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BIPRU 12.7 Liquid assets buffer

BIPRU 12.7.1G

BIPRU 12.2 provides that an ILAS BIPRU firm must ensure that its liquidity resources contain an adequate buffer of high quality, unencumbered assets. BIPRU 12.7 describes in more detail the nature of the assets that are eligible for inclusion in that buffer. The rules in this section provide that some types of assets are eligible for use only by a simplified ILAS BIPRU firm.

BIPRU 12.7.2R

For the purpose of satisfying BIPRU 12.2.8R, a firm to which this section applies may include in its liquid assets buffer only:1

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  1. (1)

    high quality debt securities issued by a government or central bank;

  2. (2)

    securities issued by a designated multilateral development bank;

  3. (3)

    reserves in the form of sight deposits with a central bank of the kind specified in BIPRU 12.7.5R and BIPRU 12.7.6R; and

  4. (4)

    in the case of a simplified ILAS BIPRU firm only, investments in a designated money market fund.

BIPRU 12.7.3R

Subject to BIPRU 12.7.4R, for the purpose of BIPRU 12.7.2R (1), a firm may include only1 a debt security which is:

  1. (1)

    issued by the central government or central bank of an EEA State; or

  2. (2)

    issued by the central government or central bank of Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.

BIPRU 12.7.4R

For the purpose of BIPRU 12.7.3R, a firm may not include a debt security unless:

  1. (1)

    the central government or central bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the table set out in BIPRU 12 Annex 1R (Mapping of credit assessments of ECAIs to credit quality steps);4 and

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  2. (2)

    that debt security is either:

    1. (a)

      denominated in the domestic currency of the country in question; or

    2. (b)

      denominated in a currency other than the domestic currency, provided it is denominated in any of Canadian dollars, euros, Japanese yen, sterling, Swiss francs or United States dollars.

BIPRU 12.7.5R

Subject to BIPRU 12.7.6R, for the purpose of BIPRU 12.7.2R (3) a firm may include only1 reserves in the form of sight deposits held by the firm with the central bank of:

  1. (1)

    an EEA State; or

  2. (2)

    Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.

BIPRU 12.7.6R

For the purpose of BIPRU 12.7.5R, a firm may not include reserves held at a central bank unless:

  1. (1)

    the central bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the table set out in BIPRU 12 Annex 1R (Mapping of credit assessments of ECAIs to credit quality steps);4 and

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  2. (2)

    those reserves are denominated in the domestic currency of the central bank in question.

BIPRU 12.7.6AR

3For the purpose of BIPRU 12.7.2R (2), a firm may not include securities issued by a designated multilateral development bank unless:

  1. (1)

    the designated multilateral development bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the table set out in BIPRU 12 Annex 1R (Mapping of credit assessments of ECAIs to credit quality steps);4 and

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  2. (2)

    those securities are denominated in any of Canadian dollars, euros, Japanese yen, sterling, Swiss francs or United States dollars.

BIPRU 12.7.7G

It is important that a firm identifies and understands the range of central bank facilities in which it is eligible to participate. A firm may be eligible to participate in some facilities of this kind by virtue of its having a branch in a particular country. In addition to identifying the central bank facilities to which it has access, a firm should ensure that it has in place appropriate legal and administrative arrangements to enable it to draw on those facilities in a timely manner.

BIPRU 12.7.8G

In deciding on the precise composition of its liquid assets buffer, a firm should ensure that it tailors the contents of the buffer to the needs of its business and the liquidity risk that it faces. In particular, a firm should ensure that it holds assets in its buffer which can be realised with the speed necessary to meet its liabilities as they fall due. In doing so, a firm should have regard to the currencies in which its liabilities are denominated and should take into account the potential effect of stressed conditions on its ability to access spot and swap foreign exchange markets in a manner consistent with the settlement cycles of foreign exchange settlement systems. A firm should have regard to the results of its ILAA or, as the case may be, its ILSA, in assessing the speed with which its liabilities fall due in stressed and non-stressed conditions.

BIPRU 12.7.9R

For the purposes of BIPRU 12.7.2R (1) and (2), a firm must only count securities:

  1. (1)

    which are unencumbered;

  2. (2) 2
    1. (a)

      to which it has legal title; or2

    2. (b)

      to which a central bank has legal title but which meet the requirements of BIPRU 12.7.9AR (1), subject to BIPRU 12.7.9AR (2); and2

  3. (3)

    which that firm realises on a regular basis.

BIPRU 12.7.9AR
  1. (1)

    2For the purposes of BIPRU 12.7.9R (2)(b) the requirements are that:

    1. (a)

      the securities are in excess of the amount of collateral required to be held by that central bank; and

    2. (b)

      the firm is entitled to regain legal title to such securities without any encumbrance.

  2. (2)

    The firm may only count securities that meet the requirements of BIPRU 12.7.9 R and BIPRU 12.7.9AR (1) from the point in time when the firm would regain legal title to the securities from the central bank, subsequent to any required notice period.

  3. (3)

    For the purposes of BIPRU 12.7.9AR (2) any required notice period is deemed to commence on the first business day that the central bank could receive notice from the firm.

BIPRU 12.7.10G

The appropriate regulator regards as encumbered any asset which the firm in question has provided as collateral. Therefore, where assets have been used as collateral in this way (for example, in a repo), they should not be included in the firms liquid assets buffer. However, any assets provided by the firm to a central bank as collateral which meet the requirements in BIPRU 12.7.9A R will be recognised as unencumbered by the for the purposes of BIPRU 12.7.9R (1). For the avoidance of doubt, there is no need for notice to have actually been served to meet the requirements in BIPRU 12.7.9AR (2).2

BIPRU 12.7.11R
  1. (1)

    For the purpose of BIPRU 12.7.9R (3), a firm1 must periodically realise a proportion of the assets in its liquid assets buffer through repo or outright sale to the market.

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  2. (2)

    [deleted]1

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  3. (3)

    A firm must ensure that in carrying out such periodic realisation:

    1. (a)

      it does so without reference to the firm's day-to-day liquidity needs;

    2. (b)

      it realises in varying amounts the assets in its liquid assets buffer;

    3. (c)

      the cumulative effect of its periodic realisation over any twelve month period is that a significant proportion of the assets in its liquid assets buffer is realised; and

    4. (d)

      in repo to the market it enters into transactions of varying durations.

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  4. (4)

    A firm must establish and maintain a written policy setting out its approach to periodic realisation of its assets.

  5. (5)

    A firm must also ensure that it periodically tests its operational ability to raise funds, through the use of central bank liquidity facilities to which it has access, using a proportion of those of its assets not in its liquid assets buffer.1

BIPRU 12.7.12G

The appropriate regulator will, as part of its review of a firm's ILAA or, as the case may be, its ILSA, assess the adequacy of a firm's periodic realisation policy and its implementation in practice.