BIPRU 12.7 Liquid assets buffer
BIPRU 12.2 provides that an ILAS BIPRU firm must ensure that its liquidity resources contain an adequate buffer of high quality, unencumbered assets. BIPRU 12.7 describes in more detail the nature of the assets that are eligible for inclusion in that buffer. The rules in this section provide that some types of assets are eligible for use only by a simplified ILAS BIPRU firm.
For the purpose of satisfying BIPRU 12.2.8R, a firm to which this section applies may only include in its liquid assets buffer:
- (1)
high quality debt securities issued by a government or central bank;
- (2)
securities issued by a designated multilateral development bank;
- (3)
reserves in the form of sight deposits with a central bank of the kind specified in BIPRU 12.7.5R and BIPRU 12.7.6R; and
- (4)
in the case of a simplified ILAS BIPRU firm only, investments in a designated money market fund.
Subject to BIPRU 12.7.4R, for the purpose of BIPRU 12.7.2R (1), a firm may include a debt security which is:
- (1)
issued by the central government or central bank of an EEA State; or
- (2)
issued by the central government or central bank of Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.
For the purpose of BIPRU 12.7.3R, a firm may not include a debt security unless:
- (1)
the central government or central bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the credit quality assessment scale published by the FSA for the purpose of BIPRU 3 (The Standardised Approach: mapping of the ECAIs credit assessments to credit quality steps (Long term mapping)); and
- (2)
that debt security is either:
Subject to BIPRU 12.7.6R, for the purpose of BIPRU 12.7.2R (3) a firm may include reserves in the form of sight deposits held by the firm with the central bank of:
- (1)
an EEA State; or
- (2)
Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.
For the purpose of BIPRU 12.7.5R, a firm may not include reserves held at a central bank unless:
- (1)
the central bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the credit quality assessment scale published by the FSA for the purpose of BIPRU 3 (The Standardised Approach: mapping of the ECAIs credit assessments to credit quality steps (Long term mapping)); and
- (2)
those reserves are denominated in the domestic currency of the central bank in question.
It is important that a firm identifies and understands the range of central bank facilities in which it is eligible to participate. A firm may be eligible to participate in some facilities of this kind by virtue of its having a branch in a particular country. In addition to identifying the central bank facilities to which it has access, a firm should ensure that it has in place appropriate legal and administrative arrangements to enable it to draw on those facilities in a timely manner.
In deciding on the precise composition of its liquid assets buffer, a firm should ensure that it tailors the contents of the buffer to the needs of its business and the liquidity risk that it faces. In particular, a firm should ensure that it holds assets in its buffer which can be realised with the speed necessary to meet its liabilities as they fall due. In doing so, a firm should have regard to the currencies in which its liabilities are denominated and should take into account the potential effect of stressed conditions on its ability to access spot and swap foreign exchange markets in a manner consistent with the settlement cycles of foreign exchange settlement systems. A firm should have regard to the results of its ILAA or, as the case may be, its ILSA, in assessing the speed with which its liabilities fall due in stressed and non-stressed conditions.
For the purposes of BIPRU 12.7.2R (1) and (2), a firm must only count securities:
- (1)
which are unencumbered;
- (2)
to which it has legal title; and
- (3)
which that firm realises on a regular basis.
- (1)
For the purpose of BIPRU 12.7.9R (3), a firm must periodically realise a proportion of the assets in its liquid assets buffer through repo or outright sale to the market.
- (2)
A firm must also ensure that it periodically realises, through the use of central bank liquidity facilities, a proportion of those of its assets which do not fall into BIPRU 12.7.2R (1)or BIPRU 12.7.2R (2).
- (3)
A firm must ensure that in carrying out such periodic realisation:
- (a)
it does so without reference to the firm's day-to-day liquidity needs;
- (b)
it realises in varying amounts the assets in its liquid assets buffer;
- (c)
the cumulative effect of its periodic realisation over any twelve month period is that a significant proportion of the assets in its liquid assets buffer is realised; and
- (d)
in repo to the market and central bank or in collateral swap transactions with a central bank, it enters into transactions of varying durations.
- (a)
- (4)
A firm must establish and maintain a written policy setting out its approach to periodic realisation of its assets.