Liquidity - frequently asked questions
Last updated 11 December 2020
The following frequently asked questions (FAQs) provide further information to assist regulated entities in the interpretation of Prudential Standard APS 210 Liquidity, Prudential Practice Guide APG 210 - Liquidity and Reporting Standard ARS 210.0 Liquidity.
These FAQs do not provide an exhaustive list of examples and regulated entities are encouraged to contact APRA where they have questions regarding the interpretation of the relevant prudential standards, guidance or reporting.
Note: These FAQs are published for information purposes only. The content of these FAQs is not legal advice. Users are encouraged to obtain professional advice about the application of any legislation or prudential standard to their particular circumstances.
Users should exercise their own skill and care when relying on any material contained in the FAQs. APRA disclaims any liability for any loss or damage arising out of any use of or reliance on these FAQs.
1. What is the APS 210 treatment of high quality liquid assets (HQLA) in another jurisdiction if the HQLA category in that jurisdiction differs from the APS 210 HQLA category?
APS 210 Attachment A paragraphs 9, 10 and 12 provide that HQLA1, HQLA2A and HQLA2B are limited to the types of assets listed in the respective paragraphs. Additionally, paragraphs 10 and 12 provide that an ADI may include the assets listed as HQLA2A or HQLA2B (respectively) 'where these assets have been recognised by APRA or the relevant prudential regulator in the jurisdiction where the liquidity risk is taken.' These provisions should be read to mean that the ADI is permitted to include assets of the relevant type if either APRA or the relevant foreign regulator has recognised the assets for that purpose. Similarly, APRA considers that it would be reasonable for an ADI to refer to statements made by the relevant prudential regulator in the jurisdiction where the liquidity risk is taken to clarify any uncertainty about whether a particular asset qualifies for treatment as HQLA1 under paragraph 9.
If the offshore regulator recognises the type of asset in a higher category of HQLA to that in APS 210, the ADI must apply the HQLA classification in APS 210. For example, European regulations consider some covered bonds to be HQLA1. However, APS 210 classifies qualifying covered bonds as HQLA2A. Covered bonds classified as HQLA1 under European regulations should be reported as HQLA2A in an ADI’s all-currencies liquidity coverage ratio (LCR).
Where a type of asset is listed for a higher category of HQLA in APS 210 but the offshore regulator recognises the type of asset in a lower category of HQLA to that in APS 210, APRA considers that it would be reasonable to apply that lower category of HQLA to the asset. As an example, United States (US) regulations treat all qualifying corporate bonds as HQLA2B regardless of rating, whereas APS 210 classifies qualifying corporate bonds rated AA- or higher as HQLA2A. Qualifying US corporate bonds should be treated as HQLA2B in the ADI’s all-currencies LCR.
As stated in APRA’s 14 July 2016 media release, there are currently no Australian dollar assets that qualify as HQLA2A or HQLA2B.
2. Under the liquidity coverage ratio, can an intermediated deposit agreement contain provisions which would allow the intermediary to terminate the agreement with the ADI within 30 days and still qualify as an intermediated deposit under APS 210 Attachment A paragraph 35?
APRA considers that provisions that allow termination of the deposit agreement by the intermediary in circumstances where the ADI essentially no longer functions as an ADI (e.g. insolvency, liquidation, loss of banking licence) would not be inconsistent with the requirements of paragraph 35.
Intermediated deposit treatment (where the funds are treated as if they are from the person who placed the funds with the intermediary) cannot be applied to deposit agreements with termination provisions within 30 days for situations such as:
- downgrade of the ADI (regardless of downgrade severity);
- default under the agreement, including failure to pay;
- change of control regarding any party to the agreement; and
- fiduciary duties or requirements of the trustee or any other party to the agreement.
3. Please clarify APRA’s intentions for intermediated deposit treatment under the NSFR in APS 210 Attachment C paragraphs 12(b), 13(b) and 14(d) in relation to the twelve or six month notice to replace the intermediary.
APRA’s intentions for intermediated deposit treatment in the NSFR are that the deposit behaviour should be based on the underlying depositors and not the intermediary for the six and twelve month measurement period of the NSFR. The intermediary should have no ability to unilaterally withdraw funds from the ADI during these periods.
To apply the intermediated deposit treatment to the NSFR, APRA expects that the underlying depositor would retain full control of its deposit for the relevant NSFR time period, and the six or twelve month periods stated in APS 210 Attachment C paragraphs 12(b), 13(b) and 14(d) should apply to each of the APS 210 Attachment A paragraph 35 subparagraphs (a) through (d) as opposed to the minimum 30 days required for intermediated deposit treatment under the LCR.
This is consistent with APRA’s statement in its 20 December 2016 letter to all ADIs entitled "Response to submissions on Basel III liquidity – the net stable funding ratio and the liquid assets requirement for foreign ADIs" which stated "The requirement in the NSFR that the intermediary cannot remove the deposit from an ADI within a defined period is to ensure that it is the individual depositor that has control over the funds in the context of the time period relevant for the NSFR."
4. How should intermediated deposits be reported in ARF 210.3.2 Contractual Maturity Mismatch – Funding and Capital (ARF 210.3.2)? Should they be reported under the category of the intermediary or the underlying person(s)?
They should be reported as deposits from the underlying person(s).
5. Can Personal Investment Entities (PIEs) with only one or two third-party managers still be treated as retail under APG 210 paragraph 114?
APRA’s intention in APG 210 is that PIEs akin to self-managed superannuation funds may be treated as retail. A third party manager (who is not a beneficiary and family member) would preclude a PIE from receiving retail treatment for the LCR and net stable funding ratio (NSFR). This provision is intended to cover any PIE with a third party manager regardless of the role of the manager or size of the PIE.
In some cases, ADIs may not have sufficient information on PIE depositors to make such a determination. In such a situation, APRA would expect ADIs to use a reasonable dollar threshold, such as $2 million . PIE’s with deposits below $2 million* could be treated as retail whereas APRA would expect PIEs with deposits above $2 million to be treated as wholesale.
* $2 million matches the maximum SME size which may be considered retail under APS 210 Attachment A paragraph 46(b).
6. How should Personal Investment Entities (PIEs) that do not qualify as retail under APG 210 paragraph 114 be treated?
PIE’s not qualifying for retail treatment should be treated as corporate deposits unless the PIE is more akin to a third-party managed fund, in which case it should be considered a financial institution.
7. Can the intermediated deposit treatment in APS 210 Attachment A paragraph 35 be applied if the individual depositors or depositor composition cannot be identified at all times?
To meet the requirements for an intermediated deposit under APS 210 Attachment A paragraph 35, the ADI does not need to know the personal details of the customer of the intermediator but should know the amount of each customer’s deposit and the customer’s category (i.e. natural person, SMSF, PIE, corporate, financial institution) at all times.
8. "SME" reporting is required for a number of the liquidity forms. Is the definition of SME the same for all liquidity reporting forms?
Yes, the definition is the same for all forms and can be found in the ARS 210 paragraph 21 as follows:
"Small and medium enterprise (SME) has the meaning given in paragraph 46 and footnote 7 of Attachment A of Prudential Standard APS 210 Liquidity."
9. How should accrued interest be treated under the NSFR?
Accrued interest receivable/payable links to the required/available stable funding of its associated asset/liability. This is consistent with the carrying value of an asset/liability which includes its accrued interest.
10. How should open repos with the Reserve Bank of Australia (RBA) be reported under the NSFR reporting for ARF 210.6 Net Stable Funding Ratio?
Under the NSFR, open repos should be reported as follows:
- report the amount borrowed in the < 6 months maturity bucket of item 11 Funding from central banks. ASF factor of 0 applies;
- report the cash received from the RBA in the < 6 months maturity bucket of item 21 Central bank reserves and balances. RSF factor of 0 applies; and
- report the encumbrance of self-securitised assets in the open repo transaction in the < 6 months maturity bucket of item 27.2.1 Encumbered CLF-eligible self-securitised assets.
11. To what extent can ADIs rely on the Basel Committee on Banking Supervision (BCBS) frequently asked questions regarding the LCR and NSFR*?
APRA has reviewed the BCBS FAQs and does not believe they conflict with APRA’s standards or guidance. However, depending on the circumstances, this may not always be the case. If a BCBS FAQ conflicts with an APRA standard or guidance in the circumstances contemplated by the ADI, the ADI may not rely on the BCBS FAQ. If the ADI is uncertain, it should either contact APRA or not rely on the BCBS FAQ.
* See the BCBS June 2017 publication "Basel III – The Liquidity Coverage Ratio framework: frequently asked questions" and the July 2017 publication "Basel III – The Net Stable Funding Ratio: frequently asked questions" - both available on the Bank for International Settlements website.
12. To what extent can an ADI rely on letters issued by APRA prior to the 1 January 2018 effective date of the updated APS 210?
Under APS 210 paragraph 71, an ADI must contact APRA if it seeks to place reliance, for the purpose of complying with APS 210, on a previous exemption or other exercise of discretion by APRA under a previous version of the Prudential Standard. This requirement applies to both letters to industry and letters sent directly to individual ADIs.
In the case of a Minimum Liquidity Holdings (MLH) or LCR determination, ADIs should assume their status has not changed under the new version of APS 210 unless APRA specifically notifies the ADI otherwise. Similarly, where APRA has set a higher minimum liquidity requirement under paragraph 56 or 58 of APS 210, the higher requirement will continue to apply unless otherwise notified. Settlement funds placed by MLH ADIs with settlement service providers may be considered approved for a prudential purpose under APS 210 Attachment B paragraph 2 if they have been previously approved in writing by APRA.
13. Does APRA require Australian domiciled MLH ADIs to have a self-securitisation? What size should the securitisation be?
APRA does not require MLH ADIs to establish self-securitisations. However, APRA typically expects MLH ADIs with more than $1 billion in liabilities to have a self-securitisation eligible for repo with the RBA. MLH ADIs without a self-securitisation program, especially those over $1 billion, may be required to hold more liquidity.
The self-securitisation as reported in item 18.7 of ARF 210.4 3-year Funding Plan should be no less than 10 per cent of an ADI’s total deposits (wholesale and retail) and short-term wholesale liabilities (the total of ARF 210.3.2 items 1 and 2.1.1). APRA does not expect MLH ADIs to have offshore wholesale funding, but if one does, it should also include ARF 210.3.2 items 2.2.1, 2.2.2 and 2.2.3. The 10 per cent stated above should be seen as a starting point or guide only. ADIs should conduct their own analysis of their balance sheet and potential funding volatility to determine the appropriate size.
The net proceeds from the self-securitisation (due to haircuts and ineligible assets) will be less than the gross/face amount of the self-securitisation notes. APRA expects that ADIs will actively manage their self-securitisation portfolio such that it is regularly topped up as mortgages amortise or become otherwise ineligible. Further, the ADI’s analysis for the appropriate size of its self-securitisation should consider the impact of the RBA’s haircuts and the ADI’s top up frequency.
14. To what extent does APRA require regular reporting of stress test results under APS 210 paragraph 65?
APRA does not require regular reporting of stress test results but may request them at any time. APRA expects that ADIs would report their stress test results to APRA upon a request or upon the stress tests revealing vulnerabilities requiring further actions.
15. Please clarify APRA’s expectations in relation to the words "without assistance from staff located outside Australia" in APS 210 paragraph 68.
Foreign ADIs have a number of operating and support models for Australia and the region to provide liquidity to branch offices. APRA does not expect staff in Australia to work in isolation. However, staff in Australia must be able to initiate and execute both making and receiving payments. This could be done by instructing offshore centres or outsourcing partners whose operations would not be impacted by time zones or other country holidays.
16. Can APRA please provide a list of Australian LCR ADIs?
As at 26 April 2018, the Australian LCR ADIs are:
- AMP Bank Ltd
- Australia and New Zealand Banking Group Limited
- Bank of China (Australia) Limited
- Bank of Queensland Limited
- Bendigo and Adelaide Bank Limited
- Citigroup Pty Limited
- Commonwealth Bank of Australia
- HSBC Bank Australia Limited
- ING Bank (Australia) Limited (trading as ING)
- Macquarie Bank Limited
- Members Equity Bank Limited
- National Australia Bank Limited
- Rabobank Australia Limited
- Suncorp-Metway Limited
- Westpac Banking Corporation
17. How should clauses which accelerate the repayment of funds owing under funding programs or agreements (such as in the event of a material adverse change) affect the treatment of the funding under APS 210 Attachment A paragraph 45 and APS 210 Attachment C paragraph 8?
APRA expects that a clause which allows a lender (or depositor) to accelerate repayment if the ADI is under financial stress but is still solvent and meeting its financial obligations under the program/agreement will be included in the LCR as funding that has its earliest possible contractual maturity date within the LCR horizon of 30 days. A run-off rate according to the requirements of APS 210 Attachment A paragraph 53 must then be applied. Similarly, APRA expects for NSFR purposes that the ADI will assume a residual maturity of less than six months, being the earliest date at which the funds under the funding agreement containing the relevant acceleration clause may be redeemed, and assign an ASF factor in accordance with the requirements of APS 210 Attachment C paragraph 15.
The clauses that were of concern allow the lender (or depositor) to accelerate maturity, making funds owed under the funding agreement immediately due and payable (regardless of the maturity date) upon the borrowing ADI hitting a particular trigger or coming under (or potentially coming under) stress. Such clauses could allow the lender (or depositor) to withdraw funds when they are most needed by the borrowing ADI. Further, the funds might be withdrawn in priority to other creditors, including retail depositors. Examples of such clauses include, but are not limited to:
- any material adverse change of the borrowing ADI which could affect the ability of the borrowing ADI to satisfy its obligations;
- meeting a specified market-based or similar trigger (for example, hitting a credit default swap spread or equity price), regardless of the likelihood of meeting that trigger;
- any representation or warranty made at issuance later becomes untrue or misleading either when made or repeated;
- a downgrade in excess of 3 notches in the borrowing ADI’s long-term credit rating; and
- any litigation or governmental investigation or proceeding pending or threatened against the borrowing ADI.
APRA appreciates the difficulty of precisely prescribing whether a clause will result in the funding being included within the 30-day horizon of the LCR. APRA expects ADIs to apply a robust process of challenge to such a determination. However, at a high level, a clause that potentially triggers early repayment where the ADI is still meeting its financial obligations under the facility, has not failed and continues to operate as an ADI should warrant careful scrutiny. If the ADI remains in doubt, it should send a query to APRA rather than risk a potential breach of the requirements in APS 210.
In addition to consideration of the appropriate LCR and NSFR requirements in APS 210, if an ADI has a term or condition in a funding agreement with a related entity which is not typically contained in its external funding programs and agreements, the ADI should also consider the requirements of APS 222 paragraph 9.
18. What Australian dollar (AUD) liquid assets qualify as HQLA for the purposes of the LCR and NSFR requirements?
The only AUD assets that qualify as HQLA1 are notes and coin, balances held with the Reserve Bank of Australia, and Australian Government and semi-government securities. There are no AUD assets that currently qualify as HQLA2.
Australian Government securities include any debt securities issued by the Export Finance and Insurance Corporation, and, the National Housing Finance and Investment Corporation, provided that they are fully and unconditionally guaranteed by the Commonwealth of Australia.
19. To the extent that surplus liquid assets in one jurisdiction or currency would not be freely available to meet outflows in other jurisdictions or currencies in times of stress, how should this be reflected in the calculation of the LCR?
For the purpose of calculating the LCR on an “all currencies” basis, surplus liquid assets in a currency are liquid assets (HQLA, RBNZ eligible securities and ALA, as applicable) that are in excess of net cash outflows (prior to applying the inflow cap) in that currency.
To the extent that surplus liquid assets in one jurisdiction or currency would not be freely available to meet outflows in other jurisdictions or currencies in times of stress, APRA expects that an ADI will exclude these liquid assets from reporting in Section A: Liquid assets of reporting form ARF 210.1A Liquidity Coverage Ratio – all currencies (Level 1 and Level 2). In such cases, the ADI should include liquid assets in that jurisdiction or currency in the order of most liquid to least liquid, that is, HQLA1 first, then HQLA2A, HQLA2B and finally ALA, up to the amount of net cash outflow in that jurisdiction or currency.
When reporting the LCR for a single currency under item “35. LCR for significant currencies” in reporting form ARF 210.1A, the above approach would not apply and an ADI should include all liquid assets in that currency.
Refer to paragraph 43 and paragraphs 24 and 29 of Attachment A to APS 210 Liquidity, and paragraphs 28 to 32 of APG 210 Liquidity.
20. What is the LCR and NSFR treatment of a term or minimum notice deposit/loan, from a Financial Institution (FI) customer, to the extent it is used as collateral for future utilisation of the undrawn portion of a committed credit or liquidity facility to that same (or related) customer? What about such a deposit from non-FI customer?
APRA views such an arrangement, whether packaged together as a single product or separate products, as functionally the same as an at-call deposit. To accord with the spirit and intent of the Standard, APRA expects such arrangements (whatever their purpose) to be treated by ADIs as at-call deposits under the LCR and NSFR.
Broadly, any arrangements by ADIs which seek to provide FI customers with immediate or at call access to funds deposited or loaned to the ADI while excluding those funds from the ADI’s LCR calculation or reporting those funds as stable in the ADI’s NSFR do not meet the spirit and intent of the Standard. Such arrangements, however structured, should be treated as at-call funding.
Term or minimum notice deposits from non-FI customers to secure future utilisation of the undrawn amount of a credit or liquidity facility should be treated as two stand-alone products for the purposes of the LCR and NSFR, based on the features of the product and the nature of the retail customer.
21. Can ADIs accept hardship requests to break term deposits from non-retail borrowers?
Under paragraph 42 of Attachment A of APS 210, an ADI may allow depositors experiencing hardship to withdraw their term deposits without changing the treatment of the entire pool of deposits.
ADIs are allowed to accept term deposit break requests from depositors experiencing hardship. This paragraph applies to all depositor types, it is not limited to retail depositors. Given the current environment, APRA will not require a policy defining hardship for all customer types in cases where such a policy does not currently exist.
22. Under what circumstances may APRA require a locally-incorporated MLH ADI to maintain higher minimum liquidity holdings under APS 210 paragraph 58?
- APS 210, paragraphs 57 and 58.
APRA may consider an increase to a locally-incorporated MLH ADI’s minimum liquidity holdings if the ADI evidences elevated liquidity risk. That evidence may include, but is not limited to
- not having access to emergency liquidity, such as from a self-securitisation, membership in an industry support scheme or an unconditionally committed facility from an investment grade entity;
- an ADI using more than an immaterial amount of short-term wholesale funding as a proportion of its total funding; or
- other factors which APRA believes may increase an ADI’s funding volatility or liquidity risk, such as concentrations in funding providers, increasing deposits of a less stable nature, or holding lower quality liquid assets.
Total funding is “Total liabilities and capital” as reported in ARF 210.3.2 item 8. Short term wholesale funding is calculated as the sum of the closing balance (column 1 in ARF 210.3.2) for all funding categorised in ARF 210.3.2 as coming from non-financial corporates, PSEs, ADI/Banks, other financial institutions, other legal entities, repo, short-term securities, and short-term securitisations.
APRA does not have strict, pre-determined parameters or formulae in place to calibrate increases in minimum liquidity holdings and will take into account the risks, available mitigants, and other factors which may be relevant.
23. Does APRA consider a mortgage warehouse facility as short-term or long-term wholesale funding?
- ARF 210.3.2 items 3.1.3, 3.2.3, 3.1.4 and 3.2.4
The treatment depends on the terms of the warehouse facility upon non-renewal or termination. If such a situation (non-renewal or termination of the facility) can result in a default of the relevant Special Purpose Vehicle (SPV), loss of mortgages, or undue pressure on the sponsoring ADI to unwind the warehouse facility at or within 12 months of the termination or non-renewal of the facility (at any time during a calendar year), the warehouse facility should be classified as short-term wholesale funding and reported in either item 3.1.3 or 3.2.3 of ARF 210.3.2. Otherwise, the warehouse facility should be treated as long-term wholesale funding and reported in either item 3.1.4 or 3.2.4 of ARF 210.3.2. For example, a warehouse facility which has a longer than 12 month amortisation period upon non-renewal or termination would be considered long-term.
For the avoidance of doubt, APRA would not consider a step-up margin, payable by the ADI to the warehouse SPV, as undue pressure unless it resulted in:
- the SPV having insufficient cash flows to meet its obligations;
- the sponsoring ADI becoming a net payer (on an ongoing basis) on its basis swap;
- the ADI being required to raise the underlying borrowers’ interest rates: or
- an outcome similar in nature to those outlined in (1) to (3).
24. In what circumstances is APRA likely to approve an alternative method for calculating an ADI’s collateral outflows due to market valuation changes on derivative transactions, under APS 210 footnote 6?
Paragraph 53 of Attachment A to APS 210 requires collateral outflows due to market valuation changes on derivative and other transactions to be calculated as 100 per cent of the largest absolute net 30-day collateral flow realised in the past 24 months (“the standard method”). Footnote 6 of APS 210 states that an ADI may, in certain circumstances, apply to APRA for approval to use an alternative method to that specified in paragraph 53.
APRA recognises that in certain circumstances an ADI may receive substantial collateral inflows due to market valuation changes on its derivatives during a period of severe stress (“right way risk”). Despite an improvement in the ADI’s liquidity position due to the inflows, the calculated collateral outflow in the LCR may increase under the standard method, negating a potential improvement in the LCR. This may result in the ADI’s LCR not reflecting its true liquidity position. In order to address this issue, the ADI may wish to apply to APRA for approval to use an alternative method. APRA would likely approve an alternative method that adjusts the collateral outflow calculated under the standard method to exclude the undue impact of right way risk.
The most efficient way for ADIs to obtain approval to use such an alternative method would be to submit to APRA a proposal in conjunction with the annual committed liquidity facility application to fix the outflow at a particular amount for the next calendar year. APRA would expect the proposed fixed outflow to be based on the collateral outflow that is calculated under the standard method, excluding right way risk inflows from periods of severe stress (such as during the COVID-19 crisis or global financial crisis). Accordingly, in most years, APRA would not expect there to be exclusions from the calculation of the collateral outflow under the standard method.
APRA expects that an ADI will regularly monitor whether the fixed outflow adequately reflects the risk of collateral outflows on its derivative and other transactions during a period of stress. An ADI should notify APRA immediately if it determines that this is not the case.
These Frequently Asked Questions (FAQs) are published for discussion purposes only. The content of these FAQs is not legal advice. Users are encouraged to obtain professional advice about the application of any legislation or prudential standard to their particular circumstances. Users should exercise their own skill and care when relying on any material contained in the FAQs. APRA disclaims any liability for any loss or damage arising out of any use of or reliance on these FAQs. The FAQs may include links to external websites that are beyond APRA’s control. APRA accepts no responsibility for the accuracy, completeness or currency of the content of these FAQs.