The Australian Prudential Regulation Authority (APRA) has
released further guidance on how it will treat authorised
deposit-taking institutions' (ADIs) applications to establish a
secured committed liquidity facility (CLF) as part of its
implementation of the Basel III liquidity framework in
APRA clearly acknowledges the role of a CLF to the extent that
ADIs do not hold enough Australian dollar high-quality liquid
assets (HQLA) to satisfy the liquidity coverage ratio (LCR) regime,
but it has made it clear that ADIs requiring a CLF ("scenario
analysis ADIs") are still expected to improve their liquidity
risk profiles both before and after the LCR regime commences:
"ADIs have made steady and material improvements to
[ADIs'] liquidity risk profiles, but more remains to be done in
both the quantitative and qualitative dimensions of liquidity risk
If it fails to reduce its liquidity risk to APRA's
satisfaction, an ADI might find the amount of the CLF it can
include in its LCR is progressively reduced.
How will APRA deal with an application for a CLF?
The CLF itself will be offered by the Reserve Bank of Australia
(RBA); APRA will determine its size for each scenario analysis ADI
and review it annually.
As a general starting point, APRA will review any request in the
context of its requirement that the ADI has first taken "all
reasonable steps" to meet its LCR requirements through its own
balance sheet management and has otherwise complied with key
qualitative and quantitative liquidity requirements.
Its annual process for determining the CLF will be as
Step 1: The RBA will estimate the available
Australian dollar HQLA that could reasonably be held by scenario
analysis ADIs over the CLF approval period. It will start by
assuming that the level of Australian dollar HQLA currently held in
aggregate by scenario analysis ADIs is appropriate, and then look
at factors such as the total amount of Australian dollar HQLA
securities on issue, the market participants that are holding that
stock and the need for the continued smooth functioning of
Step 2: Each scenario analysis ADI will submit
a three-year funding plan which sets out, among other matters, a
forecast for Australian dollar net cash outflows over the CLF
approval period. APRA will assess this and also consider the
ADI's planned program of actions to minimise reliance on the
CLF. APRA will then agree with each ADI a target Australian dollar
net cash outflow that will then be used to determine the CLF
Step 3: The size of the CLF for each ADI will
be calculated as a percentage of the system-wide CLF size (at 100
percent LCR coverage) based on each ADI's target Australian
dollar net cash outflows.
Step 4: Although the CLF limit will be set in
the context of an LCR requirement of 100 percent, APRA expects ADIs
to have an LCR at all times greater than 100 percent. Where APRA
has approved the use of a CLF for LCR purposes, the size of the CLF
will be increased to allow for an appropriate liquidity buffer as
agreed by APRA.
What's next for implementing the LCR regime in
APRA is conducting a trial exercise with all scenario analysis
ADIs this year; once this is completed, more details of the CLF
process will be released. This is expected to set out, among other
things, its views on the make-up of the CLF portfolio of eligible
At some time in the first part of 2014, APRA will release its
expectations on the use of third-party securities and
self-securitisation as security for the CLF.
APRA is still intending that the LCR regime commence on 1
Key actions for ADIs
APRA has made it very clear that a CLF doesn't mean that
scenario analysis ADIs can relax their efforts to reduce their
liquidity risk, either before or after 1 January 2015. It has
identified the following as areas ADIs should concentrate on in the
increasing the proportion of assets funded by retail
increasing the average tenor of wholesale liabilities; and
refining terms and conditions for some products.
Failure to do so could make acquiring or retaining a CLF more
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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