Part II – Lending and Borrowing Services Rules
A. General Requirements
1. Liquidity. VASPs providing Lending and Borrowing Services shall, at all times, ensure that—
a. they have sufficient Virtual Assets to provide services and satisfy client obligations; and b. sufficient collateral has been posted by borrowers in accordance with agreed amounts, and that both are monitored and audited on a regular basis.
2. VASPs providing Lending and Borrowing Services shall notify VARA immediately if the requirements in Rule II.A.1 of this Lending and Borrowing Services Rulebook are not met, or may not be materially met in the foreseeable future. 3. Withdrawals. VASPs providing Lending and Borrowing Services shall ensure all clients are fully aware when Virtual Assets are not able to be withdrawn as part of the Lending and Borrowing Services they provide. To the extent Virtual Assets are able to be withdrawn, VASPs shall ensure all clients can withdraw such Virtual Assets at all times, and complete withdrawal requests so that Virtual Assets which are the subject of such requests are transferred in accordance with client instructions within twenty-four [24] hours, subject to any factors outside of the VASP’s control including limitations or malfunctioning of any DLT not controlled by the VASP or its Group. 4. Collateral. All Virtual Assets held by a VASP providing Lending and Borrowing Services may only be used in accordance with the terms of its Lending and Borrowing Services which, in addition to the requirements in Rule II.E of this Lending and Borrowing Services Rulebook, shall be clearly set out in its Client Agreements. VASPs providing Lending and Borrowing Services shall ensure that they have adequate governance frameworks, policies, systems and controls in place to manage how collateral is held and that it is used responsibly, including in line with Client Agreements at all times. 5. Virtual Assets of a client used by a VASP in the course of, or in connection with, the provision of any Lending and Borrowing Services shall be held on behalf of the client unless the Client Agreement expressly states otherwise. 6. Counterparty due diligence. VASPs providing Lending and Borrowing Services shall, on a regular basis, conduct comprehensive due diligence on all clients and counterparties such that they are satisfied that client Virtual Assets are not subject to undue counterparty risk. In particular, VASPs shall collect and verify the following information of each counterparty—
a. the purpose[s] of loans; b. the nature and type of business; c. financial situation and overall liquidity; and d. all other information which a prudent lender would require to assess risk associated with a particular loan.
B. Client Reporting & Valuation
1. VASPs providing Lending and Borrowing Services shall, at least monthly, provide to clients a written statement containing the following information—
a. the total value of Virtual Assets in a client’s account; b. all lending and borrowing transactions entered into between the VASP and the client in the reporting period; c. the amount of interest accrued from and credited to the client’s account for lending transactions [both total and during the reporting period]; and d. the amount of collateral posted by the client for borrowing transactions in the reporting period [both total and during the reporting period].
2. VASPs shall maintain accurate and reliable records that are sufficient to confirm and identify assets under management and client positions. 3. VASPs providing Lending and Borrowing Services shall ensure that all assets under management are subject to independent valuation and client reporting. 4. VASPs shall have comprehensive and well documented valuation policies and procedures in place to ensure the production of timely and accurate valuations in accordance with Rule II.B.1 of this Lending and Borrowing Services Rulebook.
C. Additional Record-Keeping Requirements
1. VASPs providing Lending and Borrowing Services shall maintain the following for at least eight [8] years—
a. records of all transactions in relation to their Lending and Borrowing Services, including but not limited to all Client Agreements, agreements with other counterparties and client instructions; and b. information collected from counterparties in accordance with Rule II.A.6 of this Lending and Borrowing Services Rulebook.
2. All records maintained in accordance with Rule II.C.1 of this Lending and Borrowing Services Rulebook must be immediately provided for VARA inspection upon request.
D. Risk Management and Due Diligence
1. Before providing any Lending and Borrowing Services to a client, a VASP shall carry out sufficient due diligence to satisfy itself as to the risk profile of such client and transaction at that time and during the course of the Lending and Borrowing Services, the need for and the suitability of any collateral to be provided, and that any collateral is capable of being pledged including under applicable law. 2. Before providing any Lending and Borrowing Services on behalf of a third party, VASPs shall ensure that sufficient steps are taken on behalf of such third party to meet the requirements set out in Rule II.D.1 of this Lending and Borrowing Services Rulebook. 3. VASPs shall ensure that liquidity risk and market risk are each monitored and tested regularly, and appropriate measures put in place as required to address any such risk in a prompt manner. 4. VASPs shall ensure that, to the extent that collateral, including Virtual Assets, is held by them, such collateral is adequate and appropriately protects the VASP against applicable risks. VASPs shall monitor any such risk and record the assessment of such risk regularly and on an ongoing basis. VASPs shall put appropriate measures in place as required to address any such risk in a prompt manner. 5. All such risk management and due diligence must be regularly audited by an independent third party.
E. Client Agreements
1. In addition to all requirements in the Market Conduct Rulebook, Client Agreements for Lending and Borrowing Services shall set out the following, to the extent applicable—
a. descriptions of the Virtual Assets lent, borrowed, and/or used as collateral that are sufficient to identify such Virtual Assets; b. any loan-to-value ratio[s] applicable under the Client Agreement; c. the respective rights of the VASP, the client and any other Entity involved in the Lending and Borrowing Services in respect of Virtual Assets that are the subject of the Client Agreement, including in respect of collateral; d. how and when any interest is paid or payable, the applicable rate, or in the case of a variable rate, how it is calculated and how interest may vary and how such variations will be communicated by the VASP to the client; e. how and when any Virtual Assets lent or borrowed, or held as collateral, are to be held and returned; f. whether or not Virtual Assets of a client used by a VASP in the course of, or in connection with, carrying out any Lending and Borrowing Services, shall be held on behalf of the client; g. the consent of the clients to the use of any Virtual Assets of the client in the course of the provision of Lending and Borrowing Services by the VASP shall be clearly and transparently obtained in accordance with all applicable laws; h. any right of the client to withdraw any Virtual Assets lent or borrowed or held as collateral; i. a statement explaining that client Virtual Assets used by the VASP in the course of the provision of Lending and Borrowing Services may be at risk, including the types and nature of such risks, and a statement on the likelihood and severity of any losses which may be suffered; j. any rights of the VASP to vary the terms of the Client Agreement; k. any rights of the VASP and the client to terminate the Client Agreement and the consequences of termination; l. any terms relating to any fluctuation in value of the Virtual Assets to which the Client Agreement relates; m. consequences of any event of default; n. an explanation of the risks the client may be exposed to; o. full details of the VASP’s client complaints procedure to enable clients to register complaints as required in relation to the VASP or the services provided by the VASP; and p. any requirements necessary for compliance with the governing law of the Client Agreement.