A committed facility is an arrangement under which a bank or other provider promises, in a binding contract, to make funds available to a borrower on demand up to a set limit for a set period, as long as agreed conditions are met. The borrower usually pays a commitment fee on the unused amount in exchange for that certainty. Companies use committed facilities as backstop funding; payment systems, central counterparties and other financial market infrastructures use them to make sure they can complete settlement if a participant fails.
The opposite is an uncommitted facility, which a provider may decline to fund at any time without breaching any obligation. That difference matters most in a crisis, when uncommitted lines tend to vanish. In the payments world, committed lines of credit, committed foreign exchange swaps and committed repurchase agreements can count towards the liquid resources that international standards require FMIs to hold.
A committed facility in plain terms
Picture two friends who say they will lend you their car. One says, "Ask me if you need it, and I'll see." The other signs a note saying, "For the next year, the car is yours on any day you ask, as long as you keep your licence." You pay the second friend a little each month for the promise.
A committed facility is the signed note. It costs something even when you do not use it, but it means the money is there when you need it most, rather than depending on the lender's mood on a bad day.
How committed facilities work
A committed facility agreement sets out the maximum amount, the term, the drawing procedure, the interest margin on drawn amounts, the commitment fee on undrawn amounts, and the conditions for drawing. Common conditions include the absence of an event of default, accuracy of representations and compliance with any financial covenants. Corporate examples include a revolving credit facility, which can be drawn, repaid and redrawn during its life, and backup lines that support commercial paper programmes.
A committed line of credit is still a contract with conditions. A borrower that breaches a covenant may find the provider is no longer obliged to fund. Where certainty matters most, as for FMIs, the agreements are drafted with as few conditions as possible and sometimes supported by collateral that the provider can take if it funds.
Committed facilities for financial market infrastructures
A deferred net settlement system or a central counterparty must be able to settle on time even if a large participant cannot pay. Under the Principles for Financial Market Infrastructures, an FMI should hold enough qualifying liquid resources in each relevant currency to cover its largest payment obligation in extreme but plausible conditions. Qualifying resources include cash at the central bank and at creditworthy banks, committed lines of credit, committed FX swaps, committed repos, and highly marketable collateral that can be converted to cash through prearranged and highly reliable funding arrangements.
The PFMI also expect FMIs to test these facilities, to check that their providers have the capacity to perform, and to avoid relying on providers that are also participants in a way that would leave the line useless if that participant were the one in trouble. A CCP that needs cash in a currency outside its home market might use committed FX swaps with several banks for this reason, and some systems, such as CLS, have used committed liquidity arrangements with banks to handle a member's pay-in failure.
Treatment in bank regulation
For the bank providing a committed facility, the promise is a contingent use of its own funding and capital. Under Basel III, the liquidity coverage ratio assumes that a portion of undrawn committed credit and liquidity facilities will be drawn in a stress period, with higher draw-down assumptions for facilities to financial institutions. Capital rules apply a credit conversion factor to undrawn commitments. Uncommitted lines that can be cancelled at any time generally receive lighter treatment, which is one reason banks charge for commitment.
Committed versus uncommitted facilities
| Feature | Committed facility | Uncommitted facility |
|---|---|---|
| Provider's obligation | Must fund if conditions are met | May refuse any request |
| Cost to borrower | Commitment fee plus interest on drawings | Interest on drawings, often little or no fee |
| Reliability under stress | Higher, subject to conditions | Low; often withdrawn |
| Use for FMI liquidity standards | Can qualify, if highly reliable | Generally not relied on |
Limitations
A commitment is only as good as the provider. If the bank providing the line is itself under stress, it may struggle or seek reasons not to fund, creating wrong-way liquidity risk. Borrowers manage this by spreading commitments across several providers and by holding their own cash buffers. Central banks do not normally provide committed lines to private FMIs, though access to central bank accounts and facilities, where available, can reduce reliance on commercial providers.