PRA has published the first of two proposed consultation papers on Pillar 2 liquidity under the CRR. It proposes a statement of policy on its approach to three aspects of Pillar 2 liquidity: intraday risk, debt buyback and non-margined derivatives. PRA seeks views on its proposals that:

  • in general, the level of application for setting requirements under Pillar 2 will be aligned to the Pillar 1 approach;
  • in disclosing information about their liquidity position, firms should note that their publicly disclosed Liquidity Coverage Ratios (LCRs) include high quality liquid assets (HQLA) required to cover Pillar 2 risks, with no further specific disclosure on their Pillar 2 requirements unless required by law;
  • its approach to assessing liquidity risk associated with debt buyback and non-margined derivatives will be based on supervisory discretion guided by the firm’s outstanding debt or exposures; and
  • its approach to assessing intraday liquidity risk will be based on the firm’s maximum net debits, the firm’s stress testing framework, the firm’s key characteristics such as whether it is a direct or indirect participant in payment and settlement systems, and the markets it operates in.

The draft statement of policy specifically addresses franchise viability – debt buyback, early termination of non-margined derivatives and intraday liquidity. PRA will implement the Pillar 2 regime only when all individual elements are finalised, and will consider whether it needs a transition path. The paper also outlines the PRA’s Pillar 2 objectives and scope and indicated PRA’s plans for future work. The consultation closes on 12 August. (Source: PRA consults on Pillar 2 liquidity)