Internal Liquidity Adequacy Assessment

1.1

This Part applies to a CRR firm.

1.2

In this Part, the following definitions shall apply:

Delegated Regulation

means Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions.

funding risk

means the risk that a firm does not have stable sources of funding in the medium and long term to enable it to meet its financial obligations, such as payments or collateral calls, as they fall due, either at all or only at excessive cost.

Internal Liquidity Adequacy Assessment Process (ILAAP)

means the process for the identification, measurement, management and monitoring of liquidity implemented by the firm in accordance with 3 – 13.

liquidity contingency plan

a plan for dealing with liquidity crises as required by 12.1.

liquidity coverage ratio

means the ratio calculated in accordance with Article 4(1) of the Delegated Regulation.

liquidity risk

means the risk that a firm, although solvent, does not have available sufficient financial resources to enable it to meet its obligations as they fall due.

overall liquidity adequacy rule

means the rule in 2.1.

1.3

Unless otherwise defined, any italicised expression used in this Part and in the CRR has the same meaning as in the CRR.

2.1

A firm must at all times maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

2.2

For the purposes of the overall liquidity adequacy rule:

1. (1) a firm also must ensure that:
1. (a) its liquidity resources contain an adequate buffer of high quality, unencumbered assets; and
2. (b) it maintains a prudent funding profile; and
2. (2) a firm may not include liquidity resources that may be made available through emergency liquidity assistance from a central bank.

3.1

As part of the overall liquidity adequacy rule, a firm must have in place robust strategies, policies, processes and systems that enable it to identify, measure, manage and monitor liquidity risk and funding risk over an appropriate set of time horizons, including intra-day, so as to ensure that it maintains adequate levels of liquidity buffers and an appropriate funding profile. These strategies, policies, processes and systems must be tailored to business lines, currencies, branches and legal entities and must include adequate allocation mechanisms of liquidity costs, benefits and risks.

[Note: Art. 86(1) of the CRD]

3.2

The strategies, policies, processes and systems referred to in 3.1 must be proportionate to the complexity, risk profile and scope of operation of the firm, and the liquidity risk appetite and funding risk appetite set by the firm’s management body in accordance with 4, and must reflect the firm’s importance in each country in which it carries on business.

[Note: Art. 86(2) (part) of the CRD]

3.3

A firm must, taking into account the nature, scale and complexity of its activities, have liquidity risk profiles and funding risk profiles that are consistent with and not in excess of those necessary for a well-functioning and robust system.

[Note: Art. 86(3) of the CRD]

3.4

A firm must put in place risk management policies to define its approach to asset encumbrance, as well as procedures and controls that ensure that the risks associated with collateral management and asset encumbrance are adequately identified, monitored and managed.

4.1

A firm must ensure that:

1. (1) its management body establishes the firm's liquidity risk appetite and funding risk appetite and that this is appropriately documented;
2. (2) its liquidity risk appetite and funding risk appetite are appropriate for its business strategy and reflect its financial condition and funding capacity; and
3. (3) its liquidity risk appetite and funding risk appetite are communicated to all relevant business lines.

[Note: Art. 86(2) (part) of the CRD]

5.1

A firm must actively manage its intra-day liquidity positions and any related risks so that it is able to meet its payment and settlement obligations on a timely basis.

5.2

For the purposes of 5.1, a firm must ensure that its intra-day liquidity management arrangements enable it:

1. (1) to meet its payment and settlement obligations on a timely basis under both normal financial conditions and under the stresses required by 11.3;
2. (2) to identify and prioritise the most time-critical payment and settlement obligations; and
3. (3) in relation to the markets in which it is active and the currencies in which it has significant positions, to measure, monitor and deal with intra-day liquidity risk. A firm must in particular be able to:
1. (a) measure expected daily gross liquidity inflows and outflows, anticipate the intra-day timing of these flows where possible, and forecast the range of potential net funding shortfalls that might arise at different points during the day; and
2. (b) manage the timing of its liquidity outflows such that priority is given to the firm’s most time-critical payment obligations.

6.1

A firm must implement an adequate transfer pricing system to ensure that it accurately quantifies liquidity and funding costs, benefits and risk in relation to all significant business activities.

7.1

A firm must actively manage collateral positions.

7.2

A firm must distinguish between pledged and unencumbered assets that are available at all times, in particular during emergency situations. A firm must also take into account the legal entity in which assets reside, the country where assets are legally recorded either in a register or in an account as well as their eligibility and must monitor how assets can be mobilised in a timely manner.

[Note: Art. 86(5) of the CRD]

8.1

A firm must actively manage its liquidity risk exposures and related funding needs and take into account:

1. (1) existing legal, regulatory and operational limitations to potential transfers of liquidity and unencumbered assets amongst entities, both within and outside the EEA; and
   [Note: Art. 86(6) of the CRD]
2. (2) any other constraints on the transferability of liquidity and unencumbered assets across business lines, countries and currencies.

9.1

A firm must ensure that it has access to funding which is adequately diversified, both as to source and tenor.

9.2

A firm must develop methodologies for the identification, measurement, management and monitoring of funding positions. Those methodologies must include the current and projected material cash-flows in and arising from assets, liabilities, off-balance-sheet items, including contingent liabilities and the possible impact of reputational risk.

[Note: Art. 86(4) of the CRD]

10.1

A firm must actively manage its asset encumbrance position.

10.2

For the purpose of 10.1 a firm must ensure that:

1. (1) its risk management policies take into account:
1. (a) the firm’s business model;
2. (b) the countries in which it operates;
3. (c) the specificities of the funding markets; and
4. (d) the macroeconomic situation; and
2. (2) its management body receives timely information on:
1. (a) the current and expected level and types of asset encumbrance and related sources of encumbrance, such as secured funding or other transactions;
2. (b) the amount, expected level and credit quality of unencumbered assets that are capable of being encumbered, specifying the volume of assets available for encumbrance; and
3. (c) the expected amount, level and types of additional encumbrance that may result from stress scenarios.

10.3

For the purpose of this Chapter a firm must treat an asset as encumbered if it is subject to any form of arrangement to secure, collateralise or credit enhance any transaction.

11.1

A firm must consider different liquidity risk mitigation tools, including a system of limits and liquidity buffers in order to be able to withstand a range of different stress events and an adequately diversified funding structure and access to funding sources. It must review those arrangements regularly.

[Note: Art. 86(7) of the CRD]

11.2

A firm must consider alternative scenarios on liquidity positions and on risk mitigants and must review the assumptions underlying decisions concerning the funding position at least annually. For these purposes, alternative scenarios must address, in particular, off-balance sheet items and other contingent liabilities, including those of securitisation special purpose entities or other special purpose entities, as referred to in the CRR in relation to which the firm acts as sponsor or provides material liquidity support.

[Note: Art. 86(8) of the CRD]

11.3

A firm must:

1. (1) conduct on a regular basis appropriate stress tests so as to:
1. (a) identify sources of potential liquidity strain;
2. (b) ensure that current liquidity exposures continue to conform to the liquidity risk and funding risk appetite established by that firm's management body; and
3. (c) identify the effects on that firm's assumptions about pricing; and
2. (2) analyse on a regular basis the separate and combined impact of possible future liquidity stresses on its:
1. (a) cash flows;
2. (b) liquidity position;
3. (c) profitability; and
4. (d) solvency.

11.4

A firm must consider the potential impact of institution-specific, market-wide and combined alternative scenarios. Different time periods and varying degrees of stressed conditions must be considered.

[Note: Art. 86(9) of the CRD]

11.5

In carrying out the liquidity stress tests required by 11.3, a firm must make appropriate assumptions around the major sources of risk, including the major sources of risk in each of the following categories where they are relevant to the firm given the nature and scale of its business:

1. (1) retail funding risk;
2. (2) wholesale secured and unsecured funding risk;
3. (3) risks arising from the correlation between funding markets and lack of diversification between funding types;
4. (4) off-balance sheet funding risk;
5. (5) risks arising from the firm’s funding tenors;
6. (6) risks associated with a deterioration of a firm’s credit rating;
7. (7) cross currency funding risk;
8. (8) risk that liquidity resources cannot be transferred across entities, sectors and countries;
9. (9) funding risks resulting from estimates of future balance sheet growth;
10. (10) franchise risk;
11. (11) marketable assets risk;
12. (12) non-marketable assets risk;
13. (13) internalisation risk; and
14. (14) intra-day risk.

11.6

A firm must ensure that its management body reviews regularly the stresses and scenarios tested to ensure that their nature and severity remain appropriate and relevant to the firm.

11.7

A firm must ensure that the results of its stress tests are:

1. (1) reviewed by its senior management;
2. (2) reported to that firm's management body, specifically highlighting any vulnerabilities identified and proposing appropriate remedial action;
3. (3) reflected in the processes, strategies and systems established in accordance with 3.1;
4. (4) used to develop effective liquidity contingency plans;
5. (5) integrated into that firm's business planning process and day-to-day risk management; and
6. (6) taken into account when setting internal limits for the management of that firm's liquidity risk exposure.

11.8

A firm must report the results of its liquidity stress tests to the PRA in a timely manner.

12.1

A firm must adjust its strategies, internal policies and limits on liquidity risk and funding risk and develop an effective liquidity contingency plan, taking into account the outcome of the alternative scenarios referred to in 11.2.

[Note: Art. 86(10) of the CRD]

12.2

The liquidity contingency plan must include strategies to address the contingent encumbrance resulting from relevant stress events including downgrades in the firm’s credit rating, devaluation of pledged assets and increases in margin requirements.

12.3

The liquidity contingency plan must also set out adequate strategies and proper implementation measures in order to address possible liquidity shortfalls, including in relation to branches established in another EEA State. Those plans must be tested at least annually, updated on the basis of the outcome of the alternative scenarios set out in 11.2, and be reported to and approved by the firm's senior management, so that internal policies and processes can be adjusted accordingly.

[Note: Art. 86(11) (part) of the CRD]

12.4

A firm must take the necessary operational steps in advance to ensure that liquidity contingency plans can be implemented immediately, including holding collateral immediately available for central bank funding. This includes holding collateral where necessary in the currency of another EEA State or currency of a third country to which the firm has exposures, and where operationally necessary within the territory of an EEA State or third country to whose currency it is exposed.

[Note: Art. 86(11) (part) of the CRD]

13.1

A firm must ensure that:

1. (1) it regularly, but at least annually, reviews its ILAAP;
2. (2) it regularly carries out an internal assessment of the adequacy of its liquidity and funding in accordance with its ILAAP;
3. (3) the assessment in (2) is proportionate to the nature, scale and complexity of its activities and includes an assessment of:
1. (a) the adequacy of its liquidity and funding resources to cover the risks identified in accordance with this Part;
2. (b) the methodologies and assumptions applied for risk measurement and liquidity management;
3. (c) the results of the stress tests required by 11.3; and
4. (d) the firm’s compliance with this Part;
4. (4) its ILAAP identifies those of the measures set out in its liquidity contingency plans that it would implement.

13.2

A firm must make a written record of its ILAAP and the assessments required under this Part and maintain such record for at least three years.

13.3

A firm must ensure that its management body approves the firm’s ILAAP.

14.1

1. (1) This Part applies to a firm on an individual basis unless (2) applies.
2. (2) Where the PRA has waived in full the application of Part Six of the CRR to a firm and to all or some of its subsidiaries pursuant to a permission granted under Article 8(2) of the CRR, a firm must comply with this Part at the level of its domestic liquidity sub-group.
3. (3) (1) and (2) apply to a firm whether or not this Part applies to the firm on a consolidated basis.

[Note: Art 8(5) of the CRR and Art 109(1) of the CRD]

14.1A

If this Part applies to a firm on an individual basis, the firm must comply with the rules in this Part to the same extent and in the same manner as it is required to comply with the firm’s obligations laid down in Part Six of the CRR.

14.2

Where a firm is a member of a consolidation group, the firm must ensure that the arrangements, processes and mechanisms at the level of the consolidation group of which it is a member comply with the obligations set out in 3 – 13 on a consolidated basis.

14.3

Compliance with 14.2 must enable the consolidation group to have arrangements, processes and mechanisms that are consistent and well integrated and that any data relevant to the purpose of supervision can be produced.

[Note: Art 109(2) (part) of the CRD]

14.4

A firm which is an EEA parent institution must comply with this Part on the basis of its consolidated situation.

14.5

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14.6

A UK bank or building society controlled by an EEA parent financial holding company or by an EEA parent mixed financial holding company must comply with this Part on the basis of the consolidated situation of that holding company if the PRA is responsible for supervision of the UK bank or building society on a consolidated basis under Article 111 of the CRD.

14.7

A UK designated investment firm controlled by an EEA parent financial holding company or by an EEA parent mixed financial holding company must comply with this Part on the basis of the consolidated situation of that holding company if:

1. (1) there is no subsidiary of the holding company which is a credit institution to which 14.6 applies; and
2. (2) the PRA is responsible for the supervision of the UK designated investment firm on a consolidated basis under Article 111 of the CRD.

14.8

If this Part applies to a firm on a consolidated basis or on a sub-consolidated basis, the firm must carry out consolidation to the same extent and in the same manner as it is required to comply with the obligations laid down in Part Six of the CRR on a consolidated basis or sub-consolidated basis.

15.1

The applicable liquidity coverage ratio for the purpose of Article 38(2) Delegated Regulation shall be:

1. (1) 80% as from 1 October 2015;
2. (2) 90% as from 1 January 2017; and
3. (3) 100% as from 1 January 2018.

16.1

In 14.4 – 14.7 any reference to EEA is to be read as a reference to EU.