Liquidity regime: FSA takes no prisoners
This comment piece relates to the Financial Services Authority liquidity regime and the latest "Dear CEO" letter.
The FSA is clamping down hard on firms who are under-prepared for the liquidity regime. The proposed "Dear CEO" letter on liquidity was made open for comment last month, and clearly puts the FSA’s no-nonsense message across: "Where firms have not taken the appropriate action we will consider a range of sanctions including enforcement action."
In October 2009, the FSA published the final version of the new liquidity requirements and implementation timetable in Policy Statement 09/16: Strengthening liquidity standards, including feedback on CP08/22, CP09/13 and CP09/14.
The FSA’s "Dear CEO" letter comes as a result of a review of how firms are meeting the new liquidity rules which highlighted 3 main areas of particular concern:
- Pricing liquidity risk
- Intra-day management of liquidity
- Management of collateral
The regulator went on to say, "firms that failed to demonstrate compliance generally supplied no evidence of having strategies, policies, processes and systems in place relating to liquidity risk." The liquidity regime was brought in as a damage limitation exercise to lessen the degree to which failures in liquidity risk management play a part in future market-wide stress.
Of course, it is worth taking into consideration that those firms who were awaiting confirmation from the FSA for their modification – and subsequently had it denied – had a very limited time to put the systems in place. But those firms that were not in this position and are struggling to maintain adequate responses to the FSA’s requirements will need all the help they can get. The FSA has thrown down the gauntlet, and with £88M of fines issued in 2010 alone - a massive jump of 153% on 2009 - the pressure is definitely on for firms to prove they are compliant with the liquidity regime. With more than a dozen clients using its solution to satisfy liquidity reporting to the FSA, FRSGlobal is clearly well placed to provide advice on the implementation of the regime.
On January 27th 2011 FRSGlobal will host a webinar summarising "life after liquidity" where we sweep up both regulatory change and share with the market our, and our clients’, experiences in complying with these regulations. Please register here for access to this webinar.