Furthermore, the Bank will haircut the security’s market value by as much as 25 per cent, depending on the type of security involved. So, taking account of the haircut, the effective cost of obtaining this liquidity can be considerably higher than the 25 basis point penalty combined with the annual 15 basis point commitment fee.
Consequently, the CLF is only (and not completely) insuring an ADI against the liquidity risk on its securities. The credit and market risks attached to any securities remain with the ADI.