New Liquidity rules come into force on 1 December 2009 – Are you ready?

If your firm is a BIPRU firm then the following should assist in complying with the new liquidity rules coming into force this December.

If your firm is not a BIPRU firm (e.g. an exempt CAD) then this is for information purposes only.

The liquidity requirements contained in the new BIPRU chapter are being introduced in a phased approach. For non-ILAS firms, as of 1 December the relevant parts of BIPRU 12 (see Regulatory Roundup of 8 October 2008) are implemented apart from the overall liquidity adequacy rule (“OLAR”), which comes into force in November 2010. During the intervening period firms are expected to follow the overall financial adequacy rule set out in GENPRU 1.2.26. Although OLAR does not come into force until November 2010, we suggest firms work on the basis that the OLAR is in force. This will ensure that the requirement in GENPRU 1.2.26 will be met during the transitional period whilst reducing the need to make further changes to procedures to meet the November 2010 requirements.

Although at present non-ILAS firms are only required to submit one data form to the FSA (FSA055) containing a systems and controls questionnaire, BIPRU 12 requires such firms to document and report their systems, procedures and review results to their governing body for approval.

The rules require a non-ILAS firm, amongst other matters, to consider its liquidity risk, its tolerance to liquidity risk, the systems and procedures to enable appropriate assessment and approval of these and consideration of matters (both firm specific and market wide) that could impact on its liquidity risk and adequacy. The impact that these matters would have are then quantified through rigorous stress testing and consideration of contingent funding plans that may be necessary to cover periods of liquidity strain.

It is therefore essential that all affected firms are prepared for the new liquidity rules and have considered how they will manage their compliance with BIPRU 12. We will be sending Complyport clients a document summarising what we consider will be the key matters that a non-ILAS firm needs to cover when documenting their compliance with the liquidity rules.

What does it really mean?

All firms will be familiar with assessing the business risks and implementing procedures, systems and controls to document and continually monitor these. For firms who have not been performing stress test and financial scenario calculations the new liquidity rules are likely to pose a challenge. In a nutshell, the liquidity rules go beyond the consideration of risks and controls and require a degree of detailed financial analysis.

The liquidity rules are underpinned by the OLAR which requires a firm to maintain sufficient liquidity resources to ensure there is no significant risk that it cannot meet its liabilities as they fall due. To do this the firm firstly needs to have appropriate financial projections in place to illustrate the forecast liquidity profile of the firm and to provide a framework to identify the risk tolerance of the firm, periods of strain, the factors which impact on liquidity and hence the matters that may need to be considered when stress testing.

The outcome of the firm’s liquidity profile and risk tolerance will undoubtedly impact on the severity to which stress testing and contingent funding plans (for emergency situations) needs to be considered. As such the process is highly bespoke and there are no model answers. Each governing body needs to consider the specific matters that impact on their own liquidity assessment and ensure the systems and controls in place are adequate and appropriate.

It is important to note that the OLAR applies on a solo basis such that each firm must be self sufficient in terms of its own liquidity and as a rule cannot rely on liquidity support from other members in the group.

If retained clients of Complyport wish to discuss the requirements of BIPRU 12 and how they could affect you in more detail please get in touch with your usual Complyport contact who can arrange for one of our liquidity team consultants to contact you. We would also be happy to discuss with you any additional services we can provide in the reviewing of, or assisting in the preparation of, your documentation.