PRA finalises liquidity and funding risk supervision rules and guidance: PRA has published a supervisory statement on its approach to supervising liquidity and funding risks to go alongside its Policy Statement and final rules on liquidity, which create two new modules for the PRA Rulebook – CRR Firms: Individual Liquidity Assessment, and CRR Firms: Liquidity Coverage Requirement – UK-Designated Investment Firms, and make some consequential changes to parts of the PRA Handbook. The relevant rules take effect on 1 October 2015 and, in principle, delete those parts of the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU) relating to liquidity requirements, including BIPRU 12 and BIPRU Schedule 6. The supervisory statement covers PRA's expectations on:

  • the Internal Liquidity Adequacy Assessment Process (ILAAP). PRA explains how it believes firms can use existing documents to transition to the ILAAP requirements, and looks at how it expects firms to apply stress testing and manage the high quality liquid assets buffer. The statement includes a suggested structure and content of the ILAAP document;
  • the Liquidity Supervisory Review and Evaluation Process (L-SREP): PRA will carry out an L-SREP in a manner proportionate to the firm, and, following the L-SREP, will give individual liquidity guidance (ILG) to firms. It notes firms must in any event comply with PRA's overall liquidity adequacy rule (OLAR). PRA plans to follow the L-SREP process from October 2015 at the latest but will review firms on the basis of their existing ILAA if appropriate, asking for more information if this does not contain everything that the ILAAP will need to cover; 
  • drawing down Liquid Asset Buffers: PRA explains how it expects firms to notify it if the firm falls or expects to fall below its quantitative ILG, and that such firms should be prepared to discuss their plan for restoring compliance;
  • collateral placed at BoE: PRA expects firms to have robust levels of assets pre-positioned at BoE; and
  • daily reporting under stress. PRA notes the returns it expects certain firms to submit daily in times of stress.

(Source: PRA Finalises Liquidity Rules and PRA Finalises Liquidity Guidance)

PRA issues volatility adjustment caution: PRA has issued a statement in response to news that some firms are seeking to include methodology in their internal models (for Solvency 2 purposes) which would anticipate future changes in the volatility adjustment (VA) in the modelling of market and credit risk stresses. PRA states that firms should not assume any change to the level of VA when calculating the solvency capital requirement (SCR). PRA explains this is consistent with the purpose of the VA, which is to provide countercyclical relief to firms’ balance sheets. PRA believes anticipating this relief via a reduction in capital requirements would frustrate this purpose but says it would be very difficult for firms reliably to model changes to the requisite standard as the modelling of changes in the VA would need to make allowance for a number of complex factors. (Source: Volatility Adjustment in the Modelling of Market and Credit Risk Stresses)