BIPRU 12.8 Cross-border and intra-group management of liquidity

Every firm subject to BIPRU 12 is subject to the overall liquidity adequacy rule. The effect of that rule is that every firm is required to be self-sufficient in terms of liquidity adequacy and to be able to satisfy that rule relying on its own liquidity resources. Where the firm is an incoming EEA firm or third country BIPRU firm compliance with the overall liquidity adequacy rule with respect to the UK branch must be achieved relying solely on liquidity resources that satisfy the conditions in BIPRU 12.2.3 R.

However, the FSA recognises that there may be circumstances in which it would be appropriate for a firm to rely on liquidity resources which can be made available to it by other members of its group, or for a firm to rely on liquidity resources elsewhere in the firm for the purposes of ensuring that its UK branch has adequate liquidity resources in respect of the activities carried on from the branch. Where the FSA is satisfied that the statutory tests in section 148 (Modification or waiver of rules) of the Act are met, the FSA will consider modifying the overall liquidity adequacy rule to permit reliance on liquidity support of this kind.

BIPRU 12.8 provides guidance on two types of modification to the overall liquidity adequacy rule and to other rules in BIPRU 12 for which the FSA considers a firm may wish to apply, namely:

1. (1)

   an intra-group liquidity modification; and

2. (2)

   a whole-firm liquidity modification.

In considering whether the statutory tests in section 148 of the Act have been met, the FSA will, amongst others, have regard to the factors detailed below in relation to an intra-group liquidity modification (of the kind permitting the inclusion in a firm's liquidity resources of parent undertaking liquidity support) and a whole-firm liquidity modification. In practice it is likely that the FSA will view these as preconditions to the grant of an intra-group liquidity modification of that type or a whole-firm liquidity modification and will therefore ordinarily need to be satisfied fully that each has been adequately addressed. They include matters on which the FSA will need to reach agreement with the Home State regulator, third country competent authority, or other relevant supervisor, and also matters which it will need to agree directly with a firm or the parent undertaking of a firm. It is likely that a number of these matters will be reflected as requirements or conditions in the modification.

This section represents merely an indication of the matters to which the FSA will have regard in considering an application for a whole-firm liquidity modification or an intra-group liquidity modification. In considering such an application, the FSA will always take into account anything that it reasonably considers to be relevant for the purposes of assessing whether the statutory tests in section 148 of the Act are met. In doing so, it will have regard to the role and importance of a firm or UK branch in the UK1 financial system.

The FSA anticipates that an application to modify the overall liquidity adequacy rule may be accompanied by an application to waive or modify other rules in BIPRU 12 (for example, the stress testing and contingency funding plan rules in BIPRU 12.4). The FSA offers some guidance in this section on applications of this type.

The FSA recognises that a firm may be part of a wider group which manages its liquidity on a group-wide basis. A firm which considers that the statutory tests in section 148 of the Act are met may apply for an intra-group liquidity modification permitting it to rely on liquidity support from elsewhere in its group. Until a firm has such a modification it will need to meet the overall liquidity adequacy rule from its own liquidity resources. The effect of an intra-group liquidity modification is to modify the overall liquidity adequacy rule to recognise the extent to which the FSA is prepared to accept liquidity resources from other entities in a firm's group for the purposes of the firm's own compliance with the overall liquidity adequacy rule. BIPRU 12.8.11G offers additional guidance on the likely extent of this recognition.

BIPRU 12.8.14 G to BIPRU 12.8.20 G set out the FSA's likely approach in considering an application for an intra-group liquidity modification in which a firm seeks to rely on support from a parent undertaking which is constituted under the law of a country or territory outside the United Kingdom.

The FSA may also consider an application for an intra-group liquidity modification where a firm wishes to rely on liquidity resources from an entity in its group other than an overseas parent undertaking. The FSA recognises that a firm incorporated in the United Kingdom and to which BIPRU 12 applies may wish to rely on liquidity support from another such firm. In practice, the FSA anticipates that a firm applying for an intra-group liquidity modification in these circumstances will be asking for permission to rely on support from its parent undertaking in the United Kingdom. In any event, the FSA will consider such applications on a case-by-case basis and will apply the approach outlined in BIPRU 12.8.14 G to BIPRU 12.8.20 G where relevant and by analogy.

The FSA also recognises that a firm incorporated in the United Kingdom and to which BIPRU 12 applies may wish to rely on liquidity support from a subsidiary undertaking of that firm which is incorporated in a country or territory outside the United Kingdom. The FSA is, however, likely to consider that an application for an intra-group liquidity modification that contemplates reliance for liquidity support on only, or mostly, an applicant firm's overseas subsidiary undertakings is unlikely to satisfy the tests in section 148 of the Act. As a general principle, and unless persuaded otherwise by an applicant firm's arguments in support of its application for an intra-group liquidity modification, the FSA is likely to take the view that a firm's overseas subsidiary undertakings are likely to be constrained in their ability to provide meaningful levels of liquidity support to their parent undertaking.

In each application for an intra-group liquidity modification, the FSA will consider the extent to which it is appropriate to modify the overall liquidity adequacy rule to allow reliance by an applicant firm on liquidity resources elsewhere in a firm's group. However, it is unlikely that the FSA would consider the conditions in section 148 of the Act to be met in circumstances in which the overall liquidity adequacy rule was modified to allow unlimited reliance on liquidity resources that are not the applicant firm's own. As a general principle, the FSA is likely to wish to ensure that, having regard to the results of an applicant firm's ILAA:

1. (1)

   once modified, the overall liquidity adequacy rule still requires the firm to have adequate liquidity resources to enable it to wind down its business in an orderly and controlled manner in circumstances in which its business ceases to be viable; and

2. (2)

   the amount of liquidity support permitted in the modification is a reasonable one having regard to the total liquidity resources of the group entity on which it is proposed that reliance should be placed.

In determining the appropriate duration of an intra-group liquidity modification, the FSA will have regard to the role and importance of the firm in question in the UK1 financial system. In some cases, the FSA may take the view that an intra-group liquidity modification covering a firm whose role and importance in the UK1 financial system are significant ought to be reviewed more regularly than one granted in respect of a less systemically significant firm. The FSA will consider this issue in determining the appropriate duration of such a modification.

In modifying the overall liquidity adequacy rule by means of an intra-group liquidity modification, the FSA may also modify the stress testing and contingency funding plan rules in BIPRU 12.4 such that an applicant firm may achieve compliance with those rules by its parent undertaking conducting group-wide stress testing and preparing a group-wide contingency funding plan which gives adequate recognition to the position of the applicant firm.

BIPRU 12.8.15 G to BIPRU 12.8.20 G set out some of the matters on which the FSA will expect to be satisfied before granting an intra-group liquidity modification where permission is sought to rely on support from an overseas parent undertaking which is itself subject to a regime of liquidity regulation.

In relation to the regime of liquidity regulation imposed by the authority that regulates for liquidity purposes an applicant firm's parent undertaking which is constituted under the law of a country or territory outside the United Kingdom, the FSA will ordinarily expect to be satisfied that:

1. (1)

   the regime of liquidity regulation to which that undertaking is subject delivers outcomes as regards the regulation of that undertaking's liquidity risk that are broadly equivalent to those intended by BIPRU 12; and

2. (2)

   there is clarity as to any legal constraints imposed by the authority which regulates that undertaking for liquidity purposes on the provision of liquidity from that undertaking to the applicant firm.

It will not always be the case that an applicant firm wishes to rely on a parent undertaking, or other group entity, that is itself subject to a regime of liquidity regulation, whether or not equivalent to the FSA's. In assessing a firm's application for an intra-group liquidity modification, the FSA will always have regard to the regulatory framework to which the entity on which it is proposed to rely for liquidity support is subject. Other things being equal, however, the FSA is more likely to be persuaded that the tests in section 148 of the Act are met in circumstances in which the entity on which it is proposed to rely for liquidity support is itself subject to an appropriate degree of regulation. Even where the parent undertaking, or other group entity, in question is subject to a regime of liquidity regulation, the FSA will in principle be more likely to grant an intra-group liquidity modification in circumstances in which the applicant firm does not accept a significant amount of retail deposits.

In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the FSA will ordinarily expect to reach agreement with the authority that regulates that undertaking for liquidity purposes in a number of areas, including agreement that:

1. (1)

   it will notify the FSA of any material or persistent breaches by that undertaking of that authority's liquidity rules, or of risks that such breaches are imminent;

2. (2)

   it is satisfied with the adequacy of the parent undertaking's arrangements for liquidity risk management;

3. (3)

   it is satisfied as to the adequacy of the parent undertaking's liquidity resources including:

   1. (a)

      the size and quality of its liquid assets buffer; and

   2. (b)

      the size and quality of any liquidity resources that are held in the United Kingdom for the purpose of meeting the liabilities of an applicant firm as they fall due;

4. (4)

   it does not object to any undertakings given by that parent undertaking in respect of an applicant firm to ensure that the firm has adequate liquidity resources; and

5. (5)

   it will have due regard to the views of the FSA in its supervision of the liquidity position of that parent undertaking.

In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the FSA will, before granting an intra-group liquidity modification, ordinarily expect to have reached agreement with that parent undertaking that:

1. (1)

   it will make available liquidity resources at all times to that applicant firm if needed;

2. (2)

   it will enter into an undertaking in a suitable form with an applicant firm committing it to provide liquidity support to that firm on the occurrence of certain defined events;

3. (3)

   it will ensure that the applicant firm maintains liquidity resources of appropriate size and quality in the United Kingdom for the purposes of meeting the liquidity needs of that firm;

4. (4)

   it will maintain arrangements, including having adequate liquidity resources, to ensure that it, the applicant firm and any other entities in its group to which it provides liquidity support are able to wind down their businesses in an orderly and controlled manner in circumstances where its, or their, businesses cease to be viable;

5. (5)

   it will make available to the FSA information in an appropriate format on group liquidity; and

6. (6)

   it will participate in the FSA's thematic supervisory work in relation to liquidity when requested to do so by the FSA.

The FSA will wish to ensure that it has adequate data at the time of consideration of the intra-group liquidity modification application and, if the application is granted, on a continuing basis thereafter, about the liquidity position of any group entity on which the applicant firm proposes to rely for liquidity purposes. It is therefore likely that an applicant firm will be asked to provide as part of its application relevant liquidity data items populated by the entities on which the applicant firm proposes to rely. It is also likely that an applicant firm will be asked to ensure as a condition of the modification, if granted, that the entities on which it is given permission to rely for the purpose of meeting the overall liquidity adequacy rule provide completed relevant data items to the FSA on a continuing basis. The frequency of data item submission will be determined as part of the FSA's consideration of the applicant firm's case but is in any event likely to be reflective of the FSA's assessment of the liquidity risk profile of the entities on which liquidity support is permitted.

In addition, the FSA will also wish to understand in relation to any group entity on which an applicant firm proposes to rely for liquidity support the legal structure of the group and the extent to which that structure, or any relevant legal principles, may restrict the provision of timely liquidity support in appropriate amounts to the applicant firm when required.

The FSA also anticipates that an intra-group liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:

1. (1)

   the FSA receiving annual confirmation from the authority that regulates an applicant firm's parent undertaking for liquidity purposes that it remains satisfied with the arrangements in respect of that undertaking for liquidity supervision and their operation; and

2. (2)

   an annual meeting with the same authority to discuss liquidity supervision of that undertaking.

In relation to an incoming EEA firm or third country BIPRU firm, the overall liquidity adequacy rule provides that, for the purpose of complying with that rule, a firm may not, in relation to its UK branch, include liquidity resources other than those which satisfy the conditions in BIPRU 12.2.3 R. Those conditions seek to ensure that a firm of this kind has a reserve of liquidity for operational purposes that is under the control of, and available for use by, that firm's UK branch. Further guidance is given in BIPRU 12.5.39 G in relation to the local operational liquidity reserve. In addition, BIPRU 12.9.10 G explains how the FSA will approach the giving of individual liquidity guidance to an incoming EEA firm or third country BIPRU firm. The FSA does, however, recognise that there are circumstances in which it may be appropriate for a UK branch to rely on the availability of liquidity resources from elsewhere within the firm. A firm wishing to rely on support of this kind for its UK branch may apply for a modification to the overall liquidity adequacy rule where it considers that the statutory tests in section 148 of the Act are met.

Although an incoming EEA firm or third country BIPRU firm may apply to modify the overall liquidity adequacy rule and other rules in BIPRU 12, in relation to its UK branch, the FSA anticipates that many such firms will wish to apply for a modification in the form which the FSA defines as a whole-firm liquidity modification. In the FSA's view, a modification to the overall liquidity adequacy rule for a firm of this kind will tend to be appropriate where an applicant firm manages its liquidity on an integrated, whole-firm basis. Where that is the case, and having regard to the matters outlined in the guidance in this section, the FSA is likely to consider it more appropriate for the UK branch to be subject, in large part, to the same regulatory liquidity regime which applies to the rest of the firm. In granting a whole-firm liquidity modification the FSA therefore recognises that in certain circumstances a UK branch can have adequate liquidity resources in circumstances where the liquidity resources upon which the firm seeks to rely do not meet the criteria set out in BIPRU 12.2.3 R.

Accordingly, a whole-firm liquidity modification envisages:

1. (1)

   a modification to the overall liquidity adequacy rule so as to permit reliance by the firm, in relation to its UK branch, on liquidity resources wherever held in the firm for the purposes of meeting that rule; and

2. (2)

   a waiver of the remainder of the substantive rules in BIPRU 12, with the effect that the UK branch of the applicant firm becomes subject for the purpose of day-to-day liquidity supervision to the liquidity regime of the Home State regulator or third country competent authority in question.

The effect of a whole-firm liquidity modification is that the FSA will in its supervision of the liquidity of the UK branch place reliance on the liquidity regime of the Home State regulator or third country competent authority in question. The FSA will wish to ensure that it has adequate data at the time of consideration of the whole-firm liquidity modification application and, if the application is granted, on a continuing basis thereafter, about the liquidity position of the firm as a whole. It is therefore likely that an applicant firm will be asked to provide as part of its application relevant liquidity data items covering the liquidity position of the firm as a whole. It is also likely that an applicant firm will be asked, as part of its application, to provide an appropriately detailed account as to the activities conducted by its UK branch as at the date of the application. In addition, the FSA anticipates that an applicant firm will be asked to ensure as a condition of the modification, if granted, that it provides relevant data items, covering the whole-firm liquidity position, to the FSA on a continuing basis at a frequency to be determined as part of the FSA's consideration of the applicant firm's case but in any event likely to be reflective of the FSA's assessment of the liquidity risk profile of the firm.

In relation to the Home State regulator's or third country competent authority's regime of liquidity regulation, the FSA will, before granting a whole-firm liquidity modification, ordinarily expect to be satisfied that:

1. (1)

   the regime in question delivers outcomes as regards the regulation of the applicant firm's liquidity risk that are broadly equivalent to those intended by this chapter; and

2. (2)

   there is clarity as to any legal constraints imposed by the Home State regulator or third country competent authority on the provision of liquidity by a firm to its UK branch, as well as the potential for such restrictions to be imposed in the future.

In relation to the applicant firm in question, the FSA will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with the Home State regulator or third country competent authority in a number of areas, including agreement that:

1. (1)

   it will notify the FSA promptly of any material or persistent breaches by that firm of its liquidity rules, or of risks that such breaches are imminent;

2. (2)

   it is satisfied with the adequacy of the arrangements in place for firm-wide liquidity risk management;

3. (3)

   it is satisfied as to the adequacy of that firm's liquidity resources including the size and quality of its liquid assets buffer;

4. (4)

   it does not object to any undertakings given by that firm in respect of its UK branch to ensure that the branch has adequate liquidity resources; and

5. (5)

   it will have due regard to the views of the FSA in its supervision of that firm's liquidity position.

In relation to the applicant firm in question, the FSA will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with that firm in a number of areas, including agreement that:

1. (1)

   it will make available liquidity resources at all times to its UK branch if needed;

2. (2)

   it will make available to the FSA information in an appropriate format on firm-wide liquidity;

3. (3)

   it will notify the FSA at the same time as it notifies the Home State regulator or third country competent authority of any issues relevant to the liquidity position of its UK branch or compliance with the rules to which it is subject in respect of its liquidity (including with the terms of its whole-firm liquidity modification);

4. (4)

   its UK branch will continue to be fully integrated with the rest of the firm for liquidity risk management purposes; and

5. (5)

   it will participate in the FSA's thematic supervisory work in relation to liquidity when requested to do so by the FSA.

The FSA also anticipates that a whole-firm liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:

1. (1)

   the FSA receiving annual confirmation from the Home State regulator or third country competent authority that it remains satisfied with the arrangements in respect of that firm for liquidity supervision and their operation;

2. (2)

   an annual meeting with the Home State regulator or third country competent authority to discuss liquidity supervision of that firm;

3. (3)

   the FSA receiving annual confirmation from the firm, approved by its governing body, that it remains in full compliance with the terms of its whole-firm liquidity modification; and

4. (4)

   as at the first anniversary of the grant of the whole-firm liquidity modification and on each anniversary thereafter, the FSA receiving from the firm:

   1. (a)

      an appropriate account of the activities conducted by the UK branch over the previous year; and

   2. (b)

      a copy of the firm's latest business plan where this differs from that previously sent to the FSA after grant of its whole-firm liquidity modification.

In determining the appropriate duration of a whole-firm liquidity modification, the FSA will have regard to the role and importance of the UK branch in question in the UK1 financial system. In some cases, the FSA may take the view that a whole-firm liquidity modification, covering a UK branch whose role and importance in the UK1 financial system are significant, ought to be reviewed more regularly than one granted in respect of a less systemically significant branch. The FSA will consider this issue in determining the appropriate duration of such a modification. The FSA is also likely to consider it appropriate in modifications other than those of short duration to reflect in the terms of the modification representations made either in an applicant firm's business plan or direct to the FSA as part of the application process, but in either case as to the expected nature and size of the UK branch's activities over the course of the duration of the modification. Where requirements are included in a modification in relation to these matters, a firm that anticipates that it will breach those requirements will need to apply in advance of any such event for a variation to its then existing whole-firm liquidity modification. In considering an application to vary, the FSA will consider afresh whether the tests in section 148of the Act continue to be met for the grant of a whole-firm liquidity modification to the firm in question.