Reset to Today

To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004.

Content Options:

Content Options

View Options:

Alternative versions

  1. Point in time
    2012-02-06

SYSC 11.1 Application

SYSC 11.1.1 R

1 SYSC 11 applies to an insurer, unless it is3:

  1. (1)

    a non-directive friendly society; or3

  2. (2)

    a Swiss general insurer; or3

    3
  3. (3)

    an EEA-deposit insurer; or3

  4. (4)

    an incoming EEA firm; or3

    3
  5. (5) 3

    an incoming Treaty firm.

SYSC 11.1.2 R

[deleted]3

3
SYSC 11.1.3 R

[deleted]3

3
SYSC 11.1.4 R

[deleted]3

SYSC 11.1.5 G
  1. (1)

    [deleted]3

    3
  2. (2)

    [deleted]3

    3
SYSC 11.1.6 R

If a firm carries on:

  1. (1)

    long-term insurance business; and

  2. (2)

    general insurance business;

SYSC 11 applies separately to each type of business.

Purpose

SYSC 11.1.7 G

The purpose of SYSC 11 is to amplify GENPRU and SYSC in their specific application to liquidity risk and, in so doing, to indicate minimum standards for systems and controls in respect of that risk.

SYSC 11.1.8 G

Appropriate systems and controls for the management of liquidity risk will vary with the scale, nature and complexity of the firm's activities. Most of the material in SYSC 11 is, therefore, guidance. SYSC 11 lays out some of the main issues that the FSA expects a firm to consider in relation to liquidity risk. A firm should assess the appropriateness of any particular item of guidance in the light of the scale, nature and complexity of its activities as well as its obligations as set out in Principle 3 to organise and control its affairs responsibly and effectively.

SYSC 11.1.9 G

SYSC 11 addresses the need to have appropriate systems and controls to deal both with liquidity management issues under normal market conditions, and with stressed or extreme situations resulting from either general market turbulence or firm-specific difficulties.

SYSC 11.1.10 G

[deleted]3

3
3
SYSC 11.1.11 R

[deleted]3

3 3
SYSC 11.1.12 R

[deleted]3

3 3
SYSC 11.1.13 G

An insurer is also required to comply with the requirements in relation to liquidity risk set out in INSPRU 4.1.

SYSC 11.1.14 G

[deleted]3

3
SYSC 11.1.15 G

[deleted]3

3
SYSC 11.1.16 G

[deleted]3

3
SYSC 11.1.17 G

High level requirements in relation to carrying out stress testing and scenario analysis are set out in GENPRU 1.2. In particular, GENPRU 1.2.42R requires a firm to carry out appropriate stress testing and scenario analysis. SYSC 11 gives guidance in relation to these tests in the case of liquidity risk.

Stress testing and scenario analysis

SYSC 11.1.18 G

The effect of GENPRU 1.2.30R, GENPRU 1.2.34R, GENPRU 1.2.37R(1) and GENPRU 1.2.42R is that, for the purposes of determining the adequacy of its overall financial resources, a firm must carry out appropriate stress testing and scenario analysis, including taking reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which liquidity risk might occur or crystallise.

SYSC 11.1.19 G

GENPRU 1.2.40G and GENPRU 1.2.62G to GENPRU 1.2.78G give guidance on stress testing and scenario analysis, including on how to choose appropriate scenarios, but the precise scenarios that a firm chooses to use will depend on the nature of its activities. For the purposes of testing liquidity risk, however, a firm should normally consider scenarios based on varying degrees of stress and both firm-specific and market-wide difficulties. In developing any scenario of extreme market-wide stress that may pose systemic risk, it may be appropriate for a firm to make assumptions about the likelihood and nature of central bank intervention.

SYSC 11.1.20 G

A firm should review frequently the assumptions used in stress testing scenarios to gain assurance that they continue to be appropriate.

SYSC 11.1.21 E
  1. (1)

    A scenario analysis in relation to liquidity risk required under GENPRU 1.2.42R should include a cash-flow projection for each scenario tested, based on reasonable estimates of the impact (both on and off balance sheet) of that scenario on the firm's funding needs and sources.

  2. (2)

    Contravention of (1) may be relied on as tending to establish contravention of GENPRU 1.2.42R.

SYSC 11.1.22 G

In identifying the possible on and off balance sheet impact referred to in SYSC 11.1.21E (1), a firm may take into account:

  1. (1)

    possible changes in the market's perception of the firm and the effects that this might have on the firm's access to the markets, including:

    1. (a)

      (where the firm funds its holdings of assets in one currency with liabilities in another) access to foreign exchange markets, particularly in less frequently traded currencies;

    2. (b)

      access to secured funding, including by way of repo transactions; and

    3. (c)

      the extent to which the firm may rely on committed facilities made available to it;

  2. (2)

    (if applicable) the possible effect of each scenario analysed on currencies whose exchange rates are currently pegged or fixed; and

  3. (3)

    that:

    1. (a)

      general market turbulence may trigger a substantial increase in the extent to which persons exercise rights against the firm under off balance sheet instruments to which the firm is party;

    2. (b)

      access to OTC derivative and foreign exchange markets are sensitive to credit-ratings;

    3. (c)

      the scenario may involve the triggering of early amortisation in asset securitisation transactions with which the firm has a connection; and

    4. (d)

      its ability to securitise assets may be reduced.

Contingency funding plans

SYSC 11.1.23 G

GENPRU 1.2.26R states that a firm must at all times maintain overall financial resources adequate to ensure that there is no significant risk that its liabilities cannot be met as they fall due. GENPRU 1.2.42R(1)(b) provides that for the purposes of determining the adequacy of its overall financial resources, a firm must estimate the financial resources it would need in each of the circumstances and events considered in carrying out its stress testing and scenario analysis in order to, inter alia, meet its liabilities as they fall due.

SYSC 11.1.24 E
  1. (1)

    A firm should have an adequately documented contingency funding plan for taking action to ensure, so far as it can, that, in each of the scenarios analysed under GENPRU 1.2.42R(1)(b), it would still have sufficient liquid financial resources to meet liabilities as they fall due.

  2. (2)

    The contingency funding plan should cover what events or circumstances will lead the firm to put into action any part of the plan.

  3. (3)

    [deleted]3

    3
  4. (4)

    A firm's contingency funding plan should, where relevant, take account of the impact of stressed market conditions on:

    1. (a)

      the behaviour of any credit-sensitive liabilities it has; and

    2. (b)

      its ability to securitise assets.

  5. (5)

    A firm's contingency funding plan should contain administrative policies and procedures that will enable the firm to manage the plan's implementation effectively, including:

    1. (a)

      the responsibilities of senior management;

    2. (b)

      names and contact details of members of the team responsible for implementing the contingency funding plan;

    3. (c)

      where, geographically, team members will be assigned;

    4. (d)

      who within the team is responsible for contact with head office (if appropriate), analysts, investors, external auditors, press, significant client's, regulators, lawyers and others; and

    5. (e)

      mechanisms that enable senior management and the governing body to receive management information that is both relevant and timely.

  6. (6)

    Contravention of any of (1) to (5) may be relied upon as tending to establish contravention of GENPRU 1.2.30R(2)(c).

Documentation

SYSC 11.1.25 G

GENPRU 1.2.60R requires a firm to document its assessment of the adequacy of its liquidity financial resources, how it intends to deal with those risks, and details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required. Accordingly, a firm should document both its stress testing and scenario analysis (see SYSC 11.1.18 G) and its contingency funding plan (see SYSC 11.1.23 G).

3
SYSC 11.1.26 G

[deleted]3

3
SYSC 11.1.27 G

[deleted]3

3
SYSC 11.1.28 G
3

[deleted]3

SYSC 11.1.29 G

[deleted]3

3
3
SYSC 11.1.30 G

[deleted]3

3
SYSC 11.1.31 G

[deleted]3

3
SYSC 11.1.32 G

[deleted]3

3