Liquidity check and HLC requirements

25.03.2021

The Central Securities Depositories Regulation (CSDR) forms an important part of the European Commission’s agenda to enhance the safety and soundness of the key market infrastructures that form an essential part of the financial system. A number of changes are required with regards to the mitigation of any credit and liquidity risk during settlement. Not only does CSDR require that sufficient customer collateral be in place to cover any borrowing done by the customer; it is also a prerequisite that this collateral can be converted intraday into the correct currencies of the borrowing to mitigate any liquidity risk in the case of a hypothetical default of its two largest clients (cover 2). This additional liquidity check is further described here below.

CBL applies this liquidity check on settlement instruction against a financing facility. CBL has put in place several financial arrangements to enable customers to access the credit in currencies they are familiar with. With CBL’s best efforts CBL cannot dismiss an event where a trade or trades remains in an unprovisioned status (i.e. “lack of money”) despite enough credit and collateral being available. Such event is likely due to the liquidity check which has identified a temporary unavailability for the amount requested. If such a scenario happens and in order to maximise the likelihood of settlement within the deadlines and to avoid as much as possible impacts on the settlement velocity, customers should bring in cash to ensure timely settlement. Furthermore, CBL strongly recommends customers to shape their instructions1 and – in agreement with their counterparties – use the recently introduced partial settlement functionality.

Reminder: According to CSDR, a CSD-banking service provider should be permitted to grant only uncommitted credit lines to borrowing participants despite sufficient financing facilities and collateral.

Description of the settlement process inclusive of the liquidity check (this description applies for CBL customers only):

  1. Instruction: Customer sends in an instruction for settlement
  2. Instruction validation: The instruction is validated against syntactical, semantic and contextual validation rules
  3. Instruction matching: The instruction is matched with the instruction coming from the counterparty (cash amount tolerance rule applies)
  4. Settlement eligibility: Transactions, composed of receipt and delivery instructions, are eligible for settlement and ready for provisioning
  5. Credit check at currency level: The transactions are netted, and any cash amount shortage is checked against available cash or a financing facility.
  6. Collateral check: In case a financing facility is required to settle the transactions, the financing facility amount is checked against the available collateral amount (= total collateral amount – used collateral amount), allowing for auto-collateralisation. Would the instructing account be part of an umbrella structure, the credit and collateral availability is checked at the umbrella level.
  7. Liquidity check (new check): Required financing facilities for all accounts belonging to the customer entities of the same group is checked against the settlement liquidity limit. This ensures that the two largest groups of customers remain at any point in time below the available settlement liquidity limit in order to comply with the cover 2 requirement. The settlement liquidity limit represents committed repo and FX swaps as well as other funding arrangements that CBL’s Treasury has built to monetise clients’ collateral.
  8. In case all checks above are successful underlying instruction is settled.

All customers who want to use a financing facility have to sign the Credit Terms and Conditions (CTCs) in which they engage to bring a certain percentage of highly liquid collateral (HLC) as part of their overall collateral needed to secure their credit consumption. The percentage contribution for HLC is set at 15% but is subject to change. Any change would be communicated to customers via this web page. In order to ease the monitoring of the HLC CBL has put in place some specific tools:

  • Credit Usage & HLC (new): Next to the existing Credit & Collateral query in Xact Web Portal, a new “Credit Usage & HLC” view will be made available including the total HLC value and the associated HLC% compared to total credit exposure at institution level.
    For additional information, customers may refer to announcement C20055.
  • Statement of Holdings: The total collateral value and associated HLC will be available both at portfolio and ISIN levels through the MT535 report (XML and PDF versions only, not SWIFT).

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1. Please refer to the table below for the recommended shaping amounts.