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  • Other Cash Outflows

    • LM-11.3.10

      Additional items and their runoff rates as follows:

      A. Shari'a Compliant Hedging Instruments:
      (i) The sum of all net cash outflows will receive a 100 percent factor. Banks must calculate, in accordance with their existing valuation methodologies, expected cash inflows and outflows from Shari'a compliant hedging instruments. Cash flows must be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. The banks must 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. Options must be assumed to be exercised when they are in the money to the option buyer;
      (ii) Where payments for Shari'a compliant hedging instruments are collateralized by HQLA, cash outflows must be calculated net of any corresponding cash inflows from collateral received for Shari'a compliant hedging transactions, or that would result from contractual obligations for cash or collateral to be provided to the bank, if the bank is entitled to re-use the collateral in new transactions; and
      (iii) Below run-off rates apply in the following cases:
      a. Increased liquidity needs related to downgrade triggers embedded in financing transactions, Shari'a-compliant hedging transactions and other contracts. Banks must review those contracts in detail and identify the clauses that require the posting of additional collateral or early repayment upon the ratings downgrades, by and up to three notches. A 100 percent run-off rate will be applied to the amount of collateral that would be posted for, or contractual cash outflows associated with, the credit rating downgrades;
      b. Increased liquidity needs related to the changes in the market value of the bank's posted collateral. A run-off rate of 20 percent must apply to cover the possibility of changes in value of the collateral posted by the bank in the Shari'a-compliant hedging contract, as well as other transactions. This rate must apply to all collateral, excluding level 1 assets after offsetting the collateral posted by the same counterparty, which can be used again without any restrictions. This rate will be calculated based on the notional amount of the asset after any other applicable haircuts;
      c. A run-off rate of 100 percent will apply to non-segregated collateral that could contractually be recalled by the counterparty because the collateral is in excess of the counterparty's current collateral requirements;
      d. A run-off rate of 100 percent will apply to the collateral that is contractually due, but where the counterparty has not yet demanded the posting of such collateral;
      e. A run-off rate of 100 percent will apply to the amount of HQLA collateral that can be substituted for non-HQLA assets without the bank's consent; and
      f. Banks must calculate the liquidity needs to face potentially substantial liquidity risk exposures, to valuation changes of Shari'a-compliant hedging contracts. This must be calculated by identifying the largest absolute net 30-day collateral flow realized during the preceding 24 months. The net flows of collateral must be calculated by offsetting the collateral inflows and outflows. This must be executed using the same Master Netting Agreement ('MNA')
      B. Asset Backed Sukuk and Other Financing Instruments

      Such transactions are subject to a run-off rate of 100 percent of the funding transaction maturing within the 30-day period, when these instruments are issued by the bank itself (assuming that the refinancing market will not exist).
      C. Asset-backed Sukuk, Securities Investment Vehicles and Other Financing Facilities

      A run-off rate of 100 percent must apply to the payments due within a 30-day period. In cases where assets are returnable, a run-off rate of 100 percent must apply to the returned assets when there are Shari'a-compliant hedging transactions, or Shari'a-compliant hedging transactions-like components, contractually mentioned in the agreements for the structure, allowing the 'return' of assets in a financing arrangement (assuming that the refinancing market will not exist).
      D. Asset-backed Commercial Paper, Securities Investment Vehicles and Other Financing Facilities

      A run-off rate of 100 percent must apply to the payments due within a 30-day period. In cases where assets are returnable, a run-off rate of 100 percent must apply to the returned assets when there are Shari'a-compliant hedging transactions, or Shari'a-compliant hedging transactions-like components, contractually mentioned in the agreements for the structure, allowing the 'return' of assets in a financing arrangement (assuming that the refinancing market will not exist).
      E. Drawdowns on Committed Credit and Liquidity Facilities

      These facilities include contractually irrevocable ('committed') or conditionally revocable agreements to extend funds. Unconditionally revocable facilities that are unconditionally cancellable are excluded from this section and included in 'Other Contingent Funding Liabilities' section for the purpose of the following requirements:
      (i) When calculating the facilities mentioned in the preceding paragraph, the currently undrawn portion of these facilities is the calculated net of any HQLA if the HQLA have already been posted as collateral by the counterparty to secure the facilities, or are contractually obliged to be posted when the counterparty will draw down the facility if the bank is entitled to re-use the collateral and there is no undue correlation between the probability of drawing the facility and the market value of the collateral. In such cases, the assets posted as collateral can be netted to the extent that this collateral is not already counted in the stock of HQLA, as per these requirements;
      (ii) For the purpose of these requirements, a liquidity facility is defined as any committed, undrawn (unused) backup facility that would be utilized to refinance the financing/sukuk obligations of a customer in situations where such a customer is unable to rollover that financing/sukuk in financial markets. To calculate the LCR, an amount equivalent to the currently outstanding financing/sukuk issued by the customer maturing within a 30-day period is taken, while excluding the portion of the backing financing/sukuk within this period. General working capital facilities for corporate entities will not be classified as liquidity facilities, but as credit facilities. Any other undrawn facilities will be classified as credit facilities; and
      (iii) Any facilities provided to hedge funds and special purpose funding vehicles or other vehicles used to finance the banks own assets, must be captured in their entirety as a liquidity facility, to other legal entities.
      F. Contractual Obligations To Extend Funds Within a 30-day Period

      Any contractual lending obligations to financial institutions not captured elsewhere in the requirements must be captured here at a 100 percent run-off rate.

      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 percent of the total contractual inflows due in the next 30 calendar days from these clients, the difference must be reported as a 100 percent outflow (i.e. the excess above 50 percent of the total inflow of these clients within a period of 30 days).
      G. Other Contingent Funding Obligations

      The table below shows the cash outflow run-off rates for other contingent funding obligations:

      Table: Run-off rates for Other Contingent Funding Obligations

      Type of Contingent Funding Run-off Rates (%)
      Revocable and unconditional financing and liquidity facilities 'uncommitted'. 5%
      Non-contractual contingent funding obligations related to potential liquidity draws from joint venture or minority investments in entities. 5%
      Obligations related to trade financing (including letters of guarantee and letters of credit). 5%
      Guarantees and letters of credit unrelated to trade finance obligations. 5%
      Non-contractual commitments related to customers' short positions covered by other customers' collateral. 50%
      Outstanding Sukuk (more than 30 days maturity). 5%
      Any other non-contractual obligations not captured above. 5%
      (i) Lending commitments, such as direct import or export financing for non-financial corporate firms are excluded from this treatment and banks will apply the run-off rates specified in Appendix A; and
      (ii) A 100 percent run-off rate must apply for any other contractual cash outflows within the next 30 calendar days, not captured above, other than operational expenses (which are not covered by this Module).
      August 2018