On July 27, 2016, the EBA published final draft RTS on the criteria for the application of preferential treatment in cross-border intragroup credit or liquidity lines, or within an institutional protection scheme. The CRR permits regulators to grant preferential treatment for transactions within a group or an institutional protection scheme by applying higher inflow rates (in the case of the liquidity receiver) or lower outflow rates (in the case of the liquidity provider) for calculating the LCR for intra-group liquidity flows. Where transactions within a group or an institutional protection scheme constitute cross-border positions, preferential treatment is conditional upon compliance with additional objective criteria specified in the LCR Delegated Act. The CRR mandates the EBA to develop draft RTS to specify additional objective criteria.
The first criterion of the LCR Delegated Act requires the liquidity provider and receiver to present a low liquidity risk profile. The draft RTS further requires a liquidity provider and receiver to have complied with the required level of LCR specified in the LCR Delegated Act and other applicable liquidity-related supervisory requirements or measures specified in the CRD on an ongoing basis for at least 12 months prior to the authorization of preferential treatment. Additionally, the liquidity provider and receiver’s liquidity positions must pose a low level of risk according to the latest supervisory review and evaluation processed under the applicable provisions of CRD.
The second criterion requires that there are legally binding agreements and commitments between group entities regarding the credit or liquidity line. The draft RTS requires the legally binding agreements to satisfy certain conditions, including that the credit or liquidity line is a committed line which is legally and practically available at any time for the duration of the facility on a cross-border basis, and that the currency denomination of the committed credit or liquidity line is consistent with the distribution by currency of the net liquidity outflows of the liquidity receiver that are unrelated to the line.
The third criterion stipulates that the liquidity risk profile of the liquidity receiver has been adequately taken into account in the liquidity risk management of the liquidity provider.
The draft RTS further specifies that this condition will be satisfied if a number of other requirements are met, including that the liquidity provider monitors and oversees the liquidity receiver on a daily basis, and that the effects of the preferential outflow or inflow rate are fully considered and integrated into the contingency funding plans of the liquidity provider and the liquidity receiver.
The final draft RTS is available at: http://www.eba.europa.eu/documents/10180/1533013/EBA-RTS-2016- 04+%28Final+draft+RTS+on+criteria+for+a+preferential+treatment+in+crossborder+intragroup+financial+support+under+LCR%29.pdf.