The proposed rules are largely based on the Basel Committee on Banking Supervision's 'Principles for sound liquidity risk management and supervision' but they also take into account the difficulties faced in the market over the past 18 months.
While it remains the responsibility of firms' senior management to adopt a sound approach to liquidity risk management, the FSA proposes the following:
•A new, quantitative framework for liquidity risk management that places greater emphasis on firms' ability to assess liquidity risks and develop policies to tackle them;
•A strengthened qualitative framework for liquidity risk management, with an increased focus on firms' stress testing and contingency funding plans;
•New liquidity reporting requirements; and
•A new approach to firms operating in the UK that are part of a wider UK or international group.
The measures proposed in the paper are designed to enhance firms' liquidity risk management practices and the FSA hopes they will reshape business models over the coming years. They are also structured to enhance the FSA's ability to monitor and supervise firms' liquidity risk exposures.
"We are pleased with the way in which the industry has engaged with us on this issue," says Paul Sharma, director of wholesale and prudential policy at the FSA. "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 March 4, 2009. The FSA hopes to introduce the 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 paper in the first quarter of 2009.
Click here for the full consultation paper.