A new MFSA Rule on US Dollar Funding by credit institutions came into effect on 1st January 2013. This Rule applies to all credit institutions licensed under the Banking Act 1994. MFSA Rule 02/2012 is modelled on the Recommendation of the European Systemic Risk Board on US Dollar Funding (ESRB/2011/2) published as Notice No. 2012/C 72/01 of the Official Journal of the European Union, which was approved by the General Board of the European Systemic Risk Board (ESRB) on 22 December 2011, in accordance with Regulation (EU) No. 1092/2010.
The aim of the ESRB Recommendation on US Dollar denominated funding is to address on-going strains in the US Dollar funding markets particularly since this is a material funding currency for certain credit institutions in the European Union. These strains may result in potential system-wide risks, in particular, material maturity mismatches between the US Dollar assets and liabilities of credit institutions, where short-term funding is used to finance longer term assets in the said currency.
MFSA Rule 02/2012 presents two sets of obligations, namely; general obligations applying to all credit institutions as defined in the Banking Act; and reporting obligations that apply to certain credit institutions whose levels of US Dollar funding are above a certain threshold in relation to their overall lending activity. The ‘materiality’ threshold shall be determined by the Authority as a percentage of a credit institution’s total liabilities.
All credit institutions must comply with the following general obligations:
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An obligation to monitor US Dollar funding and liquidity risk as part of their overall monitoring assessment exercise of funding and liquidity positions in accordance with Banking Rule BR/05;
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An obligation to have in place risk strategies and policies, which determine their risk tolerance with respect to USD liquidity and funding;
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An obligation to have contingency funding plans in place to handle shocks in US Dollar funding.
The Authority shall moreover be identifying credit institutions it deems as having a material level of US Dollar funding based on data already available. These institutions would be required to fill in the template specified in Annex A to the Rule on a semi-annual basis, or as otherwise specified by the Authority. Credit institutions shall have one month from the end of each re-porting period in which to send the template. Credit institutions with material US Dollar funding are also to include their respective risk management actions and procedures within their ICAAP report.
The MFSA Rule 02/2012 is available for download from the MFSA website.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
