This final report presents guidelines on liquidity stress testing under Regulation (EU) 2023/1114. It stipulates that issuers of significant asset-referenced tokens and electronic money institutions must conduct these tests regularly to assess various risks, such as redemption risk and market risk. The guidelines aim to establish common reference parameters for stress test scenarios, taking into account market…
This document is the final report of the guidelines (GL) published by the European Banking Authority (EBA) in June 2024, referenced EBA/GL/2024/08. It establishes common reference parameters for liquidity stress testing scenarios within the framework of Regulation (EU) 2023/1114 (MiCAR) relating to crypto-asset markets. The scope covers issuers of tokens backed by significant assets (ARTs) and electronic money institutions issuing significant electronic money tokens (EMTs), as well as non-significant issuers if required by the competent authority. The 32-page document details the risks to be tested, the methodology, compliance obligations, as well as feedback from the public consultation. It is part of the European regulatory implementation to frame liquidity risk management in the crypto ecosystem, effective two months after official publication.
The EBA final report responds to Article 45(4) of the MiCAR regulation which requires issuers of tokens backed by significant assets and electronic money institutions issuing significant tokens to regularly perform liquidity stress tests. These tests aim to assess the capacity of asset reserves to cover redemption requests from token holders, including under stress conditions. The EBA, in cooperation with ESMA and the ECB, establishes common reference parameters to harmonize these tests at the European level, with periodic updates to incorporate market developments. The report identifies four key risks to assess: massive redemption risk, risk related to deposits with credit institutions, market and volatility risk of reserve assets, and de-pegging risk between the token value and the underlying asset. The methodology consists of applying calibrated stress factors on the weighted value of reserve assets and referenced assets, over different maturities (1, 5, 30 days and 1 year), combining historical data and expert judgment. In case of a deficit under stress, authorities may strengthen liquidity requirements, notably by increasing the asset reserve or enhancing liquidity management policies. The EBA favors a harmonized approach to risks to cover, while leaving issuers responsible for calibrating stress factors according to their specific profile, to ensure adequate sensitivity to idiosyncratic risks. The report also incorporates feedback from the public consultation, clarifying points such as the inclusion of macroeconomic conditions and the distinction between de-pegging risk and basis risk. These guidelines will enter into force two months after their official multilingual publication, with an obligation for competent authorities to notify their compliance.
The document responds to the regulatory obligation arising from MiCAR Regulation (EU) 2023/1114, which requires issuers of tokens backed by assets and electronic money institutions to conduct liquidity stress tests to better manage their liquidity risks. The objective is to ensure that issuers’ asset reserves continuously cover obligations towards token holders, even under stress. The report aims to define common reference parameters for these tests to harmonize practices within the European Union, while considering issuer specificities and market developments. The scope covers risks related to massive redemptions, bank deposits, volatility of reserve assets, and de-pegging risk between token and underlying asset. The document also specifies the methodology for calibrating stress factors, based on historical data and expert judgment, and frames implementation and reporting modalities. It fits within an evolving regulatory context, notably with the expected publication of Regulatory Technical Standards (RTS) which will specify certain aspects of asset reserves and liquidity management policies.
- Risks to assess:
- Redemption risk: assesses the propensity of holders to request token redemption, notably in case of idiosyncratic or systemic events that may trigger massive requests, potentially causing forced sales and liquidity pressure.
- Risk related to deposits with credit institutions: concerns the ability to quickly access deposits constituting a significant part of reserves (at least 30% for tokens referenced to official currencies, 60% if significant), considering credit quality, concentration, location, and maturity of deposits.
- Market and volatility risk: impact of value fluctuations of reserve assets not directly replicating referenced assets, which may cause value gaps not covered by hedging derivatives.
- De-pegging risk: risk that the token value diverges from the underlying asset value, potentially triggering massive redemptions and pressure on reserves.
- Composition and limits of asset reserves:
- Bank deposits subject to concentration limits per counterparty (25% for G-SII/O-SII, 15% for large non-systemic banks, 5% others).
- Level 1 liquid financial assets (LCR Level 1) with concentration limits (35% per issuer for sovereign bonds, 10% for covered bonds, 5% for other securities).
- General concentration limits of 30% per counterparty/issuer.
- Stress testing methodology:
- Application of stress factors to weighted values of reserve assets and referenced assets.
- Comparison of weighted amounts under stress to detect potential deficits.
- Calibration of stress factors based on own and market historical data, supplemented by expert judgment.
- Consideration of different time horizons (1 day, 5 days, 30 days, 1 year).
- Regulatory obligations and implementation:
- Guidelines apply to significant issuers and, if applicable, to non-significant ones upon request of competent authorities.
- Entry into force two months after official multilingual publication.
- Obligation for competent authorities to notify their compliance to the EBA.
- Public consultation and feedback:
- General support for the guidelines.
- Clarifications provided on inclusion of macroeconomic conditions, distinction between de-pegging risk and basis risk, and non-exhaustive list of stress parameters.
- Consideration of operational concerns, notably for small issuers and availability of historical data.
- Confirmation that tests aim for minimal harmonization while allowing issuers discretion.
- Findings:
- MiCAR regulation requires regular liquidity stress tests for significant token issuers.
- Four main risks must be assessed: redemption, bank deposits, market/volatility, de-pegging.
- Asset reserves must comply with concentration and quality limits, notably defined in RTS under adoption.
- Methodology consists of applying calibrated stress factors over different maturities, combining historical data and expert judgment.
- In case of deficit under stress, authorities may strengthen liquidity requirements or management policy.
- Assumptions:
- Lack of sufficient historical data justifies that stress factors be determined by issuers within a harmonized framework.
- Stress factors must be below 100% for reserve assets and above 100% for non-monetary referenced assets.
- Interpretations:
- The approach balances harmonization and sensitivity to issuers’ specific risks.
- Considering systemic and idiosyncratic risks is essential to prevent contagion effects in the crypto and banking ecosystem.
- Uncertainties:
- The novelty of the sector limits availability of reliable historical data.
- Rapid evolution of crypto markets may change risk profiles.
- Effectiveness of measures to strengthen requirements remains to be observed in practice.
The EBA concludes that establishing harmonized guidelines on common parameters for liquidity stress testing scenarios is essential to ensure prudent liquidity risk management in the crypto-asset sector. It recommends that token issuers apply these guidelines by calibrating their stress factors based on historical data and expert judgment, covering the four identified risks. Competent authorities must integrate these guidelines into their supervisory practices and notify their compliance to the EBA within the prescribed deadlines. Depending on test results, supervisors may strengthen liquidity requirements, either by increasing the asset reserve or by improving liquidity management policies and procedures. The report emphasizes the importance of periodic updates to the guidelines to incorporate market and risk developments. Finally, it recommends ongoing cooperation between issuers, authorities, and other stakeholders to ensure the robustness and relevance of liquidity stress tests.
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