The proposed rules are based on recently agreed international liquidity standards, in particular the Basel Committee on Banking Supervision’s (BCBS) Principles for Sound Liquidity Risk Management and Supervision, published last June, and also take into account difficulties faced in the market over the past 18 months.

The FSA’s proposals emphasise the responsibility of firms’ senior management to adopt a sound approach to liquidity risk management, and present the following changes:

• All regulated entities must have adequate liquidity and must not depend on other parts of their group to survive liquidity stresses, unless permitted to do so by the FSA.
• A new systems and controls framework based on the recent work of the BCBS and the Committee of European Banking Supervisors (CEBS).
• Individual liquidity adequacy standards for firms based on firms their being able to survive liquidity stresses of varying magnitude and duration.
• A new framework for group-wide and cross-border management of liquidity allowing firms, through waivers and modifications, to deviate from self sufficiency where this is appropriate and would not result in undue risk to clients.
• A new reporting framework for liquidity, with the FSA collecting granular, standardized liquidity data at an appropriate frequency so the FSA can see firm-specific, sector- and market-wide views on liquidity risk exposures.

Paul Sharma, Director of Wholesale and Prudential Policy at the FSA, said "These new proposals take on board the feedback we have received to last year’s discussion paper 07/7 as well as the lessons both we and firms have learned from the recent market volatility. We have put forward a robust set of proposals that we believe will greatly improve firms’ ability to deal with liquidity risks, and thereby increase the overall stability of the UK financial markets.  This builds on the international work on liquidity that is currently in train.”

The consultation period closes on 4th March 2009.  The FSA hopes to introduce new rules in October 2009. The FSA is also pre-consulting on the reporting requirements for the new liquidity regime.  The consultation period runs for a month and the FSA will then look to issue a separate reporting CP in Q1 2009.