Liquidity Regulation in the UK & Europe Impact on International Banks and Broker-Dealers

Transcription

1 S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L 7 th July, 2010 Liquidity Regulation in the UK & Europe Impact on International Banks and Broker-Dealers Derek Paine - Compliance Manager (Speaker) Henrik Lang - Liquidity Product Sales Specialist (Host) JPMorgan Chase & Co. All Rights Reserved. JPMorgan Chase Bank, N.A. Member FDIC. All services are subject to applicable laws and regulations and service terms. Not all products and services are available in all geographic areas. Eligibility for particular products and services is subject to final determination by J.P. Morgan and or its affiliates/subsidiaries.

2 Agenda Opening Remarks Brief recap of the New FSA Liquidity Standards (FSA PS09/16) FSA liquidity buffers: Update on the quantitative transitional time path Basel Committee: Proposed international minimum standards for liquidity Looking ahead: Liquidity regulation developments expected in the next 12 months Discussion Closing Remarks 1

3 Brief recap of the new FSA Liquidity Standards (FSA PS09/16) - I. Revising Liquidity Regulation FSA PS09/16 in a Nutshell New Reporting Requirements Liquid Asset Buffers 2

4 FSA Arrow Process Brief recap of the new FSA Liquidity Standards (FSA PS09/16) II. FSA (PS09/16) Liquidity Regime in a Nutshell Adequacy and Self Sufficiency Senior Management Responsibility Systems and Controls Governance Systems & Controls Measurement & Management (Pricing, Intraday, Collateral, Legal Entities, Currencies, Funding diversity) Stress Testing Contingency Funding Plans ILAS Survivability across 3 stress scenarios 10 defined risk drivers Mitigants Behavioural modelling Waive or modify selfsufficiency Whole firm liquidity waiver Whole firm liquidity modification Intra-group liquidity modification Conditions Consequences Reporting: MI; KRI s; Collateral; Intraday FSA REPORTING: 7 New FSA Data Items (solo) Supervisory Liquidity review process ( SLRP ).. ILG (Liquidity Profile & Liquidity Buffer) 3

5 FSA liquidity buffers: Update on the quantitative transitional time path I. Liquidity Calibration Statement (FSA - 8 March 2010) The Financial Services Authority (FSA) published its enhanced liquidity regime in October This introduced both tougher qualitative and quantitative standards for firms. At that stage the FSA said that it would not tighten quantitative standards before economic recovery is assured given that all firms were experiencing a market-wide stress. The FSA committed to giving a further update in the first quarter of The FSA believes that it would be premature to increase liquidity requirements across the industry at the current time. This position will be reviewed later on in the year with a further announcement in Q4, Meanwhile, the FSA is continuing to work with firms that are most affected by the new regime focusing on the steps they are taking to mitigate liquidity risk and on the additional impact of our progressively tightening quantitative requirements. The FSA is also actively contributing to the international debate on liquidity. 4

6 FSA liquidity buffers: Update on the quantitative transitional time path II Backstop ILG All ILAS firms to be issued with Backstop ILG letters ahead of implementation of the quantitative & reporting aspects of the new regime To be replaced by full ILG once ILAA s have been reviewed BUT, do not have to get to full ILG until final calibration timetable decided. 5

7 International minimum standards for liquidity Basel 3 I. International Convergence Basel 3 (as this package of internationally agreed measures has become known) covers 5 main areas: 1 2 Capital: Improving quality, consistency and transparency Changes in Risk-weighted asset calculations: incl. increasing capital requirements for counterparty credit exposures arising from derivatives, repo and securities financing transactions 3 Introduction of an international leverage ratio 4 Reducing pro-cyclicality and promoting countercyclical buffers 5 Global minimum liquidity standard for internationally active banks 6

8 International minimum standards for liquidity Basel 3 II. Current Basel Liquidity publications Liquidity covered in 17 December 2009 publication: International framework for liquidity risk measurement, standards and monitoring the Liquidity Paper This was in addition to the September 2008 publication: Principles for Sound Liquidity Risk Management the Liquidity Principles Together, these aim to address concerns arising out of the economic crisis where a combination of lack of liquidity and inadequate liquidity risk management combined to amplify difficulties caused by credit losses. The Liquidity Paper proposals are already reflected in EU Commission working documents (26 February 2010) 7

9 International minimum standards for liquidity Basel 3 III. Liquidity Paper applies only to internationally active banks, and proposes: 1. Two quantitative minimum tests to ensure both short and long term prudent financial management: Liquidity Coverage Ratio ( LCR ) Net Stable Funding Ratio ( NSFR ) 2. The adoption of minimum standards and metrics for monitoring liquidity risk on an internationally harmonised basis. For the UK, 1. is new and 2. largely already covered by the new FSA Liquidity Regime. Both 1. and 2. largely new for Europe 8

10 International minimum standards for liquidity Basel 3 IV. Liquidity Coverage Ratio: Stock of high quality liquid assets Net cash outflows over a 30-day time period 100% Net Stable Funding Ratio: Amount of stable funding Required amount of stable funding >100% Liquidity Coverage Ratio ( LCR ) Requires banks to have enough cash equivalents to meet cash outflows over a short period of acute stress (30 days) Requirement to calculate net cash flows expected over 30 days assuming increased commitments and less available resources, and then maintain a buffer of high quality liquid assets to cover Two possible definitions of high quality assets: 1. Narrow: Cash, central bank reserves & high quality sovereign paper 2. Broader: would allow 50% of high quality asset requirement to include high quality corporate bonds and covered bonds subject to haircuts Net Stable Funding Ratio ( NSFR ) Requires banks to have capital and/or longer term high quality funding which can support operations over a longer period of less severe stress (1 year) Identify illiquid proportion of each asset (on- and off-balance sheet, and hold stable funding (share capital & long-term funding) 9

11 International minimum standards for liquidity Basel 3 V. Proposed minimum tools to be included in banks overall liquidity risk frameworks: 1. Contractual maturity mismatch Measurement of mismatch between cash inflows and cash outflows over time periods, currently suggested as overnight; 7&14 days; 1,2,3&6 months; 1,3,5 years and >5yrs 2. Concentration of funding sources To identify significant wholesale funding sources where withdrawal could cause liquidity problems Funding from each significant counterparty, product/instrument or currency to be shown over different time periods: 1mo; 1-3mo; 3-6mo; 6-12mo; >12mo 3. Available unencumbered assets Banks will have to monitor & report the quantity, type, currency and location of available unencumbered assets which could be used to raise additional liquidity at reasonable cost 4. Market related data General market data to enable supervisors to assess markets, and position of individual banks against this general assessment 10

12 International minimum standards for liquidity Basel 3 VI. Industry commentary on proposed liquidity standards Reviewed the BIS comment letters from JPMorgan, Bank of America, Citigroup, Wells Fargo, Bank of New York Mellon, and State Street Common themes from the letters were as follows: "Extreme" assumptions about cash outflows for LCR and available stable funding sources for NSFR Restrictive definition of stock of high quality liquid assets in LCR and required stable funding for assets in NSFR Potential to result in higher costs which may be pushed on to clients Prescribed approach does not factor in a firm's unique business mix, customer profiles, geographic diversity, historical experiences and relative financial strength No explicit articulation of the role of Central Banks in providing liquidity (or repo funding) during severe systemic events 11

13 International minimum standards for liquidity Basel 3 VII. The key timing for the Basel III proposal and expected implementation April 16, 2010 Capital and Liquidity proposal responses due February 19, 2010 Final QIS templates issued April 30, 2010 QIS results due Dec. 31, 2010 BCBS expected to issue updated proposal including calibration of minimum standards Dec. 31, 2012 Expected international implementation (subject to change by regulators as the timeline for economic recovery becomes more clear) 12

14 Liquidity regulation developments expected in the next 12 months UK Implementation of the new FSA Liquidity Regime (BIPRU 12) 1 June 2010 for Sterling Stock Banks 1 October 2010 for mismatch banks 1 November 2010 for investment firms ILAA s will start being called for in Q (2 months notice) Some form of discussion paper expected from the FSA regarding Basel 3 proposals Harmonised reporting proposals? Rest of Europe Basel to finalise Liquidity proposals? EU implementation timetable to become clearer? 13

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