1. 30) A bank should define and identify the liquidity risk it is exposed to in all jurisdictions in which it operates directly or through its subsidiaries, branches and related entities. A bank should evaluate each major on and off balance sheet position, including contingent exposures that may affect the bank’s sources and uses of funds, and determine how it can affect liquidity risk.
2. 31) A bank should consider the interactions between exposures to funding liquidity risk and market liquidity risk¹. A bank that obtains liquidity from capital markets and interbank markets should recognize that these sources may be more volatile than traditional retail deposits. For example, under conditions of stress, investors in money market instruments may demand higher compensation for risk, require roll over at considerably shorter maturities, or refuse to extend financing at all. Moreover, reliance on the full functioning and liquidity of financial markets may not be realistic as asset and funding markets may dry up in times of stress. Market illiquidity may make it difficult for a bank to raise funds by selling assets and thus increase the need for funding liquidity.
3. 32) A bank should ensure that assets are prudently valued according to relevant financial reporting and supervisory standards. A bank should fully factor into its risk management the consideration that valuations may deteriorate under market stress, and take this into account in assessing the feasibility and impact of asset sales during stress on its liquidity position.
4. 33) A bank should recognize and consider the strong interactions between liquidity risk and the other types of risk to which it is exposed. These include interest rate, credit, operational, legal and reputational risks, which may influence a bank’s liquidity profile. Liquidity risk often can arise from perceived or actual weaknesses, failures or problems in the management of other types of risk. A bank should identify events that could have an impact on market and public perceptions about its soundness, particularly in wholesale markets.

¹ See paragraph 6 for definitions of funding liquidity risk and market liquidity risk.

1. 34) Liquidity measurement involves assessing a bank’s cash inflows against its outflows and the liquidity value of its assets to identify the potential for future net funding shortfalls. A bank should be able to measure and forecast its prospective cash flows for assets, liabilities, off-balance sheet commitments and derivatives over a variety of time horizons, under normal conditions and under a range of stress scenarios, including scenarios of severe stress. It should also consider funding needs in currencies in which the bank is active and liquidity needs arising from correspondent banking and settlement activities. Below is an overview of what is expected under the above mentioned risk drivers.
2. Future cash flows of assets and liabilities
3. 35) A bank should have a robust liquidity risk management framework providing prospective, dynamic cash flow forecasts that include assumptions on the likely behavioral responses of key counterparties to changes in conditions and are carried out at a sufficiently granular level. A bank should make realistic assumptions about its future liquidity needs for both the short- and long-term that reflect the complexities of its underlying businesses, products and markets. The Central Bank reporting format attached to this manual can provide a good starting point.
4. 36) A bank should analyze the quality of assets that could be used as collateral, in order to assess their potential for providing secured funding in stressed conditions. A bank should also manage the timing of incoming flows in relation to known outgoing sources in order to obtain an appropriate maturity distribution for its sources and uses of funds.
5. 37) In estimating the cash flows arising from its liabilities, a bank should assess the “stickiness” of its funding sources. In particular, for large wholesale funds providers, both secured and unsecured, a bank should assess the likelihood of roll-over of funding lines and how the r fund providers are likely to behave under stress - and therefore consider the possibility that secured and unsecured funding might dry up in times of stress. For secured funding with overnight maturity, a bank should not assume that the funding will automatically roll over. In addition, a bank should assess the availability of term funding back up facilities and the circumstances under which they can be utilized. In assessing the ‘stickiness’ of retail deposits a bank should also consider factors such as size, interest-rate sensitivity, geographical location of depositors and the deposit channel (e.g. short term high interest rate promotion).
6. 38) Regarding the time horizons over which to identify measure, monitor and control liquidity risk, a bank should ensure that its liquidity risk management practices integrate and consider a variety of factors. These include vulnerabilities to changes in liquidity needs and funding capacity on an intraday basis; day-to-day liquidity needs and funding capacity over short and medium-term horizons up to one year; longer-term liquidity needs over one year; and vulnerabilities to events, activities and strategies that can put a significant strain on internal cash generation capability.
7. Sources of contingent liquidity demand
8. 39) A bank should identify measure, monitor and control potential cash flows relating to off-balance sheet commitments and other contingent liabilities. This should include a robust framework for projecting the potential consequences of undrawn commitments being drawn, considering the nature of the commitment and credit worthiness of the counterparty, as well as exposures to business and geographical sectors, as counterparties in the same sectors may be affected by stress at the same time.
9. 40) For banks engaged in securitization activities, they should monitor the existence of recourse provisions in asset sales, the extension of liquidity facilities to securitization vehicles and the early amortization triggers of certain asset securitization transactions. Banks should also consider the nature and size of the bank’s potential non-contractual “obligations”, where the support provided to securitization and conduit programmes is critical to maintaining ongoing access to funding and the bank reputation in the market.
10. 41) A bank should incorporate cash flows related to the re-pricing, exercise or maturity of financial derivatives contracts in its liquidity risk analysis, including the potential for counterparties to demand additional collateral in an event such as a decline in the bank’s credit rating or creditworthiness or a decline in the price of the underlying asset.
11. Guarantees and commitments
12. 42) Undrawn loan commitments, letters of credit and financial guarantees represent a potentially significant drain of funds for a bank. A bank may be able to ascertain a "normal" level of cash outflows under routine conditions, and then estimate the scope for an increase in these flows during periods of stress. For example, an episode of financial market stress may trigger a substantial increase in the amount of draw-downs of letters of credit provided by the bank to its customers. Similarly, liquidity issues can arise when a bank relies on committed lines of credit provided by others.
13. Currencies in which a bank is active
14. 43) A bank should assess its aggregate foreign currency liquidity needs and determine acceptable currency mismatches. A bank should undertake a separate analysis of its strategy for each currency in which it has significant activity, considering potential constraints in times of stress. The size of foreign currency mismatches should take into account: (a) the bank’s ability to raise funds in foreign currency markets; (b) the likely extent of foreign currency back-up facilities available in its domestic market; (c) the ability to transfer a liquidity surplus from one currency to another, and across jurisdictions and legal entities; and (d) the likely convertibility of currencies in which the bank is active, including the potential for impairment or complete closure of foreign exchange swap markets for particular currency pairs.
15. 44) A bank should be aware of, and have the capacity to manage, liquidity risk exposures arising from the use of foreign currency deposits and short-term credit lines to fund domestic currency assets as well as the funding of foreign currency assets with domestic currency. A bank should take account of the risks of sudden changes in foreign exchange rates or market liquidity, or both, which could sharply widen liquidity mismatches and alter the effectiveness of foreign exchange hedges and hedging strategies.
16. Correspondent, custody and settlement activities
17. 45) Where relevant, a bank should understand and have the capacity to manage correspondent, custodian and settlement bank services and how they can affect its cash flows. Given that the gross value of customers’ payment traffic (inflows and outflows) can be very large, unexpected changes in these flows can result in large net deposits, withdrawals or line-of credit draw-downs that impact the overall liquidity position of the correspondent or custodian bank, both on an intraday and overnight basis. A bank also should understand and have the capacity to manage the potential liquidity needs it would face as a result of the failure-to-settle procedures of payment and settlement systems in which it is a direct participant.

1. 46) A bank should employ a range of customized internal measurement tools, or metrics, as there is no single metric that can comprehensively quantify liquidity risk. To obtain a forward looking view of liquidity risk exposures, a bank should use metrics that assess the structure of the balance sheet (e.g. by source and tenor of funding and liquid assets composition) as well as metrics that project cash flows and future liquidity positions, taking into account off-balance sheet risks (liquidity gap reports). These metrics should span vulnerabilities across business-as-usual and stressed conditions over various time horizons.
2. 47) Under business-as usual conditions, the report should identify needs that may arise from projected outflows relative to routine sources of funding. Under stress conditions, the reports should be able to identify funding gaps at various horizons, and in turn serve as a basis for liquidity risk limits and early warning indicators.
3. 48) The scenarios for the reports can be based on assumptions of the future behavior of assets, liabilities and off-balance sheet items, and then used to calculate the cumulative net excess or shortfall over the time frame for the liquidity assessment. Measurement should be performed over incremental time periods to identify projected and contingent flows taking into account the underlying assumptions associated with potential changes in cash flows of assets and liabilities.
4. 49) Management should tailor the measurement and analysis of liquidity risk to the bank’s business mix, complexity and risk profile.
5. 50) A bank should take steps to ensure that its assumptions are reasonable and appropriate, documented and periodically reviewed and approved. They should also be updated in-line with changes observed in the market.
6.  

1. 51) A bank should have a reliable management information system designed to provide the board of directors, senior management and other appropriate personnel with timely and forward-looking information on the liquidity position of the bank.
2. 52) The management information system should have the ability to calculate liquidity positions in all of the currencies in which the bank conducts business – both on a subsidiary/branch basis in all jurisdictions in which the bank is active and on an aggregate group basis. It should capture all sources of liquidity risk, including contingent risks and the related triggers and those arising from new activities, and have the ability to deliver more granular and time sensitive information during stress events.
3. 53) To effectively manage and monitor its net funding requirements, a bank should have the ability to calculate liquidity positions on an intraday basis, on a day-to-day basis for the shorter time horizons, and over a series of more distant time periods thereafter. The management information system should be used in day-to-day liquidity risk management to monitor compliance with the bank’s established policies, procedures and limits.
4. 54) To facilitate liquidity risk monitoring, senior management should agree on a set of reporting criteria, specifying the scope, manner and frequency of reporting for various recipients (such as the board, senior management, and asset – liability committee) and the parties responsible for preparing the reports.
5. 55) Reporting of risk measures should be done on a frequent basis (e.g. daily reporting for those responsible for managing liquidity risk, and at each board meeting during normal times, with reporting increasing in times of stress) and should compare current liquidity exposures to established limits to identify any emerging pressures and limit breaches.
6. A bank must establish a forward-looking funding strategy that provides effective diversification in the sources and tenor of funding.
7. 56) A bank should diversify available funding sources in the short-, medium- and long term. Diversification targets should be part of the medium- to long-term funding plans and is aligned with the budgeting and business planning process.
8. 57) Funding plans should take into account correlations between sources of funds and market conditions. The desired diversification should also include limits by counterparty, secured versus unsecured market funding, instrument type, tenor, securitization vehicle, currency, and geographic market. As a general liquidity management practice, banks should limit concentration in any one particular funding source or tenor.
9. 58) For institutions active in multiple currencies, access to diverse sources of liquidity in each currency is required, since banks are not always able to swap liquidity easily from one currency to another.
10. 59) Senior management should be aware of the composition, characteristics and diversification of the bank’s assets and funding sources. Senior management should regularly review the funding strategy in light of any changes in the internal or external environments.
11. 60) An essential component of ensuring funding diversity is maintaining market access. Market access is critical for effective liquidity risk management, as it affects both the ability to raise new funds and to liquidate assets. Senior management should ensure that market access is being actively managed, monitored and tested by the appropriate staff.
12. 61) Managing market access can include developing markets for asset sales or strengthening arrangements under which a bank can borrow on a secured or unsecured basis. A bank should maintain an active presence within markets relevant to its funding strategy. This requires an ongoing commitment and investment in adequate and appropriate infrastructures, processes and information collection.
13. 62) A bank should not assume it can access markets in a timely manner for which it has not established the necessary systems or documentation, or where these arrangements have not been periodically utilized or the bank has not confirmed that willing counterparties are in place.
14. 63) A bank should have full knowledge of the legal framework governing potential asset sales, and ensure that documentation is reliable and legally robust.
15. 64) A bank should identify and build strong relationships with current and potential investors. The frequency of contact and the frequency of use of a funding source are two possible indicators of the strength of a funding relationship. A bank should also establish and maintain a relationship with the Central Bank.
16. 65) A bank needs to identify alternative sources of funding that strengthen its capacity to withstand a variety of severe yet plausible institution-specific and market-wide liquidity shocks. Depending on the nature, severity and duration of the liquidity shock, potential sources of funding include the following:
    • • Deposit growth.
    • • The lengthening of maturities of liabilities.
    • • New issues of short- and long-term debt instruments.
    • • Intra-group fund transfers, new capital issues, the sale of subsidiaries or lines of business.
    • • Asset securitization.
    • • The sale or repo of unencumbered, highly liquid assets.
    • • Drawing-down committed facilities.
    • • Borrowing from the central bank’s marginal lending facilities.
17. A Bank must establish a liquidity risk management framework including limits, warning indicators, communication and escalation procedures.

1. 66) A bank should set limits to control its liquidity risk exposure and vulnerabilities. A bank should regularly review such limits and corresponding escalation procedures. Limits should be relevant to the business in terms of its location, complexity, and nature of products, currencies and markets served.
2. 67) Limits should be used for managing day-to-day liquidity within and across lines of business and legal entities under “normal” conditions. The limit framework should also include measures aimed at ensuring that the bank can continue to operate in a period of market stress, bank-specific stress and a combination of the two.
3. 68) For example a commonly used simple limit is the size of cumulative net cash outflow (based on board approved assumptions) and covers various time horizons. The limit may also include estimates of outflows resulting from the drawdown of commitments or other obligations of the bank.

1. 69) A bank should design a set of indicators to aid this process to identify the emergence of increased risk or vulnerabilities in its liquidity risk position or potential funding needs. Such early warning indicators should identify any negative trend and cause an assessment and potential response by management in order to mitigate the bank’s exposure to the emerging risk.
2. 70) Early warning indicators can be qualitative or quantitative in nature and may include but are not limited to:
   • • Rapid asset growth, especially when funded with potentially volatile liabilities.
   • • Growing concentrations in assets or liabilities.
   • • Increases in currency mismatches.
   • • A decrease of weighted average maturity of liabilities.
   • • Repeated incidents of positions approaching or breaching internal or regulator limits.
   • • Negative trends or heightened risk associated with a particular product line, such as rising delinquencies.
   • • Significant deterioration in the bank’s earnings, asset quality, and financial condition.
   • • Negative publicity.
   • • A credit rating downgrade.
   • • Stock price declines or rising debt costs.
   • • Widening debt or credit-default-swap spreads.
   • • Rising wholesale or retail funding costs.
   • • Counterparties that begin requesting or request additional collateral for credit.
   • • Correspondent banks that eliminate or decrease their credit lines.
   • • Increasing retail deposit outflows.
   • • Increasing redemptions of CDs before maturity.
   • • Difficulty accessing longer-term funding.
3. 71) Early warning indicators should be closely monitored by senior management on a regular basis. Limits and analysis of the indicators above should be reviewed and breaches/emerging trends should be escalated up to the board committees or the full board if significant enough.
4. 72) Clear procedures and escalation criteria should be put in place based on the warning indicators; these include the circumstances where the Contingency Funding Plan (CFP) should be invoked.
5. A bank must conduct its own internal stress tests on a regular basis for a variety of institution specific and market wide stress scenarios (individually and in combination). The scenarios should be based on the individual bank specific circumstances and business model.
6. 73) While a bank typically manages liquidity under “normal” circumstances, it should also be prepared to manage liquidity under stressed conditions. A bank should perform stress tests or scenario analyses on a regular basis in order to identify and quantify its exposures to possible future liquidity stresses, analyzing possible impacts on the institution’s cash flows, liquidity position, profitability and solvency.
7. Stress testing process
8. 74) Tests should be :
   • • Test should be done on individual entity basis, group basis and business lines.
   • • Tests should consider the implication of the scenarios across different time horizons, including on an intraday basis.
   • • The extent and frequency of testing should be commensurate with the size of the bank and its liquidity risk exposures.
   • • Banks should build in the capability to increase the frequency of tests in special circumstances, such as in volatile market conditions or at the request of the Central Bank.
   • • Senior management should be actively involved in the stress test demanding rigorous assumptions and challenging the results.
   • • The board should be informed of the stress testing results and should be able to challenge outcomes, assumptions and actions taken on the basis of the tests.

1. 75) Banks should take into account the nature of the bank’s business, activities and vulnerabilities in designing stress scenarios. The scenarios should incorporate the major funding and market liquidity risks to which the bank is exposed. These include risks associated with its business activities, products (including complex financial instruments and off-balance sheet items) and funding sources. The defined scenarios should allow the bank to evaluate the potential adverse impact these factors can have on its liquidity position. Regardless of how strong its current liquidity situation appears to be, a bank should consider the potential impact of severe stress scenarios.
2. 76) Historical data and past experiences in addition to sound judgment should be used in the scenarios. A bank should consider short-term and long term stresses as well as institution-specific and market-wide scenarios and a combination of both in the stress tests scenarios. The stress test scenarios should consider the following:
   • • A simultaneous drying up of market liquidity in several previously highly liquid markets (inter-bank money markets, non UAE funding markets, securitization).
   • • Severe constraints in accessing secured and unsecured wholesale funding;
   • • The run-off of retail funding
   • • Contingent claims and more specifically, potential draws on committed lines extended to third parties or the bank's subsidiaries, branches or head office and the liquidity absorbed by off-balance activities.
   • • Severe operational or settlement disruptions affecting one or more payment or settlement systems.
   • • Take into account the link between reductions in market liquidity and constraints on funding liquidity. This is particularly important for banks with significant market share in, or heavy reliance upon, specific funding markets.
   • • A bank should also consider the results of stress tests performed for various other risk types and consider possible interactions between liquidity risk and these other types of risk (e.g. capital stress tests).
   • • Tests should reflect accurate time-frames for the settlement cycles of assets that might be liquidated (i.e. time to receive the sale proceeds).
   • • If a bank relies upon liquidity outflows from one system to meet obligations in another, it should consider the risk that operational or settlement disruptions might prevent or delay expected flows across systems. This is particularly relevant for firms relying upon intra-group transfers or centralized liquidity management.
   • • Additional margin calls and collateral requirements.
   • • The availability of contingent lines extended to the bank.
   • • The impact of credit rating triggers.
   • • The access to Central Bank facilities.
   • • The potential reputational impact when executing contingency /remedial action.
   • • Estimates of future balance sheet growth.
   • • A bank should consider the likely behavioral response of other market participants (similar response to market stress might amplify market strain).
   • • A bank should consider the likely impact of its own behavior on other market participants.
   • • Where a bank uses a correspondent or custodian to conduct settlement, the analysis should include the impact of those agents restricting their provision of intraday credit.
3. The scenario design should be subject to regular reviews to ensure that the nature and severity of the tested scenarios remain appropriate and relevant to the bank.

1. 77) Senior management should review stress test scenarios and assumptions as well as the results of the stress tests. The bank’s choice of scenarios and related assumptions should be well documented and reviewed together with the stress test results. Stress test results and vulnerabilities and any resulting actions should be reported to and discussed with the board and the Central Bank.
2. 78) Senior management should integrate the results of the stress testing process into the bank’s strategic planning process (e.g. bank management could adjust its asset-liability composition) and the firm's day-to-day risk management practices (e.g. through monitoring sensitive cash flows or reducing concentration limits). The results of the stress tests should be explicitly considered in the setting of internal limits.
3. 79) Senior management should decide how to incorporate the results of stress tests in assessing and planning for related potential funding shortfalls in the institution's contingency funding plan. To the extent that projected funding deficits are larger than (or projected funding surpluses are smaller than) implied by the bank’s liquidity risk tolerance, management should consider whether to adjust its liquidity position or to bolster the bank’s contingency plan in consultation with the board.
4. A bank must have a formal contingency funding plan (CFP) that clearly sets out the strategies for addressing liquidity shortfalls in emergency situations.
5. 80) A bank should put in place plans for responding to severe disruptions to its ability to fund some or all of its activities in a timely manner and at a reasonable cost.
   CFPs should have the following characteristics.
   • • Be commensurate with a bank’s complexity, risk profile, scope of operations and role in the financial systems in which the bank operates.
   • • Include a clear description of a diversified set of contingency measures for preserving liquidity and making up cash flow shortfalls in various adverse situations.
   • • CFP should articulate available potential contingency funding sources and the amount of funds a bank estimates can be derived from these sources; clear escalation/prioritization procedures detailing when and how each of the actions can and should be activated; and the lead time needed to tap additional funds from each of the contingency sources.
   • • The CFP's design, plans and procedures should be closely integrated with the firm’s ongoing analysis of liquidity risk and with the results of the scenarios and assumptions used in stress tests (requirement 9).
   • • CFPs should prepare the bank to manage a range of scenarios of severe liquidity stress that include both firm-specific and more generalized market-wide stress, as well as the potential interaction between them.
   • • The plan should include a diversified menu of options in order for management to have an overview of the potentially available contingency measures. Banks should also examine the time periods for which measures can be carried out under various assumptions and stresses.
   • • CFPs should contain clear specification of roles and responsibilities, including the authority to invoke the CFP.
   • • The establishment of a formal "crisis team" should facilitate internal coordination and decision-making during a liquidity crisis; names and contact details of members of the team responsible for implementing the CFP and the locations of team members; and the designation of alternates for key roles should also be clearly stated.
   • • To facilitate the timely response needed to manage disruptions, the plan should set out a clear decision-making process on what actions to take at what time, who can take them, and what issues need to be escalated to more senior levels in the bank.
   • • The plan should explicitly set out the procedures to deliver effective internal coordination and communication across the bank’s different business lines and locations. It should also address when and how to contact external parties, the Central Bank, stakeholders, market participants, and the media.
   • • A bank’s CFP (as well as the bank's day-to-day liquidity risk management) should reflect Central Bank lending programmes and collateral requirements.
   • • The plan should be reviewed and tested regularly to ensure their effectiveness and operational feasibility timely action should be taken by management to remedy any issue identified. Key aspects of this testing include:
     • ▪ ensuring that roles and responsibilities are appropriate and understood,
     • ▪ confirming that contact information is up to date,
     • ▪ proving the transferability of cash and collateral,
     • ▪ reviewing that the necessary legal and operational documentation is in place to execute the plan at short notice,
     • ▪ The ability to sell or repo certain assets or periodically draw down credit lines.
   • • Senior management should review and update the CFP at least every year for the board’s approval, or more often as business or market circumstances change.
   • • The CFP should be consistent with the bank’s business continuity plans and should be operational under situations where business continuity arrangements have been invoked.
6. A Bank must maintain a cushion of unencumbered, high quality liquid assets to be held as insurance against a range of liquidity stress scenarios.
7. 81) Although the predefined stress test in the LCR will result in a regulatory liquid asset requirement to be held by the bank to cover the stressed outflows, the bank should assess the need for holding liquid assets that can be sold or pledged to obtain funds in a range of stress scenarios beyond the regulatory minimum established by the LCR.
8. 82) The internal stress testing referred to in requirement 9 above should be used to determine the size and composition of the liquid asset pool required to maintain sufficient resilience to unexpected stress while the bank continues to meet its daily payment and settlement obligations on a timely basis for the duration of the stress.
9. 83) The liquidity cushion should include cash and high quality government bonds or similar instruments, to guard against the most severe stress scenarios. For insuring against less intense, but longer duration stress events, a bank may choose to widen the composition of the cushion to hold other unencumbered liquid assets which are marketable.
10. 84) A bank should be realistic about how much cash it will be able to obtain from the Central Bank against eligible assets. Moreover, a bank should not rely on the Central Bank altering the amount of or the terms on which it provides liquidity.
11. Banks are required to develop a transfer-pricing framework to reflect the actual cost of funding.
12. 85) Senior management should appropriately incorporate liquidity costs, benefits and risks in the internal pricing and performance measurement for all significant business activities (both on- and off-balance sheet). The sophistication of the transfer pricing framework should be in line with the bank level of sophistication and business complexity.
13. 86) These costs, benefits and risks should then be explicitly attributed to the relevant activity so that line management incentives are consistent with and reinforce the overarching liquidity risk tolerance and strategy of the bank, with a liquidity charge assigned as appropriate to positions, portfolios, or individual transactions.
14. 87) This assignment of liquidity costs, benefits and risks should incorporate factors related to the anticipated holding periods of assets and liabilities, their market liquidity risk characteristics, and any other relevant factors, including the benefits from having access to relatively stable sources of funding, such as some types of retail deposits.
15. 88) The quantification and attribution of these risks should be explicit and transparent at the line management level and should include consideration of how liquidity would be affected under stressed conditions.
16. 89) The analytical framework should be reviewed as appropriate to reflect changing business and financial market conditions and so maintain the appropriate alignment of incentives.

1. 95) Compliance with the LCR will be on a glide path basis. This starts in January 2016 with a compliance level of 70% and banks are expected to be at the minimum compliance level of 100% by January 2019. The table below sets out the timetable for compliance:

Table 1 Glide Path

The Central Bank will set up a liquidity task force to ensure a smooth implementation of the LCR by its implementation date. Banks wishing to move to the Basel III liquidity framework must apply in writing to the Central Bank for approval to do so. Prior to approval, banks will be required to provide the Central Bank with suitable validation of adequate governance, systems and controls in place to demonstrate the bank’s ability to comply with the requirements of the Basel III liquidity framework in full.

The Central Bank task force team will engage closely with these banks as part of the on–boarding process. Banks must provide the Central Bank team with a “road map” setting out clear milestones explaining how the bank will meet the LCR and the NSFR by their respective due dates. The team will then assess the plan and provide guidance. The team will also monitor the progress of the bank against its internally set milestones.

1. 96) High quality liquid assets are strictly defined in the LCR to ensure that these assets remain liquid³ under severe stress scenarios both firm specific and market wide. It is worth mentioning that the asset that is usually liquid under normal conditions might not be liquid under a severe stress scenario. Therefore, these assets must fulfill certain pre-defined criteria before they can be considered eligible, they must be:
   • • traded in large, deep and active repo or cash markets characterized by a low level of concentration;
   • • have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions. Level 2A and 2B must meet a predefined test that the maximum decline of price must not exceed volatility targets over a 30 day period during a relevant period of significant liquidity stress;
   • • not an obligation of a financial institution or any of its affiliated entities
2. 97) High quality liquid assets are separated into two categories, Level 1 and Level 2 liquid assets. Level 1 liquid assets must only be those assigned a 0% risk weight under Basel II Standardized Approach for credit risk and are allowed with no haircuts and no cap applied to them. These assets are:
   • • Cash at Central Bank and physical cash at the bank.
   • • Reserves and account balances held at the Central Bank
   • • Central Bank CDs and all debt issued or explicitly guaranteed by UAE Federal Government or Local Governments.
   • • Debt issued by multilateral development banks and the IMF.
   • • Foreign Sovereign or Central Bank debt or guaranteed debt receiving 0% Risk Weight under Basel II standardized approach.
   • • UAE Public Sector Entities’ (PSE or GRE) debt securities which receive 0% Risk Weight under Basel II Standardized approach
3. Those assets that are 0% risk weighted and unrated are unlikely to have the same depth of market as those that are rated above investment grade in a stress scenario. Banks must take this into account when assessing an asset’s suitability and a liquidity premium charged. In any case, 0% risk weighted assets that are not rated cannot exceed 25% of the total Level 1 HQLA.
4. 98) Level 2 liquid assets (comprising Level 2A and Level2B) are also classified as highly liquid assets. However, the realizable market value under a liquidity stress might be lower than the normal market value. Level 2 assets are allowed up to 40% in total of high quality liquid assets. The following assets, after being reduced by the corresponding haircuts, are eligible as Level 2A liquid assets (‘Corporate’ in this sense may include Sovereign securities).

Table 2 Level 2 A Liquid Assests

Level 2B assets (subject to a 15% ceiling of the total) consist of residential mortgage backed securities, lower rated debt securities and common equity shares. The qualifying tests for these types of assets are to be strictly applied as per the Basel rules and it is unlikely that many domestic assets will qualify, if any. (‘Corporate’ in this sense may include Sovereign securities).

Table 3 Level 2B Liquid Assets

1. 99) Only unencumbered liquid assets that meet the above criteria are eligible for the LCR.
2. 100) Banks should endeavor to hold eligible liquid assets in the currencies that match the currencies of the net cash outflow.
3. 101) Liquid asset portfolio should be well diversified in terms of counterparties and tenor and held for the sole purpose of managing liquidity risk.
4. The Central Bank recognizes that given the nascent debt markets that exist in the UAE, the qualitative requirements placed by Basel around the robustness of markets that underpins the liquidity and pricing of these assets may require a less strict interpretation – except in the case of Level 2 B assets. However, banks must be able to demonstrate to the Central Bank that assets held in the LCR are liquid.
5. Unrated UAE domiciled GRE or PSE issuers that do not receive a 0% risk weighting can be included in Level 2A liquid assets with a 30% haircut, for the time being at least.
6. Given that the UAE Dirham is pegged to the US Dollar, for the sake of flexibility US$/AED currency mismatches can be offset. It should be noted though that Basel III requires that liquid assets be held in the currency of the net outflow, including both the US$ and AED individually, and banks are expected to comply where possible. However, net outflows in other GCC currencies pegged to the US$ that exceed 15% of the total LCR net outflows must be matched. Other pegged and free floating currencies must be matched if they exceed 10% of total net LCR outflows.
7. Where no suitable HQLA exists in the currency of the net outflow O/N placements, in that currency, with either the relevant Central Bank or a bank rated at A or better will suffice.

³ Liquidity is the ability to convert the asset immediately into cash at little or no loss in market value under a liquidity stress.

1. 102) Cash outflows are calculated by assigned run off assumptions against various liabilities both on and off balance sheet.
2. Liabilities maturing outside the 30 days stress period - 0% run off
3. 103) All liabilities that have a contractual maturity over 30 days and where the bank is not contractually obliged to pay the customer before the maturity date receive 0% run off.
4. 104) Where the bank has guaranteed payment to the customer prior to maturity upon request, the liability is treated as being contractually due immediately and is subject to the applicable run off assumptions listed below.

1. 105) Retail deposits include both term deposits (maturity over 1 day) and current/savings/at call deposits which banks are under contractual obligation to pay immediately.
2. 106) Retail deposits are separated into stable and less stable deposits.
   
   Stable retail deposits receives 5% run off & less stable receives 10% run off
3. 107) Current retail deposits are considered stable if:
   • ▪ They are resident deposits and,
   • ▪ A relationship with the customer has been well established, for example the customer has been dealing with the bank for over 1 year; or
   • ▪ The customer uses the account for transactions such as salary being deposited in the account, paying bills and standing orders.
4. 108) Retail term deposits which are maturing within the 30 day period are classified as stable if:
   • ▪ They are resident deposits and,
   • ▪ A relationship with the customer has been well established, for example the term deposit has a history of being rolled over at maturity with the bank or the relationship has been established for over 1 year with the customer.
5. 109) No more than 60% of retail deposits maturing within 30 days can be classified as stable. This cap will only be applicable during the transition period until 1 January 2019 after which all banks are expected to be in a position to comply with the Basel III requirements in full.
6. 110) All other retail deposits that do not meet the criteria for classification as “stable” are considered less stable retail deposit and receive 10% run off factor against them.
7. 111) Deposits from small and medium size entities (SMEs)⁵ can be treated as retail deposits (and sections (107)‎ to 110)‎ apply to them), if their deposit amount is less than AED 20⁶ Million.
8. Unsecured deposits from non-financial corporates – 40% run off for Non-operational & 25% run off for operational.
9. 112) Unsecured wholesale deposits (current and term) are deposits from legal entities⁷ that are not collateralized by assets owned by the bank and are not sourced from a financial institution⁸. It includes deposits sourced from Sovereigns, Public Sector or Government Related entities. Obligations related to derivative contracts are explicitly excluded.
10. 113) It includes all funding that is callable within the 30 day horizon according to its earliest possible contractual maturity date, including those that are exercisable at the investor's discretion.
11. 114) Unsecured wholesale deposits from non-financial institutions are separated into operational and non-operational wholesale deposits. Operational wholesale deposits have one or more of the following characteristics:
    • ▪ The customer is reliant on the bank to perform payments, clearing, collections, custody, cash management (and) or payroll supported by a legally binding contractual agreement. The bank will have to prove reliance.
    • ▪ The deposits are by-products of the underlying services provided by the banking organization and not sought out in the wholesale market in the sole interest of offering interest income.
    • ▪ The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer to leave any excess funds.
12. 115) It is understood that exact segregation of operational and non-operational accounts is operationally challenging for banks. The Central Bank expects banks to use their best endeavors and sound judgment in the process. Banks must also undertake a continuous upgrading/improvement of systems and MIS to ensure that by the final implementation date of 1 January 2019 they can fully comply with the requirements of Basel III in this respect. Any deliberate manipulation of the classification will result in all wholesale deposits being classified as non-operational. For example, banks would be expected to ascertain the ‘normal’ balance in these accounts for operational purposes and exclude those balances that are in excess.
13. 116) No more than 40% of total wholesale deposits maturing in one month can be classified as operational.
    Banks who operate the LCR will be expected to adjust their liability products over time, both retail and corporate, so that they can more directly reflect the characteristics of the Basel III requirements. Once this is achieved the 40% ceiling will be lifted.
14. 117) All other deposits from legal entities, including those from SMEs in excess of AED 20 million are non-operational and attract a run-off factor of 40%.
    
    Unsecured wholesale funding from financial institutions – Operational 25% run off, Non-operational at 100% run off
15. 118) This category includes non-collateralized deposit sourced from banks, insurance companies, brokers, securities firms (and the affiliates of these companies) as well as NCDs, Bonds, MTNs, CPs and other unsecured debt instruments issued by the bank and are maturing within the 30 day stress period. These are also separated into operational and non-operational deposits depending on their characteristics.
16. 119) Operational deposits from financial institutions receive 25% run off against them and have the all following characteristics:
    • ▪ The criteria is met as prescribed above for deposits from non-financial operational accounts
    • ▪ The deposits do not arise from correspondent banking, or from the provision of prime brokerage services.
    • ▪ If the deposit placed by a bank receives a 25% run off against it, the depositing bank receives 0% inflow for it. The Central Bank will ensure this treatment is applied when conducting its onsite and offsite reviews.
17. 120) A run off factor of 100% is assigned to all non-operational financial services deposits maturing within 30 days and that do not meet the above characteristics.

⁴ Defined as deposits from individuals (natural persons)
⁵ Small and medium enterprises refer to legal entities that have an annual turnover of less than AED 75 million
⁶ The AED 20 million limit is to be determined on a relationship level.
⁷ Excludes SME deposits that fall under 111)‎
⁸ Financial institution includes banks, insurance companies, brokers and their affiliates.

1. 121) Wholesale funding, that is secured by giving rights to an asset in insolvency, are assumed to be relatively more stable as the counterparts are likely to renew the funding upon maturity in a stress given the more secured position they enjoy.
2. 122) It is important to note that the stability of this funding source depends on the quality of the asset pledged as collateral. The below table shows the run off assumptions applied to wholesale deposits depending on the type of Collateral used.

Table 4 Collateral for maturing wholesale funding

Credit lines⁹ and liquidity facilities provided to retail customers - 5% draw down

1. 123) Credit lines and liquidity facilities provided to retail customers and retail SMEs (as per section 111)‎ will have 5% draw down assumption applied to the undrawn amount of the advised limit whether revocable or not.
   
   Credit lines and liquidity facilities provided to non-financial corporate customers - 10% draw down for committed credit lines and 30% for liquidity facilities
2. 124) Credit lines provided to non-financial corporate customers are assumed to draw down at 10%, liquidity facilities assume 30% draw down. This takes into account the difficulty in replacing these lines from other banks in a market wide stress and the potential actions by corporates to secure cash to ensure no interruption to their business.
   
   Credit lines and liquidity facilities to banks subject to UAE prudential supervision
3. 125) Banks should assume a 40% drawdown of the undrawn portion of these facilities.
   
   Credit lines and liquidity facilities provided to financial corporate customers - 40% draw down for committed credit lines and 100% for liquidity facilities
4. 126) Credit lines provided to other financial institutions receive 40% draw down to reflect the likelihood that they will be drawn upon in a market crisis. Similarly, liquidity facilities are assumed to be 100% fully drawn.
   
   Liquidity facilities provided to all other entities (including embedded in transactions)-100%
5. 127) A liquidity facility is defined by the BCBS as a committed undrawn back up facility put in place expressly for the purpose of refinancing debt of a customer where the customer is unable to obtain funding from the financial markets.

⁹ Credit lines include undrawn portion of overdrafts, credit cards, bill discounting facilities and other commitments to provide credit.

1. 128) LGs and LCs that are not trade finance related will be assessed based upon the nature of the beneficiary of the guarantee and the draw down assumptions as relates to credit lines, as above, will apply. However, if by the nature of the transaction 100% of the guarantee is likely to be drawn down at once then it must be assumed to be a liquidity facility and treated accordingly.
2. 129) LCs and other trade finance facilities receive 5% draw down on the outstanding amount.

Derivative contracts – assumed 3 notch downgrade to credit rating– 100% outflow

1. 130) Some banks might have derivative contracts that include Credit Support Annex (CSA) which requires the bank to post collateral against its MTM position depending on its credit rating.
2. 131) Banks should assume a three notch downgrade to their credit rating and determine the cash outflow required to obtain the additional collateral required under the CSA as a result of the downgrade. The cash outflow will be treated as 100% outflow in the 30 day stress period under the LCR.
   
   Derivative contracts –Net outflow under the contract within 30 days – 100% outflow
3. 132) Known amounts to be paid on derivative contracts less known amounts to be received from derivative contracts within 30 days should be included in the LCR outflows at 100%. Cash flows may be calculated on a net basis by counterparty only where a valid netting agreement exists or when the inflow and outflow occurs within the same business day. Derivative cash flows in different currencies from the same counterparty when the inflow and outflow occurs on the same business day may be offset against each other.

Cash Inflows – 100% in the normal course of business inflows with a cap of 75% of outflows

1. 133) Contractual cash inflows from assets that are expected to come in within the 30 day stress period under normal business conditions (see details below) are allowed to be included in the LCR up to 75% of cash outflows (see paragraph 93).
2. 134) Cash inflows from the principal and interest repayment of loans and advances to retail, SMEs and non-financial corporates are included at 50% cash inflow. This assumes that the bank will continue to extend new loans at 50% of the contractual inflows. However, because of the self-liquidating nature of trade finance transactions these may be included as a 100% cash inflow provided there is no obligation on the bank to extend further credit to the customer once the transaction has been settled. The bank must prove to the Central Bank’s satisfaction that it has exercised this option before applying the 100%.
3. 135) No Credit card and overdraft repayments are allowed as a cash inflow.
4. 136) Contractual cash inflows that are generated from financial institutions maturing within 30 days are assumed to be received in full (100% inflow). Similarly, all debt instruments that are maturing within the 30 day period will receive 100% cash inflow.
5. 137) No lines of credit, liquidity facilities, and contingent funding facilities given to the bank are allowed to be included in the cash flows (0% inflow).
6. 138) Derivative cash flows can be shown as 100% of all the net cash inflows. The methodology is the same as for outflows.
7. 139) No operational deposits made to financial institutions should be allowed as a cash inflow (0% cash inflow).
   
   Maturing secured lending transactions-Run offs depending on quality of collateral
8. 140) Transactions backed by Level 1 assets 0% inflow
9. 141) Transactions secured by Level 2A assets 15% inflow (0% if the collateral is used to cover a short position)
10. 142) Margin lending backed by all other collateral (including Level2B assets) 50% inflow (0% if the collateral is used to cover a short position)
11. 143) Transactions backed by other collateral 100% inflow (0% if the collateral is used to cover a short position)

1. 148) The ASF is determined by assigning weighted values to various funding sources depending on the nature of the source, its contractual maturity and the propensity of funding providers to withdraw their funding. This includes such things as call options and the ability of the bank to refuse the exercising of the call. Only those proportions of the cash flow actually maturing beyond the maturity thresholds as prescribed by the ratio can be included.
2. 149) The cash flows for derivative contracts will be assessed at the replacement cost where the contract has a negative value. If a netting agreement exists then this can be taken into account and the netted position can be used. Collateral posted as variation margin can also be allowed for.
3. 150) Liabilities and capital receiving a 100% ASF factor are:
   1. a) The total amount of regulatory capital excluding the proportion of Tier 2 instruments with a residual maturity of less than one year
   2. b) Any capital instrument not included in (a) that has an effective residual maturity of one year or more (excludes those with explicit or embedded option that negates this condition)
   3. c) The total amount of secured and unsecured borrowings and liabilities with effective residual maturities of one year or more.
4. 151) Liabilities receiving a 95% ASF factor:
5. These comprise ‘stable’ demand deposits as per the LCR (paragraphs 107 and 108) as well as retail term deposits as per the LCR with residual maturities of less than one year.
6. 152) Liabilities receiving a 90% ASF factor
7. These comprise ‘less stable’ demand deposits as defined in the LCR (paragraph 109) as well as retail term deposits as per the LCR with residual maturities of less than one year
8. 153) Liabilities receiving a 50% ASF factor
   1. a) Funding (secured and unsecured) with a residual maturity of less than one year provided by non-financial corporate customers
   2. b) Operational deposits (as defined in the LCR paragraph 114)
   3. c) Funding with a residual maturity of less than one year from sovereigns, public sector entities and multilateral and development banks and
   4. d) Funding from other sources not included above with a residual maturity between 6 months and one year.
9. 154) Liabilities receiving a 0% ASF factor
   
   These comprise everything else with a few technical exceptions including net derivative liabilities (refer BCBS document paragraph 25 and paragraph 149 above)

1. 155) The amount of required stable funding is measured based on the broad characteristics of the liquidity risk profile of an institutions assets and OBS exposures. The calculation first assigns a carrying value of the asset to the prescribed categories and then multiplies this by the required RSF factor. The total RSF is the sum of the weighted amounts for both on and off balance sheet exposures.
2. 156) The rationale behind the RSF factors is that they approximate the amount of a particular asset that would have to be funded, either because it will (or is likely to be) rolled over and could not be monetized either by sale or as collateral, over the course of one year without significant expense. These amounts have to be supported by stable funding.
3. 157) Assets are allocated to the appropriate RSF factor based on their residual maturity or liquidity value. Residual maturity has to take into account any options either explicit or implied that may extend the maturity of the asset (or OBS exposure). Amortized loans can be adjusted for that portion falling due within the one year time horizon.
4. 158) Encumbered assets are assessed as per the period they are encumbered for at the highest applicable RSF factor if that period is greater than 6 months. Where the encumbrance period is less that 6 months the factor will be the same as unencumbered assets.
5. 159) Banks should exclude from their assets securities which they have borrowed in financing transactions such as reverse repos and collateral swaps where they do not have beneficial ownership. Banks should include securities they have lent where they retain beneficial ownership. Securities received through collateral swaps should not be included if they do not appear on the balance sheet. Generally, if the bank retains beneficial ownership and the security appears on the balance sheet it should be assigned a RSF factor.
6. 160) Netting can be accommodated provided there is a valid netting agreement. Likewise cash collateral can be taken into account.
7. 161) Derivative assets are firstly based on replacement cost where the contract has a positive value.
8. 162) Assets assigned a 0% RSF factor
   1. a) Coins and bank notes
   2. b) Central Bank Reserves
   3. c) All claims on Central Banks with residual maturities of less than 6 months
   4. d) ‘trade date receivables’ as per BCBS document paragraph 30 and 36 (d)
9. 163) Assets assigned a 5% RSF factor
   1. a) Unencumbered Level 1 high quality liquid assets as defined in the LCR excluding those receiving a 0% RSF as above
   2. b) Marketable securities representing claims or guaranteed by those entities prescribed a 0% risk weight by the Basel II standardized approach for credit risk.
10. 164) Assets assigned a 10% RSF factor
    1. a) Unencumbered loans to financial institutions with residual maturities of less than 6 months where the loan is secured against Level 1 assets as defined by the LCR and where the bank can freely use the collateral for the life of the loan.
11. 165) Assets assigned a 15% RSF factor
    1. a) Unencumbered Level 2A assets as defined in the LCR
    2. b) All other unencumbered loans to financial institutions with residual maturities of less than 6 months not included in 164
12. 166) Assets assigned a 50% RSF factor
    1. a) Unencumbered Level 2B assets as per the LCR (when allowed)
    2. b) HQLA (as per the LCR) that are unencumbered for a period of between six months and one year
    3. c) Loans to financial institutions and central banks with a residual maturity of between six months and one year
    4. d) Deposits held at other financial institutions for operational purposes
    5. e) All other assets not included in the above categories that have a residual maturity of less than one year including loans to non-financial corporate clients, retail and SME loans as well as loans to sovereigns and PSEs. (GREs included).
    6. f) Overdrafts that are core are to be assessed on a case by case basis and will be assumed to have a maturity greater than one year.
13. 167) Assets assigned a 65% RSF factor
    1. a) Unencumbered residential mortgages with a residual maturity of one year or more providing they qualify for a 35% or lower risk weight under Basel II standardized approach for credit risk.
    2. b) Other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more that would qualify for a 35% or lower risk weight under Basel II standardized approach.
14. 168) Assets assigned an 85% RSF factor
    1. a) Cash, securities or other assets posted as initial margin for derivative contracts or assets provided to contribute to the default fund of a central counterparty.
    2. b) Other unencumbered performing loans that do not qualify for the 35% or lower risk weight requirements in 167) and have residual maturities of one year or more, excluding loans to financial institutions
    3. c) Unencumbered securities with a remaining maturity of one year or more as well as exchange traded equities that are not in default and do not qualify as HQLA under the LCR.
    4. d) Physical traded commodities such as gold
15. 169) Assets assigned a 100% RSF factor
    1. a) All assets that are encumbered for a period of one year or more
    2. b) NSFR derivative assets as calculated subject to paragraph 160 and 161 net of NSFR derivative liabilities calculated as per paragraph 149, if the NSFR derivatives assets are greater than liabilities.
    3. c) All other assets not included in the above categories including non-performing loans, loans to FIs with a residual maturity of one year or more, non-exchange traded equities, fixed assets, items deducted from regulatory capital, subsidiary interests and defaulted securities
    4. d) 20% of derivative liabilities as calculated according to paragraph 149

1. 170) 5% RSF factor of the currently undrawn portion
   1. a) Irrevocable and conditionally revocable credit and liquidity facilities for any client
   2. b) Trade finance related obligations (including guarantees and letters of credit)
2. 171) 10% RSF factor
   1. a) Non-contractual obligations such as potential requests for debt repurchases of the banks own debt, structured products where the bank has to maintain liquidity and managed funds where there is a commitment to maintain stability
3. 172) 20% RSF factor
   1. a) Guarantees and letters of credit unrelated to trade finance obligations

1. a. The LCR consists of two components:
   HQLA (Shari’ah-compliant) as the numerator and net cash outflows over the next 30 days as the denominator, both in a stress scenario. The HQLA are the assets that can be easily and immediately converted into cash, with no or little loss of value, during a time of stress.
   The total net cash outflows will be calculated as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent 30 calendar days.
2. b. The formula for calculating LCR, therefore, is as follows:

1. c. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in under the specified scenario up to an aggregate cap of 75% of total expected cash outflows. There is a cap applied on total cash inflows in order to prevent IBs from relying solely on anticipated inflows to meet their liquidity requirements, and also to ensure a minimum level of HQLA holdings. Accordingly, the amount of inflows that can offset outflows is capped at 75% of total expected cash outflows. Therefore, by applying this cap, the IB is required to hold a minimum amount of stock of HQLA equal to 25% of the total net cash outflows.
2. d. 

   Total net cash outflows over the next 30 calendar days

   =

   Total gross expected cash outflows

   -

   Lesser of (total expected cash inflows; 75% of total expected cash outflows)

3. e. The LCR requirement is based on a scenario that entails a combination of idiosyncratic and market-wide shocks; nevertheless, IBs must develop its own scenarios based on liquidity stress testing of their portfolio. IBs must hold more HQLA if the results of their stress tests indicate that this is necessary. Such internal stress tests must incorporate longer time horizons than that mandated by this Standard. IB is expected to share the results of these additional stress tests with the Central Bank.

1. a.The HQLA are defined as assets unencumbered by liens and other restrictions on transfer which can be converted into cash easily and immediately, with little or no loss of value, including under the stress scenario.
2. b.HQLA are to be determined on the basis of the eligibility criteria for different categories of HQLA and must be subject to the limits applicable to each category. These eligibility criteria for HQLA and composition limits are intended to ensure that an IB’s HQLA stock provides it with the ability to generate liquidity in fairly short order, through sale or secured funding in a stress scenario. The assets are required to meet fundamental and market-related characteristics, particularly in terms of low risk, ease and certainty of valuation, and low volatility. HQLA is also eligible for intraday and overnight liquidity facilities offered by the Central Bank.
3. c.To be considered as HQLA, an asset must also have a low correlation with risky assets, an active and sizeable market, and low volatility. This requirement has to be fulfilled at all times, including during an underlying stress scenario. These factors assist the Central Bank to determine which assets qualify as HQLA. The Central Bank also will consider risk components of HQLA, such as liquidity risk, market risk, credit risk, and operational risk. For Shari’ah-compliant assets, the risk of Shari’ah non-compliance and associated reputational problems could significantly limit liquidity for these assets – both sale and interbank trading – in the secondary market.
4. d.HQLA (except Level 2B assets, as defined below) is eligible for use as collateral when seeking short- to medium-term liquidity facilities from the Central Bank.
5. e.To meet HQLA requirements, the assets must possess the following characteristics:

   i.Fundamental characteristics:
   The assets must be low risk, as reflected in the high credit rating of the issuer or the instruments. The assets must be easy to value, have a homogeneous and relatively simple structure, and not be subject to wrong-way (highly correlated) risk. Shari’ah compliance of the structure and contracts underlying the liquid assets is another critical criterion of HQLA for IBs. Ideally, the asset must be listed on a national, regional or international stock exchange to ensure that sufficient information on pricing and trading is available to the public.

   ii.Market-related characteristics
   The assets are expected to be liquefiable at any time. Thus, as far as possible, there must be historical evidence of market breadth and depth. This could be demonstrated by low bid–ask spreads, high trading volumes, and a large and diverse number of market participants. Availability of market-makers is another factor for consideration. The asset prices are expected to have remained relatively stable and be less prone to sharp price declines over time, including during stress conditions.
   Assets must be tested through sale or Shari’ah-compliant alternatives of repurchase (repo) transactions to ascertain whether the liquid assets meet the criteria of “high quality” and fulfil the fundamental and market-related characteristics mentioned above. It is required that the liquidity-generating capacity of HQLA remains unchanged in periods of severe idiosyncratic and market stress. Lower-quality assets typically fail to meet that test. It must be noted that, in severe market conditions, if IBs attempt to raise liquidity from lower-quality assets, this will lead to significantly discounted prices. This may not only worsen the market’s confidence in the Islamic Banks but also may generate mark-to-market losses for its similar assets and put pressure on its liquidity position. In these conditions, market liquidity for lower-quality assets is likely to disappear quickly.

1. a.Level 1 Assets:
   HQLA are divided into two main categories or levels: Level 1 and Level 2. Level 1 assets can constitute an unlimited share of the pool and are not normally subject to a haircut under the LCR.
2. b.Level 1 assets are limited to:
   1. a.Coins and Banknotes;
   2. b.Reserves and account balances held at the Central Bank;
   3. c.Central Bank’s Islamic CDs;
   4. d.Sukuk and other Shari’ah-compliant marketable securities issued or guaranteed by UAE Federal Government or Local Governments;
   5. e.Sukuk and other Shari’ah-compliant marketable securities issued or guaranteed by multilateral development banks (MDBs) which are assigned a 0% risk weight;
   6. f.Sukuk and other Shari’ah-compliant marketable securities issued by foreign sovereign or foreign central banks that have a 0% risk weight; and
   7. g.Sukuk and other Shari’ah-compliant marketable securities issued by UAE Public Sector Entities’ (PSE or GRE) that have a non-0% risk weight.
3. c.Those assets that are 0% risk weighted and unrated are unlikely to have the same depth of market as those that are rated above investment grade in a stress scenario. IBs must take this into account when assessing an asset’s suitability and a liquidity premium charged. In any case, 0% risk weighted assets that are not rated cannot exceed 25% of the total Level 1 HQLA.
4. d.Level 2A Assets:
   Level 2 assets compromise Level 2A and Level 2B assets as permitted by the Central Bank. Level 2A assets are limited to the following, subject to a 15% haircut applied to the current market value of each asset:
   1. a.Shari’ah-compliant marketable securities/Sukuk issued or guaranteed by sovereigns, central banks, PSEs, MDBs, which are assigned a 20% risk weight;
   2. b.Shari’ah-compliant securities (including Shari’ah-compliant commercial paper) and Sukuk that satisfy all of the following conditions:
      1. i.not issued by an IB /financial institution or any of its affiliated entities;
      2. ii.either: (a) have a long-term credit rating from a recognised external credit assessment institution (ECAI) of at least AA- or, in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating; or (b) do not have a credit assessment by a recognised ECAI but are internally rated as having a probability of default corresponding to a credit rating of at least AA-.

      These assets must be:

      a) traded in a market characterised by a low level of concentration; and

      b) able to be regarded as a reliable source of liquidity at all times (i.e. maximum decline of price must not exceed volatility targets over a 30 day period during a relevant period of significant liquidity stress).

5. e.Level 2B Assets:
   The Level 2B assets are limited to the following:
   1. 1)Sukuk and other Shari’ah-compliant securities backed by commodity(ies) and other real asset(s) that satisfy all of the following conditions, subject to a 25% haircut:
      1. i.not issued by the IB, and the underlying assets have not been originated by, the IB itself or any of its affiliated entities;
      2. ii.have a long-term credit rating from a recognised ECAI of AA or higher, or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;
      3. iii.being traded in a market characterised by a low level of concentration and being regarded as a reliable source of liquidity at all times – that is, a maximum decline of price must not exceed volatility targets over a 30 day period during a relevant period of significant liquidity stress; and
      4. iv.the underlying asset pool is restricted to Shari’ah-compliant (residential) mortgages and cannot contain structured products.
   2. 2)Sukuk and other Shari’ah-compliant securities that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut:
      1. i.not issued by a financial institution or any of its affiliated entities;
      2. ii.either: (a) have a long-term credit rating from a recognised ECAI of between A+ and BBB- or, in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating; or (b) do not have a credit assessment by a recognised ECAI and are internally rated as having a probability of default corresponding to a credit rating of between A+ and BBB-; and
      3. iii.being traded in a market characteried by a low level of concentration and being regarded as a reliable source of liquidity at all times – that is, a maximum decline in price not exceeding 20% or an increase in a haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress.
   3. 3)Shari’ah-compliant equity shares that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut:
      1. i.not issued by a financial institution or any of its affiliated entities;
      2. ii.exchange traded and centrally cleared;
      3. iii.a constituent of the major stock index in the UAE or where the liquidity risk is taken, as decided by the Central Bank of the UAE where the index is located;
      4. iv.denominated in the UAE dirhams or in the currency of the jurisdiction where its liquidity risk is taken; and
      5. v.being traded in a capital market characterised by a low level of concentration and being regarded as a reliable source of liquidity at all times – that is, a maximum decline in share price not exceeding 40% or an increase in a haircut not exceeding 40 percentage points over a 30-day period during a relevant period of significant liquidity stress.
   4. 4)Other Shari’ah-compliant instruments or Sukuk that are widely recognised in the UAE may be included in Level 2B, subject to a minimum 50% haircut if they meet the following conditions:
      1. i.not issued by a financial institution or any of its affiliated entities; and
      2. ii.being traded in a market characterised by a low level of concentration and being regarded as a reliable source of liquidity at all times.
   5. 5)Sukuk and other Shari’ah-compliant marketable securities issued by sovereign or central banks rated BBB+ to BBB- that are not included in Level 1 assets may be included in Level 2B assets with a 50% haircut.
6. f.A cap will be applicable to the use of Level 2 assets, up to 40% of the total stock of HQLA, after the application of required haircuts. Specific to the Level 2B assets, the total assets under this category must comprise no more than 15% of the total stock of HQLA after the application of required haircuts and must be included within the overall 40% cap on Level 2 assets.
7. g.Given that the UAE Dirham is pegged to the US Dollar, for the sake of flexibility US$/AED currency mismatches can be offset. It must be noted though that it is required that liquid assets be held in the currency of the net outflow, including both the US$ and AED individually, and IBs are expected to comply where possible. However, net outflows in other GCC currencies pegged to the US$ that exceed 15% of the total LCR net outflows must be matched. Other pegged and free floating currencies must be matched if they exceed 10% of total net LCR outflows.
    

1. 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.
2. b.In particular, the assets must fulfil the following operational requirements:
   1. 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.
   2. 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.
   3. 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.
   4. 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.
   5. 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.
   6. 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.
3. 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.
4. 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.
    

1. a.The term “total net cash outflows” is defined as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and IA, and off-balance sheet (OBS) commitments by the rates at which they are expected to run off or be drawn down.
2. b.Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in under the scenario up to an aggregate cap of 75% of total expected cash outflows.
3. c.To avoid double counting, for assets that are included as part of the stock of HQLA (i.e. the numerator of the LCR), the associated cash inflows cannot also be counted as cash inflows in calculating net cash outflows. Therefore, instruments that are utilised for intraday liquidity facilities must be excluded from the components of HQLA. Obligations arising from the assets will remain recorded as components of total net cash outflows.
    

1. a.IB shall calculate total cash outflows based on the categories of cash outflows as listed below. Each category consists of various types of liabilities or IA, which have their own run-off factors tied to their behavioral characteristics.
2. b.Treatment of IAs
   Income-earning deposits with IB, whether retail or wholesale, typically take the form of IA, which are categorised as follows:
   a) Restricted IA (RIA), and
   b) Unrestricted IA (UIA).
3. c.The applicable run-off factor for IA depends on the withdrawal rights of the IAH and whether they are retail or wholesale accounts. Whether the IA are reported on-or off-balance sheet is not relevant. In the case of RIA, IAH may or may not have the right to withdraw funds before the contractual maturity date. For RIA with no withdrawal rights prior to maturity, the IB managing the RIA is not exposed to run-off for LCR purposes, unless the contract maturity date falls within the next 30 days. Alternatively, IAH may have withdrawal rights subject to giving at least 30 days’ notice. In this case, also, the IBs managing these RIA is not exposed to run-off from them for LCR purposes (except for those accounts for which notice of withdrawal has been given and the withdrawal date falls within the next 30 days, or those which mature within the next 30 days). Only in the case of RIA from which the IAH may withdraw funds at less than 30 days’ notice without any “significant reduction of profit” is the IB exposed to run-off for LCR purposes. To be “significant”, a reduction of profit must be considerably more than a mere loss of accrued income. Where an IB offers such RIA, it would be expected to retain a proportion of HQLA in the relevant RIA fund in order to meet withdrawals, in which case the HQLA would be netted off the amount of the run-off in calculating the total net cash outflows. However, it must be noted that if an IB has voluntarily waived such restrictions and permitted withdrawals to be made at short notice (i.e. less than 30 days) without any significant reduction of profit, such restrictions will have to be ignored subsequently in determining the applicable run-off factor. The run-off factor applied to the RIA is based on the aforementioned minimum ratios. Where the funds of RIA are invested in assets with a liquid secondary market, such that under normal conditions the assets may be monetised rapidly in time to meet a demand for withdrawal, there is a risk that under stressed conditions it may not be possible to monetise the assets so readily. Hence, there is a potential exposure to a (net) run-off for LCR purposes. The amount of the run-off for LCR purposes must therefore be reduced only in respect of cash and HQLA held in the RIA fund.
4. d.For UIA, in some cases withdrawals will be permitted either on demand or at less than 30 days’ notice. The run-off factor applied to UIA depends on the contractual withdrawal rights of the IAH.
5. e.Retail Deposits and IAs
   Retail deposits are separated into stable and less stable deposits. Stable retail deposits receive 5% run off and less stable receive 10% run off.
6. f.Current retail deposits/IA are considered stable if:
   1. i.They are resident deposits and,
   2. ii.A relationship with the customer has been well established, for example the customer has been dealing with the bank for over 1 year; or
   3. iii.The customer uses the account for transactions such as salary being deposited in the account, paying bills and standing order payments.
7. g.Retail term deposits/IA which are maturing within the 30 day period are classified as stable if:
   1. i.They are resident deposits, and
   2. ii.A relationship with the customer has been well established, for example, the term deposit has a history of being rolled over at maturity with the IB, or the relationship has been established for over 1 year with the customer.
8. h.Deposits from small and medium sized entities (SMEs) can be treated as retail deposits (as per the clauses above), if their deposit amount is less than AED 20 Million.
9. i.Unsecured deposits from non-financial corporates – 40% run off for Non- operational and 25% run off for operational.
10. j.Unsecured Wholesale Funding
    Unsecured wholesale funding is defined as those liabilities and general obligations of the IBs that are raised from non-natural persons such as legal entities, including sole proprietorships and partnerships and are not collateralised by legal rights to specifically designated assets owned by the funding institution in the case of bankruptcy, insolvency, liquidation or resolution. The wholesale funding included in the LCR includes funding that is callable within the LCR’s horizon of 30 days or that has its earliest possible contractual maturity date situated within this horizon, as well as funding with an undetermined maturity. Wholesale funding that is callable by the funds provider subject to a contractually defined and binding notice period surpassing the 30-day horizon is not included.
11. k.The outflows to unsecured wholesale funding are further categorised into five categories. First are current and term accounts (less than 30 days’ maturity) provided by small business customers. As with the categorisation of retail deposits, these types of current and term accounts are further divided into stable and less stable deposits. Treatment of the current and term accounts provided by small business customers is also similar to the treatment of the retail deposits. Stable deposits are assigned a 5% run-off factor, while less stable deposits are assigned run-off factors based on the different buckets that are determined according to the risk profiles of each group, with a minimum run-off factor of 10%. As indicated above, in the case of IBs that do not practice “smoothing” of profit payouts to IAH, a higher run-off factor must be applied. Categorisation of the buckets and their run-off factors shall be similar to that of the buckets of less stable current and term accounts in the retail category.
12. l.The second category is operational accounts generated by clearing, custody and cash management activities. These deposits are defined as deposits placed by financial and non-financial customers in order to facilitate their access to and ability to use payment and settlement systems and otherwise make payments. These funds are assigned a 25% run-off factor. However, this factor is only applicable if the customer has a substantive dependency on the IBs and the deposit required for such activities, and meets the international definition and qualifying criteria for funds to be recognised as operational accounts.
13. m.In order to ensure consistent and effective implementation of operational accounts, one or more of the following criteria for determining the eligibility of any account as an operational account must be met:
    1. i.used for providing cash management, custody or clearing products only;
    2. ii.must be provided under a legally binding agreement to institutional customers;
    3. iii.termination of these accounts shall be subject to either a notice period of at least 30 days or a significant reduction of profit for closing these accounts; and
    4. iv.returns on these accounts are determined without giving any economic incentive to the customer to leave any excess funds in the accounts.
14. n.Any excess balances that could be withdrawn and would still leave enough funds to fulfil the clearing, custody and cash management activities do not qualify for the 25% factor. In other words, only that part of the deposit balance with the service provider that is proven to serve a customer’s operational needs can qualify as stable. Excess balances must be treated in the appropriate category for non-operational accounts. If the IB is unable to determine the amount of the excess balance, then the entire deposit must be assumed to be excess to requirements and, therefore, considered non-operational. The IB must determine the methodology for identifying excess deposits that are excluded from this treatment. This assessment must be conducted at a sufficiently granular level to adequately assess the risk of withdrawal in an idiosyncratic stress scenario.
15. o.The third category includes funds from an institutional network of cooperative IB. In some jurisdictions, there are IBs that act as “central institutions” or central service providers for lower-tier IBs, such as Islamic cooperatives. A 25% run-off rate can be applied by such an IBs to the amount of deposits member institutions place with it as their central institution or specialised central service provider that are placed (a) due to statutory minimum deposit requirements, and which are registered at regulatory authorities, or (b) in the context of common task-sharing and legal, statutory or contractual arrangements. As with other operational accounts, these deposits would receive a 0% inflow assumption for the IBs. Supervisory approval would be needed in each case to ensure that IBs utilising this treatment actually are the central institutions or central service providers (e.g. to a cooperative network).
16. p.The fourth category is unsecured wholesale funding provided by non-financial corporates and sovereigns, the Central Bank, MDBs and PSEs. A 40% run-off factor is applicable to funds from such sources that are not specifically held for operational purposes.
17. q.The last category is “other entities”. This category consists of all deposits and funding from other institutions including, among others, banks, IBs, securities firms, insurance or Islamic insurance (Takaful) companies, etc., fiduciaries and beneficiaries, conduits and special purpose vehicles, affiliated entities of the IBs, and any other entities that are not specifically held for operational purposes and are not included in the prior categories. The run-off factor for these funds is 100%.
18. r.Secured Funds
    Secured funding is defined as liabilities and general obligations with maturities of less than 30 days that are collateralised by legal rights to specifically designated assets owned by the counterparty in the case of bankruptcy, insolvency, liquidation or resolution. Various run-off factors are assigned to these funds, depending on the type of collateral. The secured funding transactions with a central bank counterparty or backed by Level 1 assets with any counterparty are assigned a 0% run-off factor. A 15% run-off factor is assigned to secured funding transactions backed by Level 2A assets with any counterparty.
19. s.Higher run-off factors are assigned to secured funding not backed by Level 1 or Level 2A assets. Secured funding transactions backed by assets that are neither Level 1 nor Level 2A, with domestic sovereign, MDBs or domestic PSEs as a counterparty, as well as secured funding backed by commodity or real assets eligible for inclusion in Level 2B, may receive 25% run-off factors. On the other hand, secured funding backed by other Level 2B assets and all other secured funding transactions that do not fall within the above categorisations shall be assigned 50% and 100% run-off factors, respectively.
20. t.For all other maturing transactions, the run-off factor is 100%, including transactions where IB has met customers’ short positions with its own long inventory. Table below summarises the applicable standards.
21. u.For all other maturing transactions, the run-off factor is 100%, including transactions where IB has met customers’ short positions with its own long inventory. Table below summarises the applicable standards.
22. Amount to Add to Cash Outflows:

     Additional Requirements:

1. v.Some instruments under this category could include Shari’ah-compliant hedging (Tahawwut) instruments, which are assigned a 100% run-off factor; undrawn credit and liquidity facilities to retail and small business customers, which are assigned a 5% run-off factor; undrawn financing facilities to non-financial corporates as well as sovereigns, central banks, PSEs and MDBs, which are assigned a 10% run-off factor for credit and a 30% run-off factor for liquidity; as well as other contractual obligations extended to financial institutions/IBs, which are assigned a 100% run-off factor.
2. w.Some instruments under this category could include Shari’ah-compliant hedging (Tahawwut) instruments, which are assigned a 100% run-off factor; undrawn credit and liquidity facilities to retail and small business customers, which are assigned a 5% run-off factor; undrawn financing facilities to non-financial corporates as well as sovereigns, central banks, PSEs and MDBs, which are assigned a 10% run-off factor for credit and a 30% run-off factor for liquidity; as well as other contractual obligations extended to financial institutions/IBs, which are assigned a 100% run-off factor.
3. x.Shari’ah-compliant Interbank Contracts
   The instruments traded in the conventional interbank market are usually short-term and liquid in nature, and their maturities range from one day up to a year. The trading is wholesale and mostly conducted over the counter. An Islamic interbank money market would essentially perform similar functions with the exception that the instruments used must comply with Shari’ah principles. Widely used Shari’ah-compliant instruments used by IBs for interbank liquidity management are based on Mudarabah, commodity Murabahah or Wakalah arrangements. All these contracts are structured as unsecured wholesale funding. The run-off rate applied to these transactions, maturing in the next 30 calendar days, is 100%.
    

1. a.Cash Inflows – 100% in the normal course of business inflows with a cap of 75% of outflows
2. b.When considering its cash inflows, an IB must include only contractual inflows from outstanding exposures that are fully performing and for which the IB has no reason to expect a default within the 30-day time horizon. Contingent inflows (such as returns on profit-sharing instruments) are not included in total net cash inflows. IB need to monitor the concentration of expected inflows across wholesale counterparties. In order to prevent IB from placing too much reliance on expected inflows to meet their liquidity requirement, and to ensure a minimum level of HQLA holdings, the amount of inflows that can offset outflows is capped at 75% of total expected cash outflows as defined in this standard.
3. c.The first category of cash inflows is secured financing, including Shari’ah-compliant alternatives to reverse repos and securities borrowing. Unless stated otherwise, the run-off rates mentioned in the following can be applied.
4. d.IB must assume that the maturity of financing secured by Level 1 assets will be rolled over and will not give rise to any cash inflows. Therefore, an inflow factor of 0% will be applied to this kind of transaction. Maturing financing secured by Level 2 assets will lead to cash inflows equivalent to the relevant haircut for the specific assets. For instance, a 15% inflow factor is assigned if the transaction is secured by Level 2A assets; and an inflow factor of 25–50% is assigned if it is secured by Level 2B assets. IB is assumed not to roll over maturing secured financing covered by non-HQLA assets, and can assume that it will receive back 100% of the cash related to those agreements (i.e. an inflow factor of 100%).
5. e.The second category of IB cash inflows is committed facilities. No financing facilities, liquidity facilities or other contingent funding facilities that the IB holds at other institutions for its own purposes will be assumed to be drawn. Such facilities receive a 0% inflow rate, meaning that this scenario does not consider inflows from committed financing or liquidity facilities.
6. f.The third category of cash inflows is inflows from various counterparties, for which the inflow rate is determined by the type of counterparty. This category of inflows takes into account cash inflows from either secured or unsecured transactions from various counterparties, which are categorised as: (a) retail customers and small business customers and (b) wholesale inflows, including non-financial corporates, as well as financial institutions/IBs and other entities. The inflow rate will be determined based on the type of counterparty. Non-financial wholesale counterparties, as well as retail customers, may be assigned a 50% inflow factor, while financial institutions/IBs and central bank counterparties may be assigned a 100% inflow factor.
7. g.Inflows from financing that have no specific maturity (i.e. have undefined or open maturity) must not be included. Therefore, no assumptions must be applied as to when maturity of such financing would occur. An exception to this would be minimum payments of principal, fee or profit associated with an open maturity financing, provided that such payments are contractually due within 30 days. These minimum payment amounts must be captured as inflows, at the rates prescribed in (d), to these transactions.
8. h.Inflows from securities maturing within 30 days that are not included in the stock of HQLA must be placed in the same category as inflows from financial institutions (i.e. 100% inflow). IBs may also recognise in this category inflows from the release of balances held in segregated accounts in accordance with regulatory requirements for the protection of customer trading assets, provided that these segregated balances are maintained in HQLA. These inflows must be calculated in line with the treatment of other related outflows and inflows covered in this standard. Level 1 and Level 2 securities maturing within 30 days must be included in the stock of HQLA rather than being counted as inflows, provided that they meet all operational and definitional requirements.
9. i.Deposits held at other IBs for operational purposes which fall under the category of operational accounts are assumed to stay at the counterparties. Thus, no inflows can be counted for these funds (0% inflow rate). The same treatment applies for deposits held at the centralised institution in a cooperative banking network, as such funds are assumed to stay at the centralised institution.
10. j.The last category is other cash inflows – that is, inflows that are not categorised under the above categories. This category includes Shari’ah-compliant hedging to which an inflow rate of 100% is assigned. Cash inflows related to non-financial revenues, however, are not taken into account in the calculation of the net cash outflows for the purposes of the LCR.
     

1. a.There are two components of the NSFR:
   • -available stable funding (ASF); and
   • -required stable funding (RSF).

   The NSFR is defined as the ratio of the amount of available amount of stable funding to the amount of required stable funding. This ratio must be equal to at least 100% on an ongoing basis. Available stable funding is defined as the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon. Required stable funding is based on the liquidity characteristics and residual maturities of the various kinds of assets held by IBs as well as those included in its OBS exposures.

2. b.    $$$$
3. c.The amount of ASF is composed of the total amount of an IB’s (1) capital, (2) UIA with a maturity equal to or greater than one year, (3) liabilities or Sukuk issued with effective or remaining maturities of one year or greater, and (4) that portion of “stable” deposits and/or UIA with maturities of less than one year that would be expected to stay with the IB. On the other hand, the amount of RSF is measured using supervisory assumptions about the broad characteristics of the liquidity risk profiles of an IB’s assets and OBS exposures. A certain RSF factor is assigned to each asset type, with those assets deemed to be more liquid receiving a lower RSF factor and therefore requiring less stable funding.
4. d.The ASF and RSF are based on a presumed degree of stability of liabilities and liquidity characteristics of assets under the extended stress conditions, respectively. On the liability side (ASF), funding tenor and funding type and counterparty are two dimensions that must be taken into account. For example, longer-term liabilities are assumed to be more stable than short-term liabilities, and deposits or UIA from retail and small business customers are more stable than wholesale funding with the same maturity. Mostly, IBs rely on deposits and UIA provided by retail customers. These deposits and UIA are behaviorally more stable than other types of deposit. However, on the asset side (RSF), resilient credit creation, IBs behaviour, asset tenor, asset quality and liquidity value are the criteria for the appropriate amount of required stable funding. There is trade-off between these criteria. The difficulties for the IBS are lack of HQLA, unavailability of a Shari’ah-compliant repo mechanism to securitise and trade, and the absence of a secondary market.

Available Stable Funding

1. e.The amount of available stable funding (ASF) is calculated by multiplying the carrying values of funding side items by the applicable ASF factors which are based on the broad characteristics of the relative stability of an IB’s funding sources, including the contractual maturity of its liabilities and the differences in the propensity of different types of funding providers to withdraw their funding. Five categories are mentioned in this standard, IBs must first assign the carrying value of an IB’s capital and liabilities to one of the five categories as presented below. The amount assigned to each category is then multiplied by an ASF factor, and the total ASF is the sum of the weighted amounts. Carrying value represents the amount at which a liability or equity instrument is recorded before the application of any regulatory deductions, filters or other adjustments.
2. f.When determining the maturity of an equity-based or liability instrument, investors are assumed to redeem a call option at the earliest possible date in Shari’ah-compliant ways. For funding with options exercisable at the IB’s discretion, the reputational factors that may limit an IB’s ability not to exercise the option, must be taken into account. In particular, where the market expects certain liabilities to be redeemed before their legal final maturity date, IBs must assume such behaviour for the purpose of the NSFR and include these liabilities in the corresponding ASF category. For long-dated liabilities, only the portion of cash flows falling at or beyond the six-month and one-year time horizons must be treated as having an effective residual maturity of six months or more and one year or more, respectively.
3. g.RIA do not count as ASF, but retail UIA may fall into one of the categories mentioned below mostly receiving ASF factors in the 100%, the 95% or the 90% category. Sukuk issued with an effective maturity of one year or more would also qualify for a 100% ASF.
4. h.The first category of ASF is the liabilities and capital instruments receiving a 100% ASF factor. This category comprises:
   1. i.the total amount of regulatory capital, before the application of capital deductions, excluding the proportion of Tier 2 instruments with residual maturity of less than one year;
   2. ii.the total amount of any capital instrument not included in (a) that has an effective residual maturity of one year or more, but excluding any instruments with explicit or embedded options that, if exercised, would reduce the expected maturity to less than one year; and
   3. iii.the total amount of secured and unsecured funding and liabilities (including deposits and/or UIA) with effective residual maturities of one year or more. Cash flows falling below the one-year horizon but arising from liabilities with a final maturity greater than one year do not qualify for the 100% ASF factor.
5. i.The second category is the liabilities receiving a 95% ASF factor. This category comprises “stable” deposits and/or UIA with residual maturities of less than one year provided by retail and small business customers.
6. j.The third category is the liabilities of IB receiving a 90% ASF factor. It comprises “less stable” deposits and/or UIA with residual maturities of less than one year provided by retail and small business customers.
7. k.The fourth category is the liabilities receiving a 50% ASF factor which comprises:
   1. i.funding (secured and unsecured) with a residual maturity of less than one year provided by non-financial corporate customers;
   2. ii.operational accounts;
   3. iii.funding with residual maturity of less than one year from sovereigns, public sector entities (PSEs), and multilateral and national development banks; and
   4. iv.other funding (secured and unsecured) not included in the categories above with residual maturity between six months and less than one year, including funding from central banks and financial institutions.
8. l.The last category is the liabilities receiving a 0% ASF which are:
   1. i.all other liabilities and equity categories not included in the above categories, including other funding with residual maturity of less than six months from central banks and financial institutions;
   2. ii.other liabilities without a stated maturity. Two exceptions can be recognised for liabilities without a stated maturity:
      1. a.first, deferred tax liabilities, which must be treated according to the nearest possible date on which such liabilities could be realised; and
      2. b.second, minority interest, which must be treated according to the term of the instrument, usually in perpetuity.

      These liabilities would then be assigned either a 100% ASF factor if the effective maturity is one year or greater, or 50% if the effective maturity is between six months and less than one year

   3. iii.net NSFR Shari’ah-compliant hedging liabilities, and
   4. iv.“trade date” payables arising from purchases of financial instruments, foreign currencies and commodities that
      1. a.are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or
      2. b.have failed to, but are still expected to, settle.
9. m.Calculation of Shari’ah-compliant Hedging Liability Amounts
   Shari’ah-compliant hedging liabilities (e.g. Islamic swaps) are calculated first based on the replacement cost for the Shari’ah-compliant hedging contracts (obtained by marking to market), where the contract has a negative value. When an eligible bilateral netting contract is in place, the replacement cost for the set of Shari’ah-compliant hedging exposures covered by the contract will be the net replacement cost.
10. n.In calculating NSFR Shari’ah-compliant hedging liabilities, collateral posted in the form of variation margin that follows Shari’ah principles in connection with Shari’ah-compliant hedging contracts as in the TMA contract, regardless of the asset type, must be deducted from the negative replacement cost amount
11. o.Required Stable Funding
    The amount of required stable funding (RSF) is calculated by multiplying the carrying values of assets and OBS exposures by the applicable RSF factors which are based on the broad characteristics of liquidity risk profile of an IB’s assets and OBS exposures. Eight categories are mentioned in this standard, IBs must first assign the carrying values of an IB’s assets to one of eight categories as presented below. The amount assigned to each category is then multiplied by an RSF factor. The total RSF is the sum of the weighted amounts of each asset category and the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor.
12. p.The RSF factors assigned to various types of assets are intended to approximate the amount of a particular asset that would have to be funded, either because it will be rolled over, or because it could not be monetized through sale or used as collateral in a secured financing transaction over the course of one year without significant expense.
13. q.Asset categorisation to the various types of RSF is based on their residual maturity or liquidity value. When determining the maturity of an instrument, investors must be assumed to exercise any option to extend maturity. For assets with options exercisable at the IB’s discretion, reputational factors that may limit IB’s ability not to exercise the option must be taken into account. In particular, where the market expects certain assets to be extended in their maturity, IBs must assume such behaviour for the purpose of the NSFR and include these assets in the corresponding RSF category.
14. r.For purposes of determining its RSF, an IB must: (a) include financial instruments, foreign currencies and commodities for which a purchase order has been executed; and (b) exclude financial instruments, foreign currencies and commodities for which a sales order has been executed, even if such transactions have not been reflected in the balance sheet under a settlement-date accounting model, provided that (i) such transactions are not reflected as Shari’ah-compliant hedging contracts or secured financing transactions in the IB’s balance sheet, and (ii) the effects of such transactions will be reflected in the IB’s balance sheet when settled.
15. s.The first category is the assets assigned a 0% RSF factor and comprises:
    1. i.coins and banknotes immediately available to meet obligations;
    2. ii.all central bank reserves (including required reserves and excess reserves);
    3. iii.all claims on central banks with residual maturities of less than six months; and
    4. iv.“trade date” receivables arising from sales of Shari’ah-compliant financial instruments, foreign currencies and commodities that (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle.
16. t.The second category is the assets assigned a 5% RSF factor and comprises unencumbered Level 1 assets, excluding assets receiving a 0% RSF as specified above, and including: Sukuk and other Shari’ah-compliant marketable securities issued or guaranteed by sovereigns, central banks, public sector entities (PSEs), multilateral development banks (MDBs) or relevant international organisations which are assigned a 0% risk weight.
17. u.The third category is the assets assigned a 10% RSF factor which consist of the unencumbered financings to financial institutions with residual maturities of less than six months, where the financing is secured against Level 1 assets.
18. v.The fourth category is the assets assigned a 15% RSF factor which comprise:
    1. i.unencumbered Level 2A assets, including: (i) Sukuk and other Shari’ah-compliant marketable securities issued or guaranteed by sovereigns, central banks, PSEs, MDBs or relevant international organisations, which are assigned a 20% risk weight based on standardized approach as implemented in the UAE; and (ii) corporate Sukuk with a credit rating equal or equivalent to at least AA–; and
    2. ii.all other unencumbered financings to financial institutions with residual maturities of less than six months not included in the second category.
19. w.The fifth category is the assets assigned a 50% RSF factor which comprise:
    1. i.unencumbered Level 2B assets as defined and subject to the conditions set forth in paragraph 31, including: (i) Sukuk and other Shari’ah-compliant securities backed by commodity(ies) and other real asset(s) with a credit rating of at least AA; (ii) corporate Sukuk and other Shari’ah-compliant securities with a credit rating of between A+ and BBB–; and (iii) Shari’ah-compliant equity shares not issued by financial institutions or their affiliates;
    2. ii.any HQLA as defined in the LCR that are uncumbered for a period of between six months and less than one year;
    3. iii.all financings to financial institutions and central banks with a residual maturity of between six months and less than one year; and
    4. iv.deposits or UIA held at other financial institutions for operational purposes that are subject to the 50% ASF factor;
    5. v.all other non-HQLA not included in the above categories that have a residual maturity of less than one year, including financing to non-financial corporate clients, financings to retail customers (ie natural persons) and small business customers, and financings to sovereigns and PSEs.
20. x.The sixth category is the assets assigned a 65% RSF factor which comprise:
    1. i.unencumbered residential real estate financing with a residual maturity of one year or more that would qualify for a 35% or lower risk weight based on standardized approach as implemented in the UAE; and
    2. ii.other unencumbered financing not included in the above categories, excluding financing to financial institutions, with a residual maturity of one year or more that would qualify for a 35% or lower risk weight based on standardized approach as implemented in the UAE.
21. y.The seventh category is the assets assigned an 85% RSF factor which comprise:
    1. i.cash, securities or other assets posted as initial margin for Shari’ah-compliant hedging contracts and cash or other assets provided to contribute to the default fund of a central counterparty;
    2. ii.other unencumbered Sukuk and other Shari’ah-compliant securities with a remaining maturity of one year or more and Shari’ah-compliant equity shares, that are not in default and do not qualify as HQLA according to the LCR;
    3. iii.other unencumbered performing financing assets that do not qualify for the 35% or lower risk weight based on standardized approach as implemented in the UAE and have residual maturities of one year or more, excluding financing to financial institutions;
    4. iv.physical traded commodities
22. z.The last category is the assets assigned a 100% RSF factor, which comprise:
    1. i.all assets that are encumbered for a period of one year or more;
    2. ii.net NSFR Shari’ah-compliant hedging assets as calculated according to this standard
    3. iii.all other assets not included in the above categories, including non-performing financing, financing to financial institutions with a residual maturity of one year or more, non-exchange-traded Shari’ah-compliant equities, fixed assets, items deducted from regulatory capital, insurance assets, and defaulted Shari’ah-compliant securities; and
    4. ii.20% of Shari’ah-compliant hedging liabilities (i.e. negative replacement cost amounts) as calculated according to this standard (before deducting variation margin posted).

1. aa.Encumbered Assets
   Assets on the balance sheet that are encumbered for one year or more receive a 100% RSF factor. Assets encumbered for a period of between six months and less than one year that would, if unencumbered, receive an RSF factor lower than or equal to 50% receive a 50% RSF factor. Assets encumbered for between six months and less than one year that would, if unencumbered, receive an RSF factor higher than 50% retain that higher RSF factor. Where assets have less than six months remaining in the encumbrance period, those assets may receive the same RSF factor as an equivalent asset that is unencumbered.
2. bb.Secured Financing Transactions
   For secured funding arrangements, use of balance sheet and accounting treatments must generally result in IBs excluding, from their assets, Shari’ah-compliant securities which they have used in securities financing transactions where they do not have beneficial ownership. Where IBs have encumbered securities in Shari’ah-compliant repos or other securities financing transactions, but have retained beneficial ownership and those assets remain on the IBs’ balance sheet, the IB must allocate such securities to the appropriate RSF category.
3. cc.Securities financing transactions with a single counterparty may be measured net when calculating the NSFR only where a valid netting agreement exists or when the inflow and outflow occurs within the same business day.
4. dd.Calculation of Shari’ah-compliant Hedging Asset Amounts
   Shari’ah-compliant hedging assets (e.g. Islamic swaps) are calculated first based on the replacement cost for the Shari’ah-compliant hedging contracts (obtained by marking to market), where the contract has a positive value. When an eligible bilateral netting contract is in place, the replacement cost for the set of Shari’ah-compliant hedging exposures covered by the contract will be the net replacement cost.
5. ee.In calculating NSFR Shari’ah-compliant hedging assets, collateral received in connection with Shari’ah-compliant hedging contracts may not offset the positive replacement cost amount, regardless of whether or not netting is permitted under the IB’s operative accounting or risk-based framework, unless it is received in the form of cash variation margin. Any remaining balance sheet liability associated with initial margin received may not offset Shari’ah-compliant hedging assets and must be assigned a 0% ASF factor.
6. ff.Interdependent Assets and Liabilities
   Central Bank in limited circumstances may determine whether certain asset and liability items, on the basis of contractual arrangements, are interdependent such that the liability cannot fall due while the asset remains on the balance sheet, the principal payment flows from the asset cannot be used for something other than repaying the liability, and the liability cannot be used to fund other assets. For interdependent items, supervisors may adjust RSF and ASF factors so that they are both 0%, subject to the following criteria:
   a) The individual interdependent asset and liability items must be clearly identifiable.
   b) The maturity and principal amount of both the liability and its interdependent asset must be the same.
   c) The bank is acting solely as a pass-through unit to channel the funding received (the interdependent liability) into the corresponding interdependent asset.
   d) The counterparties for each pair of interdependent liabilities and assets must not be the same.
7. gg.Off-balance Sheet Exposures (OBS)
   Off-balance sheet exposures also attract RSF factors. Many potential OBS liquidity exposures require little direct or immediate funding but can lead to significant liquidity drains over a longer time horizon. The NSFR assigns an RSF factor to various OBS activities in order to ensure that Islamic Bank hold stable funding for the portion of OBS exposures that may be expected to require funding within a one-year horizon.
8. hh.Consistent with the LCR, the NSFR identified OBS exposure categories based broadly on whether the commitment is a credit or liquidity facility or some other contingent funding obligation.