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04.12.2009

Systems and controls for Liquidity Risk came into force December 01 2009

On 5th October, 2009 the FSA published its new, exigent liquidity regime, which came into force on 1st December 2009.  New liquidity reporting and quantitative requirements will be phased in gradually over several years and the requirement to maintain liquid asset buffers will only be implemented gradually – the pace will be dictated by the state of the British economy.

Other markets/countries will follow suit and tighter regulation of liquidity management will be introduced - some, like France, in 2010.   

The principle is that UK banks are expected to stand alone and should monitor and manage their own liquidity separately from the liquidity of other institutions in the group.

The new rules affect all UK banks and building societies, branches of European Economic Area (EEA) and other overseas firms operating in the UK, and investment firms. The transition will impact business models by, for example, discouraging reliance on short-term wholesale funding and increasing the quality and quantity of liquid asset buffers.

The systems and controls requirements will apply to all firms within the scope of the new liquidity regime from 01/12/09 and are contained in the updated Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU).  UK branches of overseas banks that currently benefit from a Global Liquidity Concession (GLC) will not be subject to the BIPRU 12.3 and 12.4 systems and controls requirements until November 2010.

Systems and Controls Requirements (BIPRU 12.3 and 12.4)

The BIPRU 12 rules on systems and controls are more detailed than the previous liquidity requirements of Chapter 11 of the FSA's Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook.

All BIPRU firms will be subject to liquidity risk management, stress-testing and Contingency Funding Plan (CFP) requirements in BIPRU 12.3 and 12.4. Firms are required to implement robust systems and controls to identify, measure, manage and monitor the liquidity risks to which they may be exposed. Reliable management information will ensure forward-looking information on the firm's liquidity risk and should include early warning indicators to identify increases in liquidity risk.

The FSA has indicated that firms should consider implementing appropriate transfer pricing mechanisms that align commercial incentives in relation to individual products, business lines or strategies with the associated liquidity risks that each pose. The FSA also expects firms actively to manage their collateral positions, by understanding what assets have been provided as collateral, whether these assets are able of being re-hypothecated, whether they can be mobilised for liquidity purposes in a timely manner, and which assets are available for collateralisation.

Firms will be required to have robust stress-testing and a CFP to demonstrate compliance with the rules, and should consider a range of factors including the impact of stresses on pricing assumptions and shorter and longer term stress scenarios, as well as covering institution-specific and market-wide stresses.  

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