ERCC ICMA

Professional Repo Market and

Collateral Management Course 2022

LCR and NSFR for repo

Oliver Deutscher, Head of Group Treasury Liquidity & Collateral Management, DZ BANK AG
Carolin Pirch, Group Treasury, Data Analytics and Modelling, DZ BANK AG
For training purposes only - no further distribution
Agenda

1 Introduction to LCR and NSFR

– Definition and aim of the ratios

– Similarities and differences between the ratios

2 Repos and Reverse Repos in LCR and NSFR

− Reporting / technical features of repos and reverse repos in LCR and NSFR
− Examples of short-term LCR and NSFR improvement via repos and reverse repos

3 Impacts of the regulation and monetary policies on the repo business

+ APPENDIX

2 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
1
Introduction to LCR and NSFR
1. Introduction to LCR and NSFR
LCR and NSFR introduced as post-crisis liquidity ratios within the Basel III framework

• After the financial crisis from 2007-2009, the Basel Committee on Banking Supervision (BCBS) introduced a
regulatory framework in 2010 and thereby multiple revised requirements on banks’ capital and liquidity positions in
order to promote stability in the international financial system
− Capital requirements
− Large exposure requirements
− Leverage Ratio
− Liquidity requirements (LCR, NSFR)

• Each jurisdiction is asked to implement the Basel III regulatory reforms, translating the rules into domestic
regulations

• The EU is committed to implementing the Basel III framework in the EU. For that purpose, a regulatory package
was published in 2013: the EU directive CRD IV and the EU regulation CRR; both applied as of 1 January 2014,
with some provisions phased-in until (originally) 2019. The EU has delayed the implementation of the NSFR from
January 2018 to June 2021.

2022
2007-2009 2010 2013 2014 2015 2021
and beyond
Financial Basel III Basel III LCR Basel III NSFR LCR becomes NSFR becomes Post
crisis framework framework framework effective in EU effective in EU implementation
released finalized finalized review (PIR)

Exemplary differences between the Basel III LCR/NSFR

4 Nov 2022 LCR and NSFR for repo For training and illustration purposes only framework and the EU implementation are presented for
individual topics in this presentation.
1. Introduction to LCR and NSFR
LCR – Liquidity Coverage Ratio: Definition

High-quality liquid assets (HQLA)

“Is there sufficient liquidity within the next
LCR = ≥ 100%
Net cash outflows over 30 days 30 days during a period of stress?”

High-quality liquid assets (HQLA) – Liquidity Buffer Banks must hold an amount of high-quality liquid assets that's enough
to fund expected net cash outflows for 30 days
• Cash and central bank reserves and unencumbered highly liquid bonds
• Differentiation between Level 1, Level 2A/2B and non-HQLA (“Level 3”)
• First publication of LCR Basel III rules in Dec 2010 (draft)
assets
• Effective from Jan 2015 (60% minimum requirement) on with phase-
• Bonds are recognized at market value with predefined haircuts
in to full implementation (100% minimum req.) from Jan 2019 on
• Fundamental, market-related and operational requirements
• Europe: LCR phase-in 60% from Oct 2015, 70% in 2016, 80% in
necessary to consider bonds as HQLA
2017, 100% from Jan 2018 on
Net cash outflows over 30 days • Monthly LCR reporting to the supervisory authority (T+15 days)
Stress scenario specified by the supervisory authority by specifying
• Net: Cash outflows – capped cash inflows (75% inflow cap*) haircuts, inflow and outflow factors for a firm-specific, broader industry
• Contractual cashflows within the next 30 calendar days or market liquidity stress event
• Counterparty specific run-off rates for deposits and off-balance sheet
100% LCR must be met on a daily basis (some jurisdictions: only
positions, e.g. credit facilities
on an average basis); liquidity buffer usable in times of stress

*) A 75% cap on the amount of total outflows is applied to the inflows calculation. Net cash outflows = expected cash outflows – min (expected cash inflows; 75% x expected outflows) ➔ 25% of the expected cash outflows must be covered by HQLA.

5 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
1. Introduction to LCR and NSFR
LCR – Liquidity Coverage Ratio: High-quality liquid assets and their haircuts
simplified representation

Level 1 assets Haircut

• Cash and Central Bank reserves
• Liquid marketable bonds assigned a 0% risk weight, issued or
guaranteed by sovereigns, regional governments, local authorities,
PSEs, MDBs, international organizations or central bans
• Only in EU: EU-regulated covered bonds (issue size > € 500m,
further requirements) → Level 1B assets
Level 2A assets
• Liquid marketable bonds issued by sovereigns, central banks,
PSEs, MDBs with 20% risk weight
• Qualifying non-financial corporate bonds rated AA- or higher
• Qualifying covered bonds rated AA- or higher
Level 2B assets
• Qualifying RMBS (rated AA- or higher)
• Only in EU: other qualifying ABS
• Qualifying non-financial corporate bonds (A+/BBB-)
• Equity shares (non-financial, exchange traded, major index)
All other assets (“Level 3 assets”)
• All other assets, including all (uncovered) financial bonds
HQLA are assets that remain liquid in markets during periods of
stress, which are easily and immediately converted into cash with
low or without losses, it has no impediments, with a low risk and whose
0%
pricing is easy and right
• Fundamental characteristics: Low risk, ease and certainty of
7% valuation, low correlation with risky assets, listed on a developed
and recognized exchange, ideally central bank eligible
Haircut ➔ most jurisdictions require central bank eligibility (not the EU)
• Market-related characteristics: active and sizable market, low
volatility of asset prices, credit quality (rating) ➔ HQLA should have
active outright sale or repo markets at all times
15%
• Operational requirements: HQLA must be under control of
treasury; a representative proportion of the HQLA assets must be
periodically monetised through repo or outright sale
Haircut
• Encumbrance: All assets in the stock must be unencumbered and
25% operationally monetizable: there are no restrictions on the ability of
25% / 35% the bank to liquidate, sell or transfer the asset.
50% • Diversification: the stock of HQLA should be well diversified within
50% the asset classes themselves
• Caps for HQLA level: max. 40% Level 2 assets in HQLA pool;
Haircut max. 15% Level 2B assets (additional cap in EU: min. 30% Level 1A
100% assets)

6 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
1. Introduction to LCR and NSFR
NSFR – Net Stable Funding Ratio: Definition

Available Stable Funding (ASF)

“Does the bank maintain a stable funding profile
NSFR = ≥ 100%
Required Stable Funding (RSF) and limits over-reliance on short-term funding?”

Available Stable Funding (ASF) Golden rule of balance sheet:

• ASF is calculated as the bank’s liabilities and equity
• Weighted by regulatory ASF factors which depend on the funding provider,
type of liability and residual maturity
• 3 maturity buckets: < 6 months, ≥ 6 months to < 1 year, ≥1 year
Required Stable Funding (RSF)
• RSF is calculated as the bank’s on-balance sheet assets and committed
credit / liquidity facilities (off-balance sheet)
• Weighted by regulatory RSF factors which depend on the counterparty type,
asset type, credit quality, liquidity, encumbrance and residual maturity)
• 3 maturity buckets: < 6 months, ≥ 6 months to < 1 year, ≥1 year
Short-term transactions should be financed with short-term money,
long-term transactions with long-term funds
• First publication of NSFR Basel III rules in Dec 2010 (draft)
• Final Basel III NSFR framework in Oct 2014
• Basel minimum standard from Jan 2018 on
• Europe: 100% from 28 Jun 2021 on (CRR II), no phase-in
• Quarterly NSFR reporting to the supervisory authority
• Representation of the bank‘s balance sheet, including off-balance
sheet exposure
• Transactions are reported with their carrying / accounting value,
multiplied by the applicable ASF and RSF factors
The minimum ratio of 100% must be met on a daily basis

7 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
 simplified representation

1. Introduction to LCR and NSFR

NSFR – Net Stable Funding Ratio: ASF factors
Available Stable Funding (ASF)

Liability category ASF factor

• Total regulatory capital Key aspects for ASF:
• Other capital instruments and liabilities with residual maturity of ≥ 1 year 100%
REPOS
• Long tenor → high stability;
High stability

• Stable non-maturity (demand) deposits and term deposits with residual maturity of Short tenor → low stability
95%
< 1 year provided by retail and small business customers • Any funding above 1 year has got a 100% ASF
factor
• Less stable non-maturity deposits and term deposits with residual maturity of < 1
90% • Liabilities from retail and non-financial customers
year provided by retail and small business customers
are assumed to be more stable than funding from
• Funding with residual maturity < 1 year provided by non-financial corp. customers financials
• Operational deposits • Cancellation rights of the funding provider are
• Funding with residual maturity of < 1 year from sovereigns, PSEs, and multilateral assumed to be exercised at the earliest possible
50%
and national development banks REPOS date
• Other funding with residual maturity of 6-12 months not included in the above REPOS
categories, including funding provided by central banks and financial institutions
Low stability

Example / How to read the table:

• All other liabilities and equity not included in the above categories, including A term-deposit of EUR 100 million, a residual maturity
liabilities without a stated maturity and funding with residual maturity < 6 months of 9-months of a non-financial corporation provides
provided by financial customers REPOS EUR 50 million of stable funding in the NSFR.
0%
• NSFR net derivative liabilities
• “Trade date” payables arising from purchases of financial instruments, foreign
currencies and commodities

8 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
 simplified representation

1. Introduction to LCR and NSFR

NSFR – Net Stable Funding Ratio: RSF factors
Required Stable Funding (RSF)

Asset category RSF factor

• Coins, banknotes, central bank reserves Key aspects for RSF:
• All claims on central banks with residual maturities of < 6 months
0%
• Unencumbered Level 1 assets, excluding coins, banknotes and central bank reserves
[EU: 0% RSF-Factor] + irrevocable credit and liquidity facilities
5% • Long tenor / low liquidity → high funding
High Liquidity

• Unencumbered loans to financial institutions with residual maturities of < 6 months, where the requirement;
loan is secured against Level 1 assets REV. REPOS 10% Short tenor / high liquidity → low funding
• All other unencumbered loans to financial institutions with residual maturities of < 6 months not requirement
included above REV. REPOS 15%
• Unencumbered Level 2A assets • Lending to financial customers requires less stable
• Unencumbered Level 2B assets; HQLA encumbered for 6-12 months funding than lending to non-financial corporates
• Loans to financial institutions and central banks with residual maturities of 6-12 m. REV. REPOS
• Deposits held at other financial institutions for operational purposes 50% • Cancellation rights of the borrower are assumed to
• All other assets not included above with residual maturity of < 1 year be exercised at the latest possible date
• Unencumbered residential mortgages with a residual maturity of ≥ 1 year and with a risk Example / How to read the table:
weight of ≤ 35% under the Standardised Approach (SA)
• Other unencumbered loans not included above, excluding loans to financial institutions, with a 65% An unencumbered Level 2A bond (e.g. covered bond)
residual maturity of ≥ 1 year with a risk weight of ≤ 35% under the SA of EUR 100 million requires EUR 15 million stable
Low Liquidity

• Unencumbered non-HQLA securities that are not in default with a remaining maturity of ≥ 1 funding in the NSFR.
year and exchange-traded equities
• Unencumbered performing loans with risk weights > 35% under the SA and residual maturities 85% If it is encumbered in a for example 9-month repo, the
of ≥ 1 year, excluding loans to financial institutions NSFR funding requirement for this bond increases to
• Posted initial margin and default fund for derivative contracts
EUR 50 million.
• All assets that are encumbered for a period of ≥ 1 year
• NSFR net derivative assets
• All other assets not incl. above (incl. non-performing loans, loans to financial institutions > 1 100%
year REV. REPOS ,non-exchange traded equities, fixed assets)

9 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
1. Introduction to LCR and NSFR
Similarities and differences between the ratios
non-exhaustive list

LCR NSFR

Uniform product and customer classification in LCR/NSFR, e.g. stable / Product and counterparty Uniform product and customer classification in LCR/NSFR enables
less stable retail deposits, financial institutions, non-fin. corporates, etc. classification reconciliation between the two regulatory liquidity metrics

Pre-defined regulatory weighting factors (haircuts for HQLA; inflows / Pre-defined regulatory weighting factors (ASF and RSF factors)
Regulatory parameters
outflows rates for deposits, etc.)

Similar Same HQLA Level definition and haircuts in LCR and NSFR. Lower NSFR funding requirements for HQLA compared to illiquid
HQLA concept
HQLA serve as liquidity buffer to cover 30-day cash flows assets

Encumbered securities are excluded from the stock of HQLA Encumbrance concept Higher NSFR funding requirements for encumbered assets

Consideration of amortization payments: Breakdown of a loan into 3

Consideration of amortization payments (within the next 30 days) Amortisation payments
maturity buckets according to the contractual redemption plan

Cash flow oriented ratio in a severe stress scenario Purpose Structural ratio regarding balance sheet term structure

Short-term (30 days) Time horizon Medium and long term (1 year)
Different
Market values for HQLA, cash flows (amortization, interest, fees) for
Values Accounting book values (local Gaap/IFRS)
other product types

Consideration of borrowed securities (from reverse repos or security No consideration of borrowed securities as stable funding if they are
Borrowed securities
borrowing transactions) as HQLA in the LCR not recognized in the balance sheet

10 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2 Repos and Reverse Repos
in LCR and NSFR
2. Repos and Reverse Repos in LCR and NSFR
Repos and reverse repos as instrument to impact LCR (and NSFR)

To understand the mechanism how repos and reverse repos impact the LCR (and NSFR) we have a look at the
following situation:

We are a credit institute with access to the repo market.

Like all large credit institutes we have to meet the LCR minimum requirement of 100% on a daily basis.

We ran into a short-term liquidity shortage with a LCR of just above 100%.
We are expecting a LCR shortfall in the next days unless effective countermeasures are applied.

Our balance sheet mainly consists of lower quality assets, i.e. Level 2B or Level 3 bonds as well as
credit claims.

Question: What can we do to improve our LCR?

12 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
Reporting and technical features: Repos and Reverse Repos in LCR

• Repos and reverse repos have a cash vs. collateral exchange (and therefore an LCR effect) at the start
date and at maturity.
− The effects at the start date (might) have a direct LCR effect and depend on the asset quality of the
bond
− The effects at maturity are shown as “net effect” (bond vs. cash) in the cash flow section and
depend on the asset quality, the term and the counterparty (see below)
Cash
Bank Counterparty • A repo that matures within the next 30 days leads to a cash outflow,
a reverse repo that matures within the next 30 days results in a cash inflow
Bond
• Open repos are assumed to run-off within 30 days → cash outflow,
open reverse repos are assumed to not lead to an inflow → no cash inflow
Conservative stress assumption ➔ Open (reverse) repos are disadvantageous for the LCR!
• If the repo / reverse repo payments are contractually fixed, but not yet settled at the reporting date, LCR
rules for forward starting repos apply (see appendix)

The LCR impact of repos and reverse repos depends on the following criteria:
1) Counterparty (central bank vs. non central bank) – distinction relevant for repos only (0% outflow rate for repos)
2) Term of the contract: only outflows and inflows from repos / reverse repos that mature within the next 30 calendar days are reported in the LCR. Posted and
received collateral has to be considered regardless of the term of the repo
3) Asset quality of underlying bond: outflow (repo) and inflow (reverse repo) rates depend on asset quality, e.g. Level 1, Level 2A/2B HQLA or non-HQLA

13 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
Reporting and technical features: Repos in LCR
Cash received/borrowed is counted as outflow in the LCR,
if the term is <= 30 days (or open repo)
Outflows from secured funding, LCR
received /
borrowed Cash which are from Outflow rate
Bank Counterparty Domestic central bank (all level) 0%
posted /
Bond lent
Other counterparties, backed by
Level 1 assets 0%
Level 2A assets 15% HQLA haircuts
Treatment of collateral posted
Level 2B RMBS assets 25%
Posted collateral (from bank’s own portfolio or re-used bonds received
from other secured borrowing / reverse repo transactions) has to be
Level 2B other assets „credit repos“ 50%
reported as encumbered, i.e. does not qualify as HQLA anymore. non-HQLA assets 100%

How does a repo affect the LCR? How is it reported in the LCR?

Start of repo Maturity of repo

If the maturity of the repo
Cash received → increases central bank reserves (+100% HQLA) Cash to be returned → decreases central bank reserves (-100% falls into the 30-day LCR
Cash
or nostro account at another bank (+100% inflow) HQLA) or nostro account at another bank (-100% inflow) time horizon, the expected
LCR effects of the cash to
Bond posted as collateral: Bond to be received back: be returned and the bond to
• Level 1 / Level 2 bond: no HQLA any more due to encumbrance • Level 1 / Level 2 bond: increases HQLA (market value after be received back are
Bond → reduction of HQLA (market value after regulatory haircut), regulatory haircut), e.g. +100% for a Level 1 asset, +85% for a represented on a net basis
e.g. -100% for a Level1 asset, -85% for a Level 2A asset Level 2A asset in the LCR repo outflow
• Level 3 bond: no LCR impact • Level 3 bond: no LCR impact rates, dependent on the
HQLA level of the bond.
➔ LCR has no impact on Level 1 repo
(exchange 100% cash HQLA for 100% securities HQLA)
14 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
Reporting and technical features: Reverse Repos in LCR
Cash lent to the counterparty is counted as inflow, if the term is ≤ 30 days.
There is no differentiation between central bank and other reverse repos:
Inflows from secured lending, LCR
Cash posted / which are from Inflow rate
lent
Bank Counterparty Reverse repo, backed by
received / Level 1 assets 0%
Bond HQLA haircuts
borrowed
Level 2A assets 15%
Level 2B RMBS assets 25%
Treatment of collateral received Level 2B other assets „credit repos“ 50%
Received collateral from reverse repos may be included in the stock of non-HQLA assets 100%
HQLA (if the HQLA criteria are fulfilled), irrespective of the treatment in If the collateral received is used to cover short positions, no inflow arises reflecting the
the balance sheet. need to continue to cover the short position or to re-purchase the relevant securities.

How does a reverse repo affect the LCR? How is it reported in the LCR?
Exact opposite
of the repo
impact
Start of repo Maturity of repo
If the maturity of the
Cash posted → decreases central bank reserves (-100% HQLA) or Cash to be received back → increase in central bank reserves reverse repo falls into the
Cash
nostro account at another bank (-100% inflow) (+100% HQLA) or nostro account at another bank (+100% inflow) 30-day LCR time horizon, the
expected LCR effects of the
Bond received as collateral: Bond to be returned: bond to be returned and the
• Level 1 / Level 2 bond: increase in HQLA (market value after • Level 1 / Level 2 bond: decreases HQLA (market value after cash to be received back are
Bond regulatory haircut), e.g. +100% for a Level1 asset, +85% for a regulatory haircut), e.g. -100% for a Level 1 asset, -85% for a represented on a net basis in
Level 2A asset Level 2A asset the LCR reverse repo inflow
• Level 3 bond: no LCR impact • Level 3 bond: no LCR impact rates, dependent on the HQLA
level of the bond.
➔ LCR has no impact on Level 1 reverse repo
(exchange 100% cash HQLA for 100% securities HQLA)
15 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
Reporting and technical features: Repos in NSFR
Cash received / borrowed is counted as stable refinancing depending on the term
(residual maturity). There is no differentiation in the crediting according to security
quality (HQLA level). Non-maturing (open / on-demand) repos receive 0% ASF.
received /
Secured borrowings ASF factors for cash leg
borrowed Cash
and liabilities, ≥ 6 months to
Bank Counterparty < 6 months ≥ 1 year
of which are from: < 1 year
posted /
Bond lent
Central banks, financial
corporates and financial 0% 50% 100%
institutions

Securities RSF factors (maturity of bond)

Example: exemplary for a Level ≥ 6 months to
2A bond < 6 months ≥ 1 year
(Triparty) repo with 9 months tenor (€ 100m) with underlying 10-year corporate < 1 year
bond (level 2A; assumption: € 100m book value) from the bank‘s balance sheet Unencumbered 15%
with any counterparty
• Received cash (€ 100m) with maturity 9 months (≥ 6 months to < 1 year) has
for < 6 months 15% Example

50% ASF → € 50m Encum- for ≥ 6 months to

bered 50%
• Pledged level 2A bond is encumbered for 9 months. RSF factor increases < 1 year
from 15% (unencumbered) to 50% (encumbered for 6-12 months) for ≥ 1 year 100%
→ NSFR funding requirement increases from € 15m to € 50m.
Posted collateral has to be reported as encumbered. This leads to higher funding
NSFR effect: requirements in the NSFR as bank’s own bonds (from the balance-sheet) receive a
Improvement of the NSFR by 15% (50% ASF increase vs. 35% RSF increase), higher RSF factor. If a bond received from a reverse repo transaction is re-used in a
i.e. ASF increases by € 50m; RSF increases by € 35m. repo, the reverse repo claim has to be reported as encumbered (higher RSF factor).

16 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
Reporting and technical features: Reverse Repos in NSFR

Cash lent leads to required stable funding, dependent on the term and the collateral.
Non-maturing (open / on demand) reverse repos receive 100% RSF.
posted / RSF factors
Cash
lent
Secured loans to
Bank Counterparty financial institutions ≥ 6 months to
< 6 months ≥1 year
< 1 year
received / Bond
borrowed backed by Level 1 10% 50% 100%

backed by other collateral 15% 50% 100%

In the EU: 0% RSF for < 6 months loans to financial institutions incl. reverse repos

Treatment of collateral received

Example:
Reverse repo with 9 months tenor with underlying 10-year sovereign bond
(level 1), bond is re-used in a 3-month repo, with a bank counterparty
• Assumption: cash taken from central bank account (0% RSF)
• Unencumbered secured loan with maturity ≥ 6 months to < 1 year would
receive 50% RSF
• Received level 1 bond is not reported in the NSFR as collateral received is re-
used in a 3-month repo, the reverse repo is reported as encumbered (< 6
months) → no deterioration of the RSF factor
The NSFR treatment of collateral received in a reverse repo is determined by the
collateral’s balance sheet and accounting treatments, which should generally
result in banks excluding from their assets.
In general, securities borrowed are kept off-balance sheet. In this case, there is
no NSFR treatment for the collateral.
If, however, the collateral received is kept on-balance sheet, such collateral should
receive an RSF factor according to its characteristics (whether it is HQLA, its term,
issuer, etc). Treatment of on and off-balance sheet treatment of SFTs can differ in
different jurisdictions.

NSFR effect: If the bond received is re-used (e.g. in a repo or short sale), the cash claim from
Deterioration of the NSFR by 50% of reverse repo amount the reverse repo has to be treated as encumbered.

Note: Securities financing transactions (repos / reverse repos) with a single counterparty may be
17 Nov 2022 LCR and NSFR for repo measured net and
For training in the NSFR
illustration if theonly
purposes netting conditions from the Leverage Ratio framework are met
2. Repos and Reverse Repos in LCR and NSFR
Example of a bank with the need to improve the LCR

Situation Effect of repo trades

A credit institution in the EU has run into a short- Bilateral Repo or Basket Repo, Term 90 days
term liquidity shortage with a LCR of only 104.8% Cash amount: € 0.5 bn
• HQLA (highly liquid bonds + central bank Collateral: bank bond (Level 3): € 0.55 bn (assumption: 10% counterparty credit risk haircut)
reserves) = € 6.5bn
LCR impact of the transaction LCR impact 30 days before maturity
• Net Cash Outflows (30 days) = € 6.2bn
HQLA: + € 0.5bn HQLA: + € 0.5bn
Net Cash Outflows: no impact Net Cash Outflows: + € 0.5bn*

The bank has the following bonds in its portfolio

LCR = € 7bn / € 6.2bn = 112.9%
➔ LCR improvement for 60 days
✓ LCR = € 7bn / € 6.7bn = 104.5%
➔ Due to numerator-denominator effect
(unencumbered; market values): (until residual maturity ≤ 30 days) slight drop in the LCR
• Corporate bonds, B rated (Level 3): € 1bn
• Bank bonds (Level 3): € 2bn
Bilateral Reverse Repo or Basket Reverse Repo, Term 90 days
Cash amount: € 0.5 bn
Collateral: bank bond (Level 3): € 0.65 bn (30% haircut)
LCR impact of the transaction LCR impact 30 days before maturity

➔ How can the bank improve its LCR via repo trades to HQLA: - € 0.5bn HQLA: - € 0.5bn
Net Cash Inflows: no impact Net Cash Inflows: + € 0.5bn
reach its internal minimum LCR threshold of 110%?
➔ Which repo transactions should the bank avoid in order LCR = € 6bn / € 6.2bn = 96.8%
➔ LCR limit breach
 LCR = € 6bn / € 6.7bn = 104.5%
not to drop further in the LCR?
➔ Supervisory authority to be informed

* No net cash outflow in the LCR, if counterparty is national central bank

18 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
Maturity ladder profile of repo transactions (90 days term; non-HQLA underlying)

month 0 month 1 month 2 month 3 month 4 month 5

1
REPO TRADE #1 (90 days)
LCR improvement LCR neutral*

2
REPO TRADE #2 (90 days)
LCR improvement LCR neutral*

3
REPO TRADE #3 (90 days)
LCR improvement

➢ Every 2 months: closing of 90-day term repo trade ➢ No automatism in the repo transaction
➢ No positive LCR effect during the last month (LCR outflow → The treasurer / repo trader must take action to enter into a new transaction
within the 30-day period before maturity) ➢ The counterparty can refuse to conclude another deal.
➢ In the long term, there is a positive LCR effect at any time. In this case, a new counterparty must be found.

* without consideration of numerator-denominator effect

19 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
LCR/NSFR tailor made evergreen repos as solution

Evergreen repo: An open transaction or a fixed-term transaction where both parties have an option to terminate the transaction on any business day subject to a
notice period to terminate that is longer than the conventional or mandated settlement period. In a 31-day evergreen tenor, the trade will extend automatically every day
by 1 more day, or equivalently, both parties can call the trade with 31 calendar day-notice (→ optimal for LCR purposes).

Advantage for LCR / NSFR Example (NSFR)

• Notice periods designed for Example: Eurex launched NSFR efficient Evergreen repo on May 1, 2021
regulatory liquidity metrics: Product: Spot Open NSFR185d (evergreen), Spot Open NSFR370d (evergreen)
− LCR (> 30 days) Term: Trade tenor is a constant 185 or 370 calendar days. Upon request for termination, the term leg settlement date is set 185
− NSFR (> 180 days or > 360 or 370 calendar days from the day of the termination request
days)
• Received funding can be fully
used in LCR / NSFR during the Standard Term Repo (185 days) Evergreen Repo (185 days)
term as trade tenor remains Spot 185 days repo Spot Open NSFR185d repo
constant
(> 30 days / > 180 or 360 days) ASF = 50% ✓ ASF = 50% ✓
until notice is given by one of the Front leg Term leg Front leg Term leg
parties. Term = 185 days Term = 185 days

➔ The implementation of LCR

10 days after Front Leg 10 days after Front Leg
has increased the number of
evergreen repos in the repo ASF = 0%  ASF = 50% ✓
market Front leg Term leg Front leg Term leg
+10 days +10 days
Remaining Term = 185 days
Remaining Term = 175 days

20 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
Maturity ladder profile of repo transactions (35-day evergreen repo; non-HQLA bond)

30-day LCR horizon

month 0 month 1 month 2 month 3 month 4 month 5

Notification of Termination
REPO TRADE #1 (35 days evergreen) termination in 35 days date
Automatic renewal of contract on
REPO TRADE #1 (35 days evergreen) a daily basis unless one
counterparty cancels the trade
REPO TRADE #1 (35 days evergreen)
(e.g. 35-day cancellation period)
REPO TRADE #1 (35 days evergreen)
…

LCR improvement until notification of cancellation LCR neutral*

• Cash received from repo increases central bank reserves • Cash received from repo
(HQLA) or nostro accounts (100% inflow) increases central bank
• LCR effect of posted bond depends on HQLA level; reserves (HQLA) or
e.g. Level 3 (non-HQLA) bond has no impact on LCR; nostro accounts (100%
Level 2A bond reduces HQLA by 85% inflow)
• No outflow from repo liability due to 35-day (> 30 day LCR • Outflow from repo
period) cancellation period liability dependent on
• 35-day notification period instead of 31 days to cover long-dated HQLA-level, e.g. 100%
holidays / weekends et cetera (→ technical topic) outflow for Level 3 asset

* without consideration of numerator-denominator effect

21 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
2. Repos and Reverse Repos in LCR and NSFR
Repos and reverse repos as instrument to impact LCR (and NSFR)

Coming back to our initial problem:

We are a credit institute with access to the repo market.

Like all credit institutes we have to meet the LCR minimum requirement of 100% on a daily basis.

We ran into a short-term liquidity shortage with a LCR of just above 100%.
We are expecting a LCR shortfall in the next days unless effective countermeasures are applied.

Our balance sheet mainly consists of lower quality assets, i.e. Level 2B or Level 3 bonds as well as credit claims.

Question: What can we do to improve our LCR?*

Advantage Disadvantage

Longer-term (e.g. 90-day) repo Simple unstructured repo transactions; no complexity; No automatism in the trade renewal, trader has to
1
on non-HQLA asset wide market become active; partly 2 trades in parallel

> 31-day evergreen repo on

Complex capture of the optionality in the front to middle
2 non-HQLA asset (or level 2A Automatic renewal of the transaction
and back office systems
downwards)

* Besides repo trades, other transactions can also be used to improve the LCR (e.g. issuance of bonds, commercial papers or unsecured term deposits > 30 days)

22 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
3 Impacts of the regulation
and monetary policies on
the repo business
3. Impacts of the regulation and monetary policies on the repo business
The motivation to trade repos depends on the general level of the LCR…
Banks with constant high LCRs (e.g. banks
that are mainly refinanced through retail
deposits with 5% LCR outflow rate only) can
easily enter into reverse repo trading with
lower grade collateral (“credit repos”) and
therefore high premiums (→ yield
enhancement), and being comfortable with
negative LCR impacts
Banks with volatile LCRs have to steer
and observe their LCR ratio very closely
and adjust HQLA and net cash outflows by
bespoke trades (e.g. repos / reverse repos,
CPs/CDs, own issuances,…)
24 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
Banks with low LCRs and e.g. poor unsecured
funding availabilities and larger asset pools in
Level 2A downwards, are rather forced to enter
into transactions that improve the LCR ratio
LCR LCR (credit repos), pay higher repo premiums and
long short stay > 30 days in the repo maturity profiles
Market
player
LCR LCR not Asset Manager, central banks and insurance
volatile relevant companies do not have to fulfill minimum LCR
requirements and can therefore enhance their
cash investment yields on a secured basis and
use repo premiums opportunistically in their asset
/ liability management strategies, if not restricted
by their investment or disclosure policies
3. Impacts of the regulation and monetary policies on the repo business
… and from the monetary policy of the central banks and the economic situation
2015
LCR becomes
effective in EU
• After the LCR introduction as
minimum standard, banks have
looked closely at the effect of
repos in the LCR and have
entered into certain trades to
affect the ratio
• Repo trades as well as security
borrowing / lending trades with
LCR-enhancing effects (→
certain underlyings / baskets,
certain terms, see following
pages) gained in importance in
the repo market with high spread
markups
25 Nov 2022 LCR and NSFR for repo
2019-2020
Quantitative
Easing
• From 2019 on, with the
introduction of the third series of
Targeted Longer-Term
Refinancing Operations (TLTRO
III) led to a liquidity flood in the
market
• LCR (as well as NSFR) ratios
were on a comfortable level
across the market
• Repos have lost their
importance as LCR / NSFR
management instrument
For training and illustration purposes only
Spring 2020
Covid 19 crisis
• The covid 19 crisis led to a
liquidity shortfall in the banking
sector and LCR shortfalls at
several banks
• Central bank interventions have
subsequently injected even more
liquidity into the market making
repos less significant for the
LCR i.e.: APP - Asset Purchasing
Programs, Long-Term Open
Market Operations (i.e. TLTRO’s)
2021/2022 – Quo Vadis 2023
Post Covid 19 crisis, Russia/Ukraine conflict
and energy crisis, recession fears, collateral
shortages, inflation
• Inflation dominates money and
capital market rate changes
• Changes in Central Bank
Monetary Policies / Quantitative
Tightening
• Sharp interest rate increases
• Euro system from negative rates
to extreme steep positive yield
curve
• Increased demand on HQLA’s as
alternative investment class
• Increase in short cash markets
and extreme squeezes in repo
rates and in collateral
availabilities
• Importance of repos for LCR /
NSFR management increases
Questions and discussion

26 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
Contact details

In case of questions please contact us:

Oliver Deutscher

Department Head
Group Treasury
Liquidity and Collateral Management

Tel: +49 69 7447 3480

Oliver.Deutscher@dzbank.de

Carolin Pirch

Group Treasury
Data Analytics and Modelling
Credit Management

Tel: +49 69 7447 90998

Carolin.Pirch@dzbank.de

27 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
Disclaimer

This presentation has been This document is for information purposes only. This document has been prepared by DZ BANK AG Deutsche Zentral-
Genossenschaftsbank (“DZ BANK”) and may only be distributed outside Germany in accordance with the local legal
prepared by DZ BANK AG requirements, and persons coming into possession of this information and these materials should inform themselves about
and observe the local legal requirements.
personnel for the purpose of
This document constitutes neither a public offer nor a solicitation of an offer for the purchase of securities or financial
market participant training, based on the instruments. DZ BANK does not act as investment adviser or portfolio manager. This document does not constitute a
standard Basel III framework documentation, as financial analysis. All evaluations, opinions or explanations contained herein are those of the author of the document and do
not necessarily correspond with those of third parties.
published on the bis.org website by the Basel DZ BANK assumes no liability for damages caused directly or indirectly by the distribution and/or use of this document
Committee on Banking Supervision, as well as and/or for damages which are in any way connected with the distribution/use of this document. Any investment decision
with respect to securities or any other financial instruments should be based on an individual advice and a prospectus or
the European implementation (CRR II), information memoranda and under no circumstances on this document.
published on the eba.europa.eu website. As The contents of this document correspond to the status at the point in time at which the document was drafted. Future
developments may render them obsolete without the document’s having been changed accordingly.
such it does not reflect any views from DZ BANK
Icons in this presentation made by Freepik from www.flaticon.com.
AG and/or any of its affiliates.

28 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
APPENDIX

For training purposes only - no further distribution

APPENDIX
Special LCR Basket Repos

Basket repo: A basket repo is a repo of a portfolio of bonds. Banks and other financial institutions often repo out entire portfolios of bonds
with a repo market maker. It is operationally more convenient due to the fact that it is considered as one repo trade (e.g. General Collateral (GC) Repo). Standard
baskets are generally combinations of bonds that are comparable in terms of quality, risk, substitutability, etc.

Treatment of basket repos in LCR / NSFR1) Examples (LCR)

• Clearstream Standardised Baskets:

An HQLA-eligible asset received as a component of a pool of collateral for a LCR Level 1 basket, LCR Level 2A basket, LCR Level 2B basket (according
secured transaction (e.g. reverse repo) can only be included in the stock of to EU regulation)
HQLA in the LCR to the extent that it can be monetised separately (not valid • EUREX GC Pooling Baskets: GC Pooling® ECB Basket
for a mixed pool of underlyings) ➔ Baskets have to consist of Level 1 (or Level • LCH €GCPlus Baskets: Basket 1 (LCR equivalent)
2) assets solely in order to include the bonds in the stock of HQLA. Reverse Repo, 20 days, € 1200m

Bank LCR Level 2A basket CCP

Repo, 20 days, € 800m
Impacts on repo business
• HQLA: Net view: € 400m unweighted, € 340m (85%) weighted received
Repo clearing houses adapt standard basket composition to LCR Level 1 (or Level 2A assets
Level 2) criteria, considering the • Cash flows: Gross view:
- issuer type (e.g. sovereign, regional government, supras, etc.) • € 1200m inflows unweighted; € 180m (15%) weighted
- issuer countries • € 800m outflows unweighted; € 120m (15%) weighted
- long term issue or issuer rating
- maximum maturities
- minimum issue size (for corporate bonds)

1) https://www.bis.org/bcbs/publ/d406.pdf for LCR; NSFR: received collateral from reverse repos is not reported in the NSFR
2) https://www.eurex.com/ex-en/markets/eurex-repo/gcpooling
30 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
APPENDIX
LCR treatment of forward starting transactions

Forward starting repos and reverse repos in the LCR context are contractually fixed (binding obligation to accept), but not yet settled at
reporting date; and imply an in- and/or outflow of cash and/or liquid assets in the next 30 days.

Illustration Situation LCR treatment

30-day LCR horizon
Start of repo
30-day LCR horizon
Start of repo
Start and maturity within the
LCR’s 30-day horizon (in the
future)
Maturity of repo
Start within the LCR’s 30-day
horizon (in the future); maturity
after the LCR’s 30-day horizon
Maturity of repo
No LCR impact – no reporting
Cashflows are netted against the
market value of the collateral after
deducting the regulatory haircut
HQLA collateral held
by an institution on the
first day of the LCR
horizon may count
towards the stock of
HQLA even if it is sold
or repoed forward.

Example: LCR effect: NSFR treatment of forward starting transactions:

• Forward starting repo • Cash inflow from repo in 2 days: GBP (relevant under under trade date accounting)
• Amount: GBP 50m 50m 0% RSF for “trade date receivables”
• Counterparty: investment bank • Bond outflow: GBP 53m x 85% (Level 0% ASF for “trade date payables”
• Settlement: in 2 days 2A) = GBP 45.05m ➔ no impact on NSFR
• Term: 10 days
• Underlying bond: AAA-rated corporate bond ➔ Net cash inflow GBP 4.95m
• Market value of bond: GBP 53m

https://www.bis.org/bcbs/publ/d406.pdf BCBS June 2017, FAQ 24 LCR reporting date

31 Nov 2022 LCR and NSFR for repo For training and illustration purposes only
APPENDIX
Example of a bank with a comfortable LCR

Situation Effect of repo trades

A credit institution in the EU has got a comfortable Basket Reverse Repo Trade, Term 200 days
LCR of 170% and is long in cash Cash amount: € X bn
• HQLA = € 11.9bn Collateral: Level 3 assets
Bonds € 2.9bn + € 9bn central bank reserves
LCR impact of the transaction
• Net Cash Outflows (30 days) = € 7.0bn
HQLA:
Central bank reserves: - € X bn Amount X € 1bn € 2bn € 3bn € 4bn
Level 3 assets: no impact
Net Cash Outflows: no impact LCR 155.7% 141.4% 127.1% 112.9%
The bank has the following bonds in its portfolio
(unencumbered; market values):
✓
• German Government bond € 2.9bn Assumption: Before reverse repo trade: NSFR = ASF / RSF = € 40bn / € 38bn = 105%
Internal minimum NSFR threshold = 103%
NSFR impact of the transaction with the notional of € 3bn
RSF (assets):
No consideration of collateral received in the NSFR.
➔ Which transaction can the bank do to not leave their 50% RSF for loans to financial institutions and CBs with residual maturities of 6-12
“feel-good” LCR corridor of 120-130% and earn a good months ➔ 50% * € 3bn = € 1.5bn additional RSF
premium?
➔ What is the NSFR impact?
➔ NSFR after trade = € 40bn / € 39.5bn = 101.2% (until maturity of repo < 180 days)

➔ Banks have to manage their LCR and NSFR simultaneously.

32 Nov 2022 LCR and NSFR for repo For training and illustration purposes only