a.Assets meeting the fundamental and market-related characteristics cannot automatically be recognised as HQLA. The assets are subject to operational requirements that are designed to ensure that the stock of HQLA is managed in such a way that an IB can, and is able to demonstrate that it can, immediately use the stock of assets as a source of contingent funds that is available to the IB to convert into cash through Shari’ah-compliant mechanisms – that is, outright sale or the use of Shari’ah-compliant alternatives to repurchase (repo) transactions – to fill funding gaps between cash inflows and outflows at any time during the 30-day stress period, with no restriction on the use of the liquidity generated. IBs may follow the internationally accepted operational requirements for the asset to be recognised as HQLA.
b.In particular, the assets must fulfil the following operational requirements:
i.All assets included in HQLA must meet the requirement to be unencumbered, which means free of legal, regulatory, contractual or other restrictions on the ability of the IBs to liquidate, sell, transfer or assign the asset. However, assets which qualify as HQLA that have been pre-positioned or deposited with, or pledged to, the Central Bank or a PSE, but have not been used to generate liquidity, may be included in the stock.
ii.The assets must be under the control of the IB’s liquidity risk management function. IBs may segregate the HQLA from other assets with the sole intent to use HQLA as a source of liquidity. IBs must undertake the necessary initiatives to ensure the assets are accessible to the market, to minimise the risk that they cannot be transferred and liquidated during a period of actual stress. To ensure the liquidity of the HQLA in a stress period, IBs must periodically liquidate a sample of HQLA to test their access to the market, the effectiveness of their processes of liquidation, and the availability of the assets.
iii.IBs must mitigate market and rate of return risk associated with ownership of the stock of HQLA in accordance with the Shari’ah rules and principles. IBs must also consider the impact of early settlement on the mitigation technique, if applicable, as well as other risks that may occur due to such transactions. If an IB chooses to mitigate some underlying risk by hedging it in a Shari’ah-compliant manner, the IB must include in its total cash outflows those that would result from the termination of any specific hedging transaction against the HQLA.
iv.Any surplus of HQLA held by a legal entity within a group can be included at the consolidated level only if those assets would also be freely available to the consolidated (parent) entity in times of stress.
v.A bank must develop and implement procedures, systems and controls that enable it to determine the stock of HQLA in terms of composition and various characteristics. Such procedures and systems enable the IBs to:
•confirm the eligibility of an asset for inclusion as a HQLA;
•ensure that its HQLA are appropriately diversified across asset type, issuer, currency and other factors associated with liquidity risk;
•identify the location of HQLA; and
•confirm that the amounts of HQLA held in foreign markets are adequate to meet its LCR in those markets.
vi.IBs must periodically monetise a representative proportion of the assets in its stock of HQLA through sale and Shari’ah-compliant alternatives of repurchase (repo) transactions in order to test its access to the market, the effectiveness of its processes for liquidation and the availability of the assets, and to minimise the risk of negative signaling during a period of actual stress.
c.The stock of HQLA must be well diversified within the asset classes (except for instruments issued by the sovereign government of the UAE or from the jurisdiction in which the IB operates, Central Bank reserves, Central Bank securities and cash). IB must therefore have policies and limits in place in order to avoid concentration with respect to asset types, issue and issuer types, and currency (consistent with the distribution of net cash outflows by currency) within asset classes.
d.IBs must endeavour to hold eligible liquid assets in the currencies that match the currencies of the net cash outflow. Liquid asset portfolios must be well diversified in terms of counterparties and tenor and held for the sole purpose of managing liquidity risk.