• BANK Part 9.2 BANK Part 9.2 Liquidity risk management — firms' obligations in detail

    Note for Part 9.2

    This Part applies to all banking business firms — see rule 9.1.4.

    Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 9.2.1 Liquidity risk tolerance

      (1) A banking business firm's liquidity risk tolerance defines the level of liquidity risk that the firm is willing to assume.

      Guidance
      A banking business firm's risk management strategy usually refers to risk tolerance although risk appetite may also be used. The 2 terms are used interchangeably to describe both the absolute risks a firm is open to take (by some called risk appetite) and the actual limits within its risk appetite that a firm pursues (by some called risk tolerance).
      (2) A banking business firm's liquidity risk tolerance must be appropriate for the firm's operations and strategy and its role in the financial systems in which it operates.
      (3) The firm must review its liquidity risk tolerance at least annually to reflect the firm's financial condition and funding capacity.
      (4) The firm's governing body and senior management must ensure that the firm's liquidity risk tolerance allows the firm to effectively manage its liquidity in such a way that the firm can withstand prolonged liquidity stress.
      (5) The firm must document its liquidity risk tolerance in a way that clearly states the trade-off between risks and profits.
      Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 9.2.2 BANK 9.2.2 Liquidity risk management framework — structure and basic content

      (1) A banking business firm's liquidity risk management framework must include:
      (a) a statement of the firm's liquidity risk tolerance, approved by the firm's governing body;
      (b) a statement of the firm's liquidity risk management strategy and policy, approved by the governing body;
      (c) a statement of the firm's operating standards (in the form of policies, procedures and controls) for identifying, measuring, monitoring and controlling its liquidity risk in accordance with its liquidity risk tolerance;
      (d) a statement of the firm's funding strategy, approved by the governing body; and
      (e) a contingency funding plan.
      (2) The framework must clearly set out the firm's organisational structure as it relates to liquidity risk management, and must define the responsibilities and roles of senior management involved in managing liquidity risk.
      (3) The framework must be formulated to ensure that the firm maintains sufficient liquidity to withstand a range of liquidity stress events (whether specific to the firm, market-wide, or a combination of the two), including the loss or impairment of both unsecured and secured funding sources.
      (4) The framework must be well integrated into the firm's overall risk management process.
      (5) The liquidity risk management framework must be subject to ongoing effective and comprehensive independent review.
      Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

      • Guidance

        In most cases, the independent reviews could be facilitated by the firm's internal audit function but may require the engagement of independent experts outside that function.

        Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 9.2.3 Liquidity risk management — oversight

      (1) A banking business firm's liquidity risk management oversight function must be operationally independent. It must be staffed with personnel who have the skills and authority to challenge the firm's treasury and other liquidity management functions.
      (2) The firm must have adequate policies, procedures and controls to ensure that the firm's governing body and senior management are informed immediately of new and emerging liquidity concerns.

      Guidance
      Those concerns could include:
      •   increasing funding costs or concentrations
      •   increases in funding requirements
      •   shortage of other sources of liquidity
      •   material or persistent breaches of limits
      •   significant decline in the firm's holdings of unencumbered liquid assets
      •   changes in market conditions that could signal future difficulties.
      (3) The firm's senior management must be satisfied that all of the firm's business units whose activities affect the firm's liquidity:
      (a) are fully aware of the firm's liquidity risk management strategy; and
      (b) operate in accordance with the firm's approved policies, procedures, limits and controls.
      Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 9.2.4 Liquidity management strategy

      (1) A banking business firm's liquidity management strategy must include specific policies on liquidity management, such as:
      (a) the composition and maturity of assets and liabilities;
      (b) the diversity and stability of funding sources;
      (c) the firm's approach to managing liquidity in different currencies, across borders, and across business lines and legal entities; and
      (d) the firm's approach to intraday liquidity management.
      (2) The strategy must take account of the firm's liquidity needs both under normal conditions and during periods of liquidity stress. The strategy must include quantitative and qualitative targets.
      (3) The strategy must be appropriate for the nature, scale and complexity of the firm's operations. In formulating the strategy, the firm must consider its legal structure, its key business lines, the breadth and diversity of its markets and products, the jurisdictions in which it operates, and regulatory requirements.
      (4) The firm's senior management must communicate the following throughout the firm:
      (a) the strategy;
      (b) the firm's key policies for implementing it;
      (c) the firm's liquidity management structure.
      Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 9.2.5 Liquidity risk management — processes

      (1) A banking business firm must have a sound process for identifying, measuring, monitoring and controlling liquidity risk. The process must include a robust framework for comprehensively projecting cashflows arising from assets, liabilities and off-balance-sheet items over an appropriate set of time horizons.
      (2) A banking business firm must set limits to control its liquidity risk exposure and vulnerabilities. The limits and the corresponding escalation procedures must be reviewed regularly.
      (3) The limits must be relevant to the business in terms of its location, the complexity of its operations, the nature of its products, and the currencies and markets it serves. If a limit is breached, the firm must implement a plan of action to review the exposure and reduce it to a level that is within the limit.
      (4) A banking business firm must actively manage its collateral positions, distinguishing between encumbered and unencumbered assets. The firm must monitor the legal entity in which, and the physical location where, collateral is held and how collateral can be mobilised in a timely manner.
      (5) A banking business firm must design a set of early warning indicators to help its daily liquidity risk management processes to identify the emergence of increased risk or vulnerabilities in its liquidity position or potential funding needs. The indicators must be structured so as to help identify negative trends in the firm's liquidity position and to lead to an assessment and a potential response by management to mitigate the firm's exposure to the trends.
      (6) A banking business firm must have a reliable management information system that provides the governing body, senior management and other appropriate personnel with timely and forward-looking information on the firm's liquidity position.
      (7) A banking business firm must actively manage its intraday liquidity positions to meet payment and settlement obligations on a timely basis under both normal and stressed market conditions, thus contributing to the orderly functioning of payment and settlement systems.
      (8) A banking business firm must develop and implement a costs and benefits allocation process for funding and liquidity. The process must appropriately apportion the costs of prudent liquidity management to the sources of liquidity risk, and must provide appropriate incentives to manage liquidity risk.
      (9) A banking business firm that is active in multiple currencies:
      (a) must assess its aggregate foreign currency liquidity needs and determine an acceptable level of currency mismatches; and
      (b) must undertake a separate analysis of its strategy for each significant currency, considering possible constraints during periods of liquidity stress.

      Note Such a firm must also maintain a portfolio of high-quality liquid assets consistent with the distribution of its liquidity needs by currency — see rule 9.3.6 (3).
      (10) For subrule (9) (b), a currency is significant for a banking business firm if the firm's liabilities denominated in it amount to 5% or more of the firm's total liabilities.
      Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 9.2.6 Funding strategy

      (1) A banking business firm:
      (a) must develop and document a 3-yearly funding strategy;
      (b) must maintain a continuing presence in its chosen funding markets;
      (c) must maintain strong relationships with funds providers; and
      (d) must regularly estimate its capacity to raise funds quickly.
      (2) The firm must identify the main factors that affect its ability to raise funds, and must monitor those factors closely to ensure that its estimates of its fund-raising capacity remain valid.
      (3) The strategy must be approved by the firm's governing body, and must be supported by robust assumptions in line with the firm's liquidity management strategy and business objectives.
      (4) The funding strategy must be reviewed at least annually, and must be updated as necessary in light of changed funding conditions or changes in the firm's business model.
      (5) The firm must give a copy of the funding strategy to the Regulatory Authority on request. The firm must also inform the Authority of any significant change to the strategy.
      Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 9.2.7 Stress testing

      (1) A banking business firm must carry out stress tests regularly for a variety of short-term and long-term liquidity stress scenarios (both firm-specific and market-wide, separately and in combination) to identify sources of potential liquidity stress and to ensure that the firm's exposures continue to be in accordance with its liquidity risk tolerance.
      (2) The tests must enable the firm to analyse the effect of stress scenarios on its liquidity positions, and on the liquidity positions of individual business lines.
      (3) The scenarios and related assumptions must be well documented, and must be reviewed together with the test results. The results, the vulnerabilities found and any resulting actions must be reported to, and discussed with, the firm's governing body and the Regulatory Authority.
      (4) The test outcomes must be used to adjust the firm's liquidity management strategy, policies and positions, and to develop effective contingency plans to deal with liquidity stress.
      (5) The results of the tests must be integrated into the firm's strategic planning process and its day-to-day risk management practices. The results must be explicitly considered in the setting of internal limits.
      (6) The firm must decide how to incorporate the results in assessing and planning for possible funding shortfalls in its contingency funding plan.
      Inserted by QFCRA RM/2018-1 (as from 1st May 2018).

    • BANK 9.2.8 Contingency funding plan

      (1) A banking business firm must have a formal contingency funding plan that clearly sets out the firm's strategies for addressing liquidity shortfalls in emergency situations. The plan:
      (a) must outline policies to manage a range of liquidity stress situations;
      (b) must establish clear lines of responsibility; and
      (c) must include clear escalation procedures.
      (2) The plan must be appropriate for the nature, scale and complexity of the firm's operations and the firm's role in the financial systems in which it operates.
      (3) The plan must provide a framework with a high degree of flexibility so that the firm can respond quickly in a variety of liquidity stress situations.
      (4) The plan must set out:
      (a) available sources of contingency funding and an estimate of the amount of funds that can be obtained from each source;
      (b) clear procedures for escalation and prioritisation, setting out when and how each of the actions in the plan can and must be activated; and
      (c) the lead time needed to obtain additional funds from each of the sources.
      (5) The plan's design, scope and procedures must be closely integrated with the firm's continuing analysis of liquidity risk and with the assumptions used in its stress tests and the results of those tests. The plan must address issues over a range of different time horizons, including intraday.
      (6) The firm must review and test the plan regularly to ensure that the plan remains effective and operationally feasible. The firm must review and update the plan for the governing body's approval at least annually (or more often, as changing business or market circumstances require).
      Inserted by QFCRA RM/2018-1 (as from 1st May 2018).