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Appendix H High Quality Liquid Assets as per the LCR

Appendix H: High Quality Liquid Assets as per the LCR

1. Assets are generally qualified as HQLA if they can be easily and immediately converted into cash at little, or no, loss of value under stress circumstances; and
2. The conditions identified in the following paragraphs must be satisfied by levels 1 and 2 assets.
1) Level 1 Assets
3. Level 1 assets are included in their applicable market value, can comprise of an unlimited share of the pool and are not subject to haircuts.
4. Level 1 assets are limited to:
a. Coins and banknotes;
b. Assets with central banks in the countries in which the liquidity risk is being taken (including cash reserves27 and Tawarruq transactions with the CBB) to the extent that allows banks to draw down these assets in times of stress;
c. Sukuk issued by the CBB or the Government of the Kingdom of Bahrain;
d. Sukuk and Shari'a-compliant securities issued or guaranteed by sovereigns, central banks, PSEs, the IMF, the BIS, the ECB and EC, or development banks and satisfying all of the following conditions:
i. Assigned a 0 percent risk-weight as shown in Appendix I;
ii. Traded in large, deep and active repo or cash markets, characterized by a low level of concentration;
iii. Have a proven record as a reliable source of liquidity in the markets (repo or sale), even during stressed market conditions;
iv. Not an obligation of a financial institution or any of its subsidiary entities28 ;
e. Where the sovereign has a non-0 percent risk weight, Sukuk and other Shari'a compliant securities issued in domestic currency by the sovereign or central bank in the country in which the liquidity risk is being taken or in the bank's home country; and
f. Where the sovereign has a non-0 percent risk weight, Sukuk and other Shari'a compliant securities in foreign currencies issued by the sovereign or central bank up to the amount of the bank's stressed net cash outflows in that specific foreign currency stemming from the bank's operations in the jurisdiction where the bank's liquidity risk is being taken.
2) Level 2 Assets
A. Level 2A Assets
5. Level 2A assets are limited to the following:
a. Sukuk and Shari'a-compliant securities and that can be monetized, issued or guaranteed by sovereigns, central banks, PSEs or MDBs that satisfy all of the following conditions:
i. Assigned a 20 percent risk weight as per Annexure (F);
ii. Traded in large, deep and active repo or cash markets as characterized by a low level of concentration;
iii. 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 percent, or the increase in haircut not exceeding 10 percent over a 30-day period during a relevant period of significant liquidity stress); and iv. Not an obligation of a financial institution or any of its affiliated entities.
b. Sukuk and Shari'a-compliant securities and that can be monetised (including commercial paper)29 and covered bonds30 that satisfy all of the following conditions:
i. Not issued by a financial institution or any of its affiliated entities;
ii. In the case of covered bonds: not issued by the bank itself or any of its affiliated entities;
iii. Either have a long-term credit rating from a recognized ECAI of at least (AA-) or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;
iv. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
v. 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 percent, or the increase in haircut not exceeding 10 percent, over a 30-day period during a relevant period of significant liquidity stress).
B. Level 2B Assets
6. Level 2B assets are limited to the following:
a. Sukuk and Shari'a-compliant securities (including commercial paper) issued by nonfinancial institutions, that satisfy all of the following conditions:
i. Sukuk and Shari'a-compliant securities issued by non-financial institutions or one of their subsidiaries and have a long-term credit rating between A+ and BBB- or the equivalent, or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;
ii. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
iii. Have a proven record as a reliable source of liquidity in the markets even during stressed market conditions (i.e. maximum decline of price not exceeding 20 percent or the increase in haircut not exceeding 20 percent over a 30-day period during a relevant period of significant liquidity stress).
b. Shari'a-compliant common equity shares that satisfy all of the following conditions, subject to a 50 percent haircut:
i. Not issued by a financial institution or any of its affiliated entities.
ii. Exchange traded and centrally cleared;
iii. A constituent of the major stock index in Bahrain or where the liquidity risk is taken;
iv. Denominated in Bahraini Dinar or in the currency of the jurisdiction where the liquidity risk is taken;
v. Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
vi. 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 percent, or increase in haircut not exceeding 40 percent, over a 30-day period during a relevant period of significant liquidity).
7. If a bank wishes to include other Shari'a-compliant assets under Level 2B assets, prior approval must be obtained from the CBB.

27 In this context, the central bank reserves would include demand deposits and the mentioned Tawarruq transactions, and overnight deposits and term deposits with the central bank that: (i) are repayable within 30 day or are explicitly and contractually repayable on notice from the depositing bank; or (ii) that the bank can use to obtain financing on a term basis or on an overnight basis. Other term deposits with central banks are not eligible for the stock of HQLA.

28 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 bank also qualifies as a PSE under the CBB Capital Adequacy Ratio—Basel III Guidelines where securities issued by the bank could qualify for level 1 assets if all necessary conditions are satisfied.

29 Corporate sukuk (including commercial papers) do not include complex structured products or subordinated sukuk.

30 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 profit.

August 2018