Content Options:

Add to favourites

View Options:

More Resources:

External link Handbook Publications

You are viewing the version of the document as on 2022-02-28.

MIFIDPRU 6.1 Application and purpose

MIFIDPRU 6.1.1 R

1This chapter applies to:

  1. (1)

    a MIFIDPRU investment firm; and

  2. (2)

    a UK parent entity that is required by MIFIDPRU 2.5.11R to comply with MIFIDPRU 6 on the basis of its consolidated situation.

MIFIDPRU 6.1.2 R

1Where this chapter applies on the basis of the consolidated situation of the UK parent entity, any reference to a “firm” or “MIFIDPRU investment firm” in this chapter is a reference to the hypothetical single MIFIDPRU investment firm created under the consolidated situation.

MIFIDPRU 6.1.3 G

1 MIFIDPRU 2.5.47R and MIFIDPRU 2.5.48G contain additional rules and guidance on how a UK parent entity should apply the requirements in this chapter on a consolidated basis. A UK parent entity may apply for an exemption from the application of this chapter on a consolidated basis under MIFIDPRU 2.5.19R.

Purpose and interpretation

MIFIDPRU 6.1.4 G

1This chapter contains:

  1. (1)

    a basic liquid assets requirement for MIFIDPRU investment firms (MIFIDPRU 6.2); and

  2. (2)

    rules and guidance on which assets count as core liquid assets for the purposes of the basic liquid assets requirement (MIFIDPRU 6.3).

MIFIDPRU 6.1.5 G
  1. (1)

    1Where this chapter applies to a MIFIDPRU investment firm on a solo basis, the firm must comply with this chapter relying only on the core liquid assets it holds itself.

  2. (2)

    However, the FCA recognises that there are circumstances in which it may be appropriate for a firm to rely on liquidity support provided by other entities within its group. Therefore, a firm that is subject to prudential consolidation may apply for an exemption from the application of this chapter on an individual basis under MIFIDPRU 2.3.2R(1).

MIFIDPRU 6.1.6 G

1 MIFIDPRU 7 contains requirements relating to a MIFIDPRU investment firm’s systems and controls for the identification, monitoring and management of material potential harms that arise out of liquidity risk.

MIFIDPRU 6.1.7 G

1The basic liquid assets requirement in this chapter is based on a proportion of a firm'sfixed overheads requirement and any guarantees provided to clients. A firm may need to hold more liquid assets to comply with its liquid assets threshold requirement under MIFIDPRU 7.

MIFIDPRU 6.2 Basic liquid assets requirement

MIFIDPRU 6.2.1 R

1 1A firm must hold an amount of core liquid assets equal to the sum of:

  1. (1)

    one third of the amount of its fixed overhead requirement; and

  2. (2)

    1.6% of the total amount of any guarantees provided to clients.

MIFIDPRU 6.2.2 R

1Where a firm calculates a total amount for guarantees under MIFIDPRU 6.2.1R(2), it must calculate:

  1. (1)

    the total value of guarantees that the firm has outstanding at the end of each business day; or

  2. (2)

    an average value for the guarantees that the firm has had outstanding over an appropriate time period, which must be updated at regular, appropriate intervals.

MIFIDPRU 6.2.3 G
  1. (1)

    1MIFIDPRU 6.2.2R(2) is intended to allow a firm to smooth out its liquidity requirement for guarantees, where the value of its outstanding guarantees fluctuates on a daily basis.

  2. (2)

    An appropriate time period for calculating and updating this amount is likely to be a period that produces an average value that is representative of the overall liquidity risk arising out of the provision of guarantees to clients.

MIFIDPRU 6.2.4 G

1The approach in MIFIDPRU 6.2.2R(2) is illustrated by the following example:

  1. (1)

    a firm that executes orders on behalf of a client may guarantee the settlement of any resulting transactions between the client and a third party;

  2. (2)

    in this case, it may be appropriate for the firm to use the principles for calculating average COH to calculate an average value for the guarantees that the firm has had outstanding over an appropriate time period;

  3. (3)

    average COH is calculated as the arithmetic mean of historic daily COH values. The firm could use the arithmetic mean of historic daily values for outstanding guarantees to calculate its amount for guarantees;

  4. (4)

    average COH is calculated by reference to the historic three-month period beginning six months ago (i.e. excluding the three most recent months). The firm could calculate its amount for guarantees by reference to the same time period, if this produces an average value for guarantees that is representative of the overall liquidity risk in these guarantees; and

  5. (5)

    a firm could update this calculation monthly, in line with the requirement to update average COH in MIFIDPRU 4, if this produces a value that is representative of the overall liquidity risk.

MIFIDPRU 6.3 Core liquid assets

MIFIDPRU 6.3.1 R

1Subject to MIFIDPRU 6.3.3R to MIFIDPRU 6.3.5R, a core liquid asset means any of the following, when denominated in pound sterling:

  1. (1)

    coins and banknotes;

  2. (2)

    short-term deposits at a UK-authorised credit institution;

  3. (3)

    assets representing claims on or guaranteed by the UK government or the Bank of England;

  4. (4)

    units or shares in a short-term MMF;

  5. (5)

    units or shares in a third country fund that is comparable to a short-term MMF; and

  6. (6)

    trade receivables, if the conditions in MIFIDPRU 6.3.3R are met.

MIFIDPRU 6.3.2 G

1When assessing whether a third country fund is comparable to a short-term MMF, a firm should consider factors such as:

  1. (1)

    whether the restrictions on instruments eligible for inclusion in the fund are comparable to the restrictions on instruments in article 10(1) of the Money Market Funds Regulation; and

  2. (2)

    whether the fund is subject to requirements concerning portfolio diversification and risk management which are comparable to the requirements applicable to short-term MMFs in the Money Market Funds Regulation.

MIFIDPRU 6.3.3 R

1A firm may treat trade receivables as core liquid assets if:

  1. (1)

    the firm is:

    1. (a)

      an SNI MIFIDPRU investment firm; or

    2. (b)

      a MIFIDPRU investment firm that does not have permission to carry on:

      1. (i)

        dealing on own account; or

      2. (ii)

        underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis;

  2. (2)

    they are receivable within 30 days;

  3. (3)

    they account for no more than one third of the requirement based upon the fixed overheads requirement in MIFIDPRU 6.2.1R(1);

  4. (4)

    they are not used to meet the requirement for guarantees in MIFIDPRU 6.2.1R(2); and

  5. (5)

    they are subject to a minimum haircut of 50%.

MIFIDPRU 6.3.4 R
  1. (1)

    1If a firm'srelevant expenditure or guarantees are incurred in a currency other than pound sterling, the firm may also treat the following assets as liquid assets, when denominated in that currency:

    1. (a)

      coins and banknotes;

    2. (b)

      short-term deposits at a credit institution;

    3. (c)

      assets representing claims on or guaranteed by a central bank or government in a third country;

    4. (d)

      units or shares in a short-term MMF;

    5. (e)

      units or shares in a third country fund that is comparable to a short-term MMF; and

    6. (f)

      trade receivables, if the conditions in MIFIDPRU 6.3.3R are met.

  2. (2)

    The assets in (1) must not account for more than the proportion of fixed overheads or guarantees that the firm incurs in that currency.

  3. (3)

    This rule is subject to MIFIDPRU 6.3.5R.

MIFIDPRU 6.3.5 R

1A firm must not treat any of the following as a core liquid asset:

  1. (1)

    any asset that belongs to a client; and

  2. (2)

    any other asset that is encumbered.

MIFIDPRU 6.3.6 G
  1. (1)

    1For the purposes of MIFIDPRU 6.3.5R(1), an asset may belong to a client even if the asset is held in the firm’s own name. Examples of assets belonging to a client include money or other assets held under the FCA'sclient asset rules.

  2. (2)

    For the purposes of MIFIDPRU 6.3.5R(2), an asset may be encumbered if it is pledged as security or collateral, or subject to some other legal restriction (for example, due to regulatory or contractual requirements) which affects the firm’s ability to liquidate, sell, transfer, or assign the asset.