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.

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).

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).

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.

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.

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.

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.

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.

2The effect of MIFIDPRU 6.3.4R(2) is illustrated by the following example:

1. (1)

   A firm has total fixed overheads with a value of £1,200,000, as follows:

   1. (a)

      20%, equivalent to £240,000, are incurred in USD; and

   2. (b)

      5%, equivalent to £60,000, are incurred in Swiss francs (CHF).

2. (2)

   In addition, the firm has provided total guarantees to clients with a value of £10,000,000, of which 50%, equivalent to £5,000,000, are incurred in USD.

3. (3)

   The firm’sfixed overheads requirement (one quarter of its total fixed overheads calculated in accordance with MIFIDPRU 4.5) is £300,000.

4. (4)

   Under MIFIDPRU 6.2.1R, the firm’sbasic liquid assets requirement amounts to £260,000, as follows:

   1. (a)

      £100,000 are in respect of the requirement in MIFIDPRU 6.2.1R(1) (one third of the amount of its fixed overheads requirement); and

   2. (b)

      £160,000 are in respect of the requirement in MIFIDPRU 6.2.1R(2) (1.6% of the total amount of any guarantees provided to clients).

5. (5)

   To meet its requirement in MIFIDPRU 6.2.1R, a firm may choose to use liquid assets listed in MIFIDPRU 6.3.4R denominated in a currency other than pound sterling, up to a maximum equivalent to £105,000, as follows:

   1. (a)

      Up to the equivalent of £100,000 may be held in USD denominated liquid assets (i.e. 20% of 100,000 = 20,000, to meet the requirement in MIFIDPRU 6.2.1R(1); and 50% of 160,000 = 80,000 to meet the requirement in MIFIDPRU 6.2.1R(2)); and

   2. (b)

      Up to the equivalent of £5,000 may be held in CHF denominated liquid assets (i.e. 5% of 100,000 = 5,000, to meet the requirement in MIFIDPRU 6.2.1R(1)).

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.