or haircut to compensate for high market risk. That may not only erode the market's confidence in the institution, but would also generate mark-to-market losses for institutions holding similar instruments and add to the pressure on their liquidity position, thus encouraging further fire sales and declines in prices and market liquidity. In these circumstances, private market liquidity for such instruments is likely to disappear quickly. [Basel Framework, LCR 30.3] HQLA (except Level 2B assets as defined below) should ideally be eligible at central banks^{Footnote 7} for intraday liquidity needs and overnight liquidity facilities. In the past, central banks have provided a further backstop to the supply of banking system liquidity under conditions of severe stress. Central bank eligibility should thus provide additional confidence that institutions are holding assets that could be used in events of severe stress without damaging the broader financial system. That in turn would raise confidence in the safety and soundness of liquidity risk management in the banking system. [Basel Framework, LCR 30.4] It should be noted however, that central bank eligibility does not by itself constitute the basis for the categorisation of an asset as HQLA. [Basel Framework, LCR 30.5] 2.2.A.2. Operational requirements All assets in the stock of HQLA are subject to the following operational requirements. The purpose of the operational requirements is to recognise that not all assets outlined in paragraphs 42 to 47 that meet the asset class, risk-weighting and credit-rating criteria should be eligible for the stock as there are other operational restrictions on the availability of HQLA that can prevent timely monetisation during a stress period. [Basel Framework, LCR 30.13] These operational requirements are designed to ensure that the stock of HQLA is managed in such a way that the institution can, and is able to demonstrate that it can, immediately use the stock of assets as a source of contingent funds that is available for the institution to convert into cash through outright sale or repo, to fill funding gaps between cash inflows and outflows at any time during the 30-day stress period, with no restriction on the use of the liquidity generated. [Basel Framework, LCR 30.14] OSFI Notes HQLA collateral held by an institution on the first day of the LCR horizon may count toward the stock of HQLA even if it is sold or repoed forward. [Basel Framework, LCR 40.74 ] An institution should periodically monetise a representative proportion of the assets in the stock through repo or outright sale, in order to test its access to the market, the effectiveness of its processes for monetisation, the availability of the assets, and to minimise the risk of negative signaling during a period of actual stress. [Basel Framework, LCR 30.15] OSFI Notes The extent, subject and frequency of HQLA monetization necessary to comply with paragraph 18 should be assessed on a case-by-case basis. It is the responsibility of institutions to incorporate the intent of paragraph 18 in their management of liquid assets and be able to demonstrate to OSFI an approach which is appropriate rather than ex ante stipulations. Institutions need not monetize HQLA specifically for test purposes; this requirement can be met through transactions in the course of the institution's normal business. [Basel Framework, LCR 30.15] All assets in the stock should be unencumbered. "Unencumbered" means free of legal, regulatory, contractual or other restrictions on the ability of the institution to liquidate, sell, transfer, or assign the asset. An asset in the stock should not be pledged (either explicitly or implicitly) to secure, collateralise or credit-enhance any transaction, nor be designated to cover operational costs (such as rents and salaries). Assets received in reverse repo and securities financing transactions that are held at the institution, have not been rehypothecated, and are legally and contractually available for the institution's use can be considered as part of the stock of HQLA. In addition, assets which qualify for the stock of HQLA that have been pre-positioned or deposited with, or pledged to, the central bank or a public sector entity (PSE) but have not been used to generate liquidity may be included in the stock^{Footnote 8}. [Basel Framework, LCR 30.16] OSFI Notes Assets received in collateral swap transactions or other securities financing transactions can be considered part of the stock of HQLA if they are held at the institution, have not been rehypothecated, and are legally and contractually available for the institution's use. Institutions may count the unused portion of HQLA-eligible collateral pledged with a clearing entity such as a central counterparty (CCP) against secured funding transactions towards its stock of HQLA (with associated haircuts). If the institution cannot determine which specific assets remain unused, it may assume that assets are encumbered in order of increasing liquidity value, consistent with the methodology set out in footnote 8. [Basel Framework, LCR 30.16] The assessment of whether a collateral is "unused" is to be performed at the end of day of the reporting date in the respective jurisdiction. [Basel Framework, LCR 40.47] HQLA that is borrowed without any further offsetting transaction (i.e. no repo/reverse repo or collateral swap) where the assets will be returned or can be recalled during the next 30 days should not be included in the stock of HQLA. [Basel Framework, LCR 40.74] An institution should exclude from the stock those assets that, although meeting the definition of "unencumbered" specified in paragraph 19, the institution would not have the operational capability to monetise to meet outflows during the stress period. Operational capability to monetise assets requires having procedures and appropriate systems in place, including providing the function identified in paragraph 21 with access to all necessary information to execute monetisation of any asset at any time. Monetisation of the asset must be executable, from an operational perspective, in the standard settlement period for the asset class in the relevant jurisdiction. [Basel Framework, LCR 30.17] OSFI Notes An HQLA-eligible asset received as a component of a pool of collateral for a secured transaction (e.g. reverse repo) can be included in the stock of HQLA (with associated haircuts) to the extent that it can be monetised separately. . [Basel Framework, LCR 30.16] The stock should be under the control of the function charged with managing the liquidity of the institution (e.g. the treasurer), meaning the function has the continuous authority, and legal and operational capability, to monetise any asset in the stock. Control must be evidenced either by maintaining assets in a separate pool managed by the function with the sole intent for use as a source of contingent funds, or by demonstrating that the function can monetise the asset at any point in the 30-day stress period and that the proceeds of doing so are available to the function throughout the 30-day stress period without directly conflicting with a stated business or risk management strategy. For example, an asset should not be included in the stock if the sale of that asset, without replacement throughout the 30-day period, would remove a hedge that would create an open risk position in excess of internal limits. [Basel Framework, LCR 30.18] OSFI Notes For purposes of meeting the requirements outlined in paragraph 21, OSFI will recognize liquidity contingency plans where the function charged with managing the liquidity of the institution (e.g. treasurer) has continuous delegated authority to invoke the plan at any time. An institution is permitted to hedge the market risk associated with ownership of the stock of HQLA and still include the assets in the stock. If it chooses to hedge the market risk, the institution should take into account (in the market value applied to each asset) the cash outflow that would arise if the hedge were to be closed out early (in the event of the asset being sold). [Basel Framework, LCR 30.19] In accordance with Principle 9 of the BCBS Sound Principles and Principle 8 of OSFI's Guideline B-6: Liquidity Principles an institution "should monitor the legal entity and physical location where collateral is held and how it may be mobilised in a timely manner". Specifically, it should have a policy in place that identifies legal entities, geographical locations, currencies and specific custodial or bank accounts where HQLA are held. In addition, the institution should determine whether any such assets should be excluded for operational reasons and therefore, have the ability to determine the composition of its stock on a daily basis. [Basel Framework, LCR 30.20] As noted in paragraphs 147 and 148, qualifying HQLA that are held to meet statutory liquidity requirements at the legal entity or sub-consolidated level (where applicable) may only be included in the stock at the consolidated level to the extent that the related risks (as measured by the legal entity's or sub-consolidated group's net cash outflows in the LCR) are also reflected in the consolidated LCR. Any surplus of HQLA held at the legal entity can only be included in the consolidated stock if those assets would also be freely available to the consolidated (parent) entity in times of stress. [Basel Framework, LCR 30.21] In assessing whether assets are freely transferable for regulatory purposes, institutions should be aware that assets may not be freely available to the consolidated entity due to regulatory, legal, tax, accounting or other impediments. Assets held in legal entities without market access should only be included to the extent that they can be freely transferred to other entities that could monetise the assets. [Basel Framework, LCR 30.22] In certain jurisdictions, large, deep and active repo markets do not exist for eligible asset classes, and therefore such assets are likely to be monetised through outright sale. In these circumstances, an institution should exclude from the stock of HQLA those assets where there are impediments to sale, such as large fire-sale discounts which would cause it to breach minimum solvency requirements, or requirements to hold such assets, including, but not limited to, statutory minimum inventory requirements for market making. [Basel Framework, LCR 30.23] Institutions should not include in the stock of HQLA any assets, or liquidity generated from assets, they have received under right of rehypothecation, if the beneficial owner has the contractual right to withdraw those assets during the 30-day stress period.^{Footnote 9} [Basel Framework, LCR 30.24] Assets received as collateral for derivatives transactions that are not segregated and are legally able to be rehypothecated may be included in the stock of HQLA provided that the institution records an appropriate outflow for the associated risks as set out in paragraph 96. [Basel Framework, LCR 30.25] As stated in Principle 8 of the BCBS Sound Principles and Principle 12 of OSFI's Guideline B-6: Liquidity Principles, an institution should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems. Institutions and regulators should be aware that the LCR stress scenario does not cover expected or unexpected intraday liquidity needs. [Basel Framework, LCR 30.26] While the LCR is expected to be met and reported in a single currency, institutions are expected to be able to meet their liquidity needs in each currency and maintain HQLA consistent with the distribution of their liquidity needs by currency. The institution should be able to use the stock to generate liquidity in the currency and jurisdiction in which the net cash outflows arise. As such, the LCR by currency is expected to be monitored and reported to allow the institution and OSFI to track any potential currency mismatch issues that could arise, as outlined in Chapter 6. In managing foreign exchange liquidity risk, the institution should take into account the risk that its ability to swap currencies and access the relevant foreign exchange markets may erode rapidly under stressed conditions. It should be aware that sudden, adverse exchange rate movements could sharply widen existing mismatched positions and alter the effectiveness of any foreign exchange hedges in place. [Basel Framework, LCR 30.27] In order to mitigate cliff effects that could arise, if an eligible liquid asset became ineligible (e.g. due to rating downgrade), an institution is permitted to keep such assets in its stock of liquid assets for an additional 30 calendar days. This would allow the institution additional time to adjust its stock as needed or replace the asset. [Basel Framework, LCR 30.28] 2.2.A.3. Diversification of the stock of HQLA The stock of HQLA should be well diversified within the asset classes themselves (except for sovereign debt of the institution's home jurisdiction or from the jurisdiction in which the institution operates; central bank reserves; central bank debt securities; and cash). Although some asset classes are more likely to remain liquid irrespective of circumstances, ex-ante it is not possible to know with certainty which specific assets within each asset class might be subject to shocks ex-post. Institutions should therefore have policies and limits in place in order to avoid concentration with respect to asset types, issue and issuer types, and currency (consistent with the distribution of net cash outflows by currency) within asset classes. [Basel Framework, LCR 30.29] 2.2.A.4. Definition of HQLA The stock of HQLA should comprise assets with the characteristics outlined in paragraphs 12 to 15. This section describes the type of assets that meet these characteristics and can therefore be included in the stock. [Basel Framework, LCR 30.30] There are two categories of assets that can be included in the stock. Assets to be included in each category are those that the institution is holding on the first day of the stress period, irrespective of their residual maturity. "Level 1" assets can be included without limit, while "Level 2" assets can only comprise up to 40% of the stock. [Basel Framework, LCR 30.31] Supervisors may also choose to include within Level 2 an additional class of assets (Level 2B assets - see paragraph 46 below). If included, these assets should comprise no more than 15% of the total stock of HQLA. They must also be included within the overall 40% cap on Level 2 assets. [Basel Framework, LCR 30.33] The 40% cap on Level 2 assets and the 15% cap on Level 2B assets should be determined after the application of required haircuts, and after taking into account the unwind of short-term securities financing transactions and collateral swap transactions maturing within 30 calendar days that involve the exchange of HQLA. In this context, short term transactions are transactions with a maturity date up to and including 30 calendar days. [Basel Framework, LCR 30.34] As stated in paragraph 36, the calculation of the 40% cap on Level 2 assets should take into account the impact on the stock of HQLA of the amounts of Level 1 and Level 2 assets involved in secured funding^{Footnote 10}, secured lending^{Footnote 11} and collateral swap transactions maturing within 30 calendar days. The maximum amount of adjusted Level 2 assets in the stock of HQLA is equal to two-thirds of the adjusted amount of Level 1 assets after haircuts have been applied. The calculation of the 40% cap on Level 2 assets will take into account any reduction in eligible Level 2B assets on account of the 15% cap on Level 2B assets^{Footnote 12}. [Basel Framework, LCR 30.35] OSFI Notes For purposes of the LCR calculation, OSFI will only require the size of an individual institution's pool of Level 2 and Level 2B assets to be calculated on an adjusted basis as noted in paragraph 37. OSFI will, however, through regulatory reporting, monitor the size of an institution's pool of Level 2 and Level 2B assets on an unadjusted basis as discussed in footnote 12. Further, the calculation of the 15% cap on Level 2B assets should take into account the impact on the stock of HQLA of the amounts of HQLA assets involved in secured funding, secured lending and collateral swap transactions maturing within 30 calendar days. The maximum amount of adjusted Level 2B assets in the stock of HQLA is equal to 15/85 of the sum of the adjusted amounts of Level 1 and Level 2 assets, or, in cases where the 40% cap is binding, up to a maximum of 1/4 of the adjusted amount of Level 1 assets, both after haircuts have been applied. [Basel Framework, LCR 30.36] The adjusted amount of Level 1 assets is defined as the amount of Level 1 assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 1 assets (including cash) that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 16 to 28. The adjusted amount of Level 2A assets is defined as the amount of Level 2A assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 2A assets that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 16 to 28. The adjusted amount of Level 2B assets is defined as the amount of Level 2B assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 2B assets that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 16 to 28. In this context, short-term transactions are transactions with a maturity date up to and including 30 calendar days. Relevant haircuts would be applied prior to calculation of the respective caps. [Basel Framework, LCR 30.37] The formula for the calculation of the stock of HQLA is as follows: Stock of HQLA = Level 1 + Level 2A + Level 2B – Adjustment for 15% cap – Adjustment for 40% cap Where: Adjustment for 15% cap = Max (Adjusted Level 2B – 15/85×(Adjusted Level 1 + Adjusted Level 2A), Adjusted Level 2B - 15/60×Adjusted Level 1, 0) Adjustment for 40% cap = Max ((Adjusted Level 2A + Adjusted Level 2B – Adjustment for 15% cap) - 2/3×Adjusted Level 1 assets, 0) [Basel Framework, LCR 30.38, 30.39] Alternatively, the formula can be expressed as: Stock of HQLA = Level 1 + Level 2A + Level 2B – Max ((Adjusted Level 2A+Adjusted Level 2B) – 2/3×Adjusted Level 1, Adjusted Level 2B – 15/85×(Adjusted Level 1 + Adjusted Level 2A), 0) (i) Level 1 assets Level 1 assets can comprise an unlimited share of the pool and are not subject to a haircut under the LCR^{Footnote 13}. However, national supervisors may wish to require haircuts for Level 1 securities based on, among other things, their duration, credit and liquidity risk, and typical repo haircuts. [Basel Framework, LCR 30.40] OSFI Notes Level 1 assets will not be subject to a haircut (i.e. can be included in HQLA at 100% of their market value). Level 1 assets are limited to: coins and banknotes; central bank reserves (including required reserves)^{Footnote 14}, to the extent that the central bank policies allow them to be drawn down in times of stress^{Footnote 15}; marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and European Community, or multilateral development banks^{Footnote 16}, and satisfying all of the following conditions: assigned a 0% risk-weight under the Basel II Standardised Approach for credit risk^{Footnote 17}; traded in large, deep and active repo or cash markets characterised by a low level of concentration; have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions; and not an obligation of a financial institution^{Footnote 18} or any of its affiliated entities^{Footnote 19}. OSFI Notes Claims on all provincial and territorial governments and agents of the federal, provincial or territorial government whose debts are, by virtue of their enabling legislation, obligations of the parent government, will receive the same risk weight as the Government of Canada under the Basel II Standardised Approach for credit risk. Securities issued under the National Housing Act Mortgage Backed Securities (NHA MBS) program may be included as Level 1 assets. For non-foreign non-DSIB institutions, holdings of NHA MBS and Canada Mortgage Bonds (CMBs) where the minimum pool size is less than $25 million may be included as Level 1 assets. where the sovereign has a non-0% risk weight, sovereign or central bank debt securities issued in domestic currencies by the sovereign or central bank in the country in which the liquidity risk is being taken or in the institution's home country; and where the sovereign has a non-0% risk weight, domestic sovereign or central bank debt securities issued in foreign currencies are eligible up to the amount of the institution's stressed net cash outflows in that specific foreign currency stemming from the institution's operations in the jurisdiction where the institution's liquidity risk is being taken. [Basel Framework, LCR 30.41] OSFI Notes Sovereign and central bank debt securities, even with a rating below AA-, should be considered eligible as Level 1 assets only when these assets are issued by the sovereign or central bank in the institution's home country or in host countries where the institution has a presence via a subsidiary or branch. Therefore, paragraphs 43(d) and 43(e) do not apply to a country in which the institution's only presence is liquidity risk exposures denominated in the currency of that country. [Basel Framework, LCR 30.41] In paragraph 43(e), the amount of non-0% risk-weighted sovereign/central bank debt issued in foreign currencies included in Level 1 assets is strictly limited to the foreign currency exposure in the jurisdiction of the issuing sovereign/central bank. [Basel Framework, LCR 30.41] (ii) Level 2 assets Level 2 assets (comprising Level 2A assets and any Level 2B assets permitted by OSFI) can be included in the stock of HQLA, subject to the requirement that they comprise no more than 40% of the overall stock after haircuts have been applied. The method for calculating the cap on Level 2 assets and the cap on Level 2B assets is set out in paragraphs 37 to 39. [Basel Framework, LCR 30.42] (iii) Level 2A assets A 15% haircut is applied to the current market value of each Level 2A asset held in the stock of HQLA. Level 2A assets are limited to the following: Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that satisfy all of the following conditions:^{Footnote 20}assigned a 20% risk weight under the Basel II Standardised Approach for credit risk; traded in large, deep and active repo or cash markets characterised by a low level of concentration; have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (i.e. maximum decline of price not exceeding 10% or increase in haircut not exceeding 10 percentage points over a 30-day period during a relevant period of significant liquidity stress); and not an obligation of a financial institution or any of its affiliated entities^{Footnote 21}. Corporate debt securities (including commercial paper)^{Footnote 22} and covered bonds^{Footnote 23} that satisfy all of the following conditions: in the case of corporate debt securities: not issued by a financial institution or any of its affiliated entities; in the case of covered bonds: not issued by the institution itself or any of its affiliated entities; either (i) have a long-term credit rating from a recognised external credit assessment institution (ECAI) of at least AA-^{Footnote 24} or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or (ii) do not have a credit assessment by a recognised ECAI but are internally rated as having a probability of default (PD) corresponding to a credit rating of at least AA-; traded in large, deep and active repo or cash markets characterised by a low level of concentration; and have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions: i.e. maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 10%. [Basel Framework, LCR 30.43] (iv) Level 2B assets Certain additional assets (Level 2B assets) may be included in Level 2 at the discretion of national authorities. In choosing to include these assets in Level 2 for the purpose of the LCR, supervisors are expected to ensure that such assets fully comply with the qualifying criteria^{Footnote 25}. Supervisors are also expected to ensure that institutions have appropriate systems and measures to monitor and control the potential risks (e.g. credit and market risks) that institutions could be exposed to in holding these assets. [Basel Framework, LCR 30.44] OSFI Notes OSFI will permit institutions to include Level 2B assets as eligible HQLA, up to the 15% composition limit of total HQLA noted in paragraph 35, provided the assets meet all of the eligibility criteria noted in paragraph 47 for the individual asset type. A larger haircut is applied to the current market value of each Level 2B asset held in the stock of HQLA. Level 2B assets are limited to the following: Residential mortgage backed securities (RMBS) that satisfy all of the following conditions may be included in Level 2B, subject to a 25% haircut: not issued by, and the underlying assets have not been originated by the institution itself or any of its affiliated entities; have a long-term credit rating from a recognised ECAI of AA or higher, or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; traded in large, deep and active repo or cash markets characterised by a low level of concentration; have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, i.e. a maximum decline of price not exceeding 20% or increase in haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress; the underlying asset pool is restricted to residential mortgages and cannot contain structured products; the underlying mortgages are “full recourse” loans (i.e. in the case of foreclosure the mortgage owner remains liable for any shortfall in sales proceeds from the property) and have a maximum loan-to-value ratio (LTV) of 80% on average at issuance; and the securitisations are subject to "risk retention" regulations which require issuers to retain an interest in the assets they securitise. OSFI Notes In Canada, authorities have not prescribed specific "risk retention" regulations. Enhanced disclosure and the requirement to deduct first loss in securitisations are examples where the principles of risk retention are met. For holdings of RMBS from foreign jurisdictions, institutions should follow the respective "risk retention" regulations in that jurisdiction. The LTV requirement in paragraph 47(a) refers to the weighted average (by loan balance) LTV of the portfolio of underlying mortgages, not to any individual mortgage, i.e. mortgages that have an LTV greater than 80% are not excluded per se. [Basel Framework, LCR 30.45] The "at issuance" reference in paragraph 47(a) refers to the time when the RMBS is issued, i.e. the average LTV of the underlying mortgages at the time of the issuance of the RMBS must not be higher than 80%. [Basel Framework, LCR 30.45] Corporate debt securities (including commercial paper)^{Footnote 26} that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut: not issued by a financial institution or any of its affiliated entities; either (i) have a long-term credit rating from a recognised ECAI between A+ and BBB- or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or (ii) do not have a credit assessment by a recognised ECAI and are internally rated as having a PD corresponding to a credit rating of between A+ and BBB-; traded in large, deep and active repo or cash markets characterised by a low level of concentration; and have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, i.e. a maximum decline of price not exceeding 20% or increase in haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress. OSFI Notes Sovereign and central bank debt securities rated BBB+ to BBB– that are not included in the definition of Level 1 assets according to paragraph 43(d) or 43(e) may be included in the definition of Level 2B assets with a 50% haircut within the 15% cap for all Level 2B assets. [Basel Framework, LCR 30.45] Corporate debt securities with a rating of at least AA- whose maximum decline of price or increase in haircut over a 30-day period of significant liquidity stress is between 10% and 20% may count towards Level 2B assets provided that they meet all other requirements stated in paragraph 47(b). [Basel Framework, LCR 30.43] Securities representing claims on PSEs with a rating of at least BBB- whose maximum decline of price or increase in haircut over a 30-day period of significant liquidity stress does not exceed 20% may count towards Level 2B assets provided that they meet all other requirements stated in paragraph 47(b). [Basel Framework, LCR 30.45] Common equity shares that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut: not issued by a financial institution or any of its affiliated entities; exchange traded and centrally cleared; a constituent of the major stock index in the home jurisdiction or where the liquidity risk is taken, as decided by the supervisor in the jurisdiction where the index is located; denominated in the domestic currency of an institution's home jurisdiction or in the currency of the jurisdiction where an institution's liquidity risk is taken; traded in large, deep and active repo or cash markets characterised by a low level of concentration; and have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, i.e. a maximum decline of share price not exceeding 40% or increase in haircut not exceeding 40 percentage points over a 30-day period during a relevant period of significant liquidity. [Basel Framework, LCR 30.45] OSFI Notes For purposes of the third sub-criteria under paragraph 47(c), the S&P/TSX 60 Index should be recognized as the major stock index in Canada. Institutions should consult with the supervisor in jurisdictions outside Canada where both i) common equity shares are held by the institution and ii) where liquidity risk is being taken by the institution, for a determination of the major stock index in that jurisdiction. [Basel Framework, LCR 30.45] Institutions are permitted to include long cash non-financial equity positions held against synthetic short positions as eligible Level 2B assets provided the operational requirements outlined in section 2.2.A.2 are met. In the case of equity total return swap (TRS) transactions for example, this includes that provisions are included in the TRS contracts that permit the institution with the unfettered right to terminate the TRS with settlement of cash flows (on both the equities and the TRS) occurring within the LCR's 30-day time horizon. In addition, the process of unwinding such transactions must not create an open risk position in excess of internal limits, in line with paragraph 21. Equities that are a constituent of a major stock index can only be assigned to the stock of HQLA if the stock index is located within the home jurisdiction of the institution or if the institution has liquidity risk exposure through a branch or other legal entity in that jurisdiction. [Basel Framework, LCR 30.45] (v) Treatment for jurisdictions with insufficient HQLA (a) Assessment of eligibility for alternative liquidity approaches (ALA) Some jurisdictions may have an insufficient supply of Level 1 assets (or both Level 1 and Level 2 assets^{Footnote 27}) in their domestic currency to meet the aggregate demand of institutions 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. Eligibility for such alternative treatment will be judged on the basis of the qualifying criteria set out in Annex 1 of BCBS January 2013 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^{Footnote 28}. [Basel Framework, LCR 30.32, 31.1] 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^{Footnote 29}; 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. OSFI Notes OSFI does not consider that Canada as a jurisdiction, nor the Canadian dollar (CAD) as a currency, meet the qualifying criteria for eligibility for the alternative liquidity approaches mentioned in paragraphs 48 and 49. Accordingly, OSFI has not incorporated the guidance featured in LCR 31 – Alternative Liquidity Approaches into the LAR Guideline. (vi) Eligible non-operational demand and overnight deposits OSFI will recognize non-operational demand and overnight deposits placed by an indirect clearer (that is not a subsidiary of a direct clearer) with an OSFI or provincially regulated direct clearer in the numerator of the LCR, although not as HQLA. As such, these eligible deposits should not be considered as inflows from financial institutions under paragraph 134 and will be eligible for inclusion in the LCR at the 100% rate that they would have received if they had otherwise been captured under paragraph 134.

2.2.B. Total net cash outflows

The term total net cash outflows^{Footnote 30} is defined as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or be drawn down. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in under the scenario up to an aggregate cap of 75% of total expected cash outflows. [Basel Framework, LCR 40.1] Total net cash outflows over the next 30 calendar days = Total expected cash outflows – Min {total expected cash inflows; 75% of total expected cash outflows} While most roll-off rates, draw-down rates and similar factors are harmonised across jurisdictions as outlined in this standard, a few parameters are to be determined by supervisory authorities at the national level. Where this is the case, the parameters should be transparent and made publicly available. [Basel Framework, LCR 40.2] Institutions will not be permitted to double count items, i.e. if an asset is included as part of the "stock of HQLA" (i.e. the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e. part of the denominator). Where there is potential that an item could be counted in multiple outflow categories, (e.g. committed liquidity facilities granted to cover debt maturing within the 30 calendar day period), an institution only has to assume up to the maximum contractual outflow for that product. [Basel Framework, LCR 40.4] 2.2.B.1. Cash outflows OSFI Notes For deposits that are contractually pledged to an institution as collateral to secure a credit facility or loan granted by the institution that will not mature or be settled in the next 30 days, the pledged deposit may be excluded from the LCR calculation only if the following conditions are met: the loan will not mature or be settled in the next 30 days; the pledge arrangement is subject to a legally enforceable contract disallowing withdrawal of the deposit before the loan is fully settled or repaid; and the amount of deposit to be excluded cannot exceed the outstanding balance of the loan (which may be the drawn portion of a credit facility). The above treatment does not apply to a deposit which is pledged against an undrawn facility, in which case the higher of the outflow rate applicable to the undrawn facility or the pledged deposit applies. [Basel Framework, LCR 40.5] (i) Retail deposit run-off Retail deposits are defined as deposits placed with an institution by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories^{Footnote 31}. Retail deposits subject to the LCR include demand deposits and term deposits, unless otherwise excluded under the criteria set out in paragraphs 62 and 63. [Basel Framework, LCR 40.5] These retail deposits are divided into "stable" and "less stable" portions of funds as described below, with minimum run-off rates listed for each category. Institutions should discuss with OSFI the classification of new products offered.The run-off rates for retail deposits are minimum floors, with higher run-off rates established by individual jurisdictions as appropriate to capture depositor behaviour in a period of stress in each jurisdiction. [Basel Framework, LCR 40.6] OSFI Notes For purposes of determining a retail deposit run-off rate: An established relationship between an institution and a retail depositor exists where there is evidence of a dependency or reliance of the depositor on the institution that makes deposit withdrawal highly unlikely in a stress environment. There is a general presumption that an established relationship has been developed where the depositor holds complementary banking services with the institution. This presumption holds if any of the following are met: the depositor holds a demand or term deposit in addition to: a term investment(s) or installment loan(s) maturing outside the LCR window; or a revolving credit facility with an outstanding balance (excluding credit cards); or a transactional account; or a brokerage/discount brokerage/wealth management account with the institution or its direct subsidiaries; the depositor holds investments in a registered account (e.g. Registered Retirement Savings Plans, Registered Education Savings Plans, Tax Free Savings Accounts) with the institution; other combinations of banking services and products demonstrated to increase the resilience of the depositor-institution relationship, as agreed by OSFI^{Footnote 32}. an account is transactional if it meets any of these criteria: the depositor's source of income is automatically deposited into the account; bill payments are regularly withdrawn from the account; or the account is routinely used for client-driven transactions. an unaffiliated third party is an entity that is not branded with the institution or that is not branded as a subsidiary of the institution, and that is acting on behalf of the retail client in an advisory role (e.g. ability to direct or influence the institution where the funds are placed); rate sensitive deposits (RSD) are demand deposits where the interest rate rate paid significantly exceeds the average rate for similar retail products, or where the interest rate paid is a temporary promotional^{Footnote 33} rate, and where the funds deposited are free from material constraints on withdrawals. (a) Stable deposits (run-off rate = 3% and higher) Stable deposits, which usually receive a run-off factor of 5%, are the amount of the deposits that are fully insured^{Footnote 34} by an effective deposit insurance scheme or by a public guarantee that provides equivalent protection and where: the depositors have an established relationships with the institution that make deposit withdrawal highly unlikely; or the deposits are in transactional accounts. [Basel Framework, LCR 40.7] For the purposes of this standard, an "effective deposit insurance scheme" refers to a scheme (i) that guarantees that it has the ability to make prompt payouts, (ii) for which the coverage is clearly defined and (iii) of which public awareness is high. The deposit insurer in an effective deposit insurance scheme has formal legal powers to fulfill its mandate and is operationally independent, transparent and accountable. A jurisdiction with an explicit and legally binding sovereign deposit guarantee that effectively functions as deposit insurance can be regarded as having an effective deposit insurance scheme. [Basel Framework, LCR 40.8, 40.9] The presence of deposit insurance alone is not sufficient to consider a deposit "stable". [Basel Framework, LCR 40.10] Jurisdictions may choose to apply a run-off rate of 3% to stable deposits in their jurisdiction, if they meet the above stable deposit criteria and the following additional criteria for deposit insurance schemes: the insurance scheme is based on a system of prefunding via the periodic collection of levies on institutions with insured deposits;^{Footnote 35} the scheme has adequate means of ensuring ready access to additional funding in the event of a large call on its reserves, e.g. an explicit and legally binding guarantee from the government, or a standing authority to borrow from the government; and access to insured deposits is available to depositors in a short period of time once the deposit insurance scheme is triggered^{Footnote 36}. Jurisdictions applying the 3% run-off rate to stable deposits with deposit insurance arrangements that meet the above criteria should be able to provide evidence of run-off rates for stable deposits within the banking system below 3% during any periods of stress experienced that are consistent with the conditions within the LCR. [Basel Framework, LCR 40.11, 40.12] OSFI Notes Institutions may recognize the 3% run-off rate for retail deposits that meet the stable deposit criteria in paragraph 56 that are fully insured by the Canada Deposit Insurance Corporation. Institutions may recognize the 3% run-off rate for retail deposits located outside Canada that meet the stable deposit criteria in paragraph 56 that are fully insured by a deposit insurer that meets the criteria outlined in paragraph 59 as approved by the relevant prudential supervisor in that jurisdiction. (b) Less stable deposits (run-off rates = 10% and higher) Supervisory authorities are expected to develop additional buckets with higher run-off rates as necessary to apply to buckets of potentially less stable retail deposits in their jurisdictions, with a minimum run-off rate of 10%. These jurisdiction-specific run-off rates should be clearly outlined and publicly transparent. Buckets of less stable deposits could include deposits that are not fully covered by an effective deposit insurance scheme or sovereign deposit guarantee, high-value deposits, deposits from sophisticated or high net worth individuals, deposits that can be withdrawn quickly and foreign currency deposits, as determined by each jurisdiction. Institutions must allocate each less stable deposit to one of the categories below. Where a deposit could be categorized in more than one category, the highest run-off rate should be assigned. [Basel Framework, LCR 40.13] insured retail deposits where: the depositor does not have an established relationship with the institution or the deposit is not in a transactional account; or the deposits are received from funds and trusts where the balance is controlled solely by the underlying retail customer (i.e. the intermediary does not influence the balance placed or the institution where such balances are placed at after initial placement); are assigned a 10% run-off rate; deposits sourced in the home jurisdiction but denominated^{Footnote 37} in a foreign currency that do not qualify as "stable" per paragraph 56 are assigned a 10% run-off rate; rate sensitive deposits where the client directly manages the funds and the client has an established relationship with the institution or the deposit is in a transactional account are assigned a 10% run-off rate; uninsured deposits are assigned a 10% run-off rate, including the portion of a deposit in excess of the deposit insurance coverage limit and deposits not meeting the deposit insurance coverage criteria; rate sensitive deposits where the client directly manages the funds and where: the client does not have an established relationship with the institution and the deposit is not in a transactional account are assigned a 20% run-off rate; term deposits directly managed by an unaffiliated third party that are maturing or that are cashable in the next 30 days are assigned a 30% run-off rate; demand deposits where an unaffiliated third party directly manages the funds are assigned a 40% run-off rate. Foreign currency retail deposits are deposits denominated in any other currency than the domestic currency in a jurisdiction in which the institution operates. Supervisors will determine the run-off factor that institutions in their jurisdiction should use for foreign currency deposits. Foreign currency deposits will be considered as "less stable" if there is a reason to believe that such deposits are more volatile than domestic currency deposits. Factors affecting the volatility of foreign currency deposits include the type and sophistication of the depositors, and the nature of such deposits (e.g. whether the deposits are linked to business needs in the same currency, or whether the deposits are placed in a search for yield). [Basel Framework, LCR 40.15] Cash outflows related to retail term deposits with a residual maturity or withdrawal notice period of greater than 30 days will be excluded from total expected cash outflows if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR, or if early withdrawal results in a significant penalty that is materially greater than the loss of interest^{Footnote 38}. [Basel Framework, LCR 40.16] If an institution allows a depositor to withdraw such deposits without applying the corresponding penalty, or despite a clause that says the depositor has no legal right to withdraw, the entire category of these funds would then have to be treated as demand deposits (i.e. regardless of the remaining term, the deposits would be subject to the deposit run-off rates as specified in paragraphs 55 to 61). Supervisors in each jurisdiction may choose to outline exceptional circumstances that would qualify as hardship, under which the exceptional term deposit could be withdrawn by the depositor without changing the treatment of the entire pool of deposits. [Basel Framework, LCR 40.17] OSFI Notes For purposes of paragraph 63, OSFI defines 'hardship' to include pre-defined and documented situations such as death, catastrophic illness, loss of employment, or bankruptcy of the depositor. Notwithstanding the above, supervisors may also opt to treat retail term deposits that meet the qualifications set out in paragraph 63 with a higher than 0% run-off rate, if they clearly state the treatment that applies for their jurisdiction and apply this treatment in a similar fashion across institutions in their jurisdiction. Such reasons could include, but are not limited to, supervisory concerns that depositors would withdraw term deposits in a similar fashion as retail demand deposits during either normal or stress times, concern that institutions may repay such deposits early in stressed times for reputational reasons, or the presence of unintended incentives on institutions to impose material penalties on consumers if deposits are withdrawn early. In these cases supervisors would assess a higher run-off against all or some of such deposits. [Basel Framework, LCR 40.18] OSFI Notes OSFI will treat all retail term deposits that meet the qualifications set out in paragraph 63 with a 0% run-off rate. OSFI will monitor institutions' practices regarding retail term deposits to ensure this treatment remains appropriate. (ii) Unsecured wholesale funding run-off For the purposes of the LCR, "unsecured wholesale funding” is defined as those liabilities and general obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships) and are not collateralised by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution. Obligations related to derivative contracts are explicitly excluded from this definition. [Basel Framework, LCR 40.19] The wholesale funding included in the LCR is defined as all funding that is callable within the LCR's horizon of 30 days or that has its earliest possible contractual maturity date situated within this horizon (such as maturing term deposits and unsecured debt securities) as well as funding with an undetermined maturity. This should include all funding with options that are exercisable at the investor's discretion within the 30 calendar day horizon. For funding 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 39}. In particular, where the market expects certain liabilities to be redeemed before their legal final maturity date, institutions should and OSFI will assume such behaviour for the purpose of the LCR and include these liabilities as outflows. [Basel Framework, LCR 40.20] Wholesale funding that is callable^{Footnote 40} by the funds provider subject to a contractually defined and binding notice period surpassing the 30-day horizon is not included. [Basel Framework, LCR 40.21] For the purposes of the LCR, unsecured wholesale funding is to be categorised as detailed below, based on the assumed sensitivity of the funds providers to the rate offered and the credit quality and solvency of the borrowing institution. This is determined by the type of funds providers and their level of sophistication, as well as their operational relationships with the bank. The run-off rates for the scenario are listed for each category. (a) Unsecured wholesale funding provided by small business customers: 5%, 10% and higher Unsecured wholesale funding provided by small business customers is treated the same way as retail deposits for the purposes of this standard, effectively distinguishing between a "stable" portion of funding provided by small business customers and different buckets of less stable funding defined by each jurisdiction. The same bucket definitions and associated run-off factors apply as for retail deposits. [Basel Framework, LCR 40.22] This category consists of deposits and other extensions of funds made by non-financial small business customers. "Small business customers" are defined in line with the definition of loans extended to small businesses in paragraph 25 of Chapter 5 of OSFI's CAR Guideline that are managed as retail exposures and are generally considered as having similar liquidity risk characteristics to retail accounts provided the total aggregated funding^{Footnote 41} raised from one small business customer is less than CAD $1.5 million (on a consolidated basis where applicable). [Basel Framework, LCR 40.23] Where an institution does not have any exposure to a small business customer that would enable it to use the definition under paragraph 25 of Chapter 5 of OSFI's CAR Guideline, the institution may include such a deposit in this category provided that the total aggregate funding raised from the customer is less than CAD $1.5 million (on a consolidated basis where applicable) and the deposit is managed as a retail deposit. This means that the institution treats such deposits in its internal risk management systems consistently over time and in the same manner as other retail deposits, and that the deposits are not individually managed in a way comparable to larger corporate deposits. [Basel Framework, LCR 40.24] Term deposits from small business customers should be treated in accordance with the treatment for term retail deposits as outlined in paragraphs 62, 63 and 64. [Basel Framework, LCR 40.25] (b) Operational deposits generated by clearing, custody and cash management activities: 25% Certain activities lead to financial and non-financial customers needing to place, or leave, deposits with an institution in order to facilitate their access and ability to use payment and settlement systems and otherwise make payments. These funds may receive a 25% run-off factor only if the customer has a substantive dependency with the institution and the deposit is required for such activities. Supervisory approval would have to be given to ensure that institutions utilising this treatment actually are conducting these operational activities at the level indicated. OSFI may choose not to permit institutions to utilise the operational deposit run-off rates in cases where, for example, a significant portion of operational deposits are provided by a small proportion of customers (i.e. concentration risk). [Basel Framework, LCR 40.26] Qualifying activities in this context refer to clearing, custody or cash management activities that meet the following criteria: The customer is reliant on the institution to perform these services as an independent third party intermediary in order to fulfill its normal banking activities over the next 30 days. For example, this condition would not be met if the institution is aware that the customer has adequate back-up arrangements. These services must be provided under a legally binding agreement to institutional customers. The termination of such agreements shall be subject either to a notice period of at least 30 days or significant switching costs (such as those related to transaction, information technology, early termination or legal costs) to be borne by the customer if the operational deposits are moved before 30 days. [Basel Framework, LCR 40.27] Qualifying operational deposits generated by such an activity are ones where: The deposits are by-products of the underlying services provided by the deposit-taking organisation and not sought out in the wholesale market in the sole interest of offering interest income. The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer (not limited to paying market interest rates) to leave any excess funds on these accounts. In the case that interest rates in a jurisdiction are close to zero, it would be expected that such accounts are non-interest bearing. Institutions should be particularly aware that during prolonged periods of low interest rates, excess balances (as defined below) could be significant. [Basel Framework, LCR 40.28] Any excess balances that could be withdrawn and would still leave enough funds to fulfill these clearing, custody and cash management activities do not qualify for the 25% factor. In other words, only that part of the deposit balance with the service provider that is proven to serve a customer's operational needs can qualify as stable. Excess balances should be treated in the appropriate category for non-operational deposits. If institutions are unable to determine the amount of the excess balance, then the entire deposit should be assumed to be excess to requirements and, therefore, considered non-operational. [Basel Framework, LCR 40.29] Institutions must determine the methodology for identifying excess deposits that are excluded from this treatment. This assessment should be conducted at a sufficiently granular level to adequately assess the risk of withdrawal in an idiosyncratic stress. The methodology should take into account relevant factors such as the likelihood that wholesale customers have above average balances in advance of specific payment needs, and consider appropriate indicators (e.g. ratios of account balances to payment or settlement volumes or to assets under custody) to identify those customers that are not actively managing account balances efficiently. [Basel Framework, LCR 40.30] Operational deposits would receive a 0% inflow assumption for the depositing institution given that these deposits are required for operational reasons, and are therefore not available to the depositing institution to repay other outflows. [Basel Framework, LCR 40.31] Notwithstanding these operational categories, if the deposit under consideration arises out of correspondent banking or from the provision of prime brokerage services, it will be treated as if there were no operational activity for the purpose of determining run-off factors^{Footnote 42}. [Basel Framework, LCR 40.32] The following paragraphs describe the types of activities that may generate operational deposits. An institution should assess whether the presence of such an activity does indeed generate an operational deposit as not all such activities qualify due to differences in customer dependency, activity and practices. [Basel Framework, LCR 40.33] A clearing relationship, in this context, refers to a service arrangement that enables customers to transfer funds (or securities) indirectly through direct participants in domestic settlement systems to final recipients. Such services are limited to the following activities: transmission, reconciliation and confirmation of payment orders; daylight overdraft, overnight financing and maintenance of post-settlement balances; and determination of intra-day and final settlement positions. [Basel Framework, LCR 40.33] A custody relationship, in this context, refers to the provision of safekeeping, reporting, processing of assets or the facilitation of the operational and administrative elements of related activities on behalf of customers in the process of their transacting and retaining financial assets. Such services are limited to the settlement of securities transactions, the transfer of contractual payments, the processing of collateral, and the provision of custody related cash management services. Also included are the receipt of dividends and other income, client subscriptions and redemptions. Custodial services can furthermore extend to asset and corporate trust servicing, treasury, escrow, funds transfer, stock transfer and agency services, including payment and settlement services (excluding correspondent banking), and depository receipts. [Basel Framework, LCR 40.34] A cash management relationship, in this context, refers to the provision of cash management and related services to customers. Cash management services, in this context, refers to those products and services provided to a customer to manage its cash flows, assets and liabilities, and conduct financial transactions necessary to the customer's ongoing operations. Such services are limited to payment remittance, collection and aggregation of funds, payroll administration, and control over the disbursement of funds. [Basel Framework, LCR 40.35] The portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as "stable" retail deposits. [Basel Framework, LCR 40.36] (c) Treatment of deposits in institutional networks of cooperative institutions: 25% or 100% An institutional network of cooperative (or otherwise named) institutions is a group of legally autonomous institutions with a statutory framework of cooperation with common strategic focus and brand where specific functions are performed by central institutions or specialised service providers. A 25% run-off rate can be given to the amount of deposits of member institutions with the central institution or specialised central service providers that are placed (a) due to statutory minimum deposit requirements, which are registered at regulators or (b) in the context of common task sharing and legal, statutory or contractual arrangements so long as both the institution that has received the monies and the institution that has deposited participate in the same institutional network's mutual protection scheme against illiquidity and insolvency of its members. As with other operational deposits, these deposits would receive a 0% inflow assumption for the depositing institution, as these funds are considered to remain with the centralised institution. [Basel Framework, LCR 40.37, 40.38] Supervisory approval would have to be given to ensure that institutions utilising this treatment actually are the central institution or a central service provider of such a cooperative (or otherwise named) network. Correspondent banking activities would not be included in this treatment and would receive a 100% outflow treatment, as would funds placed at the central institutions or specialised service providers for any other reason other than those outlined in (a) and (b) in the paragraph above, or for operational functions of clearing, custody, or cash management as outlined in paragraphs 81 to 83. [Basel Framework, LCR 40.39] (d) Unsecured wholesale funding provided by non-financial corporates and sovereigns, central banks, multilateral development banks, and PSEs: 20% or 40% This category comprises all deposits and other extensions of unsecured funding from non-financial corporate customers (that are not categorised as small business customers) and (both domestic and foreign) sovereign, central bank, multilateral development bank, and PSE customers that are not specifically held for operational purposes (as defined above). The run-off factor for these funds is 40%, unless the criteria in paragraph 88 are met. [Basel Framework, LCR 40.40] Unsecured wholesale funding provided by non-financial corporate customers, sovereigns, central banks, multilateral development banks, and PSEs without operational relationships can receive a 20% run-off factor if the entire amount of the deposit is fully covered by an effective deposit insurance scheme or by a public guarantee that provides equivalent protection. [Basel Framework, LCR 40.41] (e) Unsecured wholesale funding provided by other legal entity customers: 100% This category consists of all deposits and other funding from other institutions (including banks, securities firms, insurance companies, etc.), fiduciaries,^{Footnote 43} beneficiaries,^{Footnote 44} conduits and special purpose vehicles, affiliated entities of the bank^{Footnote 45} and other entities that are not specifically held for operational purposes (as defined above) and not included in the prior three categories. The run-off factor for these funds is 100%. [Basel Framework, LCR 40.42] All notes, bonds and other debt securities issued by the institution are included in this category regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts (including small business customer accounts treated as retail per paragraphs 69 to 71), in which case the instruments can be treated in the appropriate retail or small business customer deposit category. To be treated in this manner, it is not sufficient that the debt instruments are specifically designed and marketed to retail or small business customers. Rather there should be limitations placed such that those instruments cannot be bought and held by parties other than retail or small business customers. [Basel Framework, LCR 40.43] OSFI Notes Stamped bankers' acceptance (BA) liabilities issued by the institution that mature within 30 days should be included under paragraph 90. Customer cash balances arising from the provision of prime brokerage services, including but not limited to the cash arising from prime brokerage services as identified in paragraph 79, should be considered separate from any required segregated balances related to client protection regimes imposed by national regulations, and should not be netted against other customer exposures included in this standard. These offsetting balances held in segregated accounts are treated as inflows in paragraph 134 and should be excluded from the stock of HQLA. [Basel Framework, LCR 40.44] (iii) Secured funding run-off For the purposes of this standard, "secured funding" is defined as those liabilities and general obligations that are collateralised by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution. [Basel Framework, LCR 40.45] Loss of secured funding on short-term financing transactions: In this scenario, the ability to continue to transact repurchase, reverse repurchase and other securities financing transactions is limited to transactions backed by HQLA or with the bank's domestic sovereign, PSE or central bank.^{Footnote 46} Collateral swaps should be treated as repurchase or reverse repurchase agreements, as should any other transaction with a similar form. Additionally, collateral lent to the institution's customers to affect short positions^{Footnote 47} should be treated as a form of secured funding. For the scenario, an institution should apply the following factors to all outstanding secured funding transactions with maturities within the 30 calendar day stress horizon, including customer short positions that do not have a specified contractual maturity. The amount of outflow is calculated based on the amount of funds raised through the transaction, and not the value of the underlying collateral. [Basel Framework, LCR 40.46] OSFI Notes Cash outflows associated with collateral swaps occur where the collateral borrowed is of higher quality within the LCR framework than the collateral lent. Such cash outflow amounts are to be calculated as the difference between the outflow rate prescribed in the table in paragraph 95 for the collateral lent and the inflow rate prescribed for non-rehypothecated collateral in the table in paragraph 126 for the collateral borrowed. For example, where Level 2A assets are lent and Level 1 assets are borrowed, a 15% outflow rate should be allocated. Similarly, where non-HQLA assets are lent and Level 2A assets are borrowed, an 85% outflow rate should be allocated. Note that no outflow should be allocated when the collateral lent and collateral borrowed are of the same LCR type. Forward repos and forward collateral swaps that start prior to and mature within the LCR's 30-day horizon should be treated like repos and collateral swaps according to paragraphs 93 to 95. [Basel Framework, LCR 40.74] Due to the high-quality of Level 1 assets, no reduction in funding availability against these assets is assumed to occur. Moreover, no reduction in funding availability is expected for any maturing secured funding transactions with the institution's domestic central bank. A reduction in funding availability will be assigned to maturing transactions backed by Level 2 assets equivalent to the required haircuts. A 25% factor is applied for maturing secured funding transactions with the institution's domestic sovereign, multilateral development banks, or domestic PSEs that have a 20% or lower risk weight, when the transactions are backed by assets other than Level 1 or Level 2A assets, in recognition that these entities are unlikely to withdraw secured funding from institutions in a time of market-wide stress. This, however, gives credit only for outstanding secured funding transactions, and not for unused collateral or merely the capacity to borrow. [Basel Framework, LCR 40.47] For all other maturing transactions the run-off factor is 100%, including transactions where a bank has satisfied customers' short positions with its own long inventory. The table below summarises the applicable standards: Categories for outstanding maturing secured funding transactions Amount to add to cash outflows Backed by Level 1 assets or with central banks 0% Backed by Level 2A assets 15% Secured funding transactions with domestic sovereign, PSEs or multilateral development banks that are not backed by Level 1 or 2A assets. PSEs that receive this treatment are limited to those that have a risk weight of 20% or lower. 25% Backed by RMBS eligible for inclusion in Level 2B 25% Backed by other Level 2B assets 50% All others 100% [Basel Framework, LCR 40.48] OSFI Notes All secured transactions maturing within 30 days should be reported according to the collateral actually pledged as of close of business on the LCR measurement date applying the outflow assumptions in paragraph 95. In cases where the institution pledges a pool of HQLA and non-HQLA collateral to secured funding transactions and a portion of the secured funding transactions has a residual maturity greater than 30 days, if the institution cannot determine which specific assets in the collateral pool are used to collateralise the transactions with a residual maturity greater than 30 days, it may assume that assets are encumbered to these transactions in order of increasing liquidity value, consistent with the methodology set out in footnote 8, in such a way that assets with the lowest liquidity value in the LCR are assigned to the transactions with the longest residual maturities first. [Basel Framework, LCR 40.48] (iv) Additional requirements Derivatives cash outflows: the sum of all net cash outflows should receive a 100% factor. Institutions should calculate, in accordance with their existing valuation methodologies, expected contractual derivative cash inflows and outflows. Cash flows may be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. Institutions should exclude from such calculations those liquidity requirements that would result from increased collateral needs due to market value movements or falls in value of collateral posted^{Footnote 48}. Options should be assumed to be exercised when they are 'in the money' to the option buyer. [Basel Framework, LCR 40.49] OSFI Notes For purposes of paragraph 96, institutions should consider any option that expires or can be exercised within the next 30 days and that is "in the money" to the option buyer. The cash flow should reflect the state of the transaction as of the reporting date. [Basel Framework, LCR 40.49] Options with delivery settlement should be considered according to the liquidity value of the delivered assets, i.e. the assets are subject to the haircuts that would be applied if these assets were collateral in secured transactions or collateral swaps. If contractual arrangements allow for both physical delivery and cash settlement, cash settlement may be assumed. [Basel Framework, LCR 40.49] For options with delivery settlement where the delivery obligation can be fulfilled with a variety of asset classes (i.e. the party liable has the choice between different securities), if the delivery obligation can be fulfilled with different security classes, delivery of the least valuable security possible ("cheapest to deliver") can be assumed. This applies symmetrically to both the inflow and outflow perspective, such that the obligor is assumed to deliver the security with the lowest liquidity value. [Basel Framework, LCR 40.49] Cash flows arising from foreign exchange derivative transactions that involve a full exchange of principal amounts on a simultaneous basis (or within the same day) may be reflected in the LCR as a net cash flow figure, even where those deals are not covered by a master netting agreement. [Basel Framework, LCR 40.49] Where derivative payments are collateralised by HQLA, cash outflows should be calculated net of any corresponding cash or collateral inflows that would result, all other things being equal, from contractual obligations for cash or collateral to be provided to the institution, if the institution is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the collateral is received. This is in line with the principle that institutions should not double count liquidity inflows and outflows. [Basel Framework, LCR 40.50] Increased liquidity needs related to downgrade triggers embedded in financing transactions, derivatives and other contracts: (100% of the amount of collateral that would be posted for, or contractual cash outflows associated with, any downgrade up to and including a 3-notch downgrade). Often, contracts governing derivatives and other transactions have clauses that require the posting of additional collateral, drawdown of contingent facilities, or early repayment of existing liabilities upon the institution's downgrade by a recognised credit rating organisation. The scenario therefore requires that for each contract in which "downgrade triggers" exist, the institution assumes that 100% of this additional collateral or cash outflow will have to be posted for any downgrade up to and including a 3-notch downgrade of the institution's long-term credit rating. Triggers linked to an institution's short-term rating should be assumed to be triggered at the corresponding long-term rating in accordance with published ratings criteria. The impact of the downgrade should consider impacts on all types of margin collateral and contractual triggers which change rehypothecation rights for non-segregated collateral. [Basel Framework, LCR 40.51] OSFI Notes Unless expressly specified otherwise, the provisions outlined in paragraphs 98 to 102 apply to all derivative instruments (i.e. whether OTC or on-exchange; whether cleared or not). [Basel Framework, LCR 40.53] Increased liquidity needs related to the potential for valuation changes on posted collateral securing derivative and other transactions: (20% of the value of non-Level 1 posted collateral). Observation of market practices indicates that most counterparties to derivatives transactions typically are required to secure the mark-to-market valuation of their positions and that this is predominantly done using cash or sovereign, central bank, multilateral development banks, or PSE debt securities with a 0% risk weight under the Basel II standardised approach. When these Level 1 liquid asset securities are posted as collateral, the framework will not require that an additional stock of HQLA be maintained for potential valuation changes. If however, counterparties are securing mark-to-market exposures with other forms of collateral, to cover the potential loss of market value on those securities, 20% of the value of all such posted collateral, net of collateral received on a counterparty basis (provided that the collateral received is not subject to restrictions on reuse or rehypothecation) will be added to the stock of required HQLA by the institution posting such collateral. This 20% will be calculated based on the notional amount required to be posted as collateral after any other haircuts have been applied that may be applicable to the collateral category. Any collateral that is in a segregated margin account can only be used to offset outflows that are associated with payments that are eligible to be offset from that same account. [Basel Framework, LCR 40.52] OSFI Notes The notional amount to be collateralised in paragraph 99 is based on contractual terms (e.g. collateral agreements) that regularly include the methodology of calculating the amount to be covered ("notional amount"). [Basel Framework, LCR 40.52] Netting of collateral inflows and outflows across counterparties is not permitted under paragraph 99 as the impacts of valuation changes (even of identical collateral) may be asymmetric across different counterparties. [Basel Framework, LCR 40.52] The net outflows under paragraph 99 may not be calculated taking into account any additional eligible non-Level 1 collateral that is unencumbered as of the date of the LCR or that would become unencumbered as a result of the stresses – i.e. the LCR provides no basis for separate sub-pools of (non-Level 1) HQLA dedicated to specific liquidity needs or for considering contingent inflows of collateral. [Basel Framework, LCR 40.52] Increased liquidity needs related to excess non-segregated collateral held by the institution that could contractually be called at any time by the counterparty: 100% of the non-segregated collateral that could contractually be recalled by the counterparty because the collateral is in excess of the counterparty's current collateral requirements. [Basel Framework, LCR 40.53] OSFI Notes Paragraph 100 refers to excess collateral that is not subject to segregation requirements and that can count towards HQLA (i.e. where a recall by the counterparty would reduce the stock of HQLA) or where a recall by the counterparty would need to use additional funding. [Basel Framework, LCR 40.53] Increased liquidity needs related to contractually required collateral on transactions for which the counterparty has not yet demanded the collateral be posted: 100% of the collateral that is contractually due but where the counterparty has not yet demanded the posting of such collateral. [Basel Framework, LCR 40.54] Increased liquidity needs related to contracts that allow collateral substitution to non-HQLA assets: 100% of the amount of HQLA collateral that can be substituted for non-HQLA assets without the institution's consent that have been received to secure transactions that have not been segregated. [Basel Framework, LCR 40.55] OSFI Notes The risks associated with collateral substitution on secured lending transactions with a residual maturity greater than 30 days should also be considered under paragraph 102. [Basel Framework, LCR 40.55] The 100% outflow factor in paragraph 102 refers to the market value of the received collateral that is subject to potential substitution after applying the respective haircut in the LCR – i.e. this provision does not require an outflow for potential collateral substitution that is greater than the liquidity value of the received HQLA collateral in the LCR. [Basel Framework, LCR 40.55] Under paragraph 102, if HQLA collateral (e.g. Level 1 assets) may be substituted for other HQLA collateral (e.g. Level 2A assets), an outflow amounting to the market value of the received collateral multiplied by the difference between the haircuts of the received collateral and the potential substitute collateral should be applied. If the substituted collateral can be of different liquidity value in the LCR, the institution should assume that the potential substitute collateral with the lowest liquidity value will be posted. [Basel Framework, LCR 40.55] Paragraph 102 does not consider outflows of HQLA that are excluded from the institution's stock of HQLA due to failure to comply with the operational requirements for HQLA. [Basel Framework, LCR 40.55] Increased liquidity needs related to market valuation changes on derivative or other transactions: As market practice requires collateralisation of mark-to-market exposures on derivative and other transactions, institutions face potentially substantial liquidity risk exposures to these valuation changes. Inflows and outflows of transactions executed under the same master netting agreement can be treated on a net basis. Any outflow generated by increased needs related to market valuation changes should be included in the LCR calculated by identifying the largest absolute net 30-day collateral flow realised during the preceding 24 months. The absolute net collateral flow is based on both realised outflows and inflows. [Basel Framework, LCR 40.56] OSFI Notes The largest absolute net 30-day collateral flow is the largest aggregated cumulative net collateral outflow or inflow at the end of all 30-day periods during the preceding 24 months. For this purpose, institutions have to consider all 30-day periods during the preceding 24 months. Netting should be considered on a portfolio level basis. Institution management should understand how collateral moves on a counterparty basis and is encouraged to review the potential outflow at that level. However, the primary mechanism for the "look-back approach" outlined in paragraph 103 is collateral flows at the portfolio level. [Basel Framework, LCR 40.56] Loss of funding on asset-backed securities,^{Footnote 49} covered bonds and other structured financing instruments: The scenario assumes the outflow of 100% of the funding transaction maturing within the 30-day period, when these instruments are issued by the institution itself (as this assumes that the re-financing market will not exist). [Basel Framework, LCR 40.57] OSFI Notes Level 1 and Level 2 securities in a collateral pool (e.g. for covered bonds or other collateralised own issuances) that become unencumbered in the next 30 days due to the maturity of the instrument (covered bond or other collateralized own issuance) can be offset against the redemption payment for the maturing secured debt instrument. Such offsetting inflow amounts should consider the respective haircuts for Level 2 assets applied to the market value of the asset. Any net inflow should be considered as other contractual cash inflow under paragraph 140. [Basel Framework, LCR 40.57] Loss of funding on asset-backed commercial paper, conduits, securities investment vehicles and other such financing facilities: (100% of maturing amount and 100% of returnable assets). Institutions having structured financing facilities that include the issuance of short-term debt instruments, such as asset backed commercial paper, should fully consider the potential liquidity risk arising from these structures. These risks include, but are not limited to, (i) the inability to refinance maturing debt, and (ii) the existence of derivatives or derivative-like components contractually written into the documentation associated with the structure that would allow the "return" of assets in a financing arrangement, or that require the original asset transferor to provide liquidity, effectively ending the financing arrangement ("liquidity puts") within the 30-day period. Where the structured financing activities of an institution are conducted through a special purpose entity^{Footnote 50} (such as a special purpose vehicle, conduit or structured investment vehicle - SIV), the institution should, in determining the HQLA requirements, look through to the maturity of the debt instruments issued by the entity and any embedded options in financing arrangements that may potentially trigger the "return" of assets or the need for liquidity, irrespective of whether or not the SPV is consolidated. [Basel Framework, LCR 40.58] Potential Risk Element HQLA Required Debt maturing within the calculation period 100% of maturing amount Embedded options in financing arrangements that allow for the return of assets or potential liquidity support 100% of the amount of assets that could potentially be returned, or the liquidity required Drawdowns on committed credit and liquidity facilities: For the purpose of the standard, credit and liquidity facilities are defined as explicit contractual agreements or obligations to extend funds at a future date to retail or wholesale counterparties. For the purpose of the standard, these facilities only include contractually irrevocable ("committed") or conditionally revocable agreements to extend funds in the future. Unconditionally revocable facilities that are unconditionally cancellable by the institution (in particular, those without a precondition of a material change in the credit condition of the borrower) are excluded from this section and included in "Other Contingent Funding Liabilities". These off-balance sheet facilities or funding commitments can have long or short-term maturities, with short-term facilities frequently renewing or automatically rolling-over. In a stressed environment, it will likely be difficult for customers drawing on facilities of any maturity, even short-term maturities, to be able to quickly pay back the borrowings. Therefore, for purposes of this standard, all facilities that are assumed to be drawn (as outlined in the paragraphs below) will remain outstanding at the amounts assigned throughout the duration of the test, regardless of maturity. [Basel Framework, LCR 40.59] For the purposes of this standard, the currently undrawn portion of these facilities is calculated net of any HQLA eligible for the stock of HQLA, if the HQLA have already been posted as collateral by the counterparty to secure the facilities or that are contractually obliged to be posted when the counterparty will draw down the facility (e.g. a liquidity facility structured as a repo facility), if the institution is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the facility is drawn, and there is no undue correlation between the probability of drawing the facility and the market value of the collateral. The collateral can be netted against the outstanding amount of the facility to the extent that this collateral is not already counted in the stock of HQLA, in line with the principle in paragraph 53 that items cannot be double-counted in the standard. [Basel Framework, LCR 40.60] A liquidity facility is defined as any committed, undrawn back-up facility that would be utilised to refinance the debt obligations of a customer in situations where such a customer is unable to rollover that debt in financial markets (e.g. pursuant to a commercial paper programme, secured financing transactions, obligations to redeem units, etc.). For the purpose of this standard, the amount of the commitment to be treated as a liquidity facility is the amount of the currently outstanding debt issued by the customer (or proportionate share, if a syndicated facility) maturing within a 30 day period that is backstopped by the facility. The portion of a liquidity facility that is backing debt that does not mature within the 30-day window is excluded from the scope of the definition of a facility. Any additional capacity of the facility (i.e. the remaining commitment) would be treated as a committed credit facility with its associated drawdown rate as specified in paragraph 111. General working capital facilities for corporate entities (e.g. revolving credit facilities in place for general corporate or working capital purposes) will not be classified as liquidity facilities, but as credit facilities. [Basel Framework, LCR 40.61] Notwithstanding the above, any facilities provided to hedge funds, money market funds and special purpose funding vehicles, for example SPEs (as defined in paragraph 105) or conduits, or other vehicles used to finance the institution's own assets, should be captured in their entirety as a liquidity facility to other legal entities. [Basel Framework, LCR 40.62] For that portion of financing programs that are captured in paragraphs 104 and 105 (i.e. are maturing or have liquidity puts that may be exercised in the 30-day horizon), institutions that are providers of associated liquidity facilities do not need to double count the maturing financing instrument and the liquidity facility for consolidated programs. [Basel Framework, LCR 40.63] Any contractual loan drawdowns from committed facilities^{Footnote 51} and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows. Committed credit and liquidity facilities to retail and small business customers: Institutions should assume a 5% drawdown of the undrawn portion of these facilities. Committed credit facilities to non-financial corporates, sovereigns and central banks, PSEs and multilateral development banks: Institutions should assume a 10% drawdown of the undrawn portion of these credit facilities. Committed liquidity facilities to non-financial corporates, sovereigns and central banks, PSEs, and multilateral development banks: Institutions should assume a 30% drawdown of the undrawn portion of these liquidity facilities. Committed credit and liquidity facilities extended to deposit-taking institutions subject to prudential supervision: Institutions should assume a 40% drawdown of the undrawn portion of these facilities. Committed credit facilities to other financial institutions including securities firms, insurance companies, fiduciaries,^{Footnote 52} and beneficiaries^{Footnote 53} : Institutions should assume a 40% drawdown of the undrawn portion of these credit facilities. Committed liquidity facilities to other financial institutions including securities firms, insurance companies, fiduciaries, and beneficiaries: Institutions should assume a 100% drawdown of the undrawn portion of these liquidity facilities. Committed credit and liquidity facilities to other legal entities (including SPEs (as defined on paragraph 105), conduits and special purpose vehicles,^{Footnote 54} and other entities not included in the prior categories): Institutions should assume a 100% drawdown of the undrawn portion of these facilities. [Basel Framework, LCR 40.64] Contractual obligations to extend funds within a 30-day period: Any contractual lending obligations to financial institutions not captured elsewhere in this standard should be captured here at a 100% outflow rate. [Basel Framework, LCR 40.65] If the total of all contractual obligations to extend funds to retail and non-financial corporate clients within the next 30 calendar days (not captured in the prior categories) exceeds 50% of the total contractual inflows due in the next 30 calendar days from these clients, the difference should be reported as a 100% outflow. [Basel Framework, LCR 40.66] Other contingent funding obligations: (run-off rates at national discretion). [Basel Framework, LCR 40.67] These contingent funding obligations may be either contractual or non-contractual and are not lending commitments. Non-contractual contingent funding obligations include associations with, or sponsorship of, products sold or services provided that may require the support or extension of funds in the future under stressed conditions. Non-contractual obligations may be embedded in financial products and instruments sold, sponsored, or originated by the institution that can give rise to unplanned balance sheet growth arising from support given for reputational risk considerations. These include products and instruments for which the customer or holder has specific expectations regarding the liquidity and marketability of the product or instrument and for which failure to satisfy customer expectations in a commercially reasonable manner would likely cause material reputational damage to the institution or otherwise impair ongoing viability. [Basel Framework, LCR 40.68] Some of these contingent funding obligations are explicitly contingent upon a credit or other event that is not always related to the liquidity events simulated in the stress scenario, but may nevertheless have the potential to cause significant liquidity drains in times of stress. For this standard, OSFI and the institution should consider which of these "other contingent funding obligations" may materialise under the assumed stress events. The potential liquidity exposures to these contingent funding obligations are to be treated as a nationally determined behavioural assumption where it is up to OSFI to determine whether and to what extent these contingent outflows are to be included in the LCR. All identified contractual and non-contractual contingent liabilities and their assumptions should be reported, along with their related triggers. OSFI will and institutions should, at a minimum, use historical behaviour in determining appropriate outflows. [Basel Framework, LCR 40.69] Non-contractual contingent funding obligations related to potential liquidity draws from joint ventures or minority investments in entities, which are not consolidated per paragraph 142 should be captured where there is the expectation that the institution will be the main liquidity provider when the entity is in need of liquidity. The amount included should be calculated in accordance with the methodology agreed by the institution's supervisor. [Basel Framework, LCR 40.70] OSFI Notes Where required, an outflow rate of 100% should be applied to amounts resulting from the calculation prescribed in paragraph 117. As mentioned in paragraph 117, the amount to be multiplied by the 100% rate will be determined after OSFI's assessment of the institution's methodology related to such non-contractual contingent funding obligations, considering factors such as the nature of the exposure and the likelihood of draw. In the case of contingent funding obligations stemming from trade finance instruments, national authorities can apply a relatively low run-off rate (e.g. 5% or less). Trade finance instruments consist of trade-related obligations directly underpinned by the movement of goods or the provision of services, such as: documentary trade letters of credit, documentary and clean collection, import bills, and export bills; and guarantees directly related to trade finance obligations, such as shipping guarantees. [Basel Framework, LCR 40.71] OSFI Notes An outflow rate of 3% should be applied to trade finance instruments that fall under the scope of paragraph 118. Lending commitments, such as direct import or export financing for non-financial corporate firms, are excluded from this treatment and institutions will apply the draw-down rates specified in paragraph 111. [Basel Framework, LCR 40.72] National authorities should determine the run-off rates for the other contingent funding obligations listed below in accordance with paragraph 114. Other contingent funding obligations include products and instruments such as: unconditionally revocable "uncommitted" credit and liquidity facilities; OSFI Notes An outflow rate of 2% should be applied to unconditionally revocable "uncommitted" credit and liquidity facilities provided to retail and small business customers (as defined in paragraph 54 and paragraphs 70 to 71, respectively). Unconditionally revocable "uncommitted" credit and liquidity facilities provided to all other customers should be applied an outflow rate of 5%. guarantees and letters of credit unrelated to trade finance obligations (as described in paragraph 118); OSFI Notes An outflow rate of 5% should be applied to guarantees and letters of credit that do not fall under the scope of paragraph 118. non-contractual obligations such as: potential requests for debt repurchases of the institution's own debt or that of related conduits, securities investment vehicles and other such financing facilities; OSFI Notes No outflow should be applied against these non-contractual obligations (i.e. 0% outflow rate). structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes (VRDNs); and OSFI Notes A 5% outflow rate should be applied against these structured products. managed funds that are marketed with the objective of maintaining a stable value such as money market mutual funds or other types of stable value collective investment funds etc. OSFI Notes No outflow rate should be applied against these managed funds. For issuers with an affiliated dealer or market maker, there may be a need to include an amount of the outstanding debt securities (unsecured and secured, term as well as short-term) having maturities greater than 30 calendar days, to cover the potential repurchase of such outstanding securities. OSFI Notes No outflow should be applied against these non-contractual obligations (i.e. 0% outflow rate). Non-contractual obligations where customer short positions are covered by other customers' collateral: A minimum 50% run-off factor of the contingent obligations should be applied where institutions have internally matched client assets against other clients' short positions where the collateral does not qualify as Level 1 or Level 2, and the institution may be obligated to find additional sources of funding for these positions in the event of client withdrawals. [Basel Framework, LCR 40.73] OSFI Notes A 50% outflow rate should be applied against non-contractual obligations where customer short positions are covered by other customers' collateral. Other contractual cash outflows: (100%). Any other contractual cash outflows within the next 30 calendar days should be captured in this standard, such as outflows to cover unsecured collateral borrowings, uncovered short positions, dividends or contractual interest payments, with explanation given as to what comprises this bucket. Outflows related to operating costs, however, are not included in this standard. [Basel Framework, LCR 40.74] OSFI Notes The following transactions should be ignored for purposes of the LCR calculation: Forward repos, forward reverse repos and forward collateral swaps that start and mature within the LCR's 30 day horizon, Forward repos, forward reverse repos and forward collateral swaps that start prior to and mature after the LCR's 30 day horizon, All forward sales and forward purchases of HQLA, and Unsettled sales and purchases of HQLA. For forward reverse repos and collateral swaps that start within the 30 day horizon and mature beyond the LCR's 30 day horizon: Cash outflows from forward reverse repos (with a binding obligation to accept) count toward "other contractual cash outflows" according to paragraph 121 and should be netted against the market value of the collateral received after deducting the haircut applied to the respective assets in the LCR (15% to Level 2A, 25% to RMBS Level 2B assets, and 50% to other Level 2B assets). In case of forward collateral swaps, the net amount between the market values of the assets extended and received after deducting the haircuts applied to the respective assets in the LCR counts toward "other contractual cash outflows" or "other contractual cash inflows", depending on which amount is higher. Cash flows arising from purchases of non-HQLA that are executed but not yet settled at the reporting date should be treated as "other cash outflows". Note that any outflows or inflows of HQLA in the next 30 days in the context of forward and unsettled transactions are only considered if the assets do or will count toward the bank's stock of HQLA. Outflows and inflows of HQLA-type assets that are or will be excluded from the bank's stock of HQLA due to operational requirements are treated like outflows or inflows of non-HQLA. [Basel Framework, LCR 40.74] 2.2.B.2. Cash inflows When considering its available cash inflows, the institution should only include contractual inflows (including interest payments) from outstanding exposures that are fully performing and for which the institution has no reason to expect a default within the 30-day time horizon. Contingent inflows are not included in total net cash inflows. [Basel Framework, LCR 40.75] Institutions and supervisors need to monitor the concentration of expected inflows across wholesale counterparties in the context of institutions' liquidity management in order to ensure that their liquidity position is not overly dependent on the arrival of expected inflows from one or a limited number of wholesale counterparties. [Basel Framework, LCR 40.76] Cap on total inflows: In order to prevent institutions from relying solely on anticipated inflows to meet their liquidity requirement, and also to ensure a minimum level of HQLA holdings, the amount of inflows that can offset outflows is capped at 75% of total expected cash outflows as calculated in the standard. This requires that an institution must maintain a minimum amount of stock of HQLA equal to 25% of the total net cash outflows. [Basel Framework, LCR 40.77] (i) Secured lending, including reverse repos and securities borrowing An institution should assume that maturing reverse repurchase or securities borrowing agreements secured by Level 1 assets will be rolled-over and will not give rise to any cash inflows (0%). Maturing reverse repurchase or securities lending agreements secured by Level 2 HQLA will lead to cash inflows equivalent to the relevant haircut for the specific assets. A bank is assumed not to roll-over maturing reverse repurchase or securities borrowing agreements secured by non-HQLA assets, and can assume to receive back 100% of the cash related to those agreements. Collateralised loans extended to customers for the purpose of taking leveraged trading positions ("margin loans") should also be considered as a form of secured lending; however, for this scenario institutions may recognise no more than 50% of contractual inflows from maturing margin loans made against non-HQLA collateral. This treatment is in line with the assumptions outlined for secured funding in the outflows section. [Basel Framework, LCR 40.78] OSFI Notes Paragraphs 125 to 128 refer only to the types of transactions explicitly mentioned therein and, unless the counterparty is a central bank, do not cover, for example, lending that is secured by non-tradable assets, such as property, plant and equipment. [Basel Framework, LCR 40.45] Paragraph 125 and the table in paragraph 126 are specific to secured loans with a contractual maturity up to and including 30 days. Institutions should not assume any inflow for margin loans where funds are extended under "term" provisions – whereby the institution agrees to make funding available for a given period, but the client is not obliged to draw down on that funding, and where the client has drawn down on the funding – that give the client possibility to repay after more than 30 days. [Basel Framework, LCR 40.78] As an exception to paragraph 125, if the collateral obtained through reverse repo, securities borrowing, or collateral swaps, which matures within the 30-day horizon, is re-used (i.e. rehypothecated) and is used to cover short positions that could be extended beyond 30 days, an institution should assume that such reverse repo or securities borrowing arrangements will be rolled-over and will not give rise to any cash inflows (0%), reflecting its need to continue to cover the short position or to re-purchase the relevant securities. Short positions include both instances where in its 'matched book' the institution sold short a security outright as part of a trading or hedging strategy and instances where the institution is short a security in the 'matched' repo book (i.e. it has borrowed a security for a given period and lent the security out for a longer period). [Basel Framework, LCR 40.79] Maturing secured lending transactions backed by the following asset category Inflow rate (if collateral is not used to cover short positions) Inflow rate (if collateral is used to cover short positions) Level 1 assets 0% 0% Level 2A assets 15% 0% Level 2B – eligible RMBS 25% 0% Other Level 2B assets 50% 0% Margin lending backed by all other collateral 50% 0% Other collateral 100% 0% OSFI Notes Cash inflows associated with collateral swaps occur where the collateral lent is of higher quality within the LCR framework than the collateral borrowed and the collateral borrowed has not been rehypothecated to cover short positions. Such cash inflow amounts are to be calculated as the difference between the inflow rate prescribed for non-rehypothecated collateral in the table in paragraph 126 for the collateral borrowed and outflow rate prescribed in the table in paragraph 95 for the collateral lent. For example, where Level 2B non-RMBS assets are borrowed but not rehypothecated to cover short positions and Level 2A assets are lent, a 35% inflow rate should be allocated. Similarly, where non-HQLA are borrowed but not rehypothecated to cover short positions and Level 2A assets are lent, an 85% inflow rate should be allocated. Note that inflows should not be allocated when the collateral lent and collateral borrowed are of the same LCR type or when the collateral borrowed has been used to cover short positions. Forward reverse repos and forward collateral swaps that start previous to and mature within the LCR's 30-day horizon should be treated like reverse repos and collateral swaps according to paragraphs 125 to 128. [Basel Framework, LCR 40.74] The inflow rates in the third column of the table in paragraph 126 apply to all reverse repos, securities borrowings or collateral swaps where the collateral obtained is used to cover short positions. The reference in the first sentence of paragraph 126 to "short positions that could be extended beyond 30 days" does not restrict the applicability of the 0% inflow rate to the portion of secured lending transactions where the collateral obtained covers short positions with a contractual (or otherwise expected) residual maturity of up to 30 days. Rather, it is intended to point out that the institution must be aware that such short positions may be extended, which would require the institution to roll the secured lending transaction or to purchase the securities in order to keep the short positions covered. In either case, the secured lending transaction would not lead to a cash inflow for the institution's liquidity situation in a way that it can be considered in the LCR. [Basel Framework, LCR 40.79] In the case of an institution's short positions, if the short position is being covered by an unsecured security borrowing, the institution should assume the unsecured security borrowing of collateral from financial market participants would run-off in full, leading to a 100% outflow of either cash or HQLA to secure the borrowing, or cash to close out the short position by buying back the security. This should be recorded as a 100% other contractual outflow according to paragraph 121. If, however, the institution's short position is being covered by a collateralised securities financing transaction, the institution should assume the short position will be maintained throughout the 30-day period and receive a 0% outflow. [Basel Framework, LCR 40.80] Despite the roll-over assumptions in paragraphs 125 and 126, an institution should manage its collateral such that it is able to fulfill obligations to return collateral whenever the counterparty decides not to roll-over any reverse repo or securities lending transaction.^{Footnote 55} This is especially the case for non-HQLA collateral, since such outflows are not captured in the LCR framework. OSFI will monitor the institution's collateral management. [Basel Framework, LCR 40.81] (ii) Committed facilities No credit facilities, liquidity facilities or other contingent funding facilities that the institution holds at other institutions for its own purposes are assumed to be able to be drawn. Such facilities receive a 0% inflow rate, meaning that this scenario does not consider inflows from committed credit or liquidity facilities. This is to reduce the contagion risk of liquidity shortages at one institution causing shortages at other institutions and to reflect the risk that other institutions may not be in a position to honour credit facilities, or may decide to incur the legal and reputational risk involved in not honouring the commitment, in order to conserve their own liquidity or reduce their exposure to that institution. [Basel Framework, LCR 40.82] (iii) Other inflows by counterparty For all other types of transactions, either secured or unsecured, the inflow rate will be determined by counterparty^{Footnote 56}. In order to reflect the need for an institution to conduct ongoing loan origination/roll-over with different types of counterparties, even during a time of stress, a set of limits on contractual inflows by counterparty type is applied. [Basel Framework, LCR 40.83] When considering loan payments, the institution should only include inflows from fully performing loans. Further, inflows should only be taken at the latest possible date, based on the contractual rights available to counterparties. For revolving credit facilities, this assumes that the existing loan is rolled over and that any remaining balances are treated in the same way as a committed facility according to paragraph 111. [Basel Framework, LCR 40.84] Inflows from loans that have no specific maturity (i.e. have non-defined or open maturity) should not be included; therefore, no assumptions should be applied as to when maturity of such loans would occur. An exception to this would be minimum payments of principal, fee or interest associated with an open maturity loan, provided that such payments are contractually due within 30 days. These minimum payment amounts should be captured as inflows at the rates prescribed in paragraphs 133 and 134. [Basel Framework, LCR 40.85] (a) Retail and small business customer inflows This scenario assumes that institutions will receive all payments (including interest payments and installments) from retail and small business customers that are fully performing and contractually due within a 30-day horizon. At the same time, however, institutions are assumed to continue to extend loans to retail and small business customers, at a rate of 50% of contractual inflows. This results in a net inflow number of 50% of the contractual amount. [Basel Framework, LCR 40.86] (b) Other wholesale inflows This scenario assumes that institutions will receive all payments (including interest payments and installments) from wholesale customers that are fully performing and contractually due within the 30-day horizon. In addition, institutions are assumed to continue to extend loans to wholesale clients, at a rate of 0% of inflows for financial institutions and central banks, and 50% for all others, including non-financial corporates, sovereigns, multilateral development banks, and PSEs. This will result in an inflow percentage of: 100% for financial institution and central bank counterparties; and 50% for non-financial wholesale counterparties. [Basel Framework, LCR 40.87] OSFI Notes Stamped bankers' acceptance (BA) assets held by the institution that mature within 30 days should be included under paragraph 134. Inflows from securities maturing within 30 days not included in the stock of HQLA should be treated in the same category as inflows from financial institutions (i.e. 100% inflow). Institutions may also recognise in this category inflows from the release of balances held in segregated accounts in accordance with regulatory requirements for the protection of customer trading assets, provided that these segregated balances are maintained in HQLA. This inflow should be calculated in line with the treatment of other related outflows and inflows covered in this standard. Level 1 and Level 2 securities maturing within 30 days should be included in the stock of liquid assets, provided that they meet all operational and definitional requirements, as laid out in paragraphs 16 to 47. [Basel Framework, LCR 40.88] OSFI Notes Assets that fulfil the requirements of HQLA eligibility shall be considered as such and not as inflows. Institutions may not count as inflows the difference between the actual redemption amount of Level 2 securities and the amount considered as HQLA (i.e. after application of the LCR haircut). Maturing assets including Level 1 and Level 2 assets that are not HQLA-eligible due to the operational requirements may be considered as inflows under paragraph 135. Inflows from maturing securities in a collateral pool for covered bonds can be considered as inflows even if the maturing securities are (or have been) excluded from the stock of HQLA due to being "encumbered" according to paragraph 19. However, if the maturing securities need to be substituted in the collateral pool within the 30-day horizon, an "other cash outflow" per paragraph 121 should be considered amounting to the liquidity value of these securities in the LCR. [Basel Framework, LCR 40.88] Operational deposits: Deposits held at other financial institutions for operational purposes, as outlined in paragraphs 73 to 83, such as for clearing, custody, and cash management purposes, are assumed to stay at those institutions, and no inflows can be counted for these funds – i.e. they will receive a 0% inflow rate, as noted in paragraph 78. [Basel Framework, LCR 40.89] OSFI Notes For purposes of paragraph 136, where an indirect clearer (that is not a subsidiary of a direct clearer) holds operational deposits at an OSFI- or provincially-regulated direct clearer in respect of clearing-related activities, the indirect clearer may recognize a 25% inflow rate for such deposits. In addition, these deposit inflows will not be subject to the 75% inflow cap calculation outlined in paragraph 124. Deposits held for the purpose of correspondent banking are held for operational purposes and, as such, are subject to a 0% inflow rate according to paragraph 136. This does not affect the 100% outflow rate of these deposits at the part of the institution that has received the deposit according to paragraph 79. This treatment applies to all deposits that are used in the context of correspondent banking arrangements irrespective of the account name (e.g. nostro account). Within this scope, correspondent banking deposits refer to deposits a customer institution holds with another institution for the purpose that the other correspondent institution holds balances and settles payments in a currency other than the customer institution's domestic currency and on the customer institution's behalf. However, a 100% inflow rate would be applicable to the amount for which the institution is able to determine that the funds are "excess balances" in the sense of paragraph 76, i.e. they are not tied to operational purposes and may be withdrawn within 30 days. [Basel Framework, LCR 40.89] The same methodology applied in paragraphs 73 to 84 for operational deposit outflows should also be applied to determine if deposits held at another financial institution are operational deposits and receive the inflow outlined in paragraph 136. As a general principle if the institution receiving the deposit classifies the deposit as operational, the institution placing it should also classify it as an operational deposit. [Basel Framework, LCR 40.89] The same treatment applies for deposits held at the centralised institution in a cooperative network, that are assumed to stay at the centralised institution as outlined in paragraphs 85 and 86; in other words, the depositing institution should not count any inflow for these funds – i.e. they will receive a 0% inflow rate. [Basel Framework, LCR 40.90] (iv) Other cash inflows Derivatives cash inflows: the sum of all net cash inflows should receive a 100% inflow factor. The amounts of derivatives cash inflows and outflows should be calculated in accordance with the methodology described in paragraph 96. [Basel Framework, LCR 40.91] Where derivatives are collateralised by HQLA, cash inflows should be calculated net of any corresponding cash or contractual collateral outflows that would result, all other things being equal, from contractual obligations for cash or collateral to be posted by the institution, given these contractual obligations would reduce the stock of HQLA. This is in accordance with the principle that institutions should not double-count liquidity inflows or outflows. [Basel Framework, LCR 40.92] Other contractual cash inflows: Other contractual cash inflows should be captured here, with explanation given to what comprises this bucket. Inflow percentages should be determined as appropriate for each type of inflow by supervisors in each jurisdiction. Cash inflows related to non-financial revenues are not taken into account in the calculation of the net cash outflows for the purposes of this standard. [Basel Framework, LCR 40.93] OSFI Notes For forward repos and collateral swaps that start within the 30 day horizon and mature beyond the LCR's 30 day horizon: Cash inflows from forward repos are "other contractual cash inflows" according to paragraph 140 and should be netted against the market value of the collateral extended after deducting the haircut applied to the respective assets in the LCR. In case of forward collateral swaps, the net amount between the market values of the assets extended and received after deducting the haircuts applied to the respective assets in the LCR counts towards "other contractual cash outflows" or "other contractual cash inflows" depending on which amount is higher. Cash flows arising from sales of non-HQLA that are executed but not yet settled at the reporting date should be treated as "other cash inflows". Note that any outflows or inflows of HQLA in the next 30 days in the context of forward and unsettled transactions are only considered if the assets do or will count toward the bank's stock of HQLA. Outflows and inflows of HQLA-type assets that are or will be excluded from the bank's stock of HQLA due to operational requirements are treated like outflows or inflows of non-HQLA. [Basel Framework, LCR 40.93] HQLA lent by an institution without any further offsetting transaction (i.e. no repo/reverse repo or collateral swap) can count towards "other contractual cash inflows" – at their market value after application of the relevant LCR haircut – if the assets will be returned or can be recalled during the next 30 days. [Basel Framework, LCR 40.93]

2.3. Application issues for the LCR

This section outlines a number of issues related to the application of the LCR. These issues include considerations related to the scope of application of the LCR (whether they apply at group or entity level and to foreign bank branches) and the aggregation of currencies within the LCR.

A. Scope of application

In addition to the scope of application issues discussed in Chapter 1, OSFI will determine which investments in banking, securities and financial entities of a deposit-taking group that are not consolidated should be considered significant, taking into account the liquidity impact of such investments on the group under the LCR standard. Normally, a non-controlling investment (e.g. a joint-venture or minority-owned entity) can be regarded as significant if the deposit-taking group will be the main liquidity provider of such investment in times of stress (for example, when the other shareholders are non-banks or where the institution is operationally involved in the day-to-day management and monitoring of the entity's liquidity risk). OSFI will agree with each relevant institution on a case-by-case basis on an appropriate methodology for how to quantify such potential liquidity draws, in particular, those arising from the need to support the investment in times of stress out of reputational concerns for the purpose of calculating the LCR standard. To the extent that such liquidity draws are not included elsewhere, they should be treated under "Other contingent funding obligations", as described in paragraph 117. [Basel Framework, LCR 10.2] To ensure consistency in applying the consolidated LCR across jurisdictions, further information is provided below on two application issues. (a) Differences in home / host liquidity requirements While most of the parameters in the LCR are internationally "harmonised", national differences in liquidity treatment may occur in those items subject to national discretion (e.g. deposit run-off rates, contingent funding obligations, market valuation changes on derivative transactions, etc.) and where more stringent parameters are adopted by some supervisors. [Basel Framework, LCR 10.4] When calculating the LCR on a consolidated basis, a cross-border deposit-taking group should apply the liquidity parameters adopted in the home jurisdiction to all legal entities being consolidated except for the treatment of retail / small business deposits that should follow the relevant parameters adopted in host jurisdictions in which the entities (branch or subsidiary) operate. This approach will enable the stressed liquidity needs of legal entities of the group (including branches of those entities) operating in host jurisdictions to be more suitably reflected, given that deposit run-off rates in host jurisdictions are more influenced by jurisdiction-specific factors such as the type and effectiveness of deposit insurance schemes in place and the behaviour of local depositors. [Basel Framework, LCR 10.5] Home requirements for retail and small business deposits should apply to the relevant legal entities (including branches of those entities) operating in host jurisdictions if: (i) there are no host requirements for retail and small business deposits in the particular jurisdictions; (ii) those entities operate in host jurisdictions that have not implemented the LCR; or (iii) the home supervisor decides that home requirements should be used that are stricter than the host requirements. [Basel Framework, LCR 10.6] (b) Treatment of liquidity transfer restrictions As noted in paragraph 24, as a general principle, no excess liquidity should be recognised by a cross-border deposit-taking group in its consolidated LCR if there is reasonable doubt about the availability of such liquidity. Liquidity transfer restrictions (e.g. ring-fencing measures, non-convertibility of local currency, foreign exchange controls, etc.) in jurisdictions in which a deposit-taking group operates will affect the availability of liquidity by inhibiting the transfer of HQLA and fund flows within the group. The consolidated LCR should reflect such restrictions in a manner consistent with paragraph 24. For example, the eligible HQLA that are held by a legal entity being consolidated to meet its local LCR requirements (where applicable) can be included in the consolidated LCR to the extent that such HQLA are used to cover the total net cash outflows of that entity, notwithstanding that the assets are subject to liquidity transfer restrictions. If the HQLA held in excess of the total net cash outflows are not transferable, such surplus liquidity should be excluded from the standard. [Basel Framework, LCR 10.7] For practical reasons, the liquidity transfer restrictions to be accounted for in the consolidated ratio are confined to existing restrictions imposed under applicable laws, regulations and supervisory requirements^{Footnote 57}. A deposit-taking group should have processes in place to capture all liquidity transfer restrictions to the extent practicable, and to monitor the rules and regulations in the jurisdictions in which the group operates and assess their liquidity implications for the group as a whole. [Basel Framework, LCR 10.8]

B. Currencies

As outlined in paragraph 30, while the LCR is expected to be met on a consolidated basis and reported in a common currency, supervisors and institutions should also be aware of the liquidity needs in each significant currency. As indicated in the LCR, the currencies of the stock of HQLA should be similar in composition to the operational needs of the institution. Institutions and supervisors cannot assume that currencies will remain transferable and convertible in a stress period, even for currencies that in normal times are freely transferable and highly convertible. [Basel Framework, LCR 10.9]

Footnotes

Footnote 1 Following the format: [Basel Framework, XXX yy.zz]. Return to footnote 1 Footnote 2 http://www.bis.org/publ/bcbs144.htm. Return to footnote 2 Footnote 3 https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b6-2020.aspx. Return to footnote 3 Footnote 4 The BCBS Sound Principles and OSFI's Guideline B-6: Liquidity Principles require that an institution develop a Contingency Funding Plan (CFP) that clearly sets out strategies for addressing liquidity shortfalls, both institution-specific and market-wide situations of stress. A CFP should, among other things, "reflect central bank lending programmes and collateral requirements, including facilities that form part of normal liquidity management operations (e.g. the availability of seasonal credit)." Return to footnote 4 Footnote 5 Refer to the sections on "Definition of HQLA" and "Operational requirements" for the characteristics that an asset must meet to be part of the stock of HQLA and the definition of "unencumbered" respectively. Return to footnote 5 Footnote 6 Duration measures the price sensitivity of a fixed income security to changes in interest rate. Return to footnote 6 Footnote 7 In most jurisdictions, HQLA should be central bank eligible in addition to being liquid in markets during stressed periods. In jurisdictions where central bank eligibility is limited to an extremely narrow list of assets, a supervisor may allow unencumbered, non-central bank eligible assets that meet the qualifying criteria for Level 1 or Level 2 assets to count as part of the stock (see Definition of HQLA beginning from paragraph 33). Return to footnote 7 Footnote 8 If an institution has deposited, pre-positioned or pledged Level 1, Level 2 and other assets in a collateral pool and no specific securities are assigned as collateral for any transactions, it may assume that assets are encumbered in order of increasing liquidity value in the LCR, i.e. assets ineligible for the stock of HQLA are assigned first, followed by Level 2B assets, then Level 2A and finally Level 1. This determination must be made in compliance with any requirements, such as concentration or diversification, of the central bank or PSE. Return to footnote 8 Footnote 9 Refer to paragraph 126 for the appropriate treatment if the contractual withdrawal of such assets would lead to a short position (e.g. because the institution had used the assets in longer-term securities financing transactions). Return to footnote 9 Footnote 10 See definition in paragraph 92. Return to footnote 10 Footnote 11 See definition in paragraph 125. Return to footnote 11 Footnote 12 When determining the calculation of the 15% and 40% caps, supervisors may, as an additional requirement, separately consider the size of the pool of Level 2 and Level 2B assets on an unadjusted basis. Return to footnote 12 Footnote 13 For purpose of calculating the LCR, Level 1 assets in the stock of HQLA should be measured at an amount no greater than their current market value. Return to footnote 13 Footnote 14 In this context, central bank reserves would include institutions' overnight deposits with the central bank, and term deposits with the central bank that: (i) are explicitly and contractually repayable on notice from the depositing institution; or (ii) that constitute a loan against which the institution can borrow on a term basis or on an overnight but automatically renewable basis (only where the institution has an existing deposit with the relevant central bank). Other term deposits with central banks are not eligible for the stock of HQLA; however, if the term expires within 30 days, the term deposit could be considered as an inflow per paragraph 134. Return to footnote 14 Footnote 15 Local supervisors should discuss and agree with the relevant central bank the extent to which central bank reserves should count towards the stock of liquid assets, i.e. the extent to which reserves are able to be drawn down in times of stress. Return to footnote 15 Footnote 16 This follows the categorisation of market participants applied in the Basel Consolidated Framework, unless otherwise specified. Return to footnote 16 Footnote 17 Paragraph 43(c) includes only marketable securities that qualify for CRE 20.4 under the Basel Consolidated Framework. When a 0% risk-weight has been assigned at national discretion according to the provision in CRE 20.5 of the Basel Consolidated Framework, the treatment should follow paragraph 43(d) or 43(e). Return to footnote 17 Footnote 18 This includes deposit-taking entities (including banking entities), insurance entities, securities firms and their affiliates. Return to footnote 18 Footnote 19 This requires that the holder of the security must not have recourse to the financial institution or any of the financial institution's affiliated entities. In practice, this means that securities, such as government-guaranteed issuance during the financial crisis, which remain liabilities of the financial institution, would not qualify for the stock of HQLA. The only exception is when the institution also qualifies as a PSE under the Basel Consolidated Framework (Basel Framework, CRE 20.11) where securities issued by the institution could qualify for Level 1 assets if all necessary conditions are satisfied. Return to footnote 19 Footnote 20 Paragraphs 43(d) and 43(e) may overlap with paragraph 45(a) in terms of sovereign and central bank securities with a 20% risk weight. In such a case, the assets can be assigned to the Level 1 category according to Paragraph 43(d) or 43(e), as appropriate. Return to footnote 20 Footnote 21 This requires that the holder of the security must not have recourse to the financial institution or any of the financial institution's affiliated entities. In practice, this means that securities, such as government-guaranteed issuance during the financial crisis, which remain liabilities of the financial institution, would not qualify for the stock of HQLA. The only exception is when the institution also qualifies as a PSE under the Basel II Framework where securities issued by the institution could qualify for Level 1 assets if all necessary conditions are satisfied. Return to footnote 21 Footnote 22 Corporate debt securities (including commercial paper) in this respect include only plain-vanilla assets whose valuation is readily available based on standard methods and does not depend on private knowledge, i.e. these do not include complex structured products or subordinated debt. Return to footnote 22 Footnote 23 Covered bonds are bonds issued and owned by a bank or mortgage institution and are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest. Return to footnote 23 Footnote 24 In the event of split ratings, the applicable rating should be determined according to the method used in the Standardised Approach for credit risk. Local rating scales (rather than international ratings) of a supervisor-approved ECAI that meet the eligibility criteria outlined in paragraph 21.2 of the Basel Consolidated Framework [CRE 21.2] can be recognised if corporate debt securities or covered bonds are held by an institution for local currency liquidity needs arising from its operations in that local jurisdiction. This also applies to Level 2B assets. Return to footnote 24 Footnote 25 As with all aspects of the framework, compliance with these criteria will be assessed as part of peer reviews undertaken under the Committee's Regulatory Consistency Assessment Programme. Return to footnote 25 Footnote 26 Corporate debt securities (including commercial paper) in this respect include only plain-vanilla assets whose valuation is readily available based on standard methods and does not depend on private knowledge, i.e. these do not include complex structured products or subordinated debt. Return to footnote 26 Footnote 27 Insufficiency in Level 2 assets alone does not qualify for the alternative treatment. Return to footnote 27 Footnote 28 For member states of a monetary union with a common currency, that common currency is considered the "domestic currency". Return to footnote 28 Footnote 29 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. Return to footnote 29 Footnote 30 Where applicable, cash inflows and outflows should include interest that is expected to be received and paid during the 30-day time horizon. Return to footnote 30 Footnote 31 Deposits in precious metals received by an institution should be treated as retail deposits or as unsecured wholesale funding depending on the type of counterparty. An institution may assume no outflow if: the deposit physically settles and the institution is able to supply the precious metals from its own inventories; or contractual arrangements give the institution the choice between cash settlement and physical delivery and there are no market practices or reputational factors that may limit the institution's discretion to exercise the option in a way that would minimise the LCR-effective outflow (i.e., to opt for physical delivery if the institution is able to supply the precious metals from its own inventories). This provision is strictly limited in scope to precious metal deposits and does not extend to derivatives or other products that have similar economic features as precious metal deposits. Return to footnote 31 Footnote 32 Requests seeking OSFI's agreement on other combinations should be addressed to the institution's Lead Supervisor, with a copy to Market and Liquidity Risk Division (at: capitalmarkets@osfi-bsif.gc.ca), and should include a business case that, at a minimum, sets out: the reason why the agreement is being requested; rationale and supporting evidence for the proposed combination qualifying for relationship status; and financial projections, including expected impact of the reclassification on liquidity position and related metrics (internal and regulatory). Return to footnote 32 Footnote 33 In the case of promotional offers on new accounts, institutions can migrate accounts to a lower run-off rate category once the stability of the deposit has been confirmed, i.e. where the deposits are still present after the promotional period ends. In the case of a promotional rate offered on new balances only, only the new balances attracting the promotional rate should be allocated to the RSD category (rather than the entire balance of the deposit). Return to footnote 33 Footnote 34 "Fully insured" means that 100% of the deposit amount, up to the deposit insurance limit, is covered by an effective deposit insurance scheme. Deposit balances up to the deposit insurance limit can be treated as "fully insured" even if a depositor has a balance in excess of the deposit insurance limit. However, any amount in excess of the deposit insurance limit is to be treated as "less stable". For example, if a depositor has a deposit of 150 that is covered by a deposit insurance scheme, which has a limit of 100, where the depositor would receive at least 100 from the deposit insurance scheme if the financial institution were unable to pay, then 100 would be considered "fully insured" and treated as stable deposits while 50 would be treated as less stable deposits. However if the deposit insurance scheme only covered a percentage of the funds from the first currency unit (e.g. 90% of the deposit amount up to a limit of 100) then the entire 150 deposit would be less stable. In addition, where a depositor's balance includes deposits maturing in the next 30 days (demand and/or term) and term deposits with a maturity greater than 30 days that, in aggregate, exceed the deposit category's insurance coverage limit, the insured portion should be allocated on a pro rata basis between the deposit portion maturing in the next 30 days (demand and/or term) and the greater than 30 days term deposit portion. For example, if a depositor has 65 in a chequing account (i.e. demand deposit), 25 in a term deposit maturing in 20 days, and 60 in a term deposit maturing in 2 years – and assuming all these deposits are aggregated under the same deposit insurance category and where the deposit insurance scheme limit is 100 – the institution would classify 60 of the chequing account and 20-day term deposit as insured (i.e. 65+25=90 total deposits maturing in the next 30 days; 90/150=60% of the total depositor's deposits which will mature in the next 30 days; 60%×100 deposit insurance limit = 60 in insured deposits), 40 of the 2-year term deposit as insured (i.e. 60/150=40% of the total depositor's deposits which will mature outside the LCR's 30-day window; 40%×100 deposit insurance limit = 40 in insured deposits), and the remaining 50 across all deposits as uninsured. Return to footnote 34 Footnote 35 The requirement for periodic collection of levies from institutions does not preclude that deposit insurance schemes may, on occasion, provide for contribution holidays due to the scheme being well-funded at a given point in time. Return to footnote 35 Footnote 36 This period of time would typically be expected to be no more than seven business days. Return to footnote 36 Footnote 37 Refer to paragraph 145 for the treatment of retail and small business deposits sourced in host jurisdictions. Return to footnote 37 Footnote 38 If a portion of the term deposit can be withdrawn without incurring such a penalty, only that portion should be treated as a demand deposit. The remaining balance of the deposit should be treated as a term deposit. Return to footnote 38 Footnote 39 This could reflect a case where an institution may imply that it is under liquidity stress if it did not exercise an option on its own funding. Return to footnote 39 Footnote 40 This takes into account any embedded options linked to the funds provider's ability to call the funding before contractual maturity. Return to footnote 40 Footnote 41 “Aggregated funding” means the gross amount (i.e. not netting any form of credit extended to the legal entity) of all forms of funding (e.g. deposits or debt securities or similar derivative exposure for which the counterparty is known to be a small business customer). In addition, applying the limit on a consolidated basis means that where one or more small business customers are affiliated with each other, they may be considered as a single creditor such that the limit is applied to the total funding received by the institution from this group of customers. Return to footnote 41 Footnote 42 Correspondent banking refers to arrangements under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services in order to settle foreign currency transactions (e.g. so-called nostro and vostro accounts used to settle transactions in a currency other than the domestic currency of the respondent bank for the provision of clearing and settlement of payments). Prime brokerage is a package of services offered to large active investors, particularly institutional hedge funds. These services usually include: clearing, settlement and custody; consolidated reporting; financing (margin, repo or synthetic); securities lending; capital introduction; and risk analytics. Return to footnote 42 Footnote 43 Fiduciary is defined in this context as a legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles. Return to footnote 43 Footnote 44 Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract. Return to footnote 44 Footnote 45 Outflows on unsecured wholesale funding from affiliated entities of the institution are included in this category unless the funding is part of an operational relationship, a deposit in an institutional network of cooperative institutions or the affiliated entity of a non-financial corporate. Return to footnote 45 Footnote 46 In this context, PSEs that receive this treatment should be limited to those that are 20% risk weighted or better, and "domestic" can be defined as a jurisdiction where an institution is legally incorporated. Return to footnote 46 Footnote 47 A customer short position in this context describes a transaction where an institution's customer sells a security it does not own, and the institution subsequently obtains the same security from internal or external sources to make delivery into the sale. Internal sources include the institution's own inventory of collateral as well as rehypothecatable collateral held in other customer margin accounts. External sources include collateral obtained through a securities borrowing, reverse repo, or like transaction. Return to footnote 47 Footnote 48 These risks are captured in paragraphs 99 and 103, respectively. Return to footnote 48 Footnote 49 To the extent that sponsored conduits/SPVs are required to be consolidated under liquidity requirements, their assets and liabilities will be taken into account. Supervisors need to be aware of other possible sources of liquidity risk beyond that arising from debt maturing within 30 days. Return to footnote 49 Footnote 50 A special purpose entity (SPE) is defined in the Basel Consolidated Framework [Basel Framework, CRE 40.21] as a corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust. Return to footnote 50 Footnote 51 Committed facilities refer to those which are irrevocable. Return to footnote 51 Footnote 52 Fiduciary is defined in this context as a legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles. Return to footnote 52 Footnote 53 Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract. Return to footnote 53 Footnote 54 The potential liquidity risks associated with the institution's own structured financing facilities should be treated according to paragraphs 104 and 105 (100% of maturing amount and 100% of returnable assets are included as outflows). Return to footnote 54 Footnote 55 This is in line with Principle 9 of the BCBS Sound Principles and Principle 8 of OSFI's Guideline B-6: Liquidity Principles. Return to footnote 55 Footnote 56 Unsecured loans in precious metals extended by an institution or deposits in precious metals placed by an institution may be treated according to paragraphs 133-137 if the loan or deposit uniquely settles in cash. In the case of physical delivery or any optionality to do so, no inflow should be considered unless: contractual arrangements give the institution the choice between cash settlement or physical delivery and physical delivery is subject to a significant penalty, or both parties expect cash settlement; and there are no factors such as market practices or reputational factors that may limit the institution's ability to settle the loan or deposit in cash (irrespective of whether physical delivery is subject to a significant penalty). This provision is strictly limited in scope to precious metal loans and does not extend to derivatives or other products that have similar economic features as precious metal loans. Return to footnote 56 Footnote 57 There are a number of factors that can impede cross-border liquidity flows of a banking group, many of which are beyond the control of the group and some of these restrictions may not be clearly incorporated into law or may become visible only in times of stress. Return to footnote 57

Chapter 3 – Net Stable Funding Ratio

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 paragraph^{Footnote 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 Principles^{Footnote 2} and OSFI's Guideline B-6:Liquidity principles^{Footnote 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} OSFI Notes 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.

3.1 Definition and Minimum Requirements

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 fundingRequired amount of stable funding≥100% [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: Funding tenor – The NSFR is generally calibrated such that longer-term liabilities are assumed to be more stable than short-term liabilities. Funding type and counterparty – The NSFR is calibrated under the assumption that short-term (maturing in less than one year) deposits provided by retail customers and funding provided by small business customers are behaviourally more stable than wholesale funding of the same maturity from other counterparties. [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: Resilient credit creation – The NSFR requires stable funding for some proportion of lending to the real economy in order to ensure the continuity of this type of intermediation. Institution behaviour – The NSFR is calibrated under the assumption that institutions may seek to roll over a significant proportion of maturing loans to preserve customer relationships. Asset tenor – The NSFR assumes that some short-dated assets (maturing in less than one year) require a smaller proportion of stable funding because institutions would be able to allow some proportion of those assets to mature instead of rolling them over. Asset quality and liquidity value – The NSFR assumes that unencumbered, high-quality assets that can be securitised or traded, and thus can be readily used as collateral to secure additional funding or sold in the market, do not need to be wholly financed with stable funding. [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]

3.2 Definition of available stable funding

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) Guideline^{Footnote 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]

3.2.1 Calculation of derivative liability amounts

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 amount^{Footnote 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]

3.2.2 Liabilities and capital receiving a 100% ASF factor

Liabilities and capital instruments receiving a 100% ASF factor comprise: the total amount of regulatory capital, before the application of capital deductions, as defined in CAR Chapter 2, paragraph 2, excluding the proportion of Tier 2 instruments with residual maturity of less than one year; the total amount of any capital instrument not included in (a) that has an effective residual maturity of one year or more, but excluding any instruments with explicit or embedded options that, if exercised, would reduce the expected maturity to less than one year; and the total amount of secured and unsecured borrowings and liabilities^{Footnote 8,Footnote 9}, (including term deposits) with effective residual maturities of one year or more. Cash flows occurring within the one-year horizon but arising from liabilities with a final maturity of greater than one year do not qualify for the 100% ASF factor. [Basel Framework, NSF 30.10]

3.2.3 Liabilities and capital receiving a 95% ASF factor

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 customers^{Footnote 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]

3.2.4 Liabilities receiving a 90%, 80%, 70%, and 60% ASF factor

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: insured deposits where: the depositor does not have an established relationship with the institution; or the deposits are not in a transactional account; or the deposit are received from funds and trusts where the balance is controlled solely by the underlying retail customer; are assigned a 90% ASF factor; deposits sourced in the home jurisdiction but denominated in a foreign currency not qualifying as "stable" deposits under the LCR are assigned a 90% ASF factor; uninsured deposits, including the portion of a deposit in excess of the deposit insurance coverage limit and deposits not meeting the deposit insurance coverage criteria, are assigned a 90% ASF factor; rate sensitive deposits where the client directly manages the funds and where: the client has an established relationship with the institution; or the deposit is in a transactional account are assigned a 90% ASF factor; rate sensitive deposits where the client directly manages the funds and where: the client does not have an established relationship with the institution; and the deposits are not in a transactional account; are assigned a 80% ASF factor; term deposits directly managed by an unaffiliated third party that are maturing or cashable in the next 30 days are assigned a 70% ASF factor; demand deposits where an unaffiliated third party directly manages the funds are assigned a 60% 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]

3.2.5 Liabilities receiving a 50% ASF factor

Liabilities receiving a 50% ASF factor comprise: funding (secured and unsecured) with a residual maturity of less than one year provided by non-financial corporate customers; operational deposits (as defined in LAR Chapter 2, paragraphs 73-84); funding with residual maturity of less than one year from sovereigns, public sector entities (PSEs), multilateral development banks, and national development banks; and other funding (secured and unsecured) not included in the categories above with residual maturity between six months to less than one year, including funding from central banks and financial institutions^{Footnote 11,Footnote 12}. [Basel Framework, NSF 30.13]

3.2.6 Liabilities receiving a 35% ASF factor

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.

3.2.7 Liabilities receiving a 0% ASF factor

Liabilities receiving a 0% ASF factor comprise: all other liabilities and equity categories not included in the above categories, including other funding with residual maturity of less than six months from central banks^{Footnote 13} and financial institutions; other liabilities without a stated maturity. This category may include short positions and open maturity positions. Two exceptions can be recognised for liabilities without a stated maturity: first, deferred tax liabilities, which should be treated according to the nearest possible date on which such liabilities could be realised; and second, minority interest, which should be treated according to the term of the instrument, usually in perpetuity. 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; NSFR derivative liabilities as calculated according to paragraphs 13 and 14 net of NSFR derivative assets as calculated according to paragraphs 40 and 41, if NSFR derivative liabilities are greater than NSFR derivative assets^{Footnote 14}; "trade date" payables arising from purchases of financial instruments, foreign currencies and commodities that (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle. [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. Table 1: Summary of liability categories and associated ASF factors ASF factor Components of ASF category 100% Total regulatory capital (excluding Tier 2 instruments with residual maturity of less than one year) Other capital instruments and liabilities with effective residual maturity of one year or more 95% Stable non-maturity (demand) deposits and term deposits with residual maturity of less than one year provided by retail and small business customers 90% All less stable non-maturity deposits and term deposits with residual maturity of less than one year provided by retail and small business customers not assigned a lower ASF factor below 80% Rate sensitive deposits managed by the client, no relationship and deposit not in a transactional account 70% Term deposits directly managed by an unaffiliared third party (maturing or cashable in the next 30 days) 60% Demand deposits directly managed by an unaffiliated third party 50% Funding with residual maturity of less than one year provided by non-financial corporate customers Operational deposits Funding with residual maturity of less than one year from sovereigns, PSEs, and multilateral and national development banks Other funding with residual maturity between six months and less than one year not included in the above categories, including funding provided by central banks and financial institutions 35% Stamped bankers' acceptances (BA) liabilities issued by the institution with a residual maturity of less than six months 0% Matched secured financing transactions that meet the criteria for matched transactions outlined in paragraph 39 Interdependent liabilities All other liabilities and equity not included in the above categories, including liabilities without a stated maturity (with a specific treatment for deferred tax liabilities and minority interests) NSFR derivative liabilities net of NSFR derivative assets if NSFR derivative liabilities are greater than NSFR derivative assets "Trade date" payables arising from purchases of financial instruments, foreign currencies and commodities [Basel Framework, NSF 99.1]

3.3 Definition of required stable funding for assets and off-balance sheet exposures

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 maturity^{Footnote 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]

3.3.1 Encumbered assets

Assets on the balance sheet that are encumbered^{Footnote 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 exceptional^{Footnote 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]

3.3.2 Secured financing transactions

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 Guideline^{Footnote 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: Maturity The offsetting SFT must have the same maturity date and have a residual maturity of less than six months; Collateral SFTs secured against Level 1 collateral can only be matched with SFTs secured against Level 1 collateral where the collateral is from the same issuer (e.g. Government of Canada-issued collateral vs. Government of Canada-issued collateral); and, SFTs secured against other collateral must involve the same collateral, i.e. same CUSIP/ISIN. 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).

3.3.3 Calculation of derivative asset amounts

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: For trades not cleared through a qualifying central counterparty (QCCP) the VM received by the recipient counterparty is not segregated. VM would satisfy the non-segregation criterion if the recipient counterparty has no restrictions by law, regulation, or any agreement with the counterparty on the ability to use the VM received. For financial counterparties, VM must be calculated and exchanged on at least a daily basis based on mark-to-market valuation of derivative positions. To meet this criterion, derivative positions must be valued daily and VM must be transferred at least daily to the counterparty or to the counterparty's account, as appropriate. VM exchanged on the morning of the subsequent trading day based on the previous, end-of-day market values would meet this criterion. In the case of non-financial counterparties, VM does not need to be exchanged daily rather must be calculated and exchanged as prescribed in the derivative contract. VM is received in a currency specified in the derivative contract, governing master netting agreement (MNA), credit support annex to the qualifying MNA or as defined by any netting agreement with a CCP. VM exchanged is the full amount that would be necessary to extinguish the mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty. Derivative transactions and VM are covered by a single MNA between the legal entities that are the counterparties in the derivative transaction. The MNA must explicitly stipulate that the counterparties agree to settle net any payment obligations covered by such a netting agreement, taking into account any variation margin received or provided if a credit event occurs involving either counterparty. The MNA must be legally enforceable and effective in all relevant jurisdictions, including in the event of default and bankruptcy or insolvency. For the purposes of this paragraph, the term "MNA" includes any netting agreement that provides legally enforeable rights of offset and a Master MNA may be deemed to be a single MNA. 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]

3.3.4 Assets assigned a 0% RSF factor

Assets assigned a 0% RSF factor comprise: coins and banknotes immediately available to meet obligations; all central bank reserves (including required reserves and excess reserves); unencumbered Level 1 assets as defined in LAR Chapter 2, paragraph 43(c) to 43(e), including: marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community, or multilateral development banks that are assigned a 0% risk weight under the Standardised Approach for credit risk; and certain non-0% risk-weighted sovereign or central bank debt securities under the Standardised Approach for credit risk; all claims^{Footnote 22} on central banks with residual maturities of less than six months; and "trade date" receivables arising from sales of financial instruments, foreign currencies and commodities that (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle; assets associated with collateral posted as variation margin that are deducted from the replacement cost of derivative liability amounts. [Basel Framework, NSF 30.25, 30.26]

3.3.5 Assets assigned a 5% RSF factor

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]

3.3.6 Assets assigned a 10% RSF factor

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.

3.3.7 Assets assigned a 15% RSF factor

Assets assigned a 15% RSF factor comprise: unencumbered Level 2A assets as defined in LAR Chapter 2, paragraph 45, including: marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that are assigned a 20% risk weight under the Standardised Approach for credit risk; and corporate debt securities (including commercial paper) and covered bonds with a credit rating equal or equivalent to at least AA– ; (b) all other unencumbered loans^{Footnote 23} to financial institutions with residual maturities of less than six months not included in paragraphs 45 to 46. [Basel Framework, NSF 30.28]

3.3.8 Assets assigned a 50% RSF factor

Assets assigned a 50% RSF factor comprise: unencumbered Level 2B assets as defined and subject to the conditions set forth in LAR Chapter 2, paragraph 47, including: residential mortgage-backed securities (RMBS) with a credit rating of at least AA; corporate debt securities (including commercial paper) with a credit rating of between A+ and BBB–; and exchange-traded common equity shares not issued by financial institutions or their affiliates; any HQLA as defined in the LCR that are encumbered for a period of between six months and less than one year; all loans to financial institutions and central banks with residual maturity of between six months and less than one year; and deposits held at other financial institutions for operational purposes, as outlined in LAR Chapter 2, paragraphs 73-84, that are subject to the 50% ASF factor in paragraph 21(b); and all other non-HQLA not included in the above categories that have a residual maturity of less than one year, including loans to non-financial corporate clients, loans to retail customers (i.e. natural persons) and small business customers, loans to sovereigns and PSEs, and loans to national development banks. [Basel Framework, NSF 30.29]

3.3.9 Assets assigned a 65% RSF factor

Assets assigned a 65% RSF factor comprise: unencumbered residential mortgages with a residual maturity of one year or more that would qualify for a 35% or lower risk weight under the Standardised Approach for credit risk; other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more that would qualify for a 35% or lower risk weight under the Standardised Approach for credit risk; unencumbered reverse mortgages that would qualify for a 35% risk weight under the Standardised Approach for credit risk, as outlined in Section 4.1.15 of OSFI's CAR Guideline. [Basel Framework, NSF 30.30]

3.3.10 Assets assigned an 85% RSF factor

Assets assigned an 85% RSF factor comprise: cash, securities or other assets posted as initial margin for derivative contracts^{Footnote 24,Footnote 25}, and cash or other assets provided to contribute to the default fund of a central counterparty (CCP), regardless of whether those assets are on balance or off-balance sheet. Where securities or other assets posted as initial margin for derivative contracts would otherwise receive a higher RSF factor, they should retain that higher factor; other unencumbered performing loans^{Footnote 26} that do not qualify for the 35% or lower risk weight under the Standardised Approach for credit risk and have residual maturities of one year or more, excluding loans to financial institutions; unencumbered reverse mortgages that would qualify for a 50%, 75%, or 100% risk weight under the Standardised Approach for credit risk; unencumbered securities with a remaining maturity of one year or more and exchange-traded equities, that are not in default and do not qualify as HQLA according to the LCR; and physical traded commodities^{Footnote 27}, including gold. [Basel Framework, NSF 30.31]

3.3.11 Assets assigned a 100% RSF factor

Assets assigned a 100% RSF factor comprise: all assets that are encumbered for a period of one year or more; NSFR derivative assets as calculated according to paragraphs 40 and 41 net of NSFR derivative liabilities as calculated according to paragraphs 13 and 14, if NSFR derivative assets are greater than NSFR derivative liabilities^{Footnote 28}; all other assets not included in the above categories, including non-performing loans, the exposure amount that exceeds an 85% loan-to-value ratio (LTV) for unencumbered reverse mortgages where the current LTV is greater than 85%, loans to financial institutions with a residual maturity of one year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and defaulted securities; and 5% of derivative liabilities (i.e. negative replacement cost^{Footnote 29} amount) as calculated according to paragraph 13 (before deducting variation margin posted). [BCBS October 2017, Press Release] [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. Table 2: Summary of asset categories and associated RSF factors RSF factor Asset category 0% Coins and banknotes All central bank reserves Unencumbered Level 1 assets All claims on central banks with residual maturities of less than six months "Trade date" receivables arising from sales of financial instruments, foreign currencies and commodities Assets associated with collateral posted as variation margin that are deducted from the replacement cost of derivative liability amounts Matched secured financing transactions that meet the criteria for matched transactions Interdependent assets 5% Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against Level 1 and where the institution has the ability to freely rehypothecate the received collateral for the life of the loan 10% 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 15% All other unencumbered loans to financial institutions with residual maturities of less than six months not included in the above categories Unencumbered Level 2A assets 50% Unencumbered Level 2B assets HQLA encumbered for a period of six months or more and less than one year Loans to financial institutions and central banks with residual maturities between six months and less than one year Deposits held at other financial institutions for operational purposes All other assets not included in the above categories with residual maturity of less than one year, including loans to non-financial corporate clients, loans to retail and small business customers, loans to sovereigns and PSEs, and loans to national development banks 65% Unencumbered residential mortgages with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the Standardised Approach for credit risk Other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the Standardised Approach for credit risk Uunencumbered reverse mortgages that would qualify for a 35% risk weight under the Standardised Approach for credit risk 85% Cash, securities or other assets posted as initial margin for derivative contracts and cash or other assets provided to contribute to the default fund of a CCP Other unencumbered performing loans with risk weights greater than 35% under the Standardised Approach for credit risk and residual maturities of one year or more, excluding loans to financial institutions Unencumbered reverse mortgages that would qualify for a 50%, 75%, or 100% risk weight under the Standardised Approach for credit risk Unencumbered securities that are not in default and do not qualify as HQLA with a remaining maturity of one year or more and exchange-traded equities Physical traded commodities, including gold 100% All assets that are encumbered for a period of one year or more NSFR derivative assets net of NSFR derivative liabilities if NSFR derivative assets are greater than NSFR derivative liabilities 5% of derivative liabilities (i.e. negative replacement cost amount) calculated before deducting variation margin posted All other assets not included in the above categories, including non-performing loans, the exposure amount that exceeds 85% LTV for unencumbered reverse mortgages where the current LTV is greater than 85%, loans to financial institutions with a residual maturity of one year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and defaulted securities [Basel Framework, NSF 99.2]

3.3.12 Interdependent assets and liabilities

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: The individual interdependent asset and liability items must be clearly identifiable. The maturity and principal amount of both the liability and its interdependent asset should be the same. The institution is acting solely as a pass-through unit to channel the funding received (the interdependent liability) into the corresponding interdependent asset. The counterparties for each pair of interdependent liabilities and assets should not be the same. 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%: National Housing Act Mortgage Backed Securities (NHA MBS) liabilities including liabilities arising from transactions involving the Canada Mortgage Bond program, and their corresponding encumbered mortgages (up to the maximum of the amount of the recorded liabilities). This treatment explicitly excludes purchased NHA MBS and pooled and unsold NHA MBS; and Variation margin received from an institution's client and posted on the client's behalf to a CCP to clear derivative transactions, provided the institution does not guarantee performance of the third party. [Basel Framework, NSF 30.35]

3.3.13 Off-balance sheet exposures

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. Table 3: Summary of off-balance sheet categories and associated RSF factors RSF factor Off Balance Sheet Exposure 5% of the currently undrawn portion Irrevocable and conditionally revocable credit and liquidity facilities to any client 2% of the currently undrawn portion Unconditionally revocable credit and liquidity facilities provided to retail and small business customers 5% of the currently undrawn portion Unconditionally revocable credit and liquidity facilities provided to all other customers 3% Trade finance-related obligations (including guarantees and letters of credit) 5% Guarantees and letters of credit unrelated to trade finance obligations 0% Debt-buy back requests (including related conduits) 5% Structured products 0% Managed funds 5% Other non-contractual obligations [Basel Framework, NSF 30.34]

Annex 1 – Scope of application for Category I institutions

Wholesale funding reliance theshold calculation

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: Demand and notice deposits DPA 0873: Federal and provincial, total DPA 0874: Municipal or school corporations, total DPA 0875: Deposit-taking institutions, total DPA 0878: Other, total Fixed-term deposits DPA 0880: Federal and provincial, total DPA 0881: Municipal or school corporations, total DPA 2202: Deposit-taking institutions, total DPA 2339: Other, total DPA 2345: Acceptances, total Liabilities of subsidiaries other than deposits DPA 0620: call & other short loans payable, total DPA 0624: other than call and other short loans payable, total DPA 0632: Obligations related to borrowed securities, total DPA 0634: Obligations related to assets sold under repurchase agreements, total 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: Stable, insured deposits in a transactional account, provided by small business customers DPA 21201: eligible for a 3% run-off rate – in Canada DPA 21202: eligible for a 3% run-off rate – not in Canada DPA 21203: eligible for a 5% run-off rate Stable, insured deposits in non-transactional accounts with established relationships that make deposit withdrawal highly unlikely, provided by small business customers DPA 21204: eligible for a 3% run-off rate – in Canada DPA 21205: eligible for a 3% run-off rate – not in Canada DPA 21206: eligible for a 5% run-off rate Less stable deposits, provided by small business customers DPA 21207: insured deposits in non-transactional and no established relationship accounts DPA 21208: uninsured deposits DPA 21210: deposits denominated in a foreign currency DPA 21211: term deposits with remaining maturity > 30 days DPA 21232: Insured deposits received from funds and trusts where the balance is controlled by underlying small business customer Rate sensitive deposits directly managed by the client: DPA 21233: established relationship or deposit in a transactional account DPA 21234: no established relationship and not in a transactional account DPA 21235: term deposits managed by an unaffiliated third-party cashable or maturing in the next 30 days DPA 21236: demand deposits managed by unaffiliated 3rd party DPA 21237: less stable small business deposits subject to host jurisdiction requirements Total on-balance sheet assets is represented by DPA 1045 on OSFI's Balance Sheet (M4) regulatory return.

Implementation

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: Notify OSFI that this is the case within 60 days of the end of the fiscal quarter; and After confirmation from OSFI, adhere to the 100% NSFR minimum standard beginning on the end of the fiscal quarter occurring nine months after the last quarterly reference date in the moving average period calculation. 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.

Footnotes

Footnote 1 Following the format: [Basel Framework, XXX yy.zz]. Return to footnote 1 Footnote 2 https://www.bis.org/publ/bcbs144.htm. Return to footnote 2 Footnote 3 https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b6-2020.aspx. Return to footnote 3 Footnote 4 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. Return to footnote 4 Footnote 5 https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/CAR22_chpt2.aspx. Return to footnote 5 Footnote 6 NSFR derivative liabilities = (derivative liabilities) – (total collateral posted as variation margin on derivative liabilities). Return to footnote 6 Footnote 7 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 Footnote 8 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 Footnote 9 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 Footnote 10 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 Footnote 11 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 Footnote 12 For clarity, central counterparties should be categorized as financial institutions under the NSFR. Return to footnote 12 Footnote 13 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] Return to footnote 13 Footnote 14 ASF = 0% x MAX ((NSFR derivative liabilities - NSFR derivative assets), 0). Return to footnote 14 Footnote 15 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 Footnote 16 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 Footnote 17 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. Return to footnote 17 Footnote 18 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. Return to footnote 18 Footnote 19 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 Footnote 20 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. Return to footnote 20 Footnote 21 https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/LR22.aspx. Return to footnote 21 Footnote 22 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 Footnote 23 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] Return to footnote 23 Footnote 24 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] Return to footnote 24 Footnote 25 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 Footnote 26 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 Footnote 27 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 Footnote 28 RSF = 100% x MAX ((NSFR derivative assets – NSFR derivative liabilities), 0). Return to footnote 28 Footnote 29 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

Chapter 4 – Net Cumulative Cash Flow

4.1 Objective

The Net Cumulative Cash Flow (NCCF) metric is used by OSFI (in conjunction with the other metrics specified in the LAR Guideline) to supervise and monitor liquidity at an individual financial institution. The NCCF measures an institution’s detailed cash flows in order to capture the risk posed by funding mismatches between assets and liabilities after the application of assumptions around the functioning of assets and modified liabilities (i.e. where rollover of certain liabilities is permitted). The NCCF measures an institution’s net cumulative cash flows both on the basis of the consolidated balance sheet and, where required, by major individual balance sheets and components. The metric: represents a stressed cash flow measure under a severe but plausible liquidity stress scenario, reflecting the continuation of core business operations and the consideration of relevant sources of cash inflows and outflows; helps identify gaps between contractual inflows and outflows for various time bands over and up to a 12 month time horizon, which indicate potential cash flow shortfalls an institution may need to address; and, helps OSFI supervise and monitor liquidity positions of institutions in a timely and effective manner in times of stress with the accelerated reporting of the metric. The NCCF calculates a horizon for net positive cash flows in order to capture the risk posed by funding mismatches between assets and liabilities. By utilizing this type of cash flow analysis, institutions may be able to better mitigate the risk of disruption to market confidence and maintain the ability to meet short-term liabilities and continue lending in a liquidity crisis. This aims to provide institutions with the time to find alternative sources of funding or to liquidate assets as needed. The NCCF necessitates that institutions consider structural liquidity risk, contingent liquidity risk and market liquidity risk. Through the NCCF analysis, institutions will consider their ability to withstand asset devaluations, losses of market confidence, and accelerated reductions in funding capacity during a period of stress. The NCCF analysis offers further perspective into the maturity profile of an institution’s balance sheet, and provides OSFI with additional assurance of the institution’s liquidity adequacy as a complement to internationally prescribed metrics. The scope of application of the NCCF includes Domestic Systemically Important Banks (DSIBs), and Category I and II institutions as defined in the SMSB Capital and Liquidity Guideline.^{Footnote 1}

4.2 Definition

The NCCF is a liquidity horizon metric that measures an institution’s net cumulative cash flow. Cash and security flows associated with assets and liabilities that have a contractual maturity should be considered based on their residual contractual maturity. For liabilities, rollover of existing liabilities is limited to retail and small business customer term deposits, bank-sponsored acceptances, and certain other operational and non-operational deposits (see Table 1). The threshold for small business customer deposits is $5 million or less for the NCCF, on an individual account basis. Run-off rates (i.e. outflows) associated with liabilities that have an indeterminate maturity (non-defined or open maturity), such as demand deposits, are applied over two time intervals – weekly for the first month^{Footnote 2} and monthly from month 2 to month 12 (see Section 4.6). Cash inflows from maturing assets and cash outflows arising from undrawn commitments are considered separately. The liquidity scenario assumed in the NCCF encompasses a combination of idiosyncratic and systemic stresses which measure the impacts of assumptions over a one year liquidity horizon. Stress assumptions result in: cash inflows representing the market value of eligible unencumbered liquid assets; partial run-off of retail and small business customer deposits; full or partial run-off of wholesale and corporate funding; cash inflows for maturing assets, reduced to recognize continued lending; and cash outflows from off-balance sheet items, including undrawn commitments. The time bands reported under the NCCF include weekly buckets for the first four weeks, monthly buckets for month 2 to month 12, and a greater than one year bucket.

4.3 Supervisory tool

The NCCF measures an institution’s surplus or deficit at a given time period, calculated as the difference between the sum of eligible cash inflows and the sum of prescribed cash outflows from the reporting date up to the time period considered. Accordingly, an institution’s survival horizon corresponds to the last period before which the NCCF turns negative and is expressed in weeks or in months. OSFI may, as necessary, require individual institutions to meet a supervisory-communicated, institution-specific NCCF survival horizon. In such instances, the supervisory-communicated, institution-specific NCCF survival horizon will be set by OSFI after considering the trend in financial market funding liquidity indicators and institution-specific liquidity metrics and risks. In addition, when determining the NCCF survival horizon for individual institutions, OSFI will consider such factors as operating and management experience, strength of parent, earnings, diversification of assets, type of assets, inherent risk of a business model and risk appetite. While OSFI collects NCCF data over a 12 month time horizon, it is expected that institutions’ liquidity management and internal transfer pricing consider its supervisory-communicated NCCF survival horizon. For periods beyond the supervisory-communicated NCCF survival horizon, institutions should monitor their liquidity for potential liquidity mismatches and cash flow shortfalls and manage liquidity in accordance with their internally defined risk appetite.

4.4 Scope of application

DSIBs and Category I institutions are subject to the “Comprehensive NCCF”, whereas Category II institutions are subject to the “Streamlined NCCF”, unless directed otherwise by OSFI. Most assumptions from the Comprehensive NCCF carry over to the Streamlined NCCF. However, where assumptions and/or requirements differ, a reference to the respective approach and specific provision are included below to outline the relevant expectations.

Comprehensive NCCF

The NCCF supervisory tool will be assessed in three parts by OSFI, on a: Consolidated basis; Canadian currency basis; and Major foreign currency basis, defined as US dollar (USD), Euro (EUR), and British pound sterling (GBP) balance sheet basis. During periods of idiosyncratic stress to specific regions or to individual institutions, OSFI may, as necessary, require a supervisory-communicated, institution-specific NCCF survival horizon to be met on a Canadian currency basis and/or a foreign currency balance sheet basis, including USD, EUR, GBP and any other currency determined to be necessary by OSFI. Foreign branches of institutions in Canada should be included in the aforementioned balance sheets where the branch balance sheet represents at least 5% of consolidated notional assets or where requested by OSFI. Subsidiary balance sheets should be reported and monitored separately, if the sum total of all subsidiary balance sheets is 5% of consolidated notional assets, or as required by OSFI.

Streamlined NCCF

The Streamlined NCCF is only assessed on a consolidated basis with all currencies aggregated and reported in Canadian dollars. Institutions completing the Streamlined NCCF return are only required to report on collateral inflows and outflows if they also file the regulatory return Collateral and Pledging (H4) or if they are otherwise directed to do so by OSFI.

4.5 Cash inflows

Cash inflow treatments differ based on whether or not the asset meets the criteria for unencumbered liquid assets outlined below. Eligible unencumbered liquid assets (EULA) are treated as cash inflows in the first time bucket (i.e. week one), at market value, subject to relevant haircuts. Additional inflows of unencumbered liquid assets from maturing repurchase transactions of eligible liquid assets should be treated as cash inflows and assigned to the appropriate time bucket after application of the relevant haircuts. To qualify for the stock of unencumbered liquid assets under the NCCF, the assets should be eligible collateral at central banks under normal operating conditions, as specified in paragraphs 23 and 24, and must be “unencumbered”, i.e. free of legal, regulatory, contractual or other restrictions on the ability of the institution to liquidate, sell, transfer, or assign the asset. An asset in the stock should not be pledged to secure, collateralize or credit-enhance any transaction, nor be designated to cover operational costs (such as rents and salaries). The assets should also be accessible by the function charged with managing the liquidity of the institution (e.g. the treasurer) as outlined in Chapter 2, paragraph 21. For eligibility purposes, assets linked to total return swap (TRS) exposures will be given the same treatment as in the LCR (see Chapter 2, paragraph 47(c)). Institutions should only include liquid assets that it has the operational capability to monetize, meaning it has procedures and appropriate systems in place, including providing the function identified in Chapter 2, paragraph 21 with access to all necessary information to execute monetisation of any asset at any time. Only U.S. liquid assets eligible at the Bank of Canada should be considered fungible (i.e. mutually interchangeable) for NCCF liquidity measurement purposes for the Canadian dollar balance sheet under the Comprehensive NCCF. Subject to OSFI’s approval, other liquid assets may be eligible for inclusion in an institution’s respective foreign currency balance sheets and the consolidated balance sheet. In order to qualify as liquid assets under the NCCF, liquid assets held by subsidiaries, or domiciled outside Canada, should be freely transferable for regulatory purposes to the consolidated entity, meaning that there should not be regulatory, legal, tax, accounting or other impediments to their transfer. Assets held in legal entities without market access should only be included to the extent that they can be freely transferred to other entities that could monetize the assets. EULA received in reverse repo and securities financing transactions that are held at the institution, have not been rehypothecated, and are legally and contractually available for the institution's use can be considered as part of the pool of liquid assets and thus accorded immediate liquidity value (i.e. week one) after application of the relevant haircut. Institutions should not double count liquidity inflows or outflows associated with reverse repos. Institutions may receive liquidity value for collateral swaps provided they can clearly demonstrate that, at a minimum, the transactions are for a specified contract period, the securities used for the underlying collateral being swapped are outlined in the transaction details, mark-to-market procedures are understood and documented, and there is not substitution of collateral over the life of the contract, unless it is a like-for-like substitution of collateral. In addition, institutions must have adequate and ongoing market risk management control and oversight around this activity, and must recognize liquidity or cash flow implications at the termination of the swap. For the Canadian balance sheet, liquid assets are limited only to those eligible as collateral under the Standing Liquidity Facility at the Bank of Canada (see the Assets Eligible as Collateral under the Standing Liquidity Facility document at the following Assets Eligible as Collateral under the Standing Liquidity Facility document at the following link). Note that the Bank of Canada applies conditions to the use of these assets and that the asset list is subject to change. As such, institutions should use the most recent version of the aforementioned document when calculating their stock of liquid assets for NCCF purposes. For all foreign currency balance sheets, the stock of liquid assets must, at a minimum, be eligible collateral under normal operating conditions at the appropriate central bank, be unencumbered per paragraph 17, and must be approved by OSFI. OSFI reserves the right to restrict or alter this list at any time, in consideration of stressed markets or other circumstances. Cash inflow treatment for balance sheet assets that do not meet the aforementioned criteria for EULA is based on the asset’s residual contractual maturity, except: For residential and commercial mortgages, the scenario assumes that institutions will receive all payments (including interest payments and installments) from retail and small business customers that are fully performing and contractually due; at the same time, however, institutions are assumed to continue to extend residential and commercial mortgages, at a rate of 100% of contractual inflows. This results in no net eligible inflows from maturing residential and commercial mortgages. For business and government loans, the scenario assumes that institutions will receive all payments (including interest payments and installments) from businesses and governments that are fully performing and contractually due, however, institutions are assumed to continue to extend loans to businesses and governments, at a rate of 50% of contractual inflows. This results in a net inflow number of 50% of the contractual amount. Contingent inflows are not considered eligible cash inflows. All cash inflows from demand and term deposits held with other institutions are assumed to occur at the earliest contractual maturity date. In the case of demand deposits, this would mean the first week. Cash inflows from securities which are not considered EULA, should be reported at contractual maturity or the earliest option date (e.g. callable bonds). Cash inflows are limited to the face value of the security. Cash inflows from Acceptances (bankers’ acceptances) reported as an asset (customers’ liability under acceptances) on the balance sheet should occur at the latest contractual maturity date of the underlying facility. Non-financial common equity shares that meet the requirements for Level 2B asset treatment in the LCR (i.e. meet the criteria outlined in Chapter 2, paragraph 47(c) and the operational requirements outlined in Chapter 2, section 2.2.A.2) will be given cash inflow treatment in NCCF, after application of a 50% haircut, in week 4. For eligibility purposes, assets linked to total return swap (TRS) exposures will be given the same treatment as in LCR (see Chapter 2, paragraph 47(c)). Financial institution common equity shares will be given cash inflow value according to the following schedule – 12.5% in month 2, 25% in month 3, and 12.5% in month 4, provided the operational requirements outlined in Chapter 2, section 2.2.A.2 are met. Precious metals and other commodities receive no cash inflow value because their liquidity characteristics indicate a low level of confidence that cash inflows will occur within one year. Inflows from loans that have no specific maturity (i.e. have non-defined or open maturity) should not be included. An exception to this would be minimum payments of principal, fee or interest associated with an open maturity loan, which are contractually due within a specific period. These minimum payment amounts are assumed to occur at the latest possible time band within that period. Cash inflows from swapped intra-bank loans should occur at contractual maturity of the loan. These transactions occur when funds are transferred from one balance sheet to another. The originating balance sheet generates a swapped intra-bank loan by swapping funds from one currency to another (e.g., an area within a FI swaps U.S. dollar deposits to Canadian dollars and lends the funds to another area within the institution). Cash inflows from reverse repurchase agreements which do not meet the conditions outlined in paragraphs 16 to 24 are assumed to occur at contractual maturity. Cash inflows from securities borrowed are assumed to occur at contractual maturity for the principal amount borrowed. Interest will not be recognized as a cash inflow. All derivative-related cash inflows should be included at the expected contractual payment dates in accordance with their existing valuation methodologies. Cash flows may be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. The amounts of derivatives cash inflows and outflows should be calculated in accordance with other provisions of the methodology described in paragraph 46. In accordance with the principle that institutions should not double count liquidity inflows or outflows, where derivatives are collateralised by eligible liquid assets, cash inflows should be calculated net of any corresponding cash or contractual collateral outflows that would result, all other things being equal, from contractual obligations for cash or collateral to be posted by the institution, given these contractual obligations would reduce the pool of eligible liquid assets. Balances related to assets not mentioned above are to be reported in the NCCF, but no cash inflow value will be attributed to them.

4.6 Cash outflows

The cash outflow treatment for existing liabilities differs depending on whether the liability has a contractual maturity or whether the liability has an indeterminate maturity (non-defined or open maturity). On-balance sheet items, and certain off-balance sheet items are all considered as sources of cash outflows under the NCCF. Balances should be run-off on a declining balance basis. Consistent with the underlying intent of the metric, no rollover of existing liabilities is generally assumed to take place, with the exception of retail and small business customer term deposits, bankers’ acceptances, and select term deposits from non-financial counterparties. Run-off rates for retail, including small business customers, will be the same as equivalent monthly demand deposit run-offs. However, these term deposits will be assumed to renew at the same tenor as the original deposit, less the equivalent demand deposit monthly run-off rate. Run-off rates for bankers’ acceptances and select term deposits from non-financial counterparties are described further in paragraphs 45 and 58. For cashable products in which the customer has an option for early redemption, the balance should be treated as a demand deposit commencing at the first customer option date and allocated to the appropriate demand deposit and run-off rate category. If product design includes penalties that sufficiently discourage early redemption, OSFI may consider exceptions on a bilateral basis. The general treatment described in paragraph 39 (i.e. no rollover of liabilities) applies to: Repurchase agreements; Term deposits (other than retail and small business customer term deposits and select non-financial counterparties); Other wholesale liabilities (other than bankers’ acceptances), including commercial paper, certificates of deposit, deposit notes, and bonds; and, Outflows from an FI’s own ABCP, SIVs, and securitizations.^{Footnote 3} Cash outflows from swapped intra-bank deposits should occur in full at contractual maturity. These transactions occur when funds are transferred from one balance sheet to another. The originating balance sheet generates a swapped intra-bank deposit by swapping funds from one currency to another (e.g., an area within a FI swaps U.S. dollar deposits to Canadian dollars and lends the funds to another area within the institution). Cash flows associated with securities lent are assumed to occur at contractual maturity for the principal amount borrowed. Interest will not be recognized as a cash outflow. Securities sold short and funding guarantees to subsidiaries and branches should all be assumed to have immediate cash outflows (i.e. first maturity bucket). 75% of the outstanding amount of bank-sponsored Acceptances (bankers’ acceptances) reported as a liability on the balance sheet should be recorded as an outflow on a declining balance basis occurring on the earliest maturity date of each acceptance (i.e. the remaining 25% is considered to be rolled over). All other Acceptances should roll off at 100%. All derivative-related cash outflows should be included at the expected contractual payment dates in accordance with their existing valuation methodologies. Cash flows may be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. Options should be assumed to be exercised when they are ‘in the money’ to the option buyer. In accordance with the principle that institutions should not double count liquidity inflows or outflows, where derivative payments are collateralised by eligible liquid assets, cash outflows should be calculated net of any corresponding cash or collateral inflows that would result, all other things being equal, from contractual obligations for cash or collateral to be provided to the institution, if the institution is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the collateral is received. Run-off rates (i.e. outflows) associated with liabilities with an indeterminate maturity (non-defined or open maturity), such as demand/notice (less than 30 days notice) deposits, are applied over two time intervals – weekly for the first month and monthly from month 2 to month 12. Retail deposits are defined as deposits placed with an institution by a natural person and are divided into “stable” and “less stable” categories per Chapter 2, paragraphs 55 to 64. Institutions should refer to these paragraphs for definitions related to the concepts described for retail deposits below.

Stable retail deposits

Insured retail deposits that are in transactional accounts or where the depositors have an established relationship with the institution that make deposit withdrawal highly unlikely per Chapter 2, paragraph 56 are generally assigned a weekly run-off rate of 1.0% over each of the first four weeks and a monthly run-off rate of 0.75% over each of the subsequent eleven months. However, such deposits may be eligible for a weekly run-off rate of 0.5% over each of the first four weeks and a monthly run-off rate of 0.75% over each of the subsequent eleven months if the criteria outlined in Chapter 2, paragraph 59 are met.

Less stable retail deposits

Demand deposits where an unaffiliated third-party directly manages the funds are assigned a weekly run-off rate of 7.5% over each of the first four weeks and a monthly run-off rate of 10% over each of the subsequent eleven months. Term deposits directly managed by an unaffiliated third party that are maturing or cashables in the next four weeks are assigned a weekly run-off rate of 5% over each of the first four weeks and a monthly run-off rate of 7.5% over each of the subsequent eleven months. Rate sensitive deposits (RSD) where the client directly manages the funds and where the client does not have an established relationship with the institution and the account is not transactional are assigned a weekly run-off rate of 3.75% over each of the first four weeks and a monthly run-off rate of 3.75% over each of the subsequent eleven months. Rate sensitive deposits where the client directly manages the funds and where the client has an established relationship with the institution or the account is transactional are assigned a weekly run-off rate of 1.25% over each of the first four weeks and a monthly run-off rate of 3.75% over each of the subsequent eleven months. Insured retail deposits that are not in transactional accounts or where the depositors do not have other established relationships with the institution that make deposit withdrawal highly unlikely are assigned a weekly run-off rate of 1.25% over each of the first four weeks and a monthly run-off rate of 2.5% over each of the subsequent eleven months. Uninsured retail deposits are assigned a weekly run-off rate of 1.25% over each of the first four weeks and a monthly run-off rate of 3.75% over each of the subsequent eleven months.

Wholesale funding

Unsecured wholesale funding is defined as those liabilities and general obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships) and are not collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution. Unsecured wholesale funding provided by small business customers is treated the same way as retail, effectively distinguishing between a “stable” portion of funding provided by small business customers and different buckets of “less stable” funding. The same bucket definitions and associated run-off factors apply as for retail deposits. All non-small business customer unsecured term wholesale funding is assumed to run-off at 100% at contractual maturity, with the exception of term deposits from non-financial corporates, sovereigns, central banks, multilateral development banks, and PSE customers, which are assumed to run-off at 40% at contractual maturity. These term deposits will be assumed to renew with a 30-day maturity, net of the 40% run-off rate at contractual maturity. For deposits with enforceable notification periods, where the client has provided the institution a withdrawal notification of the funds, a 100% run-off rate will be applied to these amounts.

Operational deposits

For unsecured demand wholesale funding provided by non-small business customers, where the institution has operational deposits generated by clearing, custody and cash management activities that meet the criteria outlined in Chapter 2, paragraphs 73 to 83, these deposits are generally assigned a weekly run-off factor of 2.5% for each of the first four weeks and a monthly run-off rate of 5% over each of the subsequent eleven months, regardless of the counterparty type. Exceptions to the treatment prescribed in paragraph 59, relate to the portion of operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance, which can receive one of the following treatments: A weekly run-off rate of 0.75% for each of the first four weeks and a monthly run-off rate of 3% over each of the subsequent eleven months if the jurisdiction where the deposit is located permits use of the 3% run-off factor under the LCR for certain insured retail deposits per Chapter 2, paragraph 59; A weekly run-off rate of 1.25% for each of the first four weeks and a monthly run-off rate of 5% over each of the subsequent eleven months if the jurisdiction where the deposit is located does not permit use of the 3% run-off factor under the LCR for certain insured retail deposits.

Other non-operational demand deposits

All demand deposits and other extensions of unsecured funding from non-financial corporate customers (that are not categorised as small business customers) and both domestic and foreign sovereign, central bank, multilateral development bank, and PSE customers that are not specifically held for operational purposes per paragraphs 59 and 60 should be assigned a weekly run-off factor of 3% for each of the first four weeks and a monthly run-off rate of 10% over each of the subsequent eleven months. An exception to the treatment prescribed for non-operational deposits in paragraph 61 relates to unsecured demand wholesale funding provided by non-financial corporate customers, sovereigns, central banks, multilateral development banks, and PSEs without operational relationships if the entire amount of the deposit is fully covered by an effective deposit insurance scheme (as defined in Chapter 2, paragraph 57) or by a public guarantee that provides equivalent protection. In such cases, the deposits should be assigned a weekly run-off factor of 3% for each of the first four weeks and a monthly run-off rate of 5% over each of the subsequent eleven months. All demand deposits and other funding from other institutions (including banks, securities firms, insurance companies, etc.), fiduciaries^{Footnote 4}, beneficiaries^{Footnote 5}, conduits and special purpose vehicles, affiliated entities of the institution and other entities that are not specifically held for operational purposes (as defined above) and not included in the above categories are assumed to run-off evenly and in full over the first four weeks.

Off-balance sheet items

Institutions should consider cash outflows stemming from off-balance items. Credit and liquidity facilities are defined as explicit contractual agreements or obligations to extend funds at a future date to retail or wholesale counterparties. For purposes of the NCCF, these facilities include contractually irrevocable (“committed”) or conditionally revocable agreements to extend funds in the future to third parties, as well as unconditionally revocable "uncommitted" credit and liquidity facilities. For the purposes of this standard, the currently undrawn portion of these facilities is calculated net of any EULA, if: (i) the EULA have already been posted as collateral by the counterparty to secure the facilities or there is a contractual obligation to post EULA as collateral when the counterparty will draw down the facility (e.g. a liquidity facility structured as a repo facility), (ii) if the institution is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the facility is drawn, and (iii) there is no undue correlation between the probability of drawing the facility and the market value of the collateral. The collateral can be netted against the outstanding amount of the facility to the extent that this collateral is not already counted in the stock of EULA, in line with the principle that items cannot be double-counted. A liquidity facility is defined as any committed, undrawn back-up facility that would be utilised to refinance the debt obligations of a customer in situations where such a customer is unable to rollover that debt in financial markets (e.g. pursuant to a commercial paper programme, secured financing transactions, obligations to redeem units, etc.). For the purpose of the NCCF, for asset-backed commercial paper liquidity facilities, the amount of the commitment to be treated as a liquidity facility is the amount of the currently outstanding debt issued by the customer (or proportionate share, if a syndicated facility) maturing within a 30 day period that is backstopped by the facility. The portion of a liquidity facility that is backing debt that does not mature within the 30-day window is excluded from the scope of the definition of a facility. Any additional capacity of the facility (i.e. the remaining commitment) would be treated as a committed credit facility with its associated drawdown rate as specified in paragraph 68. General working capital facilities for corporate entities (e.g. revolving credit facilities in place for general corporate or working capital purposes) will not be classified as liquidity facilities, but as credit facilities. Credit and liquidity facilities to retail and small business customers are expected to be drawn on week 1, or on the earliest contractual date^{Footnote 6}, after which time the balance is assumed to remain stable (i.e. no inflow due to reimbursement), according to the following rates: 0% for facilities extended to transactors, defined as i) obligors in relation to facilities such as credit cards and charge cards with an interest free grace period, where the accrued interest over the previous 12 months is less than $50, or ii) obligors in relation to overdraft facilities or lines of credit if there has been no drawdown over the previous 12 months^{Footnote 7}; 2% for other uncommitted facilities (i.e. those that do not qualify for the 0% rate); and, 5% for other committed facilities. Committed credit facilities to other customers are expected to be drawn on week 1, or on the earliest contractual date, after which time the balance is assumed to remain stable (i.e. no inflow due to reimbursement), according to the following rates: Under the Streamlined NCCF, a 10% outflow rate will be assigned to the undrawn amount of facilities extended to non-financial corporates; Under the Comprehensive NCCF, for facilities extended to non-financial corporates, the following rates will be applicable to undrawn amounts: Where the counterparty is considered a corporate client, defined as a corporate belonging to a group with consolidated annual revenues greater than CAD $750 million^{Footnote 8}: 5% if the institution provides services to the counterparty that generate operational deposits, i.e. has an operational relationship, as described in paragraph 59; and 15% otherwise. Where the facilities are not subject to the outflow rates in sub-paragraph b.1. above: 5% if the institution provides services to the counterparty that generate operational deposits, i.e. has an operational relationship as described in paragraph 59; and 10% otherwise. 10% for facilities extended to sovereigns and central banks, PSEs, and multilateral development banks; 40% for facilities extended to deposit-taking institutions subject to prudential supervision; 40% for facilities extended to other financial institutions including securities firms, insurance companies, fiduciaries^{Footnote 9}, and beneficiaries^{Footnote 10}; 100% to other legal entities (including SPEs^{Footnote 11}, conduits and special purpose vehicles, and other entities not included in the prior categories). Uncommitted credit facilities to other customers are expected to be drawn on week 1, at a rate of 5%, or on the earliest contractual date, after which time the balance is assumed to remain stable (i.e. no inflow due to reimbursement). Committed liquidity facilities to other customers are expected to be drawn on week 1, or on the earliest contractual date, after which time the balance is assumed to remain stable (i.e. no inflow due to reimbursement), according to the following rates: 30% for facilities extended to non-financial corporates, sovereigns and central banks, PSEs, and multilateral development banks; 40% for facilities extended to deposit-taking institutions subject to prudential supervision; 100% for facilities to other financial institutions including securities firms, insurance companies, fiduciaries, and beneficiaries; 100% for liquidity facilities for Asset Backed Commercial Paper for maturities within 30 days and the unutilized capacity that can be drawn within 30 days (i.e. 0% otherwise); 100% for facilities to other legal entities (including SPEs, conduits and special purpose vehicles, and other entities not included in prior categories). Uncommitted liquidity facilities to other customers are expected to be drawn on week 1, at a rate of 5%, after which time the balance is assumed to remain stable (i.e. no inflow due to reimbursement). Obligations stemming from trade finance instruments are expected to result in outflows on week 1, at a rate of 3%. Trade finance instruments consist of trade-related obligations directly underpinned by the movement of goods or the provision of services, such as: Documentary trade letters of credit, documentary and clean collection, import bills, and export bills; and Guarantees directly related to trade finance obligations, such as shipping guarantees. Other guarantees and letters of credit unrelated to trade finance obligations (i.e. that do not fall under the scope of paragraph 72), are expected to generate outflows on week 1, equivalent to 5% of the obligations. Balances related to on-balance sheet liabilities not mentioned above are to be reported in the NCCF, but no cash outflow value is attributed to them. Table 1 and 2 present, respectively, the summarized treatment of unsecured funding by counterparty and deposit types and the summarized treatment of credit and liquidity facilities. Table 1 Paragraph Deposit Type Weekly run-off rate (first month) Monthly run-off rate (months 2 to 12)^{Table Footnote *} 49, 57 Insured retail and small business - stable (demand and term deposits):   Where criteria outlined in Chapter 2, paragraph 59 are met 0.50% 0.75% Where criteria outlined in Chapter 2, paragraph 59 are not met 1.00% 0.75% 50, 57 Demand deposits - funds managed by unaffiliated third party 7.5% 10% 51, 57 Term deposits (maturing or cashable in next 4 weeks) managed by unaffiliated third party 5% 7.5% 52, 57 RSD - client managed, no relationship, account not transactional 3.75% 3.75% 53, 57 RSD - client managed, established relationship or account transactional 1.25% 3.75% 54, 57 Insured retail and small business - not a transactional account or no relationships 1.25% 2.5% 55, 57 Uninsured retail and small business (demand and term deposits) 1.25% 3.75% 58 Unsecured wholesale term funding:   Term deposits from non-financial corporates, sovereigns, central banks, multilateral development banks, and PSE customers. 40% at maturity All other non-small business customers 100% at maturity 59, 60 Non-financial corporates, sovereigns, central banks, PSEs, MDBs, other FIs and other legal entities - operational deposits:   Where the deposit is not fully covered by deposit insurance 2.5% 5% Where the deposit is fully covered by deposit insurance and:     Jurisdiction where the deposit is located permits a 3% run-off factor 0.75% 3% Jurisdiction where the deposit is located does not permit a 3% run-off factor 1.25% 5% 61, 62 Non-financial corporates, sovereigns, central banks, PSEs and MDBs - non-operational deposits:   Where the deposit is not covered by an effective deposit insurance scheme or public guarantee 3% 10% Where the deposit is covered by an effective deposit insurance scheme or public guarantee 3% 5% 63 All other counterparties (including other FIs and other legal entities) - non-operational deposits 100% (equally runoff over 4 weeks) n/a

Table 1 Footnote

Footnote * Note that there should be no run-off beyond 100% of the original balance of any existing liability in the NCCF, and balances should be run-off on a declining balance basis. Return to footnote * Table 2 Paragraph Commitment Type Outflow Rate (week 1 or earliest contractual date) 67 Credit and liquidity facilities to retail and small business customers:   Facilities extended to transactors; 0% Other uncommitted facilities; 2% Other committed facilities. 5% 68 Committed credit facilities to non-financial corporates:   Streamlined NCCF 10% Comprehensive NCCF, where:   The customer is a corporate client:   Absence of an operational relationship 15% Presence of an operational relationship 5% The customer is a commercial client:   Absence of an operational relationship 10% Presence of an operational relationship 5% 68 Committed credit facilities to other customers, where the counterparties are:   Sovereigns, central banks, PSEs, and multilateral development banks 10% Deposit-taking institutions subject to prudential supervision 40% Other financial institutions including securities firms, insurance companies, fiduciaries and beneficiaries 40% Other legal entities (including SPEs, conduits and special purpose vehicles, and other entities not included in prior categories) 100% 69 Uncommitted credit facilities to non-retail and non-small business customers 5% 70 Committed liquidity facilities to non-retail and non-small business customers, where the counterparties are:   Non-financial corporates, sovereigns and central banks, PSEs, and multilateral development banks 30% Deposit-taking institutions subject to prudential supervision 40% Other financial institutions including securities firms, insurance companies, fiduciaries, and beneficiaries 100% For liquidity facilities backstopping ABCPs: for maturities within 30 days and unutilized capacity that can be drawn within 30 days 100% Other legal entities (including SPEs, conduits and special purpose vehicles, and other entities not included in prior categories). 100% 71 Uncommitted liquidity facilities to non-retail and non-small business customers 5% 72 Trade finance instruments 3% 73 Other guarantees and letters of credit unrelated to trade finance obligations 5%

Footnotes

Footnote 1 Refer to Chapter 1 for the scope of application for federally regulated deposit taking institutions that are themselves subsidiaries, and that have a parent that is either a DSIB or a foreign bank subsidiary. Return to footnote 1 Footnote 2 Cash flows related to days 29, 30 and 31 of a given month should be reported in the week 4 bucket and applied the weekly run-off rate assigned to week 4 cash flows. Cash flows related to the remaining days of week 5 should be reported in the month 2 bucket and applied the monthly run-off rate assigned to month 2 flows. Return to footnote 2 Footnote 3 Where financing is arranged though structured investment vehicles, financial institutions should consider the inability to refinance maturing debt during liquidity crises. Return to footnote 3 Footnote 4 Fiduciary is defined in this context as a legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles. Return to footnote 4 Footnote 5 Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract. Return to footnote 5 Footnote 6 Institutions can only recognize outflows after week 1 on the basis that the earliest contractual requirement to extend fund is longer than one week and where the institution has determined that refusing to advance funds before the end of the notice period, as requested by the customer, would not likely cause material reputational damage to the institution or otherwise impair ongoing viability. Return to footnote 6 Footnote 7 New accounts will not be deemed transactors until the account has been open for at least 12 months and the definition of a transactor is satisfied. Return to footnote 7 Footnote 8 In making the assessment for the revenue threshold, the amounts must be as reported in the audited financial statements of the corporates or, for corporates that are part of consolidated groups, their consolidated groups (according to the accounting standard applicable to the ultimate parent of the consolidated group). The figures must be based either (i) on the average amounts calculated over the prior three years, or (ii) on the latest amounts available to the institution, updated at least every three years. The classification of clients should be consistent with the classification of general corporate exposures not eligible for the AIRB approach under the CAR Guideline, as set out in CAR Chapter 5, section 5.2.2. Return to footnote 8 Footnote 9 Fiduciary is defined in this context as a legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles. Return to footnote 9 Footnote 10 Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract. Return to footnote 10 Footnote 11 A special purpose entity (SPE) is defined in the Basel Consolidated Framework (Basel CRE 40.21) as a corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust. Return to footnote 11

Chapter 5 – Operating Cash Flow Statement

5.1 Objective

The Operating Cash Flow Statement (OCFS) is used by OSFI as a supervisory tool to measure and monitor liquidity for Category III institutions, as defined in OSFI's Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions Guideline, which are not subject to the other liquidity metrics specified in the LAR Guideline (i.e., the LCR (Chapter 2), the NSFR (Chapter 3), and NCCF (Chapter 4)). The OCFS is a simple cash flow forecasting measure that factors in limited behavioural aspects captured by prescribed inflow and outflow rates. The metric provides an indication of an institution's horizon of positive cash flow based on its cumulative stock of unencumbered liquid assets, contractual cash inflows, and contractual cash outflows. The metric extends to a one-year horizon. The OCFS is not a regulatory standard and thus does not have a defined minimum required threshold. However, OSFI may, as necessary, require institutions to meet a supervisory-communicated, institution-specific OCFS level. In such instances, the supervisory-communicated, institution-specific OCFS level will be set by OSFI after considering the trend in financial market and institution-specific factors such as operating and management experience, strength of parent, earnings, diversification of assets, type of assets, inherent risk of a business model and risk appetite. Where set by OSFI, a supervisory-communicated, institution-specific OCFS level will require the institution to maintain a positive level of cumulative liquid assets and net cash flows up to a certain point in time. The OCFS is useful in assessing the potential liquidity gaps that would have to be funded or that could unduly strain the institution's liquidity position. The OCFS will be supplemented by detailed supervisory assessment of an institution's liquidity risk management framework in line with OSFI's Guideline B-6 Liquidity Principles^{Footnote 1}.

5.2 Definition

The OCFS is a liquidity horizon metric that measures an institution's liquid assets, operating cash inflows and cash outflows, and net cumulative cash flow over different periods within a 12-month time horizon. The time bands reported under the OCFS include weekly buckets for the first four weeks and monthly buckets for months 2 to month 12. OCFS (Weeks) = Liquid assets + Σ (Inflows – Outflows), Cumulative Liquid assets are those assets that are unencumbered^{Footnote 2}, and that can be converted to cash at little or no loss of value in private markets. Liquid assets^{Footnote 3} include coins and banknotes, securities representing claims on or guaranteed by a sovereign issuer, securities of a provincial or territorial government, and deposits with other federally- or provincially-regulated financial institutions. Deposits with other financial institutions must be available on demand (or overnight) and not subject to constraints^{Footnote 4} on withdrawal. For purposes of the OCFS, eligible liquid assets are not subject to haircuts. Operating cash inflows include the institution's sources of income derived from its recurring operations. These would include fees collected for managing assets, from custody services, investment advice, interest on investments and loans as well as maturing investments and maturing loans (to the extent these loans would not be rolled over). Cash outflows include operating expenses incurred to generate the institution's income as well as, for institutions that take deposits, a withdrawal of a portion of these deposits as outlined below. Expenses include non-payroll operating expenses (e.g., rent), payroll, interest payable and other operating expenses. Deposits are to be classified as either demand or term deposits. The balance at maturity for term deposits and balance of demand deposits at the time of computation will be subject to an OSFI-prescribed retention rate. The retention rates will differ based on attributes of the deposit. More specifically, deposits will be classified as: retail and small business^{Footnote 5} customer deposits – insured; retail and small business customer deposits – uninsured; brokered deposits^{Footnote 6}; and all other deposits. Retention rates are factored in by applying a run-off rate to the balance of each category, as outlined in Annex 1, on a declining balance basis (example provided in the return instructions) for each period. Term deposits will be subject to an assumed run-off at maturity, i.e., at maturity a portion is assumed to run-off and an outflow is recorded in the period while the remaining balance is expected to renew at the same tenor as the original deposit. Where an institution has extraordinary items and other non-recurring items that it believes should be considered for inclusion in the OCFS calculation, the institution should first discuss these items with its OSFI Lead Supervisor prior to incorporating the item(s) as an operating cash inflow or operating cash outflow. The sum of liquid asset holdings and net cash flows must be calculated and reported weekly for the first 4 weeks and then monthly for months 2 to 12.

Annex 1 – OCFS deposit run-off rates

Demand deposits Weekly run-off rate Monthly run-off rate Retail and small business deposits – insured 1.25% 1% Retail and small business deposits – uninsured 2.5% 5% Brokered deposits 10% 10% All other deposits 3% 10% Term deposits Run-off rate at maturity Retail and small business deposits – insured 5% Retail and small business deposits – uninsured 7.5% Brokered deposits 10% All other deposits 10%

Footnotes

Footnote 1 https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b6-2020.aspx. Return to footnote 1 Footnote 2 "Unencumbered" means free of legal, regulatory, contractual or other restriction on the ability of the institution to liquidate, sell, transfer, or assign the asset. Return to footnote 2 Footnote 3 Liquid assets for the purpose of the OCFS equate to Level 1 assets as described in the LCR (see LAR Chapter 2, paragraph 43). Securities guaranteed by the Canadian federal government (e.g. NHA MBS) can be counted towards the institution's stock of liquid assets, provided they are unencumbered. Return to footnote 3 Footnote 4 For example, deposits placed with another financial institution to access payment systems would not be considered free of constraints. Return to footnote 4 Footnote 5 Small business customers are defined in line with the definition of loans extended to small businesses. See OSFI's Capital Adequacy Requirements Guideline, Chapter 4, paragraph 83. Return to footnote 5 Footnote 6 Brokered deposits are deposits that are sourced though a third party, i.e., where the underlying customer does not directly place the deposit with the institution (or with the institution's parent). Return to footnote 6

Chapter 6 – Liquidity Monitoring Tools

This chapter is drawn from the Basel Committee on Banking Supervision's (BCBS) Basel III framework, Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013 - Part 2, Monitoring tools). 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 paragraph^{Footnote 1}. In addition to the LCR (Chapter 2) and the NSFR (Chapter 3), which are to be used as standards, and the NCCF (Chapter 4) and Operating Cash Flow Statement (Chapter 5), which are supervisory tools, this section outlines a set of additional metrics to be used as consistent monitoring tools. These metrics capture specific information related to an institution's cash flows, balance sheet structure, available unencumbered collateral and certain market indicators. [Basel Framework, SRP 50.1] The suite of liquidity monitoring tools described in this chapter are not standards and thus do not have defined minimum required thresholds. However, OSFI reserves the right to set supervisory requirements for any of the suite of liquidity metrics as required. These metrics, together with the standards and supervisory tools mentioned above, provide the cornerstone of information that aids OSFI in assessing the liquidity risk of an institution. In utilising these metrics, OSFI will take action when potential liquidity difficulties are signaled through a negative trend in the metrics, or when a deteriorating liquidity position is identified, or when the absolute result of the metric identifies a current or potential liquidity problem. Examples of actions that OSFI can take are outlined in the BCBS Sound Principles^{Footnote 2} (paragraphs 141 to 143). [Basel Framework, SRP 50.2] OSFI Notes Although the metrics outlined in this chapter are useful tools to monitor various aspects of the liquidity risk faced by institutions, the scope of application is limited to Domestic Systemically Important Banks (DSIBs) and Category I and Category II institutions, as described in OSFI’s Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions Guideline. In addition, the Institution-specific information in Section 6.5 generally only applies to DSIBs. OSFI will notify individual Category I or Category II institutions if reporting of this data is required. The metrics discussed in this section include the following: Contractual maturity mismatch; Concentration of funding; Available unencumbered assets; LCR by significant currency; Market-related monitoring tools; and Liquidity Activity Monitor.

6.1. Contractual maturity mismatch

OSFI Notes OSFI will utilize the Net Cumulative Cash Flow (NCCF) metric, as outlined in Chapter 4, to provide such a maturity mismatch metric. Non-DSIBs must provide a forecast of future operational expenses and non-interest income mapped to the NCCF time bands. Forecasting capabilities should be build up so that institutions are able to call on these numbers quickly, should OSFI require these figures as part of enhanced monitoring. Expectations with regard to the scope and granularity of these forecasted items will be discussed with OSFI.

6.2. Concentration of funding

A. Objective

This metric is meant to identify those sources of wholesale funding that are of such significance that withdrawal of this funding could trigger liquidity problems. The metric thus encourages the diversification of funding sources recommended in the BCBS Sound Principles and OSFI's Guideline B-6: Liquidity Principles. [Basel Framework, SRP 50.14]

B. Definition and practical application of the metric

A. Funding liabilities sourced from each significant counterparty as a % of total liabilities B. Funding liabilities sourced from each significant product/instrument as a % of total liabilities C. List of asset and liability amounts by significant currency 1. Calculation of the metric The numerator for A and B is determined by examining funding concentrations by counterparty or type of instrument/product. Both the absolute percentage of the funding exposure, as well as significant increases in concentrations should be monitored. [Basel Framework, SRP 50.15] (i) Significant counterparties The numerator for counterparties is calculated by aggregating the total of all types of liabilities to a single counterparty or group of connected or affiliated counterparties, as well as all other direct borrowings, both secured and unsecured, which the institution can determine arise from the same counterparty^{Footnote 3} (such as for overnight commercial paper / certificate of deposit (CP/CD) funding). [Basel Framework, SRP 50.16] A "significant counterparty" is defined as a single counterparty or group of connected or affiliated counterparties accounting in aggregate for more than 1% of the institution's total balance sheet, although in some cases there may be other defining characteristics based on the funding profile of the institution. A group of connected counterparties is, in this context, defined in the same way as in the "Large Exposure" regulation of the host country in the case of consolidated reporting for solvency purposes. Intra-group deposits and deposits from related parties should be identified specifically under this metric, regardless of whether the metric is being calculated at a legal entity or group level, due to the potential limitations to intra-group transactions in stressed conditions. [Basel Framework, SRP 50.17] (ii) Significant instruments / products The numerator for type of instrument/product should be calculated for each individually significant funding instrument/product, as well as by calculating groups of similar types of instruments/products. [Basel Framework, SRP 50.18] A "significant instrument/product" is defined as a single instrument/product or group of similar instruments/products that in aggregate amount to more than 1% of the institution's total balance sheet. [Basel Framework, SRP 50.19] (iii) Significant currencies In order to capture the amount of structural currency mismatch in an institution's assets and liabilities, institutions are required to provide a list of the amount of assets and liabilities in each significant currency. [Basel Framework, SRP 50.20] OSFI Notes Institutions will not need to provide separate information on asset and liability categories where significant currencies relate to CAD, USD, GBP and EUR as this information will be provided through reporting of individual currency balance sheets and individual currency liquid assets in the NCCF. Institutions are, however, required to provide information on the NCCF asset and liability categories in currencies other than the four listed above, to the extent they are above the significant currency threshold described in paragraph 13. A currency is considered "significant" if the aggregate liabilities denominated in that currency amount to 5% or more of the institution's total liabilities. [Basel Framework, SRP 50.21] (iv) Time buckets The above metrics should be reported separately for the time horizons of less than one month, 1-3 months, 3-6 months, 6-12 months, and for longer than 12 months. [Basel Framework, SRP 50.22]

C. Utilisation of the metric

In utilising this metric to determine the extent of funding concentration to a certain counterparty, the institution must and OSFI will recognise that currently it is not possible to identify the actual funding counterparty for many types of debt.^{Footnote 4} The actual concentration of funding sources, therefore, could likely be higher than this metric indicates. The list of significant counterparties could change frequently, particularly during a crisis. OSFI will consider the potential for herding behaviour on the part of funding counterparties in the case of an institution-specific problem. In addition, under market-wide stress, multiple funding counterparties and the institution itself may experience concurrent liquidity pressures, making it difficult to sustain funding, even if sources appear well diversified. [Basel Framework, SRP 50.23] In interpreting this metric, one must recognise that the existence of bilateral funding transactions may affect the strength of commercial ties and the amount of the net outflow.^{Footnote 5} [Basel Framework, SRP 50.24] These metrics do not indicate how difficult it would be to replace funding from any given source. [Basel Framework, SRP 50.25] To capture potential foreign exchange risks, the comparison of the amount of assets and liabilities by currency will provide OSFI with a baseline for discussions with institutions about how they manage any currency mismatches through swaps, forwards, etc. It is meant to provide a base for further discussions with the institution rather than to provide a snapshot view of the potential risk. [Basel Framework, SRP 50.26]

6.3. Available unencumbered assets

A. Objective

These metrics provide OSFI with data on the quantity and key characteristics, including currency denomination and location, of institutions' available unencumbered assets. These assets have the potential to be used as collateral to raise additional high quality liquid assets (HQLA) or secured funding in secondary markets or are eligible at central banks and as such may potentially be additional sources of liquidity for the institution. [Basel Framework, SRP 50.27]

B. Definition and practical application of the metric

Available unencumbered assets that are marketable as collateral in secondary markets and Available unencumbered assets that are eligible for central banks' standing facilities An institution is to report the amount, type and location of available unencumbered assets that could serve as collateral for secured borrowing in secondary markets at prearranged or current haircuts at reasonable costs. [Basel Framework, SRP 50.28] Likewise, an institution should report the amount, type and location of available unencumbered assets that are eligible for secured financing with relevant central banks at prearranged (if available) or current haircuts at reasonable costs, for standing facilities only (i.e. excluding emergency assistance arrangements). This would include collateral that has already been accepted at the central bank but remains unused. For assets to be counted in this metric, the institution must have already put in place the operational procedures that would be needed to monetise the collateral. [Basel Framework, SRP 50.29] An institution should report separately the customer collateral received that the institution is permitted to deliver or re-pledge, as well as the part of such collateral that it is delivering or re-pledging at each reporting date. [Basel Framework, SRP 50.30] In addition to providing the total amounts available, an institution should report these items categorised by significant currency. A currency is considered "significant" if the aggregate stock of available unencumbered collateral denominated in that currency amounts 5% or more of the associated total amount of available unencumbered collateral (for secondary markets or central banks). [Basel Framework, SRP 50.31] In addition, an institution must report the estimated haircut that the secondary market or relevant central bank would require for each asset. In the case of the latter, an institution would be expected to reference, under business as usual, the haircut required by the central bank that it would normally access (which likely involves matching funding currency – e.g. ECB for euro-denominated funding, Bank of Japan for yen funding, etc.). [Basel Framework, SRP 50.32] As a second step after reporting the relevant haircuts, an institution should report the expected monetised value of the collateral (rather than the notional amount) and where the assets are actually held, in terms of the location of the assets and what business lines have access to those assets. [Basel Framework, SRP 50.33]

C. Utilisation of the metric

These metrics are useful for examining the potential for an institution to generate an additional source of HQLA or secured funding. They will provide a standardised measure of the extent to which the LCR can be quickly replenished after a liquidity shock either via raising funds in private markets or utilising central bank standing facilities. The metrics do not, however, capture potential changes in counterparties' haircuts and lending policies that could occur under either a systemic or idiosyncratic event and could provide false comfort that the estimated monetised value of available unencumbered collateral is greater than it would be when it is most needed. OSFI is aware that these metrics do not compare available unencumbered assets to the amount of outstanding secured funding or any other balance sheet scaling factor. To gain a more complete picture, the information generated by these metrics should be complemented with the maturity mismatch metric and other balance sheet data. [Basel Framework, SRP 50.34]

6.4. LCR by significant currency

A. Objective

While the LCR is required to be met in one single currency, in order to better capture potential currency mismatches, institutions should and OSFI will also monitor the LCR in significant currencies. This will allow both the institution and OSFI to track potential currency mismatch issues that could arise. [Basel Framework, SRP 50.35]

B. Definition and practical application of the metric

The definition of the stock of high-quality foreign exchange assets and total net foreign exchange cash outflows should mirror those of the LCR for common currencies.^{Footnote 6} [Basel Framework, SRP 50.36] A currency is considered "significant" if the aggregate liabilities denominated in that currency amount to 5% or more of the institution's total liabilities. [Basel Framework, SRP 50.37] As the foreign currency LCR is not a standard but a monitoring tool, it does not have an internationally defined minimum required threshold. Nonetheless, OSFI could set minimum monitoring ratios for the foreign exchange LCR, below which OSFI should be alerted. In this case, the ratio at which OSFI should be alerted would depend on the stress assumption. OSFI will evaluate institutions' ability to raise funds in foreign currency markets and the ability to transfer a liquidity surplus from one currency to another and across jurisdictions and legal entities. Therefore, the ratio should be higher for currencies in which OSFI evaluates an institution's ability to raise funds in foreign currency markets or the ability to transfer a liquidity surplus from one currency to another and across jurisdictions and legal entities to be limited. [Basel Framework, SRP 50.38]

C. Utilisation of the metric

This metric is meant to allow the institution and OSFI to track potential currency mismatch issues that could arise in a time of stress. [Basel Framework, SRP 50.39]

6.5. Market-related monitoring tools

A. Objective

High frequency market data with little or no time lag can be used as early warning indicators in monitoring potential liquidity difficulties at institutions. [Basel Framework, SRP 50.40]

B. Definition and practical application of the metric

While there are many types of data available in the market, OSFI will monitor data at the following levels to focus on potential liquidity difficulties: Market-wide information Information on the financial sector Institution-specific information [Basel Framework, SRP 50.41] 1. Market-wide information OSFI will monitor information both on the absolute level and direction of major markets and consider their potential impact on the financial sector and the specific institution. Market-wide information is also crucial when evaluating assumptions behind an institution's funding plan. [Basel Framework, SRP 50.42] Valuable market information to monitor includes, but is not limited to, equity prices (i.e. overall stock markets and sub-indices in various jurisdictions relevant to the activities of the supervised institutions), debt markets (money markets, medium-term notes, long term debt, derivatives, government bond markets, credit default spread indices, etc.); foreign exchange markets, commodities markets, and indices related to specific products, such as for certain securitised products (e.g. the ABX). [Basel Framework, SRP 50.43] OSFI Notes Institutions do not need to provide information to OSFI related to the above market-wide information tool, rather OSFI will obtain such information from its regular monitoring of major markets and the economy more broadly. 2. Information on the financial sector To track whether the financial sector as a whole is mirroring broader market movements or is experiencing difficulties, information to be monitored includes equity and debt market information for the financial sector broadly and for specific subsets of the financial sector, including indices. [Basel Framework, SRP 50.44] OSFI Notes Institutions do not need to provide information to OSFI related to the above financial sector information tool, rather OSFI will obtain such information from its regular monitoring of indicators relevant to the financial sector. 3. Institution-specific information To monitor whether the market is losing confidence in a particular institution or has identified risks at an institution, it is useful to collect information on equity prices, CDS spreads, money-market trading prices, the situation of roll-overs and prices for various lengths of funding, the price/yield of institution debenture or subordinated debt in the secondary market. [Basel Framework, SRP 50.45] OSFI Notes Regarding institution-specific information, OSFI requests a number of metrics be provided – on a consolidated basis – including but not limited to: Timely information from institutions that details costs of unsecured and secured funding for various tenors and by specific instruments that are issued; Current short term secured and unsecured funding spreads (i.e. overnight, 1 week, 1 month, 3 month, 6 month, 1 year funding); Material balances held at central banks or other financial institutions; Trends in collateral flows, including gross inflows and outflows, net balances, and stress test projections; and, Trends in cross border flows.

C. Utilisation of the metric/data

Information such as equity prices and credit spreads are readily available. However, the accurate interpretation of such information is important. For instance, the same CDS spread in numerical terms may not necessarily imply the same risk across markets due to market-specific conditions such as low market liquidity. Also, when considering the liquidity impact of changes in certain data points, the reaction of other market participants to such information can be different, as various liquidity providers may emphasise different types of data. [Basel Framework, SRP 50.46]

6.6. Liquidity Activity Monitor (LAM)

A. Objective

The LAM provides OSFI with frequent and timely key account balances for liquidity monitoring purposes of select institutions, as determined by OSFI.

B. Definition and practical implication of the metric

OSFI may request that select institutions report the point-in-time balance for accounts such as: HQLA Non-operational demand deposits placed with other financial institutions Rate sensitive deposits – insured Rate sensitive deposits – uninsured Demand deposits – insured Demand deposits – uninsured Cashable guaranteed investment certificates (GIC) – insured Cashable GIC – uninsured Non-cashable GIC – insured Non-cashable GIC – uninsured

C. Utilisation of the metric

This balance information is useful in assessing the risk of unexpected draws on deposits in relation to the amount of an institution's liquid assets and cash surpluses available but held at other financial institutions.

Footnotes

Footnote 1 Following the format: [Basel Framework, XXX yy.zz]. Return to footnote 1 Footnote 2 http://www.bis.org/publ/bcbs144.htm. Return to footnote 2 Footnote 3 For some funding sources, such as debt issues that are transferable across counterparties (such as CP/CD funding dated longer than overnight, etc.), it is not always possible to identify the counterparty holding the debt. Return to footnote 3 Footnote 4 For some funding sources, such as debt issues that are transferable across counterparties (such as CP/CD funding dated longer than overnight, etc.), it is not always possible to identify the counterparty holding the debt. Return to footnote 4 Footnote 5 For example, where the monitored institution also extends funding or has large unused credit lines outstanding to the "significant counterparty". Return to footnote 5 Footnote 6 Cash flows from assets, liabilities and off-balance sheet items will be computed in the currency that the counterparties are obliged to deliver to settle the contract, independent of the currency to which the contract is indexed (or "linked"), or the currency whose fluctuation it is intended to hedge. Return to footnote 6

Chapter 7 – Intraday Liquidity Monitoring Tools

This chapter is drawn from the Basel Committee on Banking Supervision's (BCBS) Monitoring tools for intraday liquidity management (April 2013). 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 paragraph^{Footnote 1}. Management of intraday liquidity risk forms a key element of an institution's overall liquidity risk management framework as outlined in BCBS Sound Principles^{Footnote 2} and OSFI's Guideline B-6: Liquidity Principles^{Footnote 3}. Specifically, Principle 8 of the Sound Principles and Principle 12 of OSFI's Guideline B-6:Liquidity Principles state that "a bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems." Moreover, six operational elements that should be included in a bank's strategy for managing intraday liquidity risk are identified: have the capacity to measure expected daily gross liquidity inflows and outflows, anticipate the intraday timing of these flows where possible, and forecast the range of potential net funding shortfalls that might arise at different points during the day; have the capacity to monitor intraday liquidity positions against expected activities and available resources (balances, remaining intraday credit capacity, available collateral); arrange to acquire sufficient intraday funding to meet its intraday objectives; have the ability to manage and mobilise collateral as necessary to obtain intraday funds; have a robust capability to manage the timing of its liquidity outflows in line with its intraday objectives; and be prepared to deal with unexpected disruptions to its intraday liquidity flows. The BCBS, in consultation with the Committee on Payment and Settlement Systems (CPSS^{Footnote 4}), has developed a set of quantitative tools to enable supervisors to monitor institutions' intraday liquidity risk and their ability to meet payment and settlement obligations on a timely basis under both normal and stressed conditions. The monitoring tools will complement the qualitative guidance in the BCBS Sound Principles and OSFI's Guideline B-6:Liquidity Principles. Given the close relationship between the management of institutions' intraday liquidity risk and the smooth functioning of payment and settlement systems^{Footnote 5}, the tools will also be of benefit to central bank or other authorities responsible for the oversight of payment and settlement systems (overseers). It is envisaged that the introduction of monitoring tools for intraday liquidity will lead to closer co-operation between banking supervisors and the overseers in the monitoring of banks' payment behaviour. It is important to note that the tools are being introduced for monitoring purposes only. Internationally active institutions will be required to apply these tools. These tools may also be useful in promoting sound liquidity management practices for other institutions, whether they are direct participants^{Footnote 6} of a large-value payment system (LVPS)^{Footnote 7} or use a correspondent bank to settle payments. National supervisors will determine the extent to which the tools apply to non-internationally active banks within their jurisdictions. Consistent with their broader liquidity risk management responsibilities, institution management will be responsible for collating and submitting the monitoring data for the tools to their supervisor.^{Footnote 8} It is recognised that institutions may need to liaise closely with counterparts, including payment system operators and correspondent banks, to collate these data. However, institutions and supervisors are not required to disclose these reporting requirements publicly. Public disclosure is not intended to be part of these monitoring tools. [Basel Framework, SRP 50.3] OSFI Notes OSFI, as supervisor of the institutions subject to the Liquidity Adequacy Requirements Guideline, and the Bank of Canada, as overseers of the Canadian payment and settlement system, will, collectively, be responsible for administering the package of intraday liquidity monitoring tools. Per footnote 8, discussions between the agencies will occur, in due course, related to which specific intraday monitoring tools will be collected and utilized by each agency. Until such time as additional clarity is brought forward, all references to the term 'supervisors' from this paragraph on in this chapter should be read to mean OSFI and the Bank of Canada.

7.1. Definitions and sources and usage of intraday liquidity

7.1.A. Definitions

For the purpose of this chapter, the following definitions will apply to the terms stated below: Intraday Liquidity: funds which can be accessed during the business day, usually to enable institutions to make payments in real time;^{Footnote 9} Business Day: the opening hours of the LVPS or of correspondent banking services during which an institution can receive and make payments in a local jurisdiction; Intraday Liquidity Risk: the risk that an institution fails to manage its intraday liquidity effectively, which could leave it unable to meet a payment obligation at the time expected, thereby affecting its own liquidity position and that of other parties. Time-specific obligations: obligations which must be settled at a specific time within the day or have an expected intraday settlement deadline. [Basel Framework, SRP 50.48]

7.1.B. Intraday liquidity sources and uses

The following sets out the main constituent elements of an institution's intraday liquidity sources and usage.^{Footnote 10} (The list should not be taken as exhaustive.) Sources Own sources Reserve balances at the central bank; Collateral pledged with the central bank or with ancillary systems^{Footnote 11} that can be freely converted into intraday liquidity; Unencumbered assets on an institution's balance sheet that can be freely converted into intraday liquidity; Secured and unsecured, committed and uncommitted credit lines^{Footnote 12} available intraday; Balances with other institutions that can be used for intraday settlement. Other sources Payments received from other LVPS participants; Payments received from ancillary systems; Payments received through correspondent banking services. Usage Payments made to other LVPS participants; Payments made to ancillary systems^{Footnote 13}; Payments made through correspondent banking services; Secured and unsecured, committed and uncommitted credit lines offered intraday; Contingent payments relating to a payment and settlement system's failure (e.g. as an emergency liquidity provider). [Basel Framework, SRP 50.49] In correspondent banking, some customer payments are made across accounts held by the same correspondent bank. These payments do not give rise to an intraday liquidity source or usage for the correspondent bank as they do not link to the payment and settlement systems. However, these 'internalised payments' do have intraday liquidity implications for both the sending and receiving customer institutions and should be incorporated in their reporting of the monitoring tools. [Basel Framework, SRP 50.50]

7.2. Intraday liquidity monitoring tools

OSFI Notes At this point in time, OSFI will not require institutions to provide intraday liquidity monitoring tools via regulatory reporting. OSFI and the Bank of Canada will continue to review the applicable implementation date for these metrics and will discuss the proposed timing of rollout with institutions in advance of taking a final decision. Once implemented, the intraday liquidity monitoring tools outlined hereinafter will only apply to OSFI-regulated institutions that are direct clearers (both Domestic Systemically Important Banks (DSIBs) and small and medium sized deposit-taking institutions (SMSBs)). A number of factors influence an institution's usage of intraday liquidity in payment and settlement systems and its vulnerability to intraday liquidity shocks. As such, no single monitoring tool can provide supervisors with sufficient information to identify and monitor the intraday liquidity risk run by an institution. To achieve this, seven separate monitoring tools have been developed (see Table 1). As not all of the tools will be relevant to all reporting institutions, the tools have been classified in three groups to determine their applicability as follows: Category A: applicable to all reporting institutions; Category B: applicable to reporting institutions that provide correspondent banking services; and Category C: applicable to reporting institutions which are direct participants. [Basel Framework, SRP 50.51] Table 1 Tools applicable to all reporting institutions A(i) Daily maximum intraday liquidity usage A(ii) Available intraday liquidity at the start of the business day A(iii) Total payments A(iv) Time-specific obligations Tools applicable to reporting institutions that provide correspondent banking services B(i) Value of payments made on behalf of correspondent banking customers B(ii) Intraday credit lines extended to customers Tool applicable to reporting institutions which are direct participants C(i)Intraday throughput

7.2.A. Monitoring tools applicable to all reporting institutions

(i) Daily maximum intraday liquidity usage This tool will enable supervisors to monitor an institution's intraday liquidity usage in normal conditions. It will require institutions to monitor the net balance of all payments made and received during the day over their settlement account, either with the central bank (if a direct participant) or over their account held with a correspondent bank (or accounts, if more than one correspondent bank is used to settle payments). The largest net negative position during the business day on the account(s), (i.e. the largest net cumulative balance between payments made and received), will determine an institution's maximum daily intraday liquidity usage. The net position should be determined by settlement time stamps (or the equivalent) using transaction-by-transaction data over the account(s). The largest net negative balance on the account(s) can be calculated after close of the business day and does not require real-time monitoring throughout the day. [Basel Framework, SRP 50.64] For illustrative purposes only, the calculation of the tool is shown in Figure 1. A positive net position signifies that the institution has received more payments than it has made during the day. Conversely, a negative net position signifies that the institution has made more payments than it has received.^{Footnote 14} For direct participants, the net position represents the change in its opening balance with the central bank. For institutions that use one or more correspondent banks, the net position represents the change in the opening balance on the account(s) with its correspondent bank(s). [Basel Framework, SRP 50.65] Figure 1: Net Cumulative Position over Time   Text Description - Net Cumulative Position over Time This line chart illustrates an institution’s intraday liquidity usage. The X axis represents the timeline between start of the business day and end of the business day. The Y axis represent the net cumulative position from which the largest positive and negative positions can be observed. Beginning of day position should be zero and subsequently fluctuate according to the net payments made or received. Assuming that an institution runs a negative net position at some point intraday, it will need access to intraday liquidity to fund this balance. The minimum amount of intraday liquidity that an institution would need to have available on any given day would be equivalent to its largest negative net position. (In the illustration above, the intraday liquidity usage would be 10 units.) [Basel Framework, SRP 50.66] Conversely, when an institution runs a positive net cumulative position at some point intraday, it has surplus liquidity available to meet its intraday liquidity obligations. This position may arise because the institution is relying on payments received from other LVPS participants to fund its outgoing payments. (In the illustration above, the largest positive net cumulative position would be 8.6 units.) [Basel Framework, SRP 50.67] Institutions should report their three largest daily negative net cumulative positions on their settlement or correspondent account(s) in the reporting period and the daily average of the negative net cumulative position over the period. The largest positive net cumulative positions, and the daily average of the positive net cumulative positions, should also be reported. As the reporting data accumulates, supervisors will gain an indication of the daily intraday liquidity usage of an institution in normal conditions. [Basel Framework, SRP 50.68] (ii) Available intraday liquidity at the start of the business day This tool will enable supervisors to monitor the amount of intraday liquidity an institution has available at the start of each day to meet its intraday liquidity requirements in normal conditions. Institutions should report both the three smallest sums by value of intraday liquidity available at the start of each business day in the reporting period, and the average amount of available intraday liquidity at the start of each business day in the reporting period. The report should also break down the constituent elements of the liquidity sources available to the institution. [Basel Framework, SRP 50.69] Drawing on the liquidity sources set out in Section 7.1.B, institutions should discuss and agree with their supervisor the sources of liquidity which they should include in the calculation of this tool. Where institutions manage collateral on a cross-currency and/or cross-system basis, liquidity sources not denominated in the currency of the intraday liquidity usage and/or which are located in a different jurisdiction, may be included in the calculation if the institution can demonstrate to the satisfaction of its supervisor that the collateral can be transferred intraday freely to the system where it is needed. [Basel Framework, SRP 50.70] As the reporting data accumulates, supervisors will gain an indication of the amount of intraday liquidity available to an institution to meet its payment and settlement obligations in normal conditions. [Basel Framework, SRP 50.71] (iii) Total payments This tool will enable supervisors to monitor the overall scale of an institution's payment activity. For each business day in a reporting period, institutions should calculate the total of their gross payments sent and received in the LVPS and/or, where appropriate, across any account(s) held with a correspondent bank(s). Institutions should report the three largest daily values for gross payments sent and received in the reporting period and the average daily figure of gross payments made and received in the reporting period. [Basel Framework, SRP 50.72] (iv) Time-specific obligations This tool will enable supervisors to gain a better understanding of an institution's time specific obligations.^{Footnote 15} Failure to settle such obligations on time could result in financial penalty, reputational damage to the institution or loss of future business. [Basel Framework, SRP 50.73] Institutions should calculate the total value of time-specific obligations that they settle each day and report the three largest daily total values and the average daily total value in the reporting period to give supervisors an indication of the scale of these obligations. [Basel Framework, SRP 50.74]

7.2.B. Monitoring tools applicable to reporting banks that provide correspondent banking services

(i) Value of payments made on behalf of correspondent banking customers^{Footnote 16} This tool will enable supervisors to gain a better understanding of the proportion of a correspondent bank's payment flows that arise from its provision of correspondent banking services. These flows may have a significant impact on the correspondent bank's own intraday liquidity management.^{Footnote 17} [Basel Framework, SRP 50.76] Correspondent banks should calculate the total value of payments they make on behalf of all customers of their correspondent banking services each day and report the three largest daily total values and the daily average total value of these payments in the reporting period. [Basel Framework, SRP 50.77] (ii) Intraday credit lines extended to customers^{Footnote 18} This tool will enable supervisors to monitor the scale of a correspondent bank's provision of intraday credit to its customers. Correspondent banks should report the three largest intraday credit lines extended to their customers in the reporting period, including whether these lines are secured or committed and the use of those lines at peak usage.^{Footnote 19} [Basel Framework, SRP 50.78]

7.2.C. Monitoring tool applicable to reporting banks which are direct participants

(i) Intraday throughput This tool will enable supervisors to monitor the throughput of a direct participant's daily payments activity across its settlement account. Direct participants should report the daily average in the reporting period of the percentage of their outgoing payments (relative to total payments) that settle by specific times during the day, by value within each hour of the business day.^{Footnote 20} Over time, this will enable supervisors to identify any changes in an institution's payment and settlement behaviour. [Basel Framework, SRP 50.80]

7.3. Intraday liquidity stress scenarios

The monitoring tools in Section 7.2 will provide supervisors with information on an institution's intraday liquidity profile in normal conditions. However, the availability and usage of intraday liquidity can change markedly in times of stress. In the course of their discussions on broader liquidity risk management, institutions and supervisors should also consider the impact of an institution's intraday liquidity requirements in stress conditions. As guidance, four possible (but non-exhaustive) stress scenarios have been identified and are described below.^{Footnote 21} Institutions should determine with their supervisor which of the scenarios are relevant to their particular circumstances and business model. [Basel Framework, SRP 50.82] Institutions need not report the impact of the stress scenarios on the monitoring tools to supervisors on a regular basis. They should use the scenarios to assess how their intraday liquidity profile in normal conditions would change in conditions of stress and discuss with their supervisor how any adverse impact would be addressed either through contingency planning arrangements and/or their wider intraday liquidity risk management framework. [Basel Framework, SRP 50.86]

Stress scenarios

(i) Own financial stress: an institution suffers, or is perceived to be suffering from, a stress event For a direct participant, own financial and/or operational stress may result in counterparties deferring payments and/or withdrawing intraday credit lines. This, in turn, may result in the institution having to fund more of its payments from its own intraday liquidity sources to avoid having to defer its own payments. [Basel Framework, SRP 50.82 (1)(a)] For institutions that use correspondent banking services, an own financial stress may result in intraday credit lines being withdrawn by the correspondent bank(s), and/or its own counterparties deferring payments. This may require the institution having either to prefund its payments and/or to collateralise its intraday credit line(s). [Basel Framework, SRP 50.82 (1)(b)] (ii) Counterparty stress: a major counterparty suffers an intraday stress event which prevents it from making payments A counterparty stress may result in direct participants and institutions that use correspondent banking services being unable to rely on incoming payments from the stressed counterparty, reducing the availability of intraday liquidity that can be sourced from the receipt of the counterparty's payments. [Basel Framework, SRP 50.82 (2)] (iii) A customer bank's stress: a customer bank of a correspondent bank suffers a stress event A customer bank's stress may result in other institutions deferring payments to the customer, creating a further loss of intraday liquidity at its correspondent bank. [Basel Framework, SRP 50.82 (3)] (iv) Market-wide credit or liquidity stress A market-wide credit or liquidity stress may have adverse implications for the value of liquid assets that an institution holds to meet its intraday liquidity usage. A widespread fall in the market value and/or credit rating of an institution's unencumbered liquid assets may constrain its ability to raise intraday liquidity from the central bank. In a worst case scenario, a material credit downgrade of the assets may result in the assets no longer meeting the eligibility criteria for the central bank's intraday liquidity facilities. [Basel Framework, SRP 50.82 (4)] For an institution that uses correspondent banking services, a widespread fall in the market value and/or credit rating of its unencumbered liquid assets may constrain its ability to raise intraday liquidity from its correspondent bank(s). [Basel Framework, SRP 50.82 (4)(a)] Institutions which manage intraday liquidity on a cross-currency basis should consider the intraday liquidity implications of a closure of, or operational difficulties in, currency swap markets and stresses occurring in multiple systems simultaneously. [Basel Framework, SRP 50.82(4)(b)]

Application of the stress scenarios

For the own financial stress and counterparty stress, all reporting institutions should consider the likely impact that these stress scenarios would have on their daily maximum intraday liquidity usage, available intraday liquidity at the start of the business day, total payments and time-specific obligations. [Basel Framework, SRP 50.83] For the customer bank's stress scenario, institutions that provide correspondent banking services should consider the likely impact that this stress scenario would have on the value of payments made on behalf of its customers and intraday credit lines extended to its customers. [Basel Framework, SRP 50.84] For the market-wide stress, all reporting institutions should consider the likely impact that the stress would have on their sources of available intraday liquidity at the start of the business day. [Basel Framework, SRP 50.85] While each of the monitoring tools has value in itself, combining the information provided by the tools will give supervisors a comprehensive view of an institution's resilience to intraday liquidity shocks. Examples on how the tools could be used in different combinations by supervisors to assess an institution's resilience to intraday liquidity risk are presented in Annex 2. [Basel Framework, SRP 50.87]

7.4. Scope of application

Institutions generally manage their intraday liquidity risk on a system-by-system basis in a single currency, but it is recognised that practices differ across institutions and jurisdictions, depending on the institutional set up of an institution and the specifics of the systems in which it operates. The following considerations aim to help institutions and supervisors determine the most appropriate way to apply the tools. Should institutions need further clarification, they should discuss the scope of application with their supervisors. [Basel Framework, SRP 50.52]

(i) Systems

Institutions which are direct participants to an LVPS can manage their intraday liquidity in very different ways. Some institutions manage their payment and settlement activity on a system-by-system basis. Others make use of direct intraday liquidity 'bridges'^{Footnote 22} between LVPS, which allow excess liquidity to be transferred from one system to another without restriction. Other formal arrangements exist, which allow funds to be transferred from one system to another (such as agreements for foreign currency liquidity to be used as collateral for domestic systems). [Basel Framework, SRP 50.53] To allow for these different approaches, direct participants should apply a 'bottom-up' approach to determine the appropriate basis for reporting the monitoring tools. The following sets out the principles which such institutions should follow: As a baseline, individual institutions should report on each LVPS in which they participate on a system-by-system-basis; If there is a direct real-time technical liquidity bridge between two or more LVPS, the intraday liquidity in those systems may be considered fungible. At least one of the linked LVPS may therefore be considered an ancillary system for the purpose of the tools; If an institution can demonstrate to the satisfaction of its supervisor that it regularly monitors positions and uses other formal arrangements to transfer liquidity intraday between LVPS which do not have a direct technical liquidity bridge, those LVPS may also be considered as ancillary systems for reporting purposes. [Basel Framework, SRP 50.54] Ancillary systems (e.g. retail payment systems, CLS, some securities settlement systems and central counterparties), place demands on an institution's intraday liquidity when these systems settle the institution's obligations in an LVPS. Consequently, separate reporting requirements will not be necessary for such ancillary systems. [Basel Framework, SRP 50.55] Institutions that use correspondent banking services should base their reports on the payment and settlement activity over their account(s) with their correspondent bank(s). Where more than one correspondent bank is used, the institution should report per correspondent bank. For institutions which access an LVPS indirectly through more than one correspondent bank, the reporting may be aggregated, provided that the reporting institution can demonstrate to the satisfaction of its supervisor that it is able to move liquidity between its correspondent banks. [Basel Framework, SRP 50.56] Institutions which operate as direct participants of an LVPS but which also make use of correspondent banks should discuss whether they can aggregate these for reporting purposes with their supervisor. Aggregation may be appropriate if the payments made directly through the LVPS and those made through the correspondent bank(s) are in the same jurisdiction and same currency. [Basel Framework, SRP 50.57]

(ii) Currency

Institutions that manage their intraday liquidity on a currency-by-currency basis should report on an individual currency basis. [Basel Framework, SRP 50.58] If an institution can prove to the satisfaction of its supervisor that it manages liquidity on a cross-currency basis and has the ability to transfer funds intraday with minimal delay – including in periods of acute stress – then the intraday liquidity positions across currencies may be aggregated for reporting purposes. However, institutions should also report at an individual currency level so that supervisors can monitor the extent to which firms are reliant on foreign exchange swap markets. [Basel Framework, SRP 50.59] When the level of activity of an institution's payment and settlement activity in any one particular currency is considered de minimis with the agreement of the supervisor^{Footnote 23} a reporting exemption could apply and separate returns need not be submitted. [Basel Framework, SRP 50.60]

(iii) Organisational structure

The appropriate organisational level for each institution's reporting of its intraday liquidity data should be determined by the supervisor, but it is expected that the monitoring tools will typically be applied at a significant individual legal entity level. The decision on the appropriate entity should consider any potential impediments to moving intraday liquidity between entities within a group, including the ability of supervisory jurisdictions to ring-fence liquid assets, timing differences and any logistical constraints on the movement of collateral. [Basel Framework, SRP 50.61] Where there are no impediments or constraints to transferring intraday liquidity between two (or more) legal entities intraday, and institutions can demonstrate this to the satisfaction of their supervisor, the intraday liquidity requirements of the entities may be aggregated for reporting purposes. [Basel Framework, SRP 50.62]

(iv) Responsibility of home and host supervisors

For cross-border banking groups, where an institution operates in LVPS and/or with a correspondent bank(s) outside the jurisdiction where it is domiciled, both home and host supervisors will have an interest in ensuring that the institution has sufficient intraday liquidity to meet its obligations in the local LVPS and/or with its correspondent bank(s).^{Footnote 24} The allocation of responsibility between home and host supervisor will ultimately depend upon whether the institution operating in the non-domestic jurisdiction does so via a branch or a subsidiary. For a branch operation The home (consolidated) supervisor should have responsibility for monitoring through the collection and examination of data that its banking groups can meet their payment and settlement responsibilities in all countries and all currencies in which they operate. The home supervisor should therefore have the option to receive a full set of intraday liquidity information for its banking groups, covering both domestic and non-domestic payment and settlement obligations. The host supervisor should have the option to require foreign branches in their jurisdiction to report intraday liquidity tools to them, subject to materiality. For a subsidiary active in a non-domestic LVPS and/or correspondent bank(s) The host supervisor should have primary responsible for receiving the relevant set of intraday liquidity data for that subsidiary. The supervisor of the parent institution (the home consolidated supervisor) will have an interest in ensuring that a non-domestic subsidiary has sufficient intraday liquidity to participate in all payment and settlement obligations. The home supervisor should therefore have the option to require non-domestic subsidiaries to report intraday liquidity data to them as appropriate. [Basel Framework, SRP 50.63]

Annex 1

Practical example of the monitoring tools

The following example illustrates how the tools would operate for an institution on a particular business day. Assume that on the given day, the institution's payment profile and liquidity usage is as follows: Time Sent Received Net 07:00 Payment A: 450   -450 07:58   200 -250 08:55 Payment B: 100   -350 10:00 Payment C: 200   -550 10:45   400 -150 11:59   300 +150 13:00 Payment D: 300   -150 13:45   350 +200 15:00 Payment E: 250   -50 15:32 Payment F: 100   -150 17:00   150 0

1. Direct participant

Details of the institution's payment profile are as followings: Payment A: 450 Payment B: 100 – to settle obligations in an ancillary system Payment C: 200 – which has to be settled by 10 am Payment D: 300 – on behalf of a counterparty using some of a 500 unit unsecured credit line that the institution extends to the counterparty Payment E: 250 Payment F: 100 The institution has 300 units of central bank reserves and 500 units of eligible collateral. A(i) Daily maximum liquidity usage: largest negative net cumulative positions: 550 units largest positive net cumulative positions: 200 units A(ii) Available intraday liquidity at the start of the business day: 300 units of central bank reserves + 500 units of eligible collateral (routinely transferred to the central bank) = 800 units A(iii) Total payments: Gross payments sent: 450+100+200+300+250+100 = 1,400 units Gross payments received: 200+400+300+350+150 = 1,400 units A(iv) Time-specific obligations: 200 + value of ancillary payment (100) = 300 units B(i) Value of payments made on behalf of correspondent banking customers: 300 units B(ii) Intraday credit line extended to customers: Value of intraday credit lines extended: 500 units Value of credit line used: 300 units C(i) Intraday throughput Time Cumulative sent % sent 08:00 450 32.14 09:00 550 39.29 10:00 750 53.57 11:00 750 53.57 12:00 750 53.57 13:00 1050 75.00 14:00 1050 75.00 15:00 1300 92.86 16:00 1400 100.00 17:00 1400 100.00 18:00 1400 100.00

2. Institution that uses a correspondent bank

Details of the institution's payment profile are as followings: Payment A: 450 Payment B: 100 Payment C: 200 – which has to be settled by 10am Payment D: 300 Payment E: 250 Payment F: 100 – which has to be settled by 4pm The institution has 300 units of account balance at the correspondent bank and 500 units of credit lines of which 300 units unsecured and also uncommitted. A(i) Daily maximum intraday liquidity usage: largest negative net cumulative positions: 550 units largest positive net cumulative positions: 200 units A(ii) Available intraday liquidity at the start of the business day: 300 units of account balance at the correspondent bank + 500 units of credit lines (of which 300 units unsecured and uncommitted) = 800 units A(iii) Total payments: Gross payments sent: 450+100+200+300+250+100 = 1,400 units Gross payments received: 200+400+300+350+150 = 1,400 units A(iv) Time-specific obligations: 200 + 100 = 300 units [Basel Framework, SRP 50.88, 50.92]

Annex 2

Combining the tools

The following is a non-exhaustive set of examples which illustrate how the tools could be used in different combinations by supervisors to assess an institution's resilience to intraday liquidity risk:

(1) Time-specific obligations relative to total payments and available intraday liquidity at the start of the business day

If a high proportion of an institution's payment activity is time critical, the institution has less flexibility to deal with unexpected shocks by managing its payment flows, especially when its amount of available intraday liquidity at the start of the business day is typically low. In such circumstances the supervisor might expect the institution to have adequate risk management arrangements in place or to hold a higher proportion of unencumbered assets to mitigate this risk.

(2) Available intraday liquidity at the start of the business day relative to the impact of intraday stresses on the institution's daily liquidity usage

If the impact of an intraday liquidity stress on an institution's daily liquidity usage is large relative to its available intraday liquidity at the start of the business day, it suggests that the institution may struggle to settle payments in a timely manner in conditions of stress.

(3) Relationship between daily maximum liquidity usage, available intraday liquidity at the start of the business day and the time-specific obligations

If an institution misses its time-specific obligations, it could have a significant impact on other institutions. If it were demonstrated that the institution's daily liquidity usage was high and the lowest amount of available intraday liquidity at the start of the business day were close to zero, it might suggest that the institution is managing its payment flows with an insufficient pool of liquid assets.

(4) Total payments and value of payments made on behalf of correspondent banking customers

If a large proportion of an institution's total payment activity is made by a correspondent bank on behalf of its customers and, depending on the type of the credit lines extended, the correspondent bank could be more vulnerable to a stress experienced by a customer. The supervisor may wish to understand how this risk is being mitigated by the correspondent bank.

(5) Intraday throughput and daily liquidity usage

If an institution starts to defer its payments and this coincides with a reduction in its liquidity usage (as measured by its largest positive net cumulative position), the supervisor may wish to establish whether the institution has taken a strategic decision to delay payments to reduce its usage of intraday liquidity. This behavioural change might also be of interest to the overseers given the potential knock-on implications to other participants in the LVPS. [Basel Framework, SRP 50.87]

Footnotes

Footnote 1 Following the format: [Basel Framework, XXX yy. zz]. Return to footnote 1 Footnote 2 http://www.bis.org/publ/bcbs144.htm. Return to footnote 2 Footnote 3 https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b6-2020.aspx. Return to footnote 3 Footnote 4 The CPSS serves as a forum for central banks to monitor and analyse developments in payment and settlement arrangements as well as in cross-border and multicurrency settlement schemes. It consists of senior officials responsible for payment and settlement systems in central banks. Return to footnote 4 Footnote 5 Where reference is made in this paper to payment and settlement systems, the term is understood to encompass payment systems and clearing and settlement systems for securities and derivatives (including central counterparties). Return to footnote 5 Footnote 6 'Direct participant' means a participant in a large-value payment system that can settle transactions without using an intermediary. If not a direct participant, a participant will need to use the services of a direct participant (a correspondent bank) to perform particular settlements on its behalf. Institutions can be a direct participant in a large-value payment system while using a correspondent bank to settle particular payments, for example, payments for an ancillary system. Return to footnote 6 Footnote 7 An LVPS is a funds transfer system that typically handles large-value and high-priority payments. In contrast to retail payment systems, many LVPSs are operated by central banks, using a real-time gross settlement (RTGS) or equivalent mechanism. Return to footnote 7 Footnote 8 As agreed by national authorities in a particular jurisdiction, the monitoring data may be collected by a relevant domestic oversight authority (e.g. payments system overseer) instead of the banking supervisor. Return to footnote 8 Footnote 9 See CPSS: A glossary of terms used in payments and settlements systems, March 2003. Return to footnote 9 Footnote 10 Not all elements will be relevant to all reporting institutions as intraday liquidity profiles will differ between institutions (e.g. whether they access payment and settlement systems directly or indirectly or whether they provide correspondent banking services and intraday credit facilities to other institutions, etc.). Return to footnote 10 Footnote 11 Ancillary systems include other payment systems such as retail payment systems, CLS, securities settlement systems and central counterparties. Return to footnote 11 Footnote 12 Although uncommitted credit lines can be withdrawn in times of stress (see stress scenario (i) in Section 7.3), such lines are an available source of intraday liquidity in normal times. Return to footnote 12 Footnote 13 Some securities settlement systems offer self-collateralisation facilities in co-operation with the central bank. Through these, participants can automatically post incoming securities from the settlement process as collateral at the central bank to obtain liquidity to fund their securities settlement systems' obligations. In these cases, intraday liquidity usages are only those related to the haircut applied by the central bank. Return to footnote 13 Footnote 14 For the calculation of the net cumulative position, "payments received" do not include funds obtained through central bank intraday liquidity facilities. Return to footnote 14 Footnote 15 These obligations include, for example, those for which there is a time-specific intraday deadline, those required to settle positions in other payment and settlement systems, those related to market activities (such as the delivery or return of money market transactions or margin payments), and other payments critical to an institution's business or reputation (see footnote 10 of the BCBS Sound Principles). Examples include the settlement of obligations in ancillary systems, CLS pay-ins or the return of overnight loans. Payments made to meet the throughput guidelines are not considered time-specific obligations for the purpose of this tool. Return to footnote 15 Footnote 16 The term 'customers' includes all entities for which the correspondent bank provides correspondent banking services. Return to footnote 16 Footnote 17 Paragraph 79 of the BCBS Sound Principles states that: "[T]he level of a bank's gross cash inflows and outflows may be uncertain, in part because those flows may reflect the activities of its customers, especially where the bank provides correspondent or custodian services." Return to footnote 17 Footnote 18 Not all elements will be relevant to all reporting institutions as intraday liquidity profiles will differ between institutions (e.g. whether they access payment and settlement systems directly or indirectly or whether they provide correspondent banking services and intraday credit facilities to other institutions, etc.) Return to footnote 18 Footnote 19 The figure to be reported for the three largest intraday credit lines extended to customers should include uncommitted and unsecured lines. This disclosure does not change the legal nature of these credit lines. Return to footnote 19 Footnote 20 It should be noted that some jurisdictions already have throughput rules or guidelines in place. For example, in the case of Canada’s LVTS, Payments Canada recommends that LVTS participants abide by the following daily throughput guidelines: 25% of daily transaction value and 40% of daily transaction volume should be completed by 10:00 hours Eastern time (ET), 60% of both aggregate volume and value should be completed by 13:00 hours ET, and 80% of both aggregate volume and value should be completed by 16:30 hours ET. Note that, although these throughput guidelines are not mandatory at this time, Payments Canada reserves the right to make them mandatory if participants do not appear to be abiding by them. Return to footnote 20 Footnote 21 Institutions are encouraged to consider reverse stress scenarios and other stress testing scenarios as appropriate (for example, the impact of natural disasters, currency crisis, etc.). In addition, institutions should use these stress testing scenarios to inform their intraday liquidity risk tolerance and contingency funding plans. Return to footnote 21 Footnote 22 A direct intraday liquidity bridge is a technical functionality built into two or more LVPS that allows banks to make transfers directly from one system to the other intraday. Return to footnote 22 Footnote 23 As an indicative threshold, supervisors may consider that a currency is considered "significant" if the aggregate liabilities denominated in that currency amount to 5% or more of the institution's total liabilities. Return to footnote 23 Footnote 24 Paragraph 145 of the BCBS Sound Principles states that "the host supervisor needs to understand how the liquidity profile of the group contributes to risks to the entity in its jurisdiction, while the home supervisor requires information on material risks a foreign branch or subsidiary poses to the banking group as a whole." Return to footnote 24