Question ID:
2019_4705
Legal Act:
Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2)
Topic:
Liquidity risk
Article:
422
Paragraph:
6
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement
Article/Paragraph:
21
Disclose name of institution / entity:
Yes
Name of institution / submitter:
FMA Liechtenstein
Country of incorporation / residence:
Liechtenstein
Type of submitter:
Competent authority
Subject Matter:
Net cash out-/inflow from cash settled futures (“ICE Brent Crude futures contract”)
Question:

How to calculate the expected liquidity net cash outflow/inflow from a future contract with daily variation margin and an expected final cash settlement?

Background on the question:

The ICE Brent Crude futures contract is a deliverable contract based on Exchange Futures for Physical (EFP) delivery with an option to cash settle. The vast majority do not claim for EFP delivery, but instead take the advantage of the option to cash settle at expiry. All open contracts are marked-to-market daily. Please see details in the attached document.

 

According to Article 20(2) Delegated Act LCR “Liquidity inflows and liquidity outflows shall be assessed over a 30 calendar day stress period, under the assumption of a combined idiosyncratic and market-wide stress scenario as referred to in Article 5”.

 

Referring to derivatives Article 21 Delegated Act LCR states that “credit institutions shall calculate liquidity outflows and inflows expected over a 30 calendar day period for the contracts listed in Annex II of Regulation (EU) No 575/2013 on a net basis by counterparty subject to the existence of bilateral netting agreements in accordance with Article 295 of that Regulation.” According to Article 30(4) Delegated Sct LCR “credit institutions shall take outflows and inflows expected over 30 calendar days from the contracts listed in Annex II of Regulation (EU) No 575/2013 into account on a net basis in accordance with Article 21. In the case of a net outflow, the credit institution shall multiply the result by 100 % outflow rate.”

 

However, it is not fully clear how to calculate the net cash outflows/inflows from the above future contract under stress assumptions. To calculate the net cash outflows/inflows by the entire contract value of the respective derivative, which are expiring within 30 days, does not seem to make sense in most cases because the vast majority does not claim for EFP delivery. Yet a more realistic approach for a net cash outflow calculation for cash-settled futures could be based on all expected aggregated outflows/inflows from the marked-to-market valuation (daily variation margin) under stress assumptions.

Date of submission:
13/05/2019
Published as Final Q&A:
07/08/2020
EBA Answer:

In accordance with Articles 30(4) and 32(5) of Delegated Regulation (EU) 2015/61 (LCR DA), credit institutions shall take outflows and inflows expected over 30 calendar days from the contracts listed in Annex II of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2) into account on a net basis by counterparty subject to the existence of bilateral netting agreements according to Article 21 LCR DA. In the case of an expected net outflow, the reporting credit institution shall multiply the result by an outflow rate of 100% pursuant to Article 30(4) of Delegated Regulation (EU) 2015/61. In the case of an expected net inflow, the reporting credit institution shall multiply the result by an inflow rate of 100% pursuant to Article 32(5) LCR DA.

For the purpose of determining the above-mentioned expected outflow or inflow related to future contracts, such as ICE Brent Crude futures contracts, the reporting credit institution should consider the following:

In case of cash settlement taking place within 30 calendar days, the reporting credit institution should consider the difference between the current market value of the underlying asset and the agreed future price after deduction of liquid assets posted or received as collateral, if applicable.

Any additional outflows corresponding to collateral needs that would result from the impact of an adverse market scenario on the credit institution's derivatives transactions, financing transactions and other contracts would need to be considered separately under Article 30(3) of Delegated Regulation (EU) 2015/61. The way of how these additional collateral needs are to be calculated is specified in Delegated Regulation (EU) 2017/208.

Status:
Final Q&A