OSFI’s response to the consultation feedback on the capital and liquidity treatment of crypto-asset exposures guidelines (banking and insurance)

Stakeholders commented that the aggregation formulas provided for curvature within a bucket for Group 2a crypto assets sum the absolute values of curvature sensitivities. This results in banks being assessed curvature capital for long option positions. For all other asset classes under the market risk requirements, a single long option position would generate zero curvature capital, as opposed to a positive curvature charge under the formula in the draft guideline. Hedging transactions would also result in increased curvature capital using these formulas.

Stakeholders proposed that a higher level of conservatism can be achieved without penalizing negative curvature risk and hedges by adjusting the formula in the following manner:

$K_b=\max (K_b^{-},K_b^{+})$

${\displaystyle K_b^{-}=\sum _k\max \left({0,\mathrm{CVR}}_K^{-}\right)}$

${\displaystyle K_b^{+}=\sum _k\max \left({0,\mathrm{CVR}}_K^{+}\right)}$

We brought this issue to the Basel Committee on Banking Supervision (BCBS). The formula change was incorporated in the July 2024 technical amendment: BCBS July 2024 Technical Amendment (PDF)

We have implemented this change into our final guideline.

Stakeholders provided comments questioning the efficacy and rationale behind continuing to implement a 2.5% add-on after the BCBS left this topic to national discretion in December 2022. Specifically, respondents said:

1. A 2.5% add-on is inconsistent with the BCBS’s recommendation for national supervisors to have the discretion to apply an add-on based on “observed weakness in the infrastructure” while the rationale for a 2.5% add-on in the draft guideline was “newness” of technology.
2. A blanket add-on is subjective, duplicative, and unnecessary.
3. The add-on does not account for banks’ rigorous control frameworks, or the risk management requirements set out in this guideline.
4. Infrastructure risk is operational in nature. Institutions are already required to account for operational risk separately in the guideline.

We agree with the rationale for a 0% add-on provided by stakeholders through the consultation.

The add-on for infrastructure risk will be initially set at 0%. We may increase the infrastructure add-on in the future based on observed weakness in the infrastructure used by Group 1 crypto-assets. We will consult on any such change prior to implementation.

Stakeholders requested clarification on how to apply the group 2a classification criteria to exchange traded funds / exchange traded notes (ETFs/ETNs) that reference multiple crypto assets.

We have added a footnote to the final guidelines applying a 75% threshold (meaning that >75% of the assets in the ETF/ETN must meet the classification criteria for the ETF/ETN to be considered group 2a) in line with the treatment of instruments with multiple underlying options outlined in Chapter 9 of the CAR Guideline.

Stakeholders suggested that additional language be added to the guideline to clearly state the consequences of breaching the net short positions notification requirement. The language in the draft guideline only mentions notification requirements for net short positions, whereas the consequence of breaching the gross exposure limit is defined.

The net short position notification requirement is not a strict limit, like the gross exposure limit. As such, we have not made any changes to the final guidelines on this issue.

Stakeholders requested that group 1b crypto-assets be eligible to be classified as high quality liquid assets (HQLA), or that the criteria for group 1a be loosened to include certain digital payment tokens.

Group 1b assets bear additional credit risks relative to Group 1a assets (for example, the credit risk of the redeemer), which are reflected in the treatments included in this guideline. These additional risks preclude Group 1b assets from qualifying as HQLA. As such, we have not made any changes to the final guidelines regarding the criteria to be classified as a Group 1a crypto-asset or as HQLA.

Stakeholders raised concerns that the level of conservatism applied in the Simplified Approach could be too punitive and will result in institutions with limited exposures divesting their crypto-asset exposures rather than applying this treatment.

A necessary requirement for a simplified, uniform treatment (such as the Simplified Approach for crypto-assets) is that it must be sufficiently conservative to capitalize the risks not being measured. In other words, an institution holding only Group 2b crypto-assets should not receive a more advantageous treatment under the Simplified Approach than under the Comprehensive Approach. As such, we have not made any changes to the final guidelines on this issue.