ELM 3.6 Liquidity and interest rate risk

A firm should be able to meet its obligations as they fall due. It should hold sufficient liquidity to ensure it can be considered to be conducting its business in a prudent manner. This includes holding adequate liquidity to meet:

1. (1)

   its e-money outstandings; and

2. (2)

   requirements to make other payments such as cash flows in respect of off-balance sheet instruments and other expenses.

A firm can meet such obligations in a number of ways:

1. (1)

   by holding sufficiently immediately available cash (including bank deposits) or marketable assets; this is the primary method to be used to meet e-money obligations;

2. (2)

   by securing an appropriate matching future profile of cash flows from maturing assets and liabilities; and

3. (3)

   by borrowing; this is subject to the firm's ability to raise funds and the cost at which they can be raised, which depends upon its standing in the market and on the general liquidity situation at the time.

There are no specific rules about holding capital against interest rate risk as this risk is addressed by two other parts of ELM. These are the prohibition on paying interest in ELM 4.3.7 R and the limitations on the residual maturity of qualifying liquid assets and on the period within which the interest rate on them must be redetermined in ELM 3.3.5 R (4).