Prudential Regulation Authority Rulebook

6.1

The PRA expects a firm to have a liquidity plan in place for its MA portfolio(s).

6.2

While the PRA considers it acceptable for firms to manage liquidity at entity level, firms should be able to demonstrate the processes in place to ensure that there is sufficient liquidity available to an MA portfolio, taking account of any lack of fungibility. Firms should show in their liquidity plans how an MA portfolio can obtain the necessary liquidity, and how liquidity management for an MA portfolio interacts with liquidity management for the rest of the firm.

6.3

The PRA does not consider that the selling of assets from an MA portfolio to generate liquidity would be consistent with the MA eligibility conditions, in particular the condition that the assignment of assets should be maintained over the lifetime of the obligations except where cash flows change materially (regulation 4(5) of the IRPR regulations).

6.4

The liquidity plan will form part of a firm’s own risk management, so should reflect the firm’s own assessment and management of liquidity risk.

6.5

The PRA considers that it would be helpful for a firm’s liquidity plan for the MA portfolio to include or address the following points:

• a clear definition of liquidity risk in the context of the MA. By explicitly identifying the sources of liquidity risk, and providing a detailed consideration of how the liquidity plan would be used for risk management and decision-making in relation to an MA portfolio, firms can demonstrate that they have understood and identified that portfolio’s risks;
• an accurate forecast of cash inflows and outflows, setting out any key assumptions made (eg reinvestment rates, FX hedging requirements and use of repos). For assets exposed to the risk of cash flow variability, firms should consider cash flows using both best estimate assumptions and also alternative cash flow patterns. Also, the PRA considers that it is good practice to include a process of regularly reviewing liquidity plans, taking into account all timing requirements, including those that ensure the restoration of compliance with MA in the event of a breach;
• the tools to be developed to monitor and manage liquidity risk, including what stress and scenario testing would be performed and what mitigation options are available (eg additional sources of liquidity);
• a consideration of how any existing liquidity risk management framework could be adapted for the specific liquidity requirements of an MA portfolio. The PRA considers that it is useful to understand how the liquidity management of an MA portfolio interacts with the wider liquidity risk management framework. However, the PRA would not view a liquidity plan that only covered, for example, the overall liquidity buffers held by the firm or its holding companies, or syndicated lines of credit, as being adequate to satisfy the requirements of Conditions Governing Business 3.1(3);
• policies on the extraction of surplus, taking into account paragraphs 7.19 to 7.21 of this SS, in the liquidity plans of firms that manage this risk at entity level;
• liquidity of the assets in an MA portfolio; and
• a consideration of the liquidity of collateral posted to an MA portfolio, including in a stress scenario.