What is the minimum liquid net assets funded by equity (LNAFE) that PFMI Principle 15 Key Consideration 3 requires an FMI to hold, and how exactly is that minimum structured and calculated under the rule text?
The model constructed a "greater of" compound minimum that does not exist in the published standard. The regulator's text for Key Consideration 3 states a single flat floor — six months of current operating expenses — without any scenario-analysis-derived comparator. The scenario-analysis component the model introduced may reflect concepts from adjacent Key Considerations within the same Principle, but the model merged them into a single formulation and attributed the compound structure specifically to Key Consideration 3. An FMI compliance team relying on this response would overstate the regulatory minimum in a way that mischaracterises the rule's actual structure.
This failure implicates training-data anchoring on PFMI Principle 15 KC3's quantitative minimum: the model generated a 'greater of' compound floor where the regulator's published text states a single flat floor. The compound structure may have been synthesised from scenario-analysis language in adjacent Key Considerations. The subsystem gap is single-floor vs. compound-floor discrimination — the model's generalised schema for regulatory capital minimums produced a more complex formulation than the rule requires, expressed with high apparent confidence.
A head of liquidity risk at a major derivatives CCP wants a briefing covering the PFMI Principle 15 requirements for liquid net assets funded by equity — the minimum level, how it is calculated, and what qualifies — together with what the November 2025 CPMI-IOSCO assessment found about FMI compliance with this standard, and what changes the FIA and ISDA proposed in their response to the associated CPMI-IOSCO consultation.
The model located the correct quantitative threshold but attributed it to Key Consideration 2 instead of Key Consideration 3. The error is a cross-reference mis-assignment — the model's description of KC2's function ("potential general business losses") is drawn from the correct Key Consideration, but when it located the six-month floor it attached it to the wrong KC number. For a compliance team using this response to draft internal policy, the mis-assignment directs them to review and cite the wrong provision of the PFMI framework, with material consequences for regulatory engagement accuracy.
The model also cited a third-party regulatory commentary source as a basis for this section of its response.
This failure implicates the model's cross-reference resolution within the PFMI Principle 15 Key Consideration list: the correct threshold was located but attributed to KC2 instead of KC3. The subsystem gap is structured-document KC-number-to-provision linkage in training data — the model's Annex A representation does not reliably bind specific quantitative requirements to their correct KC identifier. The Pretextual citation (third-party commentary) used as a sourcing basis for this section of the response compounds the error.
KC3's LNAFE minimum is a single floor: six months of current operating expenses. AI tools we tested recast this as a 'greater of' dual-track minimum — (i) six months of operating expenses or (ii) the amount derived from KC2's scenario analysis, whichever is higher. That structure does not appear in KC3; the scenario-analysis sizing obligation is in KC2. A compliance opinion or board briefing that adopts the AI's framing imposes on the FMI a combined test that the regulation does not require, potentially causing the client to over-capitalise or to mischaracterise its methodology in a regulatory submission.
Each finding has a stable Citation ID (RLB-F-… for aggregated case-study findings, RLB-H-… for raw per-model hallucinations) — like a DOI, the ID always resolves to the canonical finding even if URLs change.
RegLeg Specialist Panel, Finding#2 — KC3 LNAFE floor — fabricated dual-track 'greater of' structure [RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q003], RegLegBrief AI Hallucination Research (June 04, 2026), https://reglegbrief.com/regulators/j1/int/bis-cpmi/cpmi-iosco-pfmi-l3-general-business-risk-2025/practitioners/lawyers/finding/INT-BIS-CPMI-INT-001-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-v1-003/.
RegLeg Specialist Panel (2026). "Finding#2 — KC3 LNAFE floor — fabricated dual-track 'greater of' structure — Practitioners — Lawyers." Citation ID: RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q003. RegLegBrief AI Hallucination Research, published 2026-06-04. https://reglegbrief.com/regulators/j1/int/bis-cpmi/cpmi-iosco-pfmi-l3-general-business-risk-2025/practitioners/lawyers/finding/INT-BIS-CPMI-INT-001-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-v1-003/
RegLeg Specialist Panel. (2026). Finding#2 — KC3 LNAFE floor — fabricated dual-track 'greater of' structure [Hallucination finding RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q003]. RegLegBrief AI Hallucination Research. https://reglegbrief.com/regulators/j1/int/bis-cpmi/cpmi-iosco-pfmi-l3-general-business-risk-2025/practitioners/lawyers/finding/INT-BIS-CPMI-INT-001-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-v1-003/
@misc{reglegbrief_RLB_F_INT_BIS_CPMI_IOSCO_PFMI_L3_GENERAL_BUSINESS_RISK_2025_Q003,
author = {RegLeg Specialist Panel},
title = {Finding#2 — KC3 LNAFE floor — fabricated dual-track 'greater of' structure},
year = {2026},
publisher = {RegLegBrief AI Hallucination Research},
note = {Hallucination finding Citation ID: RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q003},
url = {https://reglegbrief.com/regulators/j1/int/bis-cpmi/cpmi-iosco-pfmi-l3-general-business-risk-2025/practitioners/lawyers/finding/INT-BIS-CPMI-INT-001-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-v1-003/}
}