Join Mailing List

For latest news and information about Treasury and Financial Markets, enter your details below:

Is it in your your ILAA?

Print Preview Send to a Friend Share

Published: 6th January 2011 by William Webster

The FSA's proposed Dear CEO letter (Review of implementation of systems and controls requirements in liquidity regime dated December 2010) tells you that if it's not in writing it doesn't exist.

In June 2010 the FSA undertook a sample desktop review of BIPRU firms that had confirmed they were in compliance with the new systems and controls requirements. The vast majority of firms fell substantially short of requirements. Three areas were of particular concern.

1. Pricing liquidity risk (see BIPRU 12.3.15-16): Proper funds transfer pricing is central to the FSA's new regime. It passes the costs of liquidity to the parts of the business that create the risk. However most firms failed to explain how FTP was managed or how it altered decision making.

2. Intra-day management of liquidity (see BIPRU 12.3.17-21): Insufficient evidence was provided about managing intra day liquidity under stress. For firms that are not direct participants in a clearing system it is insufficient to ignore the risk that your agent may reduce your daylight exposure or may experience payment difficulties that affect you.

3. Management of collateral (see BIPRU 12.3.22-25): Collateral management can lead to a call on liquidity or liquid assets. The FSA found that firms were unable to demonstrate an efficient process linking the operations area and treasury. This could adversely affect counterparty's perception of the firm's liquidity.

The FSA has also alluded that it expects to see the following in your ILAA:

1. A stated risk tolerance as a finite metric(s) including survival days under stress and structural ratios.

2. A minimum of monthly ALCO meetings that deal with liquidity and can escalate matters of concern to the board.

3. Contingent plans to deal with a reduction in daylight limits or operational failure by an agent that deals with the firm's payments.

4. A process to meet currency liabilities under stress that does not require access to the currency market.

5. Adequate reporting on the source of liabilities including limits on the source and maturity of funding.

6. Reverse stress testing to determine what could lead to the need for external liquidity support.

7. A tested Contingency Funding Plan. This means not just a dry run but really using it to raise liquidity.

Is it in your ILAA?

In 2011 the FSA undertakes its review of firms' ILAAs. If you have not sufficiently covered these issues it will affect your Individual Liquidity Guidance (ILG).

Displaying 1 to 6 of 6 results in total.

Related Documents

Free to ViewPreparing your ILAA 100% relevant

12th January 2011

Not all banks have teams of people who can prepare an Individual Liquidity Adequacy Assessment ILAA. For small banks in particular the fear is that your ILAA doesn't live up to expectations and the regulator makes this clear in the SLRP. Read how one bank found a solution.

Free to ViewImproving Your ILAA 100% relevant

18th December 2012

Sometimes you have done all the necessary work for your ILAA but later on you need a thorough review in order to tighten things up. Why? Because eighteen months ago when you prepared things it took up a lot of time and resources and you knew that it would require a bit of TLC at a later date. Now things have moved on and regulation, as far as it can be, has become a little clearer. It's time to get some independent advice and expertise in order to feel comfortable that you can deal with any regulatory scrutiny.

Registration RequiredRegulation > Policy Statement 09/16 Stengthening liquidity standards October 2009 38% relevant

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.

Registration RequiredRegulation > Consultation Paper 08/22 Strengthening liquidity standards December 2008 38% relevant

31st January 2009

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".

Registration RequiredLiquidity 38% relevant

31st March 2014

Liquidity "Markets can remain irrational longer than you can remain solvent." JM Keynes • Definition • Risk drivers • Stress testing • Board responsibility • Days of survival • Buffers • Funds transfer pricing • Outcome

Free to ViewWhat's your risk appetite? 22% relevant

12th June 2010

The regulator is asking boards to define their risk appetite and risk tolerance. Whilst this insistence may be reasonable it certainly doesn't make it any easier to do. Just how do you measure the level of risk you have and then how do you relate that to your firm?