Pursuant to Article 412 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 (the "CRR"), institutions (credit institutions and investment firms) are obliged to keep a certain amount of liquid assets, the sum of which covers the liquidity needed in stressed conditions over a period of thirty days. This obligation is also referred to as the Liquidity Coverage Requirement (the "LCR") and is set forth in Articles 415-425 of the CRR. Further to publications on 'high quality liquid assets' by, amongst others, the European Central Bank (the "EBA"), the Commission is currently working on a delegated act which includes the rules for asset-backed securities and covered bonds under the LCR. Pursuant to the  draft version of the delegated act, covered bonds will be accepted as Level 1 or Level 2A assets and asset-back securities (including residential mortgaged-backed securities) will be accepted as Level 2B assets, subject, in each case to certain eligibility criteria. The level in which assets are included determines the applicable haircut.

The LCR is introduced in hindsight of the financial crisis. The purpose of the LCR is to make institutions less dependent on short-term financing. The general rule is set forth in Article 412 of the CRR. Pursuant to Article 412 of the CRR, the LCR ratio is calculated by dividing an institutions' liquid assets by its net liquidity outflows over a 30 calendar days stress period and is expressed as a percentage. In the draft delegate act the Commission lists the assets which are considered extremely highly liquid and highly liquid and splits them in Level 1 or Level 2 assets. The Commission is empowered to adopt the delegated act as per Article 460 of the CRR. 

Pursuant to the draft delegated act, subject to satisfaction of certain eligibility criteria, covered bonds will qualify as Level 1 ('extremely high quality covered bonds') or Level 2A assets ('high quality covered bonds'). The eligibility criteria for each of the Level 1 covered bonds and the level 2A covered bonds include, amongst others, a minimum rating requirement or, in the absence of a credit rating, a minimum risk weight requirement. In addition, criteria relating to issue size (EUR 500 million for Level 1 covered bonds and EUR 250 million for Level 2A covered bonds) and overcollateralisation (at least 2 per cent. for Level 1 covered bonds and 7 per cent for Level 2A covered bonds) apply. It is contemplated that the covered bonds will be subject to a haircut. For Level 1 covered bonds a haircut of 7 per cent will be applicable and for Level 2A covered bonds a haircut of 15 per cent. will be applicable.

The draft delegated act also lists the eligibility criteria for ABS to qualify as Level 2B securitisation assets. The eligibility criteria for Level 2B securitisation assets include a minimum rating requirement or, in the absence of a credit rating, a minimum risk weight requirement. In addition,  the 2A securitisation assets must be part of the most senior tranche, the issue size is at least 100 million and the remaining weighted average life of the tranche shall be 5 years or less (which may be calculated on the assumption that the call is exercised on the first permitted date). Additional eligibility criteria apply depending on the asset type. It is currently contemplated that the market value of the Level 2B securitisation assets will be subject to a haircut of 25 per cent for RMBS and 35 per cent for SME assets, car lease securitisation assets and consumer ABS.  

The Commission requested the EBA for its views on the possibility of defining a category of "high quality securitisations" to be used in banking regulations and potentially the delegated act discussed above. The request for advice is in furtherance of the report by the EBA published last year, in December 2013, in accordance with Article 509(3) of the CRR, on extremely high quality liquid assets and high quality liquid assets . It is expected that the EBA will publish its advice soon.  

The detailed LCR rules as to be determined by the Commission in the delegated act will become applicable on an unspecified date in 2015, with a progressive rate of application rising from 60 per cent. to 100 per cent. in 2018. Once in force it would be the first time that a detailed European liquidity regulation is established.