The “timely” and “large number” requirements further require information on the age and number of quotes and trades. In particular, demonstrating the “two committed market makers” means that this data will need to be sourced from a large number of brokers. The Federal Reserve Bank defines a Liquid and Readily Marketable security as “a security that is traded in an active secondary market with: (1) more than two committed market makers (2) a large number of non-market maker participants on both the buying and selling sides of transactions (3) timely and observable market prices and (4) a high trading volume.”ĭemonstrating the criteria above can be quite challenging and requires robust, granular market depth and liquidity information.įirst and foremost, it requires detailed information on actual observed quotes and trades, both on specific HQLA securities and on peer or comparable securities. With no agreed-upon guidance globally, regional interpretations and implementations vary. How to determine if a High Quality Liquid Asset is Liquid & Readily Marketable? The article highlighted the mismatch between the accounting treatment and the regulatory purpose of this liquidity buffer, a mismatch that obscures transparency into the value and liquidity of this essential capital buffer. Now, more than ever, it is important to be critical of the liquidity and marketability of a bank’s HQLA and large US banks have signaled that increased scrutiny of the “Liquid & Readily Marketable” component was on the Fed’s 2023 testing agenda, even before the recent market events.Ī recent article in highlighted the tendency of major banks to classify their HQLA at Held-to-Maturity, allowing them to be measured at cost in their financial statement. The purpose is clear, but the practice is much more challenging as there is no shared definition or criteria for LRM across jurisdictions. Basel Rules specifically require that instruments be “Liquid & Readily Marketable” (LRM) to qualify as High Quality Liquid Assets (HQLA) for liquidity coverage and capital adequacy purposes. HQLA is, by its very nature, supposed to be ‘liquid’, and not just in periods of market equilibrium, but also in periods of the most unforeseen stress and market dislocation. Now, more than ever, banks need to understand the liquidity cost, horizon and dynamics of their portfolio, both for regulatory compliance and for survival. Underpinning so many of the existing regulations (and likely those to come or be revisited in the coming years) is liquidity. The digitalization of the banking world and the role of social media in financial markets have changed the landscape of banking and regulators want to ensure that regulations are equipped to handle these new dynamics. Longstanding bank capital regulations developed off the back of the credit crisis are now being revisited and rethought. Price volatility, rising interest rates, and turmoil in the banking sector have been a stark reminder of the importance of liquidity and regulation for global banks. These events have brought bank liquidity, solvency, and capital adequacy to the forefront of regulators’ minds again. The collapse of Silicon Valley Bank and rapid deterioration of other US and global banks have called into question long-standing banking regulations and norms.
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