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Status: You are viewing the version of the handbook as on 2009-03-31.

SYSC 11.1 Application

SYSC 11.1.1R

1SYSC 11 applies to :

  1. (1)

    an insurer, unless it is an EEA-deposit insurer or a Swiss general insurer;

  2. (2)

    a BIPRU firm;

  3. (3)

    an incoming EEA firm which:

    1. (a)

      is a full BCD credit institution; and

    2. (b)

      has a branch in the United Kingdom;

  4. (4)

    a third country BIPRU firm which:

    1. (a)

      is a bank; and

    2. (b)

      has a branch in the United Kingdom.

[Note: first paragraph of article 41 of the Banking Consolidation Directive]

SYSC 11.1.2R

If this chapter applies because the firm has a branch in the United Kingdom (see SYSC 11.1.1R (3) or SYSC 11.1.1R (4)), SYSC 11 applies only with respect to the branch.

SYSC 11.1.3R

SYSC 11 applies to an incoming EEA firm only to the extent that the relevant matter is not reserved by the relevant Single Market Directive to the firm's Home State regulator.

SYSC 11.1.4R

SYSC 11 does not apply to:

  1. (1)

    a non-directive friendly society; or

  2. (2)

    a UCITS qualifier; or

  3. (3)

    an ICVC; or

  4. (4)

    an incoming EEA firm (unless it has a branch in the United Kingdom - see SYSC 11.1.1R (3)); or

  5. (5)

    an incoming Treaty firm; or2

    2
  6. (6)

    an incoming ECA provider acting as such.2

SYSC 11.1.5G
  1. (1)

    SYSC 11.1.11 R and SYSC 11.1.12 R apply only to a BIPRU firm.

  2. (2)

    SYSC 11.1.26 G to SYSC 11.1.32 G do not apply to insurers.

SYSC 11.1.6R

If a firm carries on:

  1. (1)

    long-term insurance business; and

  2. (2)

    general insurance business;

SYSC 11 applies separately to each type of business.

Purpose

SYSC 11.1.7G

The purpose of SYSC 11 is to amplify GENPRU and SYSC in their specific application to liquidity risk and, in so doing, to indicate minimum standards for systems and controls in respect of that risk.

SYSC 11.1.8G

Appropriate systems and controls for the management of liquidity risk will vary with the scale, nature and complexity of the firm's activities. Most of the material in SYSC 11 is, therefore, guidance. SYSC 11 lays out some of the main issues that the FSA expects a firm to consider in relation to liquidity risk. A firm should assess the appropriateness of any particular item of guidance in the light of the scale, nature and complexity of its activities as well as its obligations as set out in Principle 3 to organise and control its affairs responsibly and effectively.

SYSC 11.1.9G

SYSC 11 addresses the need to have appropriate systems and controls to deal both with liquidity management issues under normal market conditions, and with stressed or extreme situations resulting from either general market turbulence or firm-specific difficulties.

SYSC 11.1.10G

SYSC 11.1.11 R and SYSC 11.1.12 R implement the specific liquidity risk requirements of the BCD.

Requirements

SYSC 11.1.11R

A BIPRU firm must have policies and processes for the measurement and management of its net funding position and requirements on an ongoing and forward looking basis. Alternative scenarios must be considered and the assumptions underpinning decisions concerning the net funding position must be reviewed regularly.

[Note: annex V paragraph 14 of the Banking Consolidation Directive]

SYSC 11.1.12R

A BIPRU firm must have contingency plans in place to deal with liquidity crises.

[Note: annex V paragraph 15 of the Banking Consolidation Directive]

SYSC 11.1.13G

An insurer is also required to comply with the requirements in relation to liquidity risk set out in INSPRU 4.1.

SYSC 11.1.14G

SYSC 4.1.1 R requires a BIPRU firm to have effective processes to identify, manage, monitor and report the risks it is or might be exposed to. A BIPRU firm is required by SYSC 7.1.2 R to establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment. Liquidity risk is one of the risks covered by both of those requirements.

SYSC 11.1.15G

A UK bank, a branch of an EEA bank and a branch of an overseas bank is required in IPRU(BANK) GN 3.4.3 to set out its policy on the management of its liquidity. Guidance on a bank's liquidity policy statement is given in IPRU(BANK) LM Section 10. Guidance on a bank's management of liquidity risk is given in IPRU(BANK) LM Sections 2 and 9.

SYSC 11.1.16G

A building society is required by IPRU(BSOC) 5.2.7 R to maintain a board-approved policy statement on liquidity. Guidance on a building society's liquidity policy statement is given in IPRU(BSOC) 5.2.8 and IPRU(BSOC) Annex 5B Guidance on a building society's management of liquidity risk is given in IPRU(BSOC) Sections 5.3 to 5.8.

SYSC 11.1.17G

High level requirements in relation to carrying out stress testing and scenario analysis are set out in GENPRU 1.2. In particular, GENPRU 1.2.42R requires a firm to carry out appropriate stress testing and scenario analysis. SYSC 11 gives guidance in relation to these tests in the case of liquidity risk.

Stress testing and scenario analysis

SYSC 11.1.18G

The effect of GENPRU 1.2.30R, GENPRU 1.2.34R, GENPRU 1.2.37R(1) and GENPRU 1.2.42R is that, for the purposes of determining the adequacy of its overall financial resources, a firm must carry out appropriate stress testing and scenario analysis, including taking reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which liquidity risk might occur or crystallise.

SYSC 11.1.19G

GENPRU 1.2.40G and GENPRU 1.2.62G to GENPRU 1.2.78G give guidance on stress testing and scenario analysis, including on how to choose appropriate scenarios, but the precise scenarios that a firm chooses to use will depend on the nature of its activities. For the purposes of testing liquidity risk, however, a firm should normally consider scenarios based on varying degrees of stress and both firm-specific and market-wide difficulties. In developing any scenario of extreme market-wide stress that may pose systemic risk, it may be appropriate for a firm to make assumptions about the likelihood and nature of central bank intervention.

SYSC 11.1.20G

A firm should review frequently the assumptions used in stress testing scenarios to gain assurance that they continue to be appropriate.

SYSC 11.1.21E
  1. (1)

    A scenario analysis in relation to liquidity risk required under GENPRU 1.2.42R should include a cash-flow projection for each scenario tested, based on reasonable estimates of the impact (both on and off balance sheet) of that scenario on the firm's funding needs and sources.

  2. (2)

    Contravention of (1) may be relied on as tending to establish contravention of GENPRU 1.2.42R.

SYSC 11.1.22G

In identifying the possible on and off balance sheet impact referred to in SYSC 11.1.21E (1), a firm may take into account:

  1. (1)

    possible changes in the market's perception of the firm and the effects that this might have on the firm's access to the markets, including:

    1. (a)

      (where the firm funds its holdings of assets in one currency with liabilities in another) access to foreign exchange markets, particularly in less frequently traded currencies;

    2. (b)

      access to secured funding, including by way of repo transactions; and

    3. (c)

      the extent to which the firm may rely on committed facilities made available to it;

  2. (2)

    (if applicable) the possible effect of each scenario analysed on currencies whose exchange rates are currently pegged or fixed; and

  3. (3)

    that:

    1. (a)

      general market turbulence may trigger a substantial increase in the extent to which persons exercise rights against the firm under off balance sheet instruments to which the firm is party;

    2. (b)

      access to OTC derivative and foreign exchange markets are sensitive to credit-ratings;

    3. (c)

      the scenario may involve the triggering of early amortisation in asset securitisation transactions with which the firm has a connection; and

    4. (d)

      its ability to securitise assets may be reduced.

Contingency funding plans

SYSC 11.1.23G

GENPRU 1.2.26R states that a firm must at all times maintain overall financial resources adequate to ensure that there is no significant risk that its liabilities cannot be met as they fall due. GENPRU 1.2.42R(1)(b) provides that for the purposes of determining the adequacy of its overall financial resources, a firm must estimate the financial resources it would need in each of the circumstances and events considered in carrying out its stress testing and scenario analysis in order to, inter alia, meet its liabilities as they fall due.

SYSC 11.1.24E
  1. (1)

    A firm should have an adequately documented contingency funding plan for taking action to ensure, so far as it can, that, in each of the scenarios analysed under GENPRU 1.2.42R(1)(b), it would still have sufficient liquid financial resources to meet liabilities as they fall due.

  2. (2)

    The contingency funding plan should cover what events or circumstances will lead the firm to put into action any part of the plan.

  3. (3)

    The contingency funding plan of a firm described in SYSC 11.1.1R (2) to SYSC 11.1.1R (4) should cover the extent to which the actions in (1) include:

    1. (a)

      selling, using as collateral in secured funding (including repo), or securitising, its assets;

    2. (b)

      otherwise reducing its assets;

    3. (c)

      modifying the structure of its liabilities or increasing its liabilities; and

    4. (d)

      the use of committed facilities.

  4. (4)

    A firm's contingency funding plan should, where relevant, take account of the impact of stressed market conditions on:

    1. (a)

      the behaviour of any credit-sensitive liabilities it has; and

    2. (b)

      its ability to securitise assets.

  5. (5)

    A firm's contingency funding plan should contain administrative policies and procedures that will enable the firm to manage the plan's implementation effectively, including:

    1. (a)

      the responsibilities of senior management;

    2. (b)

      names and contact details of members of the team responsible for implementing the contingency funding plan;

    3. (c)

      where, geographically, team members will be assigned;

    4. (d)

      who within the team is responsible for contact with head office (if appropriate), analysts, investors, external auditors, press, significant client's, regulators, lawyers and others; and

    5. (e)

      mechanisms that enable senior management and the governing body to receive management information that is both relevant and timely.

  6. (6)

    Contravention of any of (1) to (5) may be relied upon as tending to establish contravention of GENPRU 1.2.30R(2)(c).

Documentation

SYSC 11.1.25G

GENPRU 1.2.60R requires a firm to document its assessment of the adequacy of its liquidity financial resources, how it intends to deal with those risks, and details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required. Accordingly, a firm should document both its stress testing and scenario analysis (see SYSC 11.1.18 G) and its contingency funding plan (see SYSC 11.1.23 G).

Management information systems

SYSC 11.1.26G

A firm should have adequate information systems for controlling and reporting liquidity risk. The management information system should be used to check for compliance with the firm's established policies, procedures and limits.

SYSC 11.1.27G

Reports on liquidity risk should be provided on a timely basis to the firm's governing body, senior management and other appropriate personnel. The appropriate content and format of reports depends on a firm's liquidity management practices and the nature, scale and complexity of the firm's business. Reports to the firm's governing body may be less detailed and less frequent than reports to senior management with responsibility for managing liquidity risk.

SYSC 11.1.28G

The FSA would expect management information to normally contain the following:

  1. (1)

    a cash-flow or funding gap report;

  2. (2)

    a funding maturity schedule;

  3. (3)

    a list of large providers of funding; and

  4. (4)

    a limit monitoring and exception report.

SYSC 11.1.29G

When considering what else might be included in liquidity risk management information, a firm should consider other types of information that may be important for understanding its liquidity risk profile. This may include:

  1. (1)

    asset quality and trends;

  2. (2)

    any changes in the firm's funding strategy;

  3. (3)

    earnings projections; and

  4. (4)

    the firm's reputation in the market and the condition of the market itself.

Limit setting

SYSC 11.1.30G

A firm's senior management should decide what limits need to be set, in accordance with the nature, scale and complexity of its activities. The structure of limits should reflect the need for a firm to have systems and controls in place to guard against a spectrum of possible risks, from those arising in day-to-day liquidity risk management to those arising in stressed conditions.

SYSC 11.1.31G

A firm should periodically review and, where appropriate, adjust its limits when conditions or risk tolerances change.

SYSC 11.1.32G

Policy or limit exceptions should receive the prompt attention of the appropriate management and should be resolved according to processes described in approved policies.