This final report presents regulatory technical standards (RTS) regarding the minimum content of liquidity management policies for issuers of asset-referenced tokens and electronic money institutions. These policies must ensure that reserve assets have a resilient liquidity profile, allowing issuers to operate normally even under liquidity stress. The RTS will be submitted to the Commission for endorsement and will…
This document is the final report of the European Banking Authority (EBA) dated June 13, 2024, entitled "Final report on draft RTS to specify the minimum content of liquidity management policy." It is a 33-page regulatory standard concerning Regulatory Technical Standards (RTS) aimed at specifying the minimum content of liquidity management policies and procedures for significant asset-referenced token (ART) issuers and electronic money institutions (EMIs) issuing significant electronic money tokens (EMTs), under Regulation (EU) 2023/1114 (MiCAR). The scope covers liquidity requirements, liquidity management policies, associated procedures, as well as liquidity stress tests, applicable to significant token issuers and, upon request of competent authorities, to non-significant issuers. The document also includes a cost-benefit analysis and feedback from the public consultation (p. 1-33).
The subject concerns defining the minimum content of liquidity management policies and procedures for significant asset-referenced token issuers and electronic money institutions issuing significant tokens, pursuant to Article 45(7)(b) of the MiCAR regulation. This requirement aims to ensure that the asset reserves held by these issuers have a resilient liquidity profile, enabling them to meet any token redemption request at any time, including under liquidity stress, without disrupting normal business continuity. The document specifies that the asset reserve must include at least 60% bank deposits in each official currency. The EBA, in cooperation with ESMA, developed these RTS to fulfill this mandate, relying notably on the Basel standards of December 2022 and the EBA guidelines on ILAAP, adapted to crypto activities. Key findings emphasize the importance of prudent reserve management, the need for a custodian diversification policy, integration of contingency plans with early warning signals, and regular liquidity stress testing including a reverse stress test. The report also mentions feedback from the public consultation, which broadly supported the proposals while raising questions about the calibration of warning signals and custodian diversification. Recommendations include adoption of the RTS by the European Commission, followed by review by the European Parliament and Council before official publication (p. 3-4, 14-33).
The document responds to the regulatory obligation under MiCAR to establish technical standards to frame liquidity management of asset-referenced token issuers and electronic money institutions issuing tokens, notably those classified as significant. The objective is to define the minimum content of liquidity management policies and procedures to ensure the resilience of asset reserves against redemption requests, including under stress conditions. The context reflects the intent to prevent liquidity risks that could affect token holders' confidence and financial market stability, notably by avoiding forced sales ("fire sales") of reserve assets. The scope covers significant issuers, with the possibility to extend to non-significant ones upon competent authorities' request. The document builds on existing international and European prudential standards, adapted to crypto-asset specificities (p. 4-7).
Liquidity risk management:
- Issuers must maintain an asset reserve with a value at least equal to that of tokens in circulation, with prudent management to avoid negative impacts on the reserve asset market.
- The liquidity of reserve assets is crucial to allow immediate redemptions, notably under stress, without causing forced sales or asset blocking.
- Holders have a permanent redemption right, which the issuer must honor either in cash or by in-kind delivery of assets.
Minimum content of policies and procedures:
- The policy must include the liquidity risk management framework, reserve management strategy, a contingency plan with early warning signals, an asset custody policy ensuring custodian diversification, and a liquidity stress testing framework.
- The policy must be specific to each token, reflecting the legal and operational segregation of reserves.
- The policy related to crypto activities must be distinct from that of the issuer's other activities.
Liquidity stress tests:
- Must cover identified risks, calibrated parameters, stress scenarios, and time horizons.
- Include a reverse stress test to assess the resilience limit of reserves.
Cost-benefit analysis and regulatory choices:
- The EBA drew inspiration from banking standards (CRD, ILAAP) adapted to crypto-assets.
- Two options were evaluated regarding inclusion of a warning signal measuring the gap between the token's market value and that of reserve assets; the chosen option mandates this signal with calibration left to the issuer.
Public consultation and feedback:
- General support for the proposed minimum content.
- Questions on custodian diversification, custodian oversight, warning signal calibration, policy segregation, and stress test implementation.
- Clarifications provided by the EBA, notably on the non-imposition of distinct IT systems per token, management of in-kind redemptions, and proportionality of requirements.
Regulatory framework and implementation:
- The RTS complement MiCAR and must be adopted by the European Commission, followed by parliamentary and Council review.
- They align with other EBA guidelines on governance, internal control, and issuers' recovery plans (p. 4-13, 14-33).
Findings:
- Significant token issuers must have a robust liquidity management policy, including contingency plans and stress tests.
- The asset reserve must have a value at least equal to that of tokens in circulation, with at least 60% in bank deposits for tokens referenced to official currencies.
- Custodian diversification is a regulatory requirement, even if temporary concentration situations may be accepted.
- Policies must be token-specific, reflecting reserve segregation.
Assumptions:
- Calibration of early warning signals, notably the gap between token value and reserve assets, is left to issuers' discretion.
- Reverse stress tests are considered essential to anticipate extreme scenarios, despite operational difficulties mentioned.
Interpretations:
- The EBA considers that implementing these RTS will strengthen issuers' resilience to liquidity risks and contribute to market stability.
- Policy segregation by token, although potentially costly, is justified by benefits in risk management and transparency.
Uncertainties:
- Precise calibration of warning signals and internal limits remains complex and depends on issuer specifics.
- Operational impact of segregation and stress test requirements, notably for new entrants, may be significant.
- Management of multi-chain or multi-issuance tokens raises practical questions not yet fully resolved (p. 14-33).
The EBA concludes that the proposed draft RTS meet the MiCAR mandate by defining a clear and proportionate minimum content for liquidity management policies and procedures of significant token issuers. It recommends adoption of these RTS by the European Commission, followed by a review procedure by the European Parliament and Council before official publication. The RTS notably impose:
- Establishment of robust liquidity risk management policies, including contingency plans with early warning signals.
- Segregation of policies and reserves by token.
- Regular liquidity stress testing, including a reverse stress test.
- Custodian diversification to limit concentration risks.
- Continuous monitoring of reserves and custodians.
The EBA emphasizes the importance of issuers' adapted calibration of warning signals according to their profile and business model. It recalls that these RTS must be read in coherence with other EBA guidelines related to governance, internal control, and issuers' recovery plans. Finally, the EBA foresees post-implementation monitoring, notably via the European Commission report scheduled for June 2025, to ensure coherence and effectiveness of the implemented arrangements (p. 3-4, 14-33).
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