BIPRU 12.2 Adequacy of liquidity resources

The overall liquidity adequacy rule

BIPRU 12.2.1R
  1. (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 purpose of (1):

    1. (a)

      a firm may not include liquidity resources that can be made available by other members of its group;

    2. (b)

      an incoming EEA firm or a third country BIPRU firm may not, in relation to its UK branch, include liquidity resources other than those which satisfy the conditions in BIPRU 12.2.3R;

    3. (c)

      a firm may not include liquidity resources that may be made available through emergency liquidity assistance from a central bank (including the European Central Bank).

BIPRU 12.2.2G

Branch liquidity resources

BIPRU 12.2.3R

The conditions to which BIPRU 12.2.1R (2)(b) refers are that the firm's liquidity resources are:

  1. (1)

    under the day-to-day control of the UK branch's senior management;

  2. (2)

    held in an account with one or more custodians in the sole name of the UK branch;

  3. (3)

    unencumbered; and

  4. (4)

    for the purpose of the overall liquidity adequacy rule only, attributed to the balance sheet of the UK branch.

BIPRU 12.2.4G

The effect of BIPRU 12.2.1R (2)(b) and BIPRU 12.2.3 R is to require an incoming EEA firm or a third country BIPRU firm to maintain a local operational liquidity reserve in relation to the activities of its UK branch. BIPRU 12.9 contains further guidance on this point.

Liquidity resources: general

BIPRU 12.2.5G

For the purposes of the overall liquidity adequacy rule, liquidity resources are not confined to the amount or value of a firm's marketable, or otherwise realisable, assets. Rather, in assessing the adequacy of those resources, a firm should have regard to the overall character of the resources available to it which enable it to meet its liabilities as they fall due. Therefore, for the purposes of that rule, a firm should ensure that:

  1. (1)

    it holds sufficient assets which are marketable, or otherwise realisable;

  2. (2)

    it is able to generate funds from those assets in a timely manner;

  3. (3)

    it maintains a prudent funding profile in which its assets are of appropriate maturities, taking account of the expected timing of that firm's liabilities; and

  4. (4)

    it is able to generate unsecured funding of appropriate tenor in a timely manner.

BIPRU 12.2.6G

The overall liquidity adequacy rule is expressed to apply to each firm on a solo basis. Each firm must be able to satisfy that rule relying solely on its own liquidity resources. Where the firm is an incoming EEA firm or a third country BIPRU firm, compliance with the overall liquidity adequacy rule with respect to the UK branch must be achieved relying solely on liquidity resources that satisfy the conditions in BIPRU 12.2.3R.

BIPRU 12.2.7G

The starting point, therefore, is that each firm, or where relevant its UK branch, must be self-sufficient in terms of its own liquidity adequacy. The appropriate regulator does, however, recognise that there are circumstances in which it may be appropriate for a firm or branch to rely on liquidity support provided by other entities in its group or from elsewhere within the firm. A firm wishing to rely on support of this kind, whether for itself or for its UK branch, may only do so with the consent of the appropriate regulator, given by way of a waiver under section 138A (Modification or waiver of rules) of the Act to the overall liquidity adequacy rule.

Liquid assets buffer and funding profile

BIPRU 12.2.8R

For the purposes of the overall liquidity adequacy rule, an ILAS BIPRU firm must also ensure that:

  1. (1)

    its liquidity resources contain an adequate buffer of high quality, unencumbered assets; and

  2. (2)

    it maintains a prudent funding profile.

BIPRU 12.2.9G

The purpose of BIPRU 12.2.8R is to ensure that an ILAS BIPRU firm has a buffer of liquid assets which are available to meet those liabilities which fall due in periods of stress experienced by that firm. Those periods of stress may be both market-wide and idiosyncratic in nature. The appropriate regulator acknowledges that in periods of stress a firm's liquid assets buffer may be eroded.

BIPRU 12.2.10G

The appropriate regulator recognises, however, that it may take time for a firm to build a buffer which is of a sufficient size and quality to help reduce the effect of periods of stress on the firm. In particular, the appropriate regulator recognises that the transition from the appropriate regulator's liquidity regime in force immediately prior to the BIPRU 12 regime is likely to be a gradual one for many firms. The appropriate regulator will seek to agree with a firm an appropriate period of time over which its liquid assets buffer ought to be built. The appropriate regulator will, in any event, incorporate into the individual liquidity guidance which it gives to the firm details of the steps that it expects the firm to take so that it may establish an appropriately robust liquid assets buffer.

BIPRU 12.2.11R

In complying with BIPRU 12.2.8R, a simplified ILAS BIPRU firm must ensure that its liquid assets buffer is at least equal to the amount of liquidity resources required by the simplified buffer requirement.

BIPRU 12.2.12G

The appropriate regulator is likely to regard a simplified ILAS BIPRU firm whose liquid assets buffer accords with the simplified buffer requirement as having an adequate buffer of assets and a prudent funding profile for the purpose of BIPRU 12.2.8R. Further guidance on this matter is provided in BIPRU 12.6.5G.

BIPRU 12.2.13G

BIPRU 12.7 contains more detailed rules and guidance about the type of assets that an ILAS BIPRU firm is permitted to hold in order to satisfy BIPRU 12.2.8R.

Individual assessments of liquidity adequacy

BIPRU 12.2.14G

The adequacy of an ILAS BIPRU firm's liquidity resources needs to be assessed both by that firm and by the appropriate regulator. This process involves:

  1. (1)

    in the case of a standard ILAS BIPRU firm, an Individual Liquidity Adequacy Assessment (ILAA) which such a firm is obliged to carry out in accordance with BIPRU 12.5;

  2. (2)

    in the case of a simplified ILAS BIPRU firm, an Individual Liquidity Systems Assessment (ILSA) which such a firm is obliged to carry out in accordance with BIPRU 12.6; and

  3. (3)

    a Supervisory Liquidity Review Process (SLRP), which is conducted by the appropriate regulator.

BIPRU 12.2.15G

BIPRU 12.5 sets out the ILAS framework. That section describes some of the stress tests that a standard ILAS BIPRU firm must carry out in conducting its ILAA and identifies a number of sources of liquidity risk in relation to which a firm is required to assess the impact of those stresses. For a standard ILAS BIPRU firm, the requirements in BIPRU 12.5 are in addition to the stress testing requirements in BIPRU 12.4. The rules in BIPRU 12.5 require a standard ILAS BIPRU firm to report the results of both sets of stress tests in its ILAA, while the rules in BIPRU 12.6 require a simplified ILAS BIPRU firm to report those results in its ILSA.

BIPRU 12.2.16G

As part of its SLRP, the appropriate regulator will, having regard to the liquidity risk profile of the firm, consider:

  1. (1)

    the adequacy, both as to amount and quality, of the liquidity resources (including the liquid assets buffer) held by the firm; and

  2. (2)

    the degree of prudence reflected in the firm's funding profile.

BIPRU 12.2.17G

In assessing the adequacy of those resources, the appropriate regulator will consider a firm's overall ability to generate funding in a way that ensures that it can meet its liabilities as they fall due both in stressed and in ordinary business conditions.

BIPRU 12.2.18G

After completing a review of the ILAA as part of the SLRP, the appropriate regulator will give a standard ILAS BIPRU firm individual liquidity guidance, advising it of the amount and quality of liquidity resources which the appropriate regulator considers are appropriate having regard to the liquidity risk profile of the firm. In giving individual liquidity guidance, the appropriate regulator will also advise the firm of what it considers to be a prudent funding profile for the firm. In giving the firm individual liquidity guidance as to its funding profile, the appropriate regulator will consider the extent to which the firm's liabilities are adequately matched by assets of appropriate maturities. Although the appropriate regulator may have given a firm individual liquidity guidance, this does not remove the need for the firm to monitor its liquidity risk profile on an ongoing basis and to consider whether it should be holding liquidity resources that are greater in amount or higher in quality, or maintaining a more prudent funding profile, than those advised in its individual liquidity guidance.

BIPRU 12.2.19G

BIPRU 12.5 sets out in greater detail the appropriate regulator's ILAS regime. BIPRU 12.9 sets out in greater detail the appropriate regulator's process for issuing an ILAS BIPRU firm with individual liquidity guidance and its approach to monitoring a firm's adherence to that guidance or, as the case may be, to the simplified buffer requirement.