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New FSA liquidity risk policy hits unsuspecting audience


New FSA liquidity risk policy hits unsuspecting audience


JWG releases media guide to help journalists pick their way through the complexities of the new liquidity risk regime for banks

London - 8 October 2009.  The industry is moving quickly to digest the implications of the FSA’s 400 pages of liquidity policy released on Monday.  This is a daunting task given that there are less than two months to go before the FSA’s first implementation deadline.Tomorrow, the FSA is holding a liquidity conference at the QE II with a price tag of £450, which will likely have 250 firms in attendance.  The turnout is surprisingly low given the enormity of the industry’s first implementation task and the timetable for compliance which has not shifted - despite a six month delay in releasing the policy. Though the Policy Statement (FSA PS09/16) has reduced the requirements for some of the 2,800 firms it applies to, all firms are subjected to significant new systems and controls requirements with which they must comply by 1 December.  This means that new risk tolerance policies, contingency funding plans and stress testing policies and procedures need to be approved by their boards by the end of next month.

JWG has analysed the changes from the 3 previous consultation documents and discussed the findings this week with industry practitioners, including six financial institutions, as part of its regular Liquidity Risk Action Network (LiRAN) workshops.  The highest impact modifications to the regime are:

1. Reporting.  Some 900 data items are now specified in regulation, many of them still require definition and interpretation

2. Liquidity risk assessment. The approach towards assessing the liquidity risk drivers that will form part of the Individual Liquidity Assessments (ILAS) of approximately 300 (of the 2800) firms’ has changed quite considerably

3. Rainy day purses.  Not only do firms need to scope and define exactly what assets qualify for their Liquid Asset Buffers, they now will be forced to hold a higher proportion of their balance sheet in low-yield securities if they are not able to prove they have ‘good quality’ systems and controls.

PJ Di Giammarino, CEO of the independent think-tank JWG, comments: “The implementation conference taking place 36 days  before the first deadline is surprisingly small.  This is a massive piece of regulation in many respects.  Many will struggle to comply with the intensive controls specified in the final regime.”

Industry participation in the consultation process has waned since the original deadline, set in December 2008, was to have the rules in place by April 2009.  Response levels to the second consultation in July were 30% less than the responses to the first paper.

“The answer is not a one size fits all solution, as there are so many different firms with different business models.  However, our experience is that 80% of the ‘known unknowns’ are non-competitive and can cease to be unknown through defining what ‘good looks like’ in a safe and collaborative manner.  Even within the same firm, many different perspectives are required to formulate responses to highly subjective questions that have no right answer.”

“This is a tricky business for the financial institution and their suppliers alike.  Many smaller firms simply don’t have the resources to analyse the problem, yet develop a solution alone.’”

Di Giammarino concludes:  “Liquidity goes much deeper than MiFID’s simple transparency and customer protection rules.  This regime has real commercial impact.  Those that do not quickly establish a full understanding of how it affects their business will lose out to their peers who achieve the correct balance between prudent balance sheet management and return on equity.”

Today, JWG has released a media guide Liquidity: everything you always wanted to know but were afraid to ask.  This is available to download at  http://www.jwg-it.eu/liran   (login required)

About JWG Group Limited

JWG seeks to be recognised by regulators, financial institutions and technology firms as the independent analysts to help them determine how the right regulations can be implemented in the right way. Founded in 2006 to initially work on MiFID, JWG launched the customer data management group and the liquidity risk action network (www.liran.eu) in 2008. For more information, see www.jwg-it.eu

For immediate release

PJ Di Giammarino,pj@jwg-it.eu, +44 (0) 7811 430 503

Louisa Excell, Louisa.excell@hotwirepr.com, +44 (0) 7976 233 051



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