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ILSA Submission Information

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Published: 16th November 2010 by William Webster

On 9th November 2010 the FSA issued proposed guidance on the Individual Liquidity Systems Assessment (ILSA) Submission Information.

It is a revised version of a document released earlier this year and attempts to clarify what's required. If you are putting together your ILSA the following may help:

The FSA periodically reviews liquidity. This is called the Supervisory Liquidity Review Process (SLRP). It can occur at any time or as part of the ARROW process. This is when the FSA will ask for your ILSA. It will be used in order to form judgment on whether your liquidity risk is appropriately managed. If the regulator determines that the simplified buffer requirement (refer to BIPRU 12.6.9R and 12.6.17G) does not adequately cover your liquidity risk the Board will be given an Individual Liquidity Guidance (ILG). This will require you to hold more in the buffer.

You may think that just complying with the simplified buffer requirement is enough but this misses the point. The ILSA is also a document that should be used by the Board to help it understand the liquidity risks the firm faces and how in times of stress those risks can be effectively dealt with. A poorly drafted ILSA puts you at risk. It exposes weak governance and risk management and is more likely to lead to an ILG.

Whilst the FSA expects the ILSA to be "proportionate to the nature, scale and complexity of a firm's activities" do not get caught out. Running "ILSA Lite" will invite questions.

The FSA's proposed structure and format for the ILSA is not ideal. However from my experience you would be advised to follow it. Sometimes that's not as easy as it sounds and you can miss things out. So what could you reasonably expect to find in your ILSA?

Using the original headings the following is a cut down version of key items in the Guidance. Does your ILSA stand up to scrutiny?

Section 1: Executive Summary

  • An overview of the processes, systems and controls
  • The amount of buffer that needs to be held
  • The liquidity risk processes
  • The balance sheet and P&L
  • The governance process
  • The liquidity risk appetite
  • The main liquidity risks
  • The challenge process

Section 2: ILSA Systems & Controls

Part 1 Background

  • Information about your firm (historical data, legal structure and organizational structure)
  • The size of the liquidity buffer and resources you hold
  • How you classify Type A and Type B accounts and their relative sizes

Part 2 Current & projected financial and liquidity positions

  • The Balance sheet and profit and loss account
  • The current business plan (as appendix)
  • How implementing the business plan will affect future liquidity
  • Details of the buffer assets held
  • Details of non buffer assets that are considered as liquid resources

Part 3 Liquidity control environment

a. Risk appetite, liquidity risk limits and positions against limits

  • The definition of risk appetite
  • The limit structure used and how it relates to the risk appetite
  • Confirmation that the risk appetite and limits are consistent with the Simplified buffer requirement

b. Timing

  • Any events that over the next year could impact on the ILSA

c. Risk analysis

  • Details of the diversification of funding sources
  • The ability to access the Bank of England
  • How stress testing works including the parameter and assumptions made
  • Whether stress testing shows that the firm breaches its risk appetite
  • Steps taken to resolve this weakness

d. Stress testing

  • What are the largest liquidity risks identified?
  • How do short term and protracted stresses impact on liquidity?
  • Have you considered firm, market wide and combination scenarios?
  • How closely is the Board involved?
  • Do the effects of stress take you beyond your risk appetite?
  • How adequate is the buffer in stressed conditions?
  • How do stresses affect profitability and solvency?

e. Contingency funding plans

  • Refer to BIPRU 12.4.13R for what's expected
  • Does it exist?
  • Has it been tested in any way?
  • Who is in charge?
  • How is it invoked?
  • What key information goes to management?
  • It should be attached as an appendix

f. Management information

  • How do you report liquidity to senior management?
  • Days of liquidity in business as usual conditions
  • Days of liquidity in stressed conditions
  • The buffer and liquid resources available relative to limits
  • Include these as appendices

Part 4 Liquidity adequacy

  • Does the buffer amount as defined under the Simplified approach (BIPRU12.6.9R) meet all the requirements you have identified?
  • Refer to TP 29 regarding the build up of the buffer
  • Can you demonstrate that you regularly access the sources of liquidity identified?

Part 5 Diversification

  • What funding sources do you have and how diversified are they?
  • How quickly can you realistically access these sources?

Part 6 Internal challenge and approval

  • Document the Board discussion and challenge process
  • What do you do to confirm and test any liquidity models used to ensure they are fit for purpose?

Part 7 Using the ILSA in the Firm

  • How do you demonstrate the ILSA is a "living document"?

Section 3 - Appendices

  • The FSA includes PC spreadsheets, cash flow forecasts, assumptions, committee reports and minutes, management information, funding sources, the buffer and liquid resources. The more that you can put in the appendices the easier the ILSA will be to read.

Conclusion

The ILSA is all about how you manage your liquidity risk. This involves behaviour and assumptions and it's not straight forward.

When in doubt the simple answer is just to increase the buffer. That's why running "ILSA lite" may prove more expensive than you anticipate.

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