EBA Q&A on LCR Calculation and Triparty
January 2022
Base FAQ 27 -d406 (now Basel CF LCR40.79) Paragraph 146 states that there is an inflow rate of 0% when collateral received through a secured lending transaction is reused to cover a short position, including matched repo books where the collateral reuse transaction has a longer maturity than the secured lending transaction. This rule reflects the risk that it may not be possible to roll-over the shorter-term transaction at maturity in order to continue borrowing the collateral reused in the longer-term transaction.
The rule overlooks the fact that, in the case of a triparty allocation, the triparty agent would automatically substitute the collateral being reused in the longer-term transaction were it no longer available to the party reusing it (because the short-term transaction supplying the collateral had not been rolled over). This substitution involves no action by either counterparty to the triparty transaction. Furthermore, triparty allocation logic cannot distinguish between long-term and short- term sources or uses, so inadvertently creates inflow reuse (such reuse can be prevented where collateral can be directed bilaterally). Any such reuse is automatically resolved by the triparty agent upon the unwind of short-dated transactions.
The full response is available at https://www.icmagroup.org/assets/ICMA-ERCC_EBA-QA_LCR-and-Triparty_Final-submission-20220105.pdf