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EBA/GL/2024/08 — Liquidity Stress Testing

EBA guidelines on liquidity stress testing for significant asset-referenced and e-money tokens under MiCA Article 45(4).

Authority

EBA

Reference

EBA/GL/2024/08

Legal basis

Article 45(8) MiCA

Status

Final adopted; translated into the EU official languages

Applies from

30 September 2024

Compliance deadline

30 September 2024

Provenance

English text adopted in the final report; standalone official-language publications available on EBA.

Source

EBA

Documents

Final report PDF; compliance table XLSX

Guidelines issued on the basis of Article 45(8) of Regulation (EU) 2023/1114

EBA/GL/2024/08

19 June 2024

establishing the common reference parameters of the stress test scenarios for the liquidity stress tests referred in Article 45(4) Regulation (EU) 2023/1114

1. Compliance and reporting obligations

Status of these guidelines

  1. This document contains guidelines issued pursuant to Article 16 of Regulation (EU) No 1093/2010. In accordance with Article 16(3) of Regulation (EU) No 1093/2010, competent authorities and financial institutions must make every effort to comply with the Guidelines.

  2. Guidelines set the EBA view of appropriate supervisory practices within the European System of Financial Supervision or of how Union law should be applied in a particular area. Competent authorities as defined in Article 3(1), point (35) of Regulation (EU) 2023/1114 to whom guidelines apply should comply by incorporating them into their practices as appropriate (e.g. by amending their legal framework or their supervisory processes).

Reporting requirements

  1. According to Article 16(3) of Regulation (EU) No 1093/2010, competent authorities must notify the EBA as to whether they comply or intend to comply with these guidelines, or otherwise with reasons for non-compliance, by [dd.mm.yyyy]. In the absence of any notification by this deadline, competent authorities will be considered by the EBA to be non-compliant. Notifications should be sent by submitting the form available on the EBA website with the reference 'EBA/GL/2024/08'. Notifications should be submitted by persons with appropriate authority to report compliance on behalf of their competent authorities. Any change in the status of compliance must also be reported to EBA.

  2. Notifications will be published on the EBA website, in line with Article 16(3).

2. Subject matter, scope and definitions

Subject matter

  1. These guidelines establish, in accordance with paragraph 8 of Article 45 of Regulation (EU) 2023/1114, the common reference parameters of the stress test scenarios to be included in the liquidity stress testing referred to in paragraph 4 of Article 45 that Regulation.

Scope of application

  1. These guidelines apply to issuers of significant asset-referenced tokens and electronic money (e-money) institutions issuing e-money tokens (in accordance with Article 58(1), point a, of Regulation (EU) 2023/1114) as defined in points 6 and 7, respectively, of Article 3(1) of that Regulation, and non-significant when the competent authority of the home Member State requires it so in accordance with Article 35(4) and Article 58(2) of the same Regulation (hereinafter, for the purpose of these guidelines, jointly referred, as the 'issuers of ARTs/EMTs").

Addressees

  1. These guidelines are addressed to competent authorities as defined in Article 3(1) point (35) of Regulation (EU) 2023/1114 to whom these guidelines apply.

  2. These guidelines are also addressed to the issuers, as defined in point 10 of Article 3(1) of Regulation (EU) 2023/1114, to whom these guidelines apply, of: (a) asset-referenced tokens as defined in Article 3(1), point 6 of that Regulation (issuers of asset-referenced tokens -ARTs-); and (b) e-money institutions issuing e-money tokens defined in Article 3(1), point 7 of that Regulation (issuers of e-money tokens -EMTs-).

3. Implementation

Date of application

  1. These guidelines apply from two months after the date of publication on the EBA's website of the guidelines in all EU official languages.

4. Guidelines on the common reference parameters of the stress test scenarios in the liquidity stress testing

4.1 General provision

  1. According with Article 45(4), 2 nd subparagraph, Regulation (EU) 2023/1114, issuers of ARTs/EMTs should assess the risks under section 4.2, taking into account regulatory changes and market trends, as well as minimum macroeconomic conditions, and apply the methodology under section 4.3, including the parameters of the stress test scenarios, considering all the asset-referenced and e-money tokens offered and activities related to them.

4.2 Risks to be assessed

4.2.1 Redemption risk

  1. Issuers of ARTs/EMTs should assess under stress the proneness to redemption requests at any time.

  2. For the purpose of paragraph 11, issuers of ARTs/EMTs should consider all the following aspects: the profile of the token holders (including retail or wholesale); the type of token (including if it is significant or not); the type of asset referenced (such as, official currency or other); the characteristics of the issuer (such as, credit institution or other); historical experience of redemption requests; and, the maturity profile of the reserve of assets. Issuers may consider any other aspect they deemed relevant for the assessment.

  3. Issuers of ARTs/EMTs should assess the need to complement the percentages of the reserve of assets with a residual maturity of up to one or five working days in accordance with Article 36(4) Regulation (EU) 2023/1114, once the relevant delegated regulation applies, by estimating a 99% confidence interval relative to the average redeemed amount in the worst cases observed of 1 and 5 days residual maturity in terms of gross outflows, based on their particular historical observations.

4.2.2 Risk related to deposits with credit institutions

  1. Issuers of ARTs/EMTs should assess under stress the possibility of failure to a prompt access to the amount of the deposits held in credit institutions as part of the reserve of assets.

  2. For the purposes of paragraph 14, issuers of ARTs/EMTs should consider all of the following aspects: i) the credit quality and the liquidity profile of the deposit counterparty; ii) the concentration by counterparty and custodian; iii) the location of the deposit; iv) the maturity of the deposit; v) the potential collateral (including volume, type or quality) lying under the deposit; and, vi) any risk factor not required following Article 36(4) Regulation (EU) 2023/1114 they may consider relevant for this risk.

4.2.3 Market risk and volatility

  1. Issuers of ARTs/EMTs should assess under stress the need of additional liquidity requirements to cover the market risk of the reserve of assets as well as its currency denomination differences, volatility and correlation relative to the one of the assets referenced, taking into account related hedging derivatives and overcollateralization in place either imposed in accordance with the specification under Article 36(4) Regulation (EU) 2023/1114, once the relevant delegated regulation applies, or any other requested by the competent authority/supervisor or held on a voluntary basis.

  2. Issuers of ARTs/EMTs should take into account the cases where a historical lookback approach is used for the determination of the overcollateralisation in place (referred in the preceding paragraph) and is based on an observation period where no stress event has taken place. In these cases, for example, longer periods including stress events should be considered or stress assumptions should be incorporated.

4.2.4 De-pegging risk

  1. Issuers of ARTs/EMTs should assess the risk that the market value of the ARTs/EMTs differ from the market value of the asset referenced and whether additional liquidity requirements are necessary to mitigate that difference.

4.3 Methodology

4.3.1 The liquidity stress testing

  1. Issuers of ARTs/EMTs should compare the total weighted amount of the reserve of assets with respect to the total weighted amount of the assets referenced by the ARTs/EMTs, under stress.

  2. For the purposes of paragraph 19, issuers of ARTs/EMTs should calculate the total weighted amount of the reserve of assets as the result of multiplying the market value of each asset in the reserve of assets by the relevant stress factor (weight). In the case of assets that are not marketable (such as cash or deposits in credit institutions), issuers of ARTs/EMTs should take the amount multiplied by the relevant stress factor.

  3. That total weighted amount of the assets referenced by the tokens is the result of multiplying the market value of the assets referenced by the relevant stress factor. In the case of ARTs/EMTs referenced to official currencies their monetary value should be taken as weighted amount of the assets referenced.

  4. A shortfall of the reserve of assets in the liquidity stress testing arises where the total weighted amount of the reserve of assets is lower than the weighted amount of the assets referenced by the tokens, under stress.

4.3.2 Identification of the common referenced parameters of the stress test scenarios

  1. Issuers of ARTs/EMTs should calibrate and determine the relevant stress factors for each asset of the reserve of assets and for the assets referenced by the ARTs/EMTs under various stress scenarios and time horizons, including 1 day, 5 days, 30 days and 1 year.

  2. Issuers of ARTs/EMTs should base the calibration of the stress factors on historical observations (their own observations plus observations from market events) and expert judgment. Issuers of ARTs/EMTs should have a historical documentation of data series of observations and detailed rationale for any expert judgment proving the appropriateness of the calibration.

  3. The stress factor for a specific asset class should be constructed considering the combination of risk factors and parameters relevant for the asset class under different stress events/scenarios from an idiosyncratic and market wide perspective. The severity of the shocks should be determined by the severity of the given stress scenario (including the time horizon). Therefore, different stress factors for the same asset class may be derived for each scenario.

  4. The stress factor to be applied to each asset of the reserve of assets should be lower than 100%. The stress factor to be applied to the assets referenced should be higher than 100% if the tokens are not referenced to official currencies.

  5. In the determination of the stress factors issuers of ARTs/EMTs should assess all the following parameters and take into account the risks envisaged in section 4.2 of these Guidelines. Issuers of ARTs/EMTs may also consider other relevant parameters and risks not already considered and which are not inconsistent with those in these guidelines.

a) Parameters related to the calibration of the stress factors of the reserve of assets

  1. In the determination of the stress factors to the following assets in the reserve of assets, issuers ARTs/EMTs should take into account under stress all the following parameters:

    1. Deposits with credit institutions:

      1. the credit quality of the deposit taking institution and expectations of nonperformance;

      2. the credit and liquidity quality of the underlying collateral if the deposit is collateralised;

      3. the concentration by the deposit taking institution;

      4. the tenor and early withdrawal options; and

      5. the roll-over risk stemming from securities financing transactions, especially repos, where cash is received against non-liquid assets.

    2. Commodities:

      1. the extent to which the reserve assets replicate the assets referenced by the tokens; and

      2. the potential delivery risk and costs associated if the redemption is in physical.

    3. LCR level 1 liquid assets subject to 0% haircuts [in accordance with Commission Delegated Regulation (EU) 2015/61] and, once the relevant delegated regulation applies, as further specified as highly liquid financial instruments in accordance with Article 38(5) Regulation (EU) 2023/1114:

      1. the weighted average residual maturity/duration to take into account their potential sensitivity to interest rate risk and related volatility;

      2. the country risk premium to take into account their related volatility;

      3. the concentration by issuer;

      4. the location of the security (custodian) to take into account any potential challenge for a prompt transfer; and

      5. the evolution of the market value of the specific security, to assess their volatility and correlation with respect to the assets referenced.

    4. LCR level 1 covered bonds [in accordance with Commission Delegated Regulation (EU) 2015/61] and, once the relevant delegated regulation applies, as further as specified as highly liquid financial instruments following Article 38(5) Regulation (EU) 2023/1114:

      1. the required LCR haircuts;

      2. the weighted average residual maturity/duration to take into account their potential sensitivity to interest rate risk and related volatility,

      3. their percentage of the reserve of assets,

      4. the concentration by issuer,

      5. the location of the security (custodian) to take into account any potential challenge for a prompt transfer,

      6. the evolution of the market value of the specific security, to assess their volatility and correlation with respect to the assets referenced.

    5. Other highly liquid financial instruments, once the relevant delegated regulation applies, as further specified following Article 38(5) Regulation (EU) 2023/1114:

      1. the required LCR haircuts;

      2. the weighted average residual maturity/duration to take into account their potential sensitivity to interest rate risk and related volatility;

      3. their percentage of the reserve of assets;

      4. the concentration by issuer;

      5. the location of the security (custodian) to take into account any potential challenge for a prompt transfer; and

      6. the evolution of the market value of the specific security, to assess their volatility and correlation with respect to the assets referenced.

b) Parameters related to the calibration of the stress factors of the assets referenced

  1. In the determination of the stress factors to the assets referenced by the tokens, issuers of ARTs/EMTs should take into account under stress all the following parameters: (i) volatility and distributional indicators of the market value of the reserve of assets (such as mean, quartiles and distribution of the market value of the reserve of assets); (ii) volatility and distributional indicators with respect to the assets referenced (such as mean, quartiles and distribution of the market value of the assets referenced); (iii) idiosyncratic stress factors (such as liquidity, solvency soundness of the issuer); (iv) market wide stress factors (such as stress factors in the financial system or the crypto eco-system, number and magnitude of deviations between the token price and the market value of the asset referenced by the token).

(EBA website source: eba.europa.eu)

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