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.
high quality debt securities issued by a government or central bank;
securities issued by a designated multilateral development bank;
issued by the central government or central bank of an EEA State; or
issued by the central government or central bank of Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.
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
that debt security is either:
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
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.
The firm may only count securities that meet the requirements of BIPRU 12.7.9 R and BIPRU 12.7.9AR (1) from the point in time when the firm would regain legal title to the securities from the central bank, subsequent to any required notice period.
The FSA regards as encumbered any asset which the firm in question has provided as collateral. Therefore, where assets have been used as collateral in this way (for example, in a repo), they should not be included in the firms liquid assets buffer. However, any assets provided by the firm to a central bank as collateral which meet the requirements in BIPRU 12.7.9A R will be recognised as unencumbered by the FSA for the purposes of BIPRU 12.7.9R (1). For the avoidance of doubt, there is no need for notice to have actually been served to meet the requirements in BIPRU 12.7.9AR (2).2
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A firm must ensure that in carrying out such periodic realisation:
it does so without reference to the firm's day-to-day liquidity needs;
it realises in varying amounts the assets in its liquid assets buffer;
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
in repo to the market it enters into transactions of varying durations.1
A firm must establish and maintain a written policy setting out its approach to periodic realisation of its assets.
A firm must also ensure that it periodically tests its operational ability to raise funds, through the use of central bank liquidity facilities to which it has access, using a proportion of those of its assets not in its liquid assets buffer.1