Prudential Regulation Authority Rulebook

Societies' core business, financing long-term residential mortgages with short-term personal savings, necessarily involves a high degree of maturity transformation, and this constitutes a major financial risk that all societies need to manage.

Wholesale markets may provide funding at a more definitive maturity than deposit funding, but may concentrate the refinancing risks societies face. Exposure to re-financing risk needs careful management, and an awareness of the risk of over-reliance on an assumption of continued access to the wholesale market.

The particular constitution of societies means that the scale of deposit funding has a significant impact on the position of investor members. The public perceives society share accounts to be as secure as (or even more secure than) bank deposits although they hold a subordinated creditor rank. A society which gears itself up significantly with wholesale funds thereby dilutes the security of its members, whilst at the same time increasing its refinancing and liquidity risks.

To access the wholesale markets some societies have been credit-rated by external agencies. Obtaining such a rating exposes the society to the danger of a change in market view of the sector or the society, and the process of obtaining and continuing management of the rating needs careful consideration and monitoring. The FSA would not expect societies on the Administered or Matched approaches to have external ratings, and would expect societies on the extended approach, if they have external ratings at all, to confine them to covered bond issues only.

For simplified ILAS BIPRU firms BIPRU 12.6.10 R sets out how they should calculate the wholesale net cash outflow component of their simplified buffer requirement.

Whilst a society which is a simplified ILAS BIPRU firm may choose to fund lending activities with wholesale funding of duration greater than three months, such funding will still influence the peak cumulative wholesale cash outflow position (and thus the simplified buffer requirement) when it is within three months from maturity. Societies using wholesale funding should therefore manage their wholesale maturity profile so that it does not cause excessive volatility to their liquid assets buffer.

To achieve this, a society which is a simplified ILAS BIPRU firm should ensure that its maturity profile of wholesale funding, net of any maturing treasury assets held to redeem the funding, resembles the respective profiles in BSOCS 4.5.1G.

The FSA would expect that societies adopting the extended, comprehensive or trading approaches to treasury management are likely to have the systems and capabilities to transact repo business. The FSA would expect that their boards would obtain full legal advice before agreeing counterparty documentation.

Whilst societies on the matched treasury risk management approach may have appropriate treasury risk management controls and procedures to undertake repo transactions, they should discuss any such plans with their supervisor before undertaking those transactions.

This table sets out guidance for wholesale funding in accordance with the five approaches (see BSOCS 1.1.2G). It shows the criteria which societies should use in developing the review of financial risk management, as detailed in BSOCS 1.15. It is designed to draw management and supervisory attention to areas of a society's business model which are different from the FSA's general expectation for societies on their respective treasury management approach. Societies should expect their supervisors to focus in greater detail on those areas of difference, to identify whether business risks and controls are aligned and if not to develop plans to address the mis-alignment. As such, these expectations should not be interpreted as hard limits but as input into establishing appropriate policies and the basis for supervisory dialogue.

WHOLESALE FUNDING FROM FINANCIAL MARKETS

ADMINISTERED APPROACH
WHOLESALE FUNDING FROM FINANCIAL MARKETS - OVERALL & SECTORAL LIMITS	Total Wholesale	Max 10% SDL
	Any single sector source	Max 5% SDL
MATURITY STRUCTURE OF WHOLESALE NET CASH OUTFLOW FROM FINANCIAL MARKETS	< 3 mths	Max 5% SDL
	< 12 mths	Max 10% SDL
FUNDING INSTRUMENTS	Term deposits and facilities
EXTERNAL RATINGS	No
Bank of England CAPACITY	Standing lending facility (if eligible) Discount window (if eligible)
CURRENCY	Sterling only
MATCHED APPROACH
WHOLESALE FUNDING FROM FINANCIAL MARKETS - OVERALL & SECTORAL LIMITS	Total Wholesale	Max 15% SDL
	Any single sector source	Max 7.5% SDL
MATURITY STRUCTURE OF WHOLESALE NET CASH OUTFLOW FROM FINANCIAL MARKETS	< 3 mths	Max 5% SDL
	< 12 mths	Max 10% SDL
FUNDING INSTRUMENTS	Term deposits and facilities Repo (after agreement with supervisor)
EXTERNAL RATINGS	No
Bank of England CAPACITY	Standing lending facility (if eligible) Discount window facility (if eligible) OMO counterparty (optional, subject to BoE acceptance)
CURRENCY	Sterling only
EXTENDED APPROACH
WHOLESALE FUNDING FROM FINANCIAL MARKETS - OVERALL & SECTORAL LIMITS
For societies wishing to operate the simplified ILAS approach	Total Wholesale	See conditions in BIPRU 12.6
	Any single sector source	Max 7.5% SDL
For standard ILAS BIPRU firms	Total wholesale and sector limits as agreed individually
MATURITY STRUCTURE OF WHOLESALE NET CASH OUTFLOW FROM FINANCIAL MARKETS
For societies wishing to operate the simplified ILAS approach	< 3 mths	Max 5% SDL
	< 12 mths	Max 15% SDL
	< 2 years	Max 20% SDL
For standard ILAS BIPRU firms	As agreed individually
FUNDING INSTRUMENTS	Term deposits and facilities CDs FRNs Fixed rate bonds Covered bonds Securitisations CP Repo
EXTERNAL RATINGS	Covered bonds only
Bank of England CAPACITY	Standing lending facility Discount window facility OMO counterparty (optional, subject to BoE acceptance)
CURRENCY	No less than 99.5% of total balance sheet assets and liabilities denominated in Sterling, US$ or €
COMPREHENSIVE APPROACH
W/SALE FUNDING FROM FINANCIAL MARKETS - OVERALL & SECTORAL LIMITS	Total wholesale and sector limits as agreed individually
MATURITY STRUCTURE OF WHOLESALE NET CASH OUTFLOW FROM FINANCIAL MARKETS	As agreed individually
FUNDING INSTRUMENTS	Term deposits and facilities CDs FRNs Fixed rate bonds Covered bonds Securitisations CP Repo
EXTERNAL RATINGS	Yes
Bank of England CAPACITY	Standing lending facility Discount window facility OMO counterparty (subject to BoE acceptance)
CURRENCY	Any traded currency
TRADING APPROACH
WHOLESALE FUNDING FROM FINANCIAL MARKETS - OVERALL & SECTORAL LIMITS	Total wholesale and sector limits as agreed individually
MATURITY STRUCTURE OF WHOLESALE NET CASH OUTFLOW FROM FINANCIAL MARKETS	As agreed individually
FUNDING INSTRUMENTS	Bank loans B Soc loans LA loans CDs FRNs Fixed rate bonds Covered bonds Securitisations CP Repo
EXTERNAL RATINGS	Yes
Bank of England CAPACITY	Standing lending facility Discount window facility OMO counterparty (subject to BoE acceptance)
CURRENCY	Any traded currency
In this and subsequent tables: CDs = certificates of deposit CPs = commercial paper FRNs = floating rate notes ILAS = individual liquidity adequacy standards LA loans = local authority loans