Dear CEO…

The headline requirement is for all in-scope firms to confirm to FSA in writing by 12th February 2010 that the full set of new liquidity systems and controls requirements have been successfully embedded within the firm, together with details of any further actions required by the firms to come into full compliance.

The secondary requirement is to confirm, in the same letter, that appropriate plans are in place to deliver accurate electronic liquidity reporting by the relevant switch-on date (staggered between 1st June and 1st November this year).

Readiness?

It would be less surprising to discover that firms have made varying degrees of progress towards full compliance, that FSA realises this, and is now cracking the whip in order to prioritise the implementation. This is a very real whip, as the second phase described in the letter shows.

The key question is how to address shortfalls, internally and subsequently with the regulator, within the next four weeks.

FSA next steps

The first stage will be for those unlucky firms selected to provide corporate documentation for review, including:

1. The Board-approved liquidity risk management policy;
2. The Board-approved Contingency Funding plan;
3. Board documentation establishing liquidity risk appetite;
4. Copies of all liquidity risk management reports and management information;
5. Stress-testing documentation, including methodologies, assumptions and reports;
6. Committee terms of reference.

The second stage, following FSA’s desk review of the documentation, will be to select firms, based on inadequate submissions, for on-site follow-up, with a view to subsequent enforcement action where justified.

The third stage will be for a further, random selection of firms to receive in-depth on-site BIPRU 12.3/12.4 inspections in Quarter 2 as part of a thematic review, with the usual post-review publication in Quarter 3 describing FSA’s findings and examples of good and bad practice.

Liquidity data reporting

Understandably, FSA expects firms to have started planning to achieve implementation by the relevant target date, even if a detailed project plan has not yet been created. However, scoping/gap analysis should already be underway within a headline project timeline and within a clear ownership structure. Any late starter has four weeks left to put the project structure and funding in place, allocate responsibilities, kick off the scoping and draft the headline project plan, risks and dependencies in sufficient detail to satisfy the regulator.

Practicalities

Where there are process gaps the inevitable prioritisation process takes place, between:

1. Those that can be established before 12th February;
2. Those that can be almost completed by that date; and
3. Those which will not be in place, whatever the effort, by then.

To maximise any available FSA tolerance, a prioritised remediation plan needs to be created for the last category, to accompany the confirmation letter. It is blindingly obvious that the earlier this plan can be created, the more progress can be reported against it on 12th February. FSA has typically been more tolerant of firms who know they have a problem but are fixing it competently than of firms with the same problem who are not – which should also reduce the competent firm’s chances of being selected for the FSA second stage.

Conclusion

If it wasn’t before, this is now your highest priority.

If you wish to discuss this article or any aspect of your liquidity risk management programme, feel free to contact Nick Gibson directly on 020 7826 9013 or via nick.gibson@chasecooper.com.