As outlined in a Feature Piece in Edition 12 of this SCM Briefing, the European Commission has adopted a Delegated Regulation to supplement the Capital Requirements Regulation (CRR) with regard to the Basel III Liquidity Coverage Requirement (LCR) which is required to be applied by banks on a phased-in basis starting from 1 January 2015 (and is directly applicable in EU Member States from 1 October 2015). The LCR requires banks to ensure that they hold a stock of unencumbered, High Quality Liquid Assets (HQLAs) equal to their potential losses during a 30-day market crisis, by providing that the stock of HQLAs divided by the bank's "net liquidity outflows" over the next 30 calendar days is equal to or greater than 100% (based on market value of the liquid assets). In order to implement the Delegated Regulation in the UK, the Prudential Regulation Authority (PRA) has released Consultation Paper 27/14 (CP 27/14) entitled "CRD IV: Liquidity", which consults on the changes required to the existing UK liquidity regime (which is currently contained in Chapter 12 of the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU)), the addition of a number of new rules, consequential amendments to the PRA's reporting requirements, and the introduction of a new Supervisory Statement on the PRA's Approach to Supervising Liquidity and Funding Risk. The proposals set out by the PRA in CP 27/14 may be summarised as follows:

  • Revoking the current UK LCR rules in BIPRU 12 and withdrawing existing firm-specific Individual Liquidity Guidance (ILG), but carrying forward the broad principles established in BIPRU 12 into the new regime;

  • Following an accelerated timeframe (which is faster than the Basel Committee's revised timetable for the phasing-in of the LCR standard), the PRA will apply an 80% LCR requirement from 1 October 2015 and a 90% requirement from 1 January 2017, with the full 100% LCR to be met by 1 January 2018;

  • A set of "interim Pillar 2 add-ons" will allow the PRA to carry forward existing add-ons to a firm's ILG that are not covered in the LCR, ensuring that, until each firm's next liquidity review, it is subject to (broadly) the same level of liquidity requirement as previously;

  • Maintaining certain aspects of the current reporting regime (daily flows and enhanced mismatch reports under FSA047 and FSA048 respectively) for a period of two years following the introduction of new Common Reporting "COREP" liquidity returns in 2015 (but not beyond the date on which the 100% LCR requirement applies), and requiring firms to ensure they are able to submit their COREP returns daily;

  • Introducing a new rule that if assets pre-positioned (with the Bank of England for use in its liquidity insurance facilities) are not eligible for inclusion in the firm's HQLA buffer, they cannot be used to meet the PRA's quantitative liquidity guidance;

  • Since the Delegated Regulation applies only to "credit institutions" (i.e. banks), the PRA proposes extending its LCR rules to UK-designated investment firms; and

  • Since CRR does not apply to relevant third-country (i.e. non-EU) firms, the PRA proposes that relevant third-country firms with UK branches should be subject to a requirement to provide liquidity information on a whole-firm basis.

CP 27/14 does not propose any rules specifically implementing Articles 10-15 of the Delegated Regulation (the definition of "Liquid Assets", which specify (in Article 13) the criteria for Level 2B securitisations as HQLAs), since the Delegated Regulation will have direct application. However, the PRA notes that additional consultations will be released on further consequential amendments to its rules that are necessary for the implementation of the new liquidity regime, so CP 27/14 is not the last word on LCR implementation in the UK. Comments on CP 27/14 are requested by 27 February 2015, with a Policy Statement containing feedback, final rules and the new Supervisory Statement, to be released during 2015.

Useful links:

Prudential Regulation Authority Consultation Paper 27/14