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Consultation Paper |CP27/14

CRD IV: Liquidity

November 2014

Prudential Regulation Authority

20 Moorgate

London EC2R 6DA

Prudential Regulation Authority, registered office: 8 Lothbury, London EC2R 7HH.

Registered in England and Wales No: 07854923

Consultation Paper |CP27/14

CRD IV: Liquidity

November 2014

This consultation paper proposes changes to the Prudential Regulation Authority (PRA) rules and guidance,

to accommodate the introduction of the European Union liquidity coverage requirement.

The Bank of England and the PRA reserve the right to publish any information which it may receive as part

of this consultation.

Information provided in response to this consultation, including personal information, may be subject to

publication or release to other parties or to disclosure, in accordance with access to information regimes

under the Freedom of Information Act 2000 or the Data Protection Act 1998 or otherwise as required by

law or in discharge of our statutory functions.

Please indicate if you regard all, or some of, the information you provide as confidential. If the

Bank of England or the PRA receives a request for disclosure of this information, the Bank of England or

the PRA will take your indication(s) into account, but cannot give an assurance that confidentiality can be

maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system on

emails will not, of itself, be regarded as binding on the Bank of England and the PRA.

Responses are requested by Friday 27 February 2015.

Please address any comments or enquiries to:

LCR CP responses

Liquidity Policy Team

Prudential Policy Directorate

Bank of England

Threadneedle Street

London

EC2R 8AH

Email: cp27_14@bankofengland.co.uk

1 Overview 5

Section I: Transition to the new liquidity regime

2 Switching off BIPRU 12 and phasing in the LCR 11

3 Maintaining the current PRA regulatory returns 13

4 Modifications granted under the current regime 15

Section II: Requirements on firms beyond meeting the LCR

5 Requirements on firms beyond meeting the LCR 19

Section III: Elements of the new regime not covered by EU legislation

6 Investment firms 25

7 UK branches of third country firms 27

8 LCR disclosure 29

Section IV: Cost benefit analysis

9 Cost benefit analysis 33

Appendices

Contents

1.1 On 10 October 2014, the European Commission published

a delegated act to supplement EU Regulation (EU)

No 575/2013 with regard to the liquidity coverage requirement

for credit institutions (‘Delegated Act’). This legislation is due

to enter into force by 31 December 2014. It will be directly

applicable in the United Kingdom from 1 October 2015.(1)

1.2 In light of this, the Prudential Regulation Authority (PRA)

must revoke existing rules where appropriate, and restate its

overall approach to regulating liquidity. The PRA proposes to

revoke the liquidity standards contained in Chapter 12 of the

Prudential sourcebook for Banks, Building Societies and

Investment Firms (BIPRU 12) at the point at which the

Delegated Act applies as a regulatory standard in the European

Union (EU). New rules are proposed to implement the PRA’s

approach to liquidity supervision (Appendix 2). Consequential

amendments will be made to the liquidity reporting

requirements in Chapter 16 of the Supervision handbook

(SUP 16), and to the PRA Fundamental Rules (Appendix 2).

The PRA will consult on further consequential amendments to

its rules that are necessary to implement its new liquidity

regime.(2)

1.3 This consultation paper (CP) seeks views on draft rules and

a draft supervisory statement (Appendix 1) which set out the

PRA’s proposed update to its liquidity regime. This

consultation is relevant to UK banks, building societies and

UK-designated investment firms (‘firms’).(3) It is also relevant

to third country firms that are banks or designated investment

firms, and European Economic Area (EEA) credit institutions

that have a branch in the United Kingdom.

Background

1.4 The Basel Committee on Banking Supervision (BCBS)

introduced the Liquidity Coverage Ratio in 2013.(4) This

standard aims to ensure that a bank has an adequate stock of

unencumbered liquid assets that consists of cash, or assets

that can be converted into cash at little or no loss of value in

private markets, to meet its liquidity needs for a thirty

calendar day liquidity stress scenario. The BCBS highlighted

the importance of liquidity to the functioning of financial

markets and the banking sector, as demonstrated by the

2007–08 crisis: many banks experienced difficulties because

they did not manage their liquidity in a prudent manner. This

contributed to the failure of several institutions. The BCBS

therefore introduced new liquidity standards as part of

‘Basel III’, a new international regulatory framework for banks,

in June 2013.

1.5 In June 2013, the EU published legislation to implement

Basel III. The legislation replaced the previous capital

requirements directives with two new instruments: the

Capital Requirements Directive (CRD)(5) and the Capital

Requirements Regulation (CRR),(6) collectively known as

CRD IV. The PRA implemented the majority of CRD IV,

including several national discretions relating to the liquidity

regime, in December 2013.(7) The Delegated Act specifies the

general liquidity coverage requirement (LCR) as per

CRR Article 412, and the circumstances under which

competent authorities have to impose specific inflow and

outflow levels on credit institutions in order to capture the

specific risk to which they are exposed, as per CRR Article 460.

1.6 In October 2009, the Financial Services Authority (FSA)

introduced a far-reaching overhaul of the UK liquidity regime,

in FSA PS09/16.(8) This regime was implemented in BIPRU 12,

which was subsequently designated by the PRA. Readers

should note that the PRA’s updated approach to supervising

liquidity risk, as set out here and in the draft supervisory

statement, carries forward the broad principles established in

the previous liquidity regime. In particular, firms should note

that liquidity buffers can — and should — be used in times of

stress (see Appendix 1, paragraphs 6.1 to 6.3).

1.7 The PRA expects this CP to be read in conjunction with the

Delegated Act, the draft supervisory statement and rules set

out in the Appendices, and all relevant European Banking

Authority (EBA) material, in order to gain a full understanding

of the proposed update to its liquidity regime.

CRD IV: Liquidity November 2014 5

1Overview

(1) European Commission: ‘Commission Delegated Regulation (EU) [No…/.. of XXX] to

supplement EU Regulation (EU) No 575/2013 with regard to liquidity coverage

requirement for Credit Institutions’,

http://ec.europa.eu/internal_market/bank/docs/regcapital/acts/delegated/141010_

delegated-act-liquidity-coverage_en.pdf.

(2) This will likely be in the form of an Occasional Consultation Paper.

(3) UK-incorporated investment firms regulated by the PRA are referred to as

UK-designated investment firms. This distinguishes them from both non-UK

incorporated designated investment firms and FCA-regulated investment firms.

(4) BCBS, ‘Basel III: The Liquidity Coverage Requirement and liquidity risk monitoring

tools’, January 2013; www.bis.org/publ/bcbs238.pdf.

(5) Directive 2013/36/EU; http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:176:0338:0436:EN:PDF.

(6) Regulation (EU) No 575/2013: http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:321:0006:0342:EN:PDF.

(7) PRA Policy Statement PS7/13, ‘Strengthening capital standards: implementing

CRD IV, feedback and final rules’, December 2013;

www.bankofengland.co.uk/pra/Documents/publications/ps/2013/ps713.pdf.

(8) FSA Policy Statement 09/16, ‘Strengthening liquidity standards’, October 2009;

www.fsa.gov.uk/pubs/policy/ps09_16.pdf.

1.8 The Delegated Act only applies to credit institutions. To

ensure a consistent approach to liquidity supervision between

UK banks and building societies and UK-designated

investment firms, the PRA proposes to make a rule which will

require UK-designated investment firms to comply with the

obligations laid down in the Delegated Act (see Section III,

Chapter 6). UK-designated investment firms should read any

reference to the Delegated Act in this CP accordingly.

1.9 Until the EEA Joint Committee amends the EEA

Agreement with a view to permitting simultaneous application

of the CRR liquidity standards in the EEA States, the CRR

liquidity standards only apply within the EU. The PRA

proposes to make rules on the assumption that the EEA Joint

Committee will incorporate the CRR liquidity standards into

the EEA Agreement. Before this happens however, the PRA

proposes transitional rules to ensure that:

• EEA credit institutions with their head offices outside the

EU be treated, in relation to their UK branches, like third

country firms; and

• the level of application of the proposed PRA’s new liquidity

regime mirrors the level of application of the CRR liquidity

standards.

The PRA proposes to revoke these transitional rules when the

CRR liquidity standards are incorporated into the EEA

Agreement. The proposed transitional rules are set out in

Appendices 2.A (Rule 15) and 2.D (Rule 4).

Structure

1.10 This CP is structured as follows:

• Section I details how the PRA proposes to carry out the

transition to its new liquidity regime, taking into account

the Delegated Act that will apply from 1 October 2015.

• Section II explains what requirements the PRA proposes to

place on firms beyond meeting the LCR.

• Section III details the elements of the PRA’s proposed new

regime which will not be covered by EU legislation.

• Section IV contains a cost benefit analysis of the proposals.

1.11 The draft supervisory statement is included as Appendix 1;

the draft rules are included as Appendix 2. Appendix 3

provides a mapping of BIPRU 12 rules to the Internal Liquidity

Adequacy Assessment (ILAA) Part of the PRA Rulebook.

Statutory Obligations

1.12 In discharging its general functions of making rules and

determining the general policy and principles, the PRA must,

so far as is reasonably possible, act in a way that advances its

two objectives: that is, its general objective to promote the

safety and soundness of PRA-authorised persons,(1) and its

secondary objective to facilitate effective competition.(2)

1.13 The purpose of the revised liquidity regime is to continue

to address a number of market and regulatory failures in

relation to firms’ liquidity risk management, detailed in the

cost benefit analysis section of this document: in this way it

supports the PRA’s general objective of promoting the safety

and soundness of firms. In addition, by fully and clearly

restating the whole liquidity regime, the PRA is helping firms

understand its expectations of them, which also helps the PRA

meet its safety and soundness objective.

1.14 In light of the introduction from 1 March 2014 of a

statutory secondary competition objective for the PRA, the

PRA has assessed whether the content of this consultation

facilitates effective competition in markets for services

provided by PRA-authorised persons in carrying out regulated

activities. The PRA considers that the transition to the LCR

will put internationally active UK firms on a level playing field

with other, non-UK firms with an international presence: the

LCR is being implemented, albeit in a different form, by all

members of the Basel Committee, and the EU definition of the

LCR will be applied across all EU Member States.

Domestically, the new Pillar 1 regime(3) will put both larger

and smaller UK firms on a level playing field. However, the

PRA recognises that the removal of the simplified Individual

Liquidity Assessment Standards (ILAS)(4) modification will

increase the compliance costs for those firms that previously

benefited from it. Offsetting this, at least partially, the PRA’s

Pillar 2 approach will be proportionate to each firm’s business

model.

1.15 In making its rules and establishing its practices and

procedures the PRA must have regard to the Regulatory

Principles.(5) The PRA considers that this proposal is

compatible with the Regulatory Principles. In particular,

section 3B(1)(a) of the Financial Services and Markets Act

(FSMA) provides that the resources of each regulator should

be used in the most efficient and economic way.

Section 3B(1)(b) of FSMA provides that the principle that a

burden or restriction which is imposed on a person, or, on the

carrying out of an activity, should be proportionate to the

6 CRD IV: Liquidity November 2014

(1) Section 2(b) of the Financial Services and Markets Act (FSMA) 2000 (General

Objective).

(2) Section 2(h) of FSMA 2000 (Secondary Objective).

(3) Please see paragraph 2.3 and the associated footnote for a definition of the Pillar 1

standard.

(4) Please see Chapter 5 for a definition of ILAS.

(5) Section 138J(3)(b) of FSMA 2000.

benefits, considered in general terms, which are expected to

result from the imposition of that burden or restriction.

1.16 In addition, when consulting on draft rules, the PRA is

required to consider:

• equality and diversity;

• the impact on mutuals; and

• the impact on competition.

1.17 The impact on competition is addressed in

paragraph 1.14. The impact on mutuals, and equality and

diversity, are considered below. The PRA is also required to

perform a cost benefit analysis of the impact of its policy

proposals: this is contained in Section IV.

Equality and Diversity

1.18 As a public body, the PRA is subject to the provisions of

the Public Sector Equality Duty (PSED) which forms part of the

Equality Act 2010. The PSED requires that when the PRA is

exercising its public functions, it has due regard to the need for

eliminating unlawful discrimination, advancing equality of

opportunity and fostering good relations between people who

share a protected characteristic. To meet this requirement,

the PRA has performed an assessment of the equality and

diversity implications of any new policy proposal considered.

In general the PRA finds that the issues addressed in this CP do

not give rise to equality and diversity implications.

1.19 The Delegated Act applies directly to PRA-regulated

firms. It contains a number of derogations towards the

eligibility of assets within a firm’s High Quality Liquid Assets

(HQLA) buffer that are only available to firms that are unable

to hold interest-bearing assets for reasons of religious

observance. These derogations support the ability of these

firms to meet the requirements of the Delegated Act.

Impact on mutuals

1.20 The proposal will affect mutuals as they are within scope

of the proposed new rules. The PRA does not expect the

impact on mutuals to be significantly different from the

impact on other firms.(1) Based on a recent survey of the costs

to firms of compliance with Common Reporting (COREP) and

Financial Reporting (FINREP), the PRA estimates that the

impact on mutuals of the LCR reporting requirements will not

be substantially different from that on other similarly sized

(non-mutual) institutions. However, the simplified regime

that was available under BIPRU 12 (ILAS regime), to firms

operating a relatively simple business model, will no longer

apply: firms previously operating under this simplified regime

will have to calculate the same LCR as other firms, whereas

previously they were able to calculate their liquid asset buffer

requirement through a simplified formula. They will also need

to apply the same stress testing approach as other firms. This

means that, aside from reporting costs, the new regime will

impose a higher burden on some smaller firms, including

mutuals, than the current BIPRU 12 regime. That burden,

however, will not be higher than that imposed on other firms

in the new regime. And, as explained above, the PRA’s Pillar 2

approach will be proportionate to each firm’s business model,

which will offset this higher burden, at least partially.

Key proposals

1.21 The main proposals put forward in this CP are as follows:

• To revoke BIPRU 12. This includes revoking the simplified

ILAS regime and the requirement on firms to undertake

standardised stress testing.

• To carry forward the broad principles established in

BIPRU 12 into the new regime.

• To apply a transition to 100% LCR on 1 January 2018 in the

following steps: an 80% requirement from 1 October 2015,

rising to 90% on 1 January 2017.

• To carry forward existing add-ons not covered in the LCR as

the new Pillar 2 add-ons, until each firm’s next liquidity

review.

• To establish a new rule to require that firms ensure their

systems and processes enable them to report all COREP

liquidity returns daily, as required by the PRA.

• To maintain reporting of FSA047 and FSA048 for a period of

up to two years after the introduction of the full suite of

COREP liquidity returns in 2015.

• To require that firms integrate fully the operational

requirements outlined in Delegated Act Article 8.

• To propose that if pre-positioned assets are not eligible for

inclusion in the HQLA buffer, they cannot be used to meet

the PRA’s quantitative liquidity guidance.

• To propose that UK-designated investment firms be subject

to the obligations stated in the Delegated Act, with any

necessary amendments, to bring their obligations in line

with those applied to UK banks and building societies.

• To propose that third country firms be subject to a

requirement to provide liquidity information on a

whole-firm basis.

CRD IV: Liquidity November 2014 7

(1) Section 138K(2) of FSMA 2000.

Responses and next steps

1.22 This consultation closes on Friday 27 February 2015.

Views are welcomed on the proposals made in this CP and

respondents are requested to structure their responses by

chapter.

1.23 In particular respondents may wish to comment on:

• The proposed transition path to the LCR, including the

proposal for interim Pillar 2 add-ons.

• The proposal to retain reporting on FSA047 and FSA048 for

up to two years after the introduction of the full suite of

COREP liquidity returns in 2015.

• How the PRA is intending to apply requirements beyond the

LCR.

• The PRA’s specific proposals for UK-designated investment

firms, and for third country firms.

• The content of the draft supervisory statement.

1.24 The PRA intends to discuss with firms their preparations

for the introduction of the LCR, and would welcome their

views on issues arising from its implementation.

1.25 The PRA intends to publish a policy statement with

feedback, final rules and a supervisory statement in 2015.

8 CRD IV: Liquidity November 2014

Section I:

Transition to the new liquidity regime

CRD IV: Liquidity November 2014 11

2.1 This chapter sets out the PRA’s proposal for switching off

the current BIPRU 12 regime, withdrawing existing

firm-specific Individual Liquidity Guidance (ILG),(1) and phasing

in the LCR in accordance with CRR Article 412(5). It also

details the PRA’s interim approach to setting Pillar 2

requirements in the new regime, and includes a proposal for

collecting LCR returns in the event that reporting on the

revised template is delayed until after the LCR is introduced

on 1 October 2015.(2)

2.2 Delegated Act Article 38 provides for a phasing-in of the

LCR ratio from 1 October 2015 until 1 January 2018.

Competent authorities are permitted by CRR Article 412(5) to

require domestically authorised institutions, or a subset of

those institutions, to maintain a higher LCR than the minimum

phase-in path, up to 100%, until the LCR is fully introduced at

a rate of 100% in accordance with CRR Article 460.

2.3 The LCR is a Pillar 1 standard, ie it is a set of measures that

applies to all firms in the same way.(3) CRD Articles 104

and 105 provide discretion for competent authorities to set

additional Pillar 2 liquidity requirements. The existing

UK regime is not based on a Pillar 1/Pillar 2 approach. But it is

similar in effect: an individual firm’s ILG is based on a

standardised stress test, and add-ons reflect firm-specific risks.

2.4 The draft supervisory statement is in Appendix 1, and the

draft rules are contained in Appendix 2.B.

Proposals

Revoking BIPRU 12 and withdrawing existing ILG

2.5 The PRA proposes to revoke the liquidity standards

contained in BIPRU 12 and to withdraw firm-specific guidance

on liquid asset buffers contained in firms’ ILG, at the point at

which the LCR comes into effect (1 October 2015). This

includes revoking the simplified ILAS regime. The PRA will

send new guidance letters to firms as appropriate, and notably

where firms have existing add-ons. In the interim, the

transitional provisions outlined in the rest of this chapter apply

as a default.

2.6 These proposals ensure that firms are subject to a single

set of liquidity standards at any one time. The PRA

understands that it would be operationally difficult for firms

to operate to two such sets at the same time.

LCR phase-in

2.7 The PRA proposes to set the LCR at 80% from 1 October

2015. This requirement would apply until the end of 2016.

The requirement would then rise to 90% on 1 January 2017.

It would reach 100% on 1 January 2018, as required by CRR

(Table A).

2.8 In choosing the initial minimum requirement for the LCR,

the PRA had regard to the Financial Policy Committee’s

(FPC’s) recommendation to the PRA in June 2013 which stated

that: ‘In assessing the liquidity of banks and building societies,

the PRA should employ, among other measures, the Liquidity

Coverage Ratio (LCR) as defined in the EU’s implementation of

the Basel standard. The minimum requirement should be set

at 80% until 1 January 2015, rising thereafter to reach an LCR

of 100% on 1 January 2018.’(4) The FPC concluded that as a

2Switching off BIPRU 12 and phasing

in the LCR

(1) Readers should note that when used with capital letters, or as the acronym ILG, the

term ‘Individual Liquidity Guidance’ refers to the quantitative liquidity requirement

set on firms under BIPRU 12. When used without capital letters, and fully spelt out,

the term ‘individual liquidity guidance’ refers to the more general guidance given to

firms, including qualitative elements.

(2) The Pillar 2 review is any activity on the part of a supervisor to assess a firm’s

compliance with the overall Pillar 2 rule. The review includes an assessment of the

strategies, processes and systems a firm has in place to identify and manage the risks

to which it is exposed or might be exposed and the risk that it might not be able to

meet the obligations in Part Three of the CRR. One part of this review is an

assessment of the adequacy of the financial resources a firm must hold to comply

with any Pillar 1 requirements as well as those resources held for risks not covered

under Pillar 1.

(3) Note, however, that the LCR is not a Pillar 1 ‘minimum’: falling below the applicable

LCR is not automatically associated with breaching the PRA’s Threshold Conditions.

Please see Section 6 of the draft supervisory statement (Appendix 1) for further

details on the PRA’s expectations of firms that fall below the level of quantitative

individual liquidity guidance.

(4) Bank of England, ‘Record of the Financial Policy Meeting’, 18 June 2013, page 2;

www.bankofengland.co.uk/publications/Documents/records/fpc/pdf/2013/

record1307.pdf.

Table A Comparison of liquidity coverage requirements during

the transition period

Date Minimum path — Proposed PRA path

CRR Article 460

From 1 October 2015 60% 80%

From 1 January 2016 70% 80%

From 1 January 2017 80% 90%

From 1 January 2018 100% 100%

general policy, setting this transition path would provide the

banking system with greater flexibility and could support

economic recovery without compromising financial stability.

In particular, the FPC noted that the impact of looser liquidity

requirements on credit conditions was uncertain. But by

removing possible impediments to an expansion of credit

supply, it intended to give the banking system more flexibility

to lend.(1) The PRA confirmed on 28 August 2013 that it

would implement this recommendation.(2)

2.9 The PRA considers that the proposal would provide a

balance between: on the one hand, ensuring that the new

requirements imposed on firms do not represent a significant

weakening of existing standards; and, on the other hand,

ensuring that the transition is not overly abrupt and does not

risk temporarily constraining banks’ ability to extend credit to

the real economy.

2.10 Question: The PRA invites comments on its proposed

transition path to 100% LCR in 2018.

Interim Pillar 2 approach

2.11 As detailed in Section 3 of the draft supervisory

statement, the PRA plans to adopt an interim Pillar 2 approach

based on firms’ existing ILG add-ons. Where current add-ons

relate to risks not captured in the LCR, the PRA proposes to

continue applying them at the same absolute amounts as

previously: these will become the new Pillar 2 add-ons, as an

interim measure until the PRA can carry out a liquidity review

of the firm. Specifically, fixed add-ons that are applicable on

30 September 2015 would continue to apply from 1 October

2015 at the same absolute amounts: this covers all add-ons

except those relating to prime brokerage and derivatives.

Box 1 illustrates the proposed approach with an example.

Initially, and until the PRA can carry out a liquidity review of

the firm, each add-on will apply at the individual level. In

addition, if the firm must comply with CRR Part 6 (Liquidity)

on a consolidated level, then the add-on will also apply at the

consolidated level.

2.12 The type of HQLA held to meet interim ILG add-ons

should be no wider than defined in the Delegated Act, and it

should follow the same composition set out in the Delegated

Act for Levels 1, 2A and 2B assets.

2.13 In due course and as the PRA’s resources permit a review

of each firm’s liquidity, the PRA intends to revise its approach

to assessing liquidity risk management in line with the ‘Draft

Guidelines for common procedures and methodologies for

the supervisory review and evaluation process under

Article 107 (3) of Directive 2013/36/EU’ (‘EBA SREP

guidelines’).(3) The PRA expects firms to have robust processes

in place to identify and manage their liquidity risks until the

PRA is able to set refreshed firm-specific guidance.

2.14 Question: The PRA invites comments on its proposed

interim Pillar 2 approach.

Reporting

2.15 Delegated Act Article 4(5) requires firms to calculate and

monitor their liquidity positions against the LCR as specified in

the Delegated Act. CRD Article 4(2) also requires the PRA, as

the competent authority, to monitor institutions’ compliance

with CRD IV.

2.16 The EBA is revising the COREP LCR template to reflect

the Delegated Act.(4) Firms may face tight deadlines in

implementing the new reporting template. In the event that

reporting on the revised template is delayed until after the

LCR is introduced on 1 October 2015, the PRA will retain the

option to collect the returns via alternative methods for a

limited period, for example using Excel spreadsheets.

2.17 CRD Article 104(1)(j) enables the PRA to impose

additional or more frequent reporting on liquidity positions.

The PRA proposes to make a rule requiring firms to have

systems and controls in place to enable firms to submit all

liquidity COREP returns daily, as required by the PRA. Firms

may also be required to provide additional information

necessary for the purpose of liquidity supervision.

2.18 Question: The PRA invites comments on options for

collecting LCR returns, in the event of a delay in the

implementation of the updated COREP LCR templates.

12 CRD IV: Liquidity November 2014

(1) Bank of England Financial Stability Report, June 2013, page 70;

www.bankofengland.co.uk/publications/Documents/fsr/2013/fsrfull1306.pdf.

(2) Bank of England News Release, 28 August 2013;

www.bankofengland.co.uk/publications/Pages/news/2013/099.aspx.

(3) EBA, ‘Guidelines for common procedures and methodologies review and evaluation

process (SREP)’, www.eba.europa.eu/documents/10180/748829/EBA-CP-2014-

14+%28CP+on+draft+SREP+Guidelines%29.pdf. Please note that these are being

finalised and that the EBA expects to issue the final version at the end of 2014.

(4) The Bank is party to this working group.

Box 1

Interim add-on illustration

Under BIPRU 12, a firm has an intraday liquidity risk

requirement of £1 billion. If it is required to hold £500 million

of liquidity as an add-on against this risk as at 30 September

2015, then £500 million is the amount that would apply as the

new Pillar 2 add-on as at 1 October 2015, and until the PRA

can conduct the firm’s next liquidity review.

3.1 This chapter sets out the PRA’s proposals for maintaining

existing liquidity returns alongside the new reporting

requirements, for a limited, transitional period. These are

delivered by proposed rules changes to SUP 16.12 and to the

Glossary of definitions, both contained in Appendix 2.

Proposals

3.2 In order to facilitate the supervision of liquidity in the

initial period following the introduction of the LCR as a

regulatory requirement, the PRA proposes to keep in place, for

a limited period, the requirement to report some of the PRA's

current liquidity returns. The PRA proposes to retain the

requirement to submit the ‘daily flows’ and ‘enhanced

mismatch’ reports (FSA047 and FSA048) for up to two years

after the introduction of the full suite of COREP liquidity

returns, but in any event not beyond the point at which the

LCR must be phased in at 100% in accordance with the

Delegated Act. These reports are central to the PRA’s

supervision of liquidity. They provide a daily breakdown of

firms’ inflows and outflows, which will not be available in the

new COREP LCR templates.(1)

3.3 The PRA further proposes to stop requiring returns

FSA050, FSA052 and FSA054 in the new regime. The last

reporting date for these returns would be as at 30 September

2015 for FSA050 and FSA054. For FSA052 (a weekly report),

the last reporting date would be 2 October 2015. In the event

that the introduction of the additional liquidity monitoring

metrics (AMMs) is delayed, the PRA proposes to maintain the

requirement to report returns FSA050, FSA052 and FSA054,

until the first date at which the AMMs start being collected by

the PRA.(2) The PRA proposes to maintain FSA051 and FSA053

beyond 1 October 2015, but expects that this will be for not

more than six months, unless the AMMs are delayed by more

than this. These two reports provide valuable information on

sources of wholesale funding (FSA051) and Financial Services

Compensation Scheme coverage (FSA053). The PRA will need

time to assess how to replace these data.

3.4 Following the application of the LCR, the PRA will no

longer retain responsibility for the supervision of branches of

EU credit institutions. The PRA therefore proposes to stop

collecting liquidity reports in relation to these branches from

1 October 2015. UK branches of EEA firms that have their

head office outside the EU (ie Iceland, Liechtenstein and

Norway) should follow the transitional reporting

arrangements proposed for UK branches of third country firms

outlined in Chapter 7.

3.5 During the transition, the PRA proposes that firms that

currently report on the basis of a Defined Liquidity Group

(DLG) by modification or DLG by default should continue to

do so.(3) However firms in a UK DLG by modification will no

longer be required to submit solo returns. Third country firms

that have a whole-firm liquidity modification (WFLM) granted

under BIPRU 12 in relation to their UK branches should

continue to report on the basis of the whole firm (or at any

other reporting level or frequency the whole-firm liquidity

modification may require), for a transitional period as detailed

in paragraphs 7.15 and 7.16. The PRA will be prepared to

consider changes to the reporting basis or frequency if

requested by a firm (for example, if firms are supervised as a

single liquidity subgroup under Article 8 of the CRR, they may

want to avoid reporting on two concurrent sets of liquidity

subgroups).

3.6 In making these proposals, the PRA aims to ensure a

smooth transition to the new regime in two ways:

i. The PRA and firms will be able to use data from the PRA’s

current returns to facilitate the process of assuring the

quality of the new data, especially with regard to the

contractual maturity ladder. The PRA’s experience in

implementing the current regime indicates that firms

need time to bring new reporting up to the required

standard: a transition without an initial period of dual

reporting may jeopardise the PRA’s safety and soundness

objective.

CRD IV: Liquidity November 2014 13

(1) A daily breakdown up to seven days will be available in the additional monitoring

metrics, when these reports start being collected.

(2) EBA, ‘Implementing Technical Standards (ITS) on additional liquidity monitoring

metrics’, www.eba.europa.eu/regulation-and-policy/liquidity-risk/draft-

implementing-technical-standards-on-additional-liquidity-monitoring-metrics.

(3) See PRA glossary for a definition of the terms Defined Liquidity Group by

modification or by default; http://fshandbook.info/FS/html/PRA/Glossary.

3Maintaining the current PRA

regulatory returns

ii. The PRA will have time to assess the differences between

the information currently submitted and the data to be

submitted under the new regime. This will allow it to

refine the framework for Pillar 2, for example with regard

to standardised stress testing. As part of this, the PRA will

study further the combined and final set of COREP

liquidity returns and, in light of this, will consider the case

for setting up any new PRA reporting requirement beyond

the COREP liquidity returns. The PRA notes that it would

be unhelpful to switch off current PRA reporting

requirements, only to reinstate them at a later stage.

3.7 The PRA’s intention in temporarily retaining existing

reporting is not to hold firms to a shadow regulatory standard.

From the cutover date of 1 October 2015, firms’ liquidity

positions will no longer be measured against the ILG.

3.8 As explained in Chapter 5, BIPRU 12.5 will be revoked.

Nonetheless, for reporting purposes, firms should continue to

use the guidance currently contained in BIPRU 12.5 regarding

what classifications to use when completing the returns (for

example, for the classification of their Type A/Type B

corporate or retail deposits).

3.9 Questions: The PRA invites comments on its proposals

to:

• Retain the requirement to submit the ‘daily flows’ and

‘enhanced mismatch’ reports (FSA047 and FSA 048) for up

to two years after the introduction of the full suite of

COREP liquidity returns in 2015.

• Stop requiring returns FSA050, FSA052 and FSA054. The

last reporting date for these returns would be as at

30 September 2015 for FSA050 and FSA054. For FSA052 (a

weekly report), the last reporting date would be 2 October

2015. In the event that the introduction of the AMMs is

delayed, the requirement to report returns FSA050, FSA052

and FSA054 would be maintained until the first date at

which the AMMs start being collected by the PRA.

• Maintain FSA051 and FSA053 beyond 1 October 2015, with

the expectation that this will be for not more than

six months, unless the AMMs are delayed by more than this.

14 CRD IV: Liquidity November 2014

4.1 This chapter sets out the PRA’s proposals in relation to the

treatment of BIPRU 12 and SUP 16.12 liquidity modifications

granted to firms in accordance with section 138A of FSMA.

4.2 The PRA offers three kinds of modifications under its

current liquidity regime:

i. Intragroup liquidity modification: this permits

PRA-regulated firms incorporated in the United Kingdom

to rely on liquidity support from elsewhere in their group.

Such modifications create either a UK DLG where all the

firms are established in the United Kingdom, or a

non-UK DLG where the UK firm is reliant on its overseas

parent. For UK DLGs, the PRA sets liquidity guidance at

the level of the group (although the individual legal

entities within the DLG typically continue to report at the

legal entity level, albeit on a less frequent basis).

ii. WFLM: this permits an overseas bank, in relation to its

UK branch, to rely on the availability of liquidity resources

from elsewhere within the firm.

iii. Simplified ILAS waiver: for firms that operate a relatively

simple business model, this allows a firm to calculate the

size and content of its liquid assets buffer according to a

simplified approach.

4.3 As set out in Chapter 2, the Delegated Act is due to apply

from 1 October 2015, and the PRA will update its existing

liquidity regime accordingly and revoke BIPRU 12. This means

that after that time, firms will no longer be able to rely on

these modifications and will not be expected to comply with

them.

4.4 Under CRR Article 8, firms can apply for a permission

which has a similar purpose to the intragroup liquidity

modification: the PRA, as the competent authority, may waive

(in full or in part) the application of the liquidity requirements

in the CRR to a firm and to all or some of its subsidiaries and

may supervise them as a single liquidity subgroup.

4.5 Following the revocation of BIPRU 12, WFLMs will cease

to have effect. There is no equivalent to the WFLM in the CRR.

Once the LCR applies in the EU, responsibility for regulating

the liquidity risk of UK branches of EU credit institutions will

pass to the EU home state regulator.

4.6 UK branches of non-EU credit institutions are not subject

to the liquidity provisions of the CRR. As such, responsibility

for their liquidity supervision will remain with the PRA. When

BIPRU 12 ceases to be in force, the WFLMs which UK branches

of non-EU credit institutions have in place will cease to have

effect.

4.7 For a period of transition, non-EU credit institutions

would continue to submit their PRA regulatory returns in

relation to their UK branches, in line with their previous

modification: the PRA will modify SUP 16.12, and the

definition of WFLM in the PRA Glossary, to reflect this.

Chapter 7 sets out in full the PRA’s proposals for liquidity

requirements in respect of UK branches of third country firms,

including transitional arrangements.

4.8 UK branches of EEA credit institutions that have their

head office outside the EU (ie Iceland, Liechtenstein and

Norway) will be subject to the same regime as for non-EEA

States, as per paragraph 1.9.

4.9 The simplified ILAS waiver has no equivalent in the CRR or

the Delegated Act. Once the PRA revokes BIPRU 12, simplified

ILAS waivers will no longer have effect. All firms in scope must

meet the LCR.

4.10 Firms that have been granted WFLMs, intragroup

liquidity modifications and simplified ILAS modifications that

expire before BIPRU 12 ceases to have effect on 30 September

2015 will need to apply for a renewal if they want to continue

to rely on the modification up to that point.

4.11 Given the short period of time for which these renewals

will be in place, the PRA has established a streamlined process

for these three types of modification, with the aim of

minimising the resource burden on both firms and the PRA,

while continuing to ensure that the statutory tests in

section 138(A) of FSMA are met.(1)

CRD IV: Liquidity November 2014 15

(1) See www.bankofengland.co.uk/pra/Pages/authorisations/waivers/extending_

modifications.aspx.

4Modifications granted under the

current regime

4.12 Firms that wish to renew or vary other types of PRA

liquidity modifications, or that wish to apply for a liquidity

modification for the first time, should contact their supervisor.

16 CRD IV: Liquidity November 2014

Section II:

Requirements on firms beyond

meeting the LCR

5.1 This chapter explains the PRA’s proposals for requirements

on firms with regard to liquidity that go beyond the

obligations laid down in the Delegated Act. The chapter also

explains the PRA’s approach to assessing whether firms meet

these requirements — its review and evaluation process.

5.2 The LCR is a Pillar 1 standard, ie it applies to all firms in the

same way. As such it could fail to capture some important

sources of liquidity risk for particular firms. Therefore, it is

appropriate to set additional requirements on firms, such as

requirements relating to their liquidity risk management: such

measures are sometimes described as Pillar 2 requirements.

5.3 The introduction of CRD IV and the recent consultation on

the EBA SREP guidelines have prompted the PRA to review its

approach to liquidity and funding risk: this chapter provides

an overview of how the PRA is updating its overall approach to

regulating liquidity risk.

5.4 The proposed new rules are contained in the ILAA Part of

the Rulebook (see Appendix 2.A). The PRA’s expectations on

how firms should comply with these rules are provided

separately in the draft supervisory statement (see Appendix 1).

The draft rules, the draft supervisory statement, and the

EBA SREP guidelines should be read together to gain a full

understanding of the updated liquidity regime and of the

PRA’s expectations of firms.

5.5 The chapter is structured as follows: first, it details the

level of application of the ILAA rules. Second, it provides a

checklist of those rules carried over or deleted from BIPRU 12.

Finally, it provides a brief overview of the overall regime, as set

out in the draft supervisory statement (Appendix 1) and draft

rules (Appendix 2).

Level of application of the ILAA rules

5.6 The PRA proposes that the rules will apply on an individual

basis, a consolidated basis, and a sub-consolidated basis where

appropriate.

5.7 However, only those firms that are under an obligation to

comply with CRR Part 6 on a consolidated basis must also

comply with these PRA rules on a consolidated basis.(1) For

example, only a firm that is an EU parent institution must

comply with the overall liquidity adequacy rule (OLAR) on a

consolidated basis.(2) This was not previously part of the

BIPRU 12 regime.

5.8 Where firms have parent undertakings or subsidiaries not

subject to the CRD, they must ensure that these implement

arrangements, processes and mechanisms that are consistent

and well integrated. Firms must also ensure that those parent

undertakings or subsidiaries are able to produce any data and

information relevant to the purpose of supervision. This is

consistent with the PRA’s current approach.(3)

5.9 The PRA is required under CRD IV to apply the Liquidity

Supervisory Review and Evaluation Process (L-SREP)(4) and any

supervisory measures in accordance with the level of

application of the requirements set out in the CRD IV

framework. Therefore, the ILAA Part of the PRA Rulebook,

including the requirement to carry out an Internal Liquidity

Adequacy Assessment Process (ILAAP), applies on an

individual basis. And it applies on a consolidated basis, where

firms must comply with CRR Part 6 (Liquidity) on a

consolidated basis. This enables the PRA to carry out L-SREPs

and to apply supervisory measures at both individual and

consolidated level, where appropriate.

Summary of rules carried forward and

deleted(5)

5.10 The PRA currently sets out its requirements and

expectations on firms in respect of their identification,

measurement, management and monitoring of liquidity risk in

BIPRU 12.2, 12.3, 12.4, 12.5 and 12.6. This section explains

which rules the PRA proposes to maintain, and which rules it

proposes to delete. It also explains one proposed new rule.

CRD IV: Liquidity November 2014 19

(1) The level of application of CRR Part 6 on a consolidated basis is set out in

CRR Article 11(3) and Article 12.

(2) See the draft supervisory statement in Appendix 1 for a definition of OLAR.

(3) SYSC 12.1.13R(2)(e).

(4) See paragraphs 5.30 to 5.34 for more details on the L-SREP process.

(5) See Appendix 3 for a mapping of BIPRU 12 rules to the ILAA Part of the Rulebook.

5Requirements on firms beyond

meeting the LCR

Proposed new rule

5.11 As noted in paragraph 2.17, CRD Article 104(1)(j) enables

the PRA to require additional or more frequent reporting on

liquidity positions. And CRR Article 414 requires that firms

submit liquidity returns daily when they do not meet, or

expect not to meet, the LCR requirement (unless exempted by

the relevant competent authority). As explained in

paragraph 2.17, the PRA proposes a new rule to require that

firms ensure that their systems and processes enable them to

report all liquidity COREP returns daily, as required by the

PRA.

5.12 Question: The PRA invites comments on its proposal for

a new rule to require that firms ensure that their systems and

processes enable them to report all COREP liquidity returns

daily, as required by the PRA.

BIPRU 12 rules carried forward

5.13 For the ILAA rules, the PRA proposes to carry forward

selected rules from BIPRU 12 which are relevant to the new

regime. They include:

• the requirement that firms hold adequate liquidity;

• the requirement that firms assess whether they hold enough

liquidity and document that assessment;

• the specification of some of the elements that firms need to

undertake in carrying out that assessment (notably around

liquidity stress testing); and

• requirements on specific aspects of liquidity risk

management.

5.14 To ensure ongoing compliance with the CRD, the PRA

proposes to carry forward the BIPRU 12 rules that relate to

liquidity risk management and that transpose CRD

Article 86.(1)

5.15 BIPRU 12 rules which remain relevant to the new regime

and which will therefore be carried forward include,

substantially, those relating to:

• the overall liquidity adequacy rule;

• liquidity risk management (ie those rules that implement

CRD Article 86);

• stress testing;

• ILAA; and

• asset encumbrance.

Proposals for rules to delete

5.16 The PRA is proposing to revoke the whole of BIPRU 12, as

explained in Chapter 1. Firms should note that this means, in

particular, that the following rules will cease to apply.

Simplified ILAS regime

5.17 The PRA proposes to delete BIPRU 12.6, as detailed in

Chapter 4.

Standardised stress testing

5.18 The proposed ILAA rules contained in Appendix 2.A

no longer specify the criteria of a standardised stress test of

the type articulated in BIPRU 12.5.

5.19 The PRA proposes to maintain the granularity of

assumptions around the risk drivers (currently in BIPRU 12.5).

However this will be incorporated in the firm-specific stress

test requirement.

Overview of regime

PRA’s expectations of firms

Overall liquidity adequacy rule

5.20 The LCR is a Pillar 1 standard, ie it is a set of measures

that applies to all firms in the same way. As such it could fail

to capture some important sources of liquidity risk for

particular firms. The LCR also does not measure whether firms

have in place adequate systems and processes for managing

liquidity risk. It follows that a firm cannot only rely on

meeting the LCR in order to be confident that it is

appropriately resilient to liquidity risk. Firms must ensure that

their liquidity and funding risks are comprehensively captured

and managed. The PRA sets this as a requirement through its

overarching rule, OLAR.

5.21 The PRA views firms’ responsibilities with regard to OLAR

to be of paramount importance. Underlying OLAR is the PRA’s

expectation that firms manage their liquidity risk prudently

and take responsibility themselves for doing so.

5.22 Quantitative requirements should encompass liquidity

needs across all time horizons in severe but plausible stresses,

for all relevant risk drivers.

5.23 Qualitative requirements cover the need for robust

governance, strategies, policies, systems and processes,

transfer pricing, collateral management, funding

diversification, market access and funding plans, in order to

identify, measure, manage and monitor liquidity risk over

meaningful time horizons. All of these must be tailored to the

firm. Qualitative requirements also include the requirement

for firms to prepare a liquidity contingency plan, which should

be informed by the results of firms’ liquidity stress testing.

20 CRD IV: Liquidity November 2014

(1) CRD Article 86 (‘Liquidity risk’) requires that competent authorities ensure that firms

have in place ‘robust strategies, policies, processes and systems’ for managing their

liquidity risk, including in respect of several important specific aspects of liquidity risk

management, including stress testing and liquidity recovery plans.

Internal Liquidity Adequacy Assessment Process

5.24 Firms are required to document their assessment of

overall liquidity adequacy and their compliance with the ILAA

rules. The document is referred to as the ILAAP document. It

serves two main purposes:

• it provides the management body with all qualitative and

quantitative information necessary to approve the risk

appetite,(1) including a description of the systems, processes

and methodologies for measuring and managing liquidity

risk; and

• it provides a basis for the PRA’s supervisory assessment of

the firm’s overall approach to liquidity management.

Stress testing

5.25 Firms’ own stress testing remains the primary

quantitative component of the overall liquidity adequacy

assessment. Requirements and expectations are broadly

unchanged compared to BIPRU 12, however the PRA proposes

some changes with regard to risk drivers, set out below.

5.26 As explained in paragraph 5.18, there will no longer be a

standardised stress test of the type articulated in BIPRU 12.5.

The PRA proposes to move the rules requiring analysis of the

risk drivers from BIPRU 12.5 so that they sit within the

requirements for firms’ own stress tests. While BIPRU 12.5 will

cease to apply, the PRA views it as desirable to maintain the

granularity and common language that the risk drivers have

brought to the process of managing liquidity risk, and so this is

captured in the draft supervisory statement.

5.27 The complete list of risk drivers contained in the draft

supervisory statement combines the risk drivers listed in the

EBA SREP guidelines and some additional risk drivers listed in

the proposed rules. Firms should refer to the draft supervisory

statement for a full list of risk drivers and analyse whether

these are relevant to them. Firms should note that the PRA

has enhanced the suite of risk drivers in the proposed rules to

incorporate analysis of internalisation risk, where applicable to

the firm.(2)

5.28 Question: The PRA invites, in particular, comments on

the proposed risk driver on internalisation risk.

Asset encumbrance

5.29 The rule around the management of asset encumbrance

was recently added to BIPRU 12 and the rule will be carried

forward in substance.(3) The requirement on firms to identify,

monitor and manage the risks associated with asset

encumbrance to within reasonable parameters will therefore

continue to apply.

Liquidity Supervisory Review and Evaluation Process

5.30 The L-SREP builds upon the process known as the PRA’s

Supervisory Liquidity Review Process under BIPRU 12, and is a

process consistent with the EBA SREP guidelines.

5.31 The draft supervisory statement in Appendix 1 provides

information on the PRA’s approach:

• to assessing whether firms have adequately covered their

risks (replacing sections of BIPRU 12.9 primarily, also 12.2

and 12.5);

• to setting additional liquidity requirements (replacing

BIPRU 12.5 and 12.9); and

• when firms fall below the level of quantitative individual

liquidity guidance (replacing sections of BIPRU 12.9).

5.32 With regards to the last point, the information provided

in the draft supervisory statement will replace the information

in the PRA’s legacy supervisory statement SS4/13 ‘Liquidity

and capital regime for UK banks and building societies:

adjustments in relation to FPC statement’.(4) The information

on liquidity in SS4/13 is specific to the BIPRU 12 regime and

will cease to apply when BIPRU 12 is revoked.

5.33 As mentioned above, the proposed ILAA rules contained

in Appendix 2.A no longer specify the criteria of a standardised

stress test of the type articulated in BIPRU 12.5. In due course,

the PRA may undertake standardised stress tests to assess

risks not captured under the LCR, as a cross-check on the LCR

and to support cross-firm analysis.

5.34 The standardised stress tests will be based on the

LCR reporting templates and the AMMs, which may need to be

augmented with further reporting. The PRA will conduct a gap

analysis: additional data may be necessary.

Setting individual liquidity guidance

5.35 Following the L-SREP, the PRA will give firms liquidity

guidance, advising a firm of the amount and quality of liquid

assets which the PRA consider are appropriate, having regard

to the liquidity risk profile of the firm. The draft supervisory

CRD IV: Liquidity November 2014 21

(1) The PRA expects firms to articulate for themselves the amount of risk they are

willing to take across different business lines to achieve their strategic objectives.

This risk appetite should be consistent with the PRA’s objective, and the firm should

pay appropriate attention to identifying, measuring and controlling risks, including

those arising in unlikely but very severe scenarios. Please also see The Prudential

Regulation Authority’s approach to banking supervision, June 2014;

www.bankofengland.co.uk/publications/Documents/praapproach/

bankingappr1406.pdf.

(2) Internationalisation risk occurs where firm or customer long positions are funded

using the proceeds from customer short trades. See paragraph 2.8(xiv) of the draft

supervisory statement for a detailed definition.

(3) PRA Policy Statement PS4/14, ‘Responses to CP5/14’, May 2014;

www.bankofengland.co.uk/pra/Documents/publications/ps/2014/ps414.pdf.

(4) PRA Supervisory Statement SS4/13, ‘Liquidity and capital regime for UK banks and

building societies: adjustments in relation to interim FPC statement’, April 2013;

www.bankofengland.co.uk/pra/Pages/publications/adjustmentstothepra.aspx.

statement outlines in more detail what a typical guidance

would contain.

5.36 The PRA will review its proposed quantitative

assessment framework, including its interim Pillar 2 approach,

at a later date. This review will consider the PRA’s approach to

trapped liquidity between different group entities and

elements set out in the Delegated Act which require the PRA

to take specific actions.

Managing HQLA buffers

5.37 Firms are reminded of their obligations to integrate fully

the operational requirements set out in Delegated Act

Article 8 in their liquidity and funding risk management when

managing their HQLA buffer.

5.38 These obligations are covered in more detail in the draft

supervisory statement. These cover in particular, but not only,

the ability to demonstrate that:

• The HQLA buffer is appropriately diversified to enable the

firm to monetise HQLAs in a short timeframe without

significant loss of value. Firms are expected to have

appropriate internal limits and controls in place to achieve

this.

• The currency denomination of assets is not an obstacle to

using assets when meeting outflows in a specific currency in

stress. To restrict currency mismatches, Delegated Act

Article 8(6) gives the PRA the option to set limits on the

proportion of net liquidity outflows in a currency that can be

met during stress by holding HQLAs not denominated in

that currency.

• When liquid assets are being held in the held-to-maturity

portfolio, this does not create barriers to a firm’s ability to

monetise these assets. Where appropriate, the PRA may ask

a firm to review its policies and procedures to ensure that it

retains full ability to monetise its HQLA buffer.

5.39 Question: The PRA invites comments on its proposals in

relation to managing the HQLA buffer.

Shari’ah-compliant firms

5.40 The Delegated Act contains a number of derogations

from the eligibility of assets within a firm’s liquidity buffer.

These derogations are only available to firms that are unable

for reasons of religious observance to hold interest-bearing

assets. The PRA expects that firms that currently qualify as

Shari’ah-compliant — as per the Glossary of definitions in the

PRA Handbook — would be eligible to benefit from these

derogations. The general and operational requirements stated

in Delegated Act Articles 7(6) and 8(6) may require these firms

to apply judgement in determining whether they meet these

requirements. The draft supervisory statement (Appendix 1)

sets out the PRA’s expectations in relation to these

requirements.

Pre-positioning

5.41 The PRA, in line with the wider Bank of England,

encourages participating firms to pre-position sufficient

eligible collateral with the Bank of England at all times, to

ensure they are able to draw under the Discount Window

Facility (DWF) quickly and smoothly should the need arise.

Firms are advised to pre-position eligible collateral at least a

day before a drawing. In particular, firms seeking to

pre-position loan collateral or own-name securitisations are

advised to do so well in advance, given the longer time

required to pre-position more complex assets.(1)

5.42 A firm can count assets pre-positioned at the Bank of

England to meet the PRA’s quantitative individual liquidity

guidance, if these assets are eligible for inclusion in the

HQLA buffer under the Delegated Act. If pre-positioned assets

are not eligible for inclusion in the HQLA buffer, they cannot

be used to meet the PRA’s quantitative liquidity guidance.

22 CRD IV: Liquidity November 2014

(1) Bank of England, ‘The Bank of England’s Sterling Monetary Framework’, updated

November 2014 (‘Red Book’), paragraphs 63 (ILTR) and 75 (DWF);

www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf.

Section III:

EIements of the new regime not

covered by EU legislation

6.1 This chapter sets out the PRA’s proposed approach to the

treatment of UK-designated investment firms,(1) given that the

Delegated Act only applies to credit institutions.

6.2 The PRA currently requires that UK-designated

investment firms be subject to the same liquidity regime as

PRA-authorised credit institutions, on the basis that a wide

variety of business models can be adversely affected by the

same liquidity stress event (as demonstrated in the recent

financial crisis). CRR Article 412(5) provides Member States

with the discretion to apply national provisions for liquidity

requirements before binding standards are fully introduced in

the EU. CRR Articles 6(4) and 11(3) also provide Member

States with discretion to exempt investment firms from the

liquidity provisions of CRR Part 6.

6.3 CRR Article 508(2) mandates the European Commission

to report on whether and how the LCR should apply to

investment firms and following the submission of that report,

to submit a legislative proposal (if deemed appropriate).

Following the conclusion of the European Commission review,

the PRA will review the appropriateness of its proposed regime

for UK-designated investment firms.

6.4 The PRA assesses that there would be benefits in applying

the same liquidity regime to UK-designated investment firms

as for credit institutions. In particular, an identical liquidity

regime provides greater transparency over the availability of

liquidity resources across a mixed banking group, which in turn

supports more effective supervision by the PRA over these

groups for liquidity purposes. A cost benefit analysis of the

PRA’s proposed regime, including for UK-designated

investment firms, is presented in Chapter 9. The PRA notes

that, if the European Commission review results in a different

regime for investment firms, this may result in UK-designated

investment firms incurring costs in order to make the

transition to the new regime.

6.5 The proposed rules are contained in Appendix 2.C.

Proposals

Application of the LCR to investment firms

6.6 As noted above, the Delegated Act will apply directly to

credit institutions. But it will not apply to investment firms.

The PRA proposes to set the same requirements for

UK-designated investment firms as for UK banks and building

societies. To achieve this outcome, the PRA proposes to make

a rule by which UK-designated investment firms will be

subject to the obligations stated in the Delegated Act, with

any necessary amendments, to bring their obligations fully

into line with those applying to UK banks and building

societies.

Level of application of the LCR for investment firms

6.7 The PRA proposes that PRA-designated investment firms

comply with the obligations laid down in the Delegated Act on

an individual and on a consolidated level in line with the

general level of application of the liquidity requirements in

CRR Part 6.

6.8 Where the PRA is the consolidating supervisor and the

consolidation group includes investment firms which may be

subject to different national liquid assets buffer requirements,

for the purpose of calculating the liquidity coverage ratio on a

consolidated basis, the definitions of liquid assets and the

outflow and inflow rates laid down in the Delegated Act

should be used.

Reporting of the LCR by investment firms

6.9 Under CRR Part 6, Title II (liquidity reporting),

UK-designated investment firms are required to report the

current COREP LCR return. The EBA is developing an updated

version of the COREP LCR template, in order to ensure

alignment between the provisions of the Delegated Act and

the reporting obligations stipulated in CRR Part 6, Title II.

6.10 However, this could result in UK-designated investment

firms being required to submit both the original and new

versions of the COREP LCR return.(2) The PRA is proposing in

this consultation to make rules which would avoid this

potential situation. If it is clarified at a later date that the new

LCR template will replace the original LCR template for

investment firms, these rules will not be necessary.

6.11 Specifically, the PRA proposes to exercise the discretions

contained in CRR Articles 6(4) and 11(3) to exempt

UK-designated investment firms from the application of

CRD IV: Liquidity November 2014 25

(1) See footnote 3 on page 5 for a definition of UK-designated investment firms.

(2) The dual reporting requirement arises because, first, the provisions of CRR Part 6

Title II require that UK investment firms continue to report the original LCR template;

and second, because the PRA proposes that UK investment firms report against the

updated version of the COREP LCR template, as this will reflect the provisions of the

Delegated Act.

6Investment firms

CRR Part 6, Title II (liquidity reporting) and Title III (reporting

on stable funding), and to make a rule requiring UK-designated

investment firms to submit the updated COREP LCR return as

well as the additional liquidity monitoring metrics and the

stable funding return. This will ensure that UK-designated

investment firms are held to only one set of COREP reporting

requirements (the updated version).

6.12 The PRA’s proposal to exercise the discretions contained

in CRR Articles 6(4) and 11(3) is based on a consideration of

the conditions contained in both Articles, namely that

competent authorities should take account of the ‘nature,

scale and complexity’ of the investment firms’ activities. On

the basis that the designation of investment firms for

regulation by the PRA involves a consideration of their nature,

scale and complexity,(1) the PRA judges that it would be

proportionate to exempt these firms from the provisions of

CRR Part 6 Titles II and III, so that the PRA can apply a

requirement that these firms report the new COREP LCR

returns. The PRA would update the announcement made in

PRA CP05/13, in which the PRA stated its intention not to

apply the discretions contained in CRR Articles 6(4)

and 11(3).(2)

6.13 The PRA’s proposal only applies in the context of the

PRA’s approach to setting a reporting requirement for

UK-designated investment firms under the LCR: it does not

impact on the wider CRR requirements as these apply to

investment firms.

26 CRD IV: Liquidity November 2014

(1) PRA Statement of Policy, ‘Designation of investment firms for prudential supervision

by the Prudential Regulation Authority’, March 2013;

www.bankofengland.co.uk/publications/Documents/other/pra/designationofinvestm

entfirms.pdf.

(2) PRA Consultation Paper CP5/13, ‘Strengthening capital standards: implementing

CRD IV’, August 2013;

www.bankofengland.co.uk/pra/Documents/publications/cp/2013/cp513.pdf.

7.1 This chapter outlines the PRA’s proposed treatment of

UK branches of third country firms that are either banks or

designated investment firms (‘relevant third country firms’)

under the PRA’s new liquidity regime.

7.2 The CRR does not apply to relevant third country firms.

7.3 In September 2014, the PRA published its approach to the

supervision of branches of international banks (PS8/14(1) and

SS10/14)(2). Under this new approach, non-EEA branches that

fall outside the PRA’s risk appetite will not be allowed to

operate in the United Kingdom.(3) The proposed liquidity

regime for UK branches of non-EEA credit institutions is

aligned with this approach.

Proposals

7.4 The CRR does not apply to relevant third country firms.

As BIPRU 12 is revoked, its requirements (OLAR, for example)

will no longer apply to branches. However, the PRA proposes

that relevant third country firms with UK branches be subject

to a requirement to provide liquidity information on a

whole-firm basis.

7.5 The PRA proposes to treat UK branches of EEA banks or

designated investment firms that have their head office

outside the EU(4) in the same way as UK branches of relevant

third country firms. This will apply until the EEA Agreement

has been amended by the EEA Joint Committee with a view to

permitting simultaneous application of the CRR liquidity

standards in the EEA States (as explained in paragraph 1.9).

7.6 The proposed rules are contained in Appendix 2.D.

Reporting for UK branches of third country firms

7.7 The proposed liquidity regime in respect of UK branches of

relevant third country firms is intended to ensure that the

PRA has:

• assurance that the firm has adequate liquidity, consistent

with the PRA’s safety and soundness objective; and

• information on a firm’s liquidity which is broadly equivalent

to the information it receives on UK branches of EU firms

that fulfil the provisions of CRD Article 158(2).

7.8 The PRA proposes that all relevant third country firms

with UK branches that come within the PRA’s risk appetite be

required to submit liquidity data on a whole-firm basis. These

firms will be required to submit a subset of the COREP

liquidity reports, specifically the updated LCR template and

contractual maturity ladder return. The PRA will require firms

to submit this information in eXtensible Business Reporting

Language (XBRL) format, consistent with the format adopted

for the submission of the wider suite of COREP returns.

7.9 The PRA proposes that firms be required to submit these

returns on a monthly basis, and that firms report the specified

returns in a single, consolidated currency. PRA supervisors

may ask firms to provide a currency breakdown if they have

concerns over the convertibility of a specific currency that a

firm has material business in, or if the PRA’s supervisory

approach requires the firm to report against all of its material

currencies.

7.10 The PRA will consider applications on a case-by-case

basis, in relation to the following aspects of the reporting

requirement placed on relevant third country firms operating a

UK branch:

• Scope of liquidity information: firms may apply to submit

their liquidity information on a consolidated group basis,

rather than at the default whole-firm level, if they can

demonstrate to the PRA that their home state liquidity

requirements are set at a similar level.

• Frequency of liquidity reports: firms may apply to submit

their liquidity information on a less frequent basis than the

default monthly requirement. The PRA will take a range of

factors into account when making a final decision on any

individual application, including considering the firm’s

relative systemic importance and its liquidity risk profile.

CRD IV: Liquidity November 2014 27

(1) PRA Policy Statement PS8/14, ‘Supervising international banks: the Prudential

Regulation Authority’s approach to branch supervision’, September 2014;

www.bankofengland.co.uk/pra/Documents/publications/ps/2014/ps814.pdf.

(2) PRA Supervisory Statement SS10/14, ‘Supervising international banks: the Prudential

Regulation Authority’s approach to branch supervision’, September 2014;

www.bankofengland.co.uk/pra/Documents/publications/ss/2014/ss1014.pdf.

(3) Where the PRA would not be content with a firm operating as a branch in the

United Kingdom in view of its lack of home state equivalence and/or the level of

assurance over resolution, or where the PRA would not be content with a firm

undertaking critical economic functions while operating as a branch in the

United Kingdom.

(4) Namely, UK branches of third country firms that are either banks or designated

investment firms with their head office in Iceland, Liechtenstein and Norway.

7UK branches of third country firms

Firms wishing to apply for a specific permission to modify

these requirements should submit a formal application

through the PRA waiver process.

7.11 The PRA expects the incremental costs of these proposals

to be low, and that they will be driven mainly by changes to

firms’ reporting systems. The majority of UK branches of

relevant third country firms currently opt out of

self-sufficiency (the default requirement under the PRA’s

current liquidity regime for both UK branches of EEA banks

and non-EEA banks). Instead these firms hold a WFLM, which

requires them to provide liquidity information on a whole-firm

basis. In this respect, the proposed new regime is not

significantly different to the current situation, in practice.

7.12 However, the incremental cost impact for relevant third

country firms may be greater than for PRA-regulated

UK incorporated firms, due to the costs associated with

creating data according to the LCR. Chapter 9 of this CP

contains more information on the cost benefit analysis of the

proposed regime for relevant third country firms with

UK branches.

7.13 The main benefit of the proposed regime is that it would

facilitate greater comparability of liquidity information across

firms supervised by the PRA, as the population of

PRA-regulated firms would be required to submit this

information through the designated COREP returns. This

would allow PRA supervisory teams to conduct a more

effective analysis in relation to a firm’s liquidity risk profile.

7.14 Question: The PRA invites feedback on the potential

costs involved in adjusting IT and reporting systems to meet

the proposed regime.

Transition period for reporting

7.15 Relevant third country firms with branches in the

United Kingdom should not be required to start reporting the

COREP LCR return and contractual maturity ladders at the

same time as firms which are directly subject to the CRR.

Instead, the PRA proposes to give relevant third country firms

a transition period during which to prepare the appropriate

reporting systems. This will apply unless the implementation

date for reporting for firms subject to the CRR is delayed. In

this interim period, firms that hold a WFLM will be required to

continue reporting their existing PRA regulatory returns.

Those firms that are currently required to meet the PRA’s

liquidity requirements at a branch level will continue to be

subject to this self-sufficiency requirement. The PRA expects

firms to re-apply for WFLMs if these expire during the

transition period.

7.16 It is proposed that the transition regime will last for

six months from the date at which the LCR applies. After this

period, the PRA proposes that all relevant third country firms

with branches in the United Kingdom be required to start

reporting the updated LCR template and contractual maturity

ladder return, at whole-firm level. In addition, all such firms

would be required to continue reporting the regulatory returns

FSA047, FSA048, FSA051 and FSA053 in line with the PRA’s

proposals for credit institutions and UK-designated investment

firms detailed in Chapter 3.

Resolution planning

7.17 For a relevant third country firm to operate in the

United Kingdom as a branch, the PRA must have received

assurance over resolution, including the availability of liquidity

in recovery or resolution situations: this is in line with the

PRA’s approach to supervising UK branches of international

banks. The PRA’s standard approach to liquidity supervision of

UK branches of relevant third country firms is therefore to

obtain whole entity liquidity information, and not to require

the relevant third country firms to hold liquidity in their

UK branches.

7.18 However, as the PRA implements its approach to the

supervision of branches of international banks, there may be

instances during the transition stage where there are material

concerns over the level of assurance the PRA has gained from

the home state supervisor over resolution or their liquidity

regime. Even when the approach is fully implemented,

assurance over resolution can change over time. In these

circumstances, the PRA will consider using its powers to

require relevant third country firms to hold liquidity resources

in their UK branch until an appropriate level of assurance is

received. The PRA expects this to be the exception rather than

the norm. It will assess this on a case-by-case basis.

28 CRD IV: Liquidity November 2014

8.1 This chapter outlines the PRA’s proposals with regards to

disclosure requirements relating to the LCR.

8.2 The BCBS published an LCR disclosure template in

January 2014.(1) These standards have not been implemented

through CRD IV. The BCBS proposed an implementation date

of 1 January 2015, although this was based on the LCR being

adopted as a regulatory requirement on the same date. The

LCR will only come into effect on 1 October 2015 in the EU.

8.3 An EBA working group is currently in the process of

designing revised COREP templates for reporting the LCR as it

is specified in the Delegated Act.(2) There is a number of

places where definitions are not yet fully standardised. It is

only when firms start reporting their LCR according to the

revised COREP templates that the PRA can begin to have

some assurance that any LCR figures firms choose to disclose

will be calculated using standardised definitions and

calculation methods. Any earlier disclosure would be based on

firms’ own definitions and calculations. This would achieve

neither transparency nor comparability. This position is

consistent with the recommendations of the Enhanced

Disclosure Task Force,(3) which has cautioned about premature

disclosure of new regulatory ratios where important elements

of regulation remain subject to change.

8.4 Providing the disclosures set out in the BCBS template

ought to enable market participants to make better

assessments about the liquidity risk management of firms. It

ought, too, to facilitate peer group comparison. As a result,

firms' transparency will be increased. That may in turn

increase the effectiveness of market discipline and support the

PRA’s safety and soundness objective and financial stability.

8.5 However, disclosures enabling market participants to

deduce the use of Bank of England liquidity assistance may

make that assistance less effective and harm the financial

system and the broader economy by undermining confidence.

This is particularly the case if published information frustrates

liquidity assistance being disclosed in an orderly way. These

consequences could threaten the PRA's safety and soundness

objective and be a cause of financial instability.

Proposals

8.6 The PRA recognises that investors expect firms to disclose

some information regarding their performance against

forthcoming regulatory standards, during the period of

transition to these standards. The PRA will not set a disclosure

requirement before the LCR is in effect as a regulatory

requirement, supported by appropriate and reliable

supervisory reporting, in October 2015. For year-end 2014

reporting, and until the PRA has made a decision, firms should

provide a qualitative discussion of how they plan to meet the

LCR.

8.7 Should firms choose to disclose information about their

LCRs, the PRA expects them not to disclose information that

could lead to premature disclosure of covert liquidity

assistance, unless compliance with their legal obligations with

regard to disclosure makes such disclosure unavoidable.

CRD IV: Liquidity November 2014 29

(1) BCBS, ‘Liquidity Coverage Ratio disclosure standards’, January 2014;

www.bis.org/publ/bcbs272.pdf.

(2) The Bank is party to this working group.

(3) Enhanced Disclosure Taskforce, ‘Enhancing the Risk Disclosure of Banks’, 29 October

2012, pages 10 (Recommendation 4) and 31:

www.financialstabilityboard.org/publications/r_121029.pdf.

8LCR disclosure

Section IV:

Cost benefit analysis

9.1 This chapter sets out an analysis of the costs and benefits

of introducing the proposed update to the liquidity regime in

the United Kingdom. This includes evaluating the policy

choices proposed in regard of the national discretions

permitted under the Delegated Act, and further proposals not

covered under the new EU legislation. All numerical

estimates are indicative as they are subject to substantial

uncertainty and highly sensitive to the underlying

assumptions.

9.2 A detailed exposition of the benefits of quantitative

liquidity regulation is available in the EBA’s December 2013

Report(1) and the FSA’s 2007 Discussion Paper.(2) This section

is largely based on the key findings from both papers. It also

draws from the PRA’s 2013 Approach to Banking Supervision

document (‘the approach document’).(3)

1 Analysis of market and regulatory failures

being addressed

What are the market and regulatory failures being

addressed?

9.3 Prudential regulation helps to address market failures that

prevail in the banking industry. The approach document

identifies the following broad categories:

•Information asymmetries mean that firms can

underestimate the cost associated with liquidity stress and

have inadequate liquidity risk management. These

information asymmetries arise because liquidity risk is a

complex area: assessing it requires technical expertise and

access to a wide range of detailed, sensitive data. To some

extent, the problem of information asymmetries arises for

any corporate where ownership and control are separate.

But it is particularly acute in the area of banks’ liquidity

management, due to the opacity of banks’ balance sheets

and the particular challenges of assessing liquidity risk. Even

when data are available, it is very difficult to assess liquidity

risk using statistical techniques, as liquidity crises are low

probability, high impact events.

•A separate collective action problem stems from the

difficulty of ascertaining the liquidity position of a firm.

Investors and depositors may not be able to price a firm’s

liquidity risk correctly, and in a competitive environment

this provides an incentive to underprice the risk: once one

firm has started underpricing, there is no incentive for other

firms to price correctly.

• Information asymmetries are exacerbated by collective

action problems among depositors: all depositors in a

bank might withdraw their deposits at the same time, only

because they all expect other depositors to do the same.

The fear of a bank run is enough to generate a bank run.(4)

• Deposit guarantees and central bank facilities exist to

mitigate this problem. But in turn this generates moral

hazard, as the availability of these guarantees and facilities

reduces firms’ incentives to manage their liquidity risk

prudently.

What are the consequences of these failures?

9.4 The above failures and externalities make banks more

vulnerable to individual or market-wide liquidity stresses (eg a

run on their deposits, or a closure of wholesale markets). In

such situations, they are more likely to resort to asset ‘fire

sales’ — offloading a substantial amount of assets to raise

cash at short notice. This can put downward pressure on the

price of the sold assets to such a degree that firms are unable

to cover their outflows, raising the risk of an individual

institution failing.

9.5 Increased vulnerability at one institution may have

systemic implications: first, asset fire sales increase the risk of

liquidity stress at other institutions as the price of all similar

assets are affected, reducing the ability of other firms to raise

cash from their liquid asset holdings; and second, because loss

of confidence in one institution may quickly spread to others.

9.6 The cost of solving liquidity stresses may be shifted to

public balance sheets, either through the extension of

emergency liquidity assistance, or through injections of capital

to vulnerable institutions.

CRD IV: Liquidity November 2014 33

(1) EBA (2013), ‘Report on impact assessment for liquidity measures under Article 509(1)

of the CRR’, 20 December, page 24;

www.eba.europa.eu/documents/10180/16145/EBA+BS+2013+415+Report+regarding

+LCR+impact.pdf.

(2) FSA Discussion Paper 07/7, ‘Review of the liquidity requirements for banks and

building societies’, December 2007, pages 16–20;

www.fsa.gov.uk/pubs/discussion/dp07_07.pdf.

(3) The Prudential Regulation Authority’s approach to banking supervision, June 2014,

Box 3, page 12; www.bankofengland.co.uk/publications/Documents/praapproach/

bankingappr1406.pdf.

(4) Douglas, W and Diamond, F (2007), ‘Banks and Liquidity Creation: A Simple

Exposition of the Diamond-Dybvig Model’, Richmond Economic Quarterly, Spring,

Vol. 93, No. 2, pages 189–200; www.rich.frb.org/publications/research/

economic_quarterly/2007/spring/pdf/diamond.pdf.

9Cost benefit analysis

What are the benefits of the new legislation and the

proposed transition?

9.7 The purpose of the new legislation is to ensure that

individual firms internalise the true cost of liquidity risk,

thereby reducing the likelihood of individual failure, of

contagion to other firms, and of these private costs being

borne by public balance sheets. The LCR will also enable a

bank to survive a stress period for a few weeks: this provides

authorities time to assess the situation and prepare an

appropriate reaction.

9.8 The proposed transition ensures that the new

requirements imposed on firms do not represent a significant

weakening of banks’ existing standards of liquidity risk

management through the adjustment period. The gradual

nature of the transition path will also allow firms more

flexibility in adjusting their balance sheet structures and

liquidity risk management to the new standard.

2 Scope

9.9 The scope of the proposals includes all UK banks, building

societies and UK-designated investment firms. Firms in these

categories will be required to maintain levels of liquidity

buffers that enable them to meet their liabilities, including in

periods of stress. Firms will be required to comply with the

new regulatory requirements at an individual level, and at a

consolidated level where appropriate.

9.10 Chapter 7 explains the PRA’s proposals for both the

transitional and end-state liquidity regime that will apply to

third country firms in relation to their UK branches when the

LCR comes into effect.

3 Estimating the costs of the discretionary

elements

9.11 The CP focuses on three areas where the PRA has

national discretion. This section considers the potential costs

of each of these in turn.

National discretion to set Pillar 2 requirements

9.12 The PRA proposes to set required amounts of Pillar 2

buffers at a level that reflects material risks not covered by the

LCR — but captured in the current BIPRU 12 regime. As

explained in Chapter 2, the PRA intends to carry across the

relevant add-ons at their current nominal values for each

individual firm. As a result, the proposed transition for Pillar 2

will not involve any extra requirements on firms. As such, an

impact analysis is not required.

National discretion to retain existing quantitative

requirements

9.13 The PRA proposes to revoke the existing liquidity

standards in BIPRU 12 and withdraw firm-specific guidance

contained in firms’ ILGs when the LCR comes into effect

(although individual add-ons will continue to apply, as

detailed in paragraphs 2.11 to 2.13). However, the PRA

proposes to continue with parts of the existing liquidity

reporting until the transition to new reporting requirements is

complete. This will act as a check for supervisors and firms to

ensure that the new regime is adequately capturing all

significant liquidity risks. However, there may be additional

risks and costs from running dual reporting for some time.

National discretion to set the transition path up to

LCR of 100% in 2018

9.14 The PRA proposes to set an initial LCR level of 80% in

2015 and 2016 and 90% in 2017. It would then reach 100% in

2018 as required in the CRR. However, CRR Article 460 allows

for the transition path to start at 60% (Chart 1). Chapter 2

explains why the PRA is proposing a faster transition path.

9.15 This section analyses the costs and benefits of the

proposal. It is structured as follows: it details the rationale

behind the selection of a baseline scenario to assess the

impact of the LCR and the transition period. It then describes

the data used, including uncertainties about the chosen data.

Next, it evaluates likely adjustment strategies at

individual-bank level. Results are then aggregated to the

UK industry level. Finally, this section evaluates the

macroeconomic costs arising from the adjustment, and

highlights potential sources of overestimation or

underestimation of costs.

34 CRD IV: Liquidity November 2014

100

2015 16 17 18

PRA transition (modelled) CRR transition (modelled)

PRA requirement CRR requirement Per cent

LCR comes into effect (October 2015)

Sources: Bank of England and CRR.

(a) The solid lines represent the CRR legal requirement and the proposed PRA transition path.

The dashed lines represent the assumption made in this assessment regarding how banks will

effect the transition in practice: namely that banks will adjust linearly to achieve the binding

requirement on 1 January of each year.

Chart 1 PRA transition path compared to CRR transition

path(a)

The policy baseline scenario

9.16 A baseline scenario is designed as the best possible

projection of the macroeconomic and financial conjuncture,

absent the proposed regulation or policy action. The baseline

serves as a primary point of comparison for all proposed policy

actions.

9.17 The following two counterfactual, hypothetical paths are

used to assess the benefits and costs of the proposed

transition path:

i. a ‘no change’ scenario, where it is assumed that the

current BIPRU 12 regime continues to apply as before and

that the PRA would not apply the LCR. Although not

applying the LCR is legally not an option, this provides an

obvious starting point; or

ii. a ‘CRR path’ scenario, where the PRA applies the lowest

possible transition path allowed by the CRR.

9.18 It would be preferable to assess the costs and benefits of

the proposed changes to a single counterfactual scenario. In

this case, the obvious comparison would be to the CRR path.

However, the CRR path starts at 60% LCR, a level much below

the current average LCR of UK firms. So to use this as the

starting point would imply loosening liquidity requirements for

all UK firms in the early stages of the transition.

9.19 In addition, CRR Article 415(3) allows competent

authorities to keep their own liquidity requirements in place

until the end of the LCR transition period (1 January 2018).

This means that it is appropriate for the PRA to consider the

current UK regime as one valid alternative, for the period of

time where the regime is stricter than the proposed CRR

transition path.

9.20 The cost of the adjustment from the current regime to

the minimum adjustment path allowed in the CRR (the

compulsory element) is evaluated first. The incremental cost

over and above the CRR minimum path of the faster

adjustment path proposed in this CP (the discretionary

element) is evaluated in a second step.

9.21 The existing UK liquidity regime means that most firms

are already holding liquid assets well above the 60% threshold

prescribed by the CRR for 2015. To reflect this, the PRA

proposes a transitional path more in line with the level of

liquid assets UK firms already hold. This transitional path will

contribute to a swifter transition to the LCR and ensure that

all firms continue to hold strong liquidity buffers to face

adverse liquidity shocks, until the transition period is

complete.

9.22 In addition, while there are ongoing costs to maintaining

an existing liquidity buffer, these are lower than the costs of

building up such a buffer in the first place. By contrast, the

benefits of holding a liquidity buffer are identical regardless of

whether the buffer is new or pre-existing. So the PRA’s

proposed transition path — compared to the CRR path — will

ensure that firms do not incur additional costs from having to

rebuild liquidity buffers after a period where looser

requirements applied (which would be the case if the PRA

were to follow the CRR transition path).

9.23 As mentioned in paragraph 1.8, the Delegated Act only

applies to credit institutions. To ensure a consistent approach

to liquidity supervision between UK banks and building

societies and UK-designated investment firms, the PRA

proposes to make a rule which will require UK-designated

investment firms to comply with the obligations laid down in

the Delegated Act. This means that investment firms will be

undergoing the same transition as credit institutions from

BIPRU 12 to LCR. Therefore, the baseline scenarios proposed

here also apply to investment firms.

Data, and dealing with the risk of sample bias

9.24 The simulation is based on data for 80 firms, including

some investment firms. However, the new rules will apply to

just over 200 firms. This means there is a risk that the sample

is not sufficiently representative of the full population of firms.

The following paragraphs explain why the assessment is based

on a restricted sample, and discuss how data from alternative

samples help mitigate concerns about the risk of sample bias.

9.25 The quantitative assessment undertaken for this paper

uses data provided on a voluntary and best-efforts basis by

80 firms, in the context of the Basel Quantitative Impact

study (QIS) undertaken in September 2013. These data are

provided based on the Basel definition of the LCR, and do not

reflect the EU definition agreed in the Delegated Act.(1) It is

likely that the potential HQLA shortfall is overestimated in

this analysis, owing to these differences. In order to improve

the coverage of firms, an alternative would be to use the data

currently reported by UK firms subject to the current regime

and attempt to map this to the EU definition of the LCR.

However, this mapping would be too unreliable and unsuitable

for this impact assessment.

9.26 The 80-firm sample shows a high level of compliance

with the proposed LCR. More than 97% of the firms in the

sample already comply with the initial combined Pillar 1 and

Pillar 2 requirements and just over 12% will need to increase

their LCR through the transition to comply with the end-point

requirement. In addition, the 80-firm sample does not show a

CRD IV: Liquidity November 2014 35

(1) To adjust for the particularities of some domestic banking systems, the Delegated

Act allows a wider range of assets to be eligible for the LCR calculation compared to

the Basel definition. It also includes some additional adjustments on the calculation

of net outflows. However, the impact of these differences depends on each bank’s

business model. The data necessary to undertake a full comparison of the LCR based

on the Basel III definition versus the Delegated Act definition are not yet available.

significant impact on those business models identified by the

EBA as more vulnerable.(1) However, given the partial

coverage of the population of firms that will be subject to the

LCR there is a risk that the business models in the 80-firm

sample are not sufficiently representative of the whole

population.

9.27 Updates of these voluntary data are only used to assess

progress over the period for the banks that report in both

periods: they are not used as the basis for the actual

calculations, owing to smaller sample sizes. In an update of

the QIS with data as at December 2013, the majority of firms

previously recorded as having an LCR below 100% in

September improved their LCR in December. A further

voluntary data sample from June 2014 shows that those banks

with shortfalls in 2013 have continued to make progress to

comply with either the transition path or the end-point

requirement. However, these more recent samples are smaller

and are therefore not entirely comparable with the

September 2013 sample.

Evaluating the cost to firms — micro impact assessment

9.28 This section estimates the private costs to firms of

adjusting their liquidity positions to the PRA’s proposed LCR

transition path, compared to the baseline scenarios outlined

above. The PRA assessed first the costs to banks of adjusting

from the counterfactual scenario (where firms are assumed to

remain on the current regime) to the CRR minimum transition

path (the compulsory element). The PRA subsequently

assessed the incremental cost to firms transitioning to the

slightly faster transition path proposed by the PRA (the

discretionary element).

9.29 Most firms that provided data on a voluntary basis in the

September 2013 QIS met an 80% LCR level already. As a

result, the impact of a transition to 80% LCR in 2015 is small.

9.30 Improvements in LCR positions apparent in the

December 2013 QIS data suggest that banks may be following

a faster transition path than that proposed by the PRA. This

may have been prompted by market and peer pressure to

demonstrate compliance with the forthcoming LCR regulatory

requirement. However, it is not possible to know with

certainty whether this trend will continue. Therefore, it is

assumed here that banks follow the proposed regulatory

transitional path (modelled as per the dashed lines shown in

Chart 1).

9.31 A study by the Bank of England and the Bank for

International Settlements (BIS) of the transition by UK banks

to the BIPRU 12 regime showed that, in response, banks

adjusted both their asset and liability structures, with no

overall impact on balance sheet size.(2) This study found that

UK banks increased the proportion of HQLAs and funding from

more stable non-financial deposits while reducing the

proportion of short-term intra-financial sector loans and

short-term wholesale funding. A related study by the EBA

found that European banks followed a variety of strategies to

maintain the same balance sheet size.(3) These include:

i. replacing non-HQLA assets with HQLAs;

ii. adjusting liabilities only — reducing short-term unstable

funding and increasing long-term funding; or

iii. adjusting the structure of both their assets and liabilities.

The EBA study found that a combination of strategies could

substantially reduce a bank’s adjustment costs.

9.32 Consistent with these two studies, it is assumed that

firms close their shortfall through pursuing a mixed strategy:

it is assumed that firms replace some non-HQLAs with a

mixed portfolio of HQLAs, and that they replace short-term

intra-financial sector funding with longer-term deposits. Both

elements of this strategy contribute equally to reducing firms’

HQLA shortfall. This adjustment strategy might lead to a

conservative estimate as banks might implement other

adjustment strategies at a lower cost (as shown in the EBA

LCR impact assessment), for example by reducing outflows or

by increasing inflows.

9.33 Historical international data on spreads from 2004 to

2012(4) are used to estimate the cost of replacing non-liquid

assets with liquid assets. The higher the quality of an asset,

the lower its yield tends to be: therefore, spreads between

HQLAs and non-HQLAs are usually negative. In particular, in

the data used here, spreads between Level 1 HQLAs and

non-HQLAs range from -400 basis points to -170 basis points.

The maximum observed range of spreads for the HQLA

portfolio is applied in the scenario calculations. For the

liability side it is assumed that firms replace interbank deposits

due within one month (and therefore attracting a 100%

outflow rate), with retail deposits that attract only a 5%

outflow rate in the LCR calculation. Based on historical

averages, it is assumed that this switch costs on average

200 basis points.(5)

36 CRD IV: Liquidity November 2014

(1) EBA, ‘Report on impact assessment for liquidity measures under Article 509(1) of the

CRR’, 20 December 2013, page 12;

www.eba.europa.eu/documents/10180/16145/EBA+BS+2013+415+Report+regarding

+LCR+impact.pdf. In the EU as a whole a greater proportion of European banks from

these categories appears to be affected by larger LCR shortfalls.

(2) Banerjee, R and Mio, H (2014), ‘The impact of liquidity regulation on banks’,

BIS Working Paper No 470; www.bis.org/publ/work470.pdf.

(3) See footnote 1 above.

(4) From Bloomberg and other market data providers; spreads were calculated from

average yields to maturity of Bank of America/Merrill Lynch bonds indices for each

asset category.

(5) Ibid. This spread is an historical average calculated from several studies of European

banks’ data on the cost of terming out debt.

9.34 UK firms are currently close to compliance with an 80%

LCR. If firms maintain current levels of liquidity the proposed

PRA adjustment path will provide them with time to assess a

range of options to either reduce outflows, increase inflows, or

substitute non-HQLAs with HQLAs. By contrast, the CRR

minimum path would take longer to bind, requiring firms to

increase their buffers only from 2016.

9.35 The expected private cost to firms of reaching 100% LCR

is the same under any transitional path, for given spreads

between HQLAs and non-HQLAs, and given the same cost of

adjustment the maturity of liabilities. However, the actual

private cost to firms of adjusting over a longer transition

period may be lower, if the transition gives firms more

flexibility to choose alternative cost-effective adjustment

strategies.

Evaluating the macroeconomic impact

9.36 The macroeconomic impact assumes that banks pass on

to their customers the incremental cost of substituting

non-HQLAs with HQLAs and of replacing short-term

wholesale funding with deposits. It is assumed that the

average unit cost of bank credit rises in line with the cost of

the adjustment strategy outlined. Bank of England banking

sector data for 2013 Q4(1) are used to estimate the amount of

deposits and the total portfolio of loans and other facilities for

UK-resident and overseas customers.(2) Based on these data, it

is estimated that the proportion of loans available for repricing

each quarter is 7.2% of the overall amount of loans

outstanding.

9.37 The ability of banks to pass through those private costs

to their customers might vary depending on the market they

operate in. It is assumed that European banks are largely

compliant with the 60% LCR starting requirement and

dominate European markets: this limits UK firms’ ability to

re-price loans in these markets. It is therefore assumed that

UK firms re-price loans in those markets according to the CRR

minimum transition path described in Chart 1.

9.38 Chart 2 shows the incremental cost of credit using a

linear interpolation (as shown in Chart 1). The relatively small

amount of loans that can be re-priced initially generates

relatively higher pass through in the PRA path. Note that the

scale of the adjustment (in basis points) is very small.

These estimates are in line with those of the EBA LCR

impact assessment.

9.39 The macroeconomic costs of the proposed transition

path arise from the reduced provision of credit and its higher

cost. For consistency with the analysis conducted to evaluate

the costs and benefits of CRD IV,(3) the PRA use the NiGEM

model to evaluate these costs, per unit of credit.(4) The cost

estimates shown in Chart 2 suggest that the costs are

negligible or small and fall within the model’s margin of error.

In the PRA transition path the fall in the level of credit occurs

earlier that in the CRR transition path, but by the end the total

impact on the level of credit is the same in both cases. The

overall level of credit falls by just under 0.18% in both

transition paths compared with the hypothetical baseline of

no LCR transition.

9.40 This very modest impact is in line with the results of the

EBA impact assessment for the United Kingdom. By the end of

the transition, the level of real GDP falls by 0.003% and

0.005% in the CRR and PRA paths respectively, driven by the

higher cost of credit to households and businesses. In the long

run, the higher cost of investment leads to a permanently

lower level of physical capital, and a permanent reduction in

the level of GDP, compared to the hypothetical baseline of no

LCR transition. The initial, short-run fall in real GDP growth is

counterbalanced by a fall in inflation: this reduces Bank rate,

under the assumption that the inflation target remains

unchanged. Therefore, in the long run, the impact on real GDP

growth is negligible.

9.41 Finally, the macroeconomic benefits of the proposed

transition path stem from a higher level of liquidity in the

banking sector, with a positive impact on financial stability

through mitigating the market and regulatory failures

described at the start of the chapter. Here the probability of a

crisis falls by 0.6 basis points in the long run in both

CRD IV: Liquidity November 2014 37

(1) Bank of England M4 and M4 lending, and monetary financial institutions

consolidated balance sheet.

(2) Some studies find that the price of non-financial loans did not respond to the

UK liquidity regulations imposed during the financial crisis (see Banerjee and

Mio (2014)). Given of the international scope of LCR, its proposed application to

both credit institutions and investment firms, and the stronger growth of

non-financial loans compared to when the Banerjee and Mio study was undertaken,

this assessment assumes that banks will recover some of the private costs from their

customers.

(3) PRA Consultation Paper CP5/13, ‘Strengthening capital standards: implementing

CRD IV’, August 2013, Chapter 5;

www.bankofengland.co.uk/pra/Documents/publications/cp/2013/cp513.pdf.

(4) FSA Occasional Paper Series No. 42, ‘Measuring the impact of prudential policy on the

macroeconomy’, May 2012; www.fsa.gov.uk/static/pubs/occpapers/op42.pdf.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2015 16 17 19

CRR

PRA

Cost per unit of credit (basis points)

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Q1 Q1

Sources: Bank of England and CRR.

Chart 2 Cost pass through (per pound lent) under

CRR and PRA transition paths

scenarios.(1) In the case of the PRA path, the maximum

incremental effect on financial stability is reached by the end

of 2015, while in the case of the CRR path this maximum

effect occurs later.

Potential sources of underestimation or overestimation

of costs

9.42 In designing the scenarios, a number of assumptions

have been made which could result in overestimating the

likely cost of the proposed transition path. Other assumptions

may result in underestimating these costs.

Potential sources of overestimation of the costs of the

transition path

9.43 There are a number of assumptions which could make

the assessment carried out above too conservative.

• As mentioned above, the data used to perform this

assessment are based on the Basel definition of the LCR. It

is likely that this results in overestimating firms’ HQLA

shortfall.

• It is assumed that banks adjust to the LCR transition path

partly by replacing some non-liquid assets with

lower-yielding, liquid assets eligible for the LCR. This is the

most expensive adjustment strategy. That said, it was

estimated in the EBA’s impact assessment report that

increasing HQLA holdings was the principal strategy

adopted by firms adjusting to the new standard.(2)

• HQLAs generally carry lower capital risk weights than

non-HQLAs. Therefore, all else equal, firms increasing their

holdings of HQLAs will see their capital ratios rise, which

should reduce their overall funding costs. Funding costs are

also positively impacted by higher investor confidence in

firms which are demonstrating higher levels of liquidity and

better liquidity risk management.

• Given the small size of the shortfall and the diverse level of

compliance to the LCR by European firms, there are

uncertainties about how much competitive constraints bind

on UK firms when repricing loans to overseas customers

(ie in markets where UK firms are likely to be competing

with European firms). The assumption made in

paragraph 9.37 is therefore conservative.

• It is assumed that the size of banks’ loan portfolios remains

constant, and that new lending is generated through ‘churn’

(existing loans are renewed when they mature). Firms

recover the cost of the transition path by repricing these

new loans. However, if loan portfolios were to expand

during the transition period, the costs of the transition to

LCR would be spread out more widely, and therefore

represent a smaller increase per unit of lending.

Potential sources of underestimation

9.44 The following assumptions may result in

underestimating the cost of the transition to LCR.

• Firms might adjust more quickly than required by the PRA,

particularly if there is market or peer pressure to

demonstrate an ability to meet the steady-state LCR

minimum requirement of 100% much sooner than 2018.

A faster adjustment may be more costly: for example, if

firms attempt to lengthen the term of existing sight deposits

over a shorter period of time, they may be forced to seek

types of funding that attract higher outflow rates (in the

LCR calculation) than term retail deposits. However, the

pressure from markets to adjust more quickly is not a direct

response to the LCR transition path being proposed by the

PRA.

• The effect of many banks in many different countries

adjusting to the LCR standard will be to increase the

demand for assets eligible as HQLAs. This could push up the

price of such assets, reducing their yield. That could make

the adjustment from higher-yielding assets to HQLAs more

costly than estimated here. However, increasing the

proportion of HQLAs is one of several possible adjustment

strategies: banks can be expected to choose a combination

of strategies which they deem to be most cost-effective. If

the price of HQLAs was to increase markedly, banks would

adjust strategies accordingly. In addition, the proposed

transition path is spread out over three years, making it less

likely to cause a sudden sharp increase in demand for

HQLAs.

4 Additional compliance costs

9.45 In addition to the costs considered above, firms will need

to adapt their systems to report the required data items

relating to the calculation of the LCR. They will also need to

devote management time to implement the changes, and

ensure staff are adequately trained to manage liquidity risk

reporting under the new regime. UK branches of third country

firms will have to report the LCR of the firm or group they are

legally part of.

9.46 To estimate the incremental compliance costs of the

new regulatory reporting requirements, the PRA used

information from a survey of firms asked to estimate the cost

of COREP and FINREP.(3)

38 CRD IV: Liquidity November 2014

(1) Ibid. This assessment consider only the marginal benefits of liquidity above those

benefits from the current United Kingdom and other elements of CRR and CRD IV

eg capital regulation.

(2) EBA (2013), ‘Report on impact assessment for liquidity measures under Article 509(1)

of the CRR’, 20 December, page 35;

www.eba.europa.eu/documents/10180/16145/EBA+BS+2013+415+Report+regarding

+LCR+impact.pdf.

(3) FSA Consultation Paper CP09/13, ‘Strengthening liquidity standards 2: liquidity

reporting’, April 2009, pages 32–33; www.fsa.gov.uk/pubs/cp/cp09_13.pdf.

9.47 The PRA has extrapolated the above costs to the entire

set of affected firms and across firm types and sizes (Table B).

There are approximately 200 UK banks and building societies

already reporting the LCR through COREP, for which the PRA

has estimated that total ongoing costs will be £36 million,

with a one-off cost of up to £46 million for updating the

systems and filling the new regulatory returns. The nine

investment firms already reporting the LCR are expected to

incur an ongoing cost of £1 million and a one-off cost of

£0.2 million. The PRA estimates that the 23 non-EEA groups

or firms with a branch in the United Kingdom and already

reporting COREP will incur ongoing costs of up to £4 million

and a one-off cost of up to £9 million. And it estimates that

the 42 groups or firms not reporting the LCR and with a

branch in the United Kingdom will incur total ongoing costs of

£8 million and one-off costs of £18 million.

9.48 The PRA does not expect the new regulation to

significantly raise or reduce the costs of entering the

UK banking sector. UK firms are already subject to liquidity

regulation: new entrants already incur costs from setting up

both a compliant liquidity risk management strategy and

adequate reporting.

9.49 The PRA estimates that the additional compliance costs

on smaller firms of the LCR reporting requirements will be

proportionally lower than that of other larger firms because of

the smaller scope of activities conducted by these firms.

5 Effects on competition

9.50 The PRA judges that, overall, there is no material impact

on competition from the PRA’s proposals.

9.51 The proposals in this CP allow for uniform treatment of

all firms with regards to Pillar 1 requirements, thus meeting

both PRA objectives. The proposed transition path for Pillar 2

requirements set out in Chapter 2 of this document reflects a

bank-by-bank approach, and sets specific liquidity risk

management requirements proportional to each firm’s risk

profile. Nonetheless, the PRA will aim to ensure consistency

in its application of the Pillar 2 regime.

9.52 The markets in which the population of affected firms

operate cover products most closely associated with the credit

intermediation process, including: deposit-taking, retail and

wholesale lending, and interbank lending. However, the

affected firms also operate in a number of other markets for

similar or complementary products such as: venture

capital/private equity, securitisation, repurchase agreements,

securities lending and borrowing, over the counter derivatives

and asset management. The PRA has not considered a strict

definition of markets in this discussion. A more complete

definition should consider products that perform very similar

functions whether currently used for this purpose or not

(‘imperfect substitutes’), and consider those firms not

currently in the market that could supply these products.

9.53 Non-banks are not captured under the scope of the

regulation and are included in this empirical assessment.

However banks compete successfully with non-banks in

certain markets. Given the negligible private costs that the

banking industry will incur when complying with the LCR in

the United Kingdom, it is not expected that competition with

non-banks will have any additional impact.

9.54 Non-UK firms will also need to comply with 100% LCR

by 2018. However, their chosen transition paths may be

different to that chosen by the United Kingdom. In the

United States, firms are expected to be compliant with a

100% LCR (on the US definition) by 1 January 2017 — a faster

transition path than that proposed by the PRA in this CP.

Similarly, Belgium requires compliance with a 100% LCR level

from 1 January 2015, and the Netherlands from October 2015.

Germany on the other hand, is setting an LCR minimum of

60% in 2015. The variety of transition paths chosen by other

countries, including other EU Member States, indicates that

the United Kingdom is not an outlier and suggests that the

effects of the PRA’s transition path on competition with

non-UK firms will be limited in aggregate.

9.55 The PRA is required to consider the competition impact

on UK firms, compared to operating in jurisdictions which do

not apply any form of liquidity regulation. However, all

members of BCBS are implementing the LCR. The BCBS is

currently reviewing members’ progress with implementation

through its Regulatory Consistency Assessment Program

(RCAP).(1)

9.56 Because the transition is binding on a subset of firms

only, those firms might resort to strategies that affect their

business models (for example, by reducing short-term

CRD IV: Liquidity November 2014 39

(1) BCBS, ‘Basel III Consistency Assessment Programme (RCAP)’, October 2013;

www.bis.org/publ/bcbs264.pdf.

Table B Costs to firms of reporting the LCR

Total one-off Total ongoing

costs (£ millions) costs (£ millions)

Firms included in the scope of the CRR for

liquidity reporting 46 36

Banks 40 31

Building societies 6 5

Additional firms required by the PRA to report the LCR 27.2 13

Investment firms 0.2 1

Non-EEA groups or firms with a branch in the United Kingdom

and where another entity reports already the LCR 9 4

Non-EEA groups or firms with a branch in the United Kingdom

and where no other entity reports the LCR 18 8

Total 73.2 49

outflows and increasing short-term inflows). This could have

unpredictable impacts on competition, but given the shortfalls

are small any impact related to such a change is likely to be

small too.

6 Impact on Shari’ah-compliant firms

9.57 Delegated Act Article 12(1)(f) allows firms which are

unable to hold interest-bearing assets for reasons of religious

observance to include non-interest bearing assets in their

liquidity buffer, provided these assets meet certain criteria.

9.58 The PRA expects that firms that meet the current

definition of Shari’ah-compliant will be eligible for this

treatment. The categories of eligible assets and haircuts that

apply to these firms under the Delegated Act are not

significantly different from the current PRA liquidity regime for

Shari’ah-compliant firms. As a result, the PRA does not expect

any major cost increase or changes in the composition and

liquidity of the HQLA buffer of Shari’ah-compliant firms from

these changes.

40 CRD IV: Liquidity November 2014

Appendices

1 Draft supervisory statement — The PRA’s approach to supervising liquidity and funding risk

2 Draft rules

2.A CRR Firms: Internal Liquidity Adequacy Assessment Instrument [Year]

2.B CRR Firms: Liquidity Coverage Requirement — Transitional Provision Instrument [Year]

2.C CRR Firms: Liquidity Coverage Requirement — UK-Designated Investment Firms Instrument [Year]

2.D Non-CRR Firms: Liquidity Reporting Instrument [Year]

2.E Liquidity Standards Consequential Instrument [Year]

3 Mapping of BIPRU 12 rules to the ILAA Part of the PRA Rulebook

Draft supervisory statement — The PRA’s

approach to supervising liquidity and funding

risk

1 Introduction

1.1 This supervisory statement is aimed at firms to which

CRD IV(1) applies. The introduction of CRD IV and the recent

consultation by the European Banking Authority (EBA) on new

guidelines for the Supervisory Review and Evaluation Process

under Directive 2013/36/EU Article 107(3)(2) (‘EBA SREP

guidelines’) have prompted the Prudential Regulation

Authority (PRA) to review its approach to liquidity and funding

risk. By clearly setting out its approach, the PRA enables firms

to understand its expectations of them: this helps the PRA

meet its safety and soundness objective. It also helps to

ensure that the PRA’s resources are used efficiently.

1.2 The European Commission delegated act to supplement

EU Regulation (EU) No 575/2013 with regard to the liquidity

coverage requirement for credit institutions (‘Delegated Act’)

will apply from 1 October 2015.(3) This legislation will be

directly applicable in the United Kingdom.

1.3 This statement supplements the requirements in the

Delegated Act, which specifies in detail the liquidity coverage

requirement (LCR) provided for in Article 412 (1) of Regulation

(EU) No 575/2013 (CRR). It provides further detail in relation

to the high-level expectations outlined in the PRA’s approach

document.(4) The supervisory statement sets out the PRA’s

expectations in relation to firms’ management of their

liquidity and funding risks. In particular, the supervisory

statement explains the PRA’s expectations in relation to the

requirements contained in the Internal Liquidity Adequacy

Assessment Part of the PRA Rulebook (ILAA rules).

1.4 The Delegated Act only applies to credit institutions.

UK-designated investment firms must comply with the

obligations laid down in the Delegated Act as they apply to

credit institutions, by virtue of rule 2.1 of the UK-designated

investment firms Part of the PRA Rulebook. They should read

references in this statement to the Delegated Act accordingly.

1.5 The PRA is required under CRD IV to apply the Liquidity

Supervisory Review and Evaluation Process (L-SREP) and any

supervisory measures in accordance with the level of

application of the requirements set out in CRD IV. Therefore,

the ILAA rules, including the requirement to carry out an

Internal Liquidity Adequacy Assessment Process (ILAAP),

applies on an individual basis and on a consolidated basis

where firms must comply with CRR Part 6 (Liquidity) on a

consolidated basis. This enables the PRA to carry out an

L-SREP and to apply supervisory measures at both individual

and consolidated level where appropriate.

1.6 The PRA’s approach is informed by the forthcoming

EBA SREP guidelines. The PRA expects firms to have regard to

the detail contained in Titles 8 and 9 of the EBA SREP

guidelines to understand the PRA’s expectations of them, in

respect of liquidity and funding risk management. The rules

should be read in conjunction with the supervisory statement

and the EBA SREP guidelines, to gain a full understanding of

the updated liquidity regime and of the PRA’s expectations of

firms.

1.7 This supervisory statement also sets out how the PRA will

set individual liquidity guidance(5) as part of the new regime

and details transitional arrangements regarding Pillar 2

requirements. It also addresses the PRA’s expectations of

firms that fall below their quantitative individual liquidity

guidance, and the treatment of collateral pre-positioned for

use in the Bank of England’s liquidity insurance facilities.

2 PRA expectations of firms’ liquidity risk

management

Overall liquidity adequacy

2.1 The PRA’s approach to liquidity supervision is based on the

principle that a firm must have adequate levels of liquidity

resources and a prudent funding profile, and that it

comprehensively manages and controls liquidity and funding

risk. The firm itself is responsible for the effective

management of its liquidity and funding risk. This overarching

principle is set out in the overall liquidity adequacy rule

(OLAR) in Chapter 2 of the ILAA rules, and supplemented by

Chapter 3 of the ILAA rules on overall strategies, processes

and systems.

2.2 For the purposes of OLAR, liquidity resources are not

confined to the amount or value of a firm’s marketable, or

otherwise realisable, assets. Rather, in assessing the adequacy

of those resources, a firm should have regard to the overall

character of the liquidity resources available to it, which

enable it to meet its liabilities as they fall due.

Appendix 1 1

(1) CRD IV implements the international regulatory framework for banks know as

Basel III in Europe. The legislation comprises two instruments: the Capital

Requirements Regulation (575/2013) (CRR) and the Capital Requirements Directive

(2013/36/EU)(CRD), jointly known as ‘CRD IV’.

(2) European Banking Authority, ‘Guidelines for common procedures and methodologies

review and evaluation process (SREP)’, www.eba.europa.eu/documents/10180/

748829/EBA-CP-2014-14+%28CP+on+draft+SREP+Guidelines%29.pdf. Please note

that these are in the process of being finalised post-consultation. The EBA expects to

issue the final version at the end of 2014.

(3) European Commission: ‘Commission Delegated Regulation (EU) [No…/.. of XXX] to

supplement EU Regulation (EU) No 575/2013 with regard to liquidity coverage

requirement for Credit Institutions’,

http://ec.europa.eu/internal_market/bank/docs/regcapital/acts/delegated/141010_d

elegated-act-liquidity-coverage_en.pdf.

(4) The Prudential Regulation Authority’s approach to banking supervision, June 2014;

www.bankofengland.co.uk/publications/Documents/praapproach/

bankingappr1406.pdf.

(5) Readers should note that when used with capital letters, or as the acronym ‘ILG’, the

term ‘Individual Liquidity Guidance’ refers to the quantitative liquidity requirement

set on firms under BIPRU 12. When used without capital letters, and fully spelt out,

the term ‘individual liquidity guidance’ refers to the more general guidance given to

firms, including qualitative elements.

2.3 The LCR specified by the Delegated Act is distinct from,

and does not replace, the concept of overall liquidity

adequacy. The LCR applies to all firms in scope: it is a set of

rules that apply to all firms and therefore could fail to capture

firm-specific risks. The LCR also does not capture any of the

qualitative arrangements that the PRA requires a firm to

implement to ensure compliance with OLAR. It follows that a

firm cannot rely solely on meeting the LCR in order to satisfy

OLAR.

Internal Liquidity Adequacy Assessment Process

2.4 The ILAA rules include requirements on firms to identify,

measure, manage and monitor liquidity and funding risk across

different time horizons, consistent with the risk appetite

established by the firm’s management body. A firm must

carry out an ILAAP in accordance with the ILAA rules, and the

ILAAP should be proportionate to the nature, scale and

complexity of the firm’s activities, as set out in Chapter 13 of

the ILAA rules. As part of the ILAAP, the firm should undertake

a regular assessment of whether its liquidity resources are

sufficient to cover the major sources of risk to the firm’s ability

to meet its liabilities as they fall due. Central to this process is

an appropriate and clearly articulated risk appetite defining

the duration and type of stress that the firm aims to survive.

The ILAAP should be recorded in a document (ILAAP

document). This should be updated annually by the firm, or

more frequently if changes in the business, strategy, nature or

scale of its activities or operational environment suggest that

the current level of liquidity resources or the firm’s funding

profile is no longer adequate.

2.5 The PRA will take into account the criteria referred to in

the forthcoming EBA SREP guidelines when reviewing a firm’s

ILAAP document and assessing a firm’s compliance with OLAR.

In particular, the PRA expects a firm to demonstrate in its

ILAAP document that it complies with the requirements

outlined in paragraphs 2.6 to 2.13 below.

Stress testing

2.6 Comprehensive, robust stress testing is a vital component

of ensuring compliance with OLAR rule. The PRA expects

firms to consider in their stress testing the impact of a range

of severe but plausible stress scenarios on their cash flows,

liquidity resources, profitability, solvency, asset encumbrance

and survival horizon. Stress scenarios should be selected to

reveal the vulnerabilities of the firm’s funding, including for

example, a vulnerability to previously liquid markets becoming

unexpectedly illiquid. External stress testing scenarios should

include a macroeconomic stress. The PRA expects the degree

of conservatism of the scenarios and assumptions to be

discussed in the ILAAP document.

2.7 In analysing the key risk drivers set out in Chapter 11 of

the ILAA rules, the PRA expects firms to make appropriate

assumptions, both quantitative and qualitative. In particular,

firms should include, where appropriate, the following

assumptions, which are discussed in detail in the EBA SREP

guidelines.

i. The run-off of retail funding

This includes an assessment of the response of different

components of the retail book that share common

features, eg guarantee cover, maturity, interest rate

sensitivity, customer type, product type, deposit size, or

the channel through which they were acquired.

ii. The reduction of secured and unsecured wholesale

funding

This includes an assessment of the type and geographical

location of the counterparty, the level of creditor

seniority, the nature of the relationship the firm has with

the counterparty, the type of underlying collateral (if

applicable), and the speed of outflow. The risk of

shortening tenors should also be assessed.

iii. The correlation, concentration and inadequate

diversification between funding types

Firms should include an assessment that takes into

account instrument type, markets, currency, liability term

structure, counterparty and market access, as appropriate.

Where diversification is sought, its effectiveness should be

considered.

iv. Additional contingent off-balance sheet exposures

Firms should include, where appropriate, an assessment of

derivative cash flows caused by maturity, exercise,

repricing, margin calls, a change in the value of posted

collateral, substitution and sleeper collateral, volatile

market conditions or buy-out requests. Firms should also

consider funding commitments (eg facilities, undrawn

loans and mortgages, overdrafts and credit cards),

guarantees and trade finance contracts, as well as facilities

to support securitisation vehicles, including sponsored and

third-party structures.

v. Funding tenors

Firms should consider vulnerabilities within the term

structure due to external, internal or contractual events

(eg where the funding provider has call options).

vi. The impact of a deterioration in the firm’s credit rating

Firms should consider all types of contractual and

behavioural outflows resulting from credit downgrades of

varying magnitude, the types of collateral which may be

required and the speed of outflow, to the extent

appropriate.

2 Appendix 1

vii. Foreign exchange (FX) convertibility and access to

FX markets

Firms should calculate stressed outflows by individual

currency and tenor where appropriate. This information

must support an assessment of how the shortfalls can be

funded in a stressed market with impaired access to

FX markets and loss of convertibility.

viii. The ability to transfer liquidity across entities, sectors

and countries

Firms should assess the implicit intragroup support

required in stress, or a failure of a group entity to repay

loans in a timely manner, where appropriate. This

assessment should include considering existing legal,

regulatory and operational limitations to potential

transfers of liquidity and unencumbered assets among

entities, business lines, countries and currencies.

ix. Estimates of future balance sheet growth

This should include considering how planned or forecast

balance sheets may behave in stress and whether the

firm’s risk appetite(1) would be breached.

x. The impact on a firm’s reputation or franchise

Firms should include an assessment of implicit liquidity

requirements arising from a need to roll over assets, to

extend or maintain other forms of liquidity support, or to

permit premature termination of retail term or notice

liabilities for reputational reasons or to protect the

franchise, as appropriate. Firms should also bear in mind

that responses to a liquidity stress cannot include actions

that would significantly damage their franchise.

2.8 In addition, the PRA also expects firms to consider, where

appropriate, the quantitative and qualitative assumptions for

the following risk drivers, which are not explicitly addressed in

the EBA SREP guidelines.

i. Intraday risk

Firms should assess intraday liquidity risk, that is, the risk

of timing mismatches arising from direct and indirect

membership in relevant payment or settlement systems.

Firms should ensure that they have sufficient liquidity at

all times to maintain normal payment activity if:

incoming payments are delayed by several hours or until

close to the end of the day; credit lines are withdrawn

and require full collateralisation; or large individual

customers default on their payments. The PRA assesses

that intraday liquidity risk exposures are material for

many firms and firms are expected to demonstrate robust

analysis as outlined above.

ii. Marketable asset risk

Firms should include a consideration of how factors

affecting their ability to liquidate assets or monetise those

through repurchase agreements may change in stress,

where appropriate. This should include market access,

haircuts, timelines, pricing, operational capacity or

eligibility.

iii. Non-marketable asset risk

The PRA defines non-marketable assets as being those

assets which cannot be monetised via repo or outright

sale. They could be monetised, for example, via the

securitisation market or as covered bonds. Firms should

include an assessment of how factors affecting the

liquidity of those assets (eg counterparty stress, whether

market access is frequent and established, early

amortisation triggers, or financing of warehoused assets)

may change under stress.

iv. Internalisation risk

Internalisation risk occurs where firm or customer long

positions are funded using the proceeds from customer

short trades. When clients close out their short positions

and these arrangements unwind, this may generate

substantial liquidity outflows for a firm. Internalisation

and netting efficiencies within synthetic prime brokerage

also give rise to liquidity risk which should be measured

and assessed as part of a firm’s stress testing, where

appropriate.

2.9 Consistent with Chapter 11 of the ILAA rules, the PRA

expects the results of the stress testing exercise to be

presented to the firm’s management body on a regular basis.

Assessment of stress factors which are not specified in

the Delegated Act

2.10 Firms are reminded of their obligation to comply with

the specific requirements of Delegated Act Article 23 when

completing their ILAAP. Article 23 requires firms to undertake

their own regular assessment of the likelihood and potential

volume of liquidity outflows during thirty calendar days, for all

products or services which meet the following two conditions:

• the products or services are not referred to in Articles 27

to 31; and

• firms either offer or sponsor these products or services, or

purchasers would consider these to be associated with the

firm.

Appendix 1 3

(1) The PRA expects firms to articulate for themselves the amount of risk they are willing

to take across different business lines to achieve their strategic objectives. This risk

appetite should be consistent with the PRA’s objective, and the firm should pay

appropriate attention to identifying, measuring and controlling risks, including those

arising in unlikely but very severe scenarios. Please also see The Prudential Regulation

Authority’s approach to banking supervision, June 2014;

www.bankofengland.co.uk/publications/Documents/praapproach/

bankingappr1406.pdf.

Firms should refer to Article 23 of the Delegated Act for

further details, including a non-exhaustive list of such

products. The PRA will assess firms’ individual assessments of

such stress factors at least annually, reach a conclusion

regarding appropriate methodologies, and report these

conclusions to the EBA.

ILAAP governance

2.11 The PRA expects the ILAAP to be the responsibility of a

firm’s management body.(1) The ILAAP document must be

approved by the management body and must meet the risk

appetite approved by the management body and the firm’s

approach for measuring and managing liquidity and funding

risk. The management body is also expected to ensure that

the ILAAP is well integrated into management processes and

the firm’s decision-making culture.

Liquidity contingency plan

2.12 Chapter 12 of the ILAA rules sets out the requirements a

firm needs to meet in relation to its liquidity contingency plan.

In addition, the PRA already requires firms to prepare a

recovery plan.(2) To the extent that the broader recovery plan

addresses the requirements for liquidity contingency plans,

firms do not have to submit a separate liquidity contingency

plan. However, regardless of whether this is addressed in the

liquidity contingency plan, or in the broader recovery plan,

firms’ arrangements should reflect the specific requirements of

good liquidity management, and must be cross-referenced,

where appropriate, in the ILAAP document. In particular, these

arrangements should be informed by the results of firms’

liquidity stress testing. The PRA expects to review these

arrangements as part of its review of firms’ liquidity

management.

Transfer pricing system

2.13 As part of its compliance with Chapter 6 of the ILAA

rules, the PRA expects a firm to ensure that the costs, benefits

and risks relating to liquidity are fully incorporated into firms’

product pricing, performance measurement and incentives,

and new product and transaction approval processes. All

significant business lines should be included, whether on or

off-balance sheet. Both stressed and business as usual costs

should be assessed. The process should be transparent and

understood by business line management, and regularly

reviewed to ensure it remains appropriately calibrated.

3 The Liquidity Supervisory Review and

Evaluation Process (L-SREP)

3.1 Building on previous liquidity reviews and ongoing

supervisory activities, the PRA will carry out an L-SREP. This

process will be consistent with the EBA SREP Guidelines. The

outcome of the L-SREP informs the setting of a firm’s

individual liquidity guidance (see Section 4 below). In carrying

out the L-SREP, the PRA will undertake the following in a

manner which is proportionate to the nature, scale and

complexity of a firm’s activities:

• review the arrangements, strategies, and processes

implemented by a firm to comply with the liquidity

standards laid down in the ILAA rules, CRR Part 6 (Liquidity)

and the Delegated Act. This includes reviewing firms’

COREP liquidity returns;

• evaluate the liquidity risk and funding risks to which the firm

is or might be exposed;

• assess the risks that the firm poses to the financial system;

and

• evaluate the further liquidity and funding risks revealed by

stress testing.

Based on this assessment, the PRA will:

• quantify specific individual liquidity guidance;

• determine specific qualitative individual liquidity guidance;

and

• determine firms’ overall liquidity risk scoring.

The first two bullet points are addressed in Section 4 on

setting individual liquidity guidance.

3.2 The quantitative assessment will review whether the firm

has correctly identified its liquidity needs across appropriate

time horizons in severe but plausible stresses in its ILAAP

document, for all relevant risk drivers.

3.3 The qualitative assessment will review the governance

arrangements of the firm, its risk management culture, and

the ability of members of the management body to perform

their duties. The degree of involvement of the management

body will be taken into account, as will the appropriateness of

the internal processes and systems underlying the ILAAP. The

qualitative review also covers the firm’s risk appetite, liquidity

contingency plans and non-stressed funding plans, collateral

management, the ability to monetise High Quality Liquid

Assets (HQLAs) and wider liquidity in a timely fashion,

intraday arrangements, market access and asset encumbrance.

3.4 The PRA may need to request further information and

meet with the management body and other representatives of

a firm, to evaluate fully the comprehensiveness of the ILAAP

4 Appendix 1

(1) As defined in the PRA Handbook; http://fshandbook.info/FS/html/PRA/Glossary.

(2) PRA Consultation Paper CP13/14, ‘Implementing the Bank Recovery and Resolution

Directive’, July 2014, Annex C;

www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp1314.pdf.

and the adequacy of the governance arrangements around it.

The management body should be able to demonstrate an

understanding of the ILAAP consistent with its taking

responsibility for it. And the management of the firm at

appropriate levels should be prepared to discuss and defend all

aspects of the ILAAP, covering both quantitative and

qualitative components. Additionally, the PRA will consider

the business model of the firm and the advocated rationale for

the model, as well as the firm’s expectations regarding the

future market and economic environment and how they might

affect its liquidity position and funding profile.

3.5 The PRA will review if a firm accurately and consistently

complies with the obligations of the Delegated Act, including

whether a firm is appropriately applying the outflow rates

cited in the Delegated Act.

3.6 The PRA will assess what requirements, beyond that of

meeting the LCR, should be requested of firms as part of the

L-SREP. It may provide further clarification on its quantitative

assessment framework, including for Pillar 2, once the

EBA SREP guidelines have been finalised and the PRA has had

an opportunity to assess them. The EBA SREP guidelines also

ask competent authorities to design generic scenarios and

assumptions and incorporate these into a stress model. This

stress model will be driven off the data supplied in the

Common Reporting (COREP) LCR reporting templates and

additional liquidity monitoring metrics (AMMs), but additional

data may be necessary.

3.7 On the basis of the L-SREP, the PRA will determine

whether the arrangements, strategies, processes and

mechanisms implemented by a firm and the liquidity it holds

provide sound management and adequate coverage of its

risks.

4 Setting individual liquidity guidance

4.1 Following the L-SREP, the PRA will give individual liquidity

guidance, advising a firm of the amount and quality of HQLAs

which the PRA considers are appropriate, having regard to the

liquidity risk profile of the firm. In giving individual liquidity

guidance, the PRA will also advise the firm of what it considers

to be a prudent funding profile for the firm. Compliance with

individual liquidity guidance does not necessarily imply

compliance with OLAR.

4.2 The type of liquid assets that a firm will be allowed to

hold to satisfy the PRA’s individual liquidity guidance will be

no wider than defined in the Delegated Act. Quantitative

guidance will extend beyond the liquidity buffer the firm is

required to maintain under the LCR and will cover liquidity

risks to which the firm is exposed to but which are not

captured by the LCR (Pillar 2 quantitative requirements).

Qualitative guidance will include actions required to mitigate

those risks identified as inconsistent with the PRA’s objectives.

Where appropriate, the PRA may also set specific guidance on

pre-positioning collateral at the Bank of England.

4.3 Typically, individual liquidity guidance given to firms will

cover the following areas:

• whether the quantity of HQLAs held is sufficient;

• whether the quality of HQLAs held is appropriate;

• whether the firm’s funding profile is appropriate; and

• any further qualitative arrangements the firm should

undertake to mitigate its liquidity risk.

4.4 The PRA is adopting an interim Pillar 2 approach based on

firms’ existing Individual Liquidity Guidance (ILG) add-ons.

Where current ILG add-ons relate to risks not captured by the

LCR, the PRA will continue to apply them at the same absolute

amounts as previously, and until the firm’s next L-SREP can be

undertaken. Where a firm needs more clarity on its interim

Pillar 2 add-ons, it should contact its PRA supervisor in a

timely manner.

4.5 The PRA proposes that, in due course, Pillar 2 add-ons be

set separately at both the individual and consolidated levels,

consistent with the level of application of the LCR. Initially

however, the interim ILG add-ons carried over will apply at

both the individual and consolidated levels. This approach will

apply until the firm’s next L-SREP can be undertaken.

4.6 The type of HQLAs held to meet interim ILG add-ons

should be no wider than defined in the Delegated Act and

follow the same composition by asset level as set out in the

Delegated Act. Nonetheless, the quality of HQLAs should be

appropriate to mitigate firm-specific risks(1) and be consistent

with OLAR.

4.7 Delegated Act Article 23 requires competent authorities

to determine outflow rates for those products or services

which are not addressed by the Delegated Act and for which

the likelihood and potential volume of liquidity flows are

material. The PRA will adopt an interim approach to define

material liquidity flows for LCR reporting and determine

appropriate outflow rates for these products or services.

4.8 The PRA will review its proposed quantitative assessment

framework, including its interim Pillar 2 approach, at a later

date. This review will consider the PRA’s approach to trapped

liquidity between and within different group entities and

elements set out in the Delegated Act which require the PRA

to take specific actions.

Appendix 1 5

(1) For example, where the PRA advises a firm of an amount of HQLAs which the PRA

considers appropriate to mitigate intraday liquidity risk, the PRA expects the firm to

be able to liquidate these HQLAs on an intraday basis, as required.

5 Managing the HQLA buffer

5.1 Firms are expected to integrate fully the operational

requirements set out in Delegated Act Article 8 in their

liquidity and funding risk management when managing their

buffer of HQLAs. An important aim of these requirements is

to maintain a firm’s ability to convert HQLAs into cash within

a short timeframe.

5.2 As part of giving individual liquidity guidance, the PRA will

set out its expectations of a firm’s compliance with these

operational requirements and the PRA may also ask a firm to

take specific actions, where appropriate. The PRA’s approach

to evaluating how a firm manages its liquidity buffer will be

adapted to each firm’s size, complexity, business model and

risk management practices.

5.3 The PRA expects firms to consider the cumulative stressed

low point of their cash flows both within the 30-day horizon

and within the context of survival days along the potentially

longer horizon of their own risk appetite. Daily granularity is

necessary for this analysis.

5.4 The PRA expects firms to focus particularly, but not solely,

on the following principles in paragraphs 5.5 to 5.13.

Ability to monetise

5.5 Firms are reminded of their obligation to have in place

appropriate internal investment policies and procedures to

control and monitor the composition of their HQLA buffer.

This also includes having appropriate internal limits and

controls to ensure that their ability to monetise HQLAs in

stress is not limited in any way.

5.6 In particular, while accounting classifications remain

decisions for firms, where firms hold HQLAs in the

held-to-maturity portfolio, they should be able to

demonstrate that this does not create barriers to their ability

to monetise these assets.

5.7 The PRA may ask a firm to review its policies and

procedures to ensure that it retains full ability to monetise its

HQLA buffer (note this will not cover those assets exempt by

Delegated Act Article 8(4) from the requirement to be

monetised periodically). In so doing, the PRA will take a

proportionate approach to assessing the evidence, based on

the firm’s business model.

Diversification of assets

5.8 Firms are reminded of their obligation to have in place

appropriate internal limits and controls to ensure that they

appropriately diversify their HQLA buffer. This should be

sufficient to demonstrate that their ability to monetise HQLAs

in a short time frame without significant loss of value is not

compromised by exposure to a common risk factor. In

addition, the PRA expects larger firms to take into account the

absolute size of their HQLA holdings and to be able to

monetise these without compromising on either speed of

disposal or price and the impact of their actions on the wider

market and on financial stability.

5.9 Firms should have due regard to their own business model

when determining the appropriate level of diversification in

their buffer. In particular, they should consider whether a

particular asset holding exposes them to wrong-way risk.(1)

Conversely, they should also consider whether their choice of

assets is appropriate given their ability to manage properly the

risk in that asset, and to access the relevant repo or sale

market.

5.10 In accordance with Delegated Act Article 8(1), the PRA

may set requirements on a firm to enforce increased

diversification of the HQLA buffer, or conversely to restrict

holdings of particular asset classes. This may include

requirements on a firm’s liquidity management practices or

investment policies. Under CRD Article 103, the PRA may also

restrict holdings of particular asset classes if it observes that

this exposes several firms to a common set of risk factors.

Consistent currency denomination

5.11 Currency conversion is an additional step between

monetising HQLA and using HQLA to meet specific outflows.

Therefore, the PRA will also review whether the currency

denomination of assets is an obstacle to firms using their

assets when meeting outflows in a specific currency in stress.

5.12 The PRA reminds firms that Delegated Act Article 8(6)

gives the PRA, as the competent authority, the option to

restrict currency mismatches by setting limits on the

proportion of net liquidity outflows in a currency that can be

met by holding HQLA not denominated in that currency. The

PRA may apply this discretion through a range of firm-specific

measures, including setting LCRs by currency on significant

currencies (therefore including the reporting currency).

Transferability of funds

5.13 In assessing the stress tests carried out by firms under

Chapter 11 of the ILAA rules, the PRA will review whether a

firm places appropriate emphasis on the risk that, in severely

stressed circumstances, liquidity might not be freely

transferred between and within group entities, across national

borders, as well as between currencies. Consistent with

Chapter 8 of the ILAA rules, the PRA will expect firms to

demonstrate that there are no legal or practical impediments

to the actual flow of liquidity across the firm and, as

appropriate, across the group.

6 Appendix 1

(1) Wrong-way risk is the risk that occurs when exposure to a counterparty is adversely

correlated with the credit quality of that counterparty.

Eligibility of non-interest bearing assets, including

sukuk(1)

5.14 Delegated Act Article 12(1)(f) allows firms to include

non-interest bearing assets in their liquidity buffer, provided

these assets meet certain criteria, and if these firms are unable

for reasons of religious observance to hold interest-bearing

assets, in accordance with their statutes of incorporation. The

PRA expects that this provision will apply to firms whose

entire operations are structured and conducted in accordance

with Islamic commercial jurisprudence and its investment

principles. However, firms should satisfy themselves that their

assets are eligible for inclusion in their HQLA buffers.

5.15 These firms may also benefit from the derogation

available under Delegated Act Article 12 which allows

competent authorities not to apply two specific criteria that

determine the eligibility of corporate debt securities for

inclusion in a firm’s Level 2B HQLA buffer: these two criteria

are the minimum issue size and maximum time to maturity.

The PRA expects that a number of sukuk will meet the

conditions that allow the PRA to exercise this discretion.

Firms that consider they would be eligible to benefit from

these derogations should apply to the PRA for a permission.

5.16 Delegated Act Article 7 requires firms to assess whether a

trading venue provides for an active and sizable market, in

order to confirm that assets that are not listed on recognised

exchanges are tradable via outright sale. In particular, firms

are required to take into account the minimum criteria

specified in Delegated Act Article 7(6)(a) and (b) when making

this assessment. The PRA acknowledges that firms will need

to exercise judgement in deciding whether these criteria are

met in relation to specific assets, including sukuk. It is the

responsibility of firms to satisfy themselves that their assets

are eligible for inclusion in their HQLA buffers. Firms should

contact their PRA supervisor if, after completing their

assessment, they are still unsure whether their assets meet the

requirement stated in the Delegated Act.

5.17 When considering the option of restricting currency

mismatches under Delegated Act Article 8, the PRA will take

into account all relevant considerations: this will include

considerations relevant to firms that, for reasons of religious

observance, are unable to hold interest-bearing assets.

6 PRA’s expectations of firms that fall

below the level of quantitative individual

liquidity guidance

6.1 A firm may use its HQLA buffer to cover its net liquidity

outflows during stress periods, as set out in Delegated Act

Article 4, thereby falling below the applicable LCR. For the

avoidance of doubt, this means that the firm will have already

fallen below the level of assets required to meet any

additional quantitative liquidity guidance that the PRA has

given the firm. Liquidity buffers can and should be used in

times of stress: a firm can fall below the level of HQLAs it is

required to hold under the LCR and still meet the Threshold

Conditions as defined in the PRA’s approach document.(2) The

introduction of the LCR will not lead to a change in that

approach.

6.2 If a firm’s liquidity buffer falls, or is expected to fall, below

the level advised in the individual liquidity guidance, or if a

firm’s funding profile ceases or is expected to cease to

conform to that advised in the individual liquidity guidance, a

firm is expected to notify the PRA immediately. It should then

agree a plan with the PRA setting out the timely restoration of

compliance with the advised guidance. The plan should

include actions documented in the firm’s liquidity contingency

plan. Firms are reminded of their obligations in CRR

Article 414 to notify the PRA immediately where it does not,

or expects not to, meet the applicable LCR.

6.3 Upon receipt of the firm’s plan, the PRA will judge how

rapidly it expects the firm to rebuild its liquidity buffer. In

exercising its judgement, the PRA will take into account both

current and forecast macroeconomic and financial conditions.

The PRA’s response will also be proportionate to the drivers,

magnitude, duration and frequency of the firm’s shortfall. It

will take into account the amount of pre-positioned collateral

at the Bank of England, or the amount available for drawing at

other central banks to which the firm has access.

7 Role of collateral pre-positioned for use

in the Bank of England’s liquidity insurance

facilities

7.1 The Bank of England announced a number of changes to

its liquidity insurance facilities in October 2013.(3) These

changes are designed to increase the availability and flexibility

of liquidity insurance, by providing liquidity at longer

maturities, against a wider range of collateral, at a lower cost

and with greater predictability of access. The certainty with

which a firm can expect to be able to access the Bank of

England’s facilities has been reinforced through a presumption

that all firms that meet Threshold Conditions may sign up for

the Sterling Monetary Framework and have full access to use

the Bank of England’s facilities.

Appendix 1 7

(1) Certificates of equal value representing an undivided interest in the ownership of

specified assets or investments acquired or to be acquired and that comply with

Islamic commercial jurisprudence and its investment principles, but excluding shares.

(2) Firms have to be able to meet their liabilities on an ongoing basis with sufficient

confidence, including in stressed circumstances, consistent with their safety and

soundness, Bank of England, The Prudential Regulation Authority’s approach to banking

supervision, June 2014; www.bankofengland.co.uk/publications/Documents/

praapproach/bankingappr1406.pdf.

(3) Bank of England (2013), ‘Liquidity Insurance at the Bank of England: developments in

the Sterling Monetary Framework’, October; www.bankofengland.co.uk/markets/

Documents/money/publications/liquidityinsurance.pdf.

7.2 The terms of the Bank of England’s liquidity insurance

facilities are set to ensure counterparties have the incentive to

manage their liquidity primarily through private markets in

normal times. Consistent with this, for limited liquidity

shocks, it is appropriate for firms to draw initially on their

holdings of HQLAs. For larger or more severe liquidity

outflows, the Bank of England expects firms to consider using

the Discount Window Facility or other liquidity insurance

facilities alongside, rather than after, using a significant

proportion of their liquidity buffer. As noted in the PRA’s

approach document, the PRA expects firms to have credible

options in their recovery plans for restoring their HQLAs

following firm-specific or market-wide stress.

7.3 A firm can count assets pre-positioned at the Bank of

England to meet the PRA’s quantitative liquidity guidance, if

these assets are eligible for inclusion in the HQLA buffer under

the Delegated Act. If pre-positioned assets are not eligible for

inclusion in the HQLA buffer, they cannot be used to meet the

PRA’s quantitative liquidity guidance.

7.4 The PRA continues to expect firms to have robust levels of

pre-positioning. However, the PRA also acknowledges the

need for flexibility for firms to be able to use these assets to

access market funding. The PRA may set explicit requirements

of firms for pre-positioning where appropriate, and may

provide additional guidance to firms in stress.

7.5 Assets pre-positioned at the Bank of England may be of

varying quality, and some of these assets may have been

monetised. The Bank of England previously stated that it will

let firms know what proportion of their Level A, B and C assets

have been encumbered,(1) but it will not specify which quality

of asset has been monetised first. For reporting purposes,

firms with pre-positioned assets that have been partially

monetised can assume that assets are encumbered in order of

increasing liquidity.

8 Appendix 1

(1) Bank of England (2010), ‘Extending eligible collateral in the Discount Window Facility

and information transparency for asset-backed securitisations’, March, page 5;

www.bankofengland.co.uk/markets/Documents/money/publications/condocmar10.pdf.

Appendix 2.A

Page 1 of 11

PRA RULEBOOK: CRR FIRMS: INTERNAL LIQUIDITY ADEQUACY ASSESSMENT

INSTRUMENT [YEAR]

Powers exercised

A. The Prudential Regulation Authority (“PRA”) makes this instrument in the exercise of the following

powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):

(1) section 137G (the PRA’s general rules); and

(2) section 137T (general supplementary powers).

B. The rule-making powers referred to above are specified for the purpose of section 138G(2) (Rule-

making instrument) of the Act.

Pre-conditions to making

C. In accordance with section 138J of the Act (Consultation by the PRA), the PRA consulted the

Financial Conduct Authority. After consulting, the PRA published a draft of proposed rules and

had regard to representations made.

PRA Rulebook: CRR Firms: Internal Liquidity Adequacy Assessment Instrument [YEAR]

D. The PRA makes the rules in the Annex to this instrument.

Commencement

E. This instrument comes into force on [Date].

Citation

F. This instrument may be cited as the PRA Rulebook: CRR Firms: Internal Liquidity Adequacy

Assessment Instrument [YEAR].

By order of the Board of the Prudential Regulation Authority

[DATE]

Appendix 2.A

Page 2 of 11

Annex

In this Annex, the text is all new and is not underlined.

Part

INTERNAL LIQUIDITY ADEQUACY ASSESSMENT

Chapter content

1. APPLICATION AND DEFINITIONS

2. OVERALL LIQUIDITY ADEQUACY RULE

3. OVERALL STRATEGIES, PROCESSES AND SYSTEMS

4. LIQUIDITY RISK APPETITE AND FUNDING RISK APPETITE

5. INTRA-DAY MANAGEMENT OF LIQUIDITY

6. TRANSFER PRICING SYSTEM

7. MANAGEMENT OF COLLATERAL

8. MANAGING LIQUIDITY ACROSS LEGAL ENTITIES, BUSINESS LINES, COUNTRIES

AND CURRENCIES

9. FUNDING DIVERSIFICATION AND MARKET ACCESS

10. MANAGEMENT OF ASSET ENCUMBRANCE

11. STRESS TESTING

12. LIQUIDITY CONTINGENCY PLAN

13. INTERNAL LIQUIDITY ADEQUACY ASSESSMENT PROCESS

14. APPLICATION OF THIS PART ON AN INDIVIDUAL BASIS AND A CONSOLIDATED

BASIS

15. TRANSITIONAL PROVISION

Links

Appendix 2.A

Page 3 of 11

1 APPLICATION AND DEFINITIONS

1.1 This Part applies to a CRR firm.

1.2 In this Part, the following definitions shall apply:

consolidation group

means the undertakings included in the scope of consolidation pursuant to Articles

18(1), 19(1), 19(3) and 23 of the CRR.

EEA parent institution

means a parent institution in an EEA State which is not a subsidiary of another

institution authorised in an EEA State or of a financial holding company or mixed

financial holding company set up in any EEA State.

EEA parent financial holding company

means a parent financial holding company in an EEA State which is not a subsidiary

of an institution authorised in any EEA State or of another financial holding company

or mixed financial holding company set up in any EEA State.

EEA parent mixed financial holding company

means a parent mixed financial holding company in an EEA State which is not a

subsidiary of an institution authorised in any EEA State or of another financial holding

company or mixed financial holding company set up in any EEA State.

funding risk

means the risk that a firm does not have stable sources of funding in the medium and

long term to enable it to meet is financial obligations, such as payments or collateral

calls, as they fall due, either at all or only at excessive cost.

Internal Liquidity Adequacy Assessment Process (ILAAP)

means the process for the identification, measurement, management and monitoring

of liquidity implemented by the firm in accordance with 3 - 13.

liquidity contingency plan

a plan for dealing with liquidity crises as required by 12.1.

liquidity risk

means the risk that a firm, although solvent, does not have available sufficient

financial resources to enable it to meet its obligations as they fall due.

overall liquidity adequacy rule

means the rule in 2.1.

1.3 Unless otherwise defined, any italicised expression used in this Part and in the CRR has the

same meaning as in the CRR.

Appendix 2.A

Page 4 of 11

2 OVERALL LIQUIDITY ADEQUACY RULE

2.1 A firm must at all times maintain liquidity resources which are adequate, both as to amount

and quality, to ensure that there is no significant risk that its liabilities cannot be met as they

fall due.

2.2 For the purposes of the overall liquidity adequacy rule:

(1) a firm also must ensure that:

(a) its liquidity resources contain an adequate buffer of high quality,

unencumbered assets; and

(b) it maintains a prudent funding profile;

(2) a firm may not include liquidity resources that may be made available through

emergency liquidity assistance from a central bank.

3 OVERALL STRATEGIES, PROCESSES AND SYSTEMS

3.1 As part of the overall liquidity adequacy rule, a firm must have in place robust strategies,

policies, processes and systems that enable it to identify, measure, manage and monitor

liquidity risk and funding risk over an appropriate set of time horizons, including intra-day, so

as to ensure that it maintains adequate levels of liquidity buffers and an appropriate funding

profile. These strategies, policies, processes and systems must be tailored to business lines,

currencies, branches and legal entities and must include adequate allocation mechanisms of

liquidity costs, benefits and risks.

[Note: Art. 86(1) of the CRD]

3.2 The strategies, policies, processes and systems referred to in 3.1 must be proportionate to

the complexity, risk profile and scope of operation of the firm, and the liquidity risk appetite

and funding risk appetite set by the firm’s management body in accordance with Chapter 4

(Liquidity risk appetite and funding risk appetite), and must reflect the firm’s importance in

each country in which it carries on business.

[Note: Art. 86(2) (part) of the CRD]

3.3 A firm must, taking into account the nature, scale and complexity of its activities, have liquidity

risk profiles and funding risk profiles that are consistent with and not in excess of those

necessary for a well-functioning and robust system.

[Note: Art. 86(3) of the CRD]

3.4 A firm must put in place risk management policies to define its approach to asset

encumbrance, as well as procedures and controls that ensure that the risks associated with

collateral management and asset encumbrance are adequately identified, monitored and

managed.

3.5 A firm must ensure that its systems and processes enable it, at the request of the PRA, to:

(1) report the items referred to in Title II and Title III of Part Six of the CRR at least daily;

and

Appendix 2.A

Page 5 of 11

(2) produce and transmit to the PRA any data and information necessary for the purpose

of monitoring the firm’s compliance with this Part.

4 LIQUIDITY RISK APPETITE AND FUNDING RISK APPETITE

4.1 A firm must ensure that:

(1) its management body establishes the firm's liquidity risk appetite and funding risk

appetite and that this is appropriately documented;

(2) its liquidity risk appetite and funding risk appetite is appropriate for its business

strategy and reflects its financial condition and funding capacity; and

(3) its liquidity risk appetite and funding risk appetite is communicated to all relevant

business lines.

[Note: Art. 86(2) (part) of the CRD]

5 INTRA-DAY MANAGEMENT OF LIQUIDITY

5.1 A firm must actively manage its intra-day liquidity positions and any related risks so that it is

able to meet its payment and settlement obligations on a timely basis.

5.2 For the purposes of 5.1, a firm must ensure that its intra-day liquidity management

arrangements enable it:

(1) to meet its payment and settlement obligations on a timely basis under both normal

financial conditions and under the stresses required by 11.3;

(2) to identify and prioritise the most time-critical payment and settlement obligations; and

(3) in relation to the markets in which it is active and the currencies in which it has

significant positions, to measure, monitor and deal with intra-day liquidity risk. A firm

must in particular be able to:

(a) measure expected daily gross liquidity inflows and outflows, anticipate the

intra-day timing of these flows where possible, and forecast the range of

potential net funding shortfalls that might arise at different points during the

day; and

(b) manage the timing of its liquidity outflows such that priority is given to the

firm’s most time-critical payment obligations.

6 TRANSFER PRICING SYSTEM

6.1 A firm must implement an adequate transfer pricing system to ensure that it accurately

quantifies liquidity costs, benefits and risk in relation to all significant business activities.

Appendix 2.A

Page 6 of 11

7 MANAGEMENT OF COLLATERAL

7.1 A firm must actively manage collateral positions.

7.2 A firm must distinguish between pledged and unencumbered assets that are available at all

times, in particular during emergency situations. A firm must also take into account the legal

entity in which assets reside, the country where assets are legally recorded either in a register

or in an account as well as their eligibility and must monitor how assets can be mobilised in a

timely manner.

[Note: Art. 86(5) of the CRD]

8 MANAGING LIQUIDITY ACROSS LEGAL ENTITIES, BUSINESS LINES, COUNTRIES

AND CURRENCIES

8.1 A firm must actively manage its liquidity risk exposures and related funding needs and take

into account:

(1) existing legal, regulatory and operational limitations to potential transfers of liquidity

and unencumbered assets amongst entities, both within and outside the EEA; and

[Note: Art. 86(6) of the CRD]

(2) any other constraints on the transferability of liquidity and unencumbered assets

across business lines, countries and currencies.

9 FUNDING DIVERSIFICATION AND MARKET ACCESS

9.1 A firm must ensure that it has access to funding which is adequately diversified, both as to

source and tenor.

9.2 A firm must develop methodologies for the identification, measurement, management and

monitoring of funding positions. Those methodologies must include the current and projected

material cash-flows in and arising from assets, liabilities, off-balance-sheet items, including

contingent liabilities and the possible impact of reputational risk.

[Note: Art. 86(4) of the CRD]

10 MANAGEMENT OF ASSET ENCUMBRANCE

10.1 A firm must actively manage its asset encumbrance position.

10.2 For the purpose of 10.1 a firm must ensure that:

(1) its risk management policies take into account:

(a) the firm’s business model;

(b) the countries in which it operates;

Appendix 2.A

Page 7 of 11

(d) the macroeconomic situation; and

(2) its management body receives timely information on:

(a) the current and expected level and types of asset encumbrance and related

sources of encumbrance, such as secured funding or other transactions;

(b) the amount, expected level and credit quality of unencumbered assets that

are capable of being encumbered, specifying the volume of assets available

for encumbrance; and

result from stress scenarios.

10.3 For the purpose of this Chapter a firm must treat an asset as encumbered if it is subject to

any form of arrangement to secure, collateralise or credit enhance any transaction.

11 STRESS TESTING

11.1 A firm must consider different liquidity risk mitigation tools, including a system of limits and

liquidity buffers in order to be able to withstand a range of different stress events and an

adequately diversified funding structure and access to funding sources. It must review those

arrangements regularly.

[Note: Art. 86(7) of the CRD]

11.2 A firm must consider alternative scenarios on liquidity positions and on risk mitigants and

must review the assumptions underlying decisions concerning the funding position at least

annually. For these purposes, alternative scenarios must address, in particular, off-balance

sheet items and other contingent liabilities, including those of securitisation special purpose

entities or other special purpose entities, as referred to in the CRR in relation to which the firm

acts as sponsor or provides material liquidity support.

[Note: Art. 86(8) of the CRD]

11.3 A firm must:

(1) conduct on a regular basis appropriate stress tests so as to:

(a) identify sources of potential liquidity strain;

(b) ensure that current liquidity exposures continue to conform to the liquidity risk

and funding risk appetite established by that firm's management body; and

(2) analyse on a regular basis the separate and combined impact of possible future

liquidity stresses on its:

(a) cash flows;

(b) liquidity position;

Appendix 2.A

Page 8 of 11

(d) solvency.

11.4 A firm must consider the potential impact of institution-specific, market-wide and combined

alternative scenarios. Different time periods and varying degrees of stressed conditions must

be considered.

[Note: Art. 86(9) of the CRD]

11.5 In carrying out the liquidity stress tests required by 11.3, a firm must make appropriate

assumptions around the major sources of risk, including the major sources of risk in each of

the following categories where they are relevant to the firm given the nature and scale of its

business:

(1) retail funding risk;

(2) wholesale secured and unsecured funding risk;

(3) risks arising from the correlation between funding markets and lack of diversification

between funding types;

(4) off-balance sheet funding risk;

(5) risks arising from the firm’s funding tenors;

(6) risks associated with a deterioration of a firm’s credit rating;

(7) cross currency funding risk;

(8) risk that liquidity resources cannot be transferred across entities, sectors and

countries;

(9) funding risks resulting from estimates of future balance sheet growth;

(10) franchise risk;

(11) intra-day risk;

(12) marketable assets funding risk;

(13) non-marketable assets risk; and

(14) internalisation risk.

11.6 A firm must ensure that its management body reviews regularly the stresses and scenarios

tested to ensure that their nature and severity remain appropriate and relevant to the firm.

11.7 A firm must ensure that the results of its stress tests are:

(1) reviewed by its senior management;

(2) reported to that firm's management body, specifically highlighting any vulnerabilities

identified and proposing appropriate remedial action;

(3) reflected in the processes, strategies and systems established in accordance with

3.1;

(4) used to develop effective liquidity contingency plans;

Appendix 2.A

Page 9 of 11

(5) integrated into that firm's business planning process and day-to-day risk

management; and

(6) taken into account when setting internal limits for the management of that firm's

liquidity risk exposure.

11.8 A firm must report the results of its liquidity stress tests to the PRA in a timely manner.

12 LIQUIDITY CONTINGENCY PLAN

12.1 A firm must adjust its strategies, internal policies and limits on liquidity risk and funding risk

and develop an effective liquidity contingency plan, taking into account the outcome of the

alternative scenarios referred to in 11.2.

[Note: Art. 86(10) of the CRD]

12.2 The liquidity contingency plan must include strategies to address the contingent encumbrance

resulting from relevant stress events including downgrades in the firm’s credit rating,

devaluation of pledged assets and increases in margin requirements.

12.3 The liquidity contingency plan must also set out adequate strategies and proper

implementation measures in order to address possible liquidity shortfalls, including in relation

to branches established in another EEA State. Those plans must be tested at least annually,

updated on the basis of the outcome of the alternative scenarios set out in 11.2, and be

reported to and approved by the firm's senior management, so that internal policies and

processes can be adjusted accordingly.

[Note: Art. 86(11) (part) of the CRD]

12.4 A firm must take the necessary operational steps in advance to ensure that liquidity

contingency plans can be implemented immediately, including holding collateral immediately

available for central bank funding. This includes holding collateral where necessary in the

currency of another EEA State or currency of a third country to which the firm has exposures,

and where operationally necessary within the territory of an EEA State or third country to

whose currency it is exposed.

[Note: Art. 86(11) (part) of the CRD]

13 INTERNAL LIQUIDITY ADEQUACY ASSESSMENT PROCESS

13.1 A firm must ensure that:

(1) it regularly, but at least annually, reviews its ILAAP;

(2) carries out an internal assessment of the adequacy of its liquidity in accordance with

its ILAAP;

(3) the assessment in (2) is proportionate to the nature, scale and complexity of its

activities and includes an assessment of:

(a) the adequacy of its liquidity resources to cover the risks identified in

accordance with this Part;

Appendix 2.A

Page 10 of 11

(b) the methodologies and assumptions applied for risk measurement and

liquidity management;

(d) the firm’s compliance with this Part;

(4) its ILAAP identifies those of the measures set out in its liquidity contingency plans

that it would implement.

13.2 A firm must maintain a record of its ILAAP for at least three years.

13.3 A firm must ensure that its management body approves the firm’s ILAAP.

14 APPLICATION OF THIS PART ON AN INDIVIDUAL BASIS AND A CONSOLIDATED

BASIS

14.1 This Part applies to a firm on an individual basis whether or not it also applies to the firm on a

consolidated basis or a sub-consolidated basis.

[Note: Art 109(1) of the CRD]

14.2 Where a firm is a member of a consolidation group, the firm must ensure that the

arrangements, processes and mechanisms at the level of the consolidation group of which it

is a member comply with the obligations set out in 3 to 13 on a consolidated basis (or a sub-

consolidated basis).

14.3 Compliance with 14.2 must enable the consolidation group to have arrangements, processes

and mechanisms that are consistent and well integrated and that any data relevant to the

purpose of supervision can be produced.

[Note: Art 109(2) (part) of the CRD]

14.4 A UK bank or building society which is an EEA parent institution must comply with this Part on

the basis of its consolidated situation.

14.5 A UK designated investment firm which is an EEA parent institution must comply with this

Part on the basis of its consolidated situation if the firm is an investment firm that is authorised

to provide the investment services and activities listed in points (3) and (6) of Section A of

Annex I to Directive 2004/39/EC.

14.6 A UK bank or building society controlled by an EEA parent financial holding company or by an

EEA parent mixed financial holding company must comply with this Part on the basis of the

consolidated situation of that holding company if the PRA is responsible for supervision of the

UK bank or building society on a consolidated basis under Article 111 of the CRD.

14.7 A UK designated investment firm controlled by an EEA parent financial holding company or

by an EEA parent mixed financial holding company must comply with this Part on the basis of

the consolidated situation of that holding company if:

(1) the firm is an investment firm that is authorised to provide the investment services

and activities listed in points (3) and (6) of Section A of Annex I to Directive

2004/39/EC;

Appendix 2.A

Page 11 of 11

(2) there is no subsidiary of the holding company which is a credit institution that is

supervised under the CRD; and

(3) the PRA is responsible for the supervision of the UK designated investment firm on a

consolidated basis under Article 111 of the CRD.

14.8 If this Part applies to a firm on a consolidated basis, the firm must carry out consolidation to

the extent and in the manner prescribed in Articles 18(1), 19(1), 19(3), 23 and 24 of the CRR.

15 TRANSITIONAL PROVISION

15.1 In 1.2 and 14.4 to 14.7:

(1) any reference to EEA is to be read as a reference to EU; and

(2) any reference to EEA State is to be read as a reference to Member State.

Appendix 2.B

Page 1 of 3

PRA RULEBOOK: CRR FIRMS: LIQUIDITY COVERAGE REQUIREMENT –

TRANSITIONAL PROVISION INSTRUMENT [YEAR]

Powers exercised

A. The Prudential Regulation Authority (“PRA”) makes this instrument in the exercise of the following

powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):

(1) section 137G (the PRA’s general rules); and

(2) section 137T (general supplementary powers).

B. The rule-making powers referred to above are specified for the purpose of section 138G(2) (Rule-

making instrument) of the Act.

Pre-conditions to making

C. In accordance with section 138J of the Act (Consultation by the PRA), the PRA consulted the

Financial Conduct Authority. After consulting, the PRA published a draft of proposed rules and

had regard to representations made.

PRA Rulebook: CRR Fi rms: Liquidity Coverage Requirement Ratio – Transitional Provision

Instrument [YEAR]

D. The PRA makes the rules in the Annex to this instrument.

Commencement

E. This instrument comes into force on 1 October 2015.

Citation

F. This instrument may be cited as the PRA Rulebook: CRR Firms: Liquidity Coverage Requirement

Ratio – Transitional Provision Instrument [YEAR]

By order of the Board of the Prudential Regulation Authority

[DATE]

Appendix 2.B

Page 2 of 3

Annex

In this Annex, the text is all new and is not underlined.

Part

LIQUIDITY COVERAGE REQUIREMENT –

TRANSITIONAL PROVISION

Chapter content

1. APPLICATION AND DEFINITIONS

2. TRANSITIONAL PROVISIONS

Links

Appendix 2.B

Page 3 of 3

1 APPLICATION AND DEFINITIONS

1.1 This Part applies to:

(1) a UK bank; or

(2) a building society.

1.2 In this Part, the following definitions shall apply:

liquidity coverage ratio

means the ratio calculated in accordance with Article 4 of the Commission Delegated

Regulation (EU) No [number]1.

2 TRANSITIONAL PROVISION

2.1 The applicable liquidity coverage ratio for the purpose of Article 412(5) CRR shall be:

(1) 80% as from 1 October 2015;

(2) 90% as from 1 January 2017; and

(3) 100% as from 1 January 2018.

1 Replace with Official Journal number of Commission Delegated Regulation made under article 460

of the CRR.

Appendix 2.C

PRA RULEBOOK: CRR FIRMS: LIQUIDITY COVERAGE REQUIREMENT – UK DESIGNATED

INVESTMENT FIRMS INSTRUMENT [YEAR]

Powers exercised

A. The Prudential Regulation Authority (“PRA”) makes this instrument in the exercise of the following

powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):

(1) section 137G (the PRA’s general rules); and

(2) section 137T (general supplementary powers).

B. The rule-making powers referred to above are specified for the purpose of section 138G(2) (Rule-

making instrument) of the Act.

Pre-conditions to making

C. In accordance with section 138J of the Act (Consultation by the PRA), the PRA consulted the

Financial Conduct Authority. After consulting, the PRA published a draft of proposed rules and

had regard to representations made.

PRA Rulebook: CRR Firms: Liquidity Coverage Requirement – UK Designated Investment

Firms Instrument [YEAR]

D. The PRA makes the rules in the Annex to this instrument.

Commencement

E. This instrument comes into force on [Date].

Citation

F. This instrument may be cited as the PRA Rulebook: CRR Firms: Liquidity Coverage Requirement

– UK Designated Investment Firms Instrument [Year].

By order of the Board of the Prudential Regulation Authority

[DATE]

Appendix 2.C

Annex

In this Annex, the text is all new and is not underlined.

Part

LIQUIDITY COVERAGE REQUIREMENT – UK

DESIGNATED INVESTMENT FIRMS

Chapter content

1. APPLICATION AND DEFINITIONS

2. LIQUIDITY COVERAGE REQUIREMENT

3. COMPLIANCE WITH LIQUIDITY REPORTING

4. APPLICATION OF THIS PART ON AN INDIVIDUAL BASIS AND A CONSOLIDATED

BASIS

5. TRANSITIONAL PROVISIONS

Links

Appendix 2.C

1 APPLICATION AND DEFINITIONS

1.1 This Part applies to a UK designated investment firm.

1.2 In this Part, the following definitions shall apply:

COREP Regulation

means the Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014

laying down implementing technical standards with regard to supervisory reporting of

institutions according to Regulation (EU) No 575/2013 of the European Parliament

and the Council, as amended by [Commission Implementing Regulation on additional

liquidity monitoring metrics]

Delegated Regulation

means Commission Delegated Regulation (EU) [number]

EEA parent institution

means a parent institution in an EEA State which is not a subsidiary of another

institution authorised in an EEA State or of a financial holding company or mixed

financial holding company set up in any EEA State.

EEA parent financial holding company

means a parent financial holding company in an EEA State which is not a subsidiary

of an institution authorised in any EEA State or of another financial holding company

or mixed financial holding company set up in any EEA State.

EEA parent mixed financial holding company

means a parent mixed financial holding company in an EEA State which is not a

subsidiary of an institution authorised in any EEA State or of another financial holding

company or mixed financial holding company set up in any EEA State.

liquidity coverage ratio

means the ratio calculated in accordance with Article 4 of the Delegated Regulation.

1.3 Unless otherwise defined, any italicised expression used in this Part and in the CRR has the

same meaning as in the CRR.

2 LIQUIDITY COVERAGE REQUIREMENT

2.1 (1) For the purpose of complying with Article 412 (1) of the CRR, a firm must comply with

the obligations set out in the Delegated Regulation as they apply to a credit institution

supervised under the CRD, subject to the modifications in (2).

Replace with ITS to be adopted by the Commission in accordance with CRR Art 415(3)(b).

Replace with Official Journal number of Commission Delegated Regulation made under article 460

of the CRR

Appendix 2.C

(2) For the purposes of (1):

(a) the provisions in Article 2(3) of the Delegated Regulation do not apply where

Article 12 of the CRR applies;

(b) the provisions in Article 2(3)(d) and Article 37 of the Delegated Regulation do

not apply; and

3 COMPLIANCE WITH LIQUIDITY REPORTING

3.1 In accordance with Article 6(4) and Article 11(3) of the CRR, a firm is exempt from complying

with the obligations laid down in Title II and Title III of Part Six of the CRR on an individual

basis and on a consolidated basis.

3.2 (1) A firm must comply with the reporting requirements laid down in Articles 2, 3, 15

, 16,

16(b) and 18 of the COREP Regulation as they apply to a credit institution supervised

under the CRD.

(2) For these purposes of (1), the words “according to Article 415 of Regulation (EU) No

575/2013” in Articles 15, 16 and 16b of the COREP Regulation are construed as

references to the obligations set out in (1).

4 APPLICATION OF THIS PART ON AN INDIVIDUAL BASIS AND A CONSOLIDATED

BASIS

4.1 This Part applies to a firm on an individual basis whether or not it also applies to the firm on a

consolidated basis.

4.2 A firm which is an EEA parent institution must comply with this Part on the basis of its

consolidated situation if the firm is an investment firm that is authorised to provide the

investment services and activities listed in points (3) and (6) of Section A of Annex I to

Directive 2004/39/EC.

4.3 A firm controlled by an EEA parent financial holding company or by an EEA parent mixed

financial holding company must comply with this Part on the basis of the consolidated

situation of that holding company if:

(1) the firm is an investment firm that is authorised to provide the investment services

and activities listed in points (3) and (6) of Section A of Annex I to Directive

2004/39/EC;

(2) there is no subsidiary of the holding company which is a credit institution that is

supervised under the CRD; and

(3) the PRA is responsible for the supervision of the UK designated investment firm on a

consolidated basis under Article 111 of the CRD.

Replace with reference to the updated Liquidity Coverage Templates under the COREP Regulation.

Appendix 2.C

4.4 If this Part applies to a firm on a consolidated basis, the firm must carry out consolidation to

the extent and in the manner prescribed in Articles 18(1), 19(1), 19(3) 23 and 24 of the CRR.

5 TRANSITIONAL PROVISIONS

5.1 The applicable liquidity coverage ratio for the purpose of Article 38 (2) of the Delegated

Regulation shall be:

(1) 80% as from 1 October 2015;

(2) 90% as from 1 January 2017; and

(3) 100% as from 1 January 2018.

5.2 In 1.2, 4.2 and 4.3:

(1) any reference to EEA is to be read as a reference to EU; and

(2) any reference to EEA State is to be read as a reference to Member State.

Appendix 2.D

Page 1 of 3

PRA RULEBOOK: NON-CRR FIRMS: LIQUIDITY REPORTING INSTRUMENT [YEAR]

Powers exercised

A. The Prudential Regulation Authority (“PRA”) makes this instrument in the exercise of the following

powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”):

(1) section 137G (the PRA’s general rules); and

(2) section 137T (general supplementary powers).

B. The rule-making powers referred to above are specified for the purpose of section 138G(2) (Rule-

making instrument) of the Act.

Pre-conditions to making

C. In accordance with section 138J of the Act (Consultation by the PRA), the PRA consulted the

Financial Conduct Authority. After consulting, the PRA published a draft of proposed rules and

had regard to representations made.

PRA Rulebook: Non-CRR Firms: Liquidity Reporting Instrument [YEAR]

D. The PRA makes the rules in the Annex to this instrument.

Commencement

E. This instrument comes into force on 1 April 2016.

Citation

F. This instrument may be cited as the PRA Rulebook: Non-CRR Firms: Liquidity Reporting

Instrument [YEAR].

By order of the Board of the Prudential Regulation Authority

[DATE]

Appendix 2.D

Page 2 of 3

Annex

In this Annex, the text is all new and is not underlined.

Part

LIQUIDITY REPORTING

Chapter content

1. APPLICATION

2. COMPLIANCE WITH CRR LIQUIDITY REPORTING

3. SYSTEMS, PROCESSES AND MECHANISMS

4. TRANSITIONAL PROVISION

Links

Appendix 2.D

Page 3 of 3

1 APPLICATION

1.1 This Part applies to every third country firm that is a bank or a designated investment firm.

2 COMPLIANCE WITH CRR LIQUIDITY REPORTING

2.1 A firm must comply with the reporting requirements laid down in Titles II and III of Part 6 of the

CRR on an individual basis as they apply to a credit institution supervised under the CRD,

subject to the modifications in 2.2.

2.2 The modifications referred to in 2.1 are that the provisions in Article 16b (1) (b) and (c) of the

Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 laying down

implementing technical standards with regard to supervisory reporting of institutions according

to Regulation (EU) No 575/2013 of the European Parliament and the Council, as amended by

[Commission Implementing Regulation on additional liquidity monitoring metrics]1, do not

apply.

3 SYSTEMS, PROCESSES AND MECHANISMS

3.1 A firm must put in place systems, processes and mechanisms that enable it, at the request of

the PRA, to report:

(1) report the items referred to in the reporting requirements in 2.1 at least daily; and

(2) produce and transmit to the PRA any data and information necessary for the purpose

of liquidity supervision.

4 TRANSITIONAL PROVISION

4.1 In 1.1 the reference to third country firm is to be read as a reference to a firm which has its

registered office (or, if it has no registered office, its head office) outside the European Union.

1 Replace with Implementing Technical Standards to be adopted by the Commission in accordance

with CRR Art 415(3)(b).

Appendix 2.E

Page 1 of 22

LIQUIDITY STANDARDS CONSEQUENTIALS INSTRUMENT [YEAR]

Powers exercised

A. The Prudential Regulation Authority (“PRA”) makes this instrument in the exercise of the

following powers and related provisions in the Financial Services and Markets Act 2000

(“the Act”):

(1) section 137G (The PRA’s general rules); and

(2) section 137T (General supplementary powers).

B. The rule-making powers referred to above are specified for the purpose of section

138G(2) (Rule-making instrument) of the Act.

Pre-conditions to making

C. In accordance with section 138J of the Act (Consultation by the PRA), the PRA consulted

the Financial Conduct Authority. After consulting, the PRA published a draft of proposed

rules and had regard to representations made.

Commencement

D. Annex A to Annex D and Annex F to this instrument come into force on 1 October 2015.

E. Annex E to this instrument shall come into force on the date specified by a subsequent

PRA Board Instrument.

Amendments to the Handbook

F. The modules of the PRA Handbook of rules and guidance listed in column (1) below are

amended in accordance with the Annexes to this instrument listed in column (2).

(1) (2)

Glossary of definitions Annex A

Senior Management Arrangements, Systems and Controls sourcebook

(SYSC) Annex B

Prudential sourcebook for Banks, Building Societies and Investment

Firms (BIPRU) Annex C

Supervision manual (SUP) Annex D

Supervision manual (SUP) Annex E

Amendments to the Rulebook

G. The PRA Rulebook: Fundamental Rules is amended in accordance with Annex F to this

instrument.

Citation

H. This instrument may be cited as the Liquidity Standards Consequentials Instrument

[YEAR].

By order of the Board of the Prudential Regulation Authority

[DATE]

Appendix 2.E

Page 2 of 22

Annex A

Amendments to the Glossary of definitions

In this Annex, underlining indicates new text and striking through indicates deleted text.

Insert the following new definitions and amendments in the appropriate alphabetical order.

ILAS BIPRU firm (A) In the PRA Handbook:

a firm falling into BIPRU 12.1.1R, but excluding a firm that is:

(a) an exempt full scope BIPRU investment firm; or a UK

bank; or

(b) a BIPRU limited licence firm; or a building society; or

investment firm; or

(d) an exempt BIPRU commodities firm. a third country

reporting firm that has a branch in the United

Kingdom.

...

intra-group liquidity

modification

a modification to the overall liquidity adequacy rule of the kind

described in BIPRU 12.8.7G as in effect on 30 September 2015

granted to a firm and in effect on that date.

...

low frequency

liquidity reporting

firm

any of the following:

(a) a simplified ILAS BIPRU firm; or

(b) a standard ILAS BIPRU firm whose most recent annual

report and accounts show balance sheet assets of less than £5

billion (or its equivalent in foreign currency translated into

sterling at the balance sheet date); or

conditions:

(i) it does not have any annual report and accounts and

it has been too recently established to be required to

have produced any;

Appendix 2.E

Page 3 of 22

(ii) it has submitted a projected balance sheet to the FCA

or PRA (as the case may be) as part of an application

for a Part 4A permission or a variation of one; and

(iii) the most recent such balance sheet shows that the firm

will meet the size condition in (b) in all periods

covered by that projection.

In respect of an incoming EEA firm or a third country BIPRU

reporting firm that is also a standard ILAS BIPRU firm and which

reports on the basis of its branch operation in the United Kingdom, if

the balance sheet assets attributable to the UK branch can be

determined from the firm's most recent annual report and accounts

(or, if applicable, the projected balance sheet) or any data item

submitted by the firm, then paragraphs (b) and (c) apply at the level

of the branch rather than of the firm.

...

overall liquidity

adequacy rule

BIPRU 12.2.1R as in effect on 30 September 2015.

...

simplified ILAS the approach to the calculation of the liquid assets buffer of a

simplified ILAS BIPRU firm described in BIPRU 12.6 as in effect on

30 September 2015.

...

simplified ILAS

BIPRU firm

an ILAS BIPRU firm that, in accordance with the procedures in

BIPRU 12 (Liquidity) as in effect on 30 September 2015, iswas

using the simplified ILAS on that date.

...

third country

reporting firm

one of the following:

(1) an overseas firm that:

(a) is a bank;

(b) is not an EEA firm; and

(2) an EEA bank that has its registered office (or if it has no

registered office, its head office) outside the EU.

Appendix 2.E

Page 4 of 22

...

whole-firm liquidity

modification

a modification to the overall liquidity adequacy rule of the kind

described in BIPRU 12.8.22G as in effect on 30 September 2015

granted to a firm and in effect on that date.

Appendix 2.E

Page 5 of 22

Annex B

Amendments to the Senior Management Arrangements, Systems and Controls

sourcebook (SYSC)

In this Annex, underlining indicates new text and striking through indicates deleted text.

12.1 Application

...

CRR firms and non-CRR firms that are parent financial holding companies in

a Member State

12.1.13 R If this rule applies under SYSC 12.1.14R to a firm, the firm must:

(1) ...

(2) ensure that the risk management processes and internal control

mechanisms at the level of any consolidation group or non-EEA sub-group

of which it is a member comply with the obligations set out in the

following provisions on a consolidated (or sub-consolidated) basis:

(a)

...

…

(e) BIPRU 12.3.4 R, BIPRU 12.3.5 R, BIPRU 12.3.7A R, BIPRU 12.3.8

R , BIPRU 12.3.22A R, BIPRU 12.3.22B R, BIPRU 12.3.27 R, BIPRU

12.4.-2 R, BIPRU 12.4.-1 R, BIPRU 12.4.5A R, BIPRU 12.4.10 R

,BIPRU 12.4.11 R and BIPRU 12.4.11A R; [deleted]

(f) …

…

Appendix 2.E

Page 6 of 22

Annex C

Amendments to the Prudential sourcebook for Banks, Building Societies and

Investment Firms (BIPRU)

The entirety of part 2 of the Annex to Prudential sourcebook for Banks, Building Societies

and Investment Firms (Liquidity Standards) Amendments Instrument 2013 is revoked.

BIPRU 12, BIPRU Schedule 3 and BIPRU Schedule 6 are deleted in their entirety.

Appendix 2.E

Page 7 of 22

Annex D

Amendments to the Supervisory manual (SUP)

The entirety of part 5 of the Annex of the Capital Requirements Regulation (Reporting)

Amendment Instrument 2013 is revoked.

In this Annex, underlining indicates new text and striking through indicates deleted text,

unless otherwise stated.

16.12 Integrated Regulatory Reporting

...

16.12.4A G RAG 1 includes an incoming EEA firm exercising a BCD right through a

UK branch.[deleted]

Group liquidity reporting

16.12.4B G Reporting at group level for liquidity purposes by firms falling within

BIPRU 12 (Liquidity) is by reference to defined liquidity groups.

Guidance about the different types of defined liquidity groups and related

material is set out in SUP 16 Annex 26 (Guidance on designated liquidity

groups in SUP 16.12).[deleted]

Regulated Activity Group 1

SUP 16.12.5R is deleted in its entirety. This text is not shown.

16.12.5A R The applicable data items and forms or reports referred to in SUP

16.12.4R are set out according to firm type in the table below:

Description

of data item

Prudential category of firm, applicable data items and reporting format (Note 1)

UK bank Building

society

Non-EEA

bank

EEA bank

that has its

registered

office (or,

if it has no

registered

office, its

head office)

outside the

EU that has

permission

to accept

deposits,

other than

one with

permission

for cross

border

services

[deleted] Credit

union

Dormant

account fund

operator

(note 15)

Appendix 2.E

Page 8 of 22

only

Annual report

and accounts No standard format No standard

format, but

in English

No standard

format

Annual report

and accounts

of the mixed-

activity

holding

company

(note 9)

No standard format

Solvency

statement

(note 10)

No standard format

Balance sheet FSA001 (note 2) FSA001

(note 2)

CQ; CY

Income

statement

FSA002 (note 2) FSA002

(note 2)

FSA002 CQ; CY

Capital

adequacy

CQ; CY

[deleted] [deleted]

Market risk FSA005 (notes 2, 4) FSA005

(notes 2, 4)

Market risk -

supplementar

FSA006 (note 5)

Large

exposures

CQ; CY

Exposures

between core

UK group

and non-core

large

exposures

group

FSA018 (note 12) FSA018

(note 12)

Liquidity

(other than

stock)

FSA011 CQ; CY

Forecast data FSA014 (note 11) FSA014

(note 11)

Solo

consolidation

data

FSA016 (note 7) FSA016

(note 7)

Interest rate

gap report

FSA017 FSA017

Appendix 2.E

Page 9 of 22

Sectoral

information,

including

arrears and

impairment

FSA015

(Note 2)

FSA015

(Note 2)

IRB portfolio

risk

FSA045 (note 13) FSA045

(note 13)

Daily Flows FSA047 (Notes 16, 20

and 22)

FSA047

(Notes 16,

20 and 22)

FSA047

(Notes 16,

18, 20 and

22)

FSA047

(Notes 16,

18, 20 and

22)

Enhanced

Mismatch

Report

FSA048 (Notes 16, 20

and 22)

FSA048

(Notes 16,

20 and 22)

FSA048

(Notes 16,

18, 20 and

22)

FSA048

(Notes 16,

18, 20 and

22)

Funding

Concentration

FSA051 (Notes 17, 21

and 22)

FSA051

(Notes 17,

21 and 22)

FSA051

(Notes 17,

19, 21 and

22)

FSA051

(Notes 17,

19, 21 and

22)

Retail and

corporate

funding

FSA053 (Notes 17, 21

and 22)

FSA053

(Notes 17,

21 and 22)

FSA053

(Notes 17,

19, 21 and

22)

FSA053

(Notes 17,

19, 21 and

22)

Note 1 When submitting the completed data item required, a firm must use the format of the data item set out in SUP 16

Annex 24R, except for credit union reports that are in SUP 16 Annex 14R. Guidance notes for completion of the data

items are contained in SUP 16 Annex 25G (or Annex 15G for credit unions).

Note 2 Firms that are members of a UK consolidation group are also required to submit this data item on a UK consolidation

group basis. Firms' attention is drawn to SUP 16.3.25G regarding a single submission for all firms in the group.

Note 3 [deleted]

Note 4 For PRA-authorised persons lines 62 to 64 only are applicable. These lines apply to a firm that applies add-ons to their

market risk capital calculation under the RNIV framework. For further guidance on how to complete the form PRA-

authorised persons may refer to SUP 16.12.25A R.

Note 5 Only applicable to firms with a VaR model permission.

Note 6 [deleted]

Note 7 Only applicable to a firm that has a solo consolidation waiver.

Note 8 [deleted]

Note 9 [deleted]

Note 10 [deleted]

Note 11 Members of a UK consolidation group should only submit this data item at the UK consolidation group level.

Note 12 Only applicable to a firm that has both a core UK group and a non-core large exposures group.

Note 13 Only applicable to firms that have an IRB permission.

Note 14 [deleted]

Appendix 2.E

Page 10 of 22

Note 15 Only applies to a dormant account fund operator that does not fall into any of the other prudential categories in this

table.

Note 16 A firm must complete this item separately on each of the following bases that are applicable.

(1) It must complete it on a solo basis (including on the basis of the firm's UK branch). Therefore even if it has a solo

consolidation waiver it must complete the item on an unconsolidated basis by reference to the firm alone.

(2) If it is a group liquidity reporting firm in a DLG by default and is a UK lead regulated firm, it must complete the

item on the basis of that group.

(3) If it is a group liquidity reporting firm in a UK DLG by modification, it must complete the item on the basis of that

group and (1) does not apply.

(4) If it is a group liquidity reporting firm in a non-UK DLG by modification, it must complete the item on the basis of

that group.

Note 17 A firm must complete this item separately on each of the following bases that are applicable.

(1) It must complete it on a solo basis (including on the basis of the firm's UK branch) unless it is a group liquidity

reporting firm in a UK DLG by modification. Therefore even if it has a solo consolidation waiver it must complete the

item on an unconsolidated basis by reference to the firm alone.

(2) If it is a group liquidity reporting firm in a UK DLG by modification, it must complete the item on the basis of that

group.

Note 18 (1) If the firm has a whole-firm liquidity modification, it must complete this item on the basis of the whole firm (or at

any other reporting level the whole-firm liquidity modification may have required) and not just its UK branch.

(2) Otherwise the firm must complete this item by reference to the activities of its branch operation in the United

Kingdom in accordance with SUP 16.12.3R (1)(a)(iv).

Note 19 (1) If the firm has a whole-firm liquidity modification there is no obligation to report this item.

(2) Otherwise the firm must complete this item by reference to the activities of its branch operation in the United

Kingdom in accordance with SUP 16.12.3R (1)(a)(iv).

Note 20 (1) This item must be reported in the reporting currency.

(2) If any data element is in a currency or currencies other than the reporting currency, all currencies (including the

reporting currency) must be combined into a figure in the reporting currency.

(3) In addition, all material currencies (which may include the reporting currency) must each be recorded separately

(translated into the reporting currency). However if:

(a) the reporting frequency is (whether under a rule or under a waiver) quarterly or less than quarterly; or

(b) the only material currency is the reporting currency;

(3) does not apply.

(4) If there are more than three material currencies for this data item, (3) only applies to the three largest in amount. A

firm must identify the largest in amount in accordance with the following procedure.

(a) For each currency, take the largest of the asset or liability figure as referred to in the definition of material currency.

(b) Take the three largest figures from the resulting list of amounts.

(5) The date as at which the calculations for the purposes of the definition of material currency are carried out is the

last day of the reporting period in question.

(6) The reporting currency for this data item is whichever of the following currencies the firm chooses, namely USD

(the United States Dollar), EUR (the euro), GBP (sterling), JPY (the Japanese Yen), CHF (the Swiss Franc), CAD (the

Canadian Dollar) or SEK (the Swedish Krona).

Note 21 Note 20 applies, except that paragraphs (3), (4) and (5) do not apply, meaning that material currencies must not be

recorded separately.

Note 22 Any changes to reporting requirements caused by a firm receiving an intra-group liquidity modification or a whole-firm

liquidity modification (or a variation to one) do not take effect until the first day of the next reporting period applicable

under the changed reporting requirements for the data item in question if the firm receives that intra-group liquidity

modification, whole-firm liquidity modification or variation part of the way through such a period. If the change is that

the firm does not have to report a particular data item or does not have to report it at a particular reporting level, the

firm must nevertheless report that item or at that reporting level for any reporting period that has already begun. This

paragraph is subject to anything that the intra-group liquidity modification or a whole-firm liquidity modification says

to the contrary.

Note 23 Only applicable to firms that hold securitisation positions in the trading book and/ or are the originator or sponsor of

securitisations held in the trading book.

Note 24 [deleted]

Appendix 2.E

Page 11 of 22

…

16.12.11B R The applicable data items referred to in SUP 16.12.4R for UK

designated investment firms are set out below:

Description of data item Applicable data items (Note 1)

…

Daily flows FSA047 (Notes 10, 13, and 15 and

16)

Enhanced Mismatch Report FSA048 (Notes 10, 13, and 15 and

16)

Liquidity Buffer Qualifying Securities FSA050 (Notes 11, 14, 15 and 16)

Funding Concentration FSA051 (Notes 11, 14, and 15 and

16)

Pricing data FSA052 (Notes 11, 15, 16 and 17)

Retail and corporate funding FSA053 (Notes 11, 14, and 15 and

16)

Currency Analysis FSA054 (Notes 11, 14, 15 and 16)

Systems and Controls Questionnaire FSA055 (Notes 12 and 16)

…

Note

A firm must complete this item separately on each of the following

bases (if applicable).

(1) It must complete it on a solo basis. Therefore even if it has an

individual consolidation permission it must complete the item on an

unconsolidated basis by reference to the firm alone.

(2) If it is a group liquidity reporting firm in a DLG by default and

is a UK lead regulated firm, it must complete the item on the basis

of that group.

(3) If it is a group liquidity reporting firm in a UK DLG by

modification, it must complete the item on the basis of that group

and (1) does not apply.

(4) If it is a group liquidity reporting firm in a non-UK DLG by

modification, it must complete the item on the basis of that group.

…

Appendix 2.E

Page 12 of 22

Note

If it is a non-ILAS BIPRU firm, it must complete it on a solo basis.

Therefore even if it has an individual consolidation permission it

must complete the item on an unconsolidated basis by reference to

the firm alone. [deleted]

…

Note

FSA047, FSA048, FSA050, FSA051, FSA052, FSA053 and

FSA054 must be completed by an ILAS BIPRU firm. An ILAS

BIPRU firm does not need to complete FSA055. A non-ILAS

BIPRU firm must complete FSA055 and does not need to complete

FSA047, FSA048, FSA050, FSA051, FSA052, FSA053 and

FSA054. [deleted]

Note

This data item must be reported only in the currencies named in

FSA052, so that liabilities in GBP are reported in GBP in rows 1 to

4, those in USD are reported in USD in rows 5 to 8, and those in

Euro are reported in Euro in rows 9 to 12. Liabilities in other

currencies are not to be reported. [deleted]

…

Regulated Activity Group 4

16.12.15B R The applicable data items referred to in SUP 16.12.4R for UK designated

investment firms are set out below:

Description of data item Applicable data items (Note 1)

…

Daily Flows FSA047 (Notes 7,10, and 12 and

13)

Enhanced Mismatch Report FSA048 (Notes 7,10, and 12 and

13)

Liquidity Buffer Qualifying Securities FSA050 (Notes 8, 11, 12 and 13)

Funding Concentration FSA051 (Notes 8, 11, and 12 and

13)

Pricing data FSA052 (Notes 8, 12, 13 and 14)

Appendix 2.E

Page 13 of 22

Retail and corporate funding FSA053 (Notes 8, 11, and 12 and

13)

Currency Analysis FSA054 (Notes 8, 11, 12 and 13)

Pricing data FSA052 (Notes 8, 12, 13 and 14)

Systems and Control Questionnaire FSA055 (Notes 9 and 13)

…

Note 7 A firm must complete this item separately on each of the

following bases (if applicable).

(1) It must complete it on a solo basis. Therefore even if it has an

individual consolidation permission it must complete the item on

an unconsolidated basis by reference to the firm alone.

(2) If it is a group liquidity reporting firm in a DLG by default

and is a UK lead regulated firm, it must complete the item on the

basis of that group.

(3) If it is a group liquidity reporting firm in a UK DLG by

modification, it must complete the item on the basis of that

group and (1) does not apply.

(4) If it is a group liquidity reporting firm in a non-UK DLG by

modification, it must complete the item on the basis of that

group.

Note 9 If it is a non-ILAS BIPRU firm, it must complete it on a solo

basis. Therefore even if it has an individual consolidation

permission it must complete the item on an unconsolidated basis

by reference to the firm alone.[deleted]

…

Note 13 FSA047, FSA048, FSA050, FSA051, FSA052, FSA053 and

FSA054 must be completed by an ILAS BIPRU firm. An ILAS

BIPRU firm does not need to complete FSA055. A non-ILAS

BIPRU firm must complete FSA055 and does not need to

complete FSA047, FSA048, FSA050, FSA051, FSA052,

FSA053 and FSA054.[deleted]

Note 14 This data item must be reported only in the currencies named in

FSA052, so that liabilities in GBP are reported in GBP in rows 1

to 4, those in USD are reported in USD in rows 5 to 8, and those

in Euro are reported in Euro in rows 9 to 12. Liabilities in other

currencies are not to be reported.[deleted]

Appendix 2.E

Page 14 of 22

…

Regulated Activity Group 7

16.12.22C R The applicable data items referred to in SUP 16.12.4R for UK

designated investment firms are set out in the table below:

Description of data item Applicable data item (Note 1)

…

Daily Flows FSA047 (Notes 6, 9, and 11 and 12)

Enhanced Mismatch Report FSA048 (Notes 6, 9, and 11 and 12)

Liquidity Buffer Qualifying

Securities

FSA050 (Notes 7, 10, 11 and 12)

Funding Concentration FSA051 (Notes 7, 10, and 11 and 12)

Pricing Data FSA052 (Note 7, 10, 12 and 13)

Retail and corporate funding FSA053 (Notes 7, 10, and 11 and 12)

Currency Analysis FSA054 (Notes 7, 10, 11 and 12)

Systems and Controls Questionnaire FSA055 (Notes 8 and 12)

…

Note 6 A firm must complete this item separately on each of the

following bases (if applicable).

(1) It must complete it on a solo basis. Therefore even if it has

an individual consolidation permission it must complete the item

on an unconsolidated basis by reference to the firm alone.

(2) If it is a group liquidity reporting firm in a DLG by default

and is a UK lead regulated firm, it must complete the item on

the basis of that group.

(3) If it is a group liquidity reporting firm in a UK DLG by

modification, it must complete the item on the basis of that

group and (1) does not apply.

(4) If it is a group liquidity reporting firm in a non-UK DLG by

modification, it must complete the item on the basis of that

group

Appendix 2.E

Page 15 of 22

Note 8 If it is a non-ILAS BIPRU firm, it must complete it on a solo

basis. Therefore even if it has an individual consolidation

permission it must complete the item on an unconsolidated basis

by reference to the firm alone.[deleted]

…

Note 12 FSA047, FSA048, FSA050, FSA051, FSA052, FSA053 and

FSA054 must be completed by an ILAS BIPRU firm. An ILAS

BIPRU firm does not need to complete FSA055. A non-ILAS

BIPRU firm must complete FSA055 and does not need to

complete FSA047, FSA048, FSA050, FSA051, FSA052,

FSA053 and FSA054.[deleted]

Note 13 This data item must be reported only in the currencies named in

FSA052, so that liabilities in GBP are reported in GBP in rows 1

to 4, those in USD are reported in USD in rows 5 to 8, and those

in Euro are reported in Euro in rows 9 to 12. Liabilities in other

currencies are not to be reported.[deleted]

…

Regulated Activity Group 8

16.12.25C R The applicable data items referred to in SUP 16.12.4R are set out in the

table below:

Description of data item Applicable data item (Note 1)

…

Daily flows FSA047 (Notes 9, 12, and 14 and 15)

Enhanced Mismatch Report FSA048 (Notes 9, 12, 14 and 15)

Liquidity Buffer Qualifying

Securities

FSA050 (Notes 10, 13, 14 and 15)

Funding Concentration FSA051 (Notes 10, 13, and 14 and

15)

Pricing data FSA052 (Notes 10, 14, 15 and 16)

Retail and corporate funding FSA053 (Notes 10, 13, and 14 and

Appendix 2.E

Page 16 of 22

15)

Currency Analysis FSA054 (Notes 10, 13, 14 and 15)

Systems and Controls Questionnaire FSA055(Notes 11 and 15)

Note 9 A firm must complete this item separately on each of the

following bases (if applicable).

(1) It must complete it on a solo basis. Therefore even if it

has an individual consolidation permission it must complete

the item on an unconsolidated basis by reference to the firm

alone.

(2) If it a group liquidity reporting firm in a DLG by default

and is a UK lead regulated firm, it must complete the item on

the basis of that group.

(3) If it is a group liquidity reporting firm in a UK DLG by

modification, it must complete the item on the basis of that

group and (1) does not apply.

(4) If it is a group liquidity reporting firm in a non-UK DLG

by modification, it must complete the item on the basis of that

group.

…

Note 11 If it is a non-ILAS BIPRU firm, it must complete it on a solo

basis. Therefore even if it has an individual consolidation

permission it must complete the item on an unconsolidated

basis by reference to the firm alone.[deleted]

…

Note 15 FSA047, FSA048, FSA050, FSA051, FSA052, FSA053 and

FSA054 must be completed by an ILAS BIPRU firm. An

ILAS BIPRU firm does not need to complete FSA055. A

non-ILAS BIPRU firm must complete FSA055 and does not

need to complete FSA047, FSA048, FSA050, FSA051,

FSA052, FSA053 and FSA054.[deleted]

Note 16 This data item must be reported only in the currencies named

in FSA052, so that liabilities in GBP are reported in GBP in

rows 1 to 4, those in USD are reported in USD in rows 5 to 8,

and those in Euro are reported in Euro in rows 9 to 12.

Liabilities in other currencies are not to be reported. [deleted]

…

Appendix 2.E

Page 17 of 22

…

Annex

26 Guidance on designated liquidity groups in SUP 16.12

The entirety of SUP 16 Annex 26 (Guidance on designated liquidity groups in SUP 16.12) is

deleted. The deleted text is not shown.

Appendix 2.E

Page 18 of 22

Annex E

Amendments to the Supervisory manual (SUP)

In this Annex, underlining indicates new text and striking through indicates deleted text,

unless otherwise stated.

16.12 Integrated Regulatory Reporting

...

Regulated Activity Group 1

SUP 16.12.5R is deleted in its entirety. This text is not shown.

16.12.5A R The applicable data items and forms or reports referred to in SUP

16.12.4R are set out according to firm type in the table below:

...

Description

of data item Prudential category of firm, applicable data items and reporting format (Note 1)

UK bank Building

society Non-EEA

bank EEA bank

that has its

registered

office (or,

if it has no

registered

office, its

head office)

outside the

EU that has

permission

to accept

deposits,

other than

one with

permission

for cross

border

services

only

[deleted] Credit

union Dormant

account fund

operator

(note 15)

…

Daily Flows FSA047 (Notes 16, 20

and 22) FSA047

(Notes 16,

20 and 22)

FSA047

(Notes 16,

18, 20 and

22)

FSA047

(Notes 16,

18, 20 and

22)

Enhanced

Mismatch

Report

FSA048 (Notes 16, 20

and 22) FSA048

(Notes 16,

20 and 22)

FSA048

(Notes 16,

18, 20 and

22)

FSA048

(Notes 16,

18, 20 and

22)

…

Note 17 A firm must complete this item separately on each of the following bases that are applicable.

(1) It must complete it on a solo basis (including on the basis of the firm's UK branch) unless it is a group liquidity

reporting firm in a UK DLG by modification. Therefore even if it has a solo consolidation waiver it must complete the

item on an unconsolidated basis by reference to the firm alone.

(2) If it is a group liquidity reporting firm in a UK DLG by modification, it must complete the item on the basis of that

Appendix 2.E

Page 19 of 22

group and (1) does not apply.[deleted]

…

Note 21 Note 20 applies, except that paragraphs (3), (4) and (5) do not apply, meaning that material currencies must not be

recorded separately.[deleted]

…

16.12.11B R The applicable data items referred to in SUP 16.12.4R for UK

designated investment firms are set out below:

Description of data item Applicable data items (Note 1)

…

Funding Concentration FSA051 (Notes 11, 14 and 15)

…

Retail and corporate funding FSA053 (Notes 11, 14 and 15)

…

Note

11 A firm must complete this item separately on each of the following

bases that are applicable.

(1) It must complete it on a solo basis unless it is a group liquidity

reporting firm in a UK DLG by modification. Therefore even if it

has an individual consolidation permission it must complete the

item on an unconsolidated basis by reference to the firm alone.

(2) If it is a group liquidity reporting firm in a UK DLG by

modification, it must complete the item on the basis of that

group.[deleted]

…

Note

14 Note 13 applies, except that paragraphs (3), (4) and (5) do not

apply, meaning that material currencies must not be recorded

separately.[deleted]

...

…

Regulated Activity Group 4

16.12.15B R The applicable data items referred to in SUP 16.12.4R for UK designated

investment firms are set out below:

Description of data item Applicable data items (Note 1)

…

Appendix 2.E

Page 20 of 22

Funding Concentration FSA051 (Notes 8, 11 and 12)

…

Retail and corporate funding FSA053 (Notes 8, 11 and 12)

…

Note 8 A firm must complete this item separately on each of the

following bases that are applicable.

(1) It must complete it on a solo basis unless it is a group

liquidity reporting firm in a UK DLG by modification. Therefore

even if it has an individual consolidation permission it must

complete the item on an unconsolidated basis by reference to the

firm alone.

(2) If it is a group liquidity reporting firm in a UK DLG by

modification, it must complete the item on the basis of that

group.[deleted]

…

Note 11 Note 10 applies, except that paragraphs (3), (4), and (5) do not

apply, meaning that material currencies must not be recorded

separately.[deleted]

…

Regulated Activity Group 7

16.12.22C R The applicable data items referred to in SUP 16.12.4R for UK

designated investment firms are set out in the table below:

Description of data item Applicable data item (Note 1)

…

Funding Concentration FSA051 (Notes 7, 10 and 11)

Retail and corporate funding FSA053 (Notes 7, 10 and 11)

…

Note 7 A firm must complete this item separately on each of the

following bases that are applicable.

(1) It must complete it on a solo basis unless it is a group

liquidity reporting firm in a UK DLG by modification. Therefore

even if it has an individual consolidation permission it must

complete the item on an unconsolidated basis by reference to the

Appendix 2.E

Page 21 of 22

firm alone.

(2) If it is a group liquidity reporting firm in a UK DLG by

modification, it must complete the item on the basis of that

group.[deleted]

…

Note 10 Note 9 applies, except that paragraphs (3), (4) and (5) do not

apply, meaning that material currencies must not be recorded

separately.[deleted]

…

Regulated Activity Group 8

16.12.25C R The applicable data items referred to in SUP 16.12.4R are set out in the

table below:

Description of data item Applicable data item (Note 1)

…

Funding Concentration FSA051 (Notes 10, 13 and 14)

…

Retail and corporate funding FSA053 (Notes 10, 13 and 14)

…

Note 10 A firm must complete this item separately on each of the

following bases that are applicable.

(1) It must complete it on a solo basis unless it is a group

liquidity reporting firm in a UK DLG by modification.

Therefore even if it has an individual consolidation

permission it must complete the item on an unconsolidated

basis by reference to the firm alone.

(2) If it is a group liquidity reporting firm in a UK DLG by

modification, it must complete the item on the basis of that

group.[deleted]

…

Note 13 Note 24 applies, except that paragraphs (3), (4) and (5) do not

apply, meaning that material currencies must not be recorded

separately.[deleted]

…

Appendix 2.E

Page 22 of 22

Annex F

Amendments to the Fundamental Rules

In this Annex new text is underlined and deleted text is struck through.

3 RESTRICTIONS

3.1 The Fundamental Rules apply to every firm, except that:

(1) ...

(2) for an incoming EEA firm that is a credit institution without a top-up

permission, Fundamental Rule 4 applies only in relation to the liquidity of a

branch established in the UK does not apply; and

(3) ...

Appendix 3 1

Mapping of BIPRU 12 rules to the ILAA Part of the PRA Rulebook

2 Appendix 3

Appendix 3 3

Consultation Paper | CP27/14 CP27 Cp2714

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