2A 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. Those arrangements must be reviewed regularly.
2A 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 annually4. For these purposes, alternative scenarios must address, in particular, off-balance sheet items and other contingent liabilities, including those of securitisation special purpose entities (SSPEs) or other special purpose entities, as referred to in the EU CRR,4 in relation to which the firm acts as sponsor or provides material liquidity support.4
conduct on a regular basis appropriate stress tests so as to:
analyse the separate and combined impact of possible future liquidity stresses on its:
Consistent with BIPRU 12.3.5R, the expects that the extent and frequency of such testing, as well as the degree of regularity of governing body review under BIPRU 12.4.2R, should be proportionate to the nature scale and complexity of a firm's activities, as well as to the size of its liquidity risk exposures. Consistent with the appropriate regulator's statutory objectives under the Act, in assessing the adequacy of a firm's stress testing arrangements (including their frequency and the regularity of governing body review) the appropriate regulator will also have regard to the role and importance of that firm in the UK1 financial system. The appropriate regulator will, however, expect stress testing and governing body review to be carried out no less frequently than annually. The appropriate regulator expects that a firm will build into its stress testing arrangements the capability to increase the frequency of those tests in special circumstances, such as in volatile market conditions or where requested by the appropriate regulator.
In conducting its stress testing, a firm should also, where relevant, consider the impact of its chosen stresses on the appropriateness of its assumptions relating to:
correlations between funding markets;
the effectiveness of diversification across its chosen sources of funding;
additional margin calls and collateral requirements;
liquidity absorbed by off-balance sheet vehicles and activities (including conduit financing);
the transferability of liquidity resources;
access to central bank market operations and liquidity facilities;
estimates of future balance sheet growth;
the continued availability of market liquidity in a number of currently highly liquid markets;
ability to access secured and unsecured funding (including retail deposits);
currency convertibility; and
access to payment or settlement systems on which the firm relies.
A firm should ensure that the results of its stress tests are:
reviewed by its senior managers;
reflected in the processes, strategies and systems established in accordance with BIPRU 12.3.4R;
used to develop effective contingency funding plans;
integrated into that firm's business planning process and day-to-day risk management; and
Contravention of any of (1)(a) to (f) may be relied upon as tending to establish contravention of BIPRU 12.3.4 R.
A4 firm must have in place liquidity recovery4plans setting out adequate strategies and proper implementation measures in order to address possible liquidity shortfalls, including in relation to branches established in another EEA State.4 Those plans must be tested at least annually,4 updated on the basis of the outcome of the alternative scenarios set out in BIPRU 12.4.-1 R, and be reported to and approved by the firm's governing body, so that internal policies and processes can be adjusted accordingly.2 A firm must take the necessary operational steps in advance to ensure that liquidity recovery plans can be implemented immediately.424444
[Note: article 86(11) (part) of the CRD]
A contingency funding plan sets out a firm's strategies for addressing liquidity shortfalls in emergency situations. Its aim should be to ensure that, in each of the stresses required by BIPRU 12.4.1R, it would still have sufficient liquidity resources to ensure that it can meet its liabilities as they fall due.
outlines strategies, policies and plans to manage a range of stresses;
establishes a clear allocation of roles and clear lines of management responsibility;
is formally documented;
includes clear invocation and escalation procedures;
is regularly tested and updated to ensure that it remains operationally robust;
outlines how that firm will meet time-critical payments on an intra-day basis in circumstances where intra-day liquidity resources become scarce;
outlines that firm's operational arrangements for managing a retail funding run;
in relation to each of the sources of funding identified for use in emergency situations, is based on a sufficiently accurate assessment of:
is sufficiently robust to withstand simultaneous disruptions in a range of payment and settlement systems;
outlines how that firm will manage both internal communications and those with its external stakeholders; and
the impact of stressed market conditions on its ability to sell or securitise assets;
the impact of extensive or complete loss of typically available market funding options;
its ability to transfer liquid assets having regard to any legal, regulatory or operational constraints; and
its ability to raise additional funding from central bank market operations and liquidity facilities.
Contravention of any of (1)(a) to (e) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.
A firm should ensure that its contingency funding plan takes into account the terms and conditions of any central bank liquidity facilities to which it has access, including both facilities that form part of normal liquidity management operations and emergency liquidity assistance on a secured basis. Where a firm includes in its contingency funding plan the use of central bank liquidity facilities it should consider the nature of those facilities, collateral eligibility, haircuts to which its collateral might be subject, terms in its existing or available funding arrangements which might impact its ability to access central bank facilities, operational arrangements for accessing those facilities and the potential reputational consequences for that firm in accessing them. In formulating its contingency funding plan, a firm should not rely on expectations it may have about future changes to central bank facilities, either in relation to their normal liquidity management operations or in relation to the availability of specific liquidity facilities in exceptional circumstances.
3The appropriate regulator expects that a firm's contingency funding plan will encompass a range of actions that the firm might take in anticipation of or in response to changes in its funding position. These changes could result from either firm-specific or general developments. The appropriate regulator anticipates that different actions in a contingency funding plan would be taken at different stages of a developing situation.