Introduction

Introduction

Guidance

(1) This Chapter addresses the regulatory requirements in respect of managing the Liquidity Risk exposures of a Bank. Liquidity risk is the risk that a Bank may not be able to meet its financial obligations as they fall due. Among all the prudential risks faced by a Bank, Liquidity Risk is highly related to group risk in that a Bank that is a member of a group could be called on to make good on commitments and guarantees in favour of the other members of its group, whether financial or non-financial members.

(2) This Chapter includes requirements that a Bank:

• (a) implement a comprehensive Liquidity Risk management framework to manage, measure and monitor Liquidity Risk commensurate with the nature, scale and complexity of its operations;
• (b) adopt prudent practices in managing Liquidity Risk;
• (c) have adequate sources of stable long-term funding;
• (d) have sufficient resources and funding to withstand severe liquidity stress; and
• (e) maintain an adequate level of liquidity, according to the norms, methodologies, standards and guidance provided in the BPG issued by the AFSA.

(3) The detailed requirements specifying the calculation methodologies, parameters, metrics and formulae in respect of the primary liquidity requirements outlined in this Chapter are provided in the Banking Prudential Guideline (BPG) issued by the AFSA. The BPG also provides detailed guidance on calculation methodologies, formulae, parameters and norms involved in calculation of quantitative liquidity requirements like the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). It is suggested that this Chapter of the BBR, be read in conjunction with Chapter 9 of the BPG issued by the AFSA, to facilitate understanding of the regulatory requirements and compliance with them.

9.1. Liquidity Risk Management – Systems and Controls

(1) A Bank must:

• (a) identify, assess, monitor, mitigate and, control its Liquidity Risk;
• (b) implement and maintain a comprehensive Liquidity Risk management framework that is appropriate for the nature and level of its Liquidity Risk;
• (c) hold adequate liquid assets, at all times, to ensure that it can meet all liabilities as they arise in the course of its business;
• (d) maintain sufficient amount of high- quality liquid assets to enable it to withstand any reasonably foreseeable liquidity stress;
• (e) develop and maintain a robust funding strategy to ensure that its activities are, and will continue to be, funded from stable sources;
• (f) be able to identify potential liquidity shortfalls by constructing maturity ladders based on appropriate periods and monitoring them;
• (g) prepare a contingency funding plan to meet liquidity shortfalls; and
• (h) implement and maintain a Liquidity Risk management policy which enables it to identify, assess, monitor, control and mitigate Liquidity Risk.

(2) The Liquidity Risk management policy must:

• (a) be documented and include the Bank’s risk appetite for Liquidity risk;
• (b) be appropriate to the nature, scale and complexity of its activities;
• (c) must establish procedures, systems, processes, controls and approaches to identify, measure, evaluate, manage and control or mitigate its Liquidity Riskand to ensure the integrity of its Liquidity Riskmanagement;
• (d) establish, and must provide for the regular review of, the Bank’s Liquidity Risktolerance and other quantitative and qualitative limits to control Liquidity Risk exposures and vulnerabilities;
• (e) must set out the organizational structure, and must define the responsibilities and roles, for managing Liquidity Risk
• (f) ensure that its risk management framework including but not limited to tools, methodologies and, systems enable it to implement its Liquidity Risk management policy; and
• (g) be reviewed and updated at a reasonable frequency, but at least on an annual basis.

(3) The Liquidity Risk management policy must enable the Bank to carry out stress-tests using various scenarios based on appropriate assumptions. The policy must take into account the Bank’s Liquidity Risk profile (including on-balance-sheet and off-balance-sheet risks) and tolerance in the context of the markets and macroeconomic conditions in which the Bank operates.

(4) The Bank must have specific policies on:

• (a) the composition and maturity of assets and liabilities;
• (b) the diversity and stability of funding sources; and
• (c) the approach to managing liquidity in different currencies, across borders, and across business lines and legal entities. Note Guidance in respect of the contents of a Bank’s Liquidity Risk management policy which is required to satisfy the regulatory requirement in the Rule 9.1 is provided in the BPG issued by the AFSA.

9.2. Role of Governing Body—Liquidity Risk

(1) A Bank’s Governing Body must ensure that its Liquidity risk management policy enables it to obtain a comprehensive bank-wide view of its Liquidity risk exposures and is consistent with the Bank’s risk profile and systemic importance.

(2) A Bank’s Governing Body must ensure that a comprehensive Liquidity Risk management framework is implemented and maintained; and that it is documented, and reviewed at least annually;

(3) A Bank must ensure that its Governing Body is responsible for monitoring the nature and level of Liquidity Risk assumed by it and for monitoring the Liquidity Risk management process.

(4) The Governing Body of the Bank must also ensure that:

• (a) an appropriate senior management structure with clearly defined responsibilities and roles for Liquidity Risk management and for compliance with the Bank’s Risk strategy, is established and maintained;
• (b) the Bank’s senior management and other relevant staff have the necessary experience to manage Liquidity Risk and to effectively implement the Liquidity Riskmanagement policy;
• (c) appropriate liquidity limits covering Liquidity Risk management in both day-to-day and stressed conditions are set;
• (d) stress-tests, funding strategies, contingency funding plans and holdings of high-quality liquid assets are effective and appropriate for the Bank;

(5) The Governing Body must regularly review reports on the Bank’s liquidity and, where necessary, information on new or emerging Liquidity Risks, with a particular view towards monitoring Liquidity Risk. The Governing Body of the Bank must also review the Liquidity Risk tolerance and strategy at least on an annual basis.

(6) The Governing Body must approve:

• (a) the Bank’s Liquidity Risk management policy;
• (b) its Liquidity Risk tolerance and risk strategy;
• (c) its funding strategy; and
• (d) its contingency funding plan.

9.3. Role of senior management – Liquidity Risk

In order to ensure sound management of the Bank’s Liquidity Risk profile, the senior management of a Bank, must do all of the following:

1. (a) develop a Liquidity Riskmanagement policy in accordance with the Bank’s approved Liquidity Risktolerance;
2. (b) develop and implement a liquidity management strategy, processes and procedures, taking into account the Bank’s approved Liquidity Risktolerance;
3. (c) ensure that the Bank maintains sufficient liquidity at all times;
4. (d) determine the structure, responsibilities and controls for managing Liquidity Risk, and for overseeing the liquidity positions, of the Bank and all of its branches and subsidiaries in all of the jurisdictions in which the Bank and its branches and subsidiaries are active, and set out that structure and those responsibilities and controls clearly in the Bank’s liquidity policies;
5. (e) continuously monitor information on the Bank’s liquidity developments and report to the Governing Body regularly.
6. (f) monitor market trends that could present significant, unprecedented or complex challenges for managing Liquidity Risk so that appropriate and timely changes can be made to its Liquidity Riskmanagement policy.
7. (g) ensure that the Bank has adequate internal controls to ensure the integrity of its Liquidity Risk management processes;
8. (h) determine, and set out in the Bank’s liquidity risk management policy, the structure, responsibilities and controls for managing Liquidity Risk and for overseeing the liquidity positions of all legal entities, branches and subsidiaries in the jurisdictions in which the Bank is active; and
9. (i) ensure that stress tests, contingency funding plans and holdings of high-quality liquid assets are effective and appropriate for the Bank;
10. (j) establish reporting criteria specifying the scope, manner and frequency of reporting for various recipients (such as the Bank’s Governing Body and senior management and any relevant committee of the governing body) and fix who is responsible for preparing the reports; and
11. (k) establish the specific procedures and approvals necessary for making exceptions to policies and limits, including the escalation procedures and follow-up actions to be taken for breaches of limits.

9.4 Liquidity Risk tolerance

(1) A Bank’s Liquidity Risk tolerance must be appropriate for the Bank’s operations and strategy and its role in the financial systems in which it operates.

(2) The Bank must review its Liquidity Risk tolerance at least annually to reflect the Bank’s financial condition and funding capacity.

(3) The Bank’s Governing Body and senior management must ensure that the Bank’s Liquidity Risk tolerance allows the Bank to effectively manage its liquidity in such a way that the Bank can withstand prolonged liquidity stress.

(4) The Bank must document its Liquidity Risk tolerance in a way that clearly states the trade-off between risks and profits.

9.5 Liquidity Risk Management – Processes and Procedures

(1) A Bank must have a sound process for identifying, measuring, monitoring and controlling Liquidity Risk. The process must include a robust framework for comprehensively projecting cashflows arising from assets, liabilities and off-balance-sheet items over an appropriate set of time horizons.

(2) A Bank must set limits to control its Liquidity Risk exposure and vulnerabilities. The limits and the corresponding escalation procedures must be reviewed regularly. The limits must be relevant to the business in terms of its location, the complexity of its operations, the nature of its products, and the currencies and markets it serves. If a limit is breached, the Bank must implement a plan of action to review the exposure and reduce it to a level that is within the limit.

(3) A Bank must actively manage its collateral positions, distinguishing between encumbered and unencumbered assets. The Bank must monitor the legal entity in which, and the physical location where, collateral is held and how collateral can be mobilised in a timely manner.

(4) A Bank must design a set of early warning indicators to help its daily Liquidity Risk management processes to identify the emergence of increased risk or vulnerabilities in its liquidity position or potential funding needs. The indicators must be structured so as to help identify negative trends in the Bank’s liquidity position and to lead to an assessment and a potential response by management to mitigate the Bank’s exposure to the trends.

(5) A Bank must have a reliable management information system that provides the governing body, senior management and other appropriate personnel with timely and forward-looking information on the Bank’s liquidity position. A Bank must actively manage its intraday liquidity positions to meet payment and settlement obligations on a timely basis under both normal and stressed market conditions, thus contributing to the orderly functioning of payment and settlement systems.

(6) A Bank must develop and implement a costs and benefits allocation process for funding and liquidity. The process must appropriately apportion the costs of prudent liquidity management to the sources of Liquidity Risk, and must provide appropriate incentives to manage Liquidity Risk.

(7) A Bank that is active in multiple currencies:

• (a) must assess its aggregate foreign currency liquidity needs and determine an acceptable level of currency mismatches; and
• (b) must undertake a separate analysis of its strategy for each significant currency, considering possible constraints during periods of liquidity stress.

(8) Such a Bank must also maintain a portfolio of high-quality liquid assets consistent with the distribution of its liquidity needs by currency. A currency is considered as significant for a Bank if its liabilities denominated in that currency amount to 5% or more of its total liabilities.

9.6 Delegation of day-to-day Liquidity Risk Management

(1) A Bank may delegate the day-to-day management of its Liquidity Risk to another entity in the same Group for management on a Group basis only if:

• (a) the Governing Body of the Bank has formally approved the delegation and keeps the delegation under review; and
• (b) the Bank notifies the AFSA in writing of the delegation on a priori basis.

(2) If a Bank delegates the management of its Liquidity Risk in accordance with (1), the requirements in this Chapter continue to apply to the Bank.

9.7 Notification about liquidity concerns

(1) A Bank must ensure that its Governing Body and senior management are informed immediately of new and emerging liquidity concerns.

(2) The Bank must notify the AFSA of any significant concerns that the Bank may have about its current or future liquidity. In particular, the Bank must immediately notify the AFSA if the Bank experiences a severe liquidity stress. The notice must describe any remedial action taken, or planned, to address the concerns or liquidity stress.

9.8. Funding Strategy

(1) A Bank must establish, and must regularly review, strategies for the ongoing measurement and monitoring of funding requirements. The resultant funding strategy must provide effective diversification in the source and nature of its funding.

Note Subrule (1) of Rule 9.8 does not apply to Credit Providers.

(2) A Bank must ensure that the funding strategy is documented and is approved by its Governing Body. A Bank must ensure that its funding strategy is reviewed regularly and at least annually and is updated as necessary in light of changed funding conditions and any change in the Bank’s strategy.

(3) The Bank must promptly inform the AFSA of any material changes to its funding strategy.

(4) A Bank must assess regularly its capacity to raise funds quickly. A Bank must assess market access under a variety of normal and stressed conditions.

(5) A Bank must:

1. (a) develop and document a 3-yearly funding strategy;
2. (b) identify the main factors that affect its ability to raise funds;
3. (c) monitor those factors closely to ensure that estimates of fund raising capacity remain valid;
4. (d) maintain a continuing presence in its chosen funding markets; and
5. (e) maintain strong relationships with funds providers.

9.9 Stress-testing and Liquidity Risk tolerance

(1) A Bank must carry out stress-testing using various short-term and long-term Bank-specific and market-wide liquidity stress scenarios, to identify sources of potential liquidity strain and to ensure that the Bank’s exposures remain within its Liquidity Risk tolerance. The tests must be carried out at intervals appropriate for the nature, scale and complexity of the Bank’s business and for its risk profile.

(2) In respect of the stress testing, a Bank must

• (a) use conservative and regularly-reviewed assumptions;
• (b) use scenarios based on varying degrees of short-term and protracted institution-specific and systemic market-wide stress (individually and in combination); and
• (c) include a cash-flow projection for each scenario tested, based on reasonable estimates of the impact (both on and off-balance sheet) of that scenario on the Bank's funding needs and sources.

(3) A Bank’s stress test scenarios and related assumptions must be fully documented and frequently reviewed to ensure they remain appropriate

(4) The Bank must report to the AFSA, in the form that the AFSA directs, the results of its stresstesting. The Bank must use results to adjust its positions, to review its Liquidity Risk management policy, and to develop effective contingency funding plans.

9.10 Contingency Funding Plan

(1) A Bank must have a documented Contingency Funding Plan (CFP) that sets out clearly its strategies for addressing liquidity shortfalls in emergency situations. The plan must set out available funding sources and the amount of funds that the Bank estimates can be obtained from those sources. A Bank must ensure that its CFP is approved by its Governing Body.

(2) The CFP must be flexible enough to enable the Bank to respond quickly in various situations. It must address the issues over various periods (including intraday) and must establish clear lines of responsibility and communication.

(3) The Bank must review and update its CFP every year (or more often as changing business or market circumstances require) for the governing body’s approval.

(4) The CFP must be commensurate with a Bank’s complexity, risk profile and scope of operations and its role in the financial systems in which it operates. Note Detailed standards and guidance in respect of a Bank’s Contingency Funding Plan which is required to satisfy the regulatory requirement in the Rule 9.10 is provided in the BPG issued by the AFSA.

(5) A Bank must review and update its CFP, at least annually for approval by its Governing Body, or more frequently if required by business or market circumstances. It must test its CFP regularly to ensure it is effective and operationally feasible.

(6) A Bank must ensure that its CFP is consistent with its business continuity and disaster recovery arrangements and can operate in situations where business continuity arrangements have been invoked.

9.11 Relation to Internal Capital Adequacy Assessment Process (ICAAP)

A Bank must be able to demonstrate to the AFSA that its ICAAP adequately captures Liquidity Risk. This is so even if the effect of Liquidity Risk on the Bank’s capital is indirect (for example, by reducing the value of the Bank’s assets at the time they are realised).

9.12 Liquidity Risk in foreign currency business

(1) This rule applies to a Bank if:

• (a) the Bank’s foreign currency business is significant; or
• (b) the Bank has significant exposure in a particular foreign currency.

(2) A Bank’s business in a currency is significant, and the Bank’s exposure in a currency is significant, if 5% or more of the gross value of its balance-sheet assets, balance-sheet liabilities or off-balancesheet financial activities is denominated in the currency.

(3) A Bank to which this rule applies must undertake separate analysis of its policies (and monitor its liquidity needs) for each significant currency.

(4) The Bank must carry out regular stress-testing to determine the extent of mismatches in each significant currency and, if appropriate, to set limits on its cash flow mismatches for each such currency and for all those currencies in total.

(5) The Bank must monitor its liquidity needs in each significant currency and must be able to demonstrate to the AFSA that it can transfer liquidity from one currency to another across jurisdictions and legal entities.

9.13 Management of encumbered assets

A Bank must set a prudent limit for encumbered assets. The Bank must keep adequate records to enable it to disclose the level of its encumbered assets to the AFSA, if required to do so.

9.14 Consequences of breaches and changes

(1) If a Liquidity Risk limit is breached, a Bank must review the exposure and reduce it to a level that is within the limit.

(2) The Bank must make appropriate adjustments to the management of its Liquidity Risk in the light of the Bank’s changing risk profile, funding strategy, and developments in the markets and macroeconomic conditions in which it operates.

9.15 Liquidity Requirements

(1) The quantitative liquidity requirements and liquid asset maintenance requirements defined in this Chapter, apply to a Bank on a solo basis, unless specified.

(2) The AFSA may require a Bank to comply with the liquidity requirements defined in this Chapter to its Financial Group, if the Bank and its Financial Group are subject to consolidated supervision.

(3) A Bank must calculate and comply with the following liquidity requirements, which are detailed in the remaining sections of this Chapter.

• (a) Liquidity Coverage Ratio
• (b) Net stable funding ratio
• (c) Maturity Mismatch Limits

9.16 Liquidity Coverage Ratio (LCR)

(1) The Rules 9.16 to 9.18 apply only to Banks licensed to conduct the Regulated Activity of Accepting Deposits. These rules, regarding compliance with LCR requirement are not applicable to Broker Dealers or Credit Providers.

Note   Although the references in these rules are made to Banks, for the sake of clarity it is reiterated that the use of the term Bank in Rules 9.16 to 9.18 only apply to Banks conducting the Regulated Activity of Accepting Deposits.

(2) A Bank must, except as provided in Rule 9.17, maintain a LCR of at least 100% from 1st January 2019 and a LCR of at least 90% till 31st December 2018.

(3) A Bank must calculate its LCR using the following formula and in accordance with the methodology, formulae, parameters and guidance set out in Chapter 9 of the BPG issued by the AFSA. LCR is calculated in accordance with the following formula:

Note Detailed guidance specifying the tools, methodologies, parameters and formulae for calculating the LCR are set out in Section D of Chapter 9 of the BPG issued by the AFSA.

(4) A Bank must calculate its LCR on an ongoing basis and separately for each material currency, in which it does banking business. A Bank must report to the AFSA its aggregate LCR calculation in USD.

(5) The AFSA may by written notice to A Bank in relation to the LCR Requirement applying to it:

1. (a) adjust the LCR Requirement;
2. (b) adjust requirements under section D of Chapter 9 of the BPG for calculating its stock of HQLA or the Total Net Cash Outflows;
3. (c) alter the calculation methodologies or parameters for the purposes of the LCR Requirement;
4. (d) disapply the LCR Requirement; or
5. (e) impose additional requirements based on its assessment of the Liquidity Risk exposure of that Bank.

(6) If the AFSA amends a requirement under (4)(a), (b), (c) or (e), the Bank must comply with the requirement as amended. If the AFSA disapplies a requirement under (1)(d), the Bank need not comply with that requirement.

(7) The procedures in Schedule 1 of the AIFC Financial Services Framework Regulations No 18 of 2017, will apply to a decision of the AFSA under (4)(a),(b),(c) or (e).

(8) If the AFSA decides to exercise its power under (4)(a),(b),(c) or (e), the Bank may refer the matter to the AIFC Court for review.

(9) If the AFSA considers that a Bank is overly reliant on cash inflows from a single wholesale counterparty or a small number of wholesale counterparties, the AFSA may direct the Bank as to how such cash flows are to be treated in the calculation of its LCR.

(10) The AFSA may allow a Bank that is a branch, or is a Subsidiary of an entity established outside the AIFC, to recognise, as cash inflow, access to its parent entity’s funds by way of a committed funding facility, up to a limit specified in the facility documentation. The facility:

1. (a) must be an irrevocable commitment; and
2. (b) must be appropriately documented.

9.17 Liquidation of assets during periods of stress

During a period of financial or liquidity stress, a Bank may liquidate part of its stock of HQLA and use the cash generated to cover cash outflows. Its level of HQLA may fall below the levels required under its LCR Requirement to the extent necessary to deal with cash outflows during that period.

9.18 Notification if LCR Requirement not met

A Bank must notify the AFSA in writing immediately if it does not meet or becomes aware of circumstances that may result in it not meeting, its LCR Requirement. This obligation applies even during a period of stress referred to in Rule 9.17.

9.19 Net Stable Funding Ratio (NSFR)

(1) The Rules 9.19 to 9.20 apply only to Banks licensed to conduct the Regulated Activity of Accepting Deposits. These rules, regarding compliance with NSFR requirement are not applicable to Broker Dealers or Credit Providers.

Note   Although the references in these rules are made to Banks, for the sake of clarity it is reiterated that the use of the term Bank in Rules 9.19 to 9.20 only apply to Banks conducting the Regulated Activity of Accepting Deposits.

(2) A Bank must calculate its NSFR using the following formula and in accordance with the methodology, formulae, parameters and guidance set out in Section E of Chapter 9 of the BPG issued by the AFSA. NSFR is calculated in accordance with the following formula:

The ASF and RSF used in this calculation of NSFR are to be determined in accordance with the methodology, formulae and guidance provided in Section E of Chapter 9 of the BPG.

(3) A Bank must maintain a NSFR of at least 100%, at all times. That is, its ASF must always be equal to or greater than its RSF.

9.20 Notification of breach of NSFR Requirement

(1) A Bank must notify the AFSA in writing immediately if it fails to meet, or becomes aware of circumstances that may result in it not meeting, its NSFR Requirement. In the notification the Bank must clearly explain:

• (a) why it ceased to meet, or thinks it may cease to meet, the requirement;
• (b) when it expects to again be able to meet the requirement; and
• (c) what it has done and will do to ensure that it meets the requirement in future, or continues to meet it, as the case requires.

(2) A Bank that gives such a notification should discuss with the AFSA what further steps it should take to deal with the situation.

9.21 The Maturity Mismatch approach

(1) A Bank must use the Maturity Mismatch approach, as set out in this rule, to measure liquidity. Under this approach, a Bank must determine the net cumulative Maturity Mismatch position for each time band by:

1. (a) determining, in accordance with the methodology in section F of Chapter 9 of the BPG, the inflows (assets) and outflows (liabilities) which are, subject to their falling within one of the time bands, to be included in the Maturity Ladder and at what maturities;
2. (b) inserting each inflow (asset) and outflow (liability) into one or more of the following time bands on the Maturity Ladder:
3. (i) sight – 8 days; or
4. (ii) sight – 1 month; and
5. (c) subtracting outflows (liabilities) from inflows (assets) in each time band. Note Detailed guidance specifying the tools, methodologies, parameters and formulae for calculating the LCR are set out in Section F of Chapter 9 of the BPG issued by the AFSA.

(2) A Bank must determine a net cumulative Maturity Mismatch position for each time band in respect of each of the deposits it has raised as a means of funding.

(3) A Bank must calculate its net cumulative Maturity Mismatch position as a percentage of the means of funding in each time band in accordance with the following formula:

Total deposit liabilities net cumulative Maturity Mismatch (%) =

(4) A Bank must ensure that its net cumulative Maturity Mismatch position as calculated in (3) above in each time band does not exceed the following:

1. (a) sight – 8 days, negative 15%; and
2. (b) sight – 1 month, negative 25%.

A Bank must notify the AFSA in writing immediately if it exceeds these net cumulative Maturity Mismatch limits.

9.22 Recognition of funding facility from parent entity

(1) This rule applies to a Bank that is operating as a branch in the AIFC.

(2) The AFSA may allow such a Bank to recognise, as an asset, access to its parent entity’s funds by way of a committed funding facility, up to a limit specified in the facility documentation. The facility:

• (a) must be an irrevocable commitment; and
• (b) must be appropriately documented.