Capacity Building for Market Players (CBM) Workshop GN-6: - PowerPoint PPT Presentation

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES FIS WORKSHOP SERIES Capacity Building for Market Players (CBM) Workshop GN-6: Quantitative Measures for Liquidity Risk Management Guidance Note Day 1 - Session 1 Sani Tazara Muhammad Member of the Secretariat, Technical and Research, IFSB 14 – 15 November 2019 | Jakarta, Indonesia Organised By: Hosted By:

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES Outline of the Presentation The Need for the GN-6 Application of the LCR in IIFS Definition and Categorisation of HQLA Operational Considerations for HQLA Infrastructure Issues in the Availability of Sharī`ah -compliant HQLA

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES The Need for the GN-6 The lack of the interbank market for short-term fund generation The shortage or unavailability of Sharī`ah -compliant securities/ Sukūk in many jurisdictions The unavailability of an Sharī`ah -compliant active trading or repurchase (repo) market The lack any form of a Sharī`ah -compliant lender-of-last-resort (SLOLR) and Sharī`ah - compliant deposit insurance scheme. Market conditions Sharī`ah requirements Balance sheet structure These specificities are fully taken into account in the calculation of ratios in this GN-6.

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES Objectives and Scope of GN-6 Objectives • To provide guidance on the application of global liquidity standards – LCR and NSFR- for the IIFS, with suitable adjustments based on the specific operational characteristics; • to provide guidance to supervisory authorities on the application of the LCR and NSFR in their jurisdictions • to delineate the disclosure requirements alongside the application of liquidity standards; and • to present the templates of the LCR and NSFR Scope • A minimum level of liquidity for IIFS for both full-fledged IIFS and Islamic windows of conventional banks on an individual and a consolidated basis. • Supervisory authorities can extend the application of this GN to Islamic investment banks and other financial institutions at their discretion.

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES Liquidity Coverage Ratio (LCR) The objective of the LCR is to promote IIFS’s resilience against short-term liquidity shocks. To meet this requirement, an IIFS is obliged to have an adequate stock of unencumbered HQLA that can be converted easily and immediately into cash with no or little loss of value, in order to meet its liquidity needs for a 30- calendar-day period under a liquidity stress scenario. * Subject to Supervisory Authority Requirement

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES Formula for Calculating LCR  The LCR requirement is based on a scenario that entails a combination of idiosyncratic and market-wide shocks Stock of Sharī`ah -compliant HQLA ≥ 100%* LCR = Total net cash outflows over the next 30 calendar days Total net cash outflows over the next 30 calendar days = Total gross expected cash outflows – Lesser of (total expected cash inflows; 75% of total expected cash outflows) IIFS are required to maintain the However, IIFS may use, with LCR at a level no lower than approval from the relevant that required by the supervisory authority, their stock supervisory authority in both of HQLA during stress normal and financial stress conditions in order to minimise times. the negative impact of the crisis. * Subject to Supervisory Authority Requirement

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES Definition of High Quality Liquid Assets (HQLA) HQLA are defined as assets unencumbered by liens and other restrictions on transfer which can be converted into cash easily and immediately, with no or little loss of value, including under the stress scenario. The assets are required to meet fundamental and market-related characteristics. • Particularly in terms of low risk, • This requirement has to be Low correlation ease and certainty of valuation, fulfilled at all times, including with risky Fundamental and low volatility. during an underlying stress and market- assets, an scenario. related active and characteristics sizeable market, and low volatility Eligible for Consideration intraday and of the inherent overnight risk of HQLA liquidity by Supervisory • Central banks should consider facilities Authorities Such as liquidity risk, market risk, Sharī`ah -compliant securities credit risk, foreign exchange risk, that they accept as eligible and legal and operational risk Sharī`ah collateral. including non- compliance risk

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES Application of LCR in IIFS • Level 1 • Level 2A Components of • Level 2B HQLA Formula of LCR • ALA treatments (if any) • Cash outflows • Retail Deposits and PSIA • Unsecured Wholesale Funding • Secured Funds • Sharī`ah -compliant hedging instruments Components of • CMT-based Deposits Total Net Cash • Sharī`ah - compliant Interbank Contracts Outflows • Cash Inflows • Secured financing • Inflow from committed facilities • Inflow from various counterparties

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES Formula for Calculating LCR (2) Level 1 – 0% haircut* Sovereign/central bank issuances, central bank reserves, coins and banknotes Level 2 Level 2A : 15% haircut ≤ 40 % Securities issued by entities with a 20% risk-weight, corporate of total sukuk rated AA- and above Stock of high- Level 2B : 25-50% haircut HQLA quality liquid Corporate sukuk rated between A+ and BBB-, RMBS, common assets (HQLA) equity shares LCR = Expected net • ‘Run - off rates’ are prescribed to calculate expected cash cash outflows outflows in a stress scenario** • Expected cash inflows are subject to a cap of 75% of total (next 30 days) Outflows minus expected cash outflows • Includes both on and off-balance sheet risks inflows Stress Scenario  the run-off of a proportion of retail funding, including current accounts, UPSIA, RPSIA, and other accounts;  a partial loss of unsecured wholesale funding capacity;  a partial loss of secured, short-term financing with certain collateral and counterparties  additional contractual outflows that would arise from a downgrade in the IIFS’s public credit rating by up to and including three notches, including additional collateral posting requirements;  increases in market volatilities that impact the quality of collateral or potential future exposure of Sharī`ah -compliant hedging positions and thus require larger collateral haircuts or additional collateral  unscheduled draws on committed but unused credit and liquidity facilities  the potential need for the IIFS to buy back or honour contractual and non-contractual obligations for the purpose of mitigating reputational risk.

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES Sharī`ah -compliant Instruments that Meet the Requirements for HQLA Level 1 Level 2A Level 2B Market – Related Fundamental Assets which qualify as Characteristics Characteristics HQLA should have certain fundamental and • Liquefiable at all times • High credit rating of the market-related • Historical evidence of market instruments or issuer characteristics, breadth and market depth • Easy to value particularly in terms of • High trading volumes • Preferably listed low risk , ease and • Stable asset prices even in stress • Sharī`ah - compliant certainty of valuation , times and low volatility • Large, active and deep Sharī`ah - compliant repo market  Sharī`ah -compliant securities that may serve as HQLA are unlikely to have a well-established history of trading in liquid secondary markets  The GN-6 proposes that central banks should consider according HQLA status to Sharī`ah - compliant securities that they accept as eligible collateral, up the limit of the liquidity facility that they would accord to the IIFS holding such securities on the basis of such collateral.

FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FACILITATING THE IMPLEMENTATION OF THE IFSB STANDARDS FIS WORKSHOP SERIES FIS WORKSHOP SERIES Sharī`ah -compliant Instruments that Meet the Requirements for HQLA A. Level 1 Assets Item Amount Factor Total Coins and banknotes Qualifying central bank reserves Qualifying Sukūk and other Sharī`ah - compliant marketable securities issued or guaranteed by 100% sovereigns, central banks, public-sector entities (PSEs), multilateral development banks or relevant international organisations assigned a 0% risk weight for credit risk under IFSB-15 Qualifying domestic currency Sukūk and other Sharī`ah - compliant marketable securities issued by sovereign or central banks that have a non-0% risk weight Qualifying foreign currencies’ Sukūk and other Sharī`ah - compliant marketable securities issued by sovereign or central banks that have a non-0% risk weight