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  • RM-3.1 RM-3.1 Liquidity Risk

    • RM-3.1.1

      Investment firm licensees must maintain a liquidity risk policy for the management of liquidity risk of the licensee, which is appropriate to the nature, scale and complexity of its activities. This policy must be approved and regularly reviewed by the Board of Directors of the licensee.

      Adopted: July 2007

    • RM-3.1.2

      Among other things, the licensee's liquidity risk policy must identify the limits it applies, how it monitors movements in risk and how it mitigates loss in the event of unexpected liquidity events.

      Adopted: July 2007

    • RM-3.1.3

      The liquidity risk policy should cover the general approach that the licensee will take to liquidity risk management, including, as appropriate, various quantitative and qualitative targets. This general approach should be communicated to all relevant functions within the organisation.

      Adopted: July 2007

    • RM-3.1.4

      The policy for managing liquidity risk should cover specific aspects of liquidity risk management. So far as appropriate to the nature, scale and complexity of the activities carried on, such aspects might include:

      (a) The basis for managing liquidity (for example, regional or central);
      (b) The degree of concentrations, potentially affecting liquidity risk, that are acceptable to the firm;
      (c) A policy for managing the liability side of liquidity risk;
      (d) The role of marketable, or otherwise realisable, assets;
      (e) Ways of managing both the licensee's aggregate foreign currency liquidity needs and its needs in each individual currency;
      (f) Ways of managing market access;
      (g) The use of derivatives to minimise liquidity risk;
      (h) The management of intra-day liquidity, where this is appropriate, for instance where the licensee is a member of or participates (directly or indirectly) in a system for the intra-day settlement of payments or transactions in investments; and
      (i) Policy on overdue and unsettled trades.
      Adopted: July 2007

    • Risk Identification

      • RM-3.1.5

        Investment firm licensees must identify significant concentrations within their asset portfolios. This should be done in relation to:

        (a) Individual counterparties or related groups of counterparties;
        (b) Credit ratings of the assets in its portfolio;
        (c) The proportion of an issue held;
        (d) Instrument types;
        (e) Geographical regions; and
        (f) Economic sectors.
        Adopted: July 2007

      • RM-3.1.6

        Investment firm licensees must identify on and off balance sheet impacts on its liquidity.

        Adopted: July 2007

      • RM-3.1.7

        For the purposes of RM-3.1.6, the licensee should take into account:

        (a) Possible changes in the market's perception of the licensee and the effects that this might have on the licensee's access to the markets, including:
        (i) Where the licensee funds its holdings of assets in one currency with liabilities in another, access to foreign exchange markets, particularly in less frequently traded currencies;
        (ii) Access to secured funding, including by way of repo transactions; and
        (iii) The extent to which the licensee may rely on committed facilities made available to it;
        (b) (If applicable) the possible effect of each scenario analysed on currencies whose exchange rates are currently pegged or fixed; and
        (c) That:
        (i) General market turbulence may trigger a substantial increase in the extent to which persons exercise rights against the licensee under off balance sheet instruments to which the licensee is party;
        (ii) Access to OTC derivative and foreign exchange markets are sensitive to credit-ratings;
        (iii) The scenario may involve the triggering of early amortisation in asset securitisation transactions with which the licensee has a connection; and
        (iv) Its ability to securitise assets may be reduced at certain times.
        Adopted: July 2007

    • Risk Measurement and Monitoring

      • RM-3.1.8

        An investment firm licensee must establish and maintain a process for the measurement, monitoring and controlling of liquidity risk, using a robust and consistent method which should be described in its liquidity risk policy statement.

        Adopted: July 2007

      • RM-3.1.9

        An investment firm licensee's monitoring framework must include a system of management reporting which provides clear, concise, timely and accurate liquidity risk reports to relevant functions within the firm. These reports must alert management when the investment firm licensee approaches, or breaches, predefined thresholds or limits, including quantitative limits imposed by the CBB.

        Adopted: July 2007

      • RM-3.1.10

        Reports on liquidity risk should be provided on a timely basis to the investment firm licensee's governing body, senior management and other appropriate personnel. The appropriate content and format of reports depends on a licensee's liquidity management practices and the nature, scale and complexity of the licensee's business. Reports to the investment firm licensee's governing body may be less detailed and less frequent than reports to senior management with responsibility for managing liquidity risk.

        Adopted: July 2007

      • RM-3.1.11

        For the purposes of testing liquidity risk, licensees must carry out appropriate stress testing and scenario analysis, including taking reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which liquidity risk might occur or crystallise. Licensees should normally consider scenarios based on varying degrees of stress and both firm-specific and market-wide difficulties. In developing any scenario of extreme market-wide stress that may pose systemic risk, it may be appropriate for an investment firm licensee to make assumptions about the likelihood and nature of CBB intervention.

        Adopted: July 2007

      • RM-3.1.12

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

        Adopted: July 2007

    • Limit Setting

      • RM-3.1.13

        Investment firm licensees must set limits in accordance with the nature, scale and complexity of their activities. The structure of limits should reflect the need for investment firm licensees to have systems and controls in place to guard against a spectrum of possible risks, from those arising in day-to-day liquidity risk management to those arising in stressed conditions.

        Adopted: July 2007

      • RM-3.1.14

        The CBB would normally expect a licensee to consider setting limits on:

        (a) Liability concentrations in relation to:
        (i) Individual, or related groups of, liability providers;
        (ii) Instrument types including those arising from short selling;
        (iii) Maturities, including the amount of debt maturing in a particular period; and
        (iv) Wholesale funding liabilities;
        (b) Where appropriate, net leverage and gross leverage; and
        (c) Daily settlement limits.
        Adopted: July 2007

    • Contingency Planning

      • RM-3.1.15

        Investment firm licensees must maintain contingency funding plans for taking action to ensure, so far as they can, that they can access sufficient liquid financial resources to meet liabilities as they fall due. These plans must also include what events or circumstances may lead to action under the plan being triggered.

        Adopted: July 2007

      • RM-3.1.16

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

        (a) The responsibilities of senior management;
        (b) Names and contact details of members of the team responsible for implementing the contingency funding plan;
        (c) Where, geographically, team members will be assigned;
        (d) Who within the team is responsible for contact with head office (if appropriate), analysts, investors, external auditors, press, significant customers, regulators, lawyers and others; and
        (e) Mechanisms that enable senior management and the governing body to receive management information that is both relevant and timely.
        Adopted: July 2007