EC drafts LCR amendments on repos, reverse repos, and collateral swaps, in line with Basel committee

The European Commission has published draft legislation for comments on amendments to the liquidity coverage ratio. The most important amendment is that the calculation of the expected liquidity outflows and inflows on repos, reverse repos and collateral swaps transactions, should be fully aligned with the international liquidity standard developed by the Basel Committee.

The impact of the change to outflows and inflows on repos, reverse repos and collateral swaps transactions should be relatively neutral or negligible since the substantive change is very minimal, the draft legislation says. On the repo side, the change is primarily drafting. On the reverse repo side, leaving aside over-collateralization and assuming the market value of the security matches the cash lent, then the liquidity value of the security equals the cash lent less the corresponding haircut. Collateral swaps are less common.

Another amendment is the application of the unwind mechanism for the calculation of the liquidity buffer. To ensure that the implementation of the LCR does not hinder the effective transmission of monetary policy to the economy and given that secured transactions with the ECB or the central bank of a member state can be expected to be rolled over under severe stress circumstances, a waiver to the unwind mechanism is introduced for secured transactions with the ECB or the central bank of a member state involving HQLA and maturing in the next thirty days.

Adoption of the draft is proposed for March 2018, after which the delegated regulation will be subject to scrutiny by the European Parliament and the Council.

Access the full draft amendment

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