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CRE Finance World Autumn 2015
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Table 1
Levels For Potential HQLA
Designation
Europe
U.S.
Canada*
Level 1 assets
(0% haircut,
covered bonds at
least 7% haircut)
(a) Coins and banknotes.
(b) Certain central bank reserves.
(c) Certain central or regional govern-
ment assets or claims.
(d) Certain third-country government/
central bank assets or claims
(typically must be rated ECAI 1)
†
.
(e) Certain assets issued by credit
institutions.
(f) Extremely high-quality covered bonds
(ECB member states).
(a) Federal Reserve bank balances.
(b) Foreign withdrawable reserves.
(c) Securities issued by or unconditionally
guaranteed as to timely P&I by the
U.S. Treasury.
(d) Liquid and readily marketable
securities guaranteed by any other
U.S. government agency.
(e) Certain liquid and readily marketable
securities that are claims on, or claims
guaranteed by, a sovereign entity, a
central bank, the Bank for Interna-
tional Settlements, the International
Monetary Fund, the European Central
Bank, and European Community, or a
multilateral development bank.
(f) Certain debt securities issued by
sovereign entities.
Securities issued under the National
Housing Act Mortgage Backed Se-
curities (NHA MBS) program may be
included as level 1 assets.
For non-foreign non-DSIB institutions,
holdings of NHA MBS and CMBS where
the minimum pool size is less than $25
million may be included as level 1 assets.
Sovereign and central bank debt se-
curities, even with a rating below ‘AA-’,
should be considered eligible as level
1 assets only when these assets are
issued by the sovereign or central bank
in the institution’s home country or in
host countries where the institution has a
subsidiary or branch.
Level 2A assets
(15% haircut)
(a) Certain regional government, local
authority, or public sector entities as-
signed a 20% risk weighting.
(b) Certain third-country government/
central bank/regional government/
local authority/public sector entities
assigned a 20% risk weighting.
(c) Certain high-quality covered bonds
(ECB member states rated ECAI 2).
(d) Certain third-country covered bonds
rated ECAI 1.
(d) Certain ECAI 1-rated corporate
bonds.
(a) Certain obligations issued or guar-
anteed by a U.S. GSE (Freddie Mac,
Fannie Mae, Farm Credit System,
Federal Home Loan Bank).
(b) Certain obligations issued or
guaranteed by a sovereign entity or a
multilateral development bank.
Covered bonds that were issued
by Canadian institutions before the
Canadian covered bond legislation
coming into force on July 6, 2012, may
be included as level 2A assets if the
other requirements are met.
Level 2B assets
(25%-50%
haircut)
(a) Certain asset-backed securities.
(b) Certain ECAI 2- or 3-rated corporate
bonds.
(c) Shares.
(d) Certain restricted-use liquidity
facilities.
(e) Certain high-quality covered bonds.
(f) Certain third-country government/
central bank/regional government/
local authority/public sector entities
rated ECAI 5 or higher.
(a) Certain IG-rated corporate debt
securities.
(b) Certain publicly traded shares of
common stock.
Sovereign and central bank debt securi-
ties rated ‘BBB+’ to ‘BBB–’ that are not
included in the definition of level 1 assets
may be included in the definition of level
2B assets with a 50% haircut within the
15% cap for all level 2B assets.
Institutions are permitted to include
long cash non-financial equity positions
held against synthetic short positions as
eligible level 2B assets provided certain
operational requirements are met.
*Based on our read, the Canadian regulations are built on the EU regulations. We’ve included what we believe to be the relevant OSFI notes.
†
Our understanding is that an ECAI 1 rating is equivalent to
a ‘AA’ or ‘AAA’ category, while ECAI 2 is ‘A’, ECAI 3 is ‘BBB’, ECAI 4 is ‘BB’, and ECAI 5 is ‘B’. P&I—Principal and interest. CMB—Canada mortgage bond. ECAI—External Credit Assessment Institutions.
ECB—European Central Bank. IG—Investment grade. GSE—Government-sponsored enterprise.
Basel III’s Recent Liquidity Guidelines
regulations, most level 1 assets may be included with no haircut,
level 2 assets receive a 15% market value haircut, and level 3 are
haircut by 25%-50%, although different instruments in each level
may have varying haircuts.