http://www.riskliquidity.com/ Credit Economical Capital en-us Copyright: (C) Pelcican Consulting http://www.riskliquidity.com/details/Systems_and_controls_for_Liquidity_Risk_came_into_force_December_01_2009.html 04/12/2009 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.   http://www.riskliquidity.com/details/Tightenting_of_eligibility_rules_for_ECB_tenders.html 23/11/2009 In what is seen as a further indicator to extraordinary governmental and supra-governmental support for bank liquidity is being unwound, the ECB announced higher ratings standards for asset backed paper eligible for collateral with the ECB. On their website on Friday they posted a Press Release including the following quote "The Eurosystem will require at least two ratings from an accepted external credit assessment institution for all ABSs issued as of 1 March 2010. In determining the eligibility of these ABSs, the Eurosystem will apply the “second-best” rule, meaning that not only the best, but also the second-best available rating must comply with the minimum threshold applicable to ABSs (see the press release of 20 January 2009)." Using the advanced technical guidance issued by Robert Fiedler and his methodology team, CBC techniques increasingly need flexible rules in determining the eligibility criteria of assets used in Central Bank operations - especially for firms who run global liquidity operations. For more information on CBC, please contact niul.dillonhatcher@pelican-consulting.co.uk   Ian http://www.riskliquidity.com/details/Slides_from_the_FSA_Conference_are_available_online.html 17/10/2009 The recent conference on Liquidity Risk, held by the FSA has now slides attached - bottom of the screen under further information. Follow this link See our article on the conference   http://www.riskliquidity.com/details/FSA_Launches_PS_09_16.html 15/10/2009 On Friday 9th October, the FSA presented to a large audience in London its intentions for liquidity risk management in the London market bringing to a close the long process of updating this crucial piece of the London financial regulatory framework.   Niul Dillon Hatcher, Pelican’s Head of Regulatory Consulting, attended the presentation with Ian Gilmour, Pelican’s Managing Director (along with more than 300 London bankers) and reports:In December 2007, the FSA began a consultation process with the UK financial services community on proposals designed to change regulation of liquidity risk management in London radically. The aim was, according to Lord Turner, (Chairman of the FSA): “to restore liquidity regulation and supervision to a position of central importance”.   This process was completed on Friday 9th October when the FSA launched the final form of regulations in the context of Policy Statement 09/16 when David Morgan (Manager, Liquidity Policy) emphasised the FSA’s core objectives: •    sustaining systemic stability;•    maintaining the soundness of financial institutions; and •    protecting consumers.The key elements of this new attitude to liquidity risk designed to achieve these objectives are:•    over-arching principles of self-sufficiency and adequacy of liquidity reserves;•    enhanced systems and control requirements (implementing the BIS’ 2008 Principles for Sound Liquidity Risk Management and Supervision);•    updated quantitative requirements coupled with a narrow definition of liquid assets;•    a new scheme allowing for modification of the regime for branches/subsidiaries; and•    granular and frequent reporting requirements.The policy will be implemented by means of an amendment to the FSA’s regulatory handbook  (BIPRU Rule 12). The final form of the regulation takes account of some – but by no means all – of the comments provided by market participants as a result of the consultation exercise including: •    expansion of the type of assets eligible for inclusion in the liquidity buffer; •    amendment of the types of concession available; and •    extension of implementation transition period.The FSA states that it will look at banks as individual cases and that the regulatory treatment of each bank will depend on its significance to the local and international system and implementation of the regulations will be phased also but for some institutions changes will be effective as soon as December 2010.At the launch, the FSA confirmed that it is aware that it is in the vanguard of international movement towards new style liquidity regulation but said that it would not tighten standards before economic recovery is assured.  It acknowledges that theirs is a tough policy that will require banks to amend business models.  David Morgan said that this was necessary to avoid a return to previous practices particularly by discouraging reliance on short-term wholesale funding and increasing the quantity and quality of assets held in liquidity buffers.  The costs of restoring banks to stability in the current crisis had been borne by the taxpayer.  The new buffer was designed to ensure that such costs would be borne by banks which took the risks and the rewards.  It was acknowledged that these new and additional costs would, of course, be passed on to customers.Sally Dewar, the FSA’s Managing Director-Risk said that it had considered representations made by the banking industry in London and had taken account of all those it thought appropriate.  The FSA confirmed its support for the international initiatives (CEBS and BIS) in course and feels that its regime is sufficiently flexible to allow amendment in order to reflect new international standards when produced.If you have any questions in relation to PS 09/16 or in relation to liquidity risk management generally, please contact Niul on +(44) (0) 20 7997 6051 or niul.dillonhatcher@pelican-consulting.co.uk. http://www.riskliquidity.com/details/Liquidity_Risk_Regulations_are_front_page_news.html 07/10/2009 Stephen Green, Chariman of HSBC said yesterday in an interview with the BBC that : "... the industry needed to "pay much more attention to liquidity" than it had done previously" Liquidity has been the centrepiece of attention this week as the FSA launched the final version of its regulations. Alongside articles in many UK newspapers, Bloomberg have a piece on just how close the UK economy came to chaos and underpins why the Liquidity regulations are now front page news. Niul Dillon Hatcher and Ian Gilmour are attending the FSA conference on Liquidity Risk and will report back on the tone from the regulators with FSA speakers  Thomas Huertas, Sally Dewar, David Morgan, Julian Adams and Mark Sinclair providing a full account of the background and technical aspects of the new regime. http://www.riskliquidity.com/details/FSA_finalises_new_Liquidity_Regulations.html 06/10/2009 The FSA have unveiled the final version of their much anticipated liquidity risk regulations.   We will providing some commentary on this once we have had time to digest the contents. For more information in the meantime, feel free to call our head of Regulatory Consulting, Niul Dillon Hatcher on +44 207 991 6050 http://www.riskliquidity.com/details/Master_Class_in_Liquidity_Risk.html 06/10/2009 Robert Fiedler and Niul Dillon Hatcher are providing a Masterclass in Liquidity Risk in Milan in October. See attached agenda and slides will be published in our document archive - request a password for more information.   In particular, alongside Robert Fiedler's explanation of modern Liquidity Risk management techniques, Niul Dillon Hatcher will deliver his first comparative analysis of international Liquidity Risk regulations   http://www.riskliquidity.com/details/Emergency_liquidity_measures_being_reviewed_in_light_of_improving_market_conditions.html 01/10/2009 Banks are starting to lend to each other again as market liquidity continues to reach records levels, due in most part to Central Bank market operations in the first half of 2009 From the FT "Banks sought just €75.2bn ($110bn, £68.7bn) of 12-month liquidity in this week's operation. That compared with €442bn demanded in the first such auction in June, the largest amount ever allocated in a single ECB operation" As at 25th September, Eonia was quoted at 0.342 and 3Month Euribor was quoted at 0.7457, a spread of .4037, which is almost half the spread compared to the height of the crisis at 0.756 - see our earlier news article on the 24th January 2009 http://www.riskliquidity.com/details/Important_week_coming_for_Liquidity_Risk.html 17/09/2009 C-EBS and FSA Meetings - week commencing 21st September 2009 This week sees increasing regulatory activity. The C EBS meeting on Liquidity Buffers "are aimed primarily at banks’ internal risk management processes, although they may be helpful for supervisory review purposes as well". Robert Fiedler and Niul Dillon Hatcher will be attending - call us on 01983 201580 if you would like to meet. There is a FSA seminar on the 24th - see agenda http://www.riskliquidity.com/details/New_Liquidity_Services_from_Pelican_Consulting_Ltd.html 15/09/2009 Our  Liquidity Services have been summarised in a useful 8 page document. If you would like a copy, please contact laura.gustar@pelican-consulting.co.uk http://www.riskliquidity.com/details/Interest_Rates_and_The_Credit_Crunch:_New_Formulas_and_Market_Models.html 28/07/2009 A February 09 paper by Fabio Mercurio has been referred to us by Gerry Salkin at Imperial College's Centre for Quantitative Finance. Its relevance to Liquidity can be summarised in this quote from the paper: "The liquidity crisis widened the basis, so that market rates that were consistent with each other suddenlyrevealed a degree of incompatibility that worsened as time passed by. For instance, theforward rates implied by two consecutive deposits became dierent than the quoted FRArates or the forward rates implied by OIS (EONIA) quotes. Remarkably, this divergencein values does not create arbitrage opportunities when credit or liquidity issues are takeninto account. As an example, a swap rate based on semiannual payments of the six-monthLIBOR rate can be dierent (and higher) than the same-maturity swap rate based onquarterly payments of the three-month LIBOR rate." The subject of EONIA has been referred to earlier in the Risk Liquidity news sections and is of huge importatance in the pricing of interest and of course liquidity We will also bring Gerry Salkin's paper shortly - if you would like an early look, please contact laura.gustar@pelican-consulting.co.uk http://www.riskliquidity.com/details/Liquidity_Risk_Webinar_in_assoication_with_Thomson_Reuters.html 02/07/2009 Pelican Consulting supported Thomson Reuters in a Liquidity Risk webinar on Bobs Guide, July 1st. A podcast of the event and recording of the presentation will be available on Bobs Guide and Thomson Reuters by 3rd July 2009 - link will be published shortly UPDATE: Link for podcast http://online.thomsonreuters.com/forms/liquidityrisk For more information on this event, please contact laura.gustar@pelican-consulting.co.uk http://www.riskliquidity.com/details/C-EBS_meeting_on_Liquidity_Buffers_on_1st_July_2009.html 18/06/2009 NOTE : This meeting was cancelled - see their website for an update A public hearing is taking place on Liquidity Buffers organised by C-EBS. We will try and issue some notes form the meeting in early July. If you want to attend, go to the link and click on the registration form   The discussion paper is available on their website from Friday 19th June 2009     http://www.riskliquidity.com/details/US_Regulatory_White_Paper.html 17/06/2009 Hot on the heels of the FSA Rules on Liquidity Risk, changes to the regulatory landscape with the Fed. In a recent White Paper from the US Treasury Department they discuss on Page 9 "Consolidated supervision of a Tier 1 FHC should extend to the parent company and to all of its subsidiaries - regulated and unregulated, US and foreign.....the constraints that the Gramm-Leach-Bliley Act (GLB Act) introduced on the Federal Reserve's ability to require reports from, examine, or impose higher prudential requirements or more stringent activity restrictions on the functionally regulated or depository institution subsidiaries of FHCs should be removed" Powerful stuff Consultation is taking place and the rules will not be in place before the FSA Regime comes into play - even with the delays enivsaged in FSA CP09.14, but its clear that around the world in the major financial centres, being a foreign owed branch or subsidiary just got a lot more complicated Contact us for more analysis http://www.riskliquidity.com/details/CP_09-14.html 10/06/2009 Strengthening liquidity standards 3: Liquidity transitional measures Well, we have had more calls on this subject than any other in the last couple of days. Pelican is putting together some useful notes on this subject. If you would like a copy, please contact laura.gustar@pelican-consulting.co.uk http://www.riskliquidity.com/details/Currency_illiquidity_-_why_size_does_not_always_matter.html 04/06/2009 Pelican employees and associates worked for Deutsche Bank during the 1997-98 asian currency crisis. We realised back then that Liquidity Risk is not just an issue for big currencies, but also for smaller currencies when FX market volatility creates difficult funding situations for internationally active banks - Thai Baht was a huge issue back then, along with other currencies with on and offshore (NDFs) components. So not only have we seen recently issues concerning the big crosses, but we now see recent issues with smaller currencies. Take the Money Market conditions in the Latvian currency - the Lat. With overnight rates rocketing to 25 % and the central banks buying Lats in the open market, any bank without a line of credit with the central bank (or a Liquidity Buffer / CBC) or the ability to borrow Lats from local banks, would be in a position of extreme illiquidity in that currency. One key principle of these type of phenomena is to have a well understood analysis of currency crises and the ability to model widening spreads in the FX market. The team have used their experience of these events to help build a robust set of Currency scenarios into the liquidity solutions we build with customers - Bid Offer rates are used rather than the mid-market which many systems providers deem adequate. So the headaches for Liquidity Risk management do not only revolve around multi-billion positions in the majors, but also in more modest (short) positions in the minor currencies. Planning around these positions has never been more important.   http://www.riskliquidity.com/details/Banking_Liquidity_Risk_-_spreads_narrowing_in_May.html 06/05/2009 May seems to be kind to most banks (except for Bank of America). Spreads are narrowing and mainstream commentators seem to be calling the bottom of the market for banks. If spreads narrow further and credit sensitivity to unsecured lending eases, then Liquidity Risk scenarios will be requried to ensure that easier liquidity does not result in the structural illiquidity that preceded this crisis. Name crsis and systemic effects in the interbank markets will be scenarios the banks will have to use to ensure their liquidity resources are adequate when inevitable volatility in the interbank market re-surfaces.   What the commentators are saying Reuters on the 6th May reported on the US Interbank market: "The U.S. two-year swap spread, seen as a key measure ofbroader banking and financial market stress, narrowed to 51basis points from around 58 basis points"Bloomberg on the 6th May reported that BNP Paribas are forecasting further falls in spreads:"The London interbank offered rate, orLibor, for three-month loans in dollars may fall two basispoints today, according to Matteo Regesta, an interest-ratestrategist in London at BNP Paribas SA, France’s largest bank " The FT are also tracking this story:"Three-month dollar Libor on Tuesday fixed at 0.98 per cent, three-month euro Libor fixed at 1.34 per cent and three-month sterling Libor fixed at 1.43 per cent." http://www.riskliquidity.com/details/FSA_CP09-13.html 30/04/2009 Liquidity Risk regulation is evolving at a fast pace and non more electric than the FSA regime. If you follow this link FSA then you get this regulators current thinking on why the reporting burden on banks is increasing through 2009. Banks are in an inenviable position. Still reeling from horrific losses, capital raising, plummeting profitability and tarnished reputations, regulators have belatedly started to beef up regulations at the worst possible time for morale and capability. However, the quote from the FSA "While we recognise that our quantitative reporting requirements may becostly to implement for many of the firms that fall within the scope of our IndividualLiquidity Adequacy Standards (ILAS) regime, we believe the data requested under the newproposals would normally be required by most firms in undertaking prudent liquidity riskmanagement for their own purposes." has merit. Banks should be running these kind of analytics in their own self interests anyway, they should not need to be told to do it. Self regulation is now seen as a quaint idea from another era. But the challenges many banks face in pulling together the data necessary, reconciling it and presenting it to regulators as fact rather than wishful thinking.....well the challenge is enormous in the timescales set out by the FSA and others. Markets Spreads between EONIA and 3M Euribor still seem to be at a wide differential. On the 29th of April 2009 : Eonia was 0.511% 3M Euribor was 1.365% Differential of .854 points compared to our last references to the rates on Thursday 22nd January : Eonia was at 1.498 % 3M Euriobor was at 2.254 % Differential of 0.756 points We did think that differential had narrowed due to better Money Market conditions, but we shall have to look a bit deeper to discover what is really happening in the Interbank markets. Fear does still seem to be running high, but market observers are quoting a thawgin of markets. If you have any observations to make on this subject please feel free to email ian.gilmour@pelican-consulting.co.uk http://www.riskliquidity.com/details/Eonia_and_Euribor_indicate_further_stress_in_Interbank_market.html 24/01/2009 Money Markets remain stressed in late January. Eonia on Thursday 22nd January was at 1.498 % but 3M Euriobor was at 2.254 % with these significant differentials being reported in articles on Reuters and the  FT We have inserted a couple of papers on the phenomenom of the Eonia spread and its importance to Liquidity Risk: 1 Neyer and Wiemers paper (Interbank market dynamics), incuding the following defintion of Eonia and Euriobor The reference rate in this segment (unsecured lending) is the Eonia (Euro Overnight Index Average). It is a market index computed as the weighted average of overnight unsecured lending transactions undertaken by a representative panel of banks. The same panel banks contributing to the Eonia also quote for the Euribor (Euro Interbank offered Rate). The Euribor is the rate at which euro interbank term deposits are offered by one prime bank to another prime bank. This is the reference rate for maturities of one, two and three weeks and for twelve maturities from one to twelve months ....(P6) and 2 Linzert and Schmidt who have a 2007 model to detemine the Eonia spread which they account for by the following significant phenomenom: Liquidity deficits of banks opportunity costs (the market is heteregenous) lagged spreads - this is indeed raised in the FT article, with the expectation of the spread narrowing through time reserve fulfillment policy uncertainty See the documents hosted on the Liquidity Risk microsite for full details   http://www.riskliquidity.com/details/Stressed_banks.html 17/01/2009 Continuing stress on the banks in January 2009 illustrates the limits of government internvention. The losses reported on the 16th January marked the end of a dire week for banks - see more information in the FT Liquidity Risk management will therefore need to take into account name stresses that last for weeks if banks are to create adequate liquidity safeguards in the future   http://www.riskliquidity.com/details/Welcome_to_our_Liquidity_Risk_microsite.html 13/01/2009 Welcome, glad to have you here Pelican Consulting is uniquely qualified in the Liquidity Risk space, being one of the only consultancies involved with designing and building operational Liquidity Risk solutions for international banks We have put together a modest centre for papers we think are useful - including a White Paper on the subject Of course we do not have a monopoly of knowledge in this space so we are teaming up with Robert Fiedler, our trusted advisor on all things Liquidity Risky. His website is at www.liqrisk.com which should be operational during January 2009 If you would like more information on our services in Liquidity Risk please call Laura Gustar on +44(0)845 123 3922 or email her on laura.gustar@pelican-consulting.co.uk