Liquidity standards

Part

BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms

Chapter

Liquidity standards

Printed on: 12/11/2024

Rulebook at: 31/12/2009

BIPRU 12

Liquidity standards

BIPRU 12.1

Application

01/12/2009

BIPRU 12.1.1

Subject to BIPRU 12.1.2R, BIPRU 12 applies to:

(1) a BIPRU firm;
(2) an incoming EEA firm which:

(a) is a full BCD credit institution; and
(b) has a branch in the United Kingdom; and

(3) a third country BIPRU firm which:

(a) is a bank; and
(b) has a branch in the United Kingdom.

01/12/2009

BIPRU 12.1.2

BIPRU 12.5 (Individual Liquidity Adequacy Standards), BIPRU 12.6 (Simplified ILAS), BIPRU 12.7 (Liquid assets buffer) and BIPRU 12.9 (Individual liquidity guidance and regulatory intervention points) apply only to an ILAS BIPRU firm.

01/12/2009

BIPRU 12.1.3

A firm that is an exempt full scope BIPRU investment firm is not an ILAS BIPRU firm.

01/12/2009

BIPRU 12.1.4

(1) An exempt full scope BIPRU investment firm is a full scope BIPRU investment firm that at all times has total net assets which are less than or equal to 50 million.
(2) In this rule, total net assets are the sum of a firm's total trading book assets and its total non-trading book assets, less the sum of its called up share capital, reserves and minority interests.
(3) For the purpose of (2), the value attributed to each of the specified balance sheet items must be that which is reported to the FSA in the firm's most recent FSA001 data item.

01/12/2009

BIPRU 12.1.5

The effect of BIPRU 12.1.4R is therefore to require the firm to sum the values of cell entries 20A and 20B in data item FSA001 and deduct from that total the sum of the values of cell entries 42, 43 and 44 in the same data item.

01/12/2009

BIPRU 12.1.6

There are some provisions in other sections of BIPRU 12 which apply only to an ILAS BIPRU firm. Where this is the case, the provision in question says so.

01/12/2009

BIPRU 12.1.7

In relation to an incoming EEA firm or a third country BIPRU firm, this chapter applies only with respect to the activities of the firm's UK branch.

01/12/2009

BIPRU 12.2

Adequacy of liquidity resources

01/12/2009

The overall liquidity adequacy rule

BIPRU 12.2.1

(1) A firm must at all times maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.
(2) For the purpose of (1):

(a) a firm may not include liquidity resources that can be made available by other members of its group;
(b) an incoming EEA firm or a third country BIPRU firm may not, in relation to its UK branch, include liquidity resources other than those which satisfy the conditions in BIPRU 12.2.3R;
(c) a firm may not include liquidity resources that may be made available through emergency liquidity assistance from a central bank (including the European Central Bank).

01/12/2009

BIPRU 12.2.2

BIPRU 12.2.1R is the overall liquidity adequacy rule.

01/12/2009

Branch liquidity resources

BIPRU 12.2.3

The conditions to which BIPRU 12.2.1R (2)(b) refers are that the firm's liquidity resources are:

(1) under the day-to-day control of the UK branch's senior management;
(2) held in an account with one or more custodians in the sole name of the UK branch;
(3) unencumbered; and
(4) for the purpose of the overall liquidity adequacy rule only, attributed to the balance sheet of the UK branch.

01/12/2009

BIPRU 12.2.4

The effect of BIPRU 12.2.1R (2)(b) and BIPRU 12.2.3 R is to require an incoming EEA firm or a third country BIPRU firm to maintain a local operational liquidity reserve in relation to the activities of its UK branch. BIPRU 12.9 contains further guidance on this point.

01/12/2009

Liquidity resources: general

BIPRU 12.2.5

For the purposes of the overall liquidity adequacy rule, liquidity resources are not confined to the amount or value of a firm's marketable, or otherwise realisable, assets. Rather, in assessing the adequacy of those resources, a firm should have regard to the overall character of the resources available to it which enable it to meet its liabilities as they fall due. Therefore, for the purposes of that rule, a firm should ensure that:

(1) it holds sufficient assets which are marketable, or otherwise realisable;
(2) it is able to generate funds from those assets in a timely manner;
(3) it maintains a prudent funding profile in which its assets are of appropriate maturities, taking account of the expected timing of that firm's liabilities; and
(4) it is able to generate unsecured funding of appropriate tenor in a timely manner.

01/12/2009

BIPRU 12.2.6

The overall liquidity adequacy rule is expressed to apply to each firm on a solo basis. Each firm must be able to satisfy that rule relying solely on its own liquidity resources. Where the firm is an incoming EEA firm or a third country BIPRU firm, compliance with the overall liquidity adequacy rule with respect to the UK branch must be achieved relying solely on liquidity resources that satisfy the conditions in BIPRU 12.2.3R.

01/12/2009

BIPRU 12.2.7

The starting point, therefore, is that each firm, or where relevant its UK branch, must be self-sufficient in terms of its own liquidity adequacy. The FSA does, however, recognise that there are circumstances in which it may be appropriate for a firm or branch to rely on liquidity support provided by other entities in its group or from elsewhere within the firm. A firm wishing to rely on support of this kind, whether for itself or for its UK branch, may only do so with the consent of the FSA, given by way of a waiver under section 148 (Modification or waiver of rules) of the Act to the overall liquidity adequacy rule.

01/12/2009

Liquid assets buffer and funding profile

BIPRU 12.2.8

For the purposes of the overall liquidity adequacy rule, an ILAS BIPRU firm must also ensure that:

(1) its liquidity resources contain an adequate buffer of high quality, unencumbered assets; and
(2) it maintains a prudent funding profile.

01/12/2009

BIPRU 12.2.9

The purpose of BIPRU 12.2.8R is to ensure that an ILAS BIPRU firm has a buffer of liquid assets which are available to meet those liabilities which fall due in periods of stress experienced by that firm. Those periods of stress may be both market-wide and idiosyncratic in nature. The FSA acknowledges that in periods of stress a firm's liquid assets buffer may be eroded.

01/12/2009

BIPRU 12.2.10

The FSA recognises, however, that it may take time for a firm to build a buffer which is of a sufficient size and quality to help reduce the effect of periods of stress on the firm. In particular, the FSA recognises that the transition from the FSA's liquidity regime in force immediately prior to the BIPRU 12 regime is likely to be a gradual one for many firms. The FSA will seek to agree with a firm an appropriate period of time over which its liquid assets buffer ought to be built. The FSA will, in any event, incorporate into the individual liquidity guidance which it gives to the firm details of the steps that it expects the firm to take so that it may establish an appropriately robust liquid assets buffer.

01/12/2009

BIPRU 12.2.11

In complying with BIPRU 12.2.8R, a simplified ILAS BIPRU firm must ensure that its liquid assets buffer is at least equal to the amount of liquidity resources required by the simplified buffer requirement.

01/12/2009

BIPRU 12.2.12

01/12/2009

BIPRU 12.2.13

BIPRU 12.7 contains more detailed rules and guidance about the type of assets that an ILAS BIPRU firm is permitted to hold in order to satisfy BIPRU 12.2.8R.

01/12/2009

Individual assessments of liquidity adequacy

BIPRU 12.2.14

The adequacy of an ILAS BIPRU firm's liquidity resources needs to be assessed both by that firm and by the FSA. This process involves:

(1) in the case of a standard ILAS BIPRU firm, an Individual Liquidity Adequacy Assessment (ILAA) which such a firm is obliged to carry out in accordance with BIPRU 12.5;
(2) in the case of a simplified ILAS BIPRU firm, an Individual Liquidity Systems Assessment (ILSA) which such a firm is obliged to carry out in accordance with BIPRU 12.6; and
(3) a Supervisory Liquidity Review Process (SLRP), which is conducted by the FSA.

01/12/2009

BIPRU 12.2.15

BIPRU 12.5 sets out the ILAS framework. That section describes some of the stress tests that a standard ILAS BIPRU firm must carry out in conducting its ILAA and identifies a number of sources of liquidity risk in relation to which a firm is required to assess the impact of those stresses. For a standard ILAS BIPRU firm, the requirements in BIPRU 12.5 are in addition to the stress testing requirements in BIPRU 12.4. The rules in BIPRU 12.5 require a standard ILAS BIPRU firm to report the results of both sets of stress tests in its ILAA, while the rules in BIPRU 12.6 require a simplified ILAS BIPRU firm to report those results in its ILSA.

01/12/2009

BIPRU 12.2.16

As part of its SLRP, the FSA will, having regard to the liquidity risk profile of the firm, consider:

(1) the adequacy, both as to amount and quality, of the liquidity resources (including the liquid assets buffer) held by the firm; and
(2) the degree of prudence reflected in the firm's funding profile.

01/12/2009

BIPRU 12.2.17

In assessing the adequacy of those resources, the FSA will consider a firm's overall ability to generate funding in a way that ensures that it can meet its liabilities as they fall due both in stressed and in ordinary business conditions.

01/12/2009

BIPRU 12.2.18

After completing a review of the ILAA as part of the SLRP, the FSA will give a standard ILAS BIPRU firm individual liquidity guidance, advising it of the amount and quality of liquidity resources which the FSA considers are appropriate having regard to the liquidity risk profile of the firm. In giving individual liquidity guidance, the FSA will also advise the firm of what it considers to be a prudent funding profile for the firm. In giving the firm individual liquidity guidance as to its funding profile, the FSA will consider the extent to which the firm's liabilities are adequately matched by assets of appropriate maturities. Although the FSA may have given a firm individual liquidity guidance, this does not remove the need for the firm to monitor its liquidity risk profile on an ongoing basis and to consider whether it should be holding liquidity resources that are greater in amount or higher in quality, or maintaining a more prudent funding profile, than those advised in its individual liquidity guidance.

01/12/2009

BIPRU 12.2.19

BIPRU 12.5 sets out in greater detail the FSA's ILAS regime. BIPRU 12.9 sets out in greater detail the FSA's process for issuing an ILAS BIPRU firm with individual liquidity guidance and its approach to monitoring a firm's adherence to that guidance or, as the case may be, to the simplified buffer requirement.

01/12/2009

BIPRU 12.3

Liquidity risk management

01/12/2009

BIPRU 12.3.1

The approach taken in BIPRU 12.3 is to set out:

(1) overarching systems and controls provisions in relation to a firm's management of its liquidity risk;
(2) provisions outlining the responsibilities of that firm's governing body and senior managers for the oversight of liquidity risk;
(3) more detailed provisions covering a number of specific areas, including:

(a) pricing liquidity risk;
(b) intra-day management of liquidity;
(c) management of collateral;
(d) management of liquidity across legal entities, business lines and currencies; and
(e) funding diversification and market access.

01/12/2009

BIPRU 12.3.2

BIPRU 12.4 contains further rules and guidance on stress testing and contingency funding plans. These are both extensions of the overarching systems and controls provisions in BIPRU 12.3. In formulating the rules and guidance in these two sections, the FSA has taken account of the Principles for Sound Liquidity Management and Supervision dated September 2008 issued by the Basel Committee on Banking Supervision. It is intended that the content of BIPRU 12.3 and BIPRU 12.4 be consistent with those Principles.

01/12/2009

BIPRU 12.3.3

BIPRU 12.5.4R provides that, in relation to a standard ILAS BIPRU firm, it must include in its ILAA an assessment of its compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4, including the results of the stress tests required by the rules in BIPRU 12.4. A simplified ILAS BIPRU firm is not subject to BIPRU 12.5 and consequently it is not required to prepare an ILAA. Instead, the rules in BIPRU 12.6 provide that such a firm is to carry out an ILSA, being alone an assessment of that firm's compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4.

01/12/2009

Overarching liquidity systems and controls requirements

BIPRU 12.3.4

A firm must have in place robust strategies, policies, processes and systems that enable it to identify, measure, manage and monitor liquidity risk, including those which enable it to assess and maintain on an ongoing basis the amounts, types and distribution of liquidity resources that it considers adequate to cover:

(1) the nature and level of the liquidity risk to which it is or might be exposed;
(2) the risk that the firm cannot meet its liabilities as they fall due; and
(3) in the case of an ILAS BIPRU firm, the risk that its liquidity resources might in the future fall below the level, or differ from the quality and funding profile, of those resources advised as appropriate by the FSA in that firm's individual liquidity guidance or, as the case may, its simplified buffer requirement.

01/12/2009

BIPRU 12.3.5

The strategies, policies, processes and systems required by BIPRU 12.3.4R must be comprehensive and proportionate to the nature, scale and complexity of a firm's activities.

01/12/2009

BIPRU 12.3.6

(1) A firm should ensure that it has in place a robust framework to project fully over an appropriate set of time horizons cash flows arising from assets, liabilities and off-balance sheet items.
(2) A firm should ensure that its strategies, policies, processes and systems in relation to liquidity risk support the liquidity risk tolerance established by its governing body in accordance with BIPRU 12.3.8R.
(3) A firm should ensure that its strategies, policies, processes and systems in relation to liquidity risk enable it to identify, measure, manage and monitor its liquidity risk positions for:

(a) all sources of contingent liquidity demand (including those arising from off-balance sheet activities);
(b) all currencies in which that firm is active; and
(c) correspondent, custody and settlement activities.

(4) A firm should ensure that it sets limits to control its liquidity risk exposure within and across lines of business and legal entities.
(5) A firm should ensure that it has in place early warning indicators to identify immediately the emergence of increased liquidity risk or vulnerabilities, including indicators that signal whether embedded triggers in funding or security arrangements such as warranties, covenants, events of default, conditions precedent or terms having similar effect are likely to, or will, be breached, occur or fail to be satisfied, or contingent risks will or are likely to crystallise, in either case with the result that access to liquidity resources may be impaired.
(6) A firm should ensure that it has in place reliable management information systems to provide its governing body, senior managers and other appropriate personnel with timely and forward-looking information on the liquidity position of the firm.
(7) Contravention of any of (1) to (6) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.

01/12/2009

BIPRU 12.3.7

As well as the rules in BIPRU 12.3 requiring a firm to have robust systems to enable it to identify, measure, manage and monitor liquidity risk, an ILAS BIPRU firm is also subject to obligations in SUP 16 (Reporting requirements) requiring it to report quantitative data about its liquidity position to the FSA. That chapter of SUP sets out the applicable data items and the rules governing the frequency of their submission to the FSA. Absent a firm-specific liquidity stress or a market liquidity stress, the rules in SUP 16 do not require daily reporting of data items. An ILAS BIPRU firm should, however, note that those rules do require that it has systems in place to ensure that it is able at all times to meet the requirements for daily reporting of applicable data items even if there is no firm-specific liquidity stress or market liquidity stress and none is expected.

01/12/2009

Governing body and senior management oversight: liquidity risk tolerance

BIPRU 12.3.8

A firm must ensure that:

(1) its governing body establishes that firm's liquidity risk tolerance and that this is appropriately documented; and
(2) its liquidity risk tolerance is appropriate for its business strategy and reflects its financial condition and funding capacity.

01/12/2009

BIPRU 12.3.9

As part of the SLRP, the FSA will assess the appropriateness of the liquidity risk tolerance adopted by an ILAS BIPRU firm to ensure that this risk tolerance is consistent with maintenance by the firm of adequate liquidity resources for the purpose of the overall liquidity adequacy rule. The FSA will expect a firm to provide it with an adequately reasoned explanation for the level of liquidity risk which that firm's governing body has decided it should assume. In assessing the appropriateness of the liquidity risk tolerance adopted by a firm, the FSA will consider whether the tolerance adopted is consistent with the firm's satisfaction of threshold condition 5 (COND 2.5.7 G (6)). Consistent with the FSA's statutory objectives under the Act, in assessing the appropriateness of a firm's adopted liquidity risk tolerance the FSA will also have regard to the role and importance of a firm in the financial system.

01/12/2009

Governing body and senior management oversight: approval and review of arrangements

BIPRU 12.3.10

A firm must ensure that its governing body approves the firm's strategies, policies, processes and systems relating to the management of liquidity risk, including those described in BIPRU 12.3.4R.

01/12/2009

BIPRU 12.3.11

A firm must ensure that its governing body reviews regularly (and not less frequently than annually):

(1) the continued adequacy of any strategies, policies, processes and systems approved in accordance with BIPRU 12.3.10R; and
(2) the firm's liquidity risk tolerance.

01/12/2009

BIPRU 12.3.12

A firm must ensure that its senior managers:

(1) continuously review that firm's liquidity position, including its compliance with the overall liquidity adequacy rule; and
(2) report to its governing body on a regular basis adequate information as to that firm's liquidity position and its compliance with the overall liquidity adequacy rule and with BIPRU 12.3.4R.

01/12/2009

BIPRU 12.3.13

Although a firm's senior managers are likely to develop strategies, policies and practices for the management of that firm's liquidity risk, it is the responsibility of a firm's governing body to approve those strategies, policies and practices as adequate. In determining the adequacy of those strategies, policies and practices, a firm's governing body should have regard to that firm's liquidity risk tolerance established in accordance with BIPRU 12.3.8R.

01/12/2009

BIPRU 12.3.14

The FSA will assess the adequacy of an ILAS BIPRU firm's liquidity risk management framework as part of the SLRP.

01/12/2009

Pricing liquidity risk

BIPRU 12.3.15

(1) In relation to all significant business activities, a firm should ensure that it accurately quantifies liquidity costs, benefits and risks and fully incorporates them into:

(a) product pricing;
(b) performance measurement and incentives; and
(c) the approval process for new products.

(2) For the purposes of (1), a firm should ensure that it:

(a) includes significant business activities whether or not they are accounted for on-balance sheet; and
(b) carries out the exercise of quantification and incorporation both in normal financial conditions and under the stresses required by BIPRU 12.4.1R.

(3) A firm should ensure that the liquidity costs, benefits and risks are clearly and transparently attributed to business lines and are understood by business line management.
(4) Contravention of any of (1), (2) or (3) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.

01/12/2009

BIPRU 12.3.16

The incorporation of liquidity pricing into a firm's processes assists in aligning the risk-taking incentives of individual business lines within that firm with the liquidity risk to which the firm as a whole is exposed as a result of their activities. It is important that all significant business activities are addressed, including activities which involve the creation of contingent exposures which may not have an immediate balance sheet impact.

01/12/2009

Intra-day management of liquidity

BIPRU 12.3.17

A firm must actively manage its intra-day liquidity positions and any related risks so that it is able to meet its payment and settlement obligations on a timely basis.

01/12/2009

BIPRU 12.3.18

In complying with BIPRU 12.3.17R, a firm should take into account all obligations arising from its acting as a custodian, a correspondent bank or a settlement agent.

01/12/2009

BIPRU 12.3.19

For the purposes of BIPRU 12.3.17R, a firm must ensure that:

(1) it is able to meet its payment and settlement obligations on a timely basis under both normal financial conditions and under the stresses required by BIPRU 12.4.1R; and
(2) its arrangements for the management of intra-day liquidity enable it to identify and prioritise the most time-critical payment and settlement obligations.

01/12/2009

BIPRU 12.3.20

The FSA considers that a firm's ability to meet its payment and settlement obligations on an intra-day basis is important not just for that firm, but also for the liquidity position of that firm's counterparties and for the smooth functioning of payment and settlement systems as a whole.

01/12/2009

BIPRU 12.3.21

(1) A firm should ensure that its intra-day liquidity management arrangements enable it, in relation to the markets in which it is active and the currencies in which it has significant positions, to:

(a) measure expected daily gross liquidity inflows and outflows, anticipate the intra-day timing of these flows where possible, and forecast the range of potential net funding shortfalls that might arise at different points during the day;
(b) monitor its intra-day liquidity positions against expected activities and available resources;
(c) identify gross liquidity inflows and outflows attributable to any correspondent, custodian or settlement agency services provided by that firm;
(d) manage the timing of its liquidity outflows such that priority is given to that firm's most time-critical obligations;
(e) deal with unexpected disruptions to its intra-day liquidity flows;
(f) acquire sufficient intra-day funding such that it is able to meet its most time-critical obligations when expected and other less time-critical obligations as soon as possible thereafter; and
(g) manage and mobilise collateral as necessary for the purposes of achieving the aim in (f).

(2) Contravention of any of (1)(a) to (g) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.

01/12/2009

Management of collateral

BIPRU 12.3.22

A firm must actively manage its collateral positions.

01/12/2009

BIPRU 12.3.23

For the purposes of BIPRU 12.3.22R, a firm must, in relation to all currencies in which it has significant positions and all jurisdictions in which it carries on significant business activities, ensure that it:

(1) can calculate all of its collateral positions, including assets currently provided as collateral, relative to the total amount of security required;
(2) can calculate the amount of unencumbered assets available to it to be provided as collateral;
(3) can mobilise collateral in a timely manner;
(4) monitors the location of available collateral;
(5) takes into account the extent to which counterparties with which it has deposited collateral may have re-hypothecated that collateral;
(6) has access to adequately diversified sources of collateral;
(7) assesses the eligibility of each major asset class that it holds for use as collateral with central banks;
(8) assesses on an ongoing basis the acceptability of its assets to major counterparties and providers of funds in secured funding markets; and
(9) monitors and manages the impact that the terms of existing funding or security arrangements, such as warranties, covenants, events of default, negative pledges and cross default clauses could have on its ability to mobilise collateral including for use in borrowing under any central bank facility (in particular, emergency liquidity assistance on a secured basis).

01/12/2009

BIPRU 12.3.24

For the purposes of BIPRU 12.3.23R (8) and (9), a firm should take into account the impact of the stresses that it conducts under BIPRU 12.4.1R on the requirements which may be imposed on the provision of its assets as collateral (for example, haircuts) and also the availability of funds from private counterparties during such periods of stress.

01/12/2009

BIPRU 12.3.25

(1) A firm should ensure that its arrangements for the management of liquidity risk:

(a) enable it to monitor shifts between intra-day and overnight or term collateral usage;
(b) enable it to appropriately adjust its calculation of available collateral to account for assets that are part of a tied hedge;
(c) include adequate consideration of the potential for uncertainty around, or disruption to, intra-day asset flows; and
(d) take into account the potential for additional collateral requirements under the terms of contracts governing existing collateral positions (for example, as a result of a deterioration in its own credit rating).

(2) Contravention of any of (1)(a) to (d) may be relied upon as tending to establish contravention of BIPRU 12.3.4 R.

01/12/2009

Managing liquidity across legal entities, business lines and currencies

BIPRU 12.3.26

In complying with BIPRU 12.3.4 R, a firm must ensure that:

(1) it actively manages its liquidity risk exposures and related funding needs; and
(2) it takes into account:

(a) the impact on its own liquidity position of its forming part of a group;
(b) the need to manage the liquidity position of individual business lines in addition to that of the firm as a whole; and
(c) the liquidity risk arising from its taking positions in foreign currencies; and

(3) where it forms part of a group, it understands and has regard to any legal, regulatory, operational or other constraints on the transferability to it of funds and collateral by other entities in that group.

01/12/2009

BIPRU 12.3.27

A firm must have policies and processes for the measurement and management of its net funding position and requirements on an ongoing and forward looking basis. Alternative scenarios must be considered and the assumptions underpinning decisions concerning the net funding position must be reviewed regularly.

[Note: annex V paragraph 14 of the Banking Consolidation Directive]

01/12/2009

BIPRU 12.3.28

In its liquidity risk management plans, a firm should identify clearly its assumptions regarding the transferability of funds and collateral. A firm should expect that the FSA will scrutinise those assumptions.

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Funding diversification and market access

BIPRU 12.3.29

In complying with BIPRU 12.3.4 R, a firm must ensure that it has access to funding which is adequately diversified, both as to source and tenor.

01/12/2009

BIPRU 12.3.30

A firm must ensure that its governing body:

(1) is aware of the composition, characteristics and degree of diversification of its assets and funding sources; and
(2) regularly reviews its funding strategy in the light of any changes in the environment in which it operates.

01/12/2009

BIPRU 12.3.31

Funding diversification should not be considered an end in its own right. Rather, the purpose of diversification is to ensure that a firm has in place alternative sources of funding that strengthen its capacity to withstand a variety of severe yet plausible institution-specific and market-wide liquidity shocks.

01/12/2009

BIPRU 12.3.32

(1) A firm should ensure that funding diversification is taken into account in that firm's business planning process.
(2) A firm should ensure that its funding arrangements take into account correlations between market conditions and the ability to access funds from different sources.
(3) A firm should ensure that in establishing adequate diversification it sets limits on its funding according to the following variables:

(a) maturity;
(b) nature of depositor or counterparty;
(c) levels of secured and unsecured funding;
(d) instrument type;
(e) securitisation vehicle;
(f) currency; and
(g) geographic market.

(4) A firm should ensure that it maintains an ongoing presence in its chosen funding markets and strong relationships with its chosen providers of funds.
(5) A firm should regularly test its capacity to raise funds quickly from its chosen funding sources to provide short, medium and long-term liquidity.
(6) A firm should ensure that its senior managers identify the main factors that affect its ability to raise funds and should monitor those factors closely to ensure that their estimates of fund raising capacity remain valid.
(7) Contravention of any of (1) to (6) may be relied upon as tending to establish contravention of BIPRU 12.3.4 R.

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BIPRU 12.4

Stress testing and contingency funding

01/12/2009

BIPRU 12.4.1

In order to ensure compliance with the overall liquidity adequacy rule and with BIPRU 12.3.4R, a firm must:

(1) conduct on a regular basis appropriate stress tests so as to:

(a) identify sources of potential liquidity strain;
(b) ensure that current liquidity exposures continue to conform to the liquidity risk tolerance established by that firm's governing body; and
(c) identify the effects on that firm's assumptions about pricing; and

(2) analyse the separate and combined impact of possible future liquidity stresses on its:

(a) cash flows;
(b) liquidity position;
(c) profitability; and
(d) solvency.

01/12/2009

BIPRU 12.4.2

In accordance with BIPRU 12.3.11R, a firm must ensure that its governing body reviews regularly the stresses and scenarios tested to ensure that their nature and severity remain appropriate and relevant to that firm.

01/12/2009

BIPRU 12.4.3

Consistent with BIPRU 12.3.5R, the FSA expects that the extent and frequency of such testing, as well as the degree of regularity of governing body review under BIPRU 12.4.2R, should be proportionate to the nature scale and complexity of a firm's activities, as well as to the size of its liquidity risk exposures. Consistent with the FSA's statutory objectives under the Act, in assessing the adequacy of a firm's stress testing arrangements (including their frequency and the regularity of governing body review) the FSA will also have regard to the role and importance of that firm in the financial system. The FSA will, however, expect stress testing and governing body review to be carried out no less frequently than annually. The FSA expects that a firm will build into its stress testing arrangements the capability to increase the frequency of those tests in special circumstances, such as in volatile market conditions or where requested by the FSA.

01/12/2009

BIPRU 12.4.4

For the purposes of BIPRU 12.4.2R, a review should take into account:

(1) changes in market conditions;
(2) changes in the nature, scale or complexity of the firm's business model and activities; and
(3) the firm's practical experience in periods of stress.

01/12/2009

BIPRU 12.4.5

(1) In designing its stress tests, a firm should in particular ensure that it considers:

(a) short-term and protracted stress scenarios;
(b) institution-specific and market-wide stress scenarios; and
(c) combinations of (a) and (b).

(2) Contravention of any of (1)(a) to (c) may be relied upon as tending to establish contravention of BIPRU 12.4.1R.

01/12/2009

BIPRU 12.4.6

The FSA expects every firm, including a firm with an apparently strong liquidity profile, to consider the potential impact of severe stress scenarios.

01/12/2009

BIPRU 12.4.7

In conducting its stress testing, a firm should also, where relevant, consider the impact of its chosen stresses on the appropriateness of its assumptions relating to:

(1) correlations between funding markets;
(2) the effectiveness of diversification across its chosen sources of funding;
(3) additional margin calls and collateral requirements;
(4) contingent claims, including potential draws on committed lines extended to third parties or to other entities in that firm's group;
(5) liquidity absorbed by off-balance sheet vehicles and activities (including conduit financing);
(6) the transferability of liquidity resources;
(7) access to central bank market operations and liquidity facilities;
(8) estimates of future balance sheet growth;
(9) the continued availability of market liquidity in a number of currently highly liquid markets;
(10) ability to access secured and unsecured funding (including retail deposits);
(11) currency convertibility; and
(12) access to payment or settlement systems on which the firm relies.

01/12/2009

BIPRU 12.4.8

(1) A firm should ensure that the results of its stress tests are:

(a) reviewed by its senior managers;
(b) reported to that firm's governing body, specifically highlighting any vulnerabilities identified and proposing appropriate remedial action;
(c) reflected in the processes, strategies and systems established in accordance with BIPRU 12.3.4R;
(d) used to develop effective contingency funding plans;
(e) integrated into that firm's business planning process and day-to-day risk management; and
(f) taken into account when setting internal limits for the management of that firm's liquidity risk exposure.

(2) Contravention of any of (1)(a) to (f) may be relied upon as tending to establish contravention of BIPRU 12.3.4 R.

01/12/2009

BIPRU 12.4.9

A firm must ensure that the results of its stress tests are reported to the FSA in a timely manner.

01/12/2009

Contingency funding plans

BIPRU 12.4.10

A firm must have an adequate contingency funding plan in place to deal with liquidity crises.

[Note: annex V paragraph 15of the Banking Consolidation Directive]

01/12/2009

BIPRU 12.4.11

In complying with BIPRU 12.4.10R, a firm must ensure that its contingency funding plan has been approved by its governing body.

01/12/2009

BIPRU 12.4.12

A contingency funding plan sets out a firm's strategies for addressing liquidity shortfalls in emergency situations. Its aim should be to ensure that, in each of the stresses required by BIPRU 12.4.1R, it would still have sufficient liquidity resources to ensure that it can meet its liabilities as they fall due.

01/12/2009

BIPRU 12.4.13

A firm must ensure that its contingency funding plan:

(1) outlines strategies, policies and plans to manage a range of stresses;
(2) establishes a clear allocation of roles and clear lines of management responsibility;
(3) is formally documented;
(4) includes clear invocation and escalation procedures;
(5) is regularly tested and updated to ensure that it remains operationally robust;
(6) outlines how that firm will meet time-critical payments on an intra-day basis in circumstances where intra-day liquidity resources become scarce;
(7) outlines that firm's operational arrangements for managing a retail funding run;
(8) in relation to each of the sources of funding identified for use in emergency situations, is based on a sufficiently accurate assessment of:

(a) the amount of funding that can be raised from that source; and
(b) the time needed to raise funding from that source;

(9) is sufficiently robust to withstand simultaneous disruptions in a range of payment and settlement systems;
(10) outlines how that firm will manage both internal communications and those with its external stakeholders; and
(11) establishes mechanisms to ensure that the firm's governing body and senior managers receive management information that is both relevant and timely.

01/12/2009

BIPRU 12.4.14

(1) In designing a contingency funding plan a firm should ensure that it takes into account:

(a) the impact of stressed market conditions on its ability to sell or securitise assets;
(b) the impact of extensive or complete loss of typically available market funding options;
(c) the financial, reputational and any other additional consequences for that firm arising from the execution of the contingency funding plan itself;
(d) its ability to transfer liquid assets having regard to any legal, regulatory or operational constraints; and
(e) its ability to raise additional funding from central bank market operations and liquidity facilities.

(2) Contravention of any of (1)(a) to (e) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.

01/12/2009

BIPRU 12.4.15

A firm should ensure that its contingency funding plan takes into account the terms and conditions of any central bank liquidity facilities to which it has access, including both facilities that form part of normal liquidity management operations and emergency liquidity assistance on a secured basis. Where a firm includes in its contingency funding plan the use of central bank liquidity facilities it should consider the nature of those facilities, collateral eligibility, haircuts to which its collateral might be subject, terms in its existing or available funding arrangements which might impact its ability to access central bank facilities, operational arrangements for accessing those facilities and the potential reputational consequences for that firm in accessing them. In formulating its contingency funding plan, a firm should not rely on expectations it may have about future changes to central bank facilities, either in relation to their normal liquidity management operations or in relation to the availability of specific liquidity facilities in exceptional circumstances.

01/12/2009

BIPRU 12.5

Individual Liquidity Adequacy Standards

01/12/2009

Individual Liquidity Adequacy Assessment

BIPRU 12.5.1

This section applies to a standard ILAS BIPRU firm.

01/12/2009

BIPRU 12.5.2

A firm must carry out an individual liquidity adequacy assessment (ILAA) in accordance with this section.

01/12/2009

BIPRU 12.5.3

In conducting its ILAA, a firm is obliged to comply with the stress testing and related requirements which appear in this section. The rules in this section also provide that in its ILAA a firm must include an assessment of the firm's compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4.

01/12/2009

BIPRU 12.5.4

A firm must ensure that:

(1) it regularly carries out an ILAA;
(2) it makes a written record of its ILAA;
(3) its ILAA is proportionate to the nature, scale and complexity of its activities;
(4) its ILAA takes into account whole-firm and group-wide liquidity resources only to the extent that reliance on these is permitted by the FSA;
(5) its ILAA includes an assessment of the results of the stress tests required by BIPRU 12.5.6 R; and
(6) its ILAA includes an assessment of the firm's compliance with BIPRU 12.3 and BIPRU 12.4, including the results of the stress tests required by the rules in BIPRU 12.4.

01/12/2009

BIPRU 12.5.5

A firm should carry out an ILAA at least annually, or more frequently if changes in its business or strategy or the nature, scale or complexity of its activities or the operational environment suggest that the current level of liquidity resources is no longer adequate. A firm should expect that its usual supervisory contact at the FSA will ask for the ILAA to be submitted as part of the ongoing supervisory process.

01/12/2009

BIPRU 12.5.6

A firm must ensure that in carrying out its ILAA it considers how that firm's liquidity resources change as a result of:

(1) the stress in BIPRU 12.5.8 R (the first liquidity stress);
(2) the stress in BIPRU 12.5.11 R (the second liquidity stress); and
(3) the first and second liquidity stresses occurring simultaneously.

01/12/2009

ILAA stresses

BIPRU 12.5.7

The FSA will review the results of a firm's ILAA, including the results of the stress tests required by BIPRU 12.5.6R, as part of its Supervisory Liquidity Review Process (SLRP). The FSA's review of the stress test results will assist it assessing the adequacy of a firm's liquidity resources relative to other ILAS BIPRU firms and, consequently, in calibrating the individual liquidity guidance that it gives to that firm. BIPRU 12.9.2G sets out the FSA's approach to assessing the adequacy of a firm's liquidity resources and indicates that, among other factors, it will have regard to the firms ILAA. It is not, therefore, the case that the amount of liquidity resources advised to the firm as being adequate in its individual liquidity guidance will necessarily equate to the amount needed to meet its liabilities as they fall due in the stresses required by BIPRU 12.5.6R. The FSA will assess the adequacy of a firm's liquidity resources on a case-by-case basis and, accordingly, the amount of liquidity resources judged as adequate in the firm's individual liquidity guidance might be either above or below the amount needed to survive the stresses required by BIPRU 12.5.6R.

01/12/2009

First liquidity stress

BIPRU 12.5.8

The first liquidity stress to which BIPRU 12.5.6R refers is an unforeseen, name-specific, liquidity stress in which:

(1) financial market participants and retail depositors consider that in the short-term the firm will be or is likely to be unable to meet its liabilities as they fall due;
(2) the firm's counterparties reduce the amount of intra-day credit which they are willing to extend to it;
(3) the firm ceases to have access to foreign currency spot and swap markets; and
(4) over the longer-term the firm's obligations linked to its credit rating crystallise as a result of a reduction in that credit rating.

01/12/2009

BIPRU 12.5.9

For the purpose of BIPRU 12.5.8R (1) to (3), a firm must assume that the initial, short-term, period of stress lasts for at least two weeks.

01/12/2009

BIPRU 12.5.10

For the purpose of BIPRU 12.5.8R (4), a firm should consider the effect of credit rating downgrades of varying degrees of severity. In doing so, it should also consider the cumulative effect of successive credit rating downgrades to its long-term credit rating.

01/12/2009

Second liquidity stress

BIPRU 12.5.11

The second liquidity stress to which BIPRU 12.5.6R refers is an unforeseen, market-wide liquidity stress of three months duration.

01/12/2009

BIPRU 12.5.12

For the purpose of BIPRU 12.5.11R, a firm must assume that the second liquidity stress is characterised by:

(1) uncertainty as to the accuracy of the valuation attributed to that firm's assets and those of its counterparties;
(2) inability to realise, or ability to realise only at excessive cost, particular classes of assets, including those which represent claims on other participants in the financial markets or which were originated by them;
(3) uncertainty as to the ability of a significant number of firms to ensure that they can meet their liabilities as they fall due; and
(4) risk aversion among participants in the markets on which the firm relies for funding.

01/12/2009

ILAA methodology

BIPRU 12.5.13

In carrying out the liquidity stresses required by BIPRU 12.5.6R, a firm must:

(1) analyse each of the sources of risk identified in BIPRU 12.5.14R;
(2) record the evidence which supports any behavioural assumptions that it makes in carrying out those stress tests;
(3) record the evidence which supports its assessment of the adequacy of its liquid assets buffer; and
(4) identify those of the measures set out in its contingency funding plan that it would implement.

01/12/2009

BIPRU 12.5.14

The sources of risk referred to in BIPRU 12.5.13R are:

(1) wholesale secured and unsecured funding risk;
(2) retail funding risk;
(3) intra-day liquidity risk;
(4) intra-group liquidity risk;
(5) cross-currency liquidity risk;
(6) off-balance sheet liquidity risk;
(7) franchise-viability risk;
(8) marketable assets risk;
(9) non-marketable assets risk; and
(10) funding concentration risk.

01/12/2009

Wholesale secured and unsecured funding risk

BIPRU 12.5.15

For the purpose of assessing its wholesale funding risk, a firm must estimate the gross wholesale outflows that could occur under the liquidity stresses required by BIPRU 12.5.6R.

01/12/2009

BIPRU 12.5.16

In assessing its wholesale funding risk, a firm must:

(1) identify its wholesale liabilities;
(2) determine how those liabilities behave under normal financial conditions;
(3) assess how they will behave under the stresses required by BIPRU 12.5.6R; and
(4) divide its wholesale liabilities into funding which the firm assesses as having a higher than average likelihood of withdrawal in response to actual or perceived changes in the firm's credit-worthiness (Type A wholesale funding) and other funding (Type B wholesale funding).

01/12/2009

BIPRU 12.5.17

In assessing how its liabilities behave under stress, the firm should categorise its liabilities according to value, maturity and estimated speed of outflow. The firm should bear in mind that wholesale funding risk may crystallise as an acute loss of funds in the short term, or as a longer-term gradual leakage of funds, or as both.

01/12/2009

BIPRU 12.5.18

In the FSA's view, Type A wholesale funding is likely to include at least funding which:

(1) is accepted from a credit institution, local authority, insurance undertaking, pension fund, money market fund, asset manager (including a hedge fund manager), government-sponsored agency, sovereign government, or sophisticated non-financial corporation; or
(2) is accepted through the treasury function of a sophisticated non-financial corporation which may be assumed to respond swiftly to negative news about a firm's credit-worthiness; or
(3) is accepted on wholesale market terms as a part of a firm's money market operations; or
(4) is accepted from a depositor with whom a firm does not have a long-established relationship or to whom a firm does not supply a range of services; or
(5) is accepted from overseas counterparties (other than those in the country or territory of incorporation of a firm's parent undertaking or, in the case of a UK branch, of the firm of which it forms part); or
(6) is obtained through unsecured debt instruments (such as certificates of deposit, medium-term notes and commercial paper); or
(7) is not obtained through repo against assets of the type described in BIPRU 12.7.2R (1) or BIPRU 12.7.2R (2); or
(8) is obtained from counterparties with a relatively low creditor seniority on the liquidation of the firm.

01/12/2009

BIPRU 12.5.19

For the purpose of BIPRU 12.5.15R, a firm must assume that it is unable to roll any of its Type A wholesale funding in the first two weeks of the stresses.

01/12/2009

Retail funding risk

BIPRU 12.5.20

In this part of BIPRU 12.5, retail funding is funding that is accepted from a consumer.

01/12/2009

BIPRU 12.5.21

For the purpose of assessing its retail funding risk, a firm must:

(1) estimate the gross retail outflows that could occur under the liquidity stresses required by BIPRU 12.5.6R;
(2) identify the stress, or combination of stresses, to which it considers its retail funding to be most vulnerable and estimate the gross retail outflows that could occur under that stress or combination of stresses; and
(3) divide its retail funding into funding which the firm assesses as having a higher than average likelihood of withdrawal in response to actual or perceived changes in the firm's credit-worthiness (Type A retail funding) and other funding (Type B retail funding).

01/12/2009

BIPRU 12.5.22

In general, the FSA expects a firm's retail funding to be less responsive than its wholesale funding to actual or perceived changes in the firm's credit-worthiness. However, a firm should nevertheless make its own assessment of the relative responsiveness of its wholesale and retail funding.

01/12/2009

BIPRU 12.5.23

For the purposes of assessing behaviour under stress, a firm should categorise its retail liabilities according to: value, maturity, estimated speed of outflow, product type, interest rate applied and any other factor that it considers relevant to its retail deposit structure.

01/12/2009

BIPRU 12.5.24

A firm should also be mindful that its retail funding profile is unlikely to be constant. In carrying out its ILAA, a firm should have regard to any changes to its retail funding profile since the previous ILAA and also to the possible impact of any future changes on its ability to maintain retail funding during periods of stress. In its ILAA submission to the FSA, a firm should include an analysis of:

(1) its retail funding profile as at the date of its ILAA;
(2) its retail funding profile over the twelve months preceding its ILAA;
(3) its projected retail funding profile over the twelve months following the date of its ILAA; and
(4) its approach to assessing which of its retail funding it has classed as Type A retail funding and which as Type B retail funding.

01/12/2009

BIPRU 12.5.25

In the FSA's view Type A retail funding is likely to include at least funding which:

(1) has been accepted through the internet; or
(2) is considered to have a more than average sensitivity to interest rate changes (such as a deposit whose acceptance can reasonably be attributed to the use of price-focused advertising by the firm accepting the deposit); or
(3) in relation to any individual depositor exceeds to a significant extent the amount of that individuals deposits with the accepting firm that are covered by a national deposit guarantee scheme; or
(4) is not accepted from a depositor with whom the firm has had a long relationship; or
(5) is accepted from retail depositors who can access their deposits before their residual contractual maturity subject to a loss of interest or payment of another form of early access charge (as a general proposition, the behaviour of liabilities to retail depositors is likely to depend in part on the contractual terms and conditions which give rise to those liabilities); or
(6) is not held in an account which is maintained for transactional purposes.

01/12/2009

Intra-day liquidity risk

BIPRU 12.5.26

For the purpose of assessing its intra-day liquidity risk arising from its direct participation in a payment or settlement system, a firm must in relation to each such system in which it participates:

(1) calculate on an intra-day basis the net amounts of collateral and cash required by that firm to fund participation in that system; and
(2) estimate how the amounts in (1) could change under the liquidity stresses required by BIPRU 12.5.6 R.

01/12/2009

BIPRU 12.5.27

For the purpose of calculating the net amounts of collateral and cash under BIPRU 12.5.26R, a firm should separately analyse:

(1) the amounts of collateral and cash needed in relation to both its own payments and those of its customers; and
(2) the intra-day timing of the payment of cash and the posting of the collateral, including the time at which the demand for its collateral and cash is greatest.

01/12/2009

BIPRU 12.5.28

For the purpose of BIPRU 12.5.26R, a firm should ensure that it takes into account, in both normal financial conditions and in periods of stress, the effect of:

(1) other participants in a payment system withholding some or all of the payments expected from them; and
(2) its customers increasing either or both the volume and value of their payments.

01/12/2009

BIPRU 12.5.29

At the same time as it carries out the calculation and estimation in BIPRU 12.5.26 R, a firm which participates directly in one or more payment or settlement systems must also estimate the impact on its liquidity position of the customer to which it has the largest intra-day credit exposure defaulting on its payment obligations to the firm:

(1) under normal financial conditions; and
(2) under the stresses required by BIPRU 12.5.6 R.

01/12/2009

BIPRU 12.5.30

For the purpose of BIPRU 12.5.29R, a firm should assume that the effect of that default is that the exposure is rolled overnight.

01/12/2009

BIPRU 12.5.31

A firm must, as part of its ILAA submission to the FSA:

(1) identify those payment and settlement systems in which it is a direct participant; and
(2) provide details of the intra-day credit policies that it applies, including the criteria against which it sets credit limits, when extending credit to a customer which is not a direct participant in the payment or settlement system in question.

01/12/2009

BIPRU 12.5.32

For the purpose of BIPRU 12.5.31R, the FSA would expect a firm, in relation to each payment or settlement system in which it participates directly, to provide details of:

(1) that firm's charges for providing intra-day credit;
(2) any collateral requirements which it applies to its customers;
(3) the credit limits that it imposes (and the circumstances, if any, in which credit may be provided notwithstanding a limit breach);
(4) the extent to which the customers of that firm make use of the credit extended to them; and
(5) where relevant, the points during the day at which a customer is required to settle, or provide assets as collateral to cover, that firm's credit exposure to it.

01/12/2009

BIPRU 12.5.33

BIPRU 12.5.34R applies to a firm which:

(1) is not a direct participant in a given payment or settlement system;
(2) is a customer of a firm that is a direct participant in such a system for the purposes of gaining access to that system; and
(3) receives intra-day credit from that participant firm or prefunds its account with such a firm.

01/12/2009

BIPRU 12.5.34

For the purpose of assessing its intra-day liquidity risk a firm to which BIPRU 12.5.33R applies must assess the effect on its own position of a participant firm from which it receives intra-day credit or with which it has a prefunded account being unable to perform its obligations to that firm:

(1) under normal financial conditions; and
(2) under the stresses required by BIPRU 12.5.6 R.

01/12/2009

BIPRU 12.5.35

As part of its ILAA submission to the FSA, a firm to which BIPRU 12.5.33R applies should include:

(1) details of any alternative arrangements that it has in place to ensure that it continues to be able to meet its liabilities as they fall due in the circumstances set out in BIPRU 12.5.34R; and
(2) details of the policies governing the use of intra-day credit provided to it by a firm which is a direct participant in a given payment or settlement system, including details of the criteria against which that participant will decide whether to reduce or cease the provision of intra-day credit.

01/12/2009

Intra-group liquidity risk

BIPRU 12.5.36

Where a firm has an intra-group liquidity modification permitting it to rely on liquidity from other members of its group in order to satisfy the overall liquidity adequacy rule, or may be exposed to calls on its own liquidity resources from others in its group, then in assessing its intra-group liquidity risk it must:

(1) take into account:

(a) the extent to which it and other entities in its group have access to central bank funding;
(b) in relation to any group entity on which a firm relies for liquidity support, the legal and regulatory regime to which that entity is subject, in particular that covering liquidity regulation; and
(c) the contractual arrangements governing any agreed forms of intra-group liquidity support (including committed funding lines); and

(2) assume that in periods of stress, group entities will not repay loans or deposits made by the firm to them, but that the firm will meet its liabilities that fall due to other group entities during the period of the relevant stress.

01/12/2009

BIPRU 12.5.37

For the purpose of BIPRU 12.5.36R, a firm should consider the full range of legal and regulatory restrictions on the availability to it of liquidity support from other members of its group. A firm should ensure that it understands restrictions in force in other jurisdictions, as well as the potential for such restrictions to be imposed in the future, as to the allowable size of intra-group exposures. A firm should also consider the circumstances in which it may find itself obliged to transfer liquidity resources to other entities in its group.

01/12/2009

BIPRU 12.5.38

In relation to an incoming EEA firm or third country BIPRU firm which does not have a whole-firm liquidity modification, that firm must assess the risk that its UK branch may be exposed to calls on liquidity under its control from its head office:

(1) in normal financial conditions; and
(2) under the liquidity stresses required by BIPRU 12.5.6 R.

01/12/2009

BIPRU 12.5.39

In complying with BIPRU 12.5.38R a firm is therefore assessing its exposure to inter-office liquidity risk, rather than intra-group liquidity risk. It is the FSA's assessment of the firm's inter-office liquidity risk that is one of the factors that will inform the FSA's decision as to the appropriate size for the firm's local operational liquidity reserve (as described in BIPRU 12.2).

01/12/2009

Cross-currency liquidity risk

BIPRU 12.5.40

For the purpose of assessing its cross-currency liquidity risk, a firm must:

(1) in relation to each currency in which it has significant positions, calculate its gross outflows and gross inflows having regard to their respective maturities;
(2) where it identifies a net outflow in (1), assess how it will fund that outflow; and
(3) estimate how the amounts in (1) and the assessment in (2) could change under the liquidity stresses required by BIPRU 12.5.6R.

01/12/2009

BIPRU 12.5.41

A firm must, as part of its ILAA submission to the FSA, in relation to each currency in which it has significant positions:

(1) identify the type of financial instruments which that firm uses to raise funding in that currency;
(2) identify the main counterparties which provide funding to that firm in that currency; and
(3) describe the arrangements that it has in place to fund net outflows in that currency on a timely basis.

01/12/2009

Off-balance sheet liquidity risk

BIPRU 12.5.42

For the purpose of assessing its off-balance sheet liquidity risk, a firm must:

(1) identify all off-balance sheet activities that might affect its cash flows;
(2) calculate the effect on its cash flows of those activities in normal financial conditions; and
(3) estimate the effect on its cash flows of those activities under the liquidity stresses required by BIPRU 12.5.6R.

01/12/2009

BIPRU 12.5.43

For the purpose of BIPRU 12.5.42R, a firm must take into account the circumstances in which it may choose to provide liquidity support in respect of its off-balance sheet activities beyond its contractual obligations (if any) to do so.

01/12/2009

BIPRU 12.5.44

For the purpose of BIPRU 12.5.42R, a firm must in particular consider the impact on its cash flows of:

(1) derivatives positions;
(2) contingent liabilities;
(3) commitments given; and
(4) liquidity facilities to support securitisation programmes.

01/12/2009

BIPRU 12.5.45

In relation to derivatives positions, a firm should:

(1) assess the effect on its cash flows arising from the maturity, exercise and repricing of derivatives in which it holds a position, including the impact of counterparties:

(a) who may require the posting of additional margin or collateral in the event of a decline in that firm's credit rating;
(b) who may require the posting of additional margin or collateral (or the return to them of margin or collateral) in the event of a change in the value of a derivative or of the posted collateral;
(c) who (in the case of those that are any of a recognised investment exchange, a designated investment exchange or a recognised clearing house) may require the posting of additional margin in volatile market conditions;
(d) who may choose to terminate an OTC derivative which they have entered into with the firm rather than post additional margin or collateral;
(e) who, in periods of name-specific liquidity stress experienced by the firm, may choose to terminate out of the money derivatives which they have entered into with that firm; and
(f) who, in periods of stress, may choose to post less liquid collateral than would likely be the case in normal financial conditions; and

(2) assume that under the stresses required by BIPRU 12.5.6 R there may be uncertainty as to the accuracy of the valuation attributed to a derivative contract.

01/12/2009

BIPRU 12.5.46

In relation to its contingent liabilities, a firm should:

(1) calculate the impact on its cash flows of those of its contingent obligations that will be triggered in normal financial conditions; and
(2) estimate the impact on its cash flows of those of its contingent obligations that may be triggered under the liquidity stresses required by BIPRU 12.5.6 R.

01/12/2009

BIPRU 12.5.47

For the purpose of BIPRU 12.5.46G, a firm should therefore assess the impact on its cash flows of the triggering of contingent obligations contained in all contractual documentation to which it is party, including: acceptances, endorsements, guarantees, underwriting agreements, standby letters of credit, documentary credits, warrants, indemnities, undrawn note issuance facilities and other revolving credit facilities. A firm should also assess the degree of concentration in its total contingent liabilities as respects obligations arising from particular types of contract, counterparty and market sector.

01/12/2009

BIPRU 12.5.48

In relation to its commitments (other than liquidity facilities to support securitisation programmes)), a firm should:

(1) calculate its maximum contractual exposure arising from those commitments;
(2) calculate the effect on its cash flows of the drawing of those commitments in normal financial conditions; and
(3) estimate the effect on its cash flows of the drawing of those commitments under the liquidity stresses required by BIPRU 12.5.6 R.

01/12/2009

BIPRU 12.5.49

For the purpose of BIPRU 12.5.48G, a firm should:

(1) consider its contractual exposure to the following types of commitment: committed funding facilities, undrawn loans and advances to wholesale counterparties, mortgages that have been agreed but not yet been drawn down, credit cards, overdrafts (and other retail lending facilities);
(2) ensure that its analysis of each type of commitment is sufficiently granular to enable that firm to:

(a) assess the circumstances in which counterparties will draw down;
(b) identify the extent of any correlations as between counterparties in deciding whether or not to draw down;
(c) identify the extent to which decisions by the firm's counterparties to draw down may be correlated to a decline in the firm's own liquidity resources; and
(d) assess the proportion of its total commitments attributable to particular counterparties; and

(3) assess the extent to which draw down requires the counterparty in question to deliver to the firm collateral in the form of marketable assets, while also assessing the anticipated effect of such a requirement on:

(a) the likelihood that the counterparty in question will draw down; and
(b) the firm's liquidity position if the counterparty in question delivers collateral on draw down; and

(4) assess the impact on its cash flows of its commitment counterparties experiencing liquidity stress at the same time as that firm is subject to the stresses required by BIPRU 12.5.6 R.

01/12/2009

BIPRU 12.5.50

In relation to liquidity facilities to support securitisation programmes, a firm should:

(1) assess the extent of its contractual obligations to provide liquidity support to sponsored and third-party structured vehicles;
(2) identify the circumstances in which support will, or is likely to, be called; and
(3) assess the impact on that firm's cash flows of such support being called:

(a) in normal financial conditions; and
(b) under the liquidity stresses required by BIPRU 12.5.6R.

01/12/2009

BIPRU 12.5.51

For the purpose of BIPRU 12.5.50G (2), a firm should consider the impact of the following events on the likelihood of a call for liquidity support: inability of a vehicle to roll over commercial paper (due either to disruption in the CP market or to concern as to the quality of the assets securitised) and, in relation to sponsored vehicles, concern as to the solvency of that firm as sponsor and, separately, the possibility of draw down of undrawn commitments entered into by the sponsored vehicle in its own right.

01/12/2009

Franchise-viability risk

BIPRU 12.5.52

For the purposes of assessing its franchise-viability risk, a firm must assess, under the liquidity stresses required by BIPRU 12.5.6 R, the liquidity resources required to maintain its core business franchise and reputation.

01/12/2009

BIPRU 12.5.53

Franchise-viability risk is the risk that in the stresses required by BIPRU 12.5.6R a firm may not have sufficient liquidity resources to maintain its core business franchise and reputation.

01/12/2009

BIPRU 12.5.54

In complying with BIPRU 12.5.52R, a firm should assess the extent to which it can and realistically will:

(1) restrict new retail lines without significantly damaging customer relationships;
(2) restrict new wholesale lending without significantly damaging its ability to resume such lending following the period of stress in question;
(3) cease to provide liquidity support to its sponsored vehicles;
(4) decline to exercise call options whose effect if not exercised might be to cause market participants to question the firm's ability to continue to meet its liabilities as they fall due; and
(5) continue any regular programme of buying back its issued debt.

01/12/2009

BIPRU 12.5.55

For the purpose of BIPRU 12.5.54G (5), a firm may wish to continue repurchasing its debt to help demonstrate that a two-way market continues to be made in its paper and, more generally, in order to maintain the long-term viability of its debt issuance programme. Equally, a firm may wish to continue repaying retail depositors before the contractual maturity of those deposits in order to maintain confidence in its ability to continue to meet its liabilities as they fall due.

01/12/2009

Marketable assets risk

BIPRU 12.5.56

For the purpose of assessing its exposure to marketable assets risk, a firm must assess how the marketable assets comprised in its liquidity resources will behave:

(1) under normal financial conditions; and
(2) under the liquidity stresses identified in BIPRU 12.5.6R, including an assessment of the effect of these stresses on:

(a) its ability to derive funding from its marketable assets in a timely fashion;
(b) the potential for using those assets as collateral to raise secured funding and the size of the haircut likely to be required by a counterparty;
(c) the likelihood and extent of forced-sale loss; and
(d) the effect on its business activities of any changes in (a) to (c) identified as likely to result from those liquidity stresses.

01/12/2009

BIPRU 12.5.57

In complying with BIPRU 12.5.56R, a firm should consider all marketable assets which count towards its liquidity resources for the purposes of meeting the overall liquidity adequacy rule. A firm should therefore include in this assessment any assets that it holds in its liquid assets buffer.

01/12/2009

BIPRU 12.5.58

The FSA regards as marketable those of a firm's assets that it is able to sell outright or repo. For liquidity management purposes, a firm would ordinarily expect to hold a stock of assets of this kind in order to reduce the likelihood that it may need to borrow unsecured at short notice. To the extent that these assets may behave differently under stress conditions than under normal financial conditions, a firm is subject to marketable assets risk.

01/12/2009

BIPRU 12.5.59

As a general proposition, the speed with which a firm may be able to realise a marketable asset, and the price impact of doing so, will depend to a significant extent on the volume of those assets which that firm wishes to realise and the market conditions prevailing at the time.

01/12/2009

BIPRU 12.5.60

The behaviour of a firm's marketable assets under conditions of stress is likely to depend on a number of different factors, including:

(1) the depth and competitiveness of the market for the marketable asset in question, the size of the bid-offer spread, the presence of committed market-makers, the nature of the information available to potential counterparties, the degree of structural complexity of the assets in question and the assets eligibility in central bank market operations and liquidity facilities; and
(2) that firm's operational capability to generate funding from those assets in a timely manner.

01/12/2009

BIPRU 12.5.61

In considering its operational capability to generate funding from assets, a firm should be aware that its capability in this regard is likely to depend on:

(1) whether it has in place arrangements for repo;
(2) the extent to which that firm already holds a significant proportion of the market for the marketable asset in question;
(3) the extent to which that firm periodically realises some or all of its holdings of that asset; and
(4) that firm's accounting treatment and valuation of that asset.

01/12/2009

BIPRU 12.5.62

For the purpose of its ILAA submission to the FSA, a firm must provide the FSA with an analysis of the profile of its marketable assets as at the date of submission in a way that:

(1) separately identifies its marketable assets according to asset class, maturity, currency, their eligibility for use in central bank monetary operations and liquidity facilities and any other characteristic that it uses in its liquidity management; and
(2) assesses the degree of diversification achieved across its marketable assets.

01/12/2009

Non-marketable assets risk

BIPRU 12.5.63

For the purpose of assessing its exposure to non-marketable assets risk, a firm must assess how the non-marketable assets in its liquidity resources will behave:

(1) under normal financial conditions; and
(2) under the liquidity stresses required by BIPRU 12.5.6 R, including an assessment of the effect of these stresses on:

(a) the firm's ability to derive funding from its non-marketable assets; and
(b) the impact on the firm's liquidity position of any consequences for its funding ability identified in (a).

01/12/2009

BIPRU 12.5.64

In complying with BIPRU 12.5.63R, a firm should consider all non-marketable assets which count towards its liquidity resources for the purposes of meeting the overall liquidity adequacy rule.

01/12/2009

BIPRU 12.5.65

BIPRU 12.2.5 G notes that a firm should include in its liquidity resources sufficient assets which are marketable or otherwise realisable. The FSA considers those assets which are capable of realisation, but other than through repo or outright sale, as non-marketable assets. To the extent that these assets may behave differently under stress conditions than under normal financial conditions, a firm is subject to non-marketable assets risk. Different forms of non-marketable assets risk arise, particularly in relation to:

(1) retail loans; and
(2) unsecured wholesale assets.

01/12/2009

BIPRU 12.5.66

In addition to realising a firm's marketable assets, a firm can meet its outflows in part by expected inflows from maturing non-marketable assets such as retail loans. Inflows from these assets (principal and interest) may in stressed conditions be affected by counterparty behaviour, exposing that firm to non-marketable assets risk.

01/12/2009

BIPRU 12.5.67

For the purpose of assessing its exposure to non-marketable assets risk a firm must assess the extent to which the behaviour of inflows from retail loans under the liquidity stresses required by BIPRU 12.5.6R may differ from that suggested by their contractual terms.

01/12/2009

BIPRU 12.5.68

For the purpose of the assessment in BIPRU 12.5.67R, a firm should ensure that it assesses repayment behaviour at a level of granularity sufficient to enable it to draw informed conclusions about its liquidity exposure. The FSA would expect a firm's assessment to analyse separately the non-marketable assets risk associated with each of its relevant products and with each type of counterparty from whom it is expecting repayments.

01/12/2009

BIPRU 12.5.69

For the purpose of the assessment in BIPRU 12.5.67R, a firm should in particular have regard to the risk associated with:

(1) repayment defaults; and
(2) exercise by its counterparties of contractual rights to repay before the expected maturity date or to delay repayment beyond that date.

01/12/2009

BIPRU 12.5.70

A firm may also use its unsecured wholesale assets to generate liquidity, otherwise than by outright sale or repo. A firm may, for example, choose to generate funding from some of the assets included in its liquidity resources by using them in securitisation or covered bond programmes. Assets that are typically used to raise liquidity in this manner include residential mortgage loans; commercial mortgage and other loans; credit card and automobile receivables, which have been packaged for the wholesale markets. To the extent that the ability to fund from these non-marketable assets may be limited under stressed conditions, a firm may be exposed to non-marketable assets risk.

01/12/2009

BIPRU 12.5.71

The assessment required by BIPRU 12.5.63R is particularly important for a firm which:

(1) ordinarily does not raise funding from its non-marketable assets in this way; or
(2) places proportionately greater reliance on securitisation programmes as compared to other funding strategies to generate liquidity.

01/12/2009

BIPRU 12.5.72

In complying with BIPRU 12.5.63R, a firm must in particular assess the non-marketable assets risk associated with asset securitisations, having regard to:

(1) the existence of early amortisation triggers and the consequences of their operation; and
(2) its financing of assets which are warehoused prior to their securitisation.

01/12/2009

BIPRU 12.5.73

A firm which chooses to warehouse assets in the way described in BIPRU 12.5.72R should consider the particular risks that arise from the method of financing that it uses to pre-fund those assets. For example, financing of warehoused assets by means of short-term (rather than long-term) funding is more likely to put that firm under liquidity pressure in the event that its proposed securitisation is not completed (either at all, or at the expected date).

01/12/2009

Funding concentration risk

BIPRU 12.5.74

A firm with a sufficiently flexible funding strategy should be able to reduce its liquidity risk by diversifying its liquidity resources.

01/12/2009

BIPRU 12.5.75

As part of its ILAA, a firm must assess the impact on the degree of diversification in its liquidity resources of the stresses required by BIPRU 12.5.6R.

01/12/2009

BIPRU 12.5.76

For the purpose of BIPRU 12.5.75R, a firm should take into account the extent to which its liquidity resources are diversified according to:

(1) type of instrument and product;
(2) currency;
(3) counterparty;
(4) liability term structure; and
(5) market for their realisation (provided that such market is open to the firm as counterparty).

01/12/2009

BIPRU 12.5.77

A firm should be aware that the degree of diversification in its liquidity resources can be compromised, particularly in periods of stress, by a number of factors, including:

(1) reduced or terminated funding provision from some counterparties as a result of that firm's credit-rating being downgraded or its financial condition deteriorating;
(2) disputes over the terms of legally binding commitments to lend which delay the provision of funding;
(3) markets previously used by the firm for raising funding ceasing to be open or operating but at reduced capacity;
(4) reliance on a small number of brokers to access funding sources; and
(5) positive correlations in the behaviour of different instruments and products.

01/12/2009

BIPRU 12.6

Simplified ILAS

01/12/2009

BIPRU 12.6.1

The FSA recognises that it may not always be appropriate to apply BIPRU 12.5 (Individual Liquidity Adequacy Standards) to every ILAS BIPRU firm. For a firm which operates a relatively simple business model, it may instead be appropriate to allow the firm to calculate the size and content of its liquid assets buffer according to a simplified approach prescribed in the Handbook in advance of any review of that firm's liquidity risk conducted by the FSA. This section sets out the simplified ILAS approach to maintaining a liquid assets buffer and a firm that operates that approach is a simplified ILAS BIPRU firm.

01/12/2009

BIPRU 12.6.2

An ILAS BIPRU firm that wishes to operate the simplified ILAS approach must:

(1) satisfy the conditions in BIPRU 12.6.6R to BIPRU 12.6.8R; and
(2) obtain a simplified ILAS waiver from the FSA.

01/12/2009

BIPRU 12.6.3

A firm will therefore lose the benefit of its simplified ILAS waiver if it ceases to satisfy the conditions in BIPRU 12.6.6R to BIPRU 12.6.8R. Consistent with Principle 11 (Relations with regulators), if a firm anticipates that it may breach those conditions, it should notify the FSA promptly.

01/12/2009

BIPRU 12.6.4

A simplified ILAS BIPRU firm must calculate the size of its simplified buffer requirement in accordance with BIPRU 12.6.9Rto BIPRU 12.6.18R.

01/12/2009

BIPRU 12.6.5

The FSA is likely to regard a simplified ILAS BIPRU firm whose liquid assets buffer accords with the simplified buffer requirement as having an adequate buffer of assets and a prudent funding profile for the purpose of BIPRU 12.2.8R. However, the simplified ILAS approach does not relieve a simplified ILAS BIPRU firm from the obligation to hold liquidity resources which are adequate for the purpose of meeting the overall liquidity adequacy rule or from the obligation in BIPRU 12.3.4R to assess and maintain on an ongoing basis the adequacy of its liquidity resources. Consequently, where a firm's own assessment of the adequacy of its liquidity resources indicates that its liquid assets buffer should be larger in size than that produced by the application of the simplified buffer requirement, the FSA will expect that firm to maintain a liquid assets buffer which is consistent with the results of its own assessment. Equally, following any review by the FSA of the liquidity risk to which a simplified ILAS BIPRU firm is exposed, the FSA may give that firm individual liquidity guidance advising it that its liquid assets buffer should be bigger than that which is produced by the application of the simplified buffer requirement.

01/12/2009

Simplified ILAS conditions

BIPRU 12.6.6

The first condition is that:

(1) no less than 75% of the firm's total liabilities are accounted for by retail deposits and no less than 70% of its total assets are accounted for by retail loans; or
(2) no less than 75% of the firm's total liabilities are accounted for by retail deposits and no less than 70% of the firm's total assets are accounted for by;

(a) money market instruments with a residual contractual maturity of three months or less; or
(b) sight deposits held with a credit institution; or
(c) term deposits with a residual contractual maturity of three months or less held with a credit institution; or

(3) no less than 80% of the firm's total liabilities are accounted for by liabilities owed to its parent undertaking and the amount of the firm's total assets does not exceed 1 billion.

01/12/2009

BIPRU 12.6.7

In this section:

(1) a retail deposit is a deposit accepted from a consumer; and
(2) a retail loan is a loan to a consumer.

01/12/2009

BIPRU 12.6.8

The second condition is that no less than 99.5% of the firm's total assets and no less than 99.5% of its total liabilities are denominated in sterling, euros or United States dollars.

01/12/2009

Size of the simplified buffer requirement

BIPRU 12.6.9

(1) A simplified ILAS BIPRU firm must ensure that the size of its liquid assets buffer is at all times greater than or equal to the amount produced by adding:

(a) the wholesale net cash outflow component;
(b) the retail deposit component; and
(c) the credit pipeline component.

(2) This is the simplified buffer requirement.

01/12/2009

The wholesale net cash outflow component

BIPRU 12.6.10

(1) The wholesale net cash outflow component is a firm's peak cumulative wholesale net cash outflow over the next three months where the peak is established by:

(a) calculating the daily wholesale net cash flow by reference to a firm's wholesale assets maturing that day and its wholesale liabilities falling due on that day;
(b) for each of the business days in the next three months, calculating the cumulative total of such daily net cash flows as at the business day in question; and
(c) identifying the minimum cumulative total figure out of all of the cumulative total figures calculated in accordance with (b).

(2) The figure identified in (1)(c) is the peak cumulative wholesale net cash outflow.
(3) For the purpose of calculating the peak cumulative wholesale net cash outflow, a firm must:

(a) exclude from the calculation in (1)(a) cash flows attributable to repo and reverse repo entered into by the firm where the security leg of the transaction in question is in respect of securities of the type described in BIPRU 12.7.2R (1) and (2);
(b) include wholesale cash outflows in that calculation according to their earliest contractual maturity; and
(c) exclude wholesale cash flows attributable to reserves in the form of sight deposits with a central bank and designated money market funds that it includes in its liquid assets buffer in accordance with the rules on asset eligibility in BIPRU 12.7.

01/12/2009

The retail deposit component

BIPRU 12.6.11

(1) The retail deposit component is the sum represented by:

(a) 20% of a firm's Type A retail deposits; and
(b) 10% of a firm's Type B retail deposits.

(2) A firm must:

(a) assess the likelihood that retail deposits that it holds will be withdrawn in response to actual or perceived changes in the firm's credit-worthiness;
(b) calculate the amount of retail deposits that it assesses as having a higher than average likelihood of withdrawal in the circumstances described in (a) (Type A retail deposits); and
(c) class all other of its retail deposits as Type B retail deposits.

01/12/2009

BIPRU 12.6.12

In the FSA's view, a Type A retail deposit is likely to include one which:

(1) has been accepted through the internet; or
(2) is considered to have a more than average sensitivity to interest rate changes (such as a deposit whose acceptance can reasonably be attributed to the use of price-focused advertising by the firm accepting the deposit); or
(3) in relation to any individual depositor exceeds to a significant extent the amount of that individuals deposits with the accepting firm that are covered by a national deposit guarantee scheme; or
(4) is not accepted from a depositor with whom the firm has had a long relationship; or
(5) is accepted from retail depositors who can access their deposits before their residual contractual maturity subject to a loss of interest or payment of another form of early access charge (as a general proposition, the behaviour of liabilities to retail depositors is likely to depend in part on the contractual terms and conditions which give rise to those liabilities); or
(6) is not held in an account which is maintained for transactional purposes.

01/12/2009

BIPRU 12.6.13

Before applying for a simplified ILAS waiver, a firm must prepare a written policy statement recording its approach to assessing the likelihood of withdrawal of its retail deposits in the circumstances described in BIPRU 12.6.11R (2)(a) and ensure that:

(1) the firm's governing body approves and conducts appropriate reviews of the policy statement; and
(2) the firm submits a copy of the policy statement to its usual supervisory contact at the FSA.

01/12/2009

BIPRU 12.6.14

In considering a firm's application for a simplified ILAS waiver, the FSA will take into account the firm's policy statement submitted to it under BIPRU 12.6.13R and form a view about the appropriateness of the assumptions on which the policy statement is based. Where a policy statement submitted after the grant of a simplified ILAS waiver reflects a materially different assessment to that set out in the policy statement considered as part of a firm's waiver application, a firm should expect that the FSA will wish to review the continued appropriateness of the firm's simplified ILAS waiver and in so doing will re-examine afresh all matters to which it had regard when the waiver in question was granted. The FSA expects a firm to review the appropriateness of its policy statement as often as is necessary and in any event no less frequently than annually. A firm should always review the continued appropriateness of its policy statement following a material change to the nature of the firm's business. Where a firm updates or otherwise changes its policy statement it should submit promptly to the FSA the new document.

01/12/2009

The credit pipeline component

BIPRU 12.6.15

The credit pipeline component is the sum represented by 25% of a firm's credit facilities offered to its retail customers but which are yet to be drawn down, including:

(1) offers to make loans secured on residential property;
(2) overdraft facilities; and
(3) credit card facilities.

01/12/2009

Buffer securities restriction

BIPRU 12.6.16

(1) A simplified ILAS BIPRU firm may only include in its liquid assets buffer eligible government and designated multilateral development bank debt securities up to the value of the buffer securities restriction.
(2) For the purpose of calculating the buffer securities restriction, a firm must:

(a) calculate its daily net flow in government and designated multilateral development bank debt securities eligible as classes of assets for inclusion in the firm's liquid assets buffer;
(b) for each of the business days in the next three months calculate the cumulative total of such daily securities flows, including the opening balance, as at the business day in question; and
(c) identify the minimum cumulative total figure out of all of the cumulative total figures calculated in accordance with (b).

(3) For the purpose of (2)(a), a firm must include all contractual inflows and outflows of eligible debt securities arising from repo, reverse repo, forward sales, redemptions and any other transactions involving those securities.

01/12/2009

BIPRU 12.6.17

In mathematical terms the calculation in BIPRU 12.6.9R and BIPRU 12.6.16R may be represented as follows:

01/12/2009

Foreign currency positions

BIPRU 12.6.18

(1) Subject to (3), a simplified ILAS BIPRU firm that has assets or liabilities denominated in either or both euros and United States dollars must carry out separate calculations under BIPRU 12.6.9R in relation to its positions in each of those currencies, in addition to that which it carries out in relation to its sterling positions (if any).
(2) A firm to which (1) applies must ensure that, for the purpose of meeting the simplified buffer requirement, it holds in its liquid assets buffer assets denominated in either or both euros and United States dollars (as relevant) greater than or equal to the amount produced by the calculation in the corresponding currency required under (1), in addition to any sterling liquid assets that it is required to hold in its buffer in respect of its sterling positions.
(3) Paragraph (1) does not apply to a simplified ILAS BIPRU firm that hedges fully its positions in either or both euros and United States dollars such that the firm is not exposed to any cross-currency liquidity risk in respect of those positions.

01/12/2009

Content of the simplified ILAS liquid assets buffer

BIPRU 12.6.19

The rules in BIPRU 12.7 set out the sorts of assets that are eligible for the liquid assets buffer of an ILAS BIPRU firm. Every ILAS BIPRU firm may include in its buffer reserves in the form of sight deposits at a central bank and high quality debt securities issued by governments and designated multilateral development banks subject to the eligibility rules in BIPRU 12.7. BIPRU 12.7 provides that a simplified ILAS BIPRU firm may also include in its buffer investments in a designated money market fund.

01/12/2009

BIPRU 12.6.20

A simplified ILAS BIPRU firm may include in the liquid assets buffer any combination of the eligible assets permitted by the rules in BIPRU 12.7.

01/12/2009

ILSA

BIPRU 12.6.21

(1) A simplified ILAS BIPRU firm must regularly carry out an ILSA which contains an assessment of the firm's compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4, including the results of the stress tests required by the rules in BIPRU 12.4.
(2) The firm must make a written record of its ILSA.
(3) The ILSA must be proportionate to the nature, scale and complexity of that firm's activities.
(4) The ILSA must take into account group-wide liquidity resources only to the extent that reliance on these is permitted by the FSA.

01/12/2009

BIPRU 12.6.22

For the purpose of BIPRU 12.6.21R, a firm should carry out an ILSA at least annually, or more frequently if changes in its business or strategy or the nature, scale or complexity of its activities or the operational environment suggest that the current level of liquidity resources is no longer adequate. A firm should expect that the firm's usual supervisory contact at the FSA will ask for the ILSA to be submitted as part of the ongoing supervisory process.

01/12/2009

BIPRU 12.7

Liquid assets buffer

01/12/2009

BIPRU 12.7.1

BIPRU 12.2 provides that an ILAS BIPRU firm must ensure that its liquidity resources contain an adequate buffer of high quality, unencumbered assets. BIPRU 12.7 describes in more detail the nature of the assets that are eligible for inclusion in that buffer. The rules in this section provide that some types of assets are eligible for use only by a simplified ILAS BIPRU firm.

01/12/2009

BIPRU 12.7.2

For the purpose of satisfying BIPRU 12.2.8R, a firm to which this section applies may only include in its liquid assets buffer:

(1) high quality debt securities issued by a government or central bank;
(2) securities issued by a designated multilateral development bank;
(3) reserves in the form of sight deposits with a central bank of the kind specified in BIPRU 12.7.5R and BIPRU 12.7.6R; and
(4) in the case of a simplified ILAS BIPRU firm only, investments in a designated money market fund.

01/12/2009

BIPRU 12.7.3

Subject to BIPRU 12.7.4R, for the purpose of BIPRU 12.7.2R (1), a firm may include a debt security which is:

(1) issued by the central government or central bank of an EEA State; or
(2) issued by the central government or central bank of Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.

01/12/2009

BIPRU 12.7.4

For the purpose of BIPRU 12.7.3R, a firm may not include a debt security unless:

(1) the central government or central bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the credit quality assessment scale published by the FSA for the purpose of BIPRU 3 (The Standardised Approach: mapping of the ECAIs credit assessments to credit quality steps (Long term mapping)); and
(2) that debt security is either:

(a) denominated in the domestic currency of the country in question; or
(b) denominated in a currency other than the domestic currency, provided it is denominated in any of Canadian dollars, euros, Japanese yen, sterling, Swiss francs or United States dollars.

01/12/2009

BIPRU 12.7.5

Subject to BIPRU 12.7.6R, for the purpose of BIPRU 12.7.2R (3) a firm may include reserves in the form of sight deposits held by the firm with the central bank of:

(1) an EEA State; or
(2) Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.

01/12/2009

BIPRU 12.7.6

For the purpose of BIPRU 12.7.5R, a firm may not include reserves held at a central bank unless:

(1) the central bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the credit quality assessment scale published by the FSA for the purpose of BIPRU 3 (The Standardised Approach: mapping of the ECAIs credit assessments to credit quality steps (Long term mapping)); and
(2) those reserves are denominated in the domestic currency of the central bank in question.

01/12/2009

BIPRU 12.7.7

It is important that a firm identifies and understands the range of central bank facilities in which it is eligible to participate. A firm may be eligible to participate in some facilities of this kind by virtue of its having a branch in a particular country. In addition to identifying the central bank facilities to which it has access, a firm should ensure that it has in place appropriate legal and administrative arrangements to enable it to draw on those facilities in a timely manner.

01/12/2009

BIPRU 12.7.8

In deciding on the precise composition of its liquid assets buffer, a firm should ensure that it tailors the contents of the buffer to the needs of its business and the liquidity risk that it faces. In particular, a firm should ensure that it holds assets in its buffer which can be realised with the speed necessary to meet its liabilities as they fall due. In doing so, a firm should have regard to the currencies in which its liabilities are denominated and should take into account the potential effect of stressed conditions on its ability to access spot and swap foreign exchange markets in a manner consistent with the settlement cycles of foreign exchange settlement systems. A firm should have regard to the results of its ILAA or, as the case may be, its ILSA, in assessing the speed with which its liabilities fall due in stressed and non-stressed conditions.

01/12/2009

BIPRU 12.7.9

For the purposes of BIPRU 12.7.2R (1) and (2), a firm must only count securities:

(1) which are unencumbered;
(2) to which it has legal title; and
(3) which that firm realises on a regular basis.

01/12/2009

BIPRU 12.7.10

The FSA regards as encumbered any asset which the firm in question has provided as collateral. Therefore, where assets have been used as collateral in this way (for example, in a repo), they should not be included in the firms liquid assets buffer.

01/12/2009

BIPRU 12.7.11

(1) For the purpose of BIPRU 12.7.9R (3), a firm must periodically realise a proportion of the assets in its liquid assets buffer through repo or outright sale to the market.
(2) A firm must also ensure that it periodically realises, through the use of central bank liquidity facilities, a proportion of those of its assets which do not fall into BIPRU 12.7.2R (1)or BIPRU 12.7.2R (2).
(3) A firm must ensure that in carrying out such periodic realisation:

(a) it does so without reference to the firm's day-to-day liquidity needs;
(b) it realises in varying amounts the assets in its liquid assets buffer;
(c) the cumulative effect of its periodic realisation over any twelve month period is that a significant proportion of the assets in its liquid assets buffer is realised; and
(d) in repo to the market and central bank or in collateral swap transactions with a central bank, it enters into transactions of varying durations.

(4) A firm must establish and maintain a written policy setting out its approach to periodic realisation of its assets.

01/12/2009

BIPRU 12.7.12

The FSA will, as part of its review of a firm's ILAA or, as the case may be, its ILSA, assess the adequacy of a firm's periodic realisation policy and its implementation in practice.

01/12/2009

BIPRU 12.8

Cross-border and intra-group management of liquidity

01/12/2009

BIPRU 12.8.1

Every firm subject to BIPRU 12 is subject to the overall liquidity adequacy rule. The effect of that rule is that every firm is required to be self-sufficient in terms of liquidity adequacy and to be able to satisfy that rule relying on its own liquidity resources. Where the firm is an incoming EEA firm or third country BIPRU firm compliance with the overall liquidity adequacy rule with respect to the UK branch must be achieved relying solely on liquidity resources that satisfy the conditions in BIPRU 12.2.3 R.

01/12/2009

BIPRU 12.8.2

However, the FSA recognises that there may be circumstances in which it would be appropriate for a firm to rely on liquidity resources which can be made available to it by other members of its group, or for a firm to rely on liquidity resources elsewhere in the firm for the purposes of ensuring that its UK branch has adequate liquidity resources in respect of the activities carried on from the branch. Where the FSA is satisfied that the statutory tests in section 148 (Modification or waiver of rules) of the Act are met, the FSA will consider modifying the overall liquidity adequacy rule to permit reliance on liquidity support of this kind.

01/12/2009

BIPRU 12.8.3

BIPRU 12.8 provides guidance on two types of modification to the overall liquidity adequacy rule and to other rules in BIPRU 12 for which the FSA considers a firm may wish to apply, namely:

(1) an intra-group liquidity modification; and
(2) a whole-firm liquidity modification.

01/12/2009

BIPRU 12.8.4

In considering whether the statutory tests in section 148 of the Act have been met, the FSA will, amongst others, have regard to the factors detailed below in relation to an intra-group liquidity modification (of the kind permitting the inclusion in a firm's liquidity resources of parent undertaking liquidity support) and a whole-firm liquidity modification. In practice it is likely that the FSA will view these as preconditions to the grant of an intra-group liquidity modification of that type or a whole-firm liquidity modification and will therefore ordinarily need to be satisfied fully that each has been adequately addressed. They include matters on which the FSA will need to reach agreement with the Home State regulator, third country competent authority, or other relevant supervisor, and also matters which it will need to agree directly with a firm or the parent undertaking of a firm. It is likely that a number of these matters will be reflected as requirements or conditions in the modification.

01/12/2009

BIPRU 12.8.5

This section represents merely an indication of the matters to which the FSA will have regard in considering an application for a whole-firm liquidity modification or an intra-group liquidity modification. In considering such an application, the FSA will always take into account anything that it reasonably considers to be relevant for the purposes of assessing whether the statutory tests in section 148 of the Act are met. In doing so, it will have regard to the role and importance of a firm or UK branch in the financial system.

01/12/2009

BIPRU 12.8.6

The FSA anticipates that an application to modify the overall liquidity adequacy rule may be accompanied by an application to waive or modify other rules in BIPRU 12 (for example, the stress testing and contingency funding plan rules in BIPRU 12.4). The FSA offers some guidance in this section on applications of this type.

01/12/2009

Intra-group liquidity modification: general

BIPRU 12.8.7

The FSA recognises that a firm may be part of a wider group which manages its liquidity on a group-wide basis. A firm which considers that the statutory tests in section 148 of the Act are met may apply for an intra-group liquidity modification permitting it to rely on liquidity support from elsewhere in its group. Until a firm has such a modification it will need to meet the overall liquidity adequacy rule from its own liquidity resources. The effect of an intra-group liquidity modification is to modify the overall liquidity adequacy rule to recognise the extent to which the FSA is prepared to accept liquidity resources from other entities in a firm's group for the purposes of the firm's own compliance with the overall liquidity adequacy rule. BIPRU 12.8.11G offers additional guidance on the likely extent of this recognition.

01/12/2009

BIPRU 12.8.8

BIPRU 12.8.14 G to BIPRU 12.8.20 G set out the FSA's likely approach in considering an application for an intra-group liquidity modification in which a firm seeks to rely on support from a parent undertaking which is constituted under the law of a country or territory outside the United Kingdom.

01/12/2009

BIPRU 12.8.9

The FSA may also consider an application for an intra-group liquidity modification where a firm wishes to rely on liquidity resources from an entity in its group other than an overseas parent undertaking. The FSA recognises that a firm incorporated in the United Kingdom and to which BIPRU 12 applies may wish to rely on liquidity support from another such firm. In practice, the FSA anticipates that a firm applying for an intra-group liquidity modification in these circumstances will be asking for permission to rely on support from its parent undertaking in the United Kingdom. In any event, the FSA will consider such applications on a case-by-case basis and will apply the approach outlined in BIPRU 12.8.14 G to BIPRU 12.8.20 G where relevant and by analogy.

01/12/2009

BIPRU 12.8.10

The FSA also recognises that a firm incorporated in the United Kingdom and to which BIPRU 12 applies may wish to rely on liquidity support from a subsidiary undertaking of that firm which is incorporated in a country or territory outside the United Kingdom. The FSA is, however, likely to consider that an application for an intra-group liquidity modification that contemplates reliance for liquidity support on only, or mostly, an applicant firm's overseas subsidiary undertakings is unlikely to satisfy the tests in section 148 of the Act. As a general principle, and unless persuaded otherwise by an applicant firm's arguments in support of its application for an intra-group liquidity modification, the FSA is likely to take the view that a firm's overseas subsidiary undertakings are likely to be constrained in their ability to provide meaningful levels of liquidity support to their parent undertaking.

01/12/2009

BIPRU 12.8.11

In each application for an intra-group liquidity modification, the FSA will consider the extent to which it is appropriate to modify the overall liquidity adequacy rule to allow reliance by an applicant firm on liquidity resources elsewhere in a firm's group. However, it is unlikely that the FSA would consider the conditions in section 148 of the Act to be met in circumstances in which the overall liquidity adequacy rule was modified to allow unlimited reliance on liquidity resources that are not the applicant firm's own. As a general principle, the FSA is likely to wish to ensure that, having regard to the results of an applicant firm's ILAA:

(1) once modified, the overall liquidity adequacy rule still requires the firm to have adequate liquidity resources to enable it to wind down its business in an orderly and controlled manner in circumstances in which its business ceases to be viable; and
(2) the amount of liquidity support permitted in the modification is a reasonable one having regard to the total liquidity resources of the group entity on which it is proposed that reliance should be placed.

01/12/2009

BIPRU 12.8.12

In determining the appropriate duration of an intra-group liquidity modification, the FSA will have regard to the role and importance of the firm in question in the financial system. In some cases, the FSA may take the view that an intra-group liquidity modification covering a firm whose role and importance in the financial system are significant ought to be reviewed more regularly than one granted in respect of a less systemically significant firm. The FSA will consider this issue in determining the appropriate duration of such a modification.

01/12/2009

BIPRU 12.8.13

In modifying the overall liquidity adequacy rule by means of an intra-group liquidity modification, the FSA may also modify the stress testing and contingency funding plan rules in BIPRU 12.4 such that an applicant firm may achieve compliance with those rules by its parent undertaking conducting group-wide stress testing and preparing a group-wide contingency funding plan which gives adequate recognition to the position of the applicant firm.

01/12/2009

Consideration of an application for an intra-group liquidity modification

BIPRU 12.8.14

BIPRU 12.8.15 G to BIPRU 12.8.20 G set out some of the matters on which the FSA will expect to be satisfied before granting an intra-group liquidity modification where permission is sought to rely on support from an overseas parent undertaking which is itself subject to a regime of liquidity regulation.

01/12/2009

BIPRU 12.8.15

In relation to the regime of liquidity regulation imposed by the authority that regulates for liquidity purposes an applicant firm's parent undertaking which is constituted under the law of a country or territory outside the United Kingdom, the FSA will ordinarily expect to be satisfied that:

(1) the regime of liquidity regulation to which that undertaking is subject delivers outcomes as regards the regulation of that undertaking's liquidity risk that are broadly equivalent to those intended by BIPRU 12; and
(2) there is clarity as to any legal constraints imposed by the authority which regulates that undertaking for liquidity purposes on the provision of liquidity from that undertaking to the applicant firm.

01/12/2009

BIPRU 12.8.16

It will not always be the case that an applicant firm wishes to rely on a parent undertaking, or other group entity, that is itself subject to a regime of liquidity regulation, whether or not equivalent to the FSA's . In assessing a firm's application for an intra-group liquidity modification, the FSA will always have regard to the regulatory framework to which the entity on which it is proposed to rely for liquidity support is subject. Other things being equal, however, the FSA is more likely to be persuaded that the tests in section 148 of the Act are met in circumstances in which the entity on which it is proposed to rely for liquidity support is itself subject to an appropriate degree of regulation. Even where the parent undertaking, or other group entity, in question is subject to a regime of liquidity regulation, the FSA will in principle be more likely to grant an intra-group liquidity modification in circumstances in which the applicant firm does not accept a significant amount of retail deposits.

01/12/2009

BIPRU 12.8.17

In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the FSA will ordinarily expect to reach agreement with the authority that regulates that undertaking for liquidity purposes in a number of areas, including agreement that:

(1) it will notify the FSA of any material or persistent breaches by that undertaking of that authoritys liquidity rules, or of risks that such breaches are imminent;
(2) it is satisfied with the adequacy of the parent undertaking's arrangements for liquidity risk management;
(3) it is satisfied as to the adequacy of the parent undertaking's liquidity resources including:

(a) the size and quality of its liquid assets buffer; and
(b) the size and quality of any liquidity resources that are held in the United Kingdom for the purpose of meeting the liabilities of an applicant firm as they fall due;

(4) it does not object to any undertakings given by that parent undertaking in respect of an applicant firm to ensure that the firm has adequate liquidity resources; and
(5) it will have due regard to the views of the FSA in its supervision of the liquidity position of that parent undertaking.

01/12/2009

BIPRU 12.8.18

In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the FSA will, before granting an intra-group liquidity modification, ordinarily expect to have reached agreement with that parent undertaking that:

(1) it will make available liquidity resources at all times to that applicant firm if needed;
(2) it will enter into an undertaking in a suitable form with an applicant firm committing it to provide liquidity support to that firm on the occurrence of certain defined events;
(3) it will ensure that the applicant firm maintains liquidity resources of appropriate size and quality in the United Kingdom for the purposes of meeting the liquidity needs of that firm;
(4) it will maintain arrangements, including having adequate liquidity resources, to ensure that it, the applicant firm and any other entities in its group to which it provides liquidity support are able to wind down their businesses in an orderly and controlled manner in circumstances where its, or their, businesses cease to be viable;
(5) it will make available to the FSA information in an appropriate format on group liquidity; and
(6) it will participate in the FSA's thematic supervisory work in relation to liquidity when requested to do so by the FSA.

01/12/2009

BIPRU 12.8.19

The FSA will wish to ensure that it has adequate data at the time of consideration of the intra-group liquidity modification application and, if the application is granted, on a continuing basis thereafter, about the liquidity position of any group entity on which the applicant firm proposes to rely for liquidity purposes. It is therefore likely that an applicant firm will be asked to provide as part of its application relevant liquidity data items populated by the entities on which the applicant firm proposes to rely. It is also likely that an applicant firm will be asked to ensure as a condition of the modification, if granted, that the entities on which it is given permission to rely for the purpose of meeting the overall liquidity adequacy rule provide completed relevant data items to the FSA on a continuing basis. The frequency of data item submission will be determined as part of the FSA's consideration of the applicant firm's case but is in any event likely to be reflective of the FSA's assessment of the liquidity risk profile of the entities on which liquidity support is permitted.

01/12/2009

BIPRU 12.8.20

In addition, the FSA will also wish to understand in relation to any group entity on which an applicant firm proposes to rely for liquidity support the legal structure of the group and the extent to which that structure, or any relevant legal principles, may restrict the provision of timely liquidity support in appropriate amounts to the applicant firm when required.

01/12/2009

Ongoing requirements

BIPRU 12.8.21

The FSA also anticipates that an intra-group liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:

(1) the FSA receiving annual confirmation from the authority that regulates an applicant firm's parent undertaking for liquidity purposes that it remains satisfied with the arrangements in respect of that undertaking for liquidity supervision and their operation; and
(2) an annual meeting with the same authority to discuss liquidity supervision of that undertaking.

01/12/2009

Whole-firm liquidity modification: general

BIPRU 12.8.22

In relation to an incoming EEA firm or third country BIPRU firm, the overall liquidity adequacy rule provides that, for the purpose of complying with that rule, a firm may not, in relation to its UK branch, include liquidity resources other than those which satisfy the conditions in BIPRU 12.2.3 R. Those conditions seek to ensure that a firm of this kind has a reserve of liquidity for operational purposes that is under the control of, and available for use by, that firm's UK branch. Further guidance is given in BIPRU 12.5.39 G in relation to the local operational liquidity reserve. In addition, BIPRU 12.9.10 G explains how the FSA will approach the giving of individual liquidity guidance to an incoming EEA firm or third country BIPRU firm. The FSA does, however, recognise that there are circumstances in which it may be appropriate for a UK branch to rely on the availability of liquidity resources from elsewhere within the firm. A firm wishing to rely on support of this kind for its UK branch may apply for a modification to the overall liquidity adequacy rule where it considers that the statutory tests in section 148 of the Act are met.

01/12/2009

BIPRU 12.8.23

Although an incoming EEA firm or third country BIPRU firm may apply to modify the overall liquidity adequacy rule and other rules in BIPRU 12, in relation to its UK branch, the FSA anticipates that many such firms will wish to apply for a modification in the form which the FSA defines as a whole-firm liquidity modification. In the FSA's view, a modification to the overall liquidity adequacy rule for a firm of this kind will tend to be appropriate where an applicant firm manages its liquidity on an integrated, whole-firm basis. Where that is the case, and having regard to the matters outlined in the guidance in this section, the FSA is likely to consider it more appropriate for the UK branch to be subject, in large part, to the same regulatory liquidity regime which applies to the rest of the firm. In granting a whole-firm liquidity modification the FSA therefore recognises that in certain circumstances a UK branch can have adequate liquidity resources in circumstances where the liquidity resources upon which the firm seeks to rely do not meet the criteria set out in BIPRU 12.2.3 R.

01/12/2009

BIPRU 12.8.24

Accordingly, a whole-firm liquidity modification envisages:

(1) a modification to the overall liquidity adequacy rule so as to permit reliance by the firm, in relation to its UK branch, on liquidity resources wherever held in the firm for the purposes of meeting that rule; and
(2) a waiver of the remainder of the substantive rules in BIPRU 12, with the effect that the UK branch of the applicant firm becomes subject for the purpose of day-to-day liquidity supervision to the liquidity regime of the Home State regulator or third country competent authority in question.

01/12/2009

BIPRU 12.8.25

The effect of a whole-firm liquidity modification is that the FSA will in its supervision of the liquidity of the UK branch place reliance on the liquidity regime of the Home State regulator or third country competent authority in question. The FSA will wish to ensure that it has adequate data at the time of consideration of the whole-firm liquidity modification application and, if the application is granted, on a continuing basis thereafter, about the liquidity position of the firm as a whole. It is therefore likely that an applicant firm will be asked to provide as part of its application relevant liquidity data items covering the liquidity position of the firm as a whole. It is also likely that an applicant firm will be asked, as part of its application, to provide an appropriately detailed account as to the activities conducted by its UK branch as at the date of the application. In addition, the FSA anticipates that an applicant firm will be asked to ensure as a condition of the modification, if granted, that it provides relevant data items, covering the whole-firm liquidity position, to the FSA on a continuing basis at a frequency to be determined as part of the FSA's consideration of the applicant firm's case but in any event likely to be reflective of the FSA's assessment of the liquidity risk profile of the firm.

01/12/2009

Consideration of an application for a whole-firm liquidity modification

BIPRU 12.8.26

In relation to the Home State regulator's or third country competent authority's regime of liquidity regulation, the FSA will, before granting a whole-firm liquidity modification, ordinarily expect to be satisfied that:

(1) the regime in question delivers outcomes as regards the regulation of the applicant firm's liquidity risk that are broadly equivalent to those intended by this chapter; and
(2) there is clarity as to any legal constraints imposed by the Home State regulator or third country competent authority on the provision of liquidity by a firm to its UK branch, as well as the potential for such restrictions to be imposed in the future.

01/12/2009

BIPRU 12.8.27

In relation to the applicant firm in question, the FSA will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with the Home State regulator or third country competent authority in a number of areas, including agreement that:

(1) it will notify the FSA promptly of any material or persistent breaches by that firm of its liquidity rules, or of risks that such breaches are imminent;
(2) it is satisfied with the adequacy of the arrangements in place for firm-wide liquidity risk management;
(3) it is satisfied as to the adequacy of that firm's liquidity resources including the size and quality of its liquid assets buffer;
(4) it does not object to any undertakings given by that firm in respect of its UK branch to ensure that the branch has adequate liquidity resources; and
(5) it will have due regard to the views of the FSA in its supervision of that firm's liquidity position.

01/12/2009

BIPRU 12.8.28

In relation to the applicant firm in question, the FSA will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with that firm in a number of areas, including agreement that:

(1) it will make available liquidity resources at all times to its UK branch if needed;
(2) it will make available to the FSA information in an appropriate format on firm-wide liquidity;
(3) it will notify the FSA at the same time as it notifies the Home State regulator or third country competent authority of any issues relevant to the liquidity position of its UK branch or compliance with the rules to which it is subject in respect of its liquidity (including with the terms of its whole-firm liquidity modification);
(4) its UK branch will continue to be fully integrated with the rest of the firm for liquidity risk management purposes; and
(5) it will participate in the FSA's thematic supervisory work in relation to liquidity when requested to do so by the FSA.

01/12/2009

Ongoing requirements

BIPRU 12.8.29

The FSA also anticipates that a whole-firm liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:

(1) the FSA receiving annual confirmation from the Home State regulator or third country competent authority that it remains satisfied with the arrangements in respect of that firm for liquidity supervision and their operation;
(2) an annual meeting with the Home State regulator or third country competent authority to discuss liquidity supervision of that firm;
(3) the FSA receiving annual confirmation from the firm, approved by its governing body, that it remains in full compliance with the terms of its whole-firm liquidity modification; and
(4) as at the first anniversary of the grant of the whole-firm liquidity modification and on each anniversary thereafter, the FSA receiving from the firm:

(a) an appropriate account of the activities conducted by the UK branch over the previous year; and
(b) a copy of the firm's latest business plan where this differs from that previously sent to the FSA after grant of its whole-firm liquidity modification.

01/12/2009

BIPRU 12.8.30

In determining the appropriate duration of a whole-firm liquidity modification, the FSA will have regard to the role and importance of the UK branch in question in the financial system. In some cases, the FSA may take the view that a whole-firm liquidity modification, covering a UK branch whose role and importance in the financial system are significant, ought to be reviewed more regularly than one granted in respect of a less systemically significant branch. The FSA will consider this issue in determining the appropriate duration of such a modification. The FSA is also likely to consider it appropriate in modifications other than those of short duration to reflect in the terms of the modification representations made either in an applicant firm's business plan or direct to the FSA as part of the application process, but in either case as to the expected nature and size of the UK branch's activities over the course of the duration of the modification. Where requirements are included in a modification in relation to these matters, a firm that anticipates that it will breach those requirements will need to apply in advance of any such event for a variation to its then existing whole-firm liquidity modification. In considering an application to vary, the FSA will consider afresh whether the tests in section 148of the Act continue to be met for the grant of a whole-firm liquidity modification to the firm in question.

01/12/2009

BIPRU 12.9

Individual liquidity guidance and regulatory intervention points

01/12/2009

BIPRU 12.9.1

The FSA will give individual liquidity guidance to a standard ILAS BIPRU firm. Ordinarily, the FSA will give individual liquidity guidance after a review of a standard ILAS BIPRU firm's ILAA. The FSA will, however, issue individual liquidity guidance to such a firm whenever it is considered appropriate.

01/12/2009

BIPRU 12.9.2

In assessing the adequacy of an ILAS BIPRU firm's liquidity resources, the FSA draws on more than just a review of the submitted ILAA, or in the case of a simplified ILAS BIPRU firm, the submitted ILSA. Use is made of wider supervisory knowledge of a firm and of wider market developments and practices. When forming a view of the individual liquidity guidance to be given to an ILAS BIPRU firm, the FSA will also consider the firm's ARROW risk assessment and any other issues arising from day-to-day supervision.

01/12/2009

BIPRU 12.9.3

The FSA will take a risk-based and proportionate approach to the review of a firm's ILAA or ILSA, focusing where appropriate on that firm's approach to dealing with the risks it faces.

01/12/2009

BIPRU 12.9.4

As part of the SLRP, the FSA will give a standard ILAS BIPRU firm individual liquidity guidance advising it of the amount and quality of liquidity resources which the FSA considers are appropriate, having regard to the liquidity risk profile of that firm. In giving individual liquidity guidance, the FSA will also advise the firm of what it considers to be a prudent funding profile for the firm. In giving the firm individual liquidity guidance as to its funding profile, the FSA will consider the extent to which the firm's liabilities are adequately matched by assets of appropriate maturities. In both cases, the FSA will have regard to the adequacy of a firm's systems and controls in relation to liquidity risk when judged against the standard described in the rules and guidance in BIPRU 12.3 and BIPRU 12.4. Individual liquidity guidance will therefore have two components:

(1) guidance about the firm's liquid assets buffer; and
(2) guidance about the firm's funding profile.

01/12/2009

BIPRU 12.9.5

The FSA will ordinarily not expect to give individual liquidity guidance to a simplified ILAS BIPRU firm. However, if after review of such a firm's ILSA, the FSA is not satisfied that the simplified buffer requirement delivers an adequate amount and quality of liquidity resources for that firm, having regard to its liquidity risk profile, the FSA will issue the firm with individual liquidity guidance and may also consider revoking the firm's simplified ILAS waiver.

01/12/2009

BIPRU 12.9.6

In giving individual liquidity guidance, the FSA seeks a balance between delivering consistent outcomes across the individual liquidity guidance that it gives to every ILAS BIPRU firm and recognising that such guidance should reflect the individual features of a firm. Comparison with the assumptions used by other firms will be used to trigger further enquiry.

01/12/2009

BIPRU 12.9.7

Following an internal validation process, the FSA will write to the standard ILAS BIPRU firm whose ILAA it has reviewed, providing both quantitative and qualitative feedback on the results of the FSA's assessment. This letter will notify that firm of the individual liquidity guidance that the FSA considers appropriate together with its reasons for concluding that such guidance is appropriate. The FSA will adopt the same process where it chooses to give individual liquidity guidance to a simplified ILAS BIPRU following a review of that firm's ILSA.

01/12/2009

BIPRU 12.9.8

Where the amount and quality of liquidity resources which the FSA considers a firm needs having regard to its liquidity risk profile are not the same as the firm's own assessment of those resources under its ILAA, the FSA expects to discuss any such difference with the firm.

01/12/2009

BIPRU 12.9.9

Consistent with Principle 11 (Relations with regulators), the FSA will expect a firm to notify it if the firm does not propose to follow its individual liquidity guidance. The FSA will expect any such notification to be accompanied by a clear account of the firm's reasons for considering the individual liquidity guidance to be inappropriate. The FSA will expect to receive any such notification within one month from the date on which it gives individual liquidity guidance to the firm. If agreement through further analysis and discussion cannot be reached (including through use of the FSA's powers under section 166 (Reports by skilled persons) of the Act), then the FSA will consider using its powers under the Act (for example, its power under section 45 to vary, on its own initiative, a firm's Part IV permission or its power of intervention under section 196) so as to require a firm to hold such liquidity resources as the FSA considers are adequate having regard to the liquidity risk profile of the firm.

01/12/2009

Additional guidance for branches

BIPRU 12.9.10

In relation to an incoming EEA firm or third country BIPRU firm, where the FSA gives that firm individual liquidity guidance in relation to its UK branch, it will have regard to the liquidity risk profile of the branch. In the absence of a whole-firm liquidity modification, the effect of BIPRU 12.2.1R (2)(b) and BIPRU 12.2.3 R is to require the firm to hold a liquid assets buffer of the amount identified as appropriate in its individual liquidity guidance (or in the case of a simplified ILAS BIPRU firm, the amount of its simplified buffer requirement unless this has been superseded by the FSA issuing individual liquidity guidance to the firm in question) in the form of a local operational liquidity reserve. Further guidance is given in BIPRU 12.5.39 G in relation to the local operational liquidity reserve. In determining the appropriate size of such a firm's liquid assets buffer the FSA will have regard to all relevant factors, including the extent to which the FSA has adequate data to enable it to assess accurately the liquidity risk elsewhere in the firm beyond its UK branch.

01/12/2009

Regulatory intervention points for ILAS BIPRU firms

BIPRU 12.9.11

BIPRU 12.2.9 G records the FSA's recognition that in periods of stress a firm's liquid assets buffer may be eroded. It may also be the case that in such periods a firm's funding profile deteriorates such that it no longer conforms to the prudent liquidity profile described in the individual liquidity guidance given to the firm. Deviation by a firm from the terms of the individual liquidity guidance given to it by the FSA or, as the case may be, from the simplified buffer requirement, does not automatically mean that the FSA will consider that the firm is in breach of, or likely to breach, threshold conditions.

01/12/2009

BIPRU 12.9.12

The FSA will examine any deviation on its own facts and will always want to understand clearly the reasons for that deviation and the firm's plans for remedying it. Deviation is, however, likely to prompt a re-examination by the FSA of the firm's compliance, and likely future compliance, with threshold conditions. The FSA will have regard to the information provided by the firm and to any other relevant factors in assessing the firm's continuing ability to satisfy threshold conditions. BIPRU 12.9.13 R to BIPRU 12.9.18 R set out a number of requirements which apply to an ILAS BIPRU firm that deviates from its individual liquidity guidance, or as the case may be, from the simplified buffer requirement.

01/12/2009

BIPRU 12.9.13

On the occurrence of any of the events identified in BIPRU 12.9.14 R, a firm must as soon as it becomes aware of the event in question:

(1) notify the FSA in writing;
(2) provide the FSA with an adequately reasoned explanation for the deviation; and
(3) implement its contingency funding plan.

01/12/2009

BIPRU 12.9.14

For the purpose of BIPRU 12.9.13 R, the events in question are:

(1) in the case of a simplified ILAS BIPRU firm only, breach, or expected breach, of the simplified buffer requirement unless this has been superseded by individual liquidity guidance that it has accepted;
(2) in the case of a standard ILAS BIPRU firm or a simplified ILAS BIPRU firm, being a firm which in either case has accepted individual liquidity guidance given to it by the FSA:

(a) its liquid assets buffer falling, or being expected to fall below, the level advised in the guidance; or
(b) its funding profile ceasing, or being expected to cease, to conform to that advised in the guidance.

01/12/2009

BIPRU 12.9.15

As part of the FSA's enquiry into the reasons for a firm's deviation, or expected deviation, from its individual liquidity guidance or, as the case may be, its simplified buffer requirement, the FSA may ask for further assessments and analyses of a firm's liquidity resources and the risks faced by the firm. The FSA may consider the use of its powers under section 166 of the Act to assist in such circumstances.

01/12/2009

BIPRU 12.9.16

Consistent with Principle 11 of the FSA's Principles for Businesses (Relations with regulators), if a firm has not accepted individual liquidity guidance given by the FSA it should, nevertheless, notify the FSA as soon as it becomes aware of either of the events identified in BIPRU 12.9.14R (2)(a) or (b).

01/12/2009

BIPRU 12.9.17

No later than two days after the day on which a firm notifies the FSA under BIPRU 12.9.13R (1), the firm must submit a liquidity remediation plan to the FSA.

01/12/2009

BIPRU 12.9.18

For the purposes of BIPRU 12.9.17 R, a firm's liquidity remediation plan must:

(1) be communicated in writing;
(2) detail the firm's forward estimates of the evolution of the size of the firm's liquid assets buffer and of its funding profile;
(3) in relation to any of the events identified in BIPRU 12.9.14 R that has occurred, detail the actions that the firm intends to take to remedy the relevant deviation, or avoid the expected deviation, including information about:

(a) the amount of funding that it is intended to raise;
(b) the intended funding providers; and
(c) the maturity profile of the intended funding;

(4) identify clear timescales for achieving each of the actions that it details in accordance with BIPRU 12.9.18R (3); and
(5) include an adequately reasoned assessment of the likelihood of the timely achievement of the actions that it details in accordance with BIPRU 12.9.18R (3).

01/12/2009

BIPRU 12.9.19

The FSA will assess the adequacy of the liquidity remediation plan submitted by a firm, including the likelihood of its success. A firm should expect that the FSA will want to discuss the terms of the liquidity remediation plan submitted to it under BIPRU 12.9.18 R. In its re-examination of the firm's compliance, and likely future compliance, with threshold conditions taken as a whole, the FSA will have regard to the adequacy of the firm's liquidity remediation plan.

01/12/2009

BIPRU 12.9.20

Other things being equal, the FSA will expect a firm which is not experiencing a period of stress to restore its liquidity resources more rapidly than one which is under stress at the time that it deviates from its individual liquidity guidance or, as the case may be, from its simplified buffer requirement.

01/12/2009

BIPRU 12.9.21

If agreement through discussion with the FSA cannot be reached as to the necessary actions and timescales to remedy deviation from that guidance, the FSA will consider using its powers under the Act (for example, its power under section 45 to vary, on its own initiative, a firm's Part IV permission or its power of intervention under section 196) so as to require the firm to take such actions as the FSA considers are necessary to return the firm to conformity with the terms of its individual liquidity guidance or, as the case may be, with its simplified buffer requirement.

01/12/2009

BIPRU 12.9.22

Although BIPRU 12.9.17 R to BIPRU 12.9.21 G set out the FSA's likely approach, the FSA will take whatever action it considers appropriate in the particular circumstances of a given case.

01/12/2009

BIPRU 12.9.23

A firm that deviates from current individual liquidity guidance that it has accepted or, as the case may be, from its simplified buffer requirement, will be experiencing a firm-specific liquidity stress for the purpose of the reporting rules in SUP 16 (Reporting requirements). Those rules require the firm to report specified data items more frequently than would otherwise be the case. Additionally, a firm that is implementing a liquidity remediation plan should expect that the FSA will wish to monitor its implementation of that plan. The firm's progress in achieving the remedial actions identified in its plan is a matter to which the FSA will have regard in considering the firm's compliance, and likely future compliance, with threshold conditions.

01/12/2009

Monitoring requirement

BIPRU 12.9.24

An ILAS BIPRU firm must monitor on each business day whether it is in conformity with individual liquidity guidance that it has accepted or, as the case may be, with the simplified buffer requirement.

01/12/2009

Mode of notification

BIPRU 12.9.25

Notification to the FSA under BIPRU 12.9.13R (1) and submission to the FSA under BIPRU 12.9.17 R must be made to the following FSA email address: data_collection@fsa.gov.uk

01/12/2009

BIPRU 12.9.26

Although BIPRU 12.9.25 R requires notification and submission in the way prescribed in that rule, the FSA expects that a firm would also bring to the attention of its usual supervisory contact at the FSA the fact that it had made such a notification or submission.

01/12/2009

BIPRU 12.9.27

For the purpose of the notification expected under BIPRU 12.9.26 G, the FSA would expect any such notification to be made in the way envisaged in BIPRU 12.9.25 R.

01/12/2009