LM-10 LM-10 Contingency Funding Plan
LM-10.1 LM-10.1 Overview
LM-10.1.1
A bank must have a CFP that clearly sets out its strategies for addressing liquidity and funding shortfalls to the extent beyond the level estimated from the stress tests performed by the bank under institution-specific, market-wide and combined stress scenarios and beyond the level covered by the bank's liquidity cushion. The CFP must contain a set of policies, procedures and action plans that prepare a bank to deal with relevant liquidity stress events in a timely and cost-effective manner, with clearly established lines of responsibility and invocation and escalation procedures. The CFP must be approved by the Board and regularly tested and updated to ensure that it is operationally robust.
August 2018LM-10.1.2
The CFP must be commensurate with the bank's complexity, risk profile, scope of operations and role in the financial system. The design of a CFP, including its action plans and procedures, must be closely integrated with the bank's ongoing analysis of liquidity risk. The CFP must address liquidity issues over a range of different time horizons.
August 2018LM-10.2 LM-10.2 Strategy, Plans and Procedures
Contingency Funding Measures and Sources
LM-10.2.1
The CFP must provide a bank's management with a diversified set of viable, readily deployable potential contingency funding measures for preserving and making up liquidity shortfalls in emergency situations. All available potential sources of funding must be outlined, along with the estimated amount of funds that can be derived from these sources, their expected degree of reliability, under what conditions these sources must be used, and the lead time needed to access additional funds from each of the sources.
August 2018LM-10.2.2
Banks must analyse the viability and likely impact on market perception of adopting different contingency funding measures. Some of the factors that must be considered include:
(a) The impact of stressed market conditions on a bank's ability to raise funding through different sources;(b) The interaction between asset markets and funding liquidity, especially in situations where there is an extensive or complete loss of typically available market funding options;(c) Any second-round effects, as well as reputation, legal, regulatory and operational constraints, related to the execution of such measures; and(d) Any peculiarities (including special terms and conditions) associated with particular funding sources. For example, banks must generally refrain from excessive reliance on back-up credit lines (even if committed) and need to understand various conditions, such as notice periods, that could affect a bank's ability to access such lines quickly.August 2018LM-10.2.3
In developing contingency funding measures, banks should also be aware of the operational procedures needed to transfer liquidity and collateral across group entities, borders and business lines, taking into account legal, regulatory, operational and time zone restrictions and controls governing such transfers. The CFP should incorporate relevant operational procedures and realistic timelines for such transfers. Assets intended to be pledged as collateral in the event that back-up funding sources are utilised, should be held by a legal entity and in a location consistent with management's funding plans.
August 2018Early Warning Signals and Triggering Events
LM-10.2.4
The CFP must clearly mention a set of triggering events that will activate the plan, as well as the mechanisms for identification, monitoring and reporting of such events at an early stage. Banks may consider the various early warning indicators highlighted in Section LM-2.3 in relation to this.
August 2018Roles and Responsibilities
LM-10.2.5
The CFP must contain clear policies and procedures enabling a bank's management to make timely and well-informed decisions, communicate the decisions effectively, and execute contingency measures swiftly and proficiently. To achieve this, the roles and responsibilities, and internal procedures for liquidity stress management must be clearly delineated. These must cover:
(a) The authority to invoke the CFP and the establishment of a formal 'crisis management team' to facilitate internal coordination and communication across different business lines and locations and decision-making by senior management in a stress situation;(b) Clear escalation and prioritisation procedures detailing what actions to take, who can take them, and when and how each of the actions can and must be activated;(c) Names and contact details of members of the team responsible for implementing the CFP and the locations of team members; and(d) The designation of alternates for key roles.August 2018Intraday Liquidity Considerations
LM-10.2.6
The CFP must include potential steps to meet intraday critical payments. In situations where intraday liquidity resources become scarce, a bank must have the ability to identify critical payments and to sequence or schedule payments based on priority.
August 2018Communications and Public Disclosure
LM-10.2.7
As part of the CFP, a bank must develop a communication plan to deliver, on a timely basis, clear and consistent communication to internal and external parties, in a time of stress, to support general confidence in the bank. Internal communication must cover employees and encompass different business lines and locations of the bank. External parties must include the CBB, other relevant local or overseas public authorities, clients and creditors. The plan must, in particular, address communication with shareholders and other external stakeholders, such as market participants, correspondents, custodians and major counterparties and customers to whom assurance about the bank is extremely important, as their actions could significantly affect the bank's reputation and liquidity position.
August 2018LM-10.3 LM-10.3 Testing, Update and Maintenance
LM-10.3.1
The CFP must be subject to regular testing to ensure its effectiveness and operational feasibility, particularly in respect of the availability of the contingency sources of funding listed in it.
August 2018LM-10.3.2
The testing of the CFP must cover:
(a) Verifying key assumptions, such as the ability to sell or repo certain assets or periodically draw down credit lines;(b) Ensuring that roles and responsibilities are appropriate and understood;(c) Confirming that contact information is up-to-date, with reporting lines clearly stated and synchronised with the latest organisation chart;(d) Proving the transferability of cash and collateral (especially across borders and entities); and(e) Reviewing that the necessary legal and operational documentation is in place to execute the plan at short notice.August 2018LM-10.3.3
The ALCO must review all aspects of the CFP following each testing exercise and ensure that follow-up actions are delivered.
August 2018LM-10.3.4
The ALCO must review and update the CFP on an annual basis at least, or more often, as warranted by changes in business or market circumstances, to ensure that the CFP remains robust over time. Any changes to the CFP must be properly documented and approved by the Board (or its relevant delegated committee).
August 2018LM-10.3.5
The CFP must be consistent with the bank's business continuity plans and should be operational under situations where business continuity arrangements have been invoked. As such, a bank should ensure effective coordination between teams managing issues surrounding liquidity crisis and business continuity.
August 2018
