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).