Part

PRU Integrated Prudential sourcebook

Chapter

Liquidity

Printed on: 28/11/2024

Rulebook at: 31/12/2006

PRU 5

Liquidity

PRU 5.1

Liquidity risk systems and controls

  • 01/10/2005

PRU 5.1.3

handbook-rule

Subject to PRU 5.1.5 R, PRU 5.1.6 R and PRU 5.1.8 R, the following provisions of PRU 5.1 apply to a firm described in PRU 5.1.4 R:

  1. (1) PRU 5.1.18 G;
  2. (2) PRU 5.1.58 G to PRU 5.1.60 G;
  3. (3) PRU 5.1.61 E;
  4. (4) PRU 5.1.62 G;
  5. (5) PRU 5.1.85 G;
  6. (6) PRU 5.1.86 E; and
  7. (7) PRU 5.1.87 G to PRU 5.1.91 G.
  • 31/12/2004

PRU 5.1.4

handbook-rule

The firms referred to in PRU 5.1.3 R are:

  1. (1) a building society;
  2. (2) a bank or an own account dealer (other than a venture capital firm) that is a UK firm;
  3. (3) an incoming EEA firm which:
    1. (a) is a full BCD credit institution; and
    2. (b) has a branch in the United Kingdom;
  4. (4) an overseas firm which is a bank or an own account dealer (other than a venture capital firm) but which is not:
    1. (a) an incoming EEA firm; or
    2. (b) a lead-regulated firm;
  5. (5) an overseas firm which:
    1. (a) is a bank;
    2. (b) is a lead-regulated firm;
    3. (c) is not an incoming EEA firm; and
    4. (d) has a branch in the United Kingdom.
  • 31/12/2004

PRU 5.1.5

handbook-rule
For a firm described in PRU 5.1.4R (3) or PRU 5.1.4R (5), PRU 5.1 applies only with respect to the branch.
  • 31/12/2004

PRU 5.1.6

handbook-rule
This section applies to an incoming EEA firm only to the extent that the relevant matter is not reserved by the relevant Single Market Directive to the firm's Home State regulator.
  • 31/12/2004

PRU 5.1.9

handbook-rule
For the purposes of this section, the guidance in PRU 1.4.14 G to PRU 1.4.16 G applies to a firm described in PRU 5.1.4 R.
  • 31/12/2004

PRU 5.1.13

handbook-guidance
The FSA recognises that a typical firm of a type described in PRU 5.1.4 R generally faces liquidity risk from a wider range of sources and of greater significance than a typical insurer. This section therefore explicitly applies some items of guidance to firms in PRU 5.1.4 R. Other parts of the guidance are also not relevant to many insurers. In particular, where the guidance refers to factors that a firm should consider in relation to a specific type of business, a firm that does not undertake such business does not need to carry out such consideration.
  • 31/12/2004

PRU 5.1.17

handbook-guidance
High level requirements in relation to carrying out stress testing and scenario analysis are set out in PRU 1.2. In particular, PRU 1.2.35 R requires a firm to carry out appropriate stress testing and scenario analysis. This section gives guidance in relation to these tests in the case of liquidity risk.
  • 31/12/2004

Firms with group liquidity management

PRU 5.1.18

handbook-guidance
Firms with group liquidity management should refer to PRU 1.4.14 G to PRU 1.4.16 G.
  • 31/12/2004

Stress testing and scenario analysis

PRU 5.1.58

handbook-guidance
PRU 1.2.26 R, PRU 1.2.27 R, PRU 1.2.31 R, PRU 1.2.33 R and PRU 1.2.35 R entail that, for the purposes of determining the adequacy of its overall financial resources, a firm must carry out appropriate stress testing and scenario analysis, including taking reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which liquidity risk might occur or crystallise.
  • 31/12/2004

PRU 5.1.59

handbook-guidance
PRU 1.2.36 G and PRU 1.2.40 G to PRU 1.2.55 G give guidance on stress testing and scenario analysis, including on how to choose appropriate scenarios, but the precise scenarios that a firm chooses to use will depend on the nature of its activities. For the purposes of testing liquidity risk, however, a firm should normally consider scenarios based on varying degrees of stress and both firm-specific and market-wide difficulties. In developing any scenario of extreme market-wide stress that may pose systemic risk, it may be appropriate for a firm to make assumptions about the likelihood and nature of central bank intervention.
  • 31/12/2004

PRU 5.1.60

handbook-guidance
A firm should review frequently the assumptions used in stress testing scenarios to gain assurance that they continue to be appropriate.
  • 31/12/2004

PRU 5.1.61

handbook-evidential-provisions
  1. (1) A scenario analysis in relation to liquidity risk required under PRU 1.2.35 R should include a cash-flow projection for each scenario tested, based on reasonable estimates of the impact (both on and off balance sheet) of that scenario on the firm's funding needs and sources.
  2. (2) Contravention of (1) may be relied on as tending to establish contravention of PRU 1.2.35 R.
  • 31/12/2004

PRU 5.1.62

handbook-guidance

In identifying the possible on and off balance sheet impact referred to in PRU 5.1.61E (1), a firm may take into account:

  1. (1) possible changes in the market's perception of the firm and the effects that this might have on the firm's access to the markets, including:
    1. (a) (where the firm funds its holdings of assets in one currency with liabilities in another) access to foreign exchange markets, particularly in less frequently traded currencies;
    2. (b) access to secured funding, including by way of repo transactions; and
    3. (c) the extent to which the firm may rely on committed facilities made available to it;
  2. (2) (if applicable) the possible effect of each scenario analysed on currencies whose exchange rates are currently pegged or fixed; and
  3. (3) that:
    1. (a) general market turbulence may trigger a substantial increase in the extent to which persons exercise rights against the firm under off balance sheet instruments to which the firm is party;
    2. (b) access to OTC derivative and foreign exchange markets are sensitive to credit-ratings;
    3. (c) the scenario may involve the triggering of early amortisation in asset securitisation transactions with which the firm has a connection; and
    4. (d) its ability to securitise assets may be reduced.
  • 31/12/2004

PRU 5.1.68

handbook-guidance

For a firm described in PRU 5.1.4 R, management information would normally contain the following:

  1. (1) a cash-flow or funding gap report;
  2. (2) a funding maturity schedule;
  3. (3) a list of large providers of funding; and
  4. (4) a limit monitoring and exception report.
  • 31/12/2004

PRU 5.1.70

handbook-guidance

For a firm described in PRU 5.1.4 R, the additional information referred to in PRU 5.1.69 G may include:

  1. (1) asset quality and trends;
  2. (2) any changes in the firm's funding strategy;
  3. (3) earnings projections; and
  4. (4) the firm's reputation in the market and the condition of the market itself.
  • 31/12/2004

PRU 5.1.79

handbook-guidance

The FSA would normally expect a firm described in PRU 5.1.4 R to consider setting limits on:

  1. (1) liability concentrations in relation to:
    1. (a) individual, or related groups of, liability providers;
    2. (b) instrument types;
    3. (c) maturities, including the amount of debt maturing in a particular period; and
    4. (d) retail and wholesale liabilities; and
  2. (2) where appropriate, net leverage and gross leverage.
  • 31/12/2004

Contingency funding plans

PRU 5.1.85

handbook-guidance
PRU 1.2.22 R states that a firm must at all times maintain overall financial resources adequate to ensure that there is no significant risk that its liabilities cannot be met as they fall due. PRU 1.2.3 R (2) states that for the purposes of determining the adequacy of its overall financial resources, a firm must estimate the financial resources it would need in each of the circumstances and events considered in carrying out its stress testing and scenario analysis in order to meet its liabilities as they fall due.
  • 31/12/2004

PRU 5.1.86

handbook-evidential-provisions
  1. (1) A firm should have a contingency funding plan for taking action to ensure, so far as it can, that, in each of the scenarios analysed under PRU 1.2.3 R (2), it would still have sufficient liquid financial resources to meet liabilities as they fall due.
  2. (2) The contingency funding plan should cover what events or circumstances will lead the firm to put into action any part of the plan.
  3. (3) Contravention of (1) or (2) may be relied upon as tending to establish contravention of PRU 1.2.22 R.
  • 31/12/2004

PRU 5.1.87

handbook-guidance
A firm should adequately document the contingency funding plan referred to in PRU 5.1.86 E.
  • 31/12/2004

PRU 5.1.88

handbook-guidance

The contingency funding plan of a firm described in PRU 5.1.4 R should cover the extent to which the actions in PRU 5.1.86E (1) include:

  1. (1) selling, using as collateral in secured funding (including repo), or securitising, its assets;
  2. (2) otherwise reducing its assets;
  3. (3) modifying the structure of its liabilities or increasing its liabilities; and
  4. (4) the use of committed facilities.
  • 31/12/2004

PRU 5.1.89

handbook-guidance

A firm's contingency funding plan should, where relevant, take account of the impact of stressed market conditions on:

  1. (1) the behaviour of any credit-sensitive liabilities it has; and
  2. (2) its ability to securitise assets.
  • 31/12/2004

PRU 5.1.90

handbook-guidance

The contingency funding plan should contain administrative policies and procedures that will enable the firm to manage the plan's implementation effectively, including:

  1. (1) the responsibilities of senior management;
  2. (2) names and contact details of members of the team responsible for implementing the contingency funding plan;
  3. (3) where, geographically, team members will be assigned;
  4. (4) who within the team is responsible for contact with head office (if appropriate), analysts, investors, external auditors, press, significant customers, regulators, lawyers and others; and
  5. (5) mechanisms that enable senior management and the governing body to receive management information that is both relevant and timely.
  • 31/12/2004

Documentation

PRU 5.1.91

handbook-guidance
PRU 1.2.37 R states that a firm must document its assessment of the adequacy of its liquidity financial resources, how it intends to deal with those risks, and details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required. Accordingly, a firm should document both its stress testing and scenario analysis (see PRU 5.1.58 G) and its contingency funding plan (see PRU 5.1.85 G).
  • 31/12/2004