A firm that is an An exempt full scope IFPRU investment firm2 is not an ILAS BIPRU firm.

The effect of BIPRU 12.1.4R is therefore to require the firm to sum the values of cell entries 20A and 20B in data item FSA001 and deduct from that total the sum of the values of cell entries 42, 43 and 44 in the same data item.

There are some provisions in other sections of BIPRU 12 which apply only to an ILAS BIPRU firm. Where this is the case, the provision in question says so.

BIPRU 12.2.1R is the overall liquidity adequacy rule.

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.

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.

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.

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.

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.

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.

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 12.7 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.

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 12.5 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.

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.

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.

After completing a review of the ILAA as part of the SLRP, the appropriate regulator will give a standard ILAS BIPRU firmindividual 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 firmindividual 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 firmindividual 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 12.5 sets out in greater detail the appropriate regulator'sILAS 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.

The approach taken in BIPRU 12.3 is to set out:

1. (1)

   overarching systems and controls provisions in relation to a firm's management of its liquidity risk;

2. (2)

   provisions outlining the responsibilities of that firm'sgoverning body and senior managers for the oversight of liquidity risk;

3. (3)

   more detailed provisions covering a number of specific areas, including:

   1. (a)

      pricing liquidity risk;

   2. (b)

      intra-day management of liquidity;

   3. (c)

      management of collateral;

   4. (d)

      management of liquidity across legal entities, business lines and currencies; and

   5. (e)

      funding diversification and market access.

BIPRU 12.4 contains further rules and guidance on stress testing and contingency funding plans. These are both extensions of the overarching systems and controls provisions in BIPRU 12.3. In formulating the rules and guidance in these two sections, the appropriate regulator has taken account of the Principles for Sound Liquidity Management and Supervision dated September 2008 issued by the Basel Committee on Banking Supervision. It is intended that the content of BIPRU 12.3 and BIPRU 12.4 be consistent with those Principles.

BIPRU 12.5.4R provides that, in relation to a standard ILAS BIPRU firm, it must include in its ILAA an assessment of its compliance with the standards set out in BIPRU 12.3and BIPRU 12.4, including the results of the stress tests required by the rules in BIPRU 12.4. A simplified ILAS BIPRU firm is not subject to BIPRU 12.5 and consequently it is not required to prepare an ILAA. Instead, the rules in BIPRU 12.6 provide that such a firm is to carry out an ILSA, being alone an assessment of that firm's compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4.

2The strategies, policies, processes and systems referred to in BIPRU 12.3.4 R should include those which enable it to assess and maintain on an ongoing basis the amounts, types and distribution of liquidity resources that it considers adequate to cover:

1. (1)

   the nature and level of the liquidity risk to which it is or might be exposed;

2. (2)

   the risk that the firm cannot meet its liabilities as they fall due; and

3. (3)

   in the case of an ILAS BIPRU firm, the risk that its liquidity resources might in the future fall below the level, or differ from the quality and funding profile, of those resources advised as appropriate by the appropriate regulator in that firm'sindividual liquidity guidance or, as the case may, its simplified buffer requirement.

As well as the rules in BIPRU 12.3 requiring a firm to have robust systems to enable it to identify, measure, manage and monitor liquidity risk, an ILAS BIPRU firm is also subject to obligations in SUP 16 (Reporting requirements) requiring it to report quantitative data about its liquidity position to the appropriate regulator. That chapter of SUP sets out the applicable data items and the rules governing the frequency of their submission to the appropriate regulator. Absent a firm-specific liquidity stress or a market liquidity stress, the rules in SUP 16 do not require daily (weekly for a low frequency liquidity reporting firm and a simplified ILAS BIPRU firm) 3reporting of data items. An ILAS BIPRU firm should, however, note that those rules do require that it has systems in place to ensure that it is able at all times to meet the requirements for daily (or weekly as applicable)3 reporting of applicable data items even if there is no firm-specific liquidity stress or market liquidity stress and none is expected.

As part of the SLRP, the appropriate regulator will assess the appropriateness of the liquidity risk tolerance adopted by an ILAS BIPRU firm to ensure that this risk tolerance is consistent with maintenance by the firm of adequate liquidity resources for the purpose of the overall liquidity adequacy rule. The appropriate regulator will expect a firm to provide it with an adequately reasoned explanation for the level of liquidity risk which that firm'sgoverning body has decided it should assume. In assessing the appropriateness of the liquidity risk tolerance adopted by a firm, the appropriate regulator will consider whether the tolerance adopted is consistent with the firm's satisfaction of threshold condition 2E, 3D, 4E or 5E as applicable7. Consistent with the appropriate regulator's statutory objectives under the Act, in assessing the appropriateness of a firm's adopted liquidity risk tolerance the appropriate regulator will also have regard to the role and importance of a firm in the UK1financial system.

Although a firm'ssenior managers are likely to develop strategies, policies and practices for the management of that firm'sliquidity risk, it is the responsibility of a firm'sgoverning body to approve those strategies, policies and practices as adequate. In determining the adequacy of those strategies, policies and practices, a firm'sgoverning body should have regard to that firm'sliquidity risk tolerance established in accordance with BIPRU 12.3.8R.

The appropriate regulator will assess the adequacy of an ILAS BIPRU firm'sliquidity risk management framework as part of the SLRP.

The incorporation of liquidity pricing into a firm's processes assists in aligning the risk-taking incentives of individual business lines within that firm with the liquidity risk to which the firm as a whole is exposed as a result of their activities. It is important that all significant business activities are addressed, including activities which involve the creation of contingent exposures which may not have an immediate balance sheet impact.

In complying with BIPRU 12.3.17R, a firm should take into account all obligations arising from its acting as a custodian, a correspondent bank or a settlement agent.

The appropriate regulator considers that a firm's ability to meet its payment and settlement obligations on an intra-day basis is important not just for that firm, but also for the liquidity position of that firm's counterparties and for the smooth functioning of payment and settlement systems as a whole.

For the purposes of BIPRU 12.3.23R (8) and (9), a firm should take into account the impact of the stresses that it conducts under BIPRU 12.4.1R on the requirements which may be imposed on the provision of its assets as collateral (for example, haircuts) and also the availability of funds from private counterparties during such periods of stress.

In its liquidity risk management plans, a firm should identify clearly its assumptions regarding the transferability of funds and collateral. A firm should expect that the appropriate regulator will scrutinise those assumptions.

Funding diversification should not be considered an end in its own right. Rather, the purpose of diversification is to ensure that a firm has in place alternative sources of funding that strengthen its capacity to withstand a variety of severe yet plausible institution-specific and market-wide liquidity shocks.

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 UK1financial 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.

For the purposes of BIPRU 12.4.2R, a review should take into account:

1. (1)

   changes in market conditions;

2. (2)

   changes in the nature, scale or complexity of the firm's business model and activities; and

3. (3)

   the firm's practical experience in periods of stress.

The appropriate regulator expects every firm, including a firm with an apparently strong liquidity profile, to consider the potential impact of severe stress scenarios.

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:

1. (1)

   correlations between funding markets;

2. (2)

   the effectiveness of diversification across its chosen sources of funding;

3. (3)

   additional margin calls and collateral requirements;

4. (4)

   contingent claims, including potential draws on committed lines extended to third parties or to other entities in that firm'sgroup;

5. (5)

   liquidity absorbed by off-balance sheet vehicles and activities (including conduit financing);

6. (6)

   the transferability of liquidity resources;

7. (7)

   access to central bank market operations and liquidity facilities;

8. (8)

   estimates of future balance sheet growth;

9. (9)

   the continued availability of market liquidity in a number of currently highly liquid markets;

10. (10)

    ability to access secured and unsecured funding (including retail deposits);

11. (11)

    currency convertibility; and

12. (12)

    access to payment or settlement systems on which the firm relies.

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.

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'scontingency 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.

In conducting its ILAA, a firm is obliged to comply with the stress testing and related requirements which appear in this section. The rules in this section also provide that in its ILAA a firm must include an assessment of the firm's compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4.

A firm should carry out an ILAA at least annually, or more frequently if changes in its business or strategy or the nature, scale or complexity of its activities or the operational environment suggest that the current level of liquidity resources is no longer adequate. A firm should expect that its usual supervisory contact at the appropriate regulator will ask for the ILAA to be submitted as part of the ongoing supervisory process.

The appropriate regulator will review the results of a firm'sILAA, including the results of the stress tests required by BIPRU 12.5.6R, as part of its Supervisory Liquidity Review Process (SLRP). The appropriate regulator's review of the stress test results will assist it assessing the adequacy of a firm's liquidity resources relative to other ILAS BIPRU firms and, consequently, in calibrating the individual liquidity guidance that it gives to that firm. BIPRU 12.9.2G sets out the appropriate regulator's approach to assessing the adequacy of a firm's liquidity resources and indicates that, among other factors, it will have regard to the firms ILAA. It is not, therefore, the case that the amount of liquidity resources advised to the firm as being adequate in its individual liquidity guidance will necessarily equate to the amount needed to meet its liabilities as they fall due in the stresses required by BIPRU 12.5.6R. The appropriate regulator will assess the adequacy of a firm's liquidity resources on a case-by-case basis and, accordingly, the amount of liquidity resources judged as adequate in the firm'sindividual liquidity guidance might be either above or below the amount needed to survive the stresses required by BIPRU 12.5.6R.

For the purpose of BIPRU 12.5.8R (4), a firm should consider the effect of credit rating downgrades of varying degrees of severity. In doing so, it should also consider the cumulative effect of successive credit rating downgrades to its long-term credit rating.

In assessing how its liabilities behave under stress, the firm should categorise its liabilities according to value, maturity and estimated speed of outflow. The firm should bear in mind that wholesale funding risk may crystallise as an acute loss of funds in the short term, or as a longer-term gradual leakage of funds, or as both.

In the appropriate regulator's view, Type A wholesale funding is likely to include at least funding which:

1. (1)

   is accepted from a credit institution, local authority, insurance undertaking, pension fund, money market fund, asset manager (including a hedge fund manager), government-sponsored agency, sovereign government, or sophisticated non-financial corporation; or

2. (2)

   is accepted through the treasury function of a sophisticated non-financial corporation which may be assumed to respond swiftly to negative news about a firm's credit-worthiness; or

3. (3)

   is accepted on wholesale market terms as a part of a firm's money market operations; or

4. (4)

   is accepted from a depositor with whom a firm does not have a long-established relationship or to whom a firm does not supply a range of services; or

5. (5)

   is accepted from overseas counterparties (other than those in the country or territory of incorporation of a firm'sparent undertaking or, in the case of a UKbranch, of the firm of which it forms part); or

6. (6)

   is obtained through unsecured debt instruments (such as certificates of deposit, medium-term notes and commercial paper); or

7. (7)

   is not obtained through repo against assets of the type described in BIPRU 12.7.2R (1) or BIPRU 12.7.2R (2); or

8. (8)

   is obtained from counterparties with a relatively low creditor seniority on the liquidation of the firm.

In general, the appropriate regulator expects a firm's retail funding to be less responsive than its wholesale funding to actual or perceived changes in the firm's credit-worthiness. However, a firm should nevertheless make its own assessment of the relative responsiveness of its wholesale and retail funding.

For the purposes of assessing behaviour under stress, a firm should categorise its retail liabilities according to: value, maturity, estimated speed of outflow, product type, interest rate applied and any other factor that it considers relevant to its retail deposit structure.

A firm should also be mindful that its retail funding profile is unlikely to be constant. In carrying out its ILAA, a firm should have regard to any changes to its retail funding profile since the previous ILAA and also to the possible impact of any future changes on its ability to maintain retail funding during periods of stress. In its ILAA submission to the appropriate regulator, a firm should include an analysis of:

1. (1)

   its retail funding profile as at the date of its ILAA;

2. (2)

   its retail funding profile over the twelve months preceding its ILAA;

3. (3)

   its projected retail funding profile over the twelve months following the date of its ILAA; and

4. (4)

   its approach to assessing which of its retail funding it has classed as Type A retail funding and which as Type B retail funding.

In the appropriate regulator's view Type A retail funding is likely to include at least funding which:

1. (1)

   has been accepted through the internet; or

2. (2)

   is considered to have a more than average sensitivity to interest rate changes (such as a deposit whose acceptance can reasonably be attributed to the use of price-focused advertising by the firm accepting the deposit); or

3. (3)

   in relation to any individual depositor exceeds to a significant extent the amount of that individuals deposits with the accepting firm that are covered by a national deposit guarantee scheme; or

4. (4)

   is not accepted from a depositor with whom the firm has had a long relationship; or

5. (5)

   is accepted from retail depositors who can access their deposits before their residual contractual maturity subject to a loss of interest or payment of another form of early access charge (as a general proposition, the behaviour of liabilities to retail depositors is likely to depend in part on the contractual terms and conditions which give rise to those liabilities); or

6. (6)

   is not held in an account which is maintained for transactional purposes.

For the purpose of calculating the net amounts of collateral and cash under BIPRU 12.5.26R, a firm should separately analyse:

1. (1)

   the amounts of collateral and cash needed in relation to both its own payments and those of its customers; and

2. (2)

   the intra-day timing of the payment of cash and the posting of the collateral, including the time at which the demand for its collateral and cash is greatest.

For the purpose of BIPRU 12.5.26R, a firm should ensure that it takes into account, in both normal financial conditions and in periods of stress, the effect of:

1. (1)

   other participants in a payment system withholding some or all of the payments expected from them; and

2. (2)

   its customers increasing either or both the volume and value of their payments.

For the purpose of BIPRU 12.5.29R, a firm should assume that the effect of that default is that the exposure is rolled overnight.

For the purpose of BIPRU 12.5.31R, the appropriate regulator would expect a firm, in relation to each payment or settlement system in which it participates directly, to provide details of:

1. (1)

   that firm's charges for providing intra-day credit;

2. (2)

   any collateral requirements which it applies to its customers;

3. (3)

   the credit limits that it imposes (and the circumstances, if any, in which credit may be provided notwithstanding a limit breach);

4. (4)

   the extent to which the customers of that firm make use of the credit extended to them; and

5. (5)

   where relevant, the points during the day at which a customer is required to settle, or provide assets as collateral to cover, that firm's credit exposure to it.

As part of its ILAA submission to the appropriate regulator, a firm to which BIPRU 12.5.33R applies should include:

1. (1)

   details of any alternative arrangements that it has in place to ensure that it continues to be able to meet its liabilities as they fall due in the circumstances set out in BIPRU 12.5.34R; and

2. (2)

   details of the policies governing the use of intra-day credit provided to it by a firm which is a direct participant in a given payment or settlement system, including details of the criteria against which that participant will decide whether to reduce or cease the provision of intra-day credit.

For the purpose of BIPRU 12.5.36R, a firm should consider the full range of legal and regulatory restrictions on the availability to it of liquidity support from other members of its group. A firm should ensure that it understands restrictions in force in other jurisdictions, as well as the potential for such restrictions to be imposed in the future, as to the allowable size of intra-group exposures. A firm should also consider the circumstances in which it may find itself obliged to transfer liquidity resources to other entities in its group.

In complying with BIPRU 12.5.38R a firm is therefore assessing its exposure to inter-office liquidity risk, rather than intra-groupliquidity risk. It is the appropriate regulator's assessment of the firm's inter-office liquidity risk that is one of the factors that will inform the appropriate regulator's decision as to the appropriate size for the firm's local operational liquidity reserve (as described in BIPRU 12.2).

In relation to derivatives positions, a firm should:

1. (1)

   assess the effect on its cash flows arising from the maturity, exercise and repricing of derivatives in which it holds a position, including the impact of counterparties:

   1. (a)

      who may require the posting of additional margin or collateral in the event of a decline in that firm's credit rating;

   2. (b)

      who may require the posting of additional margin or collateral (or the return to them of margin or collateral) in the event of a change in the value of a derivative or of the posted collateral;

   3. (c)

      who (in the case of those that are any of a recognised investment exchange, a designated investment exchange or a recognised clearing house) may require the posting of additional margin in volatile market conditions;

   4. (d)

      who may choose to terminate an OTC derivative which they have entered into with the firm rather than post additional margin or collateral;

   5. (e)

      who, in periods of name-specific liquidity stress experienced by the firm, may choose to terminate out of the money derivatives which they have entered into with that firm; and

   6. (f)

      who, in periods of stress, may choose to post less liquid collateral than would likely be the case in normal financial conditions; and

2. (2)

   assume that under the stresses required by BIPRU 12.5.6 R there may be uncertainty as to the accuracy of the valuation attributed to a derivative contract.

In relation to its contingent liabilities, a firm should:

1. (1)

   calculate the impact on its cash flows of those of its contingent obligations that will be triggered in normal financial conditions; and

2. (2)

   estimate the impact on its cash flows of those of its contingent obligations that may be triggered under the liquidity stresses required by BIPRU 12.5.6 R.

For the purpose of BIPRU 12.5.46G, a firm should therefore assess the impact on its cash flows of the triggering of contingent obligations contained in all contractual documentation to which it is party, including: acceptances, endorsements, guarantees, underwriting agreements, standby letters of credit, documentary credits, warrants, indemnities, undrawn note issuance facilities and other revolving credit facilities. A firm should also assess the degree of concentration in its total contingent liabilities as respects obligations arising from particular types of contract, counterparty and market sector.

In relation to its commitments (other than liquidity facilities to support securitisation programmes)), a firm should:

1. (1)

   calculate its maximum contractual exposure arising from those commitments;

2. (2)

   calculate the effect on its cash flows of the drawing of those commitments in normal financial conditions; and

3. (3)

   estimate the effect on its cash flows of the drawing of those commitments under the liquidity stresses required by BIPRU 12.5.6 R.

For the purpose of BIPRU 12.5.48G, a firm should:

1. (1)

   consider its contractual exposure to the following types of commitment: committed funding facilities, undrawn loans and advances to wholesale counterparties, mortgages that have been agreed but not yet been drawn down, credit cards, overdrafts (and other retail lending facilities);

2. (2)

   ensure that its analysis of each type of commitment is sufficiently granular to enable that firm to:

   1. (a)

      assess the circumstances in which counterparties will draw down;

   2. (b)

      identify the extent of any correlations as between counterparties in deciding whether or not to draw down;

   3. (c)

      identify the extent to which decisions by the firm's counterparties to draw down may be correlated to a decline in the firm's own liquidity resources; and

   4. (d)

      assess the proportion of its total commitments attributable to particular counterparties; and

3. (3)

   assess the extent to which draw down requires the counterparty in question to deliver to the firm collateral in the form of marketable assets, while also assessing the anticipated effect of such a requirement on:

   1. (a)

      the likelihood that the counterparty in question will draw down; and

   2. (b)

      the firm's liquidity position if the counterparty in question delivers collateral on draw down; and

4. (4)

   assess the impact on its cash flows of its commitment counterparties experiencing liquidity stress at the same time as that firm is subject to the stresses required by BIPRU 12.5.6 R.

In relation to liquidity facilities to support securitisation programmes, a firm should:

1. (1)

   assess the extent of its contractual obligations to provide liquidity support to sponsored and third-party structured vehicles;

2. (2)

   identify the circumstances in which support will, or is likely to, be called; and

3. (3)

   assess the impact on that firm's cash flows of such support being called:

   1. (a)

      in normal financial conditions; and

   2. (b)

      under the liquidity stresses required by BIPRU 12.5.6R.

For the purpose of BIPRU 12.5.50G (2), a firm should consider the impact of the following events on the likelihood of a call for liquidity support: inability of a vehicle to roll over commercial paper (due either to disruption in the CP market or to concern as to the quality of the assets securitised) and, in relation to sponsored vehicles, concern as to the solvency of that firm as sponsor and, separately, the possibility of draw down of undrawn commitments entered into by the sponsored vehicle in its own right.

Franchise-viability risk is the risk that in the stresses required by BIPRU 12.5.6R a firm may not have sufficient liquidity resources to maintain its core business franchise and reputation.

In complying with BIPRU 12.5.52R, a firm should assess the extent to which it can and realistically will:

1. (1)

   restrict new retail lines without significantly damaging customer relationships;

2. (2)

   restrict new wholesale lending without significantly damaging its ability to resume such lending following the period of stress in question;

3. (3)

   cease to provide liquidity support to its sponsored vehicles;

4. (4)

   decline to exercise call options whose effect if not exercised might be to cause market participants to question the firm's ability to continue to meet its liabilities as they fall due; and

5. (5)

   continue any regular programme of buying back its issued debt.

For the purpose of BIPRU 12.5.54G (5), a firm may wish to continue repurchasing its debt to help demonstrate that a two-way market continues to be made in its paper and, more generally, in order to maintain the long-term viability of its debt issuance programme. Equally, a firm may wish to continue repaying retail depositors before the contractual maturity of those deposits in order to maintain confidence in its ability to continue to meet its liabilities as they fall due.

In complying with BIPRU 12.5.56R, a firm should consider all marketable assets which count towards its liquidity resources for the purposes of meeting the overall liquidity adequacy rule. A firm should therefore include in this assessment any assets that it holds in its liquid assets buffer.

The appropriate regulator regards as marketable those of a firm's assets that it is able to sell outright or repo. For liquidity management purposes, a firm would ordinarily expect to hold a stock of assets of this kind in order to reduce the likelihood that it may need to borrow unsecured at short notice. To the extent that these assets may behave differently under stress conditions than under normal financial conditions, a firm is subject to marketable assets risk.

As a general proposition, the speed with which a firm may be able to realise a marketable asset, and the price impact of doing so, will depend to a significant extent on the volume of those assets which that firm wishes to realise and the market conditions prevailing at the time.

The behaviour of a firm's marketable assets under conditions of stress is likely to depend on a number of different factors, including:

1. (1)

   the depth and competitiveness of the market for the marketable asset in question, the size of the bid-offer spread, the presence of committed market-makers, the nature of the information available to potential counterparties, the degree of structural complexity of the assets in question and the assets eligibility in central bank market operations and liquidity facilities; and

2. (2)

   that firm's operational capability to generate funding from those assets in a timely manner.

In considering its operational capability to generate funding from assets, a firm should be aware that its capability in this regard is likely to depend on:

1. (1)

   whether it has in place arrangements for repo;

2. (2)

   the extent to which that firm already holds a significant proportion of the market for the marketable asset in question;

3. (3)

   the extent to which that firm periodically realises some or all of its holdings of that asset; and

4. (4)

   that firm's accounting treatment and valuation of that asset.

In complying with BIPRU 12.5.63R, a firm should consider all non-marketable assets which count towards its liquidity resources for the purposes of meeting the overall liquidity adequacy rule.

BIPRU 12.2.5 G notes that a firm should include in its liquidity resources sufficient assets which are marketable or otherwise realisable. The appropriate regulator considers those assets which are capable of realisation, but other than through repo or outright sale, as non-marketable assets. To the extent that these assets may behave differently under stress conditions than under normal financial conditions, a firm is subject to non-marketable assets risk. Different forms of non-marketable assets risk arise, particularly in relation to:

1. (1)

   retail loans; and

2. (2)

   unsecured wholesale assets.

In addition to realising a firm's marketable assets, a firm can meet its outflows in part by expected inflows from maturing non-marketable assets such as retail loans. Inflows from these assets (principal and interest) may in stressed conditions be affected by counterparty behaviour, exposing that firm to non-marketable assets risk.

For the purpose of the assessment in BIPRU 12.5.67R, a firm should ensure that it assesses repayment behaviour at a level of granularity sufficient to enable it to draw informed conclusions about its liquidity exposure. The appropriate regulator would expect a firm's assessment to analyse separately the non-marketable assets risk associated with each of its relevant products and with each type of counterparty from whom it is expecting repayments.

For the purpose of the assessment in BIPRU 12.5.67R, a firm should in particular have regard to the risk associated with:

1. (1)

   repayment defaults; and

2. (2)

   exercise by its counterparties of contractual rights to repay before the expected maturity date or to delay repayment beyond that date.

A firm may also use its unsecured wholesale assets to generate liquidity, otherwise than by outright sale or repo. A firm may, for example, choose to generate funding from some of the assets included in its liquidity resources by using them in securitisation or covered bond programmes. Assets that are typically used to raise liquidity in this manner include residential mortgage loans; commercial mortgage and other loans; credit card and automobile receivables, which have been packaged for the wholesale markets. To the extent that the ability to fund from these non-marketable assets may be limited under stressed conditions, a firm may be exposed to non-marketable assets risk.

The assessment required by BIPRU 12.5.63R is particularly important for a firm which:

1. (1)

   ordinarily does not raise funding from its non-marketable assets in this way; or

2. (2)

   places proportionately greater reliance on securitisation programmes as compared to other funding strategies to generate liquidity.

A firm which chooses to warehouse assets in the way described in BIPRU 12.5.72R should consider the particular risks that arise from the method of financing that it uses to pre-fund those assets. For example, financing of warehoused assets by means of short-term (rather than long-term) funding is more likely to put that firm under liquidity pressure in the event that its proposed securitisation is not completed (either at all, or at the expected date).

A firm with a sufficiently flexible funding strategy should be able to reduce its liquidity risk by diversifying its liquidity resources.

For the purpose of BIPRU 12.5.75R, a firm should take into account the extent to which its liquidity resources are diversified according to:

1. (1)

   type of instrument and product;

2. (2)

   currency;

3. (3)

   counterparty;

4. (4)

   liability term structure; and

5. (5)

   market for their realisation (provided that such market is open to the firm as counterparty).

A firm should be aware that the degree of diversification in its liquidity resources can be compromised, particularly in periods of stress, by a number of factors, including:

1. (1)

   reduced or terminated funding provision from some counterparties as a result of that firm's credit-rating being downgraded or its financial condition deteriorating;

2. (2)

   disputes over the terms of legally binding commitments to lend which delay the provision of funding;

3. (3)

   markets previously used by the firm for raising funding ceasing to be open or operating but at reduced capacity;

4. (4)

   reliance on a small number of brokers to access funding sources; and

5. (5)

   positive correlations in the behaviour of different instruments and products.

The appropriate regulator recognises that it may not always be appropriate to apply BIPRU 12.5 (Individual Liquidity Adequacy Standards) to every ILAS BIPRU firm. For a firm which operates a relatively simple business model, it may instead be appropriate to allow the firm to calculate the size and content of its liquid assets buffer according to a simplified approach prescribed in the Handbook in advance of any review of that firm'sliquidity risk conducted by the appropriate regulator. This section sets out the simplified ILAS approach to maintaining a liquid assets buffer and a firm that operates that approach is a simplified ILAS BIPRU firm.

A firm will therefore lose the benefit of its simplified ILAS waiver if it ceases to satisfy the conditions in BIPRU 12.6.6R to BIPRU 12.6.8R. Consistent with Principle 11 (Relations with regulators), if a firm anticipates that it may breach those conditions, it should notify the appropriate regulator promptly.

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. However, the simplified ILAS approach does not relieve a simplified ILAS BIPRU firm from the obligation to hold liquidity resources which are adequate for the purpose of meeting the overall liquidity adequacy rule or from the obligation in BIPRU 12.3.4Rto assess and maintain on an ongoing basis the adequacy of its liquidity resources. Consequently, where a firm's own assessment of the adequacy of its liquidity resources indicates that its liquid assets buffer should be larger in size than that produced by the application of the simplified buffer requirement, the appropriate regulator will expect that firm to maintain a liquid assets buffer which is consistent with the results of its own assessment. Equally, following any review by the appropriate regulator of the liquidity risk to which a simplified ILAS BIPRU firm is exposed, the appropriate regulator may give that firmindividual liquidity guidance advising it that its liquid assets buffer should be bigger than that which is produced by the application of the simplified buffer requirement.

In the appropriate regulator's view, a Type A retail deposit is likely to include one which:

1. (1)

   has been accepted through the internet; or

2. (2)

   is considered to have a more than average sensitivity to interest rate changes (such as a deposit whose acceptance can reasonably be attributed to the use of price-focused advertising by the firm accepting the deposit); or

3. (3)

   in relation to any individual depositor exceeds to a significant extent the amount of that individuals deposits with the accepting firm that are covered by a national deposit guarantee scheme; or

4. (4)

   is not accepted from a depositor with whom the firm has had a long relationship; or

5. (5)

   is accepted from retail depositors who can access their deposits before their residual contractual maturity subject to a loss of interest or payment of another form of early access charge (as a general proposition, the behaviour of liabilities to retail depositors is likely to depend in part on the contractual terms and conditions which give rise to those liabilities); or

6. (6)

   is not held in an account which is maintained for transactional purposes.

In considering a firm's application for a simplified ILAS waiver, the appropriate regulator will take into account the firm's policy statement submitted to it under BIPRU 12.6.13R and form a view about the appropriateness of the assumptions on which the policy statement is based. Where a policy statement submitted after the grant of a simplified ILAS waiver reflects a materially different assessment to that set out in the policy statement considered as part of a firm'swaiver application, a firm should expect that the appropriate regulator will wish to review the continued appropriateness of the firm'ssimplified ILAS waiver and in so doing will re-examine afresh all matters to which it had regard when the waiver in question was granted. The appropriate regulator expects a firm to review the appropriateness of its policy statement as often as is necessary and in any event no less frequently than annually. A firm should always review the continued appropriateness of its policy statement following a material change to the nature of the firm's business. Where a firm updates or otherwise changes its policy statement it should submit promptly to the appropriate regulator the new document.

In mathematical terms the calculation in BIPRU 12.6.9R and BIPRU 12.6.16R may be represented as follows:

6

The rules in BIPRU 12.7 set out the sorts of assets that are eligible for the liquid assets buffer of an ILAS BIPRU firm. Every ILAS BIPRU firm may include in its buffer reserves in the form of sight deposits at a central bank and high quality debt securities issued by governments and designated multilateral development banks subject to the eligibility rules in BIPRU 12.7. BIPRU 12.7 provides that a simplified ILAS BIPRU firm may also include in its buffer investments in a designated money market fund.

A simplified ILAS BIPRU firm may include in the liquid assets buffer any combination of the eligible assets permitted by the rules in BIPRU 12.7.

For the purpose of BIPRU 12.6.21R, a firm should carry out an ILSA at least annually, or more frequently if changes in its business or strategy or the nature, scale or complexity of its activities or the operational environment suggest that the current level of liquidity resources is no longer adequate. A firm should expect that the firm's usual supervisory contact at the appropriate regulator will ask for the ILSA to be submitted as part of the ongoing supervisory process.

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.

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.

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.

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

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

Every firm subject to BIPRU 12 is subject to the overall liquidity adequacy rule. The effect of that rule is that every firm is required to be self-sufficient in terms of liquidity adequacy and to be able to satisfy that rule relying on its own liquidity resources. Where the firm is an incoming EEA firm or third country BIPRU firm compliance with the overall liquidity adequacy rule with respect to the UKbranch must be achieved relying solely on liquidity resources that satisfy the conditions in BIPRU 12.2.3 R.

However, the appropriate regulator recognises that there may be circumstances in which it would be appropriate for a firm to rely on liquidity resources which can be made available to it by other members of its group, or for a firm to rely on liquidity resources elsewhere in the firm for the purposes of ensuring that its UKbranch has adequate liquidity resources in respect of the activities carried on from the branch. Where the appropriate regulator is satisfied that the statutory tests in section 138A (Modification or waiver of rules) of the Act are met, the appropriate regulator will consider modifying the overall liquidity adequacy rule to permit reliance on liquidity support of this kind.

BIPRU 12.8 provides guidance on two types of modification to the overall liquidity adequacy rule and to other rules in BIPRU 12 for which the appropriate regulator considers a firm may wish to apply, namely:

1. (1)

   an intra-group liquidity modification; and

2. (2)

   a whole-firm liquidity modification.

In considering whether the statutory tests in section 138A of the Act have been met, the appropriate regulator will, amongst others, have regard to the factors detailed below in relation to an intra-group liquidity modification (of the kind permitting the inclusion in a firm's liquidity resources of parent undertaking liquidity support) and a whole-firm liquidity modification. In practice it is likely that the appropriate regulator will view these as preconditions to the grant of an intra-group liquidity modification of that type or a whole-firm liquidity modification and will therefore ordinarily need to be satisfied fully that each has been adequately addressed. They include matters on which the appropriate regulator will need to reach agreement with the Home State regulator, third country competent authority, or other relevant supervisor, and also matters which it will need to agree directly with a firm or the parent undertaking of a firm. It is likely that a number of these matters will be reflected as requirements or conditions in the modification.

This section represents merely an indication of the matters to which the appropriate regulator will have regard in considering an application for a whole-firm liquidity modification or an intra-group liquidity modification. In considering such an application, the appropriate regulator will always take into account anything that it reasonably considers to be relevant for the purposes of assessing whether the statutory tests in section 138A of the Act are met. In doing so, it will have regard to the role and importance of a firm or UKbranch in the UK1financial system.

The appropriate regulator anticipates that an application to modify the overall liquidity adequacy rule may be accompanied by an application to waive or modify other rules in BIPRU 12 (for example, the stress testing and contingency funding planrules in BIPRU 12.4). The appropriate regulator offers some guidance in this section on applications of this type.

The appropriate regulator recognises that a firm may be part of a wider group which manages its liquidity on a group-wide basis. A firm which considers that the statutory tests in section 138A of the Act are met may apply for an intra-group liquidity modification permitting it to rely on liquidity support from elsewhere in its group. Until a firm has such a modification it will need to meet the overall liquidity adequacy rule from its own liquidity resources. The effect of an intra-group liquidity modification is to modify the overall liquidity adequacy rule to recognise the extent to which the appropriate regulator is prepared to accept liquidity resources from other entities in a firm's group for the purposes of the firm's own compliance with the overall liquidity adequacy rule. BIPRU 12.8.11G offers additional guidance on the likely extent of this recognition.

BIPRU 12.8.14 G to BIPRU 12.8.20 G set out the appropriate regulator's likely approach in considering an application for an intra-group liquidity modification in which a firm seeks to rely on support from a parent undertaking which is constituted under the law of a country or territory outside the United Kingdom.

The appropriate regulator may also consider an application for an intra-group liquidity modification where a firm wishes to rely on liquidity resources from an entity in its group other than an overseasparent undertaking. The appropriate regulator recognises that a firm incorporated in the United Kingdom and to which BIPRU 12 applies may wish to rely on liquidity support from another such firm. In practice, the appropriate regulator anticipates that a firm applying for an intra-group liquidity modification in these circumstances will be asking for permission to rely on support from its parent undertaking in the United Kingdom. In any event, the appropriate regulator will consider such applications on a case-by-case basis and will apply the approach outlined in BIPRU 12.8.14 G to BIPRU 12.8.20 G where relevant and by analogy.

The appropriate regulator also recognises that a firm incorporated in the United Kingdom and to which BIPRU 12 applies may wish to rely on liquidity support from a subsidiary undertaking of that firm which is incorporated in a country or territory outside the United Kingdom. The appropriate regulator is, however, likely to consider that an application for an intra-group liquidity modification that contemplates reliance for liquidity support on only, or mostly, an applicant firm's overseas subsidiary undertakings is unlikely to satisfy the tests in section 138A of the Act. As a general principle, and unless persuaded otherwise by an applicant firm's arguments in support of its application for an intra-group liquidity modification, the appropriate regulator is likely to take the view that a firm's overseas subsidiary undertakings are likely to be constrained in their ability to provide meaningful levels of liquidity support to their parent undertaking.

In each application for an intra-group liquidity modification, the appropriate regulator will consider the extent to which it is appropriate to modify the overall liquidity adequacy rule to allow reliance by an applicant firm on liquidity resources elsewhere in a firm'sgroup. However, it is unlikely that the appropriate regulator would consider the conditions in section 138A of the Act to be met in circumstances in which the overall liquidity adequacy rule was modified to allow unlimited reliance on liquidity resources that are not the applicant firm's own. As a general principle, the appropriate regulator is likely to wish to ensure that, having regard to the results of an applicant firm'sILAA:

1. (1)

   once modified, the overall liquidity adequacy rule still requires the firm to have adequate liquidity resources to enable it to wind down its business in an orderly and controlled manner in circumstances in which its business ceases to be viable; and

2. (2)

   the amount of liquidity support permitted in the modification is a reasonable one having regard to the total liquidity resources of the group entity on which it is proposed that reliance should be placed.

In determining the appropriate duration of an intra-group liquidity modification, the appropriate regulator will have regard to the role and importance of the firm in question in the UK1financial system. In some cases, the appropriate regulator may take the view that an intra-group liquidity modification covering a firm whose role and importance in the UK1financial system are significant ought to be reviewed more regularly than one granted in respect of a less systemically significant firm. The appropriate regulator will consider this issue in determining the appropriate duration of such a modification.

In modifying the overall liquidity adequacy rule by means of an intra-group liquidity modification, the appropriate regulator may also modify the stress testing and contingency funding planrules in BIPRU 12.4 such that an applicant firm may achieve compliance with those rules by its parent undertaking conducting group-wide stress testing and preparing a group-wide contingency funding plan which gives adequate recognition to the position of the applicant firm.

BIPRU 12.8.15 G to BIPRU 12.8.20 G set out some of the matters on which the appropriate regulator will expect to be satisfied before granting an intra-group liquidity modification where permission is sought to rely on support from an overseasparent undertaking which is itself subject to a regime of liquidity regulation.

In relation to the regime of liquidity regulation imposed by the authority that regulates for liquidity purposes an applicant firm'sparent undertaking which is constituted under the law of a country or territory outside the United Kingdom, the appropriate regulator will ordinarily expect to be satisfied that:

1. (1)

   the regime of liquidity regulation to which that undertaking is subject delivers outcomes as regards the regulation of that undertaking'sliquidity risk that are broadly equivalent to those intended by BIPRU 12; and

2. (2)

   there is clarity as to any legal constraints imposed by the authority which regulates that undertaking for liquidity purposes on the provision of liquidity from that undertaking to the applicant firm.

It will not always be the case that an applicant firm wishes to rely on a parent undertaking, or other group entity, that is itself subject to a regime of liquidity regulation, whether or not equivalent to the appropriate regulator's. In assessing a firm's application for an intra-group liquidity modification, the appropriate regulator will always have regard to the regulatory framework to which the entity on which it is proposed to rely for liquidity support is subject. Other things being equal, however, the appropriate regulator is more likely to be persuaded that the tests in section 138A of the Act are met in circumstances in which the entity on which it is proposed to rely for liquidity support is itself subject to an appropriate degree of regulation. Even where the parent undertaking, or other group entity, in question is subject to a regime of liquidity regulation, the appropriate regulator will in principle be more likely to grant an intra-group liquidity modification in circumstances in which the applicant firm does not accept a significant amount of retail deposits.

In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the appropriate regulator will ordinarily expect to reach agreement with the authority that regulates that undertaking for liquidity purposes in a number of areas, including agreement that:

1. (1)

   it will notify the appropriate regulator of any material or persistent breaches by that undertaking of that authority's liquidity rules, or of risks that such breaches are imminent;

2. (2)

   it is satisfied with the adequacy of the parent undertaking's arrangements for liquidity risk management;

3. (3)

   it is satisfied as to the adequacy of the parent undertaking's liquidity resources including:

   1. (a)

      the size and quality of its liquid assets buffer; and

   2. (b)

      the size and quality of any liquidity resources that are held in the United Kingdom for the purpose of meeting the liabilities of an applicant firm as they fall due;

4. (4)

   it does not object to any undertakings given by that parent undertaking in respect of an applicant firm to ensure that the firm has adequate liquidity resources; and

5. (5)

   it will have due regard to the views of the appropriate regulator in its supervision of the liquidity position of that parent undertaking.

In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the appropriate regulator will, before granting an intra-group liquidity modification, ordinarily expect to have reached agreement with that parent undertaking that:

1. (1)

   it will make available liquidity resources at all times to that applicant firm if needed;

2. (2)

   it will enter into an undertaking in a suitable form with an applicant firm committing it to provide liquidity support to that firm on the occurrence of certain defined events;

3. (3)

   it will ensure that the applicant firm maintains liquidity resources of appropriate size and quality in the United Kingdom for the purposes of meeting the liquidity needs of that firm;

4. (4)

   it will maintain arrangements, including having adequate liquidity resources, to ensure that it, the applicant firm and any other entities in its group to which it provides liquidity support are able to wind down their businesses in an orderly and controlled manner in circumstances where its, or their, businesses cease to be viable;

5. (5)

   it will make available to the appropriate regulator information in an appropriate format on group liquidity; and

6. (6)

   it will participate in the appropriate regulator's thematic supervisory work in relation to liquidity when requested to do so by the appropriate regulator.

The appropriate regulator will wish to ensure that it has adequate data at the time of consideration of the intra-group liquidity modification application and, if the application is granted, on a continuing basis thereafter, about the liquidity position of any group entity on which the applicant firm proposes to rely for liquidity purposes. It is therefore likely that an applicant firm will be asked to provide as part of its application relevant liquidity data items populated by the entities on which the applicant firm proposes to rely. It is also likely that an applicant firm will be asked to ensure as a condition of the modification, if granted, that the entities on which it is given permission to rely for the purpose of meeting the overall liquidity adequacy rule provide completed relevant data items to the appropriate regulator on a continuing basis. The frequency of data item submission will be determined as part of the appropriate regulator's consideration of the applicant firm's case but is in any event likely to be reflective of the appropriate regulator's assessment of the liquidity risk profile of the entities on which liquidity support is permitted.

In addition, the appropriate regulator will also wish to understand in relation to any group entity on which an applicant firm proposes to rely for liquidity support the legal structure of the group and the extent to which that structure, or any relevant legal principles, may restrict the provision of timely liquidity support in appropriate amounts to the applicant firm when required.

The appropriate regulator also anticipates that an intra-group liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:

1. (1)

   the appropriate regulator receiving annual confirmation from the authority that regulates an applicant firm'sparent undertaking for liquidity purposes that it remains satisfied with the arrangements in respect of that undertaking for liquidity supervision and their operation; and

2. (2)

   an annual meeting with the same authority to discuss liquidity supervision of that undertaking.

In relation to an incoming EEA firm or third country BIPRU firm, the overall liquidity adequacy rule provides that, for the purpose of complying with that rule, a firm may not, in relation to its UKbranch, include liquidity resources other than those which satisfy the conditions in BIPRU 12.2.3 R. Those conditions seek to ensure that a firm of this kind has a reserve of liquidity for operational purposes that is under the control of, and available for use by, that firm'sUKbranch. Further guidance is given in BIPRU 12.5.39 G in relation to the local operational liquidity reserve. In addition, BIPRU 12.9.10 G explains how the appropriate regulator will approach the giving of individual liquidity guidance to an incoming EEA firm or third country BIPRU firm. The appropriate regulator does, however, recognise that there are circumstances in which it may be appropriate for a UKbranch to rely on the availability of liquidity resources from elsewhere within the firm. A firm wishing to rely on support of this kind for its UKbranch may apply for a modification to the overall liquidity adequacy rule where it considers that the statutory tests in section 138A of the Act are met.

Although an incoming EEA firm or third country BIPRU firm may apply to modify the overall liquidity adequacy rule and other rules in BIPRU 12, in relation to its UKbranch, the appropriate regulator anticipates that many such firms will wish to apply for a modification in the form which the appropriate regulator defines as a whole-firm liquidity modification. In the appropriate regulator's view, a modification to the overall liquidity adequacy rule for a firm of this kind will tend to be appropriate where an applicant firm manages its liquidity on an integrated, whole-firm basis. Where that is the case, and having regard to the matters outlined in the guidance in this section, the appropriate regulator is likely to consider it more appropriate for the UKbranch to be subject, in large part, to the same regulatory liquidity regime which applies to the rest of the firm. In granting a whole-firm liquidity modification the appropriate regulator therefore recognises that in certain circumstances a UKbranch can have adequate liquidity resources in circumstances where the liquidity resources upon which the firm seeks to rely do not meet the criteria set out in BIPRU 12.2.3 R.

Accordingly, a whole-firm liquidity modification envisages:

1. (1)

   a modification to the overall liquidity adequacy rule so as to permit reliance by the firm, in relation to its UKbranch, on liquidity resources wherever held in the firm for the purposes of meeting that rule; and

2. (2)

   a waiver of the remainder of the substantive rules in BIPRU 12, with the effect that the UKbranch of the applicant firm becomes subject for the purpose of day-to-day liquidity supervision to the liquidity regime of the Home State regulator or third country competent authority in question.

The effect of a whole-firm liquidity modification is that the appropriate regulator will in its supervision of the liquidity of the UKbranch place reliance on the liquidity regime of the Home State regulator or third country competent authority in question. The appropriate regulator will wish to ensure that it has adequate data at the time of consideration of the whole-firm liquidity modification application and, if the application is granted, on a continuing basis thereafter, about the liquidity position of the firm as a whole. It is therefore likely that an applicant firm will be asked to provide as part of its application relevant liquidity data items covering the liquidity position of the firm as a whole. It is also likely that an applicant firm will be asked, as part of its application, to provide an appropriately detailed account as to the activities conducted by its UKbranch as at the date of the application. In addition, the appropriate regulator anticipates that an applicant firm will be asked to ensure as a condition of the modification, if granted, that it provides relevant data items, covering the whole-firm liquidity position, to the appropriate regulator on a continuing basis at a frequency to be determined as part of the appropriate regulator's consideration of the applicant firm's case but in any event likely to be reflective of the appropriate regulator's assessment of the liquidity risk profile of the firm.

In relation to the Home State regulator's or third country competent authority's regime of liquidity regulation, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to be satisfied that:

1. (1)

   the regime in question delivers outcomes as regards the regulation of the applicant firm'sliquidity risk that are broadly equivalent to those intended by this chapter; and

2. (2)

   there is clarity as to any legal constraints imposed by the Home State regulator or third country competent authority on the provision of liquidity by a firm to its UKbranch, as well as the potential for such restrictions to be imposed in the future.

In relation to the applicant firm in question, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with the Home State regulator or third country competent authority in a number of areas, including agreement that:

1. (1)

   it will notify the appropriate regulator promptly of any material or persistent breaches by that firm of its liquidity rules, or of risks that such breaches are imminent;

2. (2)

   it is satisfied with the adequacy of the arrangements in place for firm-wide liquidity risk management;

3. (3)

   it is satisfied as to the adequacy of that firm's liquidity resources including the size and quality of its liquid assets buffer;

4. (4)

   it does not object to any undertakings given by that firm in respect of its UKbranch to ensure that the branch has adequate liquidity resources; and

5. (5)

   it will have due regard to the views of the appropriate regulator in its supervision of that firm's liquidity position.

In relation to the applicant firm in question, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with that firm in a number of areas, including agreement that:

1. (1)

   it will make available liquidity resources at all times to its UKbranch if needed;

2. (2)

   it will make available to the appropriate regulator information in an appropriate format on firm-wide liquidity;

3. (3)

   it will notify the appropriate regulator at the same time as it notifies the Home State regulator or third country competent authority of any issues relevant to the liquidity position of its UKbranch or compliance with the rules to which it is subject in respect of its liquidity (including with the terms of its whole-firm liquidity modification);

4. (4)

   its UKbranch will continue to be fully integrated with the rest of the firm for liquidity risk management purposes; and

5. (5)

   it will participate in the appropriate regulator's thematic supervisory work in relation to liquidity when requested to do so by the appropriate regulator.

The appropriate regulator also anticipates that a whole-firm liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:

1. (1)

   the appropriate regulator receiving annual confirmation from the Home State regulator or third country competent authority that it remains satisfied with the arrangements in respect of that firm for liquidity supervision and their operation;

2. (2)

   an annual meeting with the Home State regulator or third country competent authority to discuss liquidity supervision of that firm;

3. (3)

   the appropriate regulator receiving annual confirmation from the firm, approved by its governing body, that it remains in full compliance with the terms of its whole-firm liquidity modification; and

4. (4)

   as at the first anniversary of the grant of the whole-firm liquidity modification and on each anniversary thereafter, the appropriate regulator receiving from the firm:

   1. (a)

      an appropriate account of the activities conducted by the UKbranch over the previous year; and

   2. (b)

      a copy of the firm's latest business plan where this differs from that previously sent to the appropriate regulator after grant of its whole-firm liquidity modification.

In determining the appropriate duration of a whole-firm liquidity modification, the appropriate regulator will have regard to the role and importance of the UKbranch in question in the UK1financial system. In some cases, the appropriate regulator may take the view that a whole-firm liquidity modification, covering a UKbranch whose role and importance in the UK1financial system are significant, ought to be reviewed more regularly than one granted in respect of a less systemically significant branch. The appropriate regulator will consider this issue in determining the appropriate duration of such a modification. The appropriate regulator is also likely to consider it appropriate in modifications other than those of short duration to reflect in the terms of the modification representations made either in an applicant firm's business plan or direct to the appropriate regulator as part of the application process, but in either case as to the expected nature and size of the UKbranch's activities over the course of the duration of the modification. Where requirements are included in a modification in relation to these matters, a firm that anticipates that it will breach those requirements will need to apply in advance of any such event for a variation to its then existing whole-firm liquidity modification. In considering an application to vary, the appropriate regulator will consider afresh whether the tests in section 138A of the Act continue to be met for the grant of a whole-firm liquidity modification to the firm in question.

The appropriate regulator will give individual liquidity guidance to a standard ILAS BIPRU firm. Ordinarily, the appropriate regulator will give individual liquidity guidance after a review of a standard ILAS BIPRU firm'sILAA. The appropriate regulator will, however, issue individual liquidity guidance to such a firm whenever it is considered appropriate.

In assessing the adequacy of an ILAS BIPRU firm's liquidity resources, the appropriate regulator draws on more than just a review of the submitted ILAA, or in the case of a simplified ILAS BIPRU firm, the submitted ILSA. Use is made of wider supervisory knowledge of a firm and of wider market developments and practices. When forming a view of the individual liquidity guidance to be given to an ILAS BIPRU firm, the appropriate regulator will also consider the regulator’s firm risk assessment and any other issues arising from day-to-day supervision.

The appropriate regulator will take a risk-based and proportionate approach to the review of a firm'sILAA or ILSA, focusing where appropriate on that firm's approach to dealing with the risks it faces.

As part of the SLRP, the appropriate regulator will give a standard ILAS BIPRU firmindividual 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 that 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 firmindividual 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. In both cases, the appropriate regulator will have regard to the adequacy of a firm's systems and controls in relation to liquidity risk when judged against the standard described in the rules and guidance in BIPRU 12.3 and BIPRU 12.4. Individual liquidity guidance will therefore have two components:

1. (1)

   guidance about the firm's liquid assets buffer; and

2. (2)

   guidance about the firm's funding profile.

The appropriate regulator will ordinarily not expect to give individual liquidity guidance to a simplified ILAS BIPRU firm. However, if after review of such a firm'sILSA, the appropriate regulator is not satisfied that the simplified buffer requirement delivers an adequate amount and quality of liquidity resources for that firm, having regard to its liquidity risk profile, the appropriate regulator will issue the firm with individual liquidity guidance and may also consider revoking the firm'ssimplified ILAS waiver.

In giving individual liquidity guidance, the appropriate regulator seeks a balance between delivering consistent outcomes across the individual liquidity guidance that it gives to every ILAS BIPRU firm and recognising that such guidance should reflect the individual features of a firm. Comparison with the assumptions used by other firms will be used to trigger further enquiry.

Following an internal validation process, the appropriate regulator will write to the standard ILAS BIPRU firm whose ILAA it has reviewed, providing both quantitative and qualitative feedback on the results of the appropriate regulator's assessment. This letter will notify that firm of the individual liquidity guidance that the appropriate regulator considers appropriate together with its reasons for concluding that such guidance is appropriate. The appropriate regulator will adopt the same process where it chooses to give individual liquidity guidance to a simplified ILASBIPRU following a review of that firm'sILSA.

Where the amount and quality of liquidity resources which the appropriate regulator considers a firm needs having regard to its liquidity risk profile are not the same as the firm's own assessment of those resources under its ILAA, the appropriate regulator expects to discuss any such difference with the firm.

Consistent with Principle 11 (Relations with regulators), the appropriate regulator will expect a firm to notify it if the firm does not propose to follow its individual liquidity guidance. The appropriate regulator will expect any such notification to be accompanied by a clear account of the firm's reasons for considering the individual liquidity guidance to be inappropriate. The appropriate regulator will expect to receive any such notification within one month from the date on which it gives individual liquidity guidance to the firm. If agreement through further analysis and discussion cannot be reached (including through use of the appropriate regulator's powers under section 166 (Reports by skilled persons) of the Act), then the appropriate regulator will consider using its powers under the Act (for example, its power under section 55J to vary, on its own initiative, a firm'sPart IV permission or its power of intervention under section 196) so as to require a firm to hold such liquidity resources as the appropriate regulator considers are adequate having regard to the liquidity risk profile of the firm.

In relation to an incoming EEA firm or third country BIPRU firm, where the appropriate regulator gives that firmindividual liquidity guidance in relation to its UKbranch, it will have regard to the liquidity risk profile of the branch. In the absence of a whole-firm liquidity modification, the effect of BIPRU 12.2.1R (2)(b) and BIPRU 12.2.3 R is to require the firm to hold a liquid assets buffer of the amount identified as appropriate in its individual liquidity guidance (or in the case of a simplified ILAS BIPRU firm, the amount of its simplified buffer requirement unless this has been superseded by the appropriate regulator issuing individual liquidity guidance to the firm in question) in the form of a local operational liquidity reserve. Further guidance is given in BIPRU 12.5.39 G in relation to the local operational liquidity reserve. In determining the appropriate size of such a firm's liquid assets buffer the appropriate regulator will have regard to all relevant factors, including the extent to which the appropriate regulator has adequate data to enable it to assess accurately the liquidity risk elsewhere in the firm beyond its UKbranch.

BIPRU 12.2.9 G records the appropriate regulator's recognition that in periods of stress a firm's liquid assets buffer may be eroded. It may also be the case that in such periods a firm's funding profile deteriorates such that it no longer conforms to the prudent liquidity profile described in the individual liquidity guidance given to the firm. Deviation by a firm from the terms of the individual liquidity guidance given to it by the appropriate regulator or, as the case may be, from the simplified buffer requirement, does not automatically mean that the appropriate regulator will consider that the firm is in breach of, or likely to breach, threshold conditions.

The appropriate regulator will examine any deviation on its own facts and will always want to understand clearly the reasons for that deviation and the firm's plans for remedying it. Deviation is, however, likely to prompt a re-examination by the appropriate regulator of the firm's compliance, and likely future compliance, with threshold conditions. The appropriate regulator will have regard to the information provided by the firm and to any other relevant factors in assessing the firm's continuing ability to satisfy threshold conditions. BIPRU 12.9.13 R to BIPRU 12.9.18 R set out a number of requirements which apply to an ILAS BIPRU firm that deviates from its individual liquidity guidance, or as the case may be, from the simplified buffer requirement.

1The appropriate regulator expects that a firm will respond dynamically to any deterioration in its liquidity position and will take contingent action as set out in its contingency funding plan well in advance of a potential event.

As part of the appropriate regulator's enquiry into the reasons for a firm's deviation, or expected deviation, from its individual liquidity guidance or, as the case may be, its simplified buffer requirement, the appropriate regulator may ask for further assessments and analyses of a firm's liquidity resources and the risks faced by the firm. The appropriate regulator may consider the use of its powers under section 166 of the Act to assist in such circumstances.

Consistent with Principle 11 of the appropriate regulator'sPrinciplesfor Businesses (Relations with regulators), if a firm has not accepted individual liquidity guidance given by the appropriate regulator it should, nevertheless, notify the appropriate regulator as soon as it becomes aware of either of the events identified in BIPRU 12.9.14R (2)(a) or (b).

The appropriate regulator will assess the adequacy of the liquidity remediation plan submitted by a firm, including the likelihood of its success. A firm should expect that the appropriate regulator will want to discuss the terms of the liquidity remediation plan submitted to it under BIPRU 12.9.18 R. In its re-examination of the firm's compliance, and likely future compliance, with threshold conditions taken as a whole, the appropriate regulator will have regard to the adequacy of the firm's liquidity remediation plan.

Other things being equal, the appropriate regulator will expect a firm which is not experiencing a period of stress to restore its liquidity resources more rapidly than one which is under stress at the time that it deviates from its individual liquidity guidance or, as the case may be, from its simplified buffer requirement.

If agreement through discussion with the appropriate regulator cannot be reached as to the necessary actions and timescales to remedy deviation from that guidance, the appropriate regulator will consider using its powers under the Act (for example, its power under section 55J to vary, on its own initiative, a firm'sPart 4A permission or its power of intervention under section 196) so as to require the firm to take such actions as the appropriate regulator considers are necessary to return the firm to conformity with the terms of its individual liquidity guidance or, as the case may be, with its simplified buffer requirement.

Although BIPRU 12.9.17 R to BIPRU 12.9.21 G set out the appropriate regulator's likely approach, the appropriate regulator will take whatever action it considers appropriate in the particular circumstances of a given case.

A firm that deviates from current individual liquidity guidance that it has accepted or, as the case may be, from its simplified buffer requirement, will be experiencing a firm-specific liquidity stress for the purpose of the reporting rules in SUP 16 (Reporting requirements). Those rules require the firm to report specified data items more frequently than would otherwise be the case. Additionally, a firm that is implementing a liquidity remediation plan should expect that the appropriate regulator will wish to monitor its implementation of that plan. The firm's progress in achieving the remedial actions identified in its plan is a matter to which the appropriate regulator will have regard in considering the firm's compliance, and likely future compliance, with threshold conditions.

Although BIPRU 12.9.25 R requires notification and submission in the way prescribed in that rule, the appropriate regulator expects that a firm would also bring to the attention of its usual supervisory contact at the appropriate regulator the fact that it had made such a notification or submission.

For the purpose of the notification expected under BIPRU 12.9.26 G, the appropriate regulator would expect any such notification to be made in the way envisaged in BIPRU 12.9.25 R.