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6.3.3 Categorisation of HQLA

C 33/2015 STA Effective from 3/1/2022
  1. a.Level 1 Assets:
    HQLA are divided into two main categories or levels: Level 1 and Level 2. Level 1 assets can constitute an unlimited share of the pool and are not normally subject to a haircut under the LCR.
  2. b.Level 1 assets are limited to:
    1. a.Coins and Banknotes;
    2. b.Reserves and account balances held at the Central Bank;
    3. c.Central Bank’s Islamic CDs;
    4. d.Sukuk and other Shari’ah-compliant marketable securities issued or guaranteed by UAE Federal Government or Local Governments;
    5. e.Sukuk and other Shari’ah-compliant marketable securities issued or guaranteed by multilateral development banks (MDBs) which are assigned a 0% risk weight;
    6. f.Sukuk and other Shari’ah-compliant marketable securities issued by foreign sovereign or foreign central banks that have a 0% risk weight; and
    7. g.Sukuk and other Shari’ah-compliant marketable securities issued by UAE Public Sector Entities’ (PSE or GRE) that have a non-0% risk weight.
  3. c.Those assets that are 0% risk weighted and unrated are unlikely to have the same depth of market as those that are rated above investment grade in a stress scenario. IBs must take this into account when assessing an asset’s suitability and a liquidity premium charged. In any case, 0% risk weighted assets that are not rated cannot exceed 25% of the total Level 1 HQLA.
  4. d.Level 2A Assets:
    Level 2 assets compromise Level 2A and Level 2B assets as permitted by the Central Bank. Level 2A assets are limited to the following, subject to a 15% haircut applied to the current market value of each asset:
    1. a.Shari’ah-compliant marketable securities/Sukuk issued or guaranteed by sovereigns, central banks, PSEs, MDBs, which are assigned a 20% risk weight;
    2. b.Shari’ah-compliant securities (including Shari’ah-compliant commercial paper) and Sukuk that satisfy all of the following conditions:
      1. i.not issued by an IB /financial institution or any of its affiliated entities;
      2. ii.either: (a) have a long-term credit rating from a recognised external credit assessment institution (ECAI) of at least AA- or, in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating; or (b) do not have a credit assessment by a recognised ECAI but are internally rated as having a probability of default corresponding to a credit rating of at least AA-.

      These assets must be:

      a) traded in a market characterised by a low level of concentration; and

      b) able to be regarded as a reliable source of liquidity at all times (i.e. maximum decline of price must not exceed volatility targets over a 30 day period during a relevant period of significant liquidity stress).

  5. e.Level 2B Assets:
    The Level 2B assets are limited to the following:
    1. 1)Sukuk and other Shari’ah-compliant securities backed by commodity(ies) and other real asset(s) that satisfy all of the following conditions, subject to a 25% haircut:
      1. i.not issued by the IB, and the underlying assets have not been originated by, the IB itself or any of its affiliated entities;
      2. ii.have a long-term credit rating from a recognised ECAI of AA or higher, or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;
      3. iii.being traded in a market characterised by a low level of concentration and being regarded as a reliable source of liquidity at all times – that is, a maximum decline of price must not exceed volatility targets over a 30 day period during a relevant period of significant liquidity stress; and
      4. iv.the underlying asset pool is restricted to Shari’ah-compliant (residential) mortgages and cannot contain structured products.
    2. 2)Sukuk and other Shari’ah-compliant securities that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut:
      1. i.not issued by a financial institution or any of its affiliated entities;
      2. ii.either: (a) have a long-term credit rating from a recognised ECAI of between A+ and BBB- or, in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating; or (b) do not have a credit assessment by a recognised ECAI and are internally rated as having a probability of default corresponding to a credit rating of between A+ and BBB-; and
      3. iii.being traded in a market characteried by a low level of concentration and being regarded as a reliable source of liquidity at all times – that is, a maximum decline in price not exceeding 20% or an increase in a haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress.
    3. 3)Shari’ah-compliant equity shares that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut:
      1. i.not issued by a financial institution or any of its affiliated entities;
      2. ii.exchange traded and centrally cleared;
      3. iii.a constituent of the major stock index in the UAE or where the liquidity risk is taken, as decided by the Central Bank of the UAE where the index is located;
      4. iv.denominated in the UAE dirhams or in the currency of the jurisdiction where its liquidity risk is taken; and
      5. v.being traded in a capital market characterised by a low level of concentration and being regarded as a reliable source of liquidity at all times – that is, a maximum decline in share price not exceeding 40% or an increase in a haircut not exceeding 40 percentage points over a 30-day period during a relevant period of significant liquidity stress.
    4. 4)Other Shari’ah-compliant instruments or Sukuk that are widely recognised in the UAE may be included in Level 2B, subject to a minimum 50% haircut if they meet the following conditions:
      1. i.not issued by a financial institution or any of its affiliated entities; and
      2. ii.being traded in a market characterised by a low level of concentration and being regarded as a reliable source of liquidity at all times.
    5. 5)Sukuk and other Shari’ah-compliant marketable securities issued by sovereign or central banks rated BBB+ to BBB- that are not included in Level 1 assets may be included in Level 2B assets with a 50% haircut.
  6. f.A cap will be applicable to the use of Level 2 assets, up to 40% of the total stock of HQLA, after the application of required haircuts. Specific to the Level 2B assets, the total assets under this category must comprise no more than 15% of the total stock of HQLA after the application of required haircuts and must be included within the overall 40% cap on Level 2 assets.
  7. g.Given that the UAE Dirham is pegged to the US Dollar, for the sake of flexibility US$/AED currency mismatches can be offset. It must be noted though that it is required that liquid assets be held in the currency of the net outflow, including both the US$ and AED individually, and IBs are expected to comply where possible. However, net outflows in other GCC currencies pegged to the US$ that exceed 15% of the total LCR net outflows must be matched. Other pegged and free floating currencies must be matched if they exceed 10% of total net LCR outflows.