FINMA Circular 2013/6 Liquidity Banks

Transcription

1 FINANCIALSERVICES FINMACircular2013/6 Liquidity Banks 1 Summary Circular13/6providesreportingrequirementsforshort termliquiditycoverageratioandqualitativerequirementsforliquidityriskmanagement. 2 TableofContents I. Titlepage pg.1 II. Circular13/6 pg.2 3 OtherLanguages DE: FINMA RS13/6Liquidität Banken FR: Circ. FINMA13/6Liquidité banques UnofficialtranslationissuedinMar

2 FinancialMarketSupervisoryAuthority(FINMA) Circular2013/6 Liquidity Banks Reportingrequirementsforshort termliquiditycoverageratioand qualitativerequirementsforliquidityriskmanagement Reference: Issued: Effective: Lastamendment: Legalbases: FINMAcirc.13/6Liquidity Banks 6December2012 1January2013 1January2013 [amendmentsaredenotedwithan*andarelistedattheendofthedocument] FINMASAart.7para.1lit.b BAart.4para.2 LiqOart.1para.2 Addressees BA ISA SESTA CISA AMLA Other Banks Fin.groups&conglomerates Otherintermediaries Insurers Ins.groups&conglomerates Intermediaries Stockexchanges&participants SecuritiesDealers Fundmanagementcompany SICAV LimitedpartnershipsforCIS SICAF Custodianbanks ManagersdomesticCIS Distributors RepresentativeofforeignCIS Otherintermediaries SRO DSFI SROSupervised Auditcompanies Ratingagencies x x 1

3 TableofContent I. Objectandscopeofapplication marginnos. 1 4 II. III. Reportingontheshort termliquiditycoverageratio (LCR) Qualitativerequirementsmadeofabank'sliquidityrisk management marginnos. marginnos A. Principles marginnos a) Theprincipleofproportionality marginno. 10 b) Ensuringabank'scontinuoussolvency marginnos B. Directing,monitoringandmanagingabank'sliquidityrisks marginnos a) Riskappetiteinregardtoliquidity marginnos b) Managementstrategiesforliquidityrisks marginnos c) Allocatingliquidityriskstovariousbusinessactivities marginnos C. Systemstomeasureandmanagerisks marginnos a) Processesusedtoidentify,assess,manageandmonitorliquidityrisks marginnos b) Managingtheliquidityrisksofmateriallegalentities,business areasandcurrencies marginnos c) Requirementsforintra daylevelsofliquidity marginnos d) Assetsheldabroad marginno. 28 D. Mitigatingliquidityrisks marginnos a) Requirementsforthesystemdefiningmaximumexposures marginnos b) Diversifyingthebank'sfinancialstructure marginnos c) Requirementsforholdingliquidityreservestomitigate rapidlydeterioratingliquiditysituations marginnos E. Stresstests marginnos F. Contingencyplanning marginnos IV. Transitionalprovisions marginnos

4 I. Objectandscopeofapplication ThiscircularclarifiestheprovisionsoftheLiquidityOrdinanceontheintroductionofareportingforthe short term liquidity coverage ratio(lcr) and the minimum qualitative requirements for a liquidity risk management. Therequirementsforthereportingfortheshort termliquiditycoverageratio(lcr)mustbemetatthe levelofboththeentirefinancialgroupandthestand aloneinstitute.instituteswhichbelongtoacentral organizationasdescribedinart.4para.3boareexemptedfromthesereportingduties. The qualitative requirements for the management of liquidity risks must be met at both the level of the entirefinancialgroupandatthestand aloneinstitute.thefollowingareexemptoftheseprovisions: b) Bankspartofacentralorganizationasdescribedinart.4para.3BO,providedthesehaveensured contractuallyand/orintheirarticlesofincorporationthatthegroup'scentralinstitutehasaccessto allrelevantinformationanddocumentsanytime,allowingittoassessthegroup'sliquidityposition atthelevelofeachindividualinstitute. Inbothcasesitmustbeensuredthatnolimitationsexistasfarasthefreetransferoffinancialmeansand collateralareconcerned. a) GroupcompaniesinSwitzerlandprovidedthesehaveensuredcontractuallyand/orintheirarticles of incorporation that the group's ultimate holding company has access to all relevant information anddocumentsanytime,allowingittoassessthegroup'sliquiditypositionatthelevelofeachindividualinstitute. Theboardofdirectorsaswellasthemanagementofagroupcompanyorofabankwhichispartofacentralorganizationareresponsiblethattheparentcompanyorthecentralorganizationfulfillstherequirementsofthequalitativemanagementofliquidityrisksforthegroupcompanyortheinstitutewhichispart ofacentralorganization II. Reportingontheshort termliquiditycoverageratio(lcr) Banks must report their data using the two reporting forms established by the FINMA for this purpose: LCRFinancialGroupandLCRStand aloneinstitute. Allinformationtobeenteredinthereportingformsreferstoatimeperiodof30days,i.e.thedurationof thestressperiodforwhichthelcriscalculated. The reporting forms are to be completed according to the guidance provided in Guidelines for the Data CollectionfortheLiquidityCoverageRatio(LCR).TheseareavailableontheFINMA'shomepage. Thereportingmusttakeplacemonthly.Thereport'scut offdateisthelastcalendardayofthemonth.the reportingmustbesubmittedbythelastcalendardayofthefollowingmonthatthelatest. Theauditfirmmustconfirmtheaccuracyofthedatasubmittedinthesereportsasrequiredbythecircular 2013/3Auditing.Moreover,itconfirmsthatthedatahasbeensubmittedontime * 3

5 III. Qualitativerequirementsmadeofabank'sliquidityriskmanagement A. Principles a)theprincipleofproportionality Therequirementsstipulatedinthethirdchapterofthiscirculardependonthebank'ssize,itstypeandthe scope,complexityandriskinessofitsbusinessactivities.certainaspectsstatedinchapteriiineednotbe appliedbysmallerbanks.theseareflaggedasexemptions. b)ensuringabank'scontinuoussolvency Banksmusthavealiquidityriskmanagementwhichiseffectivelyintegratedintothe bank'soverall risk managementprocesses. Liquidityriskmanagementmustalwaysaimforabank'ssolvency,whichmustbemaintainednowandat alltimesbutspecificallyalsoduringstressperiodsapplicabletothebankinquestionortotheentiremarketandduringwhichitisextremelydifficulttoobtainbothsecuredandunsecuredrefinancing B. Directing,monitoringandmanagingabank'sliquidityrisks a)riskappetiteinregardtoliquidity Theboardofdirectorsdefinestherisktoleranceforthebank'sliquidityrisks,regularly(atleastannually) reviews these, ensures that management implements the provisions for the risk appetite in regard to liquidityandthattherelevantemployeesareinformedclearlyandunderstandably. The bank internal strategy is based on the bank s previously defined risk appetite in regard to liquidity. Thisstrategyisusedtomanagethebank'sliquidityrisks,definingitsliquidity relateddirectivesandthe processesrequiredtomanageandcontrolitsrisks b)managementstrategiesforliquidityrisks Thebank'smanagementoracommitteereportingdirectlytoitistodevelopandimplementthestrategies tomanagetheliquidityriskstakingintoaccountthepreviouslydefinedriskappetiteinregardtoliquidity. Itclearlyandunderstandablyinformsallrelevantemployees.Specifically,thestrategytomanageabank's liquidity risks includes the issuing of directives and/or guidelines for liquidity management and for the financingstructure. 15 Ifappropriate,thebank'smanagementissuesinstructionsonthefollowing: 16 a) thedegreeofcentralizationoftheliquiditymanagement; b) theorganizationalandoperationalstructureofliquiditymanagement,specificallytheestablishment ofriskmanagementandcontrollingprocesses; c) thecompositionandthematurityprofileofassets,liabilitiesandoff balancesheetpositions; d) theallocationofliquidityriskstovariousbusinessactivities; e) intra dayliquiditymanagement; f) thecollateralmanagement; 4

6 g) thedefinitionoflimitsandtheescalationprocess; h) thediversificationofsourcesoffinancingandthelimitsoflargeexposures; i) thesizeandcompositionofreservesfromliquidassetswhichcouldbesoldorusedassecurityin timesofstress; j) theprocessesneededtodetermine,approve,useandreviewthestresstestsandtheirunderlying assumptions; k) thecontingencyplanning andreviewstheadequacyoftheseregularlybutatleastonceayear. c)allocatingliquidityriskstovariousbusinessactivities Thebankestablishesanappropriateliquiditytransfersettlementsystemforitsliquiditytobeappliedto theinternalchargingofliquiditycostsandrisksdependingonitsuseaswellasanyliquidityincome,takingintoaccountthebank'sfinancingstructure.thethuscalculatedtransferpricesaretobeusedwhen managingthebank'sbusinessactivitiesandwhencalculatingthepriceoftransactionsonandoffthebalancesheet.thecalculationoftherelevanttransferpricesmustalsoadequatelytakeintoconsiderationthe holdingperiodandthemarketliquidityoftheassetsinquestion.appropriateassumptionsmustbemade foruncertaincashflowstreams. Thetransferpricesystemforliquiditymustbemanagedandmonitoredbyabankunitnotinvolvedin eitherthetradingortreasurydepartments.therelevantemployeesmustbeinformedofthecurrently validtransferprices.thetransferpricesystemmustbecomparableandconsistentacrossthegroup.the transferpricesmustbereviewedregularlyfortheiradequacy. Smallerbankswithnosubstantialcorporateorcapitalmarketbusinessactivitiesareexemptedfromhavingtoallocatetheliquidityriskstospecificbusinessactivities.However,suchbanksmustsubstantiateand documentthisinamannerthatisunderstandableforthirdparties. C. Systemstomeasureandmanagerisks a)processesusedtoidentify,assess,manageandmonitorliquidityrisks Toidentifyandquantifyrisks,thebank sriskmanagementandcontrollingprocessesparticularlyinclude comprehensiveliquidityriskmeasurementsystemstailoredtoitsneeds.thesemustbeintegratedinthe bank'sliquiditymanagementstrategyanditscontingencyplanning.theseinclude: a) thepreparationofameaningfulliquidityoverviewwithanappropriatestructureinmaturitybands, which compare the projected streams of income with the payment streams. These must take into consideration the fluctuations which also exist even under normal circumstances. The underlying assumptionsfortheexpectedincomeandpaymentstreamsmustbedefinedanddocumented,and b) holdingsoffirst class,unencumberedliquidityreservesandhighlyliquidassetstomitigatequickly deterioratingliquiditysituations.therequirementsforholdingsuchliquidityreservesaredefined inmarginnos Theriskmanagementandcontrollingprocessesinclude,amongotherthings: 21 a) aneffectivecontingencyplanningwhichtakesintoaccountthestresssituationsdefinedinmargin no.45; 5

7 b) asystemdefiningmaximumexposuresandcontrolstakingintoaccountthestatedriskappetite; c) provisionswhichensurethattheincentivesforbusinessunitstotakerisksareinlinewiththethus causedliquidityrisksforthebankasawhole; d) provisionsonthemanagementandaccesstowell diversifiedsourcesoffinancingwithmaturities thatareequallydiversified,and e) ITsystemsaswellasqualifiedemployeestoensureatimelymeasurement,monitoringandreportingofliquiditypositionsincomparisontothesetoutlimits. b)managingtheliquidityrisksofmateriallegalentities,businessareasandcurrencies Bankswithmaterialbusinessactivitiesand/orlegalentitiesabroad 22 a) mustmanageandmonitorliquidityrisksregardlessofwhethertheirliquiditymanagementisstructuredinacentralizedordecentralizedway;however,aminimumofcentraloversightisrequiredat alltimes; b) mustensurethatalllegalentitieshaveaccesstoliquidityevenincaseofaliquidityshortage; c) ifappropriate,governsthelimitsapplicableforeachgroupcompany; d) establishesinternalcovenantsonliquiditysupportamonggroupcompanies,and e) assesseswhethertherearecompanylaw,regulatoryoroperationalrestrictionswhichcouldaffect thetransferofliquidfundsandunencumberedassetswithinthegroup. Bankswhichdisposeofsignificantassetsorliabilitiesinforeigncurrenciesandwherethereareconsiderablemismatchesregardingbothmaturitiesandcurrenciesoftheseforeign currencyassetsandliabilities mustimplementadequateprocessestomanagetheirforeign currencyliquidityinthemostimportant currenciesinordertoensuretheircommitments.theseprocessesshouldincludeatleastaseparateoverviewofliquiditydevelopmentsforeachcurrency,separatestresstestsfortheseforeigncurrenciesandthe explicitinclusioninacontingencyplansetupfortimesofinadequateliquidity. Bankswithmaterialliquidityrisksinvariouscurrenciesasdescribedinmarginno.23mustbeinapositiontorecognizedevelopmentsintheliquidityonforexswapmarketsandtheexchangeabilityofcurrenciesinatimelymannerandtofindpropercountermeasures.Upheavalsonforexswapmarketswhichintensifythemismatchesbetweencurrenciesandcauseunexpectedpricevolatilitiesmustalsobeintegrated intothestresstests c)requirementsforintra daylevelsofliquidity Banksmustbeabletodemonstratethattheyareinapositiontoreliablyestimateandmanagetheconsequencesofanintra daystresseventonthebank'sliquiditysituation.todothis,banksmustprepareadequatestresstestswhichsimulatesuchevents. Theinstrumentsandresourcesusedtomanageandmonitortheintra dayliquiditymustrelatetothe bank'sriskprofile,itsbusinessactivitiesanditsimportanceinthefinancialsystemassuch.itshouldbe takenintoconsiderationwhetherthebankdirectlytakespartinpaymentoperationsorsettlementsystems,whetheritislimitedtoactingascorrespondentorcustodianbankorwhetheritofferscorrespondentorcustodianbankservicestootherbanks,companiesorsystems

8 Ifasmallbankcandemonstrateanddocumentthatitisnotexposedtosubstantialrisksregardingintradaypaymentoperations,itneednotdisposeofaliquidityriskmanagementbeyondthenormalmeasures. 27 d)assetsheldabroad Bankswithmaterialbusinessactivitiesand/orlegalentitiesabroadmustbeinthepositiontoestimatethe accesstoassetsabroadandinformthefinmaonthisaccesswithinanacceptabledelayintimesofstress. 28 D. Mitigatingliquidityrisks a)requirementsforthesystemdefiningmaximumexposures Limitsmustreflecttheresultsfromthestresstestsandbesetinsuchamannerthattheyareaneffective managementinstrumentandthattheyareinlinewiththepreviouslydefinedriskappetiteinregardto liquidity. 29 Banksmustdefineclearanddocumentedprocessesinregardto 30 a) therighttosetorchangelimits; b) breachesoflimits; c) escalationprocessincaseofnon compliancewithlimits; d) authorizationofbreachesoflimitsbymanagement,aswellas e) thetakingofcountermeasuresandremediationifbreachesoflimitshavetakenplace. Aunitindependentoftradingandtreasurymustberesponsiblefortheongoingmonitoringwhetherlimits havebeencompliedwith. 31 b)diversifyingthebank'sfinancialstructure Smallbanksnotactiveincapitalmarketsandtradingorthosewhichdonotrefinancethemselvesonthe moneyandcapitalmarketsorthroughinstitutionalinvestorsaswellassubsidiariesofforeignbanks whichfinancethemselvesthroughthegroup spooloffundsareexemptedfromtheserequirements. Banksmustregularlyestimatehowquicklyliquiditycanbegeneratedfromrelevantfinancingsources whichareavailabletoitincasesofstress. Banksmustlimitandmonitorlargeexposurestospecificfinancingsourcesandmaturityperiodsbytaking appropriatemeasures.anadequatediversificationisattainedbybreakingthesedownaccordingtoshortterm,medium termandlong termfinancing,depositortypes,investors,counterparties,instruments,marketsorcurrencies.adequatemeasurescouldforinstancebethesettingoflimits. Bankswhichmostlyfinancethemselvesonmoneymarketsorcapitalmarketsthroughinstitutionalinvestors,aswellasotherbanks,insurancecompanies,hedgefunds,moneymarketfunds,pensionfundsor otherlargecorporationsmustestimatetheconsequencesincasethefinancingbysuchanimportantcounterpartyisdiscontinuedandimplementrelevantcountermeasures

9 c) Requirements for holding liquidity reserves to mitigate rapidly deteriorating liquiditysituations Banksmustensurethattheirtheirliquidityreservesaresufficientlylargeandthatthesearecomposedof sustainableassets, a) in consideration of the bank's business model, the riskiness of its balance sheet and off balance sheettransactions,theliquidityofitsassetsandliabilitiesandthatthesearesufficientinviewofthe sizeofexistingfundingshortfallsandtherelevantfinancingstrategies; 36 b) harmonizedwiththepreviouslydefinedrisktoleranceandappropriatelydiversified; c) alignedtothebank'sliquidityrequirementsasdeterminedbythestresstest,and d) thatthesetakeintoconsiderationtherelevantjurisdictionsandcurrencies,andtherelatedrisks. Banksmustprudentlyvaluetheirassets,conservativelycalculatingdiscountsandhaircutsapplicableto marketprices.specifically,theymusttakeintoconsiderationthatthevalueofassetsmaydropintimesof stressand/orthatitcouldbeimpossibleoratleastverydifficulttoselltheseintimesofstress.thevalues ofassets,discountsandhaircutsmustbere assessedregularly. Thebankmustensurethatliquidityreservesarenotblockedduetolegal,regulatoryoroperationalrestrictions.Assumptionsrelatingtothetransferabilityofassetsorcollateralmustbetransparent. Thebankmustassesswhetherassetsusedtocollateralizefinancialtransactionscanbepledgedtocounterpartiesandifthesewouldindeedacceptthem. Theorganizationalunitinchargeofliquiditymanagementmusthaveguaranteedaccesstotheassetsof theliquidityreservesincaseofliquidityshortages E. Stresstests Banksmust 41 a) regularlyperformstresstestsatallrelevantlevelsinordertoidentifyandquantifyproblemspotentiallycausedbyextremeeventsandthusdeterminetheconsequencesonitscashinflowsandoutflowsandthebank'soverallliquidityposition; b) adequatelydefinestresstestparametersregardingscope,methods,scenariodiversity,strictnessof scenarios,thetimehorizonschosen,thetypesofshocksandthefrequencyofthesetests; c) substantiate their choice of stress tests in a way understandable to third parties and document these.moreover,thestresstestsmustberegularlyreviewedfortheiradequacyandrelevanceand afterastresseventhasoccurred. Ifasmallbankcanverifiablysubstantiateanddocumentthatthedesignoftheinternationalscenarioofits LCR 1 forliquidityrisksenteredintoisadequate,itmayusethisscenariofordifferenttimehorizons,provideditadjustsittoreflecttheinstitution'sspecificities BaselCommitteeonBankingSupervision BaselIII:Internationalframeworkforliquidityriskmeasurement,standardsandmonitoring, December2010,availableunderhttp:// 8

10 Theresultsofstresstestsaretobedocumentedadequatelyandtobeusedasfollows: 43 b) Comparethemwithamountandthecompositionoftheliquidityreserve c) Usethemtodefinelimits d) Usethemtoallocateliquidityriskstobusinessactivities. Smallerbanks,asdefinedinmarginno.19,areexemptfromstipulation(d). Managementmustbedeeplyinvolvedinthestresstestingfortheinstitution sliquidity.theresultsofthe stresstestsmustberegularlyreportedtotheboardofdirectorsbutatleastannually.theseresultsserve asabasetodeterminewhetherremediationisnecessarytomitigatetherisksasdefinedinmarginno.43. Banksaretodefinetheirstresstestsandtheunderlyingassumptions.Banksdescribedinmarginno.42 areexemptedfromthisobligation.stresstestsmustalsoaddressexternaleventswhichcouldhappen, albeitwithlowprobability,butwhichareneverthelessplausible. a) Theselectedstrictnessofthestresseventsdependsonhistoricalevents,casestudiesfromliquidity crises and/or hypothetical models defined by internal and/or external experts. When doing so, it shouldbetakenintoconsiderationthatliquidityshortagesveryoftenareextremesituationswith unexpectedoutflowsofliquidityaswellasfinancingconsequences.thisiswhytheparametersof thestresseventshouldbeasconservativeaspossible. b) Itmustbeensuredthatthediversescenariosselectedcoverallofthepotentialmaterialliquidity risksthebankcouldbeexposedto. c) Thestressscenariosmustspecificallytakeintoconsiderationthelinkbetweenincreasedliquidity requirements, the tightening of market and financing liquidity as well as the likelihood of deposit withdrawals. d) Thestressscenariosmusttakeintoconsiderationshort termliquidityshortagesasmuchaslonger lastingones. Banksexposedtorisksstemmingfromintra daypaymentoperationsmustalsotakeintoconsideration intra dayliquidityrisksintheirstresstests F. Contingencyplanning a) Comparethemwiththepreviouslydefinedriskappetiteinregardtoliquidityandthebank sliquiditysituation; Withtheexceptionofthebanksdescribedinmarginno.42,banksmusttakeintoconsiderationthefollowingaspects: Banksmustdisposeofacomprehensiveandeffectivecontingencyplanfortimesofacuteliquidityshortages,whichiscloselyrelatedtotheongoingriskassessmentinregardtoliquidity. 48 Suchacontingencyplanmustinclude: 49 a) ideal early warning indicators for the timely recognition of any dangers to liquidity positions or potentialrefinancingpossibilities,andbeingabletoreactaccordingly; 9

11 b) emergency triggers and a structured, multi tiered escalation process depending on the gravity of theliquiditycrisisathand; c) possibleactions,dependingonthelevelontheescalationpyramidand/orthestressevent,whereas the liquidity generating and liquidity saving measures should be demonstrated and prioritized. Sourcesofliquidityandthegenerationofliquiditymustbeestimatedconservatively; d) operationalprocessesallowingthetransferofliquidityandassetsbetweenjurisdictions,legalentitiesandsystems,takingintoconsiderationanyrestrictionswhichwouldapplytothetransferability ofliquidityandassets; e) acleardefinitionofrolesandtheallocationofcompetences,rightsanddutiesofallfunctionsinvolved; f) clearprocedures,decisiontreesandreportingdutieswiththeaimofprovidingatimelyandcontinuingflowofinformationtoupperechelonsofmanagement.itistobeclearlydefinedwhichincidentsaretobereportedtotheseupperechelons. g) clearlydevelopedanddefinedcommunicationpathsandstrategieswhichensureaclear,consistent andregularflowofinformationtoexternalandinternalpartiesincaseofanemergency. Incaseofseriousliquidityproblems,theFINMAmustbeinformedimmediately. 50 Thecontingencyplanmustbereviewedannuallyandupdatedaccordingly.Suchareviewmustincludeall aspectsofthecontingencyplan.theresultsfromthisreviewmustbeforwardedtomanagement. 51 Theliquiditycontingencyplanmustbeintegratedintothebank'soverallemergencyplan. 52 Banksmustadequatelydocumentcomponentsofthecontingencyplanasdescribedinmarginnos.48 and IV. Transitionalprovisions Thefullycompletedreportingformsontheshort termliquiditycoverageratioasat30june2013mustbe submittedtotheswissnationalbankby31july2013forthefirsttime. 54 Thequalitativerequirementsmadeoftheliquidityriskmanagementmustbemetasof1January

12 Listofchanges Thecircularhasbeenamendedasfollows: Thesechangesenterintoforceon Amendedmarginno.: 9 11

13 Contacts PhilippRickert Partner,FinancialServices HeadBanking Zurich Tel Fax HansStamm Partner,FinancialServices Zurich Tel Fax MarkusSchunk Partner,HeadInvestmentManagement Zurich Tel Fax OlivierGauderon Partner,FinancialServices Geneva Tel Fax PatrizioAggio Director,FinancialServices Lugano Tel Fax The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG Holding AG/SA, a Swiss corporation, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss legal entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 12