Under PFMI Principle 15 Key Consideration 3, what is the specific condition that governs whether equity held under international risk-based capital standards (e.g. Basel/CRD) can be counted towards an FMI's liquid net assets funded by equity requirement?
The model generated a two-part compound condition, a KC4 liquidity requirement and a non-duplication-across-Principles constraint, that does not appear in the regulator's text. The published rule states a single permissive condition framed around avoiding duplicate capital requirements. The model's formulation is internally coherent and draws on real concepts from adjacent provisions of the PFMI framework, but it applies them to this Key Consideration in a way the standard does not support, producing a materially more restrictive and structurally different rule than the regulator published.
This failure implicates training-data representation of PFMI Principle 15's Key Consideration structure: the model generated a two-part compound condition drawing on real concepts from adjacent Key Considerations (KC4 liquidity, cross-Principles non-duplication) and applied them to KC3 in a way the standard does not support. The subsystem gap is verbatim-constraint anchoring — the model's schema for how this provision works overrode the regulator's actual published language, producing a materially more restrictive rule that does not exist.
Under PFMI Principle 15 Key Consideration 3, what is the specific condition that governs whether equity held under international risk-based capital standards (e.g. Basel/CRD) can be counted towards an FMI's liquid net assets funded by equity requirement?
The model generated a two-part compound condition, a KC4 liquidity requirement and a non-duplication-across-Principles constraint, that does not appear in the regulator's text. The published rule states a single permissive condition framed around avoiding duplicate capital requirements. The model's formulation is internally coherent and draws on real concepts from adjacent provisions of the PFMI framework, but it applies them to this Key Consideration in a way the standard does not support, producing a materially more restrictive and structurally different rule than the regulator published.
This failure implicates training-data representation of PFMI Principle 15's Key Consideration structure: the model generated a two-part compound condition drawing on real concepts from adjacent Key Considerations (KC4 liquidity, cross-Principles non-duplication) and applied them to KC3 in a way the standard does not support. The subsystem gap is verbatim-constraint anchoring — the model's schema for how this provision works overrode the regulator's actual published language, producing a materially more restrictive rule that does not exist.
A lawyer drafting a Principle 15 compliance opinion for a CCP that holds Basel CET1 needs the KC3 carve-out condition stated accurately: equity counted toward LNAFE must satisfy the 'relevant and appropriate to avoid duplicate capital requirements' qualifier, nothing more, nothing less. AI tools tested on this question either replaced that condition with a KC4 liquidity screen that does not appear in KC3, or flatly denied the carve-out exists.
Either version produces an opinion that is wrong on the law: the first imposes a stricter standard than the regulation requires; the second advises the client to exclude capital it is permitted to include. Both errors surface in regulatory examination or in counterparty due diligence.
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#1, KC3 Basel equity carve-out, invented liquidity condition / outright denial [RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002], RegLegBrief AI Hallucination Research (June 11, 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-v1-002/.
RegLeg Specialist Panel (2026). "Finding#1, KC3 Basel equity carve-out, invented liquidity condition / outright denial — Practitioners — Lawyers." Citation ID: RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002. RegLegBrief AI Hallucination Research, published 2026-06-11. 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-v1-002/
RegLeg Specialist Panel. (2026). Finding#1, KC3 Basel equity carve-out, invented liquidity condition / outright denial [Hallucination finding RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002]. 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-v1-002/
@misc{reglegbrief_RLB_F_INT_BIS_CPMI_IOSCO_PFMI_L3_GENERAL_BUSINESS_RISK_2025_Q002,
author = {RegLeg Specialist Panel},
title = {Finding#1, KC3 Basel equity carve-out, invented liquidity condition / outright denial},
year = {2026},
publisher = {RegLegBrief AI Hallucination Research},
note = {Hallucination finding Citation ID: RLB-F-INT-BIS-CPMI-IOSCO-PFMI-L3-GENERAL-BUSINESS-RISK-2025-Q002},
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-v1-002/}
}
Every finding on this page compares an AI subject's account of the rule against the regulator's verbatim text from the regulator's own portal. Both are linked. Each delta, its root causes, and impact analysis are documented and published with immutable Citation IDs.