Article 11, paragraph 2, subparagraph (c) sets out that a CSD-banking service provider should have a prearranged funding arrangement in accordance with point (e) of Article 59(4) of Regulation 909/2014 and specified in Article 38 of the RTS to be able to liquidate the instruments accepted as collateral under this paragraph within 5 days. In addition, that subparagraph also requires the CSD-banking service provider to hold sufficient qualifying liquid resources (QLR) to a sufficient amount to ensure that it covers the time gap for liquidating such collateral in case of default of the participant.

Article 38 sets out what the requirements for “prearranged and highly reliable funding arrangements” (PAFA) are. This Article, on multiple occasions, indicates that such arrangements are meant to convert collateral into cash, with the help of liquidity providers (i.e. repo arrangements or similar). In addition, this is confirmed by the fact that Article 59(4) of Regulation 909/2014, to which Article 11, para 2, subpara (c), point (i) refers, specifically introduces prudential requirements for liquidity risks.

This is distinct from the liquidation process of collateral, which, in our view, is the act of selling the instruments, and resolves the credit risk and market risk. Nevertheless, Article 11, paragraph 2, subparagraph (c), point (i) does require the CSD-banking service provider to have PAFA to liquidate the instruments within five days.

In addition to the above, we note that Article 11, paragraph 2, subparagraph (c), point (ii) also requires the CSD-banking service provider to hold sufficient QLR to cover the time gap for liquidating the collateral. Therefore, the liquidity risk is already covered by QLR.