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FSA challenges 2,800 CEOs on liquidity risk

FSA challenges 2,800 CEOs on liquidity risk

Firms to face detailed reviews on liquidity risk compliance

London – 15 January 2010.  Six weeks on from the start of the new liquidity risk regime, the FSA has this week sent out a ‘Dear CEO’ letter giving firms one month to confirm that they comply with the new systems and controls procedures.

The FSA allowed 2,800 firms approximately 40 days to implement the qualitative systems and controls requirements.  That deadline has now passed.  Firms are now being asked to declare whether they maintain robust liquidity risk management policies, plans, governance, measurement and stress testing procedures. 

PJ Di Giammarino, CEO of JWG, comments “It is great to see the FSA sticking to its guns.  This is a complex and difficult regime to initiate in this turbulent regulatory environment.  Confusingly, the BCBS and CEBS are also active in this space with half a dozen new documents being issued over the last month.  This is in addition to the new stress testing requirements prescribed in the FSA’s PS09/20 in December for implementation this year.”

The letter expects firms to confirm compliance by 12 February and it stipulates that selected firms will have to provide board-approved policies and governance arrangements, meeting minutes, liquidity management information and full descriptions of their stress testing methodologies and assumptions.

JWG’s 2009 research showed that almost half the firms’ compliance efforts could fall short of expectations by the deadline.  Despite calls from some quarters for industry guidance in this space, a benchmark does not exist.  CEOs are now being asked to commit to a qualitative judgement about their liquidity risk capabilities without the benefit of a reference point.

Di Giammarino continues “Underlying data that supports this regime will not be reviewed until later this year.  Although, for the first time, the FSA has recognised that there are issues surrounding data, they appear to have put the cart before the horse by concentrating on the mechanics of the process rather than what good data looks like.  A more focused effort will be required to get in front of the data tsunami created by this regime.

“Data quality discussions are not only welcome, but long overdue.  Without banks and their regulators agreeing common methods of producing and receiving data, the clarity sought by these regulatory efforts will not be achieved.  The US House of Representatives has proposed data standards that would allow their regulatory environment to function effectively and efficiently.  This has yet to happen in the UK.  In the absence of a data rulebook, does this mean that the UK will have to align with technical data standards and benchmarks defined on the other side of the Atlantic?”

On Tuesday 19 January, JWG will examine what it takes to do stress testing right at the Capital Markets Chamber, in its debate: This house believes that stress is a killer for banks operating in the UK.  For more information see  or click here.

About JWG: JWG seeks to be recognised by regulators, financial institutions and technology firms as the independent analysts to help determine how the right regulations can be implemented in the right way.  JWG is unique.  Its status as an independent think-tank permits collaboration with regulatory and industry bodies, financial institutions and technology firms without serving the interests of any constituent over another.

For immediate release

PJ Di Giammarino: +44 (0) 7811 430 503

Louisa Excell: (0) 20 7608 8350

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