SUP 16 Annex 26 Guidance on designated liquidity groups in SUP 16.12

Purpose of this guidance

1.1

G

The purpose of this Annex is to explain the different types of defined liquidity group dealt with in SUP 16.12 (Integrated Regulatory Reporting) and what a group liquidity reporting firm is.

2.

G

Defined liquidity groups are relevant to liquidity reporting by ILAS BIPRU firms. Liquidity reporting under SUP 16.12 relates to a firm on a solo or branch basis and in addition by reference to a firm's designated liquidity group.

The two main types of designated liquidity groups

3.

G

Defined liquidity groups are divided into two types:

(1)

a DLG by default; and

(2)

a DLG by modification (this type is subdivided into other types as explained in this Annex).

DLG by default

4.

G

Broadly speaking, a firm's DLG by default is made up of the members of the firm's group on which it relies for liquidity or that rely on the firm. It also includes certain funding vehicles. It covers each entity:

(1)

that provides or is committed to provide material support to the firm against liquidity risk; or

(2)

to which the firm provides or is committed to provide material support against liquidity risk; or

(3)

that has reasonable grounds to believe that the firm would supply such support, and vice versa.

5.

G

Paragraph (b) of the definition of DLG by default deals with a case in which there are several UK ILAS BIPRU firms in the same group. The effect is this. Say that there are two UK ILAS BIPRU firms, A and B in the group. Say that A relies on, or is relied on by, companies M, N, O and P. B relies on, or is relied on by, companies P, Q, R and S. The result is that A and B have the same DLG by default, which is made up of companies A, B, M, N, O, P, Q, R and S.

6.

G

There is an exclusion relating to participations. Say that 70% of B is owned by unconnected third party shareholders and that A and B rely on each other. A will report on the basis of a group made up of A, B, M, N, O and P. B will report on the basis of a group made up of A, B, P, Q, R and S.

7.

G

The full definition is set out in the Glossary.

8.

G

The definition applies automatically. It does not depend, for example, on the firm getting a waiver under BIPRU 12 (Liquidity). However, in practice it is likely that the firm and the FSA will agree who is in the firm's DLG by default.

9.

G

A DLG by default is only relevant to a UK lead regulated firm.

10.

G

A firm may have a DLG by default and a DLG by modification at the same time.

Types of DLG by modification

11.

G

A DLG by modification only applies to a firm with an intra-group liquidity modification. BIPRU 12.8 has more about intra-group liquidity modifications.

12.

G

Every firm subject to BIPRU 12 (Liquidity) 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.

13.

G

The FSA recognises that a firm may be part of a wider group which manages its liquidity on a group-wide basis. This is recognised by an intra-group liquidity modification. A DLG by modification arises out of the intra-group liquidity modification.

14.

G

There are two types of DLG by modification:

(1)

a DLG by modification (firm level); and

(2)

a non-UK DLG by modification (DLG level).

Types of DLG by modification (firm level)

15.

G

If the firm obtains an intra-group liquidity modification it will permit the firm to rely on liquidity support from elsewhere in its group for the purposes of the overall liquidity adequacy rule. A DLG by modification (firm level) is made up of the group members on which the firm can rely for these purposes, together with the firm itself. It is called 'firm level' because it relates to the way that the overall liquidity adequacy rule is applied to the firm.

16.

G

There are two types of DLG by modification (firm level):

(1)

a UK DLG by modification; and

(2)

a non-UK DLG by modification (firm level).

17.

G

It is not possible for a firm to have both types.

18.

G

A UK DLG by modification is made up solely of UK ILAS BIPRU firms. That means that the intra-group liquidity modification will permit the firm to rely on liquidity support from other specified UK ILAS BIPRU firms elsewhere in its group, but no one else.

19.

G

A non-UK DLG by modification (firm level) is defined to mean any kind of DLG by modification (firm level) except for a UK DLG by modification. In practice though an intra-group liquidity modification setting up a non-UK DLG by modification (firm level) will be expected to allow the firm to rely on support from a parent undertaking which is constituted under the law of a country or territory outside the United Kingdom or on subsidiary undertakings of that parent which are themselves constituted under the law of a country or territory outside the United Kingdom. These parents and their subsidiaries (together with the firm itself) will make up the non-UK DLG by modification (firm level). It is not envisaged that a non-UK DLG by modification (firm level) will include UK members (other than the firm itself). That is why this type of defined liquidity group is called a non-UK DLG by modification (firm level).

Non-UK DLG by modification (DLG level)

20.

G

It is envisaged that if a firm has a UK DLG by modification, the intra-group liquidity modification will apply the overall liquidity adequacy rule to the UK DLG by modification as a whole. The starting position is that the UK DLG by modification should be self-sufficient for liquidity purposes.

21.

G

However, the intra-group liquidity modification may permit the UK DLG by modification to rely on liquidity support from elsewhere in the group. In this case this other part of the group, together with the UK DLG by modification, forms the non-UK DLG by modification (DLG level). It is called 'DLG level' because it relates to the way that the overall liquidity adequacy rule is applied to the firm's DLG.

22.

G

It is not envisaged that a firm with a non-UK DLG by modification (firm level) will have a non-UK DLG by modification (DLG level).

23.

G

It is envisaged that the only group members on which the non-UK DLG by modification (firm level) will be able to rely for these purposes will be foreign parents and others described in paragraph 19 of SUP 16 Annex26G . That is why it is called a non-UK DLG by modification (DLG level).

Combinations of DLG

24.

G

That means that the types of DLG by modification a firm may have are these:

(1)

a UK DLG by modification and nothing else; or

(2)

a non-UK DLG by modification (firm level) and nothing else; or

(3)

a UK DLG by modification and non-UK DLG by modification (DLG level).

Group liquidity reporting firm

25.

G

The defined term group liquidity reporting firm is also used in connection with reporting at the level of a defined liquidity group. Its purpose is to identify the firms on which the reporting obligation falls.

26.

G

The general principle is that reporting is done by UK ILAS BIPRU firms. In the case of a DLG by modification, the reporting will be done by UK ILAS BIPRU firms that have been granted the intra-group liquidity modification.

27.

G

However there may be other types members of the defined liquidity group. For example, say that UK ILAS BIPRU firm A has a defined liquidity group made up of companies B, C, D and E. Say that B is an authorised person but is not a UK ILAS BIPRU firm, that C is a UK company that is not authorised and that D and E are foreign and not authorised. A, B, C, D and E are all members of the defined liquidity group. However B, C, D and E do not have to report on the defined liquidity group under SUP 16.12. That obligation falls on A. A is the group liquidity reporting firm.