CLF Operational Notes

1. Introduction

The Reserve Bank provides a Committed Liquidity Facility (CLF) to certain authorised deposit-taking institutions (ADIs) as part of Australia's implementation of the Basel III liquidity standards. Consistent with the standards, certain ADIs are required by APRA to maintain a liquidity coverage ratio (LCR) at or above 100 per cent. These ADIs may seek approval from APRA to meet part of their Australian dollar liquidity requirements through a CLF with the Reserve Bank. The CLF Operational Notes contain further details on the operation of the CLF.

2. Status of the CLF Operational Notes

These CLF Operational Notes are published by the Reserve Bank as a guideline only. They are intended to assist ADIs to better understand how a CLF will operate in practice. They are only legally binding to the extent that they are specifically referred to in the CLF Terms and Conditions. The details in the CLF Operational Notes that are specifically referred to in the CLF Terms and Conditions are:

• Counterparty Eligibility (CLF Terms and Conditions Clause 7(a)(x))
• Using the CLF (CLF Terms and Conditions Clause 5(b)(i))
• Pricing Rate (CLF Terms and Conditions Clause 9)
• Eligible Securities (CLF Terms and Conditions Clause 1.3)
• CLF Fee (CLF Terms and Conditions Clause 10.1)
• Notices (CLF Terms and Conditions Clause 17(d))

The CLF Operational Notes do not constitute an offer, undertaking or intention by the Reserve Bank to create legal relations or to enter into any agreement. The establishment of a CLF between the Reserve Bank and an ADI is subject to, among other things, the execution of a CLF Commitment Deed by both the Reserve Bank and the ADI.

The Reserve Bank may make additions, modifications or amendments to these CLF Operational Notes at any time without the consent of any ADI. Any addition, modification or amendment to these CLF Operational Notes will be published on the Reserve Bank's website on the CLF Notifications page at least one month prior to coming into effect.

3. Establishment of a CLF

The Reserve Bank will consider a request from an ADI to enter into a CLF where APRA has agreed that part of the ADI's LCR requirement may be met by the ADI's use of a CLF.

The CLF commitment between an ADI and the Reserve Bank will be open-ended and established via a deed executed by the ADI and the Reserve Bank. The ADI will need to send two signed originals of the deed, under which the ADI requests that the Reserve Bank enter into a CLF with the ADI, to the Reserve Bank. The deeds must be substantially in the form set out in Schedule 1 of the CLF Terms and Conditions. If the Reserve Bank is prepared to enter into a CLF with the ADI, it will countersign the two deeds. The Reserve Bank will then retain one fully executed original deed for the Reserve Bank's records and return the other fully executed original deed to the ADI for its safekeeping. At that point the CLF will be effective as an agreement between the Reserve Bank and the ADI.

In order for the Reserve Bank to satisfy itself that the CLF Terms and Conditions will be binding on the ADI, the two signed original deeds submitted by the ADI to the Reserve Bank must be accompanied by evidence in form and substance acceptable to the Reserve Bank of the authority of the signatory. For example, the deeds could be signed by two directors, or one director and one secretary, of the ADI in accordance with section 127 of the Corporations Act 2001 (Cth), in which case the deeds should be accompanied by a company search obtained from ASIC which shows that the two directors or director and secretary hold the relevant office. Or, if the ADI executes the deeds under power of attorney, the deeds should be accompanied by a certificate from a director or secretary of the ADI which, if relevant, certifies that the attorney holds the particular position or office referred to in the power of attorney and encloses a certified copy of the power of attorney duly executed by two directors or a director and secretary of the ADI in accordance with s127 of the Corporations Act, a company search from ASIC which shows that the two directors or director and secretary hold that office and a specimen signature of the attorney. Any such power of attorney must specifically contemplate the execution of the deeds by the attorney. The Reserve Bank may also require a legal opinion from independent solicitors. Any legal opinions required to be delivered will be at the expense of the ADI.

4. CLF Commitment Amount

The size of the Reserve Bank's commitment to the ADI on a particular day will be equal to the amount which APRA has most recently advised the ADI and the Reserve Bank that it will accept for the ADI's LCR purposes for that date. This means that the size of the Reserve Bank's commitment to the ADI will vary following notification by APRA to the ADI of a change to the acceptable amount of CLF commitment, with the size of the Reserve Bank's commitment varying from the date that APRA is prepared to accept the change. If there is any discrepancy between the amount which APRA has most recently advised the ADI and the amount which APRA has most recently advised the Reserve Bank, the lesser amount for that particular date will prevail.

The commitment of the Reserve Bank will not have any specified end date. In that sense the commitment is ‘open-ended’. This makes it possible for the commitment amount to be automatically updated following APRA's annual review process without it being necessary for a new CLF Commitment Deed to be executed. However, both the ADI and the Reserve Bank will have the ability to terminate the CLF by giving notice to the other party. The ADI will be able to effect a cancellation by giving not less than one calendar month's written notice and the Reserve Bank will be able to effect a cancellation by giving not less than twelve calendar months’ written notice.

5. Commitment to enter into SF Repos

Under the CLF the Reserve Bank will be committed to enter into one or more SF Repos (Standing Facility Repos) at the ADI's request provided, among other things, that the aggregate purchase price of all SF Repos between the Reserve Bank and the ADI will not exceed the CLF commitment amount. An ‘SF Repo’ is defined in the RITS Regulations. The terms of the SF Repo will be governed by the SIFMA/ICMA Agreement as amended by the terms set out in Annex I in section 3 of Annexure A of the RITS Regulations and by the CLF Terms and Conditions.

6. Counterparty Eligibility

To be able to use the CLF, the ADI needs to hold and use an Exchange Settlement Account with the Reserve Bank. The Reserve Bank expects that an SF Repo transaction between the Reserve Bank and an ADI will be settled using that ADI's Exchange Settlement Account. In addition, the ADI must satisfy the criteria for counterparty eligibility for the Reserve Bank's domestic market operations, which are published on the Reserve Bank's website: Eligible Counterparties.

7. Using the CLF

If an ADI wishes to make use of the CLF it must submit a valid utilisation request to the Reserve Bank, unless the Reserve Bank chooses to waive this requirement. A utilisation request is, in essence, a request from an ADI to the Reserve Bank to enter into an SF Repo. To be valid, the utilisation request must satisfy each of the requirements set out in Clause 5 of the CLF Terms and Conditions. Those requirements cover who is able to submit a request, when it is able to be given, in what form it must be made and what details it must include. The Reserve Bank has provided templates for the utilisation request and the attestation of positive net worth, as attachments to these CLF Operational Notes.

Any SF Repo between an ADI as seller and the Reserve Bank as buyer will constitute a utilisation of the CLF by the ADI, regardless of the term of the repo, its pricing rate or the securities which are to be bought and sold. Given this, intraday repos and open repos at the rate on surplus ESA balances are a utilisation of the CLF. In contrast, repos that the Reserve Bank enters into with an ADI as part of the Reserve Bank's open market operations are not considered to be a utilisation of the CLF.

The Reserve Bank may not insist that an ADI submits a fully compliant Utilisation Request where the ADI is proposing to enter into:

• intraday SF Repos, where the securities nominated by the ADI are Commonwealth Government Securities or Semi-government Securities; or
• Open SF Repos where the pricing rate is set equal to the rate on surplus ESA balances, and the ADI's position in Open SF Repos at the rate on surplus ESA balances is within the maximum permitted position set by the Reserve Bank.

However, the Reserve Bank will not be under any obligation to enter into an SF Repo unless (among other things) a fully compliant Utilisation Request has been submitted.

For more details on the arrangements for intraday SF Repos and Open SF Repos at the rate on surplus ESA balances, please see the Reserve Bank website: Liquidity Facilities.

Following a purchase of securities by the Reserve Bank from an ADI under an SF Repo, an ADI will have the right to request a substitution of the securities which are the subject of the SF Repo (for example between CGS/semis and other eligible securities). Any such substitution is subject to the agreement of the Reserve Bank.

8. Pricing Rate

The ‘pricing rate’ for the purposes of an SF Repo is effectively the interest rate which is applied to the initial purchase price for the SF Repo to determine the repurchase price for the SF Repo. The CLF Terms and Conditions provide that the pricing rate in respect of any SF Repo will be either the Reserve Bank's rate on surplus ESA balances or the Reserve Bank's cash rate target plus a ‘Margin’, with the amount of the ‘Margin’ to be determined in accordance with these CLF Operational Notes. For the purposes of clause 9 (‘Pricing’) of the CLF Terms and Conditions the ‘Margin’ is 0.25 per cent. The Reserve Bank may vary this margin at any time in its sole discretion by way of an update to these CLF Operational Notes. Any change to the margin will become effective not less than one month following the date on which the Reserve Bank publishes the change on the CLF Notifications page. The Reserve Bank may also, at its discretion, agree to apply a lower pricing rate to an SF Repo.

The pricing rate which applies to an SF Repo will be determined as follows:

9. Eligible Securities

As part of a request to enter into an SF Repo under the CLF, the ADI must nominate ‘Eligible Securities’ that it wishes to sell to the Reserve Bank. The details on what securities the Reserve Bank considers to be ‘Eligible Securities’ are available on the Reserve Bank website: Eligible Securities and Margin Ratios. If the proposed securities are not currently Reserve Bank eligible securities, the ADI must submit an Eligible Security Application Form for assessment by the Reserve Bank's Risk and Compliance Department. The Reserve Bank has discretion to broaden the eligibility criteria for Eligible Securities at any time. The Reserve Bank will provide not less than one years' notice of any decision to narrow the eligibility criteria for 'Eligible Securities' for the purposes of the CLF, via the CLF Notifications page.

Unless otherwise advised, the Reserve Bank will not purchase a security from an ADI that is deemed to be materially related to the credit quality of that security. An ADI may apply for an exemption from certain aspects of the Reserve Bank's related-party guidelines for the purpose of contracting an SF Repo under the CLF. Exemptions may be granted to the extent necessary for the ADI to satisfy the LCR. While it is the Reserve Bank's preference for related-party assets purchased under SF Repo to be backed by at least 90 per cent full-doc, domestic, insurable residential mortgages, the Reserve Bank will consider related-party exemptions for other types of asset-backed securities on a case-by-case basis. Any queries relating to the eligibility of collateral securities should be directed to the Reserve Bank's Risk and Compliance Department at Eligible_Securities@rba.gov.au.

When Eligible Securities are purchased by the Reserve Bank under an SF Repo, the Reserve Bank will, in its absolute discretion, determine the fair value of the Eligible Securities nominated by the ADI. Each day the Reserve Bank will re-value all securities held under SF Repo. For guidance on the Reserve Bank's approach to valuing asset-backed securities without observed market prices, please see the Reserve Bank website: Valuing Asset-Backed Securities Without Observed Market Prices.

The fair value of the Eligible Securities is adjusted by a margin ratio in order to obtain the ‘purchase price’ for the securities. The Reserve Bank maintains a list of ‘margin ratios’ on its website for reference: Margin Maintenance and Substitutions on Repurchase Agreements. This list is published as a guide only and is not binding on the Reserve Bank.

10. CLF Fee

In consideration of the Reserve Bank's CLF commitment to an ADI, the ADI must pay a monthly CLF Fee in advance to the Reserve Bank.

The CLF Fee for a calendar month must be paid to the Reserve Bank by the ADI by no later than 4.00 pm AEST/AEDT on the last Settlement Day (i.e. a day on which RITS is open for settlement) of the immediately preceding month. If the CLF fee has not been paid when due, the Reserve Bank will not be obliged to enter into an SF Repo with the ADI. A failure to pay the CLF fee will also entitle the Reserve Bank to cancel its commitment to the ADI.

The amount of the CLF Fee due to the Reserve Bank by an ADI in respect of a calendar month is calculated by multiplying (as at the first business day of the calendar month for which the CLF Fee is being paid):

1. the amount of the Reserve Bank's CLF commitment to the ADI;
2. the CLF Fee Rate; and
3. 1/12,

and rounding that figure to the nearest cent.

For the purposes of paragraph (a), the calculation of the Reserve Bank's CLF commitment is determined by reference to the amount most recently advised by APRA for the first business day of the calendar month for which the CLF Fee is being paid and is not affected by any amounts which have been utilised by means of an SF Repo under the CLF.

For the purposes of paragraph (b), the CLF Fee Rate is: 0.15 per cent until 31 December 2019; 0.17 per cent from 1 January 2020 to 31 December 2020; and 0.20 per cent from 1 January 2021 onwards.

The Reserve Bank may change the CLF Fee Rate at its sole discretion by way of an update to these CLF Operational Notes. Any change to the CLF Fee Rate will become effective no earlier than three months following the date on which the Reserve Bank publishes the change to these CLF Operational Notes on the CLF Notifications page.

The Reserve Bank will provide a monthly invoice to the ADI. The payment of the CLF Fee will be via RITS cash transfer.

11. Notices

Notices to the Reserve Bank under the CLF Terms and Conditions must be sent by ADIs via email to: Dealingroom@rba.gov.au.

The Reserve Bank has provided a template for updating the list of CLF Authorised Signatories as an attachment to these CLF Operational Notes. The updated list of CLF authorised signatories must be signed by two directors or a director and company secretary of the ADI. The most recently received list of CLF Authorised Signatories will supersede all previous lists of CLF Authorised Signatories.

12. Privacy

All ADIs which apply for and/or enter into a CLF with the Reserve Bank are responsible for ensuring that a copy of the following notice is given to all relevant employees within their organisation.

The Reserve Bank collects personal information regarding the contacts (including CLF authorised signatories) for an ADI in respect of a CLF including their name, title and position, work telephone number, work email address and/or specimen signature (the Information). The Reserve Bank collects the Information in order to: identify and verify the contacts for the ADI; communicate with the ADI in respect of the CLF; and check the due execution of communications from the ADI (including any Utilisation Requests). If the Information were not collected, the Reserve Bank would not be able to establish a CLF with the ADI or, in respect of that CLF, communicate with the ADI, maintain contact information for the ADI or ensure requests and instructions received from the ADI are correctly authorised. The Information is of a kind which the Reserve Bank does not usually disclose to persons or organisations outside the Reserve Bank. Individuals are entitled under Australian privacy law in certain circumstances to access, and seek correction of, personal information about them held by the Reserve Bank. If you wish to access the personal information the Reserve Bank holds about you, or if you have an enquiry or complaint about how the Reserve Bank handles personal information, you can contact the Reserve Bank's Privacy Officer by email to privacy@rba.gov.au or by phone on 02 9551 8111. The personal information of a contact (including a CLF authorised signatory) for an ADI should be updated by notice given in accordance with the CLF Terms and Conditions and these CLF Operational Notes. More information about access, correction and complaints is in the Reserve Bank's Privacy Policy available on its website at www.rba.gov.au/privacy/.

Attachment A: Form of Utilisation Request

By email

Dear Sir / Madam

Committed Liquidity Facility – [Name of CLF Participant] – Utilisation Request

1. We refer to the Committed Liquidity Facility established by a CLF Commitment Deed between [Name of CLF Participant] and the Reserve Bank dated [          ] (the Committed Liquidity Facility). Terms defined in the Committed Liquidity Facility have the same meaning in this Utilisation Request.
2. This is a Utilisation Request for the purposes of the Committed Liquidity Facility.
3. We wish to Utilise the Committed Liquidity Facility by entry into an SF Repo with the Reserve Bank on the following terms:
   1. Purchase Date: [          ]
      [Note: the proposed Purchase Date for the SF Repo must be a Settlement Day on or after the date of the Utilisation Request]
   2. Purchase Price: [          ]
      [Note: the proposed Purchase Price for the SF Repo must be in Australian dollars and must not exceed the Reserve Bank's Commitment. The proposed Purchase Price is the proposed price at which the CLF Participant will sell the Purchased Securities to the Reserve Bank (i.e. the Australian dollar amount the CLF Participant proposes will be paid by the Reserve Bank to the CLF Participant to purchase the Purchased Securities). It is not the Fair Value of the Purchased Securities]
   3. Purchased Securities: [          ]
      [Note: the proposed ‘Purchased Securities’ for the SF Repo must be Eligible Securities. The Fair Value of these Eligible Securities as adjusted by the applicable Margin Ratios must be no less than the proposed Purchase Price. The ISIN or other identifying number(s) of the Eligible Securities must be specified.]
   4. Repurchase Date: [          ]
      [Note: the SF Repo must be:
      1. intraday (i.e. required to be reversed on the Purchase Date);
      2. terminable on demand (i.e. an Open SF Repo); or
      3. for a fixed term which ends on a Settlement Day no later than the thirtieth day following the ‘Purchase Date’ for the SF Repo,
         
         
      as agreed by the CLF Participant and the Reserve Bank based on good faith negotiations following the Reserve Bank's receipt of the Utilisation Request. If no agreement is able to be reached by 5.45 pm AEST/AEDT on the date of the proposed Purchase Date, the SF Repo will be an Open SF Repo. If an SF Repo which is terminable on demand is preferred, ‘Open SF Repo’ should be specified above as the Repurchase Date]
4. We confirm that:
   (a) the execution, delivery and performance of the SF Repo will not violate any law, statute, regulation, ordinance, code, by-law, rules or other law applicable to us;
   (b) the representations and warranties in clause 11.1 of the Terms and Conditions are true and correct when repeated on the date of this Utilisation Request; and
   (c) no ‘Event of Default’ (or event which, with the giving of notice or the lapse of time or both, would constitute an ‘Event of Default’) has occurred or is continuing in respect of us under the Master Agreement.
5. We attach to this Utilisation Request a letter to the Reserve Bank from our chief executive officer in which our chief executive officer attests that we have positive net worth.

Yours faithfully

.......................................
Name: [Insert name of authorised signatory]
Title: [Insert title of authorised signatory]

.......................................
Name: [Insert name of authorised signatory]
Title: [Insert title of authorised signatory]

[Note: the Utilisation Request may be signed by a single CLF Authorised Signatory (if the CLF Authorised Signatory is authorised to act severally), two CLF Authorised Signatories (if the CLF Authorised Signatories are authorised to act jointly) or by two directors or a director and company secretary of the CLF Participant]

Attachment B: Form of Attestation of Positive Net Worth

Dear Sir / Madam

Committed Liquidity Facility – [Name of CLF Participant] – Attestation of Positive Net Worth

1. I refer to:
   1. the Committed Liquidity Facility established by a CLF Commitment Deed between the CLF Participant and the Reserve Bank dated [          ] (the Committed Liquidity Facility); and
   2. the Utilisation Request from the CLF Participant to the Reserve Bank dated the same date as this letter.
2. Terms defined in the Committed Liquidity Facility have the same meaning in this letter.
3. For and on behalf of the CLF Participant I confirm that, as at the date of this letter, the CLF Participant has positive net worth.

Yours faithfully

.......................................
Name: [Insert name of the chief executive officer (or equivalent officer)]
Title: [Insert title – chief executive officer (or equivalent officer)]

Attachment C: Form of Update to CLF Authorised Signatories

By email

Dear Sir / Madam

Committed Liquidity Facility – [Name of CLF Participant] – Update of CLF Authorised Signatories

We refer to the Committed Liquidity Facility established by a CLF Commitment Deed between us and the Reserve Bank dated [          ] (the Committed Liquidity Facility). Terms defined in the Committed Liquidity Facility have the same meaning in this notice.

This is an update of the list of CLF Authorised Signatories, which supersedes all previous lists of CLF Authorised Signatories.

We:

1. list our CLF Authorised Signatory(s), including their specimen signature(s), telephone number(s) and email address(es); and
2. confirm that each CLF Authorised Signatory is duly authorised to provide notices under the Committed Liquidity Facility on behalf of the CLF Participant [individually] or [jointly with another CLF Authorised Signatory].

Each of the following is a CLF Authorised Signatory of the CLF Participant for the purposes of the Committed Liquidity Facility between the CLF Participant and the Reserve Bank:

[Insert signatory block for the CLF Participant]