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ILSA Guidance Consultation

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Published: 19th November 2010 by William Webster


Liquidity Policy

The Financial Services Authority

25 The North Colonnade

London E14 5HS





Dear Sir,

Re. Guidance consultation Individual Liquidity Systems Assessment (ILSA) - Simplified ILAS BIPRU Firms

Further to the above guidance consultation I make the following comments. I am writing in my capacity as a treasury consultant to both standard and simplified firms. I have no objection with my response being in the public domain.

Stress testing and BIPRU 12.4 and 12.5

1. A simplified ILAS BIPRU firm under BIPRU 12.6.9R and 12.6.17G is obliged to hold buffer assets determined by a calculation. Furthermore under BIPRU 12.4 a simplified firm must also undertake stress testing of its liquidity.

2. If as a result of stress testing, the buffer is determined to be insufficient then it would be incumbent on the firm to mitigate the liquidity risk and/or increase its buffer.

3. The FSA should explain with clarity what is required from simplified firms when they stress test their liquidity risk. It is my opinion that the proposed guidance on the ILSA submission falls short of this requirement.

4. 2.19 of the proposed guidance reads as follows: "It is important to note that, for the purposes of meeting the BIPRU 12.4 stress testing requirements, it is unacceptable for a firm to simply replicate the liquidity stress testing methodology set out in BIPRU 12.5. A simplified ILAS BIPRU firm is exempt from BIPRU 12.5, and as such, no part of BIPRU 12.5 applies to it".

5. Whilst BIPRU 12.5 does not apply to simplified firms it is clear from reading both BIPRU 12.4 and 12.5 that if a simplified firm used part of the methodology outlined in 12.5 it would not contravene 12.4. Indeed it would potentially enhance its understanding of the liquidity risks it faced.

6. Specifically BIPRU 12.4.5 E refers to short term protracted stress scenarios, institution specific and market wide scenarios and combinations of both. BIPRU 12.5.8 , 12.5.9, 12.5.10, 12.5.11, 12.5.12 refer to the same or similar scenarios albeit they provide a firm with much more detail about what is expected.

7. Furthermore BIPRU 12.5.14 R refers to specific drivers of liquidity risk which are fleshed out in proceeding paragraphs. These risks are not dissimilar to those found in BIPRU 12.4.7 but again 12.5 provides much more detail about what is expected.

8. From a practical standpoint BIPRU 12.4 does not provide simplified firms with sufficient guidance on what the FSA requires when liquidity is stress tested. This may lead to the quality of some ILSAs being compromised. If the use of BIPRU 12.5 is ruled out perhaps the FSA would consider much clearer guidance to simplified firms about what is expected when they undertake stress testing. For example how long is a stress supposed to last? This is not in BIPRU 12.4 but is in BIPRU 12.5. Alternatively another solution that could be adopted is for the FSA to suggest simplified firms may use parts of BIPRU 12.5 should they feel it is appropriate to their business.

Liquidity adequacy

9. I refer to the proposed guidance 2.23: "The ILSA should discuss the total amount of liquidity the firm holds and describe how it supports the overall liquidity adequacy rule. The ILSA should also discuss why the firm thinks its liquid asset portfolio (to include its liquidity buffer requirements) is appropriate to ensure the firm meets the overall liquidity adequacy rule and is sufficiently marketable to provide liquidity as and when required. This section should clearly explore whether holding the quantum defined in BIPRU 12.6.9R is sufficient to meet all liabilities as they fall due. Additional liquidity may need to be held, and that can be held in non-qualifying buffer assets".

10. The last sentence of this paragraph requires clarification. Does it mean for simplified firms if they identify a need to hold more buffer than that defined in BIPRU 12.6.9R they can disregard BIPRU 12.7.2 R?

Yours sincerely,

William R. Webster


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