Page 42 - Banking Finance October 2019

ARTICLE

Z Structured products where the receivable should be considered as encumbered. When
customers anticipate ready the collateral received from a secured funding transaction
marketability, such as adjustable has been re-hypothecated, the receivable should be
rate notes and variable rate considered encumbered for the term of the re-
demand notes (VRDNs) hypothecation of the collateral.
Z Managed funds that are marketed
When the collateral received from a secured funding
with the objective of maintaining transaction has been sold outright, thereby creating a short
a stable value
position, the receivable related to the original secured
Y Trade finance-related obligations funding transaction should be considered encumbered for
(including guarantees and letters of the term of the residual maturity of this receivable. Thus,
credit) the on-balance sheet receivable should:
Y Guarantees and letters of credit Y Be treated accordingly, if the remaining period of
unrelated to trade finance obligations encumbrance is less than six months (i.e. it is considered
as being unencumbered in the NSFR);
Encumbered Assets: Y Be assigned a 50% or higher RSF factor if the remaining

Assets on the balance sheet that are encumbered for one period of encumbrance is between six months and less
year or more receive a 100% RSF factor. Assets encumbered than one year. and
for a period of between six months and less than one year Y Be assigned a 100% RSF factor if the remaining period
that would, if unencumbered, receive an RSF factor lower of encumbrance is greater than one year.
than or equal to 50%, receive a 50% RSF factor. Assets
encumbered for between six months and less than one year Encumbrance treatment applied to secured lending (e.g.
that would, if unencumbered, receive an RSF factor higher reverse repo) transactions where collateral received
than 50%, retain that higher RSF factor. appears on bank's balance sheet, and it has been re-
hypothecated or sold thereby creating a short position-
Where assets have less than six months remaining in the Collateral received that appears on a bank's balance sheet
encumbrance period, those assets may receive the same RSF and has been re-hypothecated (e.g. encumbered to a repo)
factor as an equivalent asset that is unencumbered. In should be treated as encumbered.
addition, for the purposes of calculating the NSFR, assets
that are encumbered for exceptional central bank liquidity Consequently, the collateral received should:
operations may receive RSF factor which must not be lower Y Be treated as being unencumbered if the remaining
than the RSF factor applied to the equivalent asset that is period of encumbrance is less than six months according
unencumbered. to the NSFR standard, and receive the same RSF factor
as an equivalent asset that is unencumbered;
Encumbrance treatment applied to secured lending (e.g.
Y Be assigned a 50% or higher RSF factor if the remaining
reverse repo) where collateral received does not appear on period of encumbrance is between six months and less
bank's balance sheet, and it has been re-hypothecated or than one year.
sold thereby creating a short position. The encumbrance
Y Be assigned a 100% RSF factor if the remaining period
treatment should be applied to the on-balance sheet
receivable to the extent that the transaction cannot mature of encumbrance is greater than one year.
without the bank returning the collateral received to the
counterparty. For a transaction to be "unencumbered", it Calculation of Derivative Asset Amounts:
must be "free of legal, regulatory, contractual or other Derivative assets are calculated first based on the
restrictions on the ability of the bank to liquidate, sell, replacement cost for derivative contracts (obtained by
transfer or assign the asset". marking to market) where the contract has a positive value.
When an eligible bilateral netting contract is in place, the
Since the liquidation of the cash receivable is contingent on replacement cost for the set of derivative exposures covered
the return of collateral that is no longer held by the bank, by the contract will be the net replacement cost.

42 | 2019 | OCTOBER | BANKING FINANCE