Published on 13 July 2017
Pillar 2 liquidity - CP13/17
This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA’s) proposals on a cashflow mismatch risk (CFMR) framework and other PRA methodologies for assessing firms’ liquidity risk, under the Pillar 2 liquidity (‘Pillar 2’) framework.
This CP also proposes updates to Supervisory Statement (SS) 24/15 and SS34/15, draft reporting rule changes, and a draft reporting template and instructions relating to CFMR.
In CP21/16, the PRA outlined the objectives of the Pillar 2 framework, its scope, and planned future work. It proposed a Statement of Policy (SoP) on its approach to three Pillar 2 risks: intraday liquidity, debt buyback, and non-margined derivatives. It also made proposals on the level of application of Pillar 2 and the PRA’s expectations relating to disclosure of Pillar 2. This CP builds on those proposals.
Additionally, this CP:
- seeks early views on aspects of the calibration of overall liquidity requirements which will be consulted on in a third CP; and
- outlines how feedback on CP21/16 was taken into account.
This CP is relevant to UK banks, building societies and PRA-designated investment firms.
Summary of proposals
The PRA proposes:
- to assess CFMR on both a consolidated currency and single currency basis;
- that firms should survive throughout the granular LCR stress scenario on a consolidated currency basis;
- to introduce a new liquidity reporting template (PRA110) to monitor CFMR;
- to collect the new liquidity reporting template on a weekly basis with a one-day remittance period for large firms, and a monthly basis with a fifteen day remittance period for small firms;
- to assess prime brokerage and matched book risks based on the LCR rates for secured transactions and supervisory judgement;
- to assess margined derivatives liquidity risks considering the firm’s historical initial margin posted and received, with a stress uplift applied;
- to assess securities financing margin liquidity risks based on the firm’s historical margin posted, with a stress uplift applied;
- to assess intragroup liquidity risk on a case-by-case basis, taking into account intragroup interconnectedness; and
- to assess liquidity systems and controls risks based on supervisory judgement of quantitative and qualitative issues.
Responses and next steps
This consultation closes on Friday 13 October 2017.
The entry into force of the proposed survival guidance under the granular Liquidity Covering Requirement (LCR) stress will be linked to the implementation of the new PRA110 report proposed for 1 January 2019. The implementation of the new Pillar 2 methodologies is envisaged to commence in early 2018.
Appendix 3 – draft reporting template and instructions:
Published on 12 May 2016
Pillar 2 liquidity - CP21/16
Update 18 October 2016
The PRA published PRA statement on feedback received during the consultation period for CP21/16 ‘Pillar 2 liquidity’. This statement summarises the feedback received on the draft statement of policy, but does not provide final policy proposals. As noted in CP21/16, the PRA will publish a second consultation paper covering a range of risks outlined in CP21/16 (mid-2017 on current plans).
In June 2015, the Prudential Regulation Authority (PRA) restated its overall approach to liquidity and funding risks, taking into account the European Commission’s delegated act under EU Regulation 575/2013 with regard to the Liquidity Coverage Requirement (LCR) for credit institutions. That policy is available in Policy Statement 11/15 ‘CRD IV Liquidity’ and Supervisory Statement (SS) 24/15 ‘The PRA’s approach to supervising liquidity and funding risks’. The LCR is a Pillar 1 standard applicable across the European Union which took effect on 1 October 2015. In SS24/15, the PRA outlined an interim Pillar 2 approach, and indicated that it would further review its assessment framework at a later date.
In this consultation paper (CP), the PRA proposes a statement of policy on its approach to three aspects of Pillar 2 liquidity (‘Pillar 2’): intraday risk, debt buyback and non-margined derivatives. The CP also outlines the PRA’s Pillar 2 objectives and scope. In addition, it provides an early overview of planned future work to develop the Pillar 2 approach where the PRA is not yet setting out proposals. As such, this CP constitutes the first of two planned CPs on Pillar 2.
The PRA’s aim in publishing a first CP now is to:
- seek specific feedback from firms on those elements where its thinking is advanced enough to make specific proposals; and
- invite early views from industry on key future elements of the regime where it is not yet ready to make specific proposals.
The implementation of the entire Pillar 2 regime will only take place once all individual elements have been consulted on and the PRA has published its final approach following the second CP on Pillar 2.
Summary of proposals
The specific proposals on which the PRA seek feedback from firms are that:
- in general, the level of application for setting requirements under Pillar 2 will be aligned to the Pillar 1 approach;
- that in disclosing information about their liquidity position, firms should note that their publically disclosed Liquidity Coverage Ratios (LCRs) include high quality liquid assets (HQLA) required to cover Pillar 2 risks, with no further specific disclosure on their Pillar 2 requirements unless required by law;
- the PRA’s approach to assessing liquidity risk associated with debt buyback and non-margined derivatives will be based on supervisory discretion guided by the firm’s outstanding debt or exposures; and
- the PRA’s approach to assessing intraday liquidity risk will be based on the firm’s maximum net debits, the firm’s stress testing framework, the firm’s key characteristics such as whether it is a direct or indirect participant in payment and settlement systems, and the markets it operates in.
This consultation closed on Friday 12 August 2016.