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Article 4 - Application of the derogation provided for in Article 419(2)(a) of Regulation (EU) No 575/2013

Article 4

Application of the derogation provided for in Article 419(2)(a) of Regulation (EU) No 575/2013

1.   An institution shall take all reasonable steps to fulfil the liquidity coverage requirement set out in Article 412 of Regulation (EU) No 575/2013 before applying the derogation provided for in Article 419(2)(a) of that Regulation.

2.   An institution shall ensure that it is at all times able to operationally identify the liquid assets used to meet foreign currency liquidity coverage requirements and the liquid assets held as a result of the application of the derogation provided for in Article 419(2)(a) of Regulation (EU) No 575/2013.

3.   An institution shall ensure that its foreign exchange risk management framework meets the following conditions:

(a)

currency mismatches resulting from the use of the derogation provided for in Article 419(2)(a) of Regulation (EU) No 575/2013 are adequately measured, monitored, controlled and justified;

(b)

liquid assets inconsistent with the distribution by currency of liquidity outflows after the deduction of inflows can be liquidated in the currency of the Member State of the relevant competent authority whenever necessary;

(c)

historical evidence relating to stress periods supports the conclusion that the institution is able to promptly liquidate the assets referred to in point (b).

4.   An institution which uses liquid assets in a currency other than the currency of the Member State of the relevant competent authority to cover liquidity needs in the latter currency shall apply a haircut of 8 % to the value of those assets in addition to any haircut applied in accordance with Article 418 of Regulation (EU) No 575/2013.

Where the liquid assets are denominated in a currency that is not actively traded in global foreign exchange markets, the additional haircut shall be the higher of 8 % and the largest monthly exchange rate movement between both currencies in the 10 years prior to the relevant reporting reference date.

Where the currency of the Member State of the relevant competent authority is formally pegged to another currency under a mechanism in which the central banks of both currencies are bound to support the currency peg, the institution may apply a haircut equal to the width of the exchange rate band.