Our daily update referred to the publication of the FSA's "Dear CEO letter", in which the FSA asks for responses by 12 February 2010:

  • confirming that the new systems and controls requirements have been properly embedded;
  • outlining any remaining actions that need to be taken; and
  • confirming that appropriate plans are in place to ensure accurate electronic reporting of liquidity data from the firm's switch-on date.

Although the letter raises issues which potentially affect the wider community of BIPRU firms, the FSA has confirmed that only ILAS BIPRU firms need provide responses in the manner contemplated by the letter.

The expectation is that other BIPRU firms (to whom the FSA did not send hard copies of the letter) will effectively be self-certifying on the same issues through return 55 in the new suite of returns.

Liquidity Risk Management

The FSA generally publishes "Dear CEO" letters to maintain regulatory transparency and to flag issues and concerns. Like other "soft guidance" issued by the FSA, such letters are most often used as a tool for delivering regulatory messages more widely. There is an expectation that firms will read "Dear CEO" letters to identify the concern the FSA is addressing, consider whether a similar concern arises in connection with its own business, and if so, to consider whether that concern has been, or how it should be, addressed. [See our article "Soft guidance: tool or weapon in a principles-based world?"].

This particular "Dear CEO" letter essentially refers to existing requirements and guidance. Full-scope ILAS BIPRU firms are the FSA's priority at this stage.

The FSA accepts that there will be some element of proportionality in the application of guidance to other BIPRU firms. Those other BIPRU firms may nevertheless wish to consider whether they have policies appropriate for their business to deal with the following key aspects highlighted in the letter:

  • a contingency funding plan;
  • the pricing of liquidity risk; and
  • governance arrangements around liquidity risk management.

The FSA now plans to carry on some thematic work and pick some sample firms (again mainly focussing on full-scope ILAS BIPRU firms) to look at the way in which the "qualitative aspects" of the new regime have been dealt with. Its findings, including examples of good practice, will be published in the third quarter of 2010, and this is likely to provide additional guidance for BIPRU firms generally to consider.

Liquidity data

The letter also confirms that later in the year, the FSA intends to carry out some work on compliance with liquidity data regulatory reporting requirements. That data will be used to monitor firms’ compliance with the FSA's liquidity risk standards, to assess their liquidity risk profiles and to draw market-wide and peer-group comparisons. The FSA will run its stress scenarios on the basis of the contractual data collected.