CA-14.13.11

Stressed credit market events have shown that market participants cannot assume that markets remain liquid under those conditions. Banks experienced significant illiquidity in a wide range of credit products held in the trading book, including leveraged loans. Under these circumstances, liquidity in many parts of the securitisation markets dried up, forcing banks to retain exposures in securitisation pipelines for prolonged periods of time. The CBB therefore expects banks to pay particular attention to the appropriate liquidity horizon assumptions within their IRC models.

CA-14.13.12

The liquidity horizon represents the time required to sell the position or to hedge all material risks covered by the IRC model in a stressed market. The liquidity horizon must be measured under conservative assumptions and should be sufficiently long that the act of selling or hedging, in itself, does not materially affect market prices. The determination of the appropriate liquidity horizon for a position or set of positions may take into account a bank's internal policies relating to, for example, prudent valuation (as per the prudent valuation guidance of Chapter CA-16), valuation adjustments⁸⁹ and the management of stale positions.

⁸⁹ For establishing prudent valuation adjustments, see also Paragraphs CA-8.2.10 to CA-8.2.13.

CA-14.13.13

The liquidity horizon for a position or set of positions has a floor of three months.

CA-14.13.14

In general, within a given product type a non-investment-grade position is expected to have a longer assumed liquidity horizon than an investment-grade position. Conservative assumptions regarding the liquidity horizon for non-investment-grade positions are warranted until further evidence is gained regarding the market's liquidity during systematic and idiosyncratic stress situations. Banks also need to apply conservative liquidity horizon assumptions for products, regardless of rating, where secondary market liquidity is not deep, particularly during periods of financial market volatility and investor risk aversion. The application of prudent liquidity assumptions is particularly important for rapidly growing product classes that have not been tested in a downturn.

CA-14.13.15

A bank can assess liquidity by position or on an aggregated basis ("buckets"). If an aggregated basis is used (e.g. investment-grade European corporate exposures not part of a core CDS index), the aggregation criteria would be defined in a way that meaningfully reflect differences in liquidity.

CA-14.13.16

The liquidity horizon is expected to be greater for positions that are concentrated, reflecting the longer period needed to liquidate such positions. This longer liquidity horizon for concentrated positions is necessary to provide adequate capital against two types of concentration: issuer concentration and market concentration.