Regulation > CP 09/14 Strengthening liquidity standards 3: Liquidity transitional measures June 2009

Published: 29th June 2009 by William Webster

The FSA presumes that every firm must be self sufficient for liquidity purposes unless a waiver is granted.

The systems and controls requirement applies to all firms from Q4 2009 and will have no phased or transitional introduction.

To prevent unnecessary constraints to the banking system the quantitative requirement will be phased in and the transitional measures will take effect from Q4 2009.

For firms where Individual Liquidity Adequacy Standards (ILAS) apply the FSA will issue an Individual Liquidity Guidance (ILG). This ILG will act as a low level backstop. The ILAS assessments will then commence with the level of liquidity necessary in the long run being agreed with each firm. The FSA indicates that this transitional period will vary between firms and during this transitional period firms must comply with their existing prudential requirements.

A simplified ILAS regime that involves liquidity buffers applies to firms that meet the following citeria:

The majority of the firm’s assets are secured on residential mortgages;
The assets and liabilities are exclusively in sterling;
At least 70% of liabilities are retail deposits.

The FSA believes this covers Building Societies that use a Matched or Administered approach to the treasury.

For these simpler firms the minimum liquidity buffer can be considered as an ILG. Implementation will be phased and the FSA proposes that the minimum liquidity buffer should rise from 30% (year 1), 50% (year 2), 70% (year 3) and 100% from (year 4) of the final figure.

The annexes to this CP describe how the transitional measures apply to different firms.

Banks on Sterling Stock Liquidity Approach: In the new regime these banks will be ILAS firms. A low level backstop ILG will apply from Q4 2009. Then a strengthening of liquidity over a number of years is anticipated. Current reporting arrangements remain until March 2010. From April 2010 the new reporting regime will apply.

Banks using the Mismatch Liquidity Approach: It is assumed these banks will be ILAS firms. The earliest date the FSA anticipates issuing a low level backstop ILG is June 2010.

Banks using the simplified ILAS: Until June 2010 firms’ existing mismatch guideline will apply. From June 2010 a liquidity buffer will apply. There is a phased introduction 30% (year 1), 50% (year 2), 70% (year 3) and 100% from (year 4) of the final figure.

Building societies not within the simplified ILAS: A low level backstop ILG will be issued in Q4 2009. This will take effect in Q1 2010. Then a strengthening of liquidity over a number of years is anticipated.

Building societies within the simplified ILAS: From June 2010 a liquidity buffer will apply this will be phased in over 3 years. The FSA does not plan to issue an ILG.

There are also annexes relating to UK branches of overseas firms without a Global Liquidity Concession (GLC), UK branches of overseas firms with a GLC, Full Scope BIPRU investment firms and non ILAS firms.

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Related Documents

Regulation > CP 09/13 Strengthening liquidity standards 2: Liquidity reporting April 2009

28th April 2009

This CP is mainly concerned with questions about what firms should report and the frequency and scope of reporting. The Individual Liquidity Guidance (ILG) will lead to a strengthening of firms' liquidity over a period of several years. The rules and guidance on liquidity risk including the transitional arrangements are to be effective in Q4 2009. New reporting arrangements are to go live in Q1 2010.

Regulation > Consultation Paper 08/22 Strengthening liquidity standards December 2008

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This CP sets out the FSA's plans to reform the liquidity regime. It requires firms to undertake a much more rigorous analysis of their liquidity position. This includes the effect of stressed conditions on their business. The firm will submit what it considers to be an appropriate liquidity buffer to the regulator. The FSA will then decide whether it is sufficient. In determining the buffer the FSA will also assess the firm's systems and management. If these are considered weak the buffer will be increased accordingly. The liquidity buffer can only be held in liquid assets. The FSA's view is that this primarily means Gilts, sovereign debt or central bank deposits. The FSA makes it clear, "The responsibility of adopting a sound approach to liquidity risk management is on firms and their senior management".

Regulation > Policy Statement 09/16 Stengthening liquidity standards October 2009

7th November 2009

Policy Statement 09/16 Strengthening liquidity standards refers to earlier consultation papers CP08/22, CP09/13 and CP09/14 and the comments received. In general whilst the FSA acknowledges many of the issues raised little has altered in the final policy. Firms will be expected to be self sufficient for liquidity purposes. Senior management is responsible for reviewing the level of liquidity, compliance and reporting to the Board. The FSA highlights that many firms have been unable to identify and report contractual cash flows on a regular basis. This will be unacceptable. Non compliance will be treated with regulatory sanction. How a firm is subject to Individual Liquidity Adequacy Standards (ILAS) depends on the size of the firm and the risks it presents. The ILAS framework comprises an Individual Liquidity Adequacy Assessment (ILAA), a Supervisory Liquidity Review Process (SLRP) and Individual Liquidity Guidance (ILG). Firms are obliged in the ILAA to undertake robust stress testing. The purpose of this is to show that the firm fully understands its liquidity risk. ILAS firms will need to report the stress test results in their ILAA. Liquidity management systems, controls and stress testing are all board responsibilities. The ILG is the amount of liquid resources the FSA expects a firm to hold. This will contain "guidance" on the amount of the liquid asset buffer and the firm's funding profile. As an incentive for firms to improve their systems and controls, the FSA will increase the amount of liquidity the firm must hold. Deposits at the central bank and tradable securities issued by the central bank will count towards the buffer. Holding currency denominated bonds should take into account potential problems in the FX market. For this reason a domestic bank with mainly sterling liabilities must hold its buffer in gilts. The FSA now require firms to price the cost of liquidity into products. This should mean that the cost of holding the liquidity buffer is passed on to those customers that create a stressed outflow requirement. The new regime will be phased in. The scope and application of the new rules will depend on the importance of the firm and its ability to create systemic risk.

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