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Deutsche Bank

DB agrees that the liquidity provider should present a low liquidity risk profile in order to apply the preferential treatment in the LCR calculation. In order to make the criteria more practical, DB has some clarifying questions and suggestions. We would welcome further clarity regarding Article 2a of the draft RTS “The liquidity provider and receiver shall comply with the required level of the liquidity coverage ratio on an ongoing basis and for at least the previous 12 months”. Are we correct in assuming that this means that both entities must be LCR compliant for a full year (without applying the preferential treatment) before both provider and receiver can apply the preferential treatment to their LCR ratio calculations? If so this unnecessarily creates trapped intragroup liquidity for a period of 12 months and should be removed from the text. We would suggest that the EBA reconsiders the requirement for the liquidity receiver to have a low liquidity risk profile. For banks operating a centralised liquidity model in particular, liquidity receivers often need intragroup liquidity support since they are generally unable to access sufficient market liquidity on a stand-alone basis or can only do so on a prohibitive basis.
Additionally, with respect to Article 2a, we would recommend that the EBA considers removing the requirement to apply the preferential treatment following the supervisory review and evaluation process (SREP), since this process consists of a number of qualitative factors related to the supervisory judgement on the quality of Internal Liquidity Adequacy Assessment Process (ILAAP) documents, governance arrangements, data infrastructure and adequacy of internal controls. The calculation of the LCR requirement related to setting intragroup flows should remain a quantitative exercise with data driven methodology. As a practical alternative measure, the EBA should separate the requirements around calculation of the LCR from the SREP process in Article 2a, given the time it will take for the European Central Bank (ECB) and other national competent authorities to conduct liquidity reviews. Given the duration of SREP processes and the workload for regulatory authorities, there is a possibility that it will be a
prolonged time before an assessment of both liquidity provider and receiver are completed. In the interim, as the regulation is currently drafted, firms will be unable to apply the preferential treatment, which would trap liquidity within groups. This is contrary to the regulatory intention of the EBA when drafting these standards to ensure the appropriate use of intragroup liquidity lines. As an interim measure, we would suggest that the EBA allows firms to apply the preferential treatment utilising prior national competent
authorities’ views on the regulatory liquidity score for individual entities. Lastly, according to the final SREP Guidelines1, regulators shall not be required to disclose the individual SREP component scores.
Therefore, firms might not even have official confirmation of their liquidity risk score, which could create
confusion within firms as to whether or not they are permitted to apply the preferential treatment.
DB supports the position in favour of legally binding agreements and commitments. However, there are
some practical implications with the RTS as currently drafted that could be unnecessary onerous.
First, given the number of legal entities within large cross-border financial services groups, requiring
each and every liquidity line to be regularly reviewed and supported by an external legal opinion will be
a costly and time intensive process, which is not proportional. The EBA should consider amending the
requirement to accommodate the principle of proportionality. One possible solution would be for the
EBA to consider allowing intragroup support agreements to be reviewed by a firm’s internal legal
department. This would be in line with other special treatment requirements under the LCR, e.g. the
European Central Bank (ECB) explicitly allows a legal opinion by an internal legal department with
regard to the liquidity waiver requirement of Art. 8(1)(c) CRR on contracts that provide the free
movement of funds between the group entities2.In addition, the EBA clarified that the legal opinions on
risk mitigation instruments need not be obtained from an external legal counsel. As long as it is
independent, written and reasoned, the opinion may also be provided by an internal legal counsel3.
Secondly, we would welcome further clarification related to Article 3a; “They shall repeat this review on
a regular basis and shall draw on an external written and reasoned legal opinion.” As part of the regular
reviews, is it the intention of the EBA that a new legal opinion be secured every time each intragroup
liquidity facility is reviewed? In addition, we would welcome further clarification on “It shall be
specifically dedicated to the application of the preferential treatment and available on demand” as this
text is unclear.
Thirdly, it would be helpful for further clarification regarding Article 3C; “The amount of the facility shall
not be revised without the prior consent of the relevant competent authority” Amending the amount of
intragroup liquidity facilities is a practical aspect of day to day liquidity risk management, therefore it
seems unreasonable and overly intrusive to require regulatory approval each time an intragroup facility
is amended. This would be especially burdensome during a stress event where speed of action is
paramount. Intragroup liquidity lines and their potential use in stress forms part of the firm’s recovery
planning, which is the sole responsibility of the firm. Regulatory approval for these will delay the
effectiveness of invoking mitigating contingency actions (which could include increasing committed
intragroup liquidity facilities). This delay can potentially exacerbate a liquidity stress. We would strongly suggest that the text should be amended to require firms to notify the relevant competent authority of a
material change in the amount of any facility on an annual basis as part of the ILAAP submission
process.
We generally agree with the specification set out in the RTS, although some of the criteria related to the liquidity provider will require some operational adjustments to systems.
Anne-Karien von Fumetti
+442075477958