Customers short sales internally matched with other clients’ long positions, as part of primary brokerage services

What is the expected treatment in the Liquidity Coverage Ratio of an internalized transaction, maturing within 30 calendar days, where the institution grants a margin loan to a client against a collateral that does not qualify as liquid assets and where this collateral is lent to another client to cover short sales?

For the purpose of the Liquidity Coverage Ratio, the margin loans and the coverage of customers securities short sales, where the collateral received or the securities lent do qualify as liquid assets,  should be treated as securities financing transactions (as per art. 4(1)139   CRR) subject respectively to the inflows provided for in article 32(3)b or outflows provided for in article 28(3).  Where the collateral does not qualify as liquid assets, article 32(3)c provides for a dedicated treatment for margin loans maturing within next 30 calendar days, by assigning them a cash inflow up to 50% of the loan value. Article 28(3) does not propose a similar exception that would apply to the coverage of the customer short positions.  However, in article 30, dedicated to the additional outflows, it is stipulated in paragraph 12, that where a credit institution has covered the short sales of a client by internally matching them with the assets of another client and the assets do not qualify as liquid assets, those transactions shall be subject to a 50% outflow rate for the contingent obligation.   It is unclear whether the customer to customer internalized transactions where the securities involved do not qualify as liquid assets are subject to symmetrical inflow and outflow rates or if it is assumed that, in the LCR scenario framework, the institution would face a 50% additional funding need on top of the 100% loss of the funding source from the customer short position that would have to be considered by application of Article 28(3) when the collateral is non liquid.  Furthermore, it is unclear whether the outflow rate must be calculated based on the cash leg of the transaction (as it is the case for the inflow of the matching internal transaction) or if it must be computed based on the security market value as ITS 2021/451 (Annex XXV – Part 2 - 1.4.) may suggest.