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Liquidity policy - quick guide

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Published: 30th July 2010 by William Webster

Societies should have a liquidity policy statement. This should include strategies, policies, processes and systems that manage liquidity risk and liquidity risk tolerance. This document needs to be approved by the board; it should be regularly updated and fit in with the strategic plan. There should be sections on:

1. An introduction section

  • Background to the society's approach to liquidity risk management
  • The Board approval process
  • Frequency of review

2. Objectives section

This should include the purpose of liquid assets and whether the firm operates under simplified or standard ILAS.

3. Operational section

This should explain the society's business and how it impacts on the need for liquidity in treasury and the liquidity being held net of mortgage commitments as a percentage of SDLs.

4. Risk management section

  • Controls and limits on countries, sectors, counterparties and brokers
  • How credit ratings are used. The minimum acceptable rating. Other information used in the credit decision process
  • Policy of assessment for un-rated investments
  • Operational and settlement risk, board authorisations, delegation, dealer limits, confirmation processes and segregation of duties
  • Policy on repo and reverse repo
  • The procedures for overriding these limits and controls
  • How information is reported to the board 

5. Maturity Section

This should provide a clear view of the maturity of treasury investments. Simplified ILAS firms should be able to measure and manage the peak cumulative wholesale outflows over 3 months in order that sufficient buffer is maintained.

Asset Categories:

  • Assets held in the liquidity buffer
  • Society and local authority deposits
  • Repo
  • Mortgage backed securities, covered bonds
  • Commercial paper
  • Bank deposits and CDs
  • Collateral eligible at the Bank of England

There should also be policy/explanation on:

Clearing systems and depository usage, standby facilities, external professional advisors and custody arrangements.

If business risks and controls are not in alignment with the FSA's expectations plans will be required to adjust the society's risk management and/or business strategy.

For detailed guidance refer to FSA Policy Statement 10/5 A specialist sourcebook for building societies, Section 3: Treasury investments and liquidity risk management.

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