EBA/RTS/2024/11 — Highly Liquid Reserve Assets

EBA final report on Highly Liquid Reserve Assets, tracking draft technical-standard mandates and adoption status.

Authority

EBA

Reference

EBA/RTS/2024/11

Mandate(s)

Article 38(5) MiCA

Status

Pending Commission adoption

Source

EBA

EBA/RTS/2024/11

13 June 2024

Final Report

Draft Regulatory Technical Standards market risk, credit risk and concentration risk under Article 38(5) of

to specify the highly liquid financial instruments with minimal Regulation (EU) 2023/1114

1. Executive Summary

2. Background and rationale

2.1

Liquidity related risks of issuers of ARTs and EMTs

2.1.1

Liquidity risks related to the reserve assets. Redemption of tokens and financial stability.

2.1.2

Liquidity risks related to the DLT infrastructure

2.1.3

Custody of the reserve assets

2.2

Draft regulatory technical standards specifying the highly liquid financial instruments

2.2.1

Definition of liquid assets in the LCR vs Definition of highly liquid financial instruments in the reserve of assets

2.2.2

Concentration limits of investments by UCITs (undertakings for collective investment in transferable securities)

2.2.3

The various types of assets that can be referenced by ARTs and correlation between the assets referenced by the ARTs and the reserve assets

2.2.4

Concentration limits of ARTs in custody with entities within the same group

Draft regulatory technical standards

4. Accompanying documents

4.1

Draft cost-benefit analysis / impact assessment

4.1.1

Problem identification and background

4.1.2

Policy objective

4.1.3

Baseline scenario

4.1.4

Options considered, assessment of the options and preferred options

4.2

Feedback on the public consultation

Summary of key issues and the EBA's response

Summary of responses to the consultation and the EBA's analysis

1. Executive Summary

Article 38(1) of Regulation (EU) 2023/1114 requires that issuers of asset-referenced tokens, irrespective of whether they are significant or not, that decide to invest the proceeds they receive from the issuance of the tokens and form part of the reserve of assets, shall do it in financial instruments that are highly liquid and with minimal market risk, credit risk and concentration risk. These highly liquid financial instruments shall be capable of being liquidated rapidly with minimal adverse price effect since they need to be effective to be able to meet in a prompt manner any redemption request stemming from the token holders at any time including under stress.

The requirement of a reserve of assets applies as well to electronic money (e-money) institutions issuing e-money tokens that are significant by virtue of Article 58(1) of Regulation (EU) 2023/1114 and can be expanded to e-money institutions issuing e-money tokens that are not significant if the competent authority of the home Member State requires it so following Article 58(2) of Regulation (EU) 2023/1114.

With these draft Regulatory Technical Standards (RTS) the EBA is complying with its mandate in Article 38(5) of Regulation (EU) 2023/1114 to specify the financial instruments that can be considered highly liquid and bearing minimal market risk, credit risk and concentration risk. With this the identification of eligible investments of the reserve of assets becomes harmonized and transparent.

In the development of the mandate the EBA is required to take into account the various types of assets that can be referenced by an asset-referenced token and the correlation between the asset referenced by the asset-referenced token and the highly liquid financial instruments that the issuer might invest in, in order to mitigate different market value volatilities between them to ensure that the amount of the reserve of assets can meet at all times the market value of the asset referenced for any redemption request that can arise. Furthermore, in the specification of highly liquid financial instruments, the EBA needs to take into account the LCR framework and the UCITs framework, the latter particularly to determine concentration limits in the investment of highly liquid financial instruments by issuer, which is also part of the mandate.

Next steps

The draft regulatory technical standards will be submitted to the Commission for endorsement following which they will be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal of the European Union.

2. Background and rationale

Article 36(1) of Regulation (EU) 1114/2023 on markets in crypto-assets (Regulation (EU) 2023/1114) requires issuers of asset-referenced tokens (ARTs), whether they are significant ARTs or not, to constitute and maintain a reserve of assets at all times to cover their liabilities against the holders of their issued ARTs matching the risks reflected within said liabilities. Article 58(1) extends that requirement to e-money institutions issuing significant e-money tokens (EMTs). Furthermore, Article 58(2) envisages the possibility that competent authorities may impose that requirement as well to e-money institutions issuing EMTs that are not significant.
The reserve of assets shall be composed of the assets that the issuer receives and keeps when issuing the tokens (e.g. deposits with credit institutions, commodities, financial instruments.) and by the highly liquid financial instruments the issuer may invest in.
In the case of ARTs referencing one or more official currencies, the reserve of assets shall be composed of deposits in credit institutions by at least 30% 1 (or 60% 2 if required by the relevant competent authority) of the amount of the assets referenced in each official currency for issuers of ARTs that are not significant, or 60% 3 in the case of issuers of significant ARTs.
The minimum amount in the reserve of assets of deposits in credit institutions of 60% of the amount referenced is also required in the case of e-money institutions issuing EMTs that are significant 4 . Emoney institutions issuing EMTs that are not significant can be required by their competent authority to have a minimum of 30% 5 or 60% 6 in the form of deposits in credit institutions.
This minimum required amounts of deposit in credit institutions within the reserve of assets does not apply in the case of ARTs referencing assets other than official currencies, for example commodities or financial instruments. However, in the case of these ARTs, funds received by the issuer when issuing the token may be kept as deposits in credit institutions on a voluntary basis within the reserve of assets. Indeed Article 38(1) envisages that ARTs issuers may invest a part of the reserve of assets in highly liquid financial instruments but are not obliged to do it and, therefore, have the possibility to keep the funds received from the issuance of the ARTs.

1 Article 36(4)(d) MiCAR

2 Article 35(4) MiCAR in conjunction with Article 45(7) MiCAR

3 Article 45(7) MiCAR

4 Article 58(1) MiCAR in conjunction with Article 45(7) MiCAR

5 Article 58(2) MiCAR in conjunction with Articles 58(1) and 36(4)(d) MiCAR

6 Article 58(2) MiCAR in conjunction with Articles 58(1) and 45(7) MiCAR

In the case of ARTs referencing a combination of official currencies with assets other than official currencies the minimum required amount of deposits in credit institutions within the reserve of assets applies for the part of amount referencing official currencies only.
Article 38(1) refers to the part of the reserve of assets that issuers invest in. This part shall be composed of highly liquid financial instruments with minimal market risk, credit risk and concentration risk that can be liquidated rapidly with minimal adverse price effect.
The EBA is mandated under Article 38(5), in cooperation with ESMA and the ECB, to develop draft regulatory technical standards (RTS) specifying those highly liquid financial instruments and concentration limits, for which the EBA shall take into account (i) the various types of assets that can be referenced by an asset-referenced token; (ii) the correlation between the assets referenced by the asset-referenced token and the highly liquid financial instruments the issuers may invest in; (iii) the definition and specifications of the liquidity coverage requirement; (iv) concentration limits in the UCITs framework for the purposes of preventing the issuer from investing in highly liquid financial instruments issued by a single entity more than a certain percentage of the reserve of assets and (v) constraints on concentration of tokens by custodians belonging to the same group.
For the development of these RTS, the EBA builds on the 2022 Basel standards on the prudential treatment of crypto assets exposures as well as on the new international regulatory developments, as well as the UCITs Directive 2009/65 and the Commission Delegated Regulation (EU) 2015/61 (LCR Delegated Regulation) as envisaged in Regulation (EU) 2023/1114.

As established in Articles 49 and 39, EMTs and ARTs holders can request redemption of the tokens at any time, including stress scenarios, against the reserve assets. In the case of EMTs, the redemption shall be at par value by paying in funds the monetary value of the EMT. In the case of ARTs, redemption shall be made by the issuer either by paying an amount in funds equivalent to the market value of the assets referenced or by delivering the assets referenced by the ARTs. Where issuers of ARTs accepted a payment in funds in an official currency when selling the token, then they shall always provide the option to redeem the token in funds denominated in the same official currency.
The said ARTs and EMTs issuers are thus required to maintain a pool of assets by which the tokens maintain a stable value, relative to the asset or assets they reference.
Article 36(1)(b) clarifies that the composition of the reserve of assets shall aim to cover the liquidity risks associated to the permanent redemption rights of the token holders.

The composition and management of the reserve of assets are of key importance to ensure that the reserve assets can be liquidated rapidly at or close to prevailing market prices.
Obstacles to a prompt access to the reserve of assets, like deterioration in the solvency profile of the credit institutions holding issuers' deposits, or negative volatility of the highly liquid financial instruments in the reserve of assets, challenge the stability of the market value of the tokens with

subsequent potential largescale redemption requests. This in turn may result in 'fire sales' of reserve assets challenging the stabilization mechanism and causing losses that could make the reserve assets insufficient relative to the liabilities and even deteriorate the own funds of the issuers.

Massive fire sales could negatively impact the markets in which the high liquid financial instruments are traded. A large redemption request of tokens, in particular in the case of market wide stress events, with a high concentration of the reserve assets as deposits with banks, could prompt a massive run of these deposits causing a deterioration of the liquidity profile of the affected banks and a loss of confidence in the general banking system.
Furthermore, such situation could impair user confidence in the resilience of the token as a payment mechanism.
The ability to sell reserve assets in large volume at (or close to) prevailing market prices would depend on the market depth firstly and then on quality, liquidity and concentration of the reserve assets. The degree of transparency as to the nature and liquidity of these reserve assets might also affect confidence in the token.

DLT failure, including issues regarding the validation of users' ownership and transfer of tokens, or the lack of network capacity to validate large volumes of transactions might cause users' loss of confidence, and trigger redemption requests. Disruption to the mechanism that links the value of the token and the value of its reserves, for example a cyber-incident, entailing a value mismatch between reserve assets and crypto assets could also be a source of liquidity risk.

2.1.3 Custody of the reserve assets

Potential uncertainties regarding the terms under which the assets can be transferred to the token holders/issuers or liquidated on the market, legal impediments (e.g. in case of regulators take-over of the custodian) or conflict of interest between the custodian-issuer versus holder of the token (if the valuation of the reserve assets does not reflect its market value) can be a source of liquidity risks for the tokens issuers.

2.2 Draft regulatory technical standards specifying the highly liquid financial instruments

The EBA is mandated to take into account the following specific aspects for the definition of highly liquid financial instruments in the reserve of assets.

2.2.1 Definition of liquid assets in the LCR vs Definition of highly liquid financial instruments in the reserve of assets

Article 38(5) refers to 'financial instruments' that can be highly liquid. The EBA follows the legal definition of 'financial instruments'. Directive 2014/65/EU on markets in financial instruments (MIFID II) refers in Section C of Annex I to 'Financial instruments' including basically transferable securities, money market instruments, units in collective investment undertakings (CIUs) and derivatives. Similarly point 50 of Article 4 of the CRR defines 'financial instrument' as the following

mainly: a cash instrument or a primary financial instrument. Furthermore, those established as such in MIFID, contracts that give rise to both a financial asset of one party and a financial liability or equity instrument of another party and derivatives, as long as their value is derived from the price of an underlying financial instrument or another underlying item, a rate, or an index.

The EBA takes into account the definition of financial instrument in the specification of highly liquid financial instruments.
When specifying the highly liquid financial instruments, as mandated in Article 38(5), the EBA shall take into account '(c) the liquidity coverage requirement as referred to in Article 412 of Regulation (EU) No 575/2013 and as further specified in Commission Delegated Regulation (EU) 2015/61 '.
The Commission Delegated Regulation (EU) 2015/61 (LCR DR) provides definitional criteria to identify specific categories of assets that could be considered liquid assets in the liquidity coverage ratio if they meet specific general and operational requirements. Liquid assets in the LCR are ready to be liquidated immediately at any point in time, including under stress scenarios, and with no or low loss of market value. Their characteristics serve as the basis for the definition of the eligible highly liquid financial instruments in the issuer's reserve assets. Highly liquid financial instruments in the reserve assets aim to meet similar targets under similar conditions and scenarios, i.e. to cover payment of obligations in a prompt manner in the short term, including stress scenarios, with no or low loss of value.
The EBA considers that highly liquid financial instruments in the reserve of assets need to overall meet the general and operational requirements as envisaged in Articles 7 and 8 of LCR DR with some specificities.
In the cases of EMTs as well as in the case of ARTs where the assets referenced are official currencies, highly liquid financial instruments in the reserve of assets are capped due to the minimum required amount of reserve of assets to be held as deposits with banks, as opposed to the uncapped amount of sovereign bonds in the LCR liquidity buffer. Due to this implicit cap, the EBA considers that in these cases sovereign bonds should not be exempted from the requirements to have a market value that is public or easy to determine, to be listed on a recognized exchange or tradable on generally accepted repurchase markets, to be diversified and subject to a minimum monetisation on an annual basis. Due to the limitation already imposed on highly liquid financial instruments, the definition of eligible sovereign exposures here should be reinforced, and thus not benefit from the exemptions in the LCR. In the LCR the uncapped amount might cover concerns about compliance with those requirements.
Full currency matching between the reserve of assets and the assets referenced is referred to by Regulation (EU) 2023/1114. Articles 39(2) and 49(4) Regulation (EU) 2023/1114 establish that issuers of ARTs shall always provide the possibility to redeem the token in funds denominated in the same official currency as the one in which they accepted the payment when selling the token and where issuers of EMTs shall redeem the token at par value paying in funds the monetary value of the EMT. This general one to one currency matching between the reserve of assets and the liabilities against token holders is complemented by a second layer currency consistency requirements between the bank deposits in the reserve of assets and the assets referenced in Articles 36(4d) and 45(7)(b). Therefore, no reference to operational requirements in the LCR related

to currency consistency needs to be envisaged for the highly liquid financial instruments in the reserve of assets.

Article 38(5) requires highly liquid financial instruments to have minimal market risk, credit risk and concentration risk. Haircuts reflect credit and liquidity risk of liquid assets in the LCR as illustrated by Article 418(1) CRR. The Basel standards on the LCR refers to the haircuts to compensate for market, credit and liquidity risk. Caps on specific liquid assets in the LCR liquidity buffer represent limits for assets of lower quality. Considering the required minimal credit risk and market risk, minimum volatility and maximum price stability, including under stress, the EBA considers that the highest quality liquid assets in the LCR, i.e., 0% haircut and uncapped level 1 assets, seem to be the most appropriate category of assets to be included as eligible highly liquid financial instruments only. This basically includes financial instruments in the form of sovereign bonds, regional government/local authorities/PSE bonds that are assimilated to sovereign bonds, central bank assets, promotional bonds and bonds issued by multilateral development banks and by other specific international organizations. Minimal concentration risk is addressed in the mandate to set concentration limits by issuer.
In addition to this the EBA considers that level 1 extremely high-quality covered bonds in the LCR should be included as highly liquid financial instruments in the reserve of assets, capped at 35% of the reserve of assets (please see section 4.1 of this final report on the impact assessment). This is in order to ensure that issuers of tokens referenced to official currencies other than EUR can meet the minimum required amount of reserve of assets considering their limited access to only one or very limited number of issuers of level 1 government bonds in the LCR as well as taking into account the required currency matching between the reserve of assets and the assets referenced and concentration limits by issuer following the mandate to the EBA.
As established in paragraph 2 of Article 38 units in UCITs are considered highly liquid financial instruments if the UCIT invests solely in highly liquid financial instruments as defined in these RTS and the issuer of the token still ensures that the concentration risk of the reserve of assets is minimal.

a. Unwinding collateral swaps, repos and reverse repos in the definition of highly liquid financial instruments

Before the application of the unwinding mechanism, the issuer of tokens should generally reflect the following items in the reserve of assets (mainly as long as related to securities financing transactions):
-The highly liquid financial instruments that are expected to be available at any time, including on day zero. This excludes those pledged and encumbered in repos or collateral swaps. This is consistent with the LCR treatment of HQLA, that should be available at any time during the 30-day time horizon.
-The deposits with banks that can be used. This is consistent with the LCR treatment of inflows/outflows from deposits during the 30-day time horizon.
Unwinding short-term collateral swaps, repos and reverse repos seeks to cover the risk of computing in the banks' LCR or in the reserve of assets of tokens' issuers co llateral received under

securities financing transactions that will be paid out in the short term. It ultimately targets to avoid any overestimate of the LCR or of the reserve of assets.

The unwinding mechanism in the LCR consists of considering the cash and collateral in/outflows upon maturity of the transactions in the short term for the purposes of computing the HQLA caps only. Thus, level 1 HQLA available at present should not be impacted in theory. However, in the LCR inflows/outflows apply and take into account the flows of cash/collateral of these transactions in the short term.
The unwinding mechanism proposed in these draft RTS is for the purposes of both the computation of the reserve of assets itself and for the caps. This is in order to take into account the risk that is covered in the LCR by inflows/outflows. The reserve assets, including cash/deposits or highly liquid financial instruments, count only as long as available at the end of the short-term time horizon considered, on which the unwinding applies. Thus, it takes into account the resources available at inception plus the incoming/outcoming of cash/collateral during the time horizon. In summary the unwinding of securities financing transactions in the reserve of assets includes the impact of the inflows/outflows recognised in the LCR.
In summary the following adjustments need to be considered in the unwinding of securities financing transactions for the computation of the reserve of assets of the issuer of tokens. To be noted that haircuts do not apply here (please see paragraph 57).
-Reverse repos - collateral eligible in the reserve of assets: unwinding = - market value of collateral + cash leg
-Reverse repos - collateral is not eligible in the reserve of assets: unwinding = + cash leg
-Repos -collateral is eligible in the reserve of assets: unwinding = + market value of collateral -cash leg
-Repos -collateral is not eligible in the reserve of assets: unwinding = - cash leg
-Collateral swap -collateral received and lent are eligible in the reserve of assets = + market value of collateral to be received -market value of collateral to be paid out
-Collateral swap -collateral received and lent are not eligible in the reserve of assets = no unwinding
-Collateral swap -collateral received is eligible in the reserve of assets and lent is not eligible in the reserve of assets = - market value of collateral to be paid out
-Collateral swap -collateral received is not eligible in the reserve of assets and lent is eligible in the reserve of assets = + market value of collateral to be received

Time horizon

The EBA has assessed the determination of the time horizon for the unwinding. Short term definition should be in line with Regulation (EU) 2023/1114. It is, thus, understood the time by which the liquid assets should be available.
Article 36(a) and (b) Regulation (EU) 2023/1114 focuses on the liquidity resources up to the following 5 working days as 'survival period' like for immediate effectiveness of the reserve of assets. The assumption is that the liquidity stress here might be expected to happen much more quickly and profoundly than in the banking business.
There are some drawbacks in considering a time horizon larger than 5 days for the unwinding. Liquid assets that would be available during the following 5 days, that Regulation (EU) 2023/1114 seems to consider in the reserve of assets, would be underestimated. For example, this is the case of 15 days collateral swaps where liquid assets have been received in exchange of non-liquid assets. At the same time, there is an overestimation of the liquidity resources only available beyond 5 working days if for example a reverse repo maturing in 15 days collateralised by non-liquid assets is included.

Other aspects

The amount of the reserve of assets, after unwinding the relevant securities financing transactions, should be considered for the purposes of the 35% cap in covered bonds (please see section 2.2.1 of this final report), the minimum percentages of the reserve of assets maturing up to 1 or 5 working days (please see the draft RTS to further specify the liquidity requirements of the reserve of assets under Article 36(4) of Regulation (EU) 2023/1114) and for the concentration limits of highly liquid financial instruments by issuer (please see section 2.2.2 of this final report) and of deposits by counterparty (please see the draft RTS to further specify the liquidity requirements of the reserve of assets under Article 36(4) of Regulation (EU) 2023/1114).

2.2.2 Concentration limits of investments by UCITs (undertakings for collective investment in transferable securities)

When specifying the highly liquid financial instruments, as mandated in point (d) of Article 38(5), the EBA shall take into account ' (i) constraints on concentration preventing the issuer from investing more than a certain percentage of reserve assets in highly liquid financial instruments with minimal market risk, credit risk and concentration risk issued by a single entity .' For these purposes ' EBA shall devise suitable limits to determine concentration requirements. Those limits shall take into account, amongst others, the relevant thresholds laid down in Article 52 of Directive 2009/65/EC '.
The EBA takes into account the references in Regulation (EU) 2023/1114 to UCITs and the similarities in risks and activities between them and ART/EMT issuers and considers the concentration limits that should apply to highly liquid financial instruments in the form of securities in the reserve of assets as concentration requirements by issuer.
The UCITs framework envisages a general concentration limit of 5% of their investments for securities issued by the same issuer. This limit is envisaged to be able to be increased up to 25%, in the case of covered bonds, and to 35% for the cases of, generally, government bonds. For exposures to OTC derivatives, the UCITs framework envisages a concentration limit with the same counterpart of 10%, if it is a credit institution, or 5% otherwise.
The EBA is proposing the 35% limit for government bonds and a 10% limit for covered bonds. This is in order to ensure that issuers of tokens referenced to assets denominated in currencies other than EUR can meet the minimum necessary reserve of assets considering generally a single issuer of government bonds in the same currency, full currency matching requirement between reserve

of assets and assets referenced and, in some case, potentially a limited number of covered bonds issuers.

A look through approach is envisaged for the assessment of compliance with the concentration limit when it comes to units in UCITs or in CIUs as highly liquid financial instruments.
The EBA proposes also the inclusion of the concentration limit by counterparty in the OTC derivatives for the unmargined part of them. The margins provided are considered to mitigate the remaining risk.

2.2.3 The various types of assets that can be referenced by ARTs and correlation between the assets referenced by the ARTs and the reserve assets

When specifying the highly liquid financial instruments, as mandated in Article 38(5), the EBA shall take into account '(a) the various types of assets that can be referenced by an asset -referenced token; '. Furthermore, the EBA shall take into account ' (b) the correlation between those assets referenced by the asset-referenced token and the highly liquid financial instruments the issuers may invest in; '.
Regulation (EU) 2023/1114 refers to 'electronic money token' or 'e -money token' as a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.
Regulation (EU) 2023/1114 refers to 'asset -referenced tokens' aiming at maintaining a stable value by referencing any other value or right, or combination thereof, including one or several official currencies.
Regulation (EU) 2023/1114 allows for the widest possible set of types of assets that can be referenced by ARTs, including commodities, financial instruments or crypto-assets.
The market value of the reserve assets held by the issuer needs to fully cover the amount of the liabilities against the token holders which are pegged to the market value of the assets referenced.
The EBA considers that mitigating the risk of any difference between the volatility of the market value of the asset referenced and the volatility of the market value of the reserve of assets should be a key factor in the determination of the composition of the reserve of assets to ensure that their amount is always at least equal to the amount of the liability towards the token holder. This is linked to a minimum correlation between the market value of the reserve of assets and the market value of the assets referenced.
In the case of EMTs or ARTs referenced to official currencies, a sufficient correlation between the reserve assets and assets referenced is reasonably expected since Regulation (EU) 2023/1114 envisages the reserve of assets to be held as bank deposits in the proportion of assets referenced. The rest of the reserve of assets is proposed to be composed of assets with low volatility, i.e. 0% LCR haircut liquid assets and level 1 extremely high-quality covered bonds.
In the case of ARTs referencing assets other than official currencies (e.g. commodities, financial instruments or crypto-assets), the EBA considers that by allowing these referenced assets and derivatives relating to them, covering market value changes between the assets referenced and the

reserve assets, as highly liquid financial instruments, a minimum correlation between their market value and subsequent mitigation of the de-pegging risk is expected to be achieved. This is in addition to the fact that the issuer may keep the assets received when selling the ARTs (e.g. commodities) and not invest them in highly liquid financial instruments.

At the same time the EBA understands that introducing volatility in the amount of reserve of assets via the inclusion of volatile assets in the definition of highly liquid financial instruments might bring volatility in the market value of the ARTs that might ultimately result in a massive redemption request. This would lead to liquidity risks for the issuer, bank deposits counterparties, as well as generally financial markets due to fire sales including the banking system and crypto-assets markets.
Therefore, the EBA proposes the eligibility of the referenced assets, if financial instruments, or of financial instruments relating to them 7 in the definition of highly liquid financial instruments in the reserve of assets but without setting a minimum or maximum value for it. With this, the EBA also seeks to ensure a good balance between the Regulation (EU) 2023/1114 expectation to taken into account for these purposes the definition of liquid assets in the LCR while seeking a minimum correlation between the reserve assets and the assets referenced. Still, the EBA expects that the referenced assets that are included in the reserve of assets meet the operational and general requirement as for liquid assets in the LCR, e.g. unencumbered, readily available and without any impediments for their liquidation.
The EBA proposes to not apply regulatory haircuts to the highly liquid financial instruments for simplicity reasons and since the risk covered by them is addressed via a minimum overcollateralisation of the assets referenced as proposed in the draft RTS to further specify the liquidity requirements of the reserve of assets under Article 36(4) Regulation (EU) 2023/1114.
With the inclusion of the referenced assets in the definition of highly liquid financial instruments within the reserve of assets, the 5% concentration limit by issuer in the UCITs framework should apply for the cases of those financial instruments in the form of securities.

2.2.4 Concentration limits of ARTs in custody with entities within the same group

When specifying the highly liquid financial instruments, as mandated in Article 38(5), the EBA shall take into account '(cd) constraints on concentration, preventing the issuer from holding in custody more than a certain percentage of crypto-assets or assets with crypto-asset service providers or credit institutions which belong to the same group, as defined in Article 2, point (11), of Directive 2013/34/EU of the European Parliament and of the Council or investment firms. '
Article 37(1)(e) establishes that concentration in the custodians of reserve assets needs to be avoided . Recital 55, however, envisages that ' However, in certain situations, this might not be possible due to a lack of suitable alternatives. In such cases, a temporary concentration should be deemed acceptable.'
It is not part of the EBA mandate to set specific concentration limits on this. However, the EBA proposes that the liquidity management and procedures in place for token issuers envisage specific measures to address this concentration risk. The draft RTS on the specification of the liquidity

7 For instance, an ETF/ETN on gold or a derivative contract on another commodity.

management policy and procedures in place under Article 45(7)(b) envisage specific provisions for these purposes.

3. Draft regulatory technical standards

COMMISSION DELEGATED REGULATION (EU) ./.

of XXX

supplementing Regulation (EU) 2023/1114 of the European Parliament and of the Council with regard to regulatory technical standards for specifying the highly liquid financial instruments with minimal market risk, credit risk and concentration risk

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 8 , and in particular Article 38(5), fourth subparagraph, thereof,

Whereas:

(1) For the purpose of allowing investment in highly liquid financial instruments having minimal market, credit and concentration risk, as envisaged in Article 38(1) of Regulation (EU) 2023/1114, level 1 liquid assets subject to 0% haircut according to Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 9 should be included as highly liquid financial instruments in the reserve of assets of a token issuer.
(2) In the identification of the highly liquid financial instruments having minimal market, credit and concentration risk, it is necessary to take into account the following requirements set out in Regulation (EU) 2023/1114: (i) the required currency matching between the denomination of the reserve of assets and the assets-referenced by the tokens; (ii) a minimum required amount of 30% of deposits with credit institutions, denominated in the official currency referenced by tokens that are not significant; and (iii) the concentration limits by issuer referred to in the prudential framework applicable to undertakings for collective investment in transferable securities (UCITS). Based on these aspects, it is necessary to include level 1 liquid assets in the form of extremely high quality covered bonds as referred to in Delegated Regulation (EU) 2015/61 as highly liquid financial instruments, up to 35% of the value of the reserve of assets, so as to ensure that the requirements on highly liquid financial instruments can be met while ensuring that the market, credit and concentration risk of the reserve of assets remain low.
(3) In the determination of the highly liquid financial instruments, it is necessary to take into account the expected higher volatility of the assets referenced by the tokens, when they are not referenced to official currencies. Therefore, in order to allow maintaining a higher correlation between the value of the assets referenced and the value of the

8 OJ L 150, 9.6.2023, p. 40.

9 Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions (OJ L 11, 17.1.2015, p. 1).

reserve of assets, the specific financial instruments referenced by the tokens or derivatives relating to the assets referenced by the tokens should be included in the reserve of assets as highly liquid financial instruments. This higher correlation is necessary to mitigate the potential mismatch in market and credit risk between the assets referenced and the reserve of assets.

(4) As in the determination of the LCR liquidity buffer in accordance with Delegated Regulation (EU) 2015/61, an unwinding mechanism for secured funding, secured lending or collateral swap transactions should be envisaged for the determination of the amount of the reserve of assets.
(5) Overall, the general and operational eligibility requirements for liquid assets set out in Delegated Regulation (EU) 2015/61 should apply also for the highly liquid financial instruments in the reserve of assets. However, some exceptions should be envisaged to adapt the applicable framework to the specificities of the crypto-activity and to the specific requirements in Regulation (EU) 2023/1114. For example, the requirement that issuers of high quality liquid assets in Delegated Regulation (EU) 2015/61 have not to belong to the financial sector should not apply to issuers of highly liquid financial instruments. In addition, Regulation (EU) 2023/1114 requires the currency matching between the denomination of the reserve of assets and the denomination of the assets referenced by the tokens. Furthermore, some exemptions to the general and operational requirements applicable to some level 1 liquid assets subject to 0% haircut in accordance with Delegated Regulation (EU) 2015/61should not be replicated in the framework applicable to highly liquid financial instruments, to take into account the quantitative limits set out in Regulation (EU) 2023/1114 to their inclusion in the reserve of assets.
(6) The market value of the highly liquid financial instruments should be calculated considering the cash-inflows and outflows that would derive from derivatives hedging not only their market risk, including interest rate risk or currency risk, but also the difference between the market value of the highly liquid financial instruments and the market value of the assets referenced. This is particularly relevant for the case of tokens that are not referenced to official currencies, which might be expected to be more volatile.
(7) As mandated by Regulation (EU) 2023/1114, specific concentration limits by issuer of highly liquid financial instruments should be provided, taking into account the prudential framework applicable to UCITS. Therefore, it is necessary to introduce a general 5% limit for securities and crypto-assets, a 35% limit for level 1 liquid assets with 0% haircut, as referred to in Delegated Regulation (EU) 2015/61, and a 10% limit in the cases of level 1 liquid assets consisting in extremely high quality covered bonds as referred to in that Delegated Regulation.
(8) The definition of the highly liquid financial instruments with minimal market risk, credit risk and concentration risk should also take into account the developments of the work in the BCBS framework to identify the eligible reserve assets for cryptoactivities.
(9) Considering that requirements set out in Article 38 of Regulation (EU) 2023/1114 shall also apply to electronic money institutions issuing e-money tokens (either significant or, where decided, non-significant), as per Article 58(1), point (a), and (2) of that

Article 1

Definition of highly liquid financial instruments

Financial instruments shall be considered highly liquid financial instruments with minimal market risk, credit risk and concentration risk, where they meet all of the following conditions:
(a) they comply with the general requirements laid down in Article 7 of Commission Delegated Regulation (EU) 2015/61; 12
(b) they comply with the operational requirements laid down in Article 8 of Delegated Regulation (EU) 2015/61;
(c) they belong to one of the following categories of financial instruments:
(i) level 1 assets referred to in Article 10 of Delegated Regulation (EU) 2015/61 that are not subject to any haircut;
(ii) level 1 assets qualifying as exposures in the form of extremely highquality covered bonds, as referred to in Article 10(1), point (f), of

10 Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, p. 84).

11 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2020, p. 12).

12 Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions Text with EEA relevance (OJ L 11, 17.1.2015, p. 1).

Regulation, this Regulation should also apply to those tokens that are subject to or required to comply with those requirements.

(10) There is a need to ensure, without prejudice to the withdrawal of the authorization in accordance with Article 24 Regulation (EU) 2023/1114, that, in cases of deviations from the requirements set out in this Regulation, including for reasons of the financial instruments ceasing to meet the conditions set out therein, a plan is promptly submitted to the competent authority.
(11) This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.
(12) The European Banking Authority, in cooperation with the European Supervisory Authority (ESMA) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council 10 and with the European Central Bank, has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council, 11

HAS ADOPTED THIS REGULATION:

Delegated Regulation (EU) 2015/61, up to 35 % of the value of the reserve of assets;

(iii)for tokens not referencing official currencies, other financial instruments, provided these instruments are either assets, including commodities, referenced by the tokens or derivatives on the assets referenced by the tokens.

For the purposes of the first subparagraph, point (a), the provision in Article 7(7), point (aa), of Commission Delegated Regulation (EU) 2015/61 shall not apply.

For the purposes of the first subparagraph, point (b):

(a) the operational requirements for credit institutions in Article 8 of Commission Delegated Regulation (EU) 2015/61 shall be read as referred to the issuers of the tokens;
(b) Article 8(1), second subparagraph, points (a)(iii) and (b), and Article 8(6) of Commission Delegated Regulation (EU) 2015/61 shall not apply;
(c) Article 8(4), second subparagraph, of Commission Delegated Regulation (EU) 2015/61 shall not apply with respect to assets referred to in Article 10(1), points (c) to (e) and (g), of that Regulation.

For the purposes of the first subparagraph, point (c)(iii), and without prejudice to the second subparagraph, where crypto-assets qualifying as financial instruments as referred to in Article 2(4), point (a), of Regulation (EU) 2023/1114, are included in the reserve of assets:

(a) all reference to credit institutions in Article 7(3) of Commission Delegated Regulation (EU) 2015/61 shall be read as referred to the issuers of the tokens that hold the reserve assets;
(b) Article 7(4) of Commission Delegated Regulation (EU) 2015/61 shall not apply.

For the purposes of the first subparagraph, point (c)(iii), where financial instruments qualifying as derivatives are included in the reserve of assets:

(a) subparagraph 1, points (a) and (b), shall not apply to those derivatives;
(b) those derivatives shall be taken into account for the purposes of Article 2 of this Regulation.

For the purposes of calculating the market value of the reserve of assets, the haircuts set out in Articles 10 to 19 of Commission Delegated Regulation (EU) 2015/61 shall not apply.

Article 2

Hedging derivatives to highly liquid financial instruments

The net liquidity outflows and inflows that would ensue from an early close-out of the hedge, including from derivatives hedging the difference between the change of the market value of reserve assets and the change of the market value of the assets referenced by the token, shall be taken into account in the valuation of the highly liquid financial instruments.

Article 3

Concentration limit by issuer of highly liquid financial instruments

The market value of highly liquid financial instruments with minimal market risk, credit risk and concentration risk issued or guaranteed by a single entity or by entities with close links shall not be higher than:
(a) 35% of the market value of the reserve of assets, in the case of securities or money market instruments that are not subject to any haircuts in accordance to Articles 10 to 19 of Commission Delegated Regulation (EU) 2015/61;
(b) 10% of the market value of the reserve of assets, in the case of extremely high quality covered bonds as referred to in Article 10(1), point (f), of Commission Delegated Regulation (EU) 2015/61;
(c) 5% of the market value of the reserve of assets, in the case of other securities, money market instruments or crypto-assets that qualify as financial instruments, as referred to in Article 2(4), point (a), of Regulation (EU) 2023/1114. This limit applies to the market value of units in undertakings for collective investment in transferable securities (UCITS) with a single management company or with management companies with close links.
The risk exposure to a counterparty in an OTC derivative transaction that is unmargined shall not exceed:
(a) 10% of the market value of the reserve of assets, when the counterparty is a credit institution; or
(b) 5% of the market value of the reserve of assets, in all other cases.
When applying paragraphs 1 and 2, issuers of tokens shall look through to the underlying exposures of collective investment undertakings (CIUs), as defined in Article 4(1), point (7), of Regulation (EU) No 575/2013, whose units are included in the reserve of assets.

Article 4

Unwind mechanism

Issuers of asset-referenced tokens, and e-money institutions issuing e-money tokens subject to this Regulation, shall apply the approach set out in paragraph 2 to all of the following:
(a) the determination of the amount of the reserve of assets envisaged in Article 36(1) of Regulation (EU) 2023/1114;

(b) the application of the percentages of the reserve of assets with maximum maturities established in [Article 1 and Article 2 of the RTS to further specify the liquidity requirements of the reserve of assets under Article 36(4) of Regulation (EU) 2023/1114] ;
(c) the application of the concentration limits by deposit counterparty established in [Article 5 of the RTS to further specify the liquidity requirements of the reserve of assets under Article 36(4) of Regulation (EU) 2023/1114] ;
(d) the application of the concentration limits by issuer of highly liquid financial instruments established in Article 3.

In the case of point (a), the approach set out in paragraph 2 shall apply without prejudice to the application of the operational requirements set out in Article 1(1), first subparagraph, point (b), and the 35 % cap to covered bonds referred to in Article 1(1), first subparagraph, point (c)(ii).

The issuers of asset-referenced tokens, and e-money institutions issuing e-money tokens subject to this Regulation, shall consider the impact on the reserve of assets of the termination of secured funding, secured lending or collateral swap transactions entered into using reserve assets on at least one leg of the transaction, where the transaction matures within five working days.

The reserve of assets shall be adjusted with an increase of its value, by an amount equivalent to the market value of the cash or other reserve assets to be received at the maturity of the transactions referred to in the first subparagraph, and with a decrease of its value, by an amount equivalent to the market value of the cash or other reserve assets to be posted at the maturity of those transactions.

Article 5 Changes in characteristics of financial instruments

Where an issuer of asset-referenced tokens, or an e-money institution issuing e-money tokens subject to this Regulation, does not meet all the requirements set out in this Regulation, including for reasons relating to the financial instruments ceasing to fulfil the conditions set out therein, or where the issuer or the e-money institution, or the competent authority has evidence such requirements are likely to be breached, the issuer or the e-money institution shall, without prejudice to Article 24 of Regulation (EU) 2023/1114, prepare a detailed plan, including following a request by the competent authority, and submit it to the authority within five working days.

Article 6 Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, For the Commission The President

[For the Commission On behalf of the President [Position]

4. Accompanying documents

4.1 Draft cost-benefit analysis / impact assessment

As per Article 10(1) and Article 15(1) of Regulation (EU) No 1093/2010 (EBA Regulation), regulatory technical standards (RTS) and implementing technical standards shall be accompanied by an Impact Assessment (IA) which analysis 'the potential related costs and benefits.' This section presents the IA of the main policy options included in this Final report on the draft RTS on the specification of highly liquid financial instruments, which the EBA is mandated to develop under Article 38(5) of Regulation (EU) 2023/XXX on markets in cryptoassets.
Regulation (EU) No 1114/2023 (Regulation (EU) 2023/1114) sets out a new legal framework for issuers of ARTs and EMTs, requiring issuers that invest a part of the reserve of assets to do it in highly liquid financial instruments with minimal market risk, credit risk and concentration risk under Article 38 (1) of REGULATION (EU) 2023/1114. Paragraph 5 of that Article mandates the EBA to specify the financial instruments that can be considered for the purposes of forming part of the reserve of assets as highly liquid and with minimal market risk, credit risk and concentration risk. In that paragraph the EBA is also mandated to devise concentration limits by issuer of highly liquid financial instruments as a maximum percentage of the reserve of assets.

4.1.1 Problem identification and background

Article 36(1) of Regulation (EU) 2023/1114 requires issuers of asset-referenced tokens (ARTs), whether they are either if the ARTs are significant ARTs or not, to constitute and maintain a reserve of assets at all times to cover their liabilities against the holders of their issued ARTs matching the risks reflected within these liabilities. The reserve of assets is composed of the assets received when issuing the token holders and by the highly liquid financial instruments the issuer may invest in. In the case of tokens referenced to official currencies, a minimum part of the reserves should be held in the form of deposits in credit institutions (at least 30% of the amount referenced in each official currency if the token is not significant, and at least 60% if the token is significant). Upon redemption requests from token holders, the issuers should be able to liquidate the reserve assets.
As established in Article 49 and Article 39, EMTs and ARTs holders can request redemption of the tokens at any time, including stress scenarios, against the reserve assets. Upon redemption requests, the issuers should be able to liquidate the highly liquid financial instruments to fulfil the requests. The way the reserves are invested in will have implications on the overall liquidity risks related to these issuers, and on financial markets due to potential triggering of fire sales. This may in turn have implication on the financial stability as a whole.

4.1.2 Policy objective

The general objective of the policies in this RTS is to ensure financial stability by limiting the liquidity related risks of the issuers of ARTs and EMTs, that could be triggered by the redemption of tokens.
The specific objective of the policies specified in this RTS is to ensure that reserve assets can be liquidated rapidly at or close to prevailing market prices, and that issuers of ARTs and EMTs have a clear view of the instruments that are eligible to be included in their reserve of assets in terms of categories of liquid assets, the general and operational requirements that they need to fulfill, as well as concentration limits.
In addition, when developing its mandate the EBA needs to take into account:
-The specifications of the liquidity coverage ratio.
-The type of assets that can be referenced by the tokens and the correlation between them and the highly liquid financial instruments.
-Concentration limits for UCITs under Article 52 of Directive 2009/65/EC.

4.1.3 Baseline scenario

In a baseline scenario there would be no RTS specifying the highly liquid financial instruments that can be used by issuer of ARTs and EMTs to invest their reserve of assets. As a result, the interpretation of the Regulation (EU) 2023/1114 in this respect would diverge significantly across entities and may lead to significant liquidity risks.

4.1.4 Options considered, assessment of the options and preferred options

Policy issue 1: Categories of liquid assets in the LCR framework

Article 38(1) and (5) refers to financial instruments that can be considered highly liquid. The EBA has assessed the different possible categories of liquid assets in the LCR and has confronted them with the expectations of the highly liquid financial instruments in Regulation (EU) 2023/1114. For its specification the EBA takes into account the definition of financial instruments in point (50) of Article 4 of the CRR in conjunction with Section C of Annex I of MIFID II. Table 1 provides a description of the categories of the liquid assets in the LCR, with additional columns specifying the haircuts and the caps applicable to each category of liquid asset.
As stated in Article 418(1) of the CRR, the haircuts applicable to liquid assets in the LCR reflect at least the duration, the credit and liquidity risk and typical repo haircuts in periods of general market stress. The BCBS standard on LCR refer also to the haircuts to cover additional price and market liquidity risks. The haircuts ultimately protect against potential losses in the value of liquid assets when liquidated in stressed conditions.
The caps, as maximum amount of the relevant category of liquid assets in the liquidity buffer, are designed to reduce the risk that the liquidity buffer may be comprised of an excessive amount of assets of lower liquidity.
With regards to the categories of liquid assets to be included in the reserve of assets, the following options were considered:
Option A: Only Level 1 0% haircut liquid assets. With this option the reserve of assets of an issuer of a token referenced to an official currency other than EUR would be limited to:

0% haircut level 1 HQLA in the LCR as highly liquid financial instruments (35% of the reserve of assets, considering the highest concentration limit by issuer to allow for the largest possible amount of securities taking into account that there is only one issuer of 0% level 1 HQLA generally in non-euro area member states since currency matching between the reserve of assets and the assets referenced is required in Regulation (EU) 2023/1114), and
Deposits with credit institution (at least 30% of the amount referenced), which would need to reach basically the remaining 65% of the amount of the necessary reserve of assets.

Option B: Only Level 1 liquid assets (including Level 1 extremely high-quality covered bonds) With this option the reserve of asset would be composed of:

0% haircut level 1 HQLA in the LCR as highly liquid financial instruments (35% of the reserve of assets, considering the highest concentration limit by issuer and the fact that there is

Table 1. Categories of liquid assets in the LCR

Disadvantages

Policy option

Advantages

Disadvantages

Full table: see EBA final report.

Figure 1. Outstanding amount of government debt securities in the EU (EUR billion)

Figure 2. Amount of covered bonds issued by banks by Member State

Source: EUCLID supervisory data, reference date: December 2022

Policy issue 2: Application of LCR general and operational requirements to highly liquid instruments

When specifying the highly liquid financial instruments, as mandated in point (c) of Article 38(5), the EBA shall take into account ' the liquidity coverage requirement as referred to in Article 412 of Regulation (EU) No 575/2013 and as further specified in Commission Delegated Regulation (EU) 2015/61 '.
The Commission Delegated Regulation (EU) 2015/61 (LCR DR) provides definitional criteria to identify specific categories of assets that could be considered as liquid assets for the LCR purposes if they meet specific general and operational requirements. Liquid assets in the LCR are ready to be liquidated immediately at any point in time, including under stress scenarios, and with no or low loss of market value. Their characteristics might serve as the basis for the definition of the eligible highly liquid f inancial instruments in the issuer's reserve assets. Highly liquid financial instruments in the reserve assets aim to meet similar targets under similar conditions and scenarios, i.e. to cover payment of obligations in a prompt manner, including stress scenarios, with no or low loss of value.
In this regard the following options where considered:

Option A: All general and operational requirements should be fulfilled as in the LCR.

Option B: All general and operational requirements should be fulfilled but excluding the exemptions in the LCR for sovereign bonds.

The EBA assessed whether highly liquid financial instruments in the reserve of assets need to meet the general requirements as envisaged in Article 7 LCR DR in Table 2, and whether highly liquid financial instruments in the reserve of assets need to meet the operational requirements as envisaged in Article 8 LCR DR in Table 3.
Based on the assessment, all the LCR general and operational requirements should apply also to the highly liquid financial instruments in the reserve of assets. Exemptions to sovereign bonds on them, as envisaged in the LCR, should not apply here. In the LCR level 1 sovereign bonds are not subject to any haircut and are uncapped. However these sovereign bonds as highly liquid financial instruments in the reserve of assets are capped as long as a material amount of deposits with credit institutions is required as a minimum in the case of tokens referenced to official currencies.

Table 2. Assessment of adequacy of LCR general requirements for highly liquid financial instruments in the reserve of assets

LCR liquid assets

Highly liquid financial instruments in the reserve of assets

Full table: see EBA final report.

Table 2. Assessment of adequacy of LCR operational requirements for highly liquid financial instruments in the reserve of assets

LCR liquid assets

Highly liquid financial instruments in the reserve of assets

Full table: see EBA final report.

Policy issue 3: Correlation between the highly liquid financial instruments and the assets referenced by the token.

One of the most prominent risks associated with tokens is the lack of correlation between the market value of the assets referenced and the reserve assets. Reserve assets such as government bonds, covered bonds and deposits have little correlation with for instance commodities. Figure 3 presents the prices of a few commodities (gold, silver and oil) that are reference assets for certain tokens. The EBA assessed the eligibility of the financial instruments used as assets referenced (or the financial instruments relating to assets referenced, e.g. derivatives on assets referenced) as highly liquid financial instruments. With these instruments,

the token issuer will be able to establish a higher correlation between the assets and the liabilities.

Figure 3. Commodity prices

A. Gold settlement spot (USD)

B. Silver settlement spot (USD)

C. Current oil Brent settlement spot (USD)

Source: Capital IQ, S&P Global

Two policy options were considered here for the cases of tokens referenced to other than official currencies:

Option A: Financial instruments used as assets referenced or derivatives relating to the assets referenced are also added as highly liquid financial instruments to the general categories of assets proposed under Policy issue 1.

Option B: No additional category of highly liquid financial instruments to the one proposed by the EBA under Policy issue 1.

The following table summarises the main advantages and disadvantages for each policy option:

Advantages

Disadvantages

Option A

It gives the issuer the possibility to increase correlation between the market value of the reserve assets and assets referenced. The issuer would adapt the amount of assets referenced in the reserve of assets to its own risk appetite and business model. Tokens with different risk profiles of issuers for different risk profiles of investors would be available.

Potential unintended effects, like a higher redemption request by token holders with potential consequences on the financial systems and the crypto ecosystem, driven by a perceived high volatility of the market value of the reserve assets. This could happen if not read together with the sought to be covered volatility of the market value of the asset referenced. This seems a real possibility taking into account the complexity of these products. Some assets referenced used as highly liquid financial instruments would not form part of the definitional categories of liquid assets in the LCR. However, the general and operational requirements for liquid assets in the LCR are required here. This would allow for a good

Advantages

Disadvantages

balance between a good correlation and maximum liquidity risk in these assets referenced used as highly liquid financial instruments.

Option B

Lower volatility in the reserve of assets and market price of the token is expected. Simplification of the eligible highly liquid financial instruments.

Correlation between market value of the highly liquid financial instruments and the assets referenced would not be able to be fulfilled easily as required by Regulation (EU) 2023/1114. Different types of assets referenced would not be taken into account in the definition of eligible highly liquid financial instruments as required by Regulation (EU) 2023/1114.

Regulation (EU) 2023/1114 does not seem to set too many restrictions to the assets that a token can be referenced to. This might include for example, commodities, non-HQLA, indexes. Under Option A financial instruments used as assets referenced (e.g. non-HQLA) or financial instruments relating to assets referenced by the token (e.g. derivatives relating to commodities) could be considered in the computation of the highly liquid financial instruments. No minimum or maximum amount of assets referenced in the reserve of assets would be established.
The EBA has opted for Option A. The EBA assessed that the benefits are greater than the potential disadvantages mainly because avoiding the possibility of correlation might indeed make the reserve assets insufficient to pay the redemption requests of token holders at any point in time. In addition to it Regulation (EU) 2023/1114 requires the EBA to take into account the different types of assets referenced for the definition of the highly liquid financial instruments. In any case the EBA does not set any minimum or maximum amount required in the form of the assets referenced within the reserve of assets but considers it as part of the risk management of the issuer to mitigate volatility by ensuring correlation and taking into account its risk appetite.
The EBA assessed the convenience of applying the LCR haircuts in the measurement of the highly liquid financial instruments. The EBA assessed that for simplification purposes a minimum required overcollateralization in the determination of the liquidity re quirements of the issuer's reserve of assets might suffice.

Policy issue 4: Concentration limits by issuer of highly liquid financial instruments

The EBA has considered the concentration limits by issuer envisaged Article 52 of Directive 2009/65/EC for the investments of UCITs and has assessed their application to the highly liquid financial instruments as specified here.
Generally, the EBA follows the application of the 5% concentration limit by issuer for investments in securities or money market instruments by UCITs and applies it for securities and money market instruments in the form of highly liquid financial instruments in the reserve of assets.
Specifically for the cases of securities issued or guaranteed by a public entity generally the UCITs framework refers to the limit of 5% that can be increased up to 35% by the relevant Member State. As regards the cases of covered bonds member states can also increase the 5% concentration limit to 25%. The EBA has assessed these intervals for the determination of the concentration limits of those securities as highly liquid financial instruments in the reserve of assets taking into account some particular aspects. Two policy options were considered:

Option A: The default limit of 5% would apply to these categories of securities.

Option B: A 35% concentration limit would apply in the case of securities issued or guaranteed by a public entity and a 10% for the cases of covered bonds.

The following table captures the main advantages and disadvantages for these options:

Policy option

Advantages

Disadvantages

Full table: see EBA final report.

4.2 Feedback on the public consultation

The EBA publicly consulted on the draft proposal contained in this paper.

The consultation period lasted for three months and ended on 8 February 2024. 9 responses were received, of which 6 were published on the EBA website.

This paper presents a summary of the key points and other comments arising from the consultation, the analysis and discussion triggered by these comments and the actions taken to address them if deemed necessary.

In many cases several industry bodies made similar comments or the same body repeated its comments in the response to different questions. In such cases, the comments, and EBA analysis are included in the section of this paper where EBA considers them most appropriate.

Changes to the draft RTS have been incorporated as a result of the responses received during the public consultation.

Summary of key issues and the EBA's response

Broadly, respondents support the draft RTS specifying the highly liquid financial instruments (HLFI). Some comments and concerns are raised though that are addressed in the following feedback table. Particularly concerns are raised with regards to the concentration limits of government bonds in the case of EMTs that are referenced to official currencies other than euro. Clarification of some aspects is also requested. The EBA has taken into account and assessed the comments received.

The EBA has particularly continued working on the required diversification by issuer of particularly government bonds denominated in USD. Potential challenges to meet the regulatory expectations proposed were raised by many respondents with respect to this case. Concerns were raised particularly to the case of non-significant EMTs, where the reserve of assets should be composed of deposits with credit institutions by at least 30% of the official currency referenced, government bonds with a concentration limit of 35% by issuer and currency matching in USD between the reserve of assets and the assets referenced (USD) shall be met. Respondents raised concerns as to how to meet the remaining 35% of the minimum reserve of assets considering only one issuer of USD government bonds. The EBA would like to clarify that the draft RTS identify as eligible HLFI those financial instruments considered as 0% haircut level 1 liquid assets in the LCR. Within this category not only bonds issued or guaranteed by the central government should be considered, but also those issued by relevant international organisations and multilateral development banks as envisaged in the LCR framework. With this consideration multiple issuers of significant outstanding amounts of 0% haircut level 1 liquid assets denominated in USD can be found in markets. Further illustration of this point is provided in the feedback table and the impact assessment of the final report.

The EBA assessed the request to provide clarification on the process to follow in the case of assets being considered as highly liquid financial instruments in the reserve of assets that might cease meeting any requirement in this Regulation, like definitional elements or concentration limits for example. The EBA has assessed that in these cases potential unintended consequences, like fire sales, could be triggered if the issuer might decide to promptly sell a material amount of these assets to replace them for others. The EBA has considered necessary to introduce here some regulatory provisions to ensure that a prompt communication with the relevant supervisory authorities will take place in these cases to seek for an appropriate plan to remedy that situation and avoid any potential unintended consequence.

The EBA is also providing clarification to some comments raised, as for example the list of highly liquid financial instruments in the case of token referenced to others than official currencies, the application of concentration limits to UCITS units or the consideration of tokenised liquid assets as highly liquid financial instruments.

Summary of responses to the consultation and the EBA's analysis

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

General comments

A couple of respondents highlight the challenge of producing a complex, comprehensive and highly technical body of MiCAR level 2 regulatory instruments and related guidelines within a tight timeframe and raises concerns in that these instruments need to ensure consistency across them. Therefore, the respondent flags the need of keeping these instruments under review after their application with close ongoing dialogue with supervisors and the industry. In this context, the respondent refers to the report that the European Commission, after consulting EBA and ESMA, has to present to the European Parliament and the Council by 30 June 2025, according to Article 140 of MiCAR, on the application of MiCAR and accompanied as appropriate by a legislative proposal.

Furthermore, it is suggested that the EBA and the European Commission to work on a consolidated document for at least all the liquidity risk related standards that would facilitate its implementation and compliance.

Some respondents raised comments on aspects that are related to other consultation papers (e.g. overcollateralization, risks to cover in the liquidity stress testing.), in which case they are addressed in the relevant final report. Some respondents raised concerns and comments on the level 1 text directly, MiCAR, (e.g. minimum amount of deposits.), in which case they are out of the scope of the consultation process of these draft RTS. In some cases some respondents provide feedback to similar topic across various questions; here the responses are considered in the most appropriate question. The EBA has intended to capture all feedback received in the most appropriate manner avoiding repetitions across questions or different consultation papers.

Responses to questions in Consultation Paper EBA/CP/2023/24

Question 1 Do respondents have any comment on the list of eligible highly liquid financial instruments provided under point (c) of Article 1(1) of these draft RTS?

Different regimes: emoney tokens versus other forms of emoney Two respondents raised concerns about the differences in the minimum requirements of the reserve of assets and the list of eligible highly liquid financial instruments (HLFI) for emoney tokens in MiCAR and these RTS versus other e-money forms in accordance with the e-money Directive (EMD). In their view the more constrained definition of reserve of assets and HLFI in MiCAR versus the EMD contradicts the 'same risk, same rules' principle under technology In the development of the draft RTS the EBA needs to work under the specific framework of EMTs in the level 1 text, MiCAR, and in accordance with the mandate under Article 38(5) taking into account the aspect established therein, mainly the LCR framework, the UCITs framework for concentration No changes made Question 2 Do respondents have any comment on the general and operational requirements to be met by highly liquid financial instruments provided under points (a) and (b) of Article 1(1) of these draft RTS? Please explain if some criteria is expected to be challenging to be met in practice.

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

neutrality. In their view, according to these principles, e- money tokens (EMTs) should be subject to the same rules as traditional e-money as long as the associated risks are the same. They also refer to Article 48(2) MiCAR that stipulates that EMTs 'shall be deemed to be electronic money'. The difference between traditional e-money and EMTs is purely a difference in the underlying technology. They acknowledge that the EU-legislator, with the MiCAR level 1 text that has been adopted, deviated from these principles. Under MiCAR, much more stringent requirements apply to significant EMTs. Moreover, national competent authorities are afforded discretion to apply these more stringent requirements also to non-significant EMTs that, otherwise, should follow the EMD.

limits by issuer, the type of asset referenced and the correlation between the HLFI and the asset reference.

Tokenised HLFI

One respondent recommends to explicitly include tokenised versions of eligible assets in the list of eligible highly liquid financial instruments.

Article 1(c) of these draft RTS lists the categories of financial instruments that could qualify as highly liquid financial instruments for the purposes of Article 38(1) of MiCAR. Therein the EBA is mandated to take into account the LCR framework in the definition of highly liquid financial instruments. Indeed, in points (i) and (ii) of Article 1(c) of these draft RTS references to specific categories of liquid assets in the LCR framework are made. Therefore, any update to the LCR rules, including the potential consideration of tokenised versions of liquid assets as such, would apply automatically to the definition of highly liquid financial instruments, without the need of any change of these RTS.

No changes made

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Article 1(1)(c)(iii) of the draft RTS envisages for the cases of tokens that are not referenced to official currencies to consider as highly liquid financial instruments, in addition to 0% haircut level 1 HQLA and level 1 extremely high-quality covered bonds, in the LCR, the assets referenced by the token, as well as derivatives relating to them, if financial instruments. As stated in Article 1(1) this includes crypto-assets if financial instruments and if used as assets referenced.

Bank deposits, reverse repos, derivatives and UCITs shares

One respondent suggests clarification to Article 38(2) MiCAR that deposits with credit institutions and reverse repos and hedges that would themselves qualify for the reserve holdings are also eligible to back UCITS or tokenised versions of the same, despite not being included in Article 10 of Delegated Regulation (EU) 2015/61. Another respondent suggests including UCITs shares as HLFI under level 1 HQLA if the UCITs invest in level 1 highly liquid assets only.

Article 38(2) of MiCAR establishes that units in UCITS shallbedeemedHLFIifthe UCITS invests solely in HLFI and where the issuer of the token ensures that the reserve of assets is invested in such a way that the concentration risk is minimised. Deposits with credit institutions are not financial instruments following MIFID and therefore they are not HLFI as such. However, UCITs might receive and keep deposits with credit institutions upon issuance and delivery of units without investing them in HLFI. HLFI used as collateral in reverse repos should be taken into account in the computation of HLFI following Article 1(1)(a) of the draft RTS in conjunction with Article 7(2)(b) of the LCR Delegated Regulation. The unwind mechanism envisaged in Article 4 of the draft RTS shall be taken into account. Derivatives are HLFI along the lines of Article 2 and Article 1(1)(c)(iii) of the draft RTS.

No change made

Comments

Summary of responses received

EBA analysis the proposals

Amendments to

The consideration of UCITS units as HLFI, including cases where the UCITS invests solely in LCR level 1 HQLA, is ruled by the level 1 text, under Article 38(2) MiCAR, directly.

Fiduciary structure involving escrow accounts at central banks

One respondent suggests including as HLFI a fiduciary structure involving escrow accounts at central banks of member states. The respondent argues that these accounts are on the one hand also highly liquid and on the other hand are not exposed to market risk or credit risk. It is also argued that adding such assets to the definition of HLFI is needed for operational purposes, as issuers will only have access to central bank accounts if they simultaneously hold a license as credit institutions as central banks will not grant accounts to institutions which are not credit institutions. It is also indicated that all other e-money issuers need to be onboarded by other third credit institutions which then hold escrow accounts at central bank. The structure involving fiduciary services and escrow accounts described above, in view of the respondent, will enable issuers to achieve to avoid credit and concentration risks the same as it happens for credit institutions. Following this, the respondent also suggests that the limits in regard to concentration risk of credit institutions should not apply in such cases.

The EBA would like to clarify that deposits with credit institutions are not eligible HLFI since they are not included as financial instruments under Section C of Annex I of MIFID Directive that refers to transferable securities, money market instruments, CIU shares, derivatives. However, the EBA takes into account the considerations made for this type of accounts as potential cases to benefit from less strict concentration limits by counterparty under the RTS further specifying the liquidity requirements of the reserve of assets under Article 36(4) MiCAR. The EBA has provided analysis to this case in the feedback table of the cited consultation paper.

No changes made

Gold referenced financial instruments

One respondent, while supporting the EBA approach to include financial instruments referenced to gold as HLFI for tokens referenced to gold, suggests the following change to Article 1- paragraph 1-point c(iii), to ensure legal clarity: (iii) where the tokens are not referenced to official currencies, other financial instruments that are either related to any assets , including when those assets are

The EBA agrees with the proposed drafting amendment for clarification.

Article 1(1)(c)(iii) is amended for clarification as follows: ' where the for tokens are not referencing referenced to official currencies, other

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

commodities, referenced by the tokens or derivatives relating to the assets referenced by the tokens.

financial instruments, provided these instruments that are either assets, including commodities, referenced by the tokens or derivatives on relating to the assets referenced by the tokens. '

Cap on derivatives

One respondent suggests capping the amount of derivatives at 5% of the reserves for ARTs not referenced to official currencies to avoid leverage risk.

The EBA does not consider setting caps on derivatives as part of HLFI in the draft RTS. The EBA notes that the benefits of hedging derivatives that enable to protect the value of the reserve of assets from negative market price variations are expected to be larger than the exposure to leverage risk. Moreover, the EBA observes that increasing derivatives payables do not challenge redemption since derivatives payables cannot be met with the reserve assets as per paragraphs 2 and 3 of Article 36 where the reserve of assets shall be legally and operationally segregated from the issuer's estate. However, the EBA refers to Article 35(3) MiCAR where the competent authority can increase the level of own funds requirements where a higher degree of risk is assessed over the elements listed therein, for example in the case of risk posed by the investment policy on the reserve of

No change made

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

assets, where the use of derivatives with excessive leverage risk could be considered.

Restricted list of HLFI

One respondent argues that the list of eligible HLFI is very limited which might force the issuer of tokens to opt for the riskier eligible assets. Besides, the respondent argues that the list of eligible HLFI for tokens referenced to other than official currencies is even more limited.

The EBA considers that 0%haircut level 1 HQLA in the LCR and extremely high-quality covered bonds ensure minimal credit, market and liquidity risk for the definition of eligible HLFI in the case of tokens referenced to official currencies. Eligible covered bonds are capped at 35% of the reserve of assets to compensate a slightly higher haircut of 7% in the LCR. Concentration limits by issuer applies to mitigate concentration risk. Therefore, the EBA considers that the risk across all the HLFI for tokens referenced to official currencies is minimal. The EBA would like to clarify that the list of HLFI for tokens that are not referenced to official currencies includes those HLFI for tokens referenced to official currencies (included in points (i) and (ii) of Article 1(1)(c)) and also those HLFI included in point (iii) of Article 1(1)(c). Therefore, the list of HLFI for tokens that are not referenced to official currencies is not morelimited than that for token referenced to official currencies rather the contrary. The additional

No change made

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

HLFI diversification

One respondent would like to highlight the fact that Article 8 of Delegated Regulation (EU) 2015/61 on the LCR requires that credit institutions' holdings of assets remain appropriately diversified at all times. In their view, this could be inconsistent with the requirement to hold 30% of the official currencies referenced by non-significant EMT as deposits with EEA member state credit institutions, where, they argue, deposit concentration limits do not apply.

The EBA has not increased the minimum amount of deposits with credit institutions within the reserve of assets of tokens referenced to official currencies as established in Articles 36(4)(d) and 45(7)(b), and following their mandates to the EBA therein, for tokens referenced to official currencies that are not significant, at 30% of the official currencies referenced, or that are significant, at 60% of the official currencies referenced. The RTS cannot therefore reduce those percentages of deposits with credit institutions in the reserve of assets established as a minimum in the level 1 text, MiCAR. However, the draft RTS on liquidity requirements under Article 36(4) of MiCAR provide some concentration limits by counterparty to ensure some minimum sound techniques of the liquidity management of the reserve of assets. The EBA would like to recall that the deposits with credit institutions are not HQLA in the LCR framework, towards which diversification requirements under Article 8(1) of the LCR Delegated Regulation applies.

No changes made

Grace period or waiver for assets losing eligibility in the reserve of assets

One respondent would welcome further clarity with respect to changes in assets' eligibility. In the case certain assets become ineligible while being held in the reserve, the respondent asks which grace period or waiver would be required to remediate and replace these with eligible assets.

The EBA has assessed the need to envisage a regulatory process in case an asset would cease complying with the definition of HLFI and more generally with any requirement in this regulation. The EBA has included a recital and an article in this regard to clarify the process to follow in these cases in order to avoid unintended consequences as, for

A new recital (10) has been introduced as follows ' There is a need to ensure, without prejudice to the withdrawal of the authorization in accordance with

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

example, potential fire sales of assets that have just become HLFI non-eligible.

Article 24 Regulation (EU) 2023/1114, that, in cases of deviations from the requirements set out in this Regulation, including for reasons of the financial instruments ceasing to meet the conditions set out therein, a plan is promptly submitted to the competent authority. ' A new Article 5 has been included ' Changes in characteristics of financial instruments Where an issuer of asset-referenced tokens, or an e- money institution issuing e-money tokens subject to this Regulation, does not meet all

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

the requirements set

out in this Regulation, including for reasons relating to financial ceasing fulfil the set out or where issuer or the e- institution, the competent

shall, prejudice to 24 of

the instruments to money has such are to be

2023/1114, detailed plan,

a including following a the

conditions therein, the

submit it to the

authority evidence

requirements likely

breached, the issuer

or the e-money

institution without

Article

(EU) prepare

Regulation

request by

competent

and

authority,

authority within five

working days. '

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Question 3 Do respondents find the treatment for hedging derivatives under Article 2 clear to be applied?

Foreign Exchange (FX) hedges

One respondent asks clarification that the treatment for hedging derivatives under Article 2 includes Foreign Exchange (FX) hedges.

Article 2 of the draft RTS refers to hedging derivatives to HLFI as regards market value. Indeed recital 6 refers specifically to currency risk in this regard.

No changes made

Question4Do respondents think that the draft RTS create any impediment for issuers to ensure a good control of the correlation between the highly liquid financial instruments and the assets referenced? This is particularly relevant for the case of tokens referenced to assets other than official currencies.

35% concentration limit by issuer of government bonds in Article 3(1)(a)

One respondent considers that the 35% concentration limit by government bond issuer is an impediment for a good correlation between the HLFI and the assets referenced since it will introduce complexity into the operational asset management of the e-money token issuer in regard to: a) complying with the regulatory concentration limits, b) complying with the over-collateralization requirement, and c) ensuring operational sustainability since it will create additional costs and will reduce income.

Please see EBA analysis to question 5 in this regard.

No changes made

Question 5 Do respondents have any concern about the feasibility for issuers to have the minimum amount of reserve of assets considering the list of eligible highly liquid financial instruments, the one-to-one currency matching requirement in Regulation (EU) 2023/1114 and the concentration limits under Article 3 of these draft RTS? This is particularly relevant for tokens referenced to official currencies.

35% concentration limit for government bonds, and particularly if non-EUR denominated

Some concerns are raised on this limit generally from the perspective of the central government as the issuer of the bond. Some respondents argue that the 35% concentration limit deviates from the LCR framework where no concentration limit applies. They flag that this is a case of issuers of bonds with no credit risk where no haircut applies

The EBA followed the mandate in Article 38(5) of MiCAR to device concentration limits with respect to the investments of reserve of assets in HLFI issued by the same issuer, for which the EBA should take into account, among others, the UCITS framework as laid down in Article 52 of the Directive 2009/65/EC. Here

No changes made

Comments

Summary of responses received

in the LCR. For the same reason it is also argued that the application of the concentration limit should not apply to them both, either at single entity level or at an aggregated level considering also the bonds held by entities with close links. One respo ndent strongly questions the EBA's interpretation about the ' similarities in risks and activities between them (UCITS) and ART/EMT issuers' in the context of the UCITs framework as a reference for concentration limits. The respondent considers that it does simplify the diversity of business models between EMT/ART issuance for payments, settlement or trading purposes, and other, primarily commodity ART issuance. Most EMTs are more akin to payment instruments and are pegged to and backed by a fiat currency. They are very different from UCITS, which are meant as an investment instrument.

More particularly concerns are basically focused on the cases of non-euro denominated EMTs. One respondent argues that if a stablecoin is pegged to the US dollar and invests a large majority of reserves in highly liquid assets like US treasuries, or is pegged to any non-euro EU currency, such as the Swedish or Danish krone and invests into their respective government bonds, the respondent considers that having no or as a minimum a higher concentration limit, will not compromise the resilience of the stablecoin and is unlikely to have spillover effects into the market or other markets. They ask the EBA to revisit its proposal and scrap, or as a minimum, increase the 35% concentration limit to allow for diverse products to enter the EU market and promote competitiveness. Some respondent considers the current 35% highly disproportionate. Also, one respondent raised arguments of discrimination with respect to some currencies from non-euro area that might feel forced to

EBA analysis

Amendments to the proposals

the concentration limit for investment of a UCITS in government bonds issued by the same entity is envisaged to be implemented as a 35% of the total investments as a maximum. The EBA has followed the least conservative concentration limit envisaged therein, 35%. It should be noted that as a difference with respect to the LCR framework where government bonds subject to 0% haircut are not capped in the liquidity buffer, in MiCAR they are implicitly significantly capped (for the minimum reserves required) due to the requirements the level 1 text envisaged to have in the reserve of assets a material minimum amount of deposits with credit institutions (60% of the official currencies referenced if the token is significant o 30% if the token is not significant and the competent authority require it so).

In the case of non-EURO denominated tokens, and with the main purpose to facilitate diversification of HLFI by issuer, the draft RTS envisaged extremely high-quality covered bonds up to 35% of the reserve of assets.

Specifically, in the case of USD referenced tokens, the EBA would like to highlight the existence of multiple issuers of large amounts of USD denominated bonds subject to 0% haircut under Article 10 of the LCR DR and therefore meeting the criteria in Article 1(1)(c)(i). To be noted that Article 10(1)(g) of the LCR DR envisages as such those issued by the multilateral development banks and the international organizations referred to in Article 117(2) and Article 118, respectively, of Regulation (EU) No 575/2013

Comments

Summary of responses received

invest in other assets than government bonds. One respondent argues that the RTS impose additional and more restrictive concentration limits of 35% for EMT issuers in relation to reserve assets held in non-euro denominated government bonds, even though these assets are not inherently carrying higher risk by virtue of the crypto nature in comparison to other entities such as UCITS investments.

EBA analysis

Amendments to the proposals

(e.g. the World Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Stability Mechanism, the European Financial Stability Facility.)

The EBA considers that therefore, for the case of USD referenced tokens, the 35% concentration limit together with the definition of eligible HLFI and the required currency matching in MiCAR are feasible criteria to be met. Still currency risk hedging derivatives are also a valid instrument following Article 2 of the draft RTS.

The following table show the volume of outstanding amount of USD, GB and JPY denominated bonds issued by the EU central governments, some other central governments and some multilateral development banks and international organisations whose issuances are considered 0% haircut level 1 HQLA in the LCR (article 10 of LCR DR). Bonds issued by central governments of other third countries that are assigned a credit quality step 1 could also be added. (Source: Bloomberg/Thomson Reuters -Currency USD/Million -March 2024):

European Bank for Reconstruction & Development

European Stability Mechanism

European Investment Bank

International Bank &

for Reconstruction Development

Asian Development Bank Inter- American Development Bank

Council Bank

Of Europe Development

FR IT

NO SE

FI ES

USD

26,984

8,000

101,473

156,439 99,669

84,339

7,000 29,732,535

217,329

12,000 129,687

19,795

15,750

6,625

50,885

52,337

2,900

62,452

600

31,784 490

5,531

9,675

GBP

5,332

46,592

18,409

13,127

10,271

3,487

360

- 1,210

3,111

968

121

4,719

466

650

2,270

434

JPY

274

1,460

609

532

- 1,020

16,761 3,342,436

13,112

2,915

3,967

4,111

977

146

10,880

334

5,141

319

2,798

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Concentration limits with derivatives counterparties

One respondent considers that the proposed risk exposure limit to a counterparty in an OTC derivative transaction of ' 10% of the market value of the reserve of assets, when the counterparty is a credit institution, or 5% for other counterparties ' is too low. As it currently stands, it is argued that it would require issuers of significant EMT to do so with at least 6 different banks. They add that EMT issuers and crypto businesses generally still face difficulties to open a bank account. They argue that establishing and maintaining various additional relations with different banks is highly difficult from an operational point of view, as this takes a lot of time and can easily take up 6 months or more, making it difficult for issuers to be able to comply with their regulatory requirements in a timely manner and thus provide services to EU customers.

In the determination of the concentration limits with derivatives by counterparty the EBA has taken into account the UCITS framework as laid down in Article 52 of the Directive 2009/65/EC that envisages a limit of 10% or 5% of the reserve of assets, if the counterparty is a credit institutions or other counterparty. It should be noted that these limits apply to the unmargined amount of OTC derivatives only. Furthermore, the EBA considers that there is some misunderstanding in the number of minimum derivatives bank counterparties provided by the respondent. The respondent might be referring to a minimum number of 6 bank counterparties of deposits with credit institutions in the case of significant tokens referenced to official currencies, since the minimum 60% of the amount of official currencies referenced and considering the current proposed 10% concentration limit by deposit counterparty in the RTS on liquidity requirements under Article 36(4) of MiCAR. However, considering that risk exposure to a counterparty in an OTC derivative that is unmargined will reach 60% of the reserve of assets does not seem expected.

No changes made

Question 6 Do respondents have any concern about the operational feasibility of the look through approach envisaged in paragraph 3 of Article 3 of these draft RTS? If yes, please elaborate your answer and specify the reasons for the concerns

Concentration limit by management company

One respondent would like to clarify that when issuers use collective investment undertakings (CIUs) for investing into highly liquid financial instruments, they are not bound by a

Article 38(2) of MiCAR refers to the UCITs units that would be eligible as highly liquid financial instruments (HLFI) if UCITS invests solely in assets as further

The following amendment for clarification is

Comments

Summary of responses received

general limit of maximum 5% of the value of the reserve that can be invested into these instruments, but that instead issuers shall look through the CIU exposures in order to assess the concentration limits by issuers as defined by Article 3 of the RTS. This seemed to be interpreted differently during the EBA public hearing on the topic on January 30th. It is important to highlight that only if this look-through approach is guaranteed, issuers will be practically able to use CIUs for their reserve investment, as a general 5% threshold for CIUs would remove the economic rationale behind using these structures altogether.

EBA analysis

Amendments to the proposals

specified by the EBA to be eligible as HLFI and where the issuer of the asset-referenced token ensures that the reserve of assets is invested in such a way that the concentration risk is minimised.

For the purposes of computation of concentration limits of HLFI by issuer two points need to be observed by the token issuer:

First, the token issuer will compute each issuer's HLFI held directly plus those held indirectly. For these purposes HLFI held indirectly are those in the UCITS' investment whose units are held by the token issuer. A look-through approach needs to be applied for these purposes consisting of multiplying the market value of the units held in the UCITS by the proportion of the relevant HLFI into the full investment of the UCITS.

Second, as directly regards the concentration by UCIT of UCITS units that are eligible as HLFI, i.e. where the management company of the UCITS is the same. This means that the rules in Article 3(1) apply the same when it comes to these units in UCITS held by the token issuer as for any other HLFI held. A 5% concentration limit applies here.

Both should be understood in the context of the obligation in Article 38(2) of MiCAR to minimise the concentration risk of the reserve of assets for the purposes of considering UCITS units as HLFI. The EBA considers that a potential situation where all HLFI would be composed of units in UCITs under the same management company would not be a prudent proposed to Article 3(1)(c): ' 5% of the market value of the reserve of assets, in the case of other securities, money market instruments or crypto-assets that qualify as financial instruments, as referred to in Article 2(4), point (a), of Regulation (EU) 2023/1114. This limit applies to the market value of units in undertakings for collective investment in transferable securities (UCITS) with a single management company or with management companies with close links. '

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Implementation of the look-trough approach

One respondent considers that the look-trough approach can pose several challenges: limited data availability and transparency regarding the underlying assets of CIUS. Dueto varying standards for financial disclosure and risk management among jurisdictions, as well contractual obligations preventing full disclosure of information, some CIUs might not disclosure comprehensive information about their investments, marking it difficult for token issuers to conduct a thorough look through analysis.

The EBA considers that issuers should optimise the use of the information available or with access to, supported with reasonable and justified assumptions as necessary, for the purposes of ensuring that the look-through approach is applied in a proper manner.

No changes made

Frequency of the implementation of the look-trough approach

Two respondents ask the EBA to clarify the frequency to implement the look-through analysis. One of them highlights that the overall analysis is resource- intensive particularly with frequent changes made to the UCITS investments. The other respondent considers that paragraph 3 of Article 3 is not in accordance with Article 38.2 of the Regulation (EU) 2023/1114. In their view Article 38.2 only requires applying the look through approach, to verify whether the UCITS invests solely in the required assets therein for the purposes of considering the UCITS shares eligible as HLFI,

The EBA would like to clarify that the analysis should be done consistently with the MiCAR requirements to token issuers to always maintain the reserve of assets as per Article 36(1) of MiCAR and by a value at least the value of the tokens in circulation as per Article 36(7). The application of the look-through approach is necessary for the identification of eligible HLFI in the reserve of assets and therefore for its computation for the purposes of compliance with those provisions. The look-through approach is also necessary for the issuer's sound management of risks because the volatility of UCITs units' prices depend on the underlying portfolio.

No change proposed

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

with respect to the investments of the UCITs at its setup but not continuously during its operational evolution. The respondent adds that even if their understanding is wrong, they are nevertheless concerned about a look through approach due to the following: a) The portfolio data of CIU is only available ex-post based on their publicly available reports, so that there is always a time gap between each day and the last information disclosed. This time gap could imply that the actual risks and investments of the UCITs each day would not be captured through the available data that day. This 'supposed security' might lead issuers to wrong conclusions. b) It is operationally not feasible to automate limits in the implementation of the look through. Therefore, a lot of manual controls would be needed which would increase the issuers' costs in back -office processes including portfolio management, risk management and operations. Besides the manual approach is prone to errors and could only be developed as an ex-post evaluation.

Therefore, the look-through approach should be applied on a continuous basis. It is expected that issuers pay a closer attention to the portfolio of UCITS adopting an active asset management. Furthermore, for the purposes of the eligibility of UCITS shares as HLFI, Article 38(2) refers to the obligation of UCITS investing solely in HLFI and where the token's issuer ensures that the reserve of assets is invested in a way that the concentration risk is minimised. There is no reference to this requirement being met only at the set up of the UCITS. On the contrary, these criteria should be met on a continuous basis, again for the purposes of the identification of eligible HLFI and subsequent maintenance of minimum reserves at all times as envisaged in Articles 36(1) and 36(7).

Question 7: Do respondents have any comment with regards to the unwind mechanism proposed under Article 4 of these draft RTS and the related examples provided?

Definition of working days

Two respondents would like to clarify how ' working days ' are defined in the regulation as it relates to EMTs referencing official currencies. They ask if it is a working day in the primary market of the underlying currency, Target2, or any calendar day.

The reference in the unwind mechanism to a maturity window of '5 working days' responds to the '5 working days' considered as maximum maturity of a part of the reserve of assets under Article 36(4)(b) of MiCAR. Therefore the reading of '5 working days' should be the same as in MiCAR.

No changes proposed

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Flexibility in the unwind mechanism

One respondent considers that there should be some flexibility in the unwinding mechanism, particularly when it comes to concentration limits of sovereign bonds, that could temporarily be higher, when unwinding deposits, but also in relation to the concentration risk for deposits for individual banks.

The unwinding mechanism is necessary for the identification of eligible HLFI, taking into account the application of their concentration limits, and the computation of the reserve of assets. It is therefore necessary to guarantee that the requirement to maintain a minimum amount of the reserve of assets is met at all times as required by Articles 36(1) and 36(7) of MiCAR.

No changes proposed

Question 8: Do respondents have any general comment about the interaction of these draft RTS with the business model and the continuity of the business of these activities?

Harmonisation of requirements and supervision across jurisdictions

One respondent considers that the business model of an EMT issuer seeks to establish a fungible instrument that is available in all markets and jurisdictions without prejudice. The leading EUR denominated stablecoin should be accessible outside the EU market as well, requiring liquidity to be held in foreign banks to facilitate creation and redemption with as little delay as possible. As such, it is important that global regulators reach consensus on the reserve requirements to ensure a fungible instrument when transacted cross-border. If requirements vary by jurisdiction, holders of EMTs outside of MiCA's scope in non -EU countries might be advantaged relative to EU holders of the same token that is issued in the EU subject to MiCA requirements. For example, where a U.S. Dollar denominated token can be fully backed by US short term US government bonds in the US, the same would not be true for the MiCA-issuance part where a large portion of the reserve needsto be held in either deposits or covered bonds due to the potential concentration thresholds per issuer. This could make the EU-backing riskier (or in other cases less risky) than The BCBS is currently consulting on targeted adjustments to tighten its standard on bank's exposures to cryptoassets (see : Press release: Basel Committee consults on targeted adjustments to tighten its standard on banks' exposures to cryptoassets (bis.org)). This consultation paper includes requirements for the reserve of assets that participate to the setting of global standards on the reserve of liquid assets of issuers of stablecoins.

No proposed changes

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Concentration limit by issuer for government bonds

it is elsewhere, thereby raising the question of true fungibility. They urge the EBA to closely coordinate with other global regulators to ensure consistent regulatory frameworks are adopted and a notion of regulatory equivalence is introduced amongst key jurisdictions such as between the EU and the U.S. With regards to concentration limits by issuer of government bonds in the case of EUR referenced tokens, one respondent, while understands and appreciate the limits, considers that they create unnecessary risks, including but not limited to operational and hedging risks, relative to backing tokens tied to currencies that are backed by a single currencies. One respondent reiterated its responses on the earlier questions of this consultation and believe the proposed concentration limits for non-euro denominated government bonds of up to 35% would inevitably have a negative impact on the business model of many issuers in the EU under MiCAR. From a competitiveness perspective, the proposed

Please see EBA analysis to question 5

No changes made

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

issuers' business models, and the way they maintain stability.

Bank versus non-bank issuers

One respondent argues that different rules should apply when it comes to issuers that are credit institutions versus issuers that are not credit institutions. It is argued that issuers not being credit institutions are much smaller firms and can hardly build up operational processes to comply with all requirements while performing economically well. Moreover, they do not have the possibilities that credit institutions have such as their access to capital markets or central banks. In their view this will create a very high impact on the operational and risk management processes (for instance after redemptions or during reconciliations) greatly impeding an economical business model. Credit institutions on the other hand, have these operational structures in place.

The EBA would like to clarify that, in accordance with recital 71 of MiCAR, requirements with regard to reserve of assets, such as investment of reserve of assets, do not apply to credit institutions issuing e- money tokens. As regards ARTs the level 1 text, MiCAR, and consistently with it the RTS further developing the liquidity requirements and reserve of assets in MiCAR, do not envisage any differentiated treatment between credit institution and other entities issuing ARTs.

No changes made

Complexity of rules

One respondent considers that the extremely high complexity of the draft rules requires extensive legal, compliance-related and operationally related resources which may greatly impact the business case of issuers.

The draft RTS requirements are adapted to the complexity of the business model of issuers and follow the mandates in MiCAR.

No change proposed

Question 9. Do respondents find any provision in these draft RTS confusing or difficult to understand?

Eligible HLFI for tokens referenced to gold

One respondent requests clarification of golden backed tokens and relevant eligible golden backed assets. They would like clarification if a claim to reserves backed by gold could be eligible.

The EBA would like to clarify that for the cases of tokens referenced to gold the reserve of assets could be composed of the following without prejudice of compliance with other requirement (e.g. concentration limits, overcollateralisaton.):

No changes made

Comments

Summary of responses received

EBA analysis the proposals

Amendments to

- The assets received upon issuance of the token, which could be, inter alia, physical gold. - HLFI resulting from the investment of the proceed received upon issuance of the tokens. These could be: - 0% haircut HQLA in the LCR - Extremely high-quality covered bonds in the LCR Financial instruments referenced to gold. For example, these could be financial instruments tracking the value of gold. Claims tracking the value of gold would be eligible as long as the claims are financial instrument following MIFID definition.

Question 10. Do respondents have any comment on the impact assessment provided?

Gold value

as reserve

One respondent, while mostly agrees with the analysis by the EBA, considers that in the case of gold, it is worth noting that gold is traditionally considered a safe asset, in particular in times of financial instability. Due to this countercyclical effect of gold, they don't expect the disadvantages highlighted by the EBA to be as impactful on gold tokens as it would on other commodities. On the contrary, during the times of financial instability and increased economic risks, gold provides a liquid and safe asset for investors.

The EBA would like to recall that the inclusion of financial instruments referenced/tracking the value of gold in the case of tokens referenced to gold responds to the need to ensure correlation between volatilities between HLFI and the assets referenced as required in Article 38(5)(b) of MiCAR. This is a prevailing factor in the determination of the composition of HLFI of tokens that are not referenced to official currencies. No proposed

changes

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Good morning

Final Report

Contents

1. Executive Summary

Next steps

2. Background and rationale

2.1 Liquidity related risks of issuers of ARTs and EMTs

2.1.1 Liquidity risks related to the reserve assets. Redemption of tokens and financial stability.

2.1.2 Liquidity risks related to the DLT infrastructure

2.1.3 Custody of the reserve assets

2.2 Draft regulatory technical standards specifying the highly liquid financial instruments

2.2.1 Definition of liquid assets in the LCR vs Definition of highly liquid financial instruments in the reserve of assets

a. Unwinding collateral swaps, repos and reverse repos in the definition of highly liquid financial instruments

Time horizon

Other aspects

2.2.2 Concentration limits of investments by UCITs (undertakings for collective investment in transferable securities)

2.2.3 The various types of assets that can be referenced by ARTs and correlation between the assets referenced by the ARTs and the reserve assets

2.2.4 Concentration limits of ARTs in custody with entities within the same group

3. Draft regulatory technical standards

COMMISSION DELEGATED REGULATION (EU) ./.

of XXX

THE EUROPEAN COMMISSION,

Whereas:

Article 1

Definition of highly liquid financial instruments

HAS ADOPTED THIS REGULATION:

Article 2

Article 3

Concentration limit by issuer of highly liquid financial instruments

Article 4

Unwind mechanism

Article 5 Changes in characteristics of financial instruments

Article 6 Entry into force

4. Accompanying documents

4.1 Draft cost-benefit analysis / impact assessment

4.1.1 Problem identification and background

4.1.2 Policy objective

4.1.3 Baseline scenario

4.1.4 Options considered, assessment of the options and preferred options

Policy issue 1: Categories of liquid assets in the LCR framework

Disadvantages

Policy issue 2: Application of LCR general and operational requirements to highly liquid instruments

Policy issue 3: Correlation between the highly liquid financial instruments and the assets referenced by the token.

A. Gold settlement spot (USD)

B. Silver settlement spot (USD)

C. Current oil Brent settlement spot (USD)

Policy issue 4: Concentration limits by issuer of highly liquid financial instruments

4.2 Feedback on the public consultation

Summary of key issues and the EBA's response

Summary of responses to the consultation and the EBA's analysis

General comments

Responses to questions in Consultation Paper EBA/CP/2023/24

Question 1 Do respondents have any comment on the list of eligible highly liquid financial instruments provided under point (c) of Article 1(1) of these draft RTS?

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Comments

Summary of responses received

EBA analysis

Amendments to the proposals

Question 8: Do respondents have any general comment about the interaction of these draft RTS with the business model and the continuity of the business of these activities?

Harmonisation of requirements and supervision across jurisdictions