BoE refines margin liquidity risk assessment proposals
18 July 2017 London
Image: Shutterstock
Securities financing margin liquidity risk assessments should be based on historical margin posted, with a stress uplift applied, according to the Bank of England’s Prudential Regulation Authority (PRA).
The PRA’s latest proposals for a cash flow mismatch risk framework and other methodologies for assessing firms’ liquidity risk, under the Pillar 2 liquidity framework, were set out in a Bank of England consultation paper published last week.
The paper explained that the stress uplift will be subject to supervisory judgement, and factors taken into account will include the sophistication of the firm’s intraday liquidity management systems, how the firm connects to the respective payment and securities settlement systems it uses, and the business model of the firm.
The PRA stated that it expects firms to consider the risk of haircut and collateral eligibility changes in their assessment of intraday liquidity risk.
The latest definition of margin risk builds upon on the earlier proposal shown in the PRA’s 2016 consultation paper—CP21/16.
In CP21/16, the PRA defined securities financing margin risk requirements as “the risk of additional outflows relating to margin requirements on securities transactions where the credit quality of the collateral has deteriorated is not captured by the Pillar 1 standard”.
The International Securities Lending Association has confirmed it will be offering comment on the revised standards on behalf of its members.
The consultation period on the PRA's proposals will run until Friday 13 October, after which the proposed survival guidance under the granular Liquidity Covering Requirement stress will be linked to the implementation of the new PRA110 report set for 1 January 2019.
The implementation of the new Pillar 2 standards is scheduled to begin in early 2018.
The PRA’s latest proposals for a cash flow mismatch risk framework and other methodologies for assessing firms’ liquidity risk, under the Pillar 2 liquidity framework, were set out in a Bank of England consultation paper published last week.
The paper explained that the stress uplift will be subject to supervisory judgement, and factors taken into account will include the sophistication of the firm’s intraday liquidity management systems, how the firm connects to the respective payment and securities settlement systems it uses, and the business model of the firm.
The PRA stated that it expects firms to consider the risk of haircut and collateral eligibility changes in their assessment of intraday liquidity risk.
The latest definition of margin risk builds upon on the earlier proposal shown in the PRA’s 2016 consultation paper—CP21/16.
In CP21/16, the PRA defined securities financing margin risk requirements as “the risk of additional outflows relating to margin requirements on securities transactions where the credit quality of the collateral has deteriorated is not captured by the Pillar 1 standard”.
The International Securities Lending Association has confirmed it will be offering comment on the revised standards on behalf of its members.
The consultation period on the PRA's proposals will run until Friday 13 October, after which the proposed survival guidance under the granular Liquidity Covering Requirement stress will be linked to the implementation of the new PRA110 report set for 1 January 2019.
The implementation of the new Pillar 2 standards is scheduled to begin in early 2018.
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