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. 2

However, the appropriate regulator 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 group2. Where the appropriate regulator is satisfied that the statutory tests in section 138A (Modification or waiver of rules) of the Act are met, the appropriate regulator will consider modifying the overall liquidity adequacy rule to permit reliance on liquidity support of this kind.

BIPRU 12.8 provides guidance on a type2 of modification to the overall liquidity adequacy rule and to other rules in BIPRU 12 for which the appropriate regulator considers a firm may wish to apply, namely:

1. (1)

   an intra-group liquidity modification.2

2. (2)

   [deleted]2

In considering whether the statutory tests in section 138A of the Act have been met, the appropriate regulator 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)2. In practice it is likely that the appropriate regulator will view these as preconditions to the grant of an intra-group liquidity modification of that type 2and will therefore ordinarily need to be satisfied fully that each has been adequately addressed. They include matters on which the appropriate regulator will need to reach agreement with another2 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 appropriate regulator will have regard in considering an application for 2an intra-group liquidity modification. In considering such an application, the appropriate regulator will always take into account anything that it reasonably considers to be relevant for the purposes of assessing whether the statutory tests in section 138A of the Act are met. In doing so, it will have regard to the role and importance of a firm 2in the UK1 financial system.

The appropriate regulator 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 appropriate regulator offers some guidance in this section on applications of this type.

The appropriate regulator 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 138A 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 appropriate regulator 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 appropriate regulator'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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 138A 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator would consider the conditions in section 138A 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 appropriate regulator 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 appropriate regulator will have regard to the role and importance of the firm in question in the UK1 financial system. In some cases, the appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator's. In assessing a firm's application for an intra-group liquidity modification, the appropriate regulator 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 appropriate regulator is more likely to be persuaded that the tests in section 138A 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator 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 appropriate regulator information in an appropriate format on group liquidity; and

6. (6)

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

The appropriate regulator 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 appropriate regulator on a continuing basis. The frequency of data item submission will be determined as part of the appropriate regulator's consideration of the applicant firm's case but is in any event likely to be reflective of the appropriate regulator's assessment of the liquidity risk profile of the entities on which liquidity support is permitted.

In addition, the appropriate regulator 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 appropriate regulator 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 appropriate regulator 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.