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