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Practice Notes - Liquidity Ratios: Inclusion of Floating Rate Notes
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Practice Notes - Liquidity Ratios: Inclusion of Floating Rate
Notes
APRA has preserved this AFIC Practice Note as guidance for building societies and credit unions.
Practice Note 01/98
16 January 1998
APPLICABLE TO CREDIT UNIONS
AND BUILDING SOCIETIES
LIQUIDITY RATIOS: INCLUSION OF FLOATING RATE NOTES (FRNS)
Background
Clarification has been sought recently regarding inclusion of floating rate notes in the calculations for meeting
the PLA and operational liquidity ratios.
Floating rate notes (FRNs) is a generic term applied to physical debt instruments bearing an interest rate that
is tied to an interest rate standard such as BBSW or LIBOR. FRNs may be issued by a range of institutions
including governments and semi-government authorities, banks, building societies and credit unions and other
commercial enterprises. FRNs may be asset or mortgage backed, subordinated debt facilities or medium term
note facilities. In some cases, term callable deposits (TCDs) have been classed as FRNs.
Given the diversity of terms, conditions and issuers, it is not appropriate that FRNs, as a class, be included by
societies in the calculation of either the PLA or operational liquidity ratios.
Practice
The Prudential Standards list assets that qualify for the purposes of calculating the PLA and operational
liquidity ratios. Instruments that may be classed as FRNs qualify as PLA where:
z
the instrument, for example, a TCD, is classed as a bank deposit under Section 16(1) of the Banking Act
1959.
z
a Commonwealth, State and Territory Government issues or guarantees the instrument. Instruments
issued by government owned enterprises must carry carry a Government guarantee to be included in
the PLA calculation.
z
an Australian bank is the issuer or counterparty, the debt is not subordinated and maturity is less than
12 months.
Societies should note that Australian banks and their subsidiaries market a range of FRNs including paper
issued by corporates. Unless an Australian bank or Government is the counterparty, investments cannot be
included as PLA or operational liquidity.
Implications for Quarterly Reporting
The quarterly return does not provide for separate recognition of bank issued, short term FRNs. For these
investments to be included in the PLA calculation and given an appropriate risk weight, societies should
include bank issued, short term FRNs at "[BS17] Bank Bills" in the quarterly return.
Australian Prudential Regulation Authority
www.apra.gov.au
http://www.apra.gov.au/ADI/practice-and-interpretative-notes-liquidity-ratios-inclusio... 24/05/2011