On May 12, 2016, the Prudential Regulation Authority published a consultation paper on its proposed approach to Pillar 2 liquidity requirements for intraday risk, debt buyback and non-margined derivatives, including a proposed policy statement. The CRD gives national regulators discretion to set Pillar 2 liquidity requirements, in addition to the standard Pillar 1 LCR which applies to all firms. The PRA is proposing that: (i) the level of application for setting Pillar 2 requirements should be aligned to the Pillar 1 approach; (ii) there should be no specific disclosure requirements under Pillar 2, other than the disclosure of the high quality liquid assets required to cover Pillar 2 risks which are part of the LCR disclosure requirements; (iii) it will use supervisory discretion, guided by a firm's outstanding debt or exposures, to assess liquidity risk linked with debt buyback and non-margined derivatives; and (iv) the assessment of intraday liquidity risk will be based on a firm’s maximum net debits, stress testing framework and key characteristics, as well as the markets in which it operates.

The paper also sets out the PRA’s initial approach to prime brokerage matched books and settlement failure risks. The PRA intends to consult on more specific proposals for these liquidity risks, using the feedback it receives on its proposed general approach. Responses to the proposals are due by August 12, 2016. The Pillar 2 requirements will only be implemented once all of the individual elements have been finalized by the PRA. The second consultation will also discuss a proposed approach to the timing and format of a transition path.

The consultation paper is available at: http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp2116.pdf