Controlling Liquidity Risk
An Authorised Person must ensure that the system referred to in Rule 9.2.1(5):(a) enables the Authorised Person's Governing Body and senior management to review compliance with limits set in accordance with Rule 9.2.7 and operating procedures; and(b) has appropriate approval processes, limits and other mechanisms designed to provide reasonable assurance that the Authorised Person's Liquidity Risk management processes are adhered to.
PRU 9.2.7(1) An Authorised Person must ensure that its Governing Body sets appropriate liquidity limits covering Liquidity Risk management in both day-to-day and stressed conditions.(2) An Authorised Person must periodically review and, where appropriate, adjust the limits referred to in (1) when its Liquidity Risk policy changes.(3) An Authorised Person must promptly resolve any policy or limit exceptions according to the processes described in its Liquidity Risk policy.
An Authorised Person must assess market access under a variety of normal and stressed conditions.
PRU 9.2.9 PRU 9.2.9(1) An Authorised Person must use stress and scenario testing to assess the Liquidity Risk it would face in different circumstances.(2) When using stress and scenario testing in accordance with (1), an Authorised Person must:(a) use scenarios based on varying degrees of stress and both Authorised Person-specific and market-wide difficulties; and(b) 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 Authorised Person's funding needs and sources.(3) An Authorised Person must frequently review the assumptions used in stress testing scenarios to ensure they remain appropriate.
Guidance1. The identification of the possible balance sheet and off-balance sheet impact referred to in Rule 9.2.9(2)(b) should take into account:a. possible changes in the market's perception of the Authorised Person and the effects that this might have on the Authorised Person's access to the markets, including:i. where the Authorised Person funds its holdings of assets in one currency with liabilities in another, access to foreign exchange markets, particularly in less frequently traded currencies;ii. access to secured funding, including by way of repurchase agreement transactions; andiii. the extent to which the Authorised Person may rely on committed facilities made available to it;b. whenever applicable the possible effect of each scenario tested on currencies whose exchange rates are currently pegged or fixed; andc. that:i. general market turbulence may trigger a substantial increase in the extent to which Persons exercise rights against the Authorised Person under off-balance sheet instruments to which the Authorised Person is party;ii. access to OTC Derivative and foreign exchange markets is sensitive to credit-ratings;iii. Early Amortisation in asset securitisation transactions with which the Authorised Person has a connection may be triggered; andiv. its ability to securitise assets may be reduced.
PRU 9.2.10(1) An Authorised Person must have a documented contingency funding plan to ensure that, for each of the tested scenarios, the Authorised Person has sufficient liquid financial resources to meet its liabilities as they fall due.(2) The contingency funding plan referred to in (1) must:(a) list the events or circumstances that will lead the Authorised Person to put any part of the plan into action;(b) set out the extent to which the plan relies upon:(i) asset sales, using assets as Collateral on secured funding (including repurchase agreements), securitising its assets or otherwise reducing its assets;(ii) modifying the structure of, or increasing, its liabilities; and(iii) the use of committed facilities; and(c) contain administrative policies and procedures that will enable the Authorised Person to manage the implementation of the plan, including:(i) the responsibilities of senior management;(ii) the names, location and contact details of members of the team responsible for implementing the plan;(iii) the details of who is responsible for contact with the Authorised Person's head office (if appropriate), analysts, investors, external Auditors, media, significant customers, regulators and others; and(iv) the mechanisms that enable senior management and the Governing Body to receive relevant, accurate, comprehensive, timely and reliable management information.