RBI/2017-18/178
DBR.BP.BC.No.106/21.04.098/2017-18
May
17, 2018
All Scheduled Commercial
Banks
(excluding RRBs)
Dear Sir/Madam,
Basel III Framework on Liquidity
Standards –
Net Stable Funding Ratio (NSFR) – Final Guidelines
The Net Stable Funding Ratio
(NSFR) and Liquidity Coverage Ratio (LCR) are significant components of the
Basel III reforms. The LCR guidelines which promote short term resilience
of a bank’s liquidity profile have been issued vide circular DBOD.BP.BC.No.120/21.04.098/2013-14 dated June
9, 2014. The NSFR guidelines on the other hand ensure reduction in
funding risk over a longer time horizon by requiring banks to fund their
activities with sufficiently stable sources of funding in order to mitigate
the risk of future funding stress.
2. The draft guidelines on the NSFR for banks in
India were issued on May 28, 2015 for comments. The final guidelines, after
considering comments received from various stakeholders, are given in
the Annex for implementation from
a date to be communicated in due course.
Yours faithfully,
(Prakash Baliarsingh)
Chief General Manager
Annex
Basel
III Framework on Liquidity Standards – Net Stable Funding Ratio (NSFR)
Table
of Contents
|
Paragraph
No.
|
Topic
|
|
|
Net Stable Funding
Ratio (NSFR)
|
|
1.
|
Introduction
|
|
2.
|
Objective
|
|
3.
|
Scope
|
|
4.
|
Definition of the
NSFR
|
|
5.
|
Minimum Requirement
and Implementation Date
|
|
6.
|
Calibrations of ASF
and RSF - Criteria and Assumptions
|
|
7.
|
Definition and
Computation of ASF
|
|
8.
|
ASF – Other
Requirements
|
|
9.
|
Definition and
Computation of RSF
|
|
10.
|
RSF – Other
Requirements
|
|
11.
|
Frequency of
calculation and reporting
|
|
12.
|
NSFR Disclosure
Standards
|
|
Appendix
I
|
BLR-7 – Statement
of NSFR
|
|
Appendix
II
|
NSFR Disclosure
Template
|
|
Net
Stable Funding Ratio (NSFR)
1. Introduction
1.1 In the backdrop of the
global financial crisis that started in 2007, the Basel Committee on
Banking Supervision (BCBS) proposed certain reforms to strengthen global
capital and liquidity regulations with the objective of promoting a more
resilient banking sector. In this regard, the Basel III rules text on
liquidity – “Basel III: International framework for liquidity risk
measurement, standards and monitoring” was issued in December 2010 which
presented the details of global regulatory standards on liquidity. Two
minimum standards, viz., Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR) for funding liquidity were prescribed by the Basel
Committee for achieving two separate but complementary objectives.
1.2 The LCR promotes short-term
resilience of banks to potential liquidity disruptions by ensuring that
they have sufficient high quality liquid assets (HQLAs) to survive an acute
stress scenario lasting for 30 days. The NSFR promotes resilience over a
longer-term time horizon by requiring banks to fund their activities with
more stable sources of funding on an ongoing basis.
1.3 At the time of issuing the
December 2010 document, the Basel Committee had put in place a rigorous
process to review the standard and its implications for financial markets,
credit extension and economic growth and agreed to review the development
of the NSFR over an observation period. The focus of this review was on
addressing any unintended consequences for financial market functioning and
the economy, and on improving its design with respect to several key
issues, notably: (i) the impact on retail business activities; (ii) the
treatment of short-term matched funding of assets and liabilities; and
(iii) analysis of sub-one year buckets for both assets and liabilities.
1.4 These guidelines are based
on the final rules text on NSFR published by the BCBS in October 2014 and
take into account the Indian conditions.
2. Objective
The objective of NSFR is to
ensure that banks maintain a stable funding profile in relation to the
composition of their assets and off-balance sheet activities. A sustainable
funding structure is intended to reduce the probability of erosion of a
bank’s liquidity position due to disruptions in a bank’s regular sources of
funding that would increase the risk of its failure and potentially lead to
broader systemic stress. The NSFR limits overreliance on short-term
wholesale funding, encourages better assessment of funding risk across all
on- and off-balance sheet items, and promotes funding stability.
3. Scope
The NSFR would be applicable for
Indian banks at the solo as well as consolidated level. For foreign banks
operating as branches in India, the framework would be applicable on
stand-alone basis (i.e., for Indian operations only).
4. Definition of NSFR
The NSFR is defined as the
amount of available stable funding relative to the amount of required
stable funding. “Available stable funding” (ASF) is defined as the portion
of capital and liabilities expected to be reliable over the time horizon
considered by the NSFR, which extends to one year. The amount of stable
funding required ("Required stable funding") (RSF) of a specific
institution is a function of the liquidity characteristics and residual
maturities of the various assets held by that institution as well as those
of its off-balance sheet (OBS) exposures.
5. Minimum Requirement and
Implementation Date
The above ratio should be equal
to at least 100% on an ongoing basis. However, the NSFR would be
supplemented by supervisory assessment of the stable funding and liquidity
risk profile of a bank. On the basis of such assessment, the Reserve Bank
may require an individual bank to adopt more stringent standards to reflect
its funding risk profile and its compliance with the Sound Principles
(issued vide circular “Liquidity Risk
Management by Banks” DBOD.BP.No.56/21.04.098/2012-13 dated November 7, 2012).
The NSFR would be binding on banks with effect from a date which will be
communicated in due course.
6. Calibrations of ASF and RSF -
Criteria and Assumptions
ASF and RSF reflect the amount
of funding available and required for liabilities and assets (including off
balance sheet assets).The amounts of ASF and RSF specified in the BCBS
standard are calibrated to reflect the presumed degree of stability of
liabilities and liquidity of assets.
6.1 The calibration reflects the
stability of liabilities across two dimensions:
(a) Funding tenor – The NSFR is
generally calibrated such that longer-term liabilities are assumed to be
more stable than short-term liabilities.
(b) Funding type and
counterparty – The NSFR is calibrated under the assumption that short-term
(maturing in less than one year) deposits provided by retail customers and
funding provided by small business customers are behaviourally more stable
than wholesale funding of the same maturity from other counterparties.
6.2 In determining the
appropriate amounts of required stable funding for various assets, the
following criteria are taken into consideration, recognising the potential
trade-offs between these criteria:
(a) Resilient credit creation –
The NSFR requires stable funding for some proportion of lending to the real
economy in order to ensure the continuity of this type of intermediation.
(b) Bank behaviour – The NSFR is
calibrated under the assumption that banks may seek to roll over a
significant proportion of maturing loans to preserve customer
relationships.
(c) Asset tenor – The NSFR
assumes that some short-dated assets (maturing in less than one year)
require a smaller proportion of stable funding because banks would be able
to allow some proportion of those assets to mature instead of rolling them
over.
(d) Asset quality and liquidity
value – The NSFR assumes that unencumbered, high-quality assets that can be
securitised or traded, and thus can be readily used as collateral to secure
additional funding or sold in the market, do not need to be wholly financed
with stable funding.
6.3 Additional stable funding
sources are also required to support at least a small portion of the
potential calls on liquidity arising from OBS commitments and contingent
funding obligations.
6.4 Definitions on various
components of NSFR indicated in these guidelines mirror those outlined in
the circular on LCR, unless otherwise specified. All references to LCR
definitions in the NSFR refer to the definitions in the LCR standard issued
vide circular dated June 9, 2014 and
modified vide circular dated March 31, 2015; March 23, 2016 and August 2, 2017.
7. Definition and computation of
Available Stable Funding
7.1 The amount of ASF is
measured, based on the broad characteristics of the relative stability of
an institution’s funding sources, including the contractual maturity of its
liabilities and the differences in the propensity of different types of
funding providers to withdraw their funding. The amount of ASF is
calculated by first assigning the carrying value of an institution’s
capital and liabilities to one of five categories as presented below. The
amount assigned to each category is then multiplied by an ASF factor, and
the total ASF is the sum of the weighted amounts. Carrying value represents
the amount at which a liability or equity instrument is recorded before the
application of any regulatory deductions, filters or other adjustments.
Table
1
|
Sr.
No.
|
Components
of ASF category (liability categories)
|
Associated
ASF factor
|
(i)
|
• Total regulatory capital
(excluding Tier 2 instruments with residual maturity of less than one
year)
• Other capital instruments
with effective residual maturity of one year or more
• Other liabilities with
effective residual maturity of one year or more
|
100%
|
(ii)
|
• Stable non-maturity (demand)
deposits and term deposits with residual maturity of less than one year
provided by retail and small business customers
|
95%
|
(iii)
|
• Less stable non-maturity
deposits and term deposits with residual maturity of less than one year
provided by retail and small business customers
|
90%
|
(iv)
|
• Funding with residual
maturity of less than one year provided by non-financial corporate
customers
• Operational deposits
• Funding with residual
maturity of less than one year from sovereigns, PSEs, and multilateral
and national development banks
• Other funding with residual
maturity between six months and less than one year not included in the
above categories, including funding provided by central banks and
financial institutions
|
50%
|
(v)
|
• All other liabilities and
equity not included in the above categories, including liabilities
without a stated maturity (with a specific treatment for deferred tax
liabilities and minority interests)
• NSFR derivative liabilities
net of NSFR derivative assets if NSFR derivative liabilities are greater
than NSFR derivative assets
• “Trade date” payables
arising from purchases of financial instruments, foreign currencies and
commodities.
|
0%
|
7.2 Liabilities and capital
receiving a 100% ASF factor
Liabilities and capital
instruments receiving a 100% ASF factor comprise:
(a) the total amount of
regulatory capital, before the application of capital deductions, as
defined in paragraph 4.2 of the Master
Circular on Basel III Capital dated July 1, 2015, excluding the
proportion of Tier 2 instruments with residual maturity of less than one
year;
(b) the total amount of any
capital instrument not included in (a) that has an effective residual
maturity of one year or more, but excluding any instruments with explicit
or embedded options that, if exercised, would reduce the expected maturity
to less than one year; and
(c) the total amount of secured
and unsecured borrowings and liabilities (including term deposits1) with effective2 residual
maturities of one year or more. Cash flows due before the one-year horizon
but arising from liabilities with a final maturity greater than one year do
not qualify for the 100% ASF factor.
7.3 Liabilities receiving a 95%
ASF factor
Liabilities receiving a 95% ASF
factor comprise “stable” (as defined in the Explanatory Notes to BLR-1
in circular on LCR dated June 9, 2014)
non-maturity (demand) deposits and/or term deposits with residual
maturities of less than one year provided by retail and small business
customers.
7.4 Liabilities receiving a 90%
ASF factor
Liabilities receiving a 90% ASF
factor comprise “less stable” (as defined in the ‘Explanatory Notes’ to
BLR-1 in Circular on LCR dated June 9, 2014)
non-maturity (demand) deposits and/or term deposits with residual
maturities of less than one year provided by retail and small business
customers as defined in the ‘Explanatory Note’ to BLR-1 of Circular dated June 9, 2014 and modified
vide circular dated March 31, 2015.
7.5 Liabilities receiving a 50%
ASF factor
Liabilities receiving a 50% ASF
factor comprise:
(a) funding (secured and
unsecured) with a residual maturity of less than one year provided by
non-financial corporate customers;
(b) operational deposits (as
defined in the ‘Explanatory Notes’ to Circular
on LCR dated June 9, 2014 and modified vide circular dated
March 31, 2015);
(c) funding with residual
maturity of less than one year from sovereigns, public sector entities
(PSEs), and multilateral and national development banks (NABARD, NHB &
SIDBI); and
(d) other funding (secured and
unsecured) not included in the categories above with residual maturity
between six months to less than one year, including funding from RBI and/or
other central banks and financial institutions.
7.6 Liabilities receiving a 0%
ASF factor
Liabilities receiving a 0% ASF
factor comprise:
(a) all other liabilities and
equity categories not included in the above categories, including other
funding with residual maturity of less than six months from RBI and/or
other central banks and financial institutions;
(b) other liabilities without a
stated maturity. This category may include short positions and open
maturity positions. Two exceptions can be recognised for liabilities
without a stated maturity:
·
first,
deferred tax liabilities, which should be treated according to the nearest
possible date on which such liabilities could be realised; and
·
second,
minority interest, which should be treated according to the term of the
instrument, usually in perpetuity.
These liabilities would then be
assigned either a 100% ASF factor if the effective maturity is one year or
greater, or 50%, if the effective maturity is between six months and less
than one year;
(c) NSFR derivative liabilities
as calculated according to paragraphs 8.1 below, net of NSFR derivative
assets as calculated according to paragraph 10.12 below, if NSFR derivative
liabilities are greater than NSFR derivative assets; and
(d) “trade date” payables
arising from purchases of financial instruments, foreign currencies and commodities
that (i) are expected to settle within the standard settlement cycle or
period that is customary for the relevant exchange or type of transaction,
or (ii) have failed to, but are still expected to, settle.
8. ASF – Other Requirements
8.1 Calculation of derivative
liability amounts
Derivative liabilities are
calculated first based on the replacement cost for derivative contracts
(obtained by marking to market) where the contract has a negative value. If
the derivative exposure is covered by an eligible bilateral netting
contract as specified in the Annex 20 (Part B) of the Master Circular on
Basel III Capital Regulations3,
the replacement cost for the set of derivative exposures covered by the
contract will be the net replacement cost. In calculating NSFR derivative
liabilities, collateral posted in the form of variation margin in
connection with derivative contracts, regardless of the asset type, must be
deducted from the negative replacement cost amount.
8.2 When determining the
maturity of an equity or liability instrument, investors are assumed to
redeem a call option at the earliest possible date. For funding with
options exercisable at the bank’s discretion, the RBI may take into account
reputational factors that may limit a bank’s ability not to exercise the
option. In particular, where the market expects certain liabilities to be
redeemed before their legal final maturity date, banks should assume such behaviour
for the purpose of the NSFR and include these liabilities in the
corresponding ASF category. For long-dated liabilities, only the portion of
cash flows falling at or beyond the six-month and one-year time horizons
should be treated as having an effective residual maturity of six months or
more and one year or more, respectively.
9. Definition and computation of
Required Stable Funding (RSF)
9.1 The amount of required
stable funding is measured based on the broad characteristics of the
liquidity risk profile of an institution’s assets and OBS exposures. The
amount of required stable funding is calculated by first assigning the
carrying value4 of an institution’s assets
to the categories listed in the Table 2 below.
Unless explicitly stated otherwise in the NSFR standard, assets should be
allocated to maturity buckets according to their contractual residual
maturity. However, this should take into account embedded optionality, such
as put or call options, which may affect the actual maturity date as
described in paragraphs 8.2 and 10.2. The amount assigned to each category
is then multiplied by its associated required stable funding (RSF) factor,
and the total RSF is the sum of the weighted amounts added to the amount of
OBS activity (or potential liquidity exposure) multiplied by its associated
RSF factor (Table 3). Definitions mirror
those outlined in the extant LCR guidelines, unless otherwise specified5.
Table
2
|
Sr.
No.
|
Components
of RSF category
|
Associated
RSF factor
|
(i)
|
• Coins and banknotes
• Cash Reserve Ratio (CRR)
including excess CRR
• All claims on RBI with
residual maturities of less than six months
• “Trade date” receivables
arising from sales of financial instruments, foreign currencies and
commodities.
|
0%
|
(ii)
|
• Unencumbered Level 1 assets,
excluding coins, banknotes and CRR
• Unencumbered SLR Securities
|
5%
|
(iii)
|
• Unencumbered loans to
financial institutions with residual maturities of less than six months,
where the loan is secured against Level 1 assets as defined in LCR circular dated June 9, 2014 and updated
from time to time, and where the bank has the ability to freely
re-hypothecate 6the
received collateral for the life of the loan
|
10%
|
(iv)
|
• All other ‘standard’
unencumbered loans to financial institutions with residual maturities of
less than six months not included in the above categories
• Unencumbered Level 2A assets
|
15%
|
(v)
|
• Unencumbered Level 2B assets
• HQLA encumbered for a period
of six months or more and less than one year
• ‘Standard’ Loans to
financial institutions and central banks with residual maturities between
six months and less than one year
• Deposits held at other
financial institutions for operational purposes
• All other assets not
included in the above categories with residual maturity of less than one
year, including ‘standard’ loans to non-financial corporate clients, to
retail and small business customers, and ‘standard’ loans to sovereigns
and PSEs
|
50%
|
(vi)
|
• Unencumbered ‘standard’
residential mortgages with a residual maturity of one year or more and
with the minimum risk weight permitted under the Standardised Approach7
• Other unencumbered
‘standard’ loans not included in the above categories, excluding loans to
financial institutions, with a residual maturity of one year or more and with
a risk weight of less than or equal to 35% under the Standardised
Approach
|
65%
|
(vii)
|
• Cash, securities or other
assets posted as initial margin for derivative contracts and cash or
other assets provided to contribute to the default fund of a CCP
• Other unencumbered
performing loans with risk weights greater than 35% under the Standardised
Approach and residual maturities of one year or more, excluding loans to
financial institutions
• Unencumbered securities that
are not in default and do not qualify as HQLA/SLR with a remaining
maturity of one year or more and exchange-traded equities
• Physical traded commodities,
including gold
|
85%
|
(viii)
|
• All assets that are
encumbered for a period of one year or more
• NSFR derivative assets net
of NSFR derivative liabilities if NSFR derivative assets are greater than
NSFR derivative liabilities
• 5% of derivative liabilities
as calculated according to para 8.1
• All other assets not
included in the above categories, including non-performing loans, loans
to financial institutions with a residual maturity of one year or more,
non-exchange-traded equities, fixed assets, items deducted from
regulatory capital, retained interest, insurance assets, subsidiary
interests and defaulted securities
• All restructured ‘standard’
loans which attract higher risk weight and additional provision
|
100%
|
Table
3
|
Sr.
No.
|
Off-balance
Sheet Items which require stable Funding
|
Associated
RSF factor
|
(i)
|
Irrevocable and conditionally
revocable credit and liquidity facilities to any client
|
5% of the currently undrawn
portion
|
(ii)
|
Other contingent funding
obligations, including products and instruments such as:
• Unconditionally revocable
credit and liquidity facilities
• Non-contractual obligations
such as:
- potential requests for debt
repurchases of the bank’s own debt or that of related conduits,
securities investment vehicles and other such financing facilities
- structured products where
customers anticipate ready marketability, such as adjustable rate notes
and variable rate demand notes (VRDNs)
- managed funds that are
marketed with the objective of maintaining a stable value
|
5% of the currently undrawn
portion
|
(iii)
|
• Trade finance-related
obligations (including guarantees and letters of credit)
• Guarantees and letters of
credit unrelated to trade finance obligations
|
3% of the currently undrawn
portion
|
9.2 Assets assigned a 0% RSF
factor
Assets assigned a 0% RSF factor
comprises:
(a) coins and banknotes
immediately available to meet obligations;
(b) CRR (including required
reserves and excess reserves);all claims8 on RBI with residual maturities of less than six
months;
(c) “trade date” receivables
arising from sales of financial instruments, foreign currencies and
commodities that (i) are expected to settle within the standard settlement
cycle or period that is customary for the relevant exchange or type of
transaction, or (ii) have failed to, but are still expected to, settle.
9.3 Assets assigned a 5% RSF
factor
Assets assigned a 5% RSF factor
comprise unencumbered Level 1 assets as defined in LCR circular dated June
9, 2014, excluding assets receiving a 0% RSF as specified above, and
including:
·
marketable
securities representing claims on or guaranteed by sovereigns, central
banks, PSEs, the Bank for International Settlements, the International
Monetary Fund, the European Central Bank and the European Community, or
multilateral development banks that are assigned a 0% risk weight under the
Basel II Standardised Approach for credit risk;
·
certain
non-0% risk-weighted sovereign or central bank debt securities as specified
in the LCR circular.
·
Unencumbered
SLR securities
9.4 Assets assigned a 10% RSF
factor
Unencumbered loans to financial
institutions with residual maturities of less than six months, where the
loan is secured against Level 1 assets as defined in LCR guidelines dated
June 9, 2014 read with circular dated March 31, 2015, and where the bank
has the ability to freely re-hypothecate the received collateral for the
life of the loan.
9.5 Assets assigned a 15% RSF
factor
Assets assigned a 15% RSF factor
comprise:
(a) unencumbered Level 2A assets
as defined in LCR circular dated June 9, 2014 read
with circular dated March 31, 2015,
including:
·
marketable
securities representing claims on or guaranteed by sovereigns, central
banks, PSEs or multilateral development banks that are assigned a 20% risk
weight under the Basel II Standardised Approach for credit risk; and
·
corporate
debt securities (including commercial paper) and covered bonds with a
credit rating equal or equivalent to at least AA–;
(b) all other standard
unencumbered loans to financial institutions with residual maturities of
less than six months not included in paragraph 9.4 above.
9.6 Assets assigned a 50% RSF
factor
Assets assigned a 50% RSF factor
comprise:
(a) unencumbered Level 2B assets
as defined and subject to the conditions set forth in LCR guidelines dated
June 9, 2014 read with guidelines dated March 31, 2015, including:
·
residential
mortgage-backed securities (RMBS) with a credit rating of at least AA;
·
corporate
debt securities (including commercial paper) with a credit rating of
between A+ and BBB–; and
·
exchange-traded
common equity shares not issued by financial institutions or their
affiliates;
(b) any HQLA as defined in the
LCR that are encumbered for a period of between six months and less than
one year;
(c) all loans to financial
institutions and central banks with residual maturity of between six months
and less than one year; and
(d) deposits held at other
financial institutions for operational9 purposes , as outlined in LCR guidelines dated
June 9, 2014 read with guidelines dated March 31, 2015, that are subject to
the 50% ASF factor in paragraph 7.5 (b); and
(e) all other non-HQLA not
included in the above categories that have a residual maturity of less than
one year, including loans to non-financial corporate clients, loans to
retail customers (i.e. natural persons) and small business customers, and
loans to sovereigns, PSEs and national development banks (NABARD, NHB &
SIDBI).
9.7 Assets assigned a 65% RSF
factor
Assets assigned a 65% RSF factor
comprise:
(a) unencumbered residential
mortgages with a residual maturity of one year or more that would qualify
for the minimum risk weight under the Basel II Standardised Approach for
credit risk; and
(b) other unencumbered loans not
included in the above categories (including loans to sovereigns and PSEs with
a residual maturity of one year or more), excluding loans to financial
institutions, with a residual maturity of one year or more that would
qualify for a 35% or lower risk weight under the Basel II Standardised
Approach for credit risk.
9.8 Assets assigned an 85% RSF
factor
Assets assigned an 85% RSF
factor comprise:
(a) cash, securities or other
assets posted as initial margin for derivative contracts10 (regardless of whether these assets are on- or
off-balance sheet) and cash or other assets provided to contribute to the
default fund of a central counterparty (CCP). Where securities or other
assets posted as initial margin for derivative contracts would otherwise
receive a higher RSF factor, they should retain that higher factor. For OTC
transactions, any fixed independent amount a bank was contractually
required to post at the inception of the derivatives transaction should be
considered as initial margin, regardless of whether any of this margin was
returned to the bank in the form of variation margin payments. If the
initial margin is formulaically defined at a portfolio level, the amount
considered as initial margin should reflect this calculated amount as of
the NSFR measurement date, even if, for example, the total amount of margin
physically posted to the bank’s counterparty is lower because of VM
payments received. For centrally cleared transactions, the amount of
initial margin should reflect the total amount of margin posted (IM and VM)
less any mark-to-market losses on the applicable portfolio of cleared
transactions.
(b) other unencumbered
performing loans that do not qualify for the 35% or lower risk weight under
the Basel II Standardised Approach for credit risk and have residual
maturities of one year or more, excluding loans to financial institutions;
(c) unencumbered securities with
a remaining maturity of one year or more and exchange-traded equities, that
are not in default and do not qualify as SLR/ HQLA according to the LCR;
and
(d) physical traded commodities,
including gold.
9.9 Assets assigned a 100% RSF
factor
Assets assigned a 100% RSF
factor comprise:
(a) all assets that are
encumbered11 for a period of one year
or more;
(b) NSFR derivative assets as
calculated according to paragraphs 10.12 net of NSFR derivative liabilities
as calculated according to paragraphs 8.1, if NSFR derivative assets are
greater than NSFR derivative liabilities;
(c) all other assets not
included in the above categories, including non-performing loans12, loans to financial institutions with a residual
maturity of one year or more, non-exchange-traded equities, fixed assets,
items deducted from regulatory capital, retained interest, insurance
assets, subsidiary interests and defaulted securities; and
(d) 5% of derivative liabilities
(ie negative replacement cost amount) as calculated according to paragraph
8.1 (before deducting variation margin posted).
(e) All ‘standard’ restructured
loans which attract higher risk and/or additional provisioning.
10. RSF – Other Requirements
10.1 The RSF factors assigned to
various types of assets are intended to approximate the amount of a
particular asset that would have to be funded, either because it will be
rolled over, or because it would not be monetised through sale or used as
collateral in a secured borrowing transaction over the course of one year
without significant expense. Under the standard, such amounts are expected
to be supported by stable funding.
10.2 Assets should be allocated
to the appropriate RSF factor based on their residual maturity or liquidity
value. When determining the maturity of an instrument, investors should be
assumed to exercise any option to extend maturity. For assets with options
exercisable at the bank’s discretion, RBI may take into account
reputational factors that may limit a bank’s ability not to exercise the
option13 and prescribe higher RSF
Factor. In particular, where the market expects certain assets to be extended
in their maturity, banks should assume such behaviour for the purpose of
the NSFR and include these assets in the corresponding RSF category. If
there is a contractual provision with a review date to determine whether a
given facility or loan is renewed or not, RBI may authorise banks on a case
by case basis, to use the next review date as the maturity date. In doing
so, RBI will consider the incentives created and the actual likelihood that
such facilities/loans will not be renewed. For amortising loans and other
claims, the portion that comes due within the one-year horizon can be
treated in the less-than-one-year residual maturity category.
10.3 For purposes of determining
its required stable funding, an institution should (i) include financial
instruments, foreign currencies and commodities for which a purchase order
has been executed, and (ii) exclude financial instruments, foreign currencies
and commodities for which a sales order has been executed, even if such
transactions have not been reflected in the balance sheet under a
settlement-date accounting model, provided that (i) such transactions are
not reflected as derivatives or secured financing transactions in the
institution’s balance sheet, and (ii) the effects of such transactions will
be reflected in the institution’s balance sheet when settled.
10.4 Encumbered assets: Assets on the balance sheet that are
encumbered 14for one year or more receive a
100% RSF factor. Assets encumbered for a period of between six months and
less than one year that would, if unencumbered, receive an RSF factor lower
than or equal to 50%, receive a 50% RSF factor. Assets encumbered for
between six months and less than one year that would, if unencumbered,
receive an RSF factor higher than 50%, retain that higher RSF factor. Where
assets have less than six months remaining in the encumbrance period, those
assets may receive the same RSF factor as an equivalent asset that is
unencumbered. In addition, for the purposes of calculating the NSFR, assets
that are encumbered for exceptional15 central
bank liquidity operations may receive RSF factor which must not be lower
than the RSF factor applied to the equivalent asset that is unencumbered.
10.5 Encumbrance treatment
applied to secured lending (e.g. reverse repo) where collateral received
does not appear on bank’s balance sheet, and it has been rehypothecated or
sold thereby creating a short position - The encumbrance treatment should be applied to the
on-balance sheet receivable to the extent that the transaction cannot
mature without the bank returning the collateral received to the
counterparty. For a transaction to be “unencumbered”, it must be “free of
legal, regulatory, contractual or other restrictions on the ability of the
bank to liquidate, sell, transfer or assign the asset”. Since the
liquidation of the cash receivable is contingent on the return of
collateral that is no longer held by the bank, the receivable should be
considered as encumbered. When the collateral received from a secured
funding transaction has been rehypothecated, the receivable should be
considered encumbered for the term of the rehypothecation of the
collateral. When the collateral received from a secured funding transaction
has been sold outright, thereby creating a short position, the receivable
related to the original secured funding transaction should be considered
encumbered for the term of the residual maturity of this receivable. Thus,
the on-balance sheet receivable should:
·
be
treated according to para 10.9 if the remaining period of encumbrance is
less than six months (i.e. it is considered as being unencumbered in the
NSFR);
·
be
assigned a 50% or higher RSF factor if the remaining period of encumbrance
is between six months and less than one year according to paragraph 10.4;
and
·
be
assigned a 100% RSF factor if the remaining period of encumbrance is
greater than one year according to paragraph 10.4.
10.6 Encumbrance treatment
applied to secured lending (e.g. reverse repo) transactions where collateral
received appears on bank’s balance sheet, and it has been rehypothecated or
sold thereby creating a short position- Collateral received that appears on
a bank’s balance sheet and has been rehypothecated (e.g. encumbered to a
repo) should be treated as encumbered according to paragraph 10.4.
Consequently, the collateral received should:
·
be
treated as being unencumbered if the remaining period of encumbrance is
less than six months according to paragraph 10.4 of the NSFR standard, and
receive the same RSF factor as an equivalent asset that is unencumbered;
·
be
assigned a 50% or higher RSF factor if the remaining period of encumbrance
is between six months and less than one year according to paragraph 10.4;
and
·
be
assigned a 100% RSF factor if the remaining period of encumbrance is
greater than one year according to paragraph 10.4.
If the collateral has been sold
outright, thereby creating a short position, the corresponding on-balance
sheet receivable should be considered encumbered for the term of the residual
maturity of this receivable, and receive an RSF factor according to para
10.5.
10.7 For assets that are owned
by banks, but segregated to satisfy statutory requirements for the
protection of customer equity in margined trading accounts, should be reported
in accordance with the underlying exposure, whether or not the segregation
requirement is separately classified on a bank’s balance sheet. However,
those assets should also be treated according to paragraph 10.4. That is,
they could be subject to a higher RSF depending on (the term of)
encumbrance. The (term of) encumbrance should be determined by authorities,
taking into account whether the institution can freely dispose or exchange
such assets and the term of the liability to the bank’s customer(s) that
generates the segregation requirement.
10.8 Secured financing
transactions: For secured funding
arrangements, use of balance sheet and accounting treatments should
generally result in banks excluding, from their assets, securities which
they have borrowed in securities financing transactions (such as reverse
repos and collateral swaps) where they do not have beneficial ownership. In
contrast, banks should include securities they have lent in securities
financing transactions where they retain beneficial ownership. Banks should
also not include any securities they have received through collateral swaps
if those securities do not appear on their balance sheets. Where banks have
encumbered securities in repos or other securities financing transactions, but
have retained beneficial ownership and those assets remain on the bank’s
balance sheet, the bank should allocate such securities to the appropriate
RSF category according to its characteristics (whether it HQLA, its term,
issuer etc.).
10.9 The treatment (applicable
RSF factor) for the amount receivable by a bank under reverse repo
transaction is the same as with any other loan, which will depend on the
counterparty and term of the operation, with the exception of loans
(reverse repos) to financial institutions with residual maturity of less
than six months secured by level 1 assets (which receive a 10% RSF factor
as per paragraph 9.4) or by other assets (which receive a 15% RSF factor as
per paragraph 9.5).
10.10 Amounts receivables and
payable under these securities financing transactions should generally be
reported on a gross basis, meaning that the gross amount of such
receivables and payables should be reported on the RSF side and ASF side,
respectively. The only exception is securities financing transactions with
a single counterparty may be measured net when calculating the NSFR,
provided that the netting conditions set out in Paragraph 16.4.4.2 of circular ‘Revised Framework for Leverage Ratio’ dated
January 8, 2015 are met.
10.11 For loans which are only
partially secured and are therefore separated into secured and unsecured
portions with different risk weights under Basel II, the specific
characteristics of these portions of loans should be taken into account for
the calculation of the NSFR: the secured and unsecured portions of a loan
should each be treated according to its characteristics and assigned the
corresponding RSF factor. If it is not possible to draw the distinction
between the secured and unsecured part of the loan, the higher RSF factor
should apply to the whole loan.
10.12 Calculation of derivative
asset amounts: Derivative assets are
calculated first based on the replacement cost for derivative contracts
(obtained by marking to market) where the contract has a positive value.
When an eligible bilateral netting contract is in place that meets the
conditions as specified in Annex 20 (part B) of the Master Circular on Basel III Capital Regulations dated
July 1, 2014, the replacement cost for the set of derivative
exposures covered by the contract will be the net replacement cost. In
calculating NSFR derivative assets16,
collateral received in connection with derivative contracts may not offset
the positive replacement cost amount, regardless of whether or not netting
is permitted under the bank’s operative accounting or risk-based framework,
unless it is received in the form of cash variation margin and meets the
conditions as specified in paragraph 16.4.3.8 of the Revised Framework for Leverage Ratio dated January 8,
2015. Any remaining balance sheet liability associated with (a)
variation margin received that does not meet the criteria above or (b)
initial margin received may not offset derivative assets and should be
assigned a 0% ASF factor.
10.13 If an on-balance sheet
asset is associated with collateral posted as initial margin to the extent
that the bank’s accounting framework reflects on balance sheet, for
purposes of the NSFR, that asset should not be counted as an encumbered
asset in the calculation of a bank’s RSF to avoid any double-counting.
10.14 Derivative transactions
with central banks arising from the latter’s short-term monetary policy and
liquidity operations to be excluded from the reporting bank’s NSFR
computation and to offset unrealised capital gains and losses related to
these derivative transactions from ASF. These transactions include foreign
exchange derivatives such as foreign exchange swaps, and should have a
maturity of less than six months at inception. As such, the bank’s NSFR
would not change due to entering a short-term derivative transaction with
its central bank for the purpose of short-term monetary policy and
liquidity operations.
11. Frequency of calculation and
reporting
Banks are required to meet the
NSFR requirement on an ongoing basis and they should have the required
systems in place for such calculation and monitoring. The NSFR as at the
end of each quarter (starting date will be announced in due course) should
be reported to the RBI (Department of Banking Supervision, CO) in the
prescribed format (BLR 7) within 15 days from the end of the quarter.
12. NSFR Disclosure Standards
12.1 To promote the consistency
and usability of disclosures related to the NSFR, and to enhance market
discipline, banks will be required to publish their NSFRs according to a
common template (Appendix II). Banks must publish
this disclosure along with the publication of their financial statements
(i.e. typically quarterly or semi-annually), irrespective of whether the
financial statements are audited. The NSFR information must be calculated
on a consolidated basis and presented in Indian Rupee.
12.2 Banks must either include
the disclosures required by this document in their published financial
reports or, at a minimum, provide a direct and prominent link to the
complete disclosure on their websites or in publicly available regulatory
reports. Banks must also make available on their websites, or through
publicly available regulatory reports, an archive of all templates relating
to prior reporting periods. Irrespective of the location of the disclosure,
the minimum disclosure requirements must be in the format required by this
document.
12.3 Data must be presented as
quarter-end observations. For banks reporting on a semi-annual basis, the
NSFR must be reported for each of the two preceding quarters. For banks
reporting on an annual basis, the NSFR must be reported for the preceding
four quarters. Both unweighted and weighted values of the NSFR components
must be disclosed unless otherwise indicated. Weighted values are
calculated as the values after ASF or RSF factors are applied.
12.4 In addition to the
prescribed common template, banks should provide a sufficient qualitative
discussion around the NSFR to facilitate an understanding of the results
and the accompanying data. For example, where significant to the NSFR,
banks could discuss the drivers of their NSFR results and the reasons for
intra-period changes as well as the changes over time (e.g. changes in
strategies, funding structure, circumstances etc.).
1 TDs which
can’t be withdrawn early without significant penalty
2 For arriving
at effective residual maturity banks must take into account possibilities
of early withdrawal due to “call options”, either embedded or explicit.
3 Currently,
relevant only in case of banks’ exposures to Qualifying Central
Counterparties (QCCPs) subject to conditions mentioned in paragraph
5.15.3.9 of the Master Circular. In case of OTC derivatives, please refer
to circular DBOD.No.BP.BC.48/21.06.001/2010-11 dated October 1,
2010 on Prudential
Norms for Off-Balance Sheet Exposures of Banks – Bilateral netting of
counterparty credit exposures. As indicated therein, bilateral netting of
mark-to-market (MTM) values arising on account of derivative contracts is
not permitted.
4 Carrying value
of an asset item should generally be recorded by following its accounting
value, ie net of specific provisions in line with paragraph 52 of the Basel
II Standardised Approach and paragraph 12 of the Basel III leverage ratio
framework and disclosure requirements.
5 For the
purposes of calculating the NSFR, HQLA are defined as all HQLA without
regard to LCR operational requirements and LCR caps on Level 2 and Level 2B
assets that may otherwise limit the ability of some HQLA to be included as
eligible HQLA in calculation of the LCR. HQLA and Operational requirements
are defined in LCR circular dated June 9, 2014 read with circular dated March 31, 2015
6 Currently
re-hypothecation is permitted in India only in respect of G-Secs in terms
of circular FMRD.DIRD.5/14.03.002/2014-15 dated February 5, 2015
7 For the
purpose of NSFR, only the Basel II Standardised Approach risk weights may
be used to determine the NSFR treatment.
8 The term
“claims” is broader than loans, for example, also includes central bank
bills and the asset account created on banks’ balance sheets by entering
into repo transactions with central banks. It will also include standing
deposit with RBI.
9 Non-operational
deposits held at other financial institutions should have the same treatment
as loans to financial institutions, taking into account the term of the
operation.
10 Initial margin
posted on behalf of a customer, where the bank does not guarantee
performance of the third party, would be exempt from this requirement. This
refers to the cases in which the bank provides a customer access to a third
party (e.g. a CCP) for the purpose of clearing derivatives, where the
transactions are executed in the name of the customer, and the bank does
not guarantee the performance of this third party.
11 In case of a
collateral pledged in a repo operation with remaining maturity of one year
or greater but where the collateral pledged matures in less than one year,
the collateral should be considered encumbered for the term of the repo or
secured transaction, even if the actual maturity of the collateral is
shorter than one year. This follows because collateral would have to be
replaced once it matures
12 As defined
in Master Circular - Prudential norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances dated July 1, 2015
13 This could
reflect a case where a bank may imply that it would be subject to funding
risk if it did not exercise an option on its own assets.
14 Encumbered
assets include but are not limited to assets backing securities or covered
bonds and assets pledged in securities financing transactions or collateral
swaps. “Unencumbered” is defined in LCR circular dated June
9, 2014.
15 In general,
exceptional central bank liquidity operations are considered to be
non-standard, temporary operations conducted by the central bank in order
to achieve its mandate in a period of market-wide financial stress and/or
exceptional macroeconomic challenges.
16 NSFR
derivative assets = (derivative assets) – (cash collateral received as
variation margin on derivative assets).
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