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  • PIB 9.2 PIB 9.2 Liquidity Risk policy, Systems and Controls

    • PIB 9.2.1 PIB 9.2.1

      (1) An Authorised Firm must establish and maintain a Liquidity Risk policy.
      (1A) An Authorised Firm must ensure the policy is in writing and is approved at least annually by its Governing Body.
      (1B) The policy must set out the level of Liquidity Risk the Authorised Firm is willing to tolerate, which must be in line with its business objectives, strategy and overall risk tolerance.
      (2) The policy must include systems and controls for intra-day daily, short-term, medium-term and long-term management of Liquidity Risk appropriate to the nature, scale and complexity of the activities conducted by the firm.
      (3) The systems and controls referred to in (2) must include:
      (a) a system for identifying and assessing Liquidity Risk in accordance with PIB Rule 9.2.4.
      (b) a system for the measurement and monitoring of Liquidity Risk using a robust and consistent method which enables the Authorised Firm to implement the requirements set out in PIB Rule 9.2.5;
      (c) a system for controlling Liquidity Risk which enables the Authorised Firm to implement the requirements set out in PIB Rule 9.2.6;
      (d) a system for collateral management and asset encumbrance which is able to adequately identify, monitor and manage the risks associated with these activities in accordance with PIB Rule 9.2.8;
      (e) a system for adequate allocation of liquidity costs, benefits and risks that meets the requirements set out in PIB Rule 9.2.9; and;
      (f) a system to manage intra-day liquidity positions effectively and meet the requirements in PIB Rule 9.2.10.
      (4) An Authorised Firm must ensure that it has risk management systems to implement the policy.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
      [Amended] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
      [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

      • PIB 9.2.1 Guidance

        1. The DFSA expects that an Authorised Firm's Liquidity Risk policy will set out the approach that the Authorised Firm will take to Liquidity Risk management, including various quantitative and qualitative targets. It should be communicated to all relevant functions and staff within the organisation.
        2. The level of Liquidity Risk tolerance should ensure that the Authorised Firm manages its liquidity and funding risk prudently in normal times in a way that allows it to withstand periods of stress. The level of Liquidity Risk tolerance should be expressed in qualitative and quantitative terms that are clear enough for all levels of management to be able to understand the trade-off between risks and profits.
        3. The DFSA expects that an Authorised Firm will intergrate its Liquidity Risk policy within its overall risk management framework and that its policy will take into account the need to:
        a. develop liquidity management processes and procedures to implement the Authorised Firm's stated Liquidity Risk tolerance;
        b. ensure that the Authorised Firm maintains sufficient liquidity resources at all times to meet its ongoing liquidity obligations and withstand a period of individual or market-wide stress;
        c. determine the structure, responsibilities and controls for managing Liquidity Risk and for overseeing the liquidity positions of all branches and subsidiaries in the jurisdictions in which the Authorised Firm is active, and outline these elements clearly in the Authorised Firm's liquidity policies;
        d. have in place adequate internal controls to ensure the integrity of its Liquidity Risk management processes;
        e. ensure that stress tests, contingency funding plans and holdings of liquid assets are effective and appropriate for the Authorised Firm's business model, funding strategy, complexity of its on- and off-balance sheet activities and funding mismatches. The Authorised Firm should also make appropriate assumptions in relation to the marketability of liquid assets under various stress scenarios;
        f. establish a set of reporting criteria, specifying the scope, manner and frequency of reporting to various recipients (such as the Governing Body, senior management and the asset/liability committee) and who is responsible for preparing the reports. The reporting should include a comprehensive system for projecting cash flows arising from assets, liabilities and off-balance sheet items, both consolidated and at the entity level, over an appropriate set of time horizons;
        g. establish the specific procedures and approvals necessary for exceptions to policies and limits, including the escalation procedures and follow-up actions to be taken for breaches of limits;
        h. monitor closely current trends and potential market developments that may present significant, unprecedented and complex challenges for managing Liquidity Risk so that appropriate and prompt changes to the liquidity management strategy can be made as needed;
        i. continuously review information on the Authorised Firm's liquidity developments and report regularly to the Governing Body; and
        j. maintain an independent and competent internal control function and conduct regular internal audit reviews to ensure the integrity and effectiveness of the Liquidity Risk policy.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
        [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

    • PIB 9.2.2 PIB 9.2.2

      (1) An Authorised Firm must ensure that its Governing Body is ultimately responsible for the Liquidity Risk assumed by the firm as well as the adequacy of systems, controls and processes used to manage that risk.
      (2) Without limiting the operation of (1), the responsibilities of an Authorised Firm's Governing Body in respect of Liquidity Risk include:
      (a) approving the Authorised Firm's Liquidity Risk policy;
      (b) establishing and maintaining a senior management structure with clearly defined responsibilities and roles for the management of Liquidity Risk and for ensuring compliance with the Authorised Firm's Liquidity Risk policy;
      (c) ensuring the senior management in (b) and other relevant personnel have the necessary experience to manage Liquidity Risk;
      (d) monitoring the Authorised Firm's overall Liquidity Risk profile on a regular basis by receiving adequate reporting and being aware of any material changes in the Authorised Firm's current or prospective Liquidity Risk profile;
      (e) ensuring that Liquidity Risk is adequately identified, assessed, mitigated, controlled and monitored in accordance with the Authorised Firm's Liquidity Risk policy;
      (f) ensuring that the Liquidity Risk policy are is documented; and
      (g) ensuring that the Liquidity Risk policy are is reviewed at least annually.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
      [Amended] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
      [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

      • PIB 9.2.2 Guidance

        1. Senior management and the Governing Body of an Authorised Firm are expected to demonstrate a thorough understanding of the links between funding liquidity risk and market liquidity risk, as well as how other risks, including credit, market, operational and reputation risks, affect the Authorised Firm's overall Liquidity Risk policy.
        2. Senior management should ensure that all business units with activities that have an impact on Liquidity Risk are aware of the Liquidity Risk policy and limits.
        3. Senior management should ensure that the Liquidity Risk policy outlines clearly the structure, responsibilities and controls for managing Liquidity Risk in and across different jurisdictions, legal entities and branches. They should also ensure that the structure, responsibilities and controls take into account legal, operational, regulatory, reputational and other constraints on liquidity transfer.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
        [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

      • Requirements imposed on a Category 2 firm

        (3) An Authorised Firm in Category 2 must:
        (a) establish and maintain a senior management structure to manage Liquidity Risk;
        (b) identify, assess, mitigate, control and monitor Liquidity Risk; and
        (c) monitor the Authorised Firm's overall Liquidity Risk profile on a regular basis.
        [Added] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]

        • Guidance

          In respect of Rule 9.2.2(2)(b), senior management are expected to:

          a. oversee the development, establishment and maintenance of procedures and practices that translate the goals, objectives and risk tolerances approved by the Governing Body into operating standards that are consistent with the Governing Body's intent and which are understood by the relevant members of an Authorised Firm's staff;
          b. adhere to the lines of authority and responsibility that the Governing Body has established for managing Liquidity Risk;
          c. oversee the establishment and maintenance of management information and other systems that identify, assess, control and monitor the Authorised Firm's Liquidity Risk; and
          d. oversee the establishment of effective internal controls over the Liquidity Risk management process.
          [Added] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]

    • PIB 9.2.3 PIB 9.2.3

      (1) An Authorised Firm 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 Authorised Firm:
      (i) has formally approved the delegation;
      (ii) keeps the delegation under review; and
      (b) the Authorised Firm notifies the DFSA in writing of the delegation immediately upon its being made.
      (2) If an Authorised Firm delegates the management of its Liquidity Risk in accordance with (1), the requirements in this chapter continue to apply to the Authorised Firm.
      (3) An Authorised Firm must revoke a delegation referred to in (1) and bring day-to-day Liquidity Risk management back within the Authorised Firm if the DFSA requests it in writing to do so.
      Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
      [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

      • PIB 9.2.3 Guidance

        If Liquidity Risk management is delegated as set out in PIB Rule 9.2.3, responsibility for its effectiveness remains with the Authorised Firm's Governing Body.

        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]

    • Identifying Liquidity Risk

      • PIB 9.2.4 PIB 9.2.4

        (1) An Authorised Firm must comply with the requirements in this Rule in implementing its system and controls referred to in PIB Rule 9.2.1(2) and (3).
        (2) An Authorised Firm must assess the cash flows for its assets, liabilities and off-balance sheet items under both normal market conditions and stressed conditions resulting from either general market turbulence or firm-specific difficulties.
        (3) An Authorised Firm must assess the extent to which committed facilities can be relied upon under stressed conditions identified in accordance with PIB Rule 9.2A.3.
        (4) An Authorised Firm must consider potential liability concentrations when determining the appropriate mix of liabilities.
        (5) An Authorised Firm must identify the Liquidity Risk across all legal entities, branches and subsidiaries and in all jurisdictions in which it operates.
        (6) If an Authorised Firm has significant, unhedged liquidity mismatches in particular currencies, it must assess:
        (a) the volatilities of the exchange rates of the mismatched currencies;
        (b) likely access to the foreign exchange markets in normal and stressed conditions; and
        (c) the stability of deposits in those currencies with the Authorised Firm in stressed conditions.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
        [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

        • PIB 9.2.4 Guidance

          1. As part of the assessment for the purposes of PIB Rule 9.2.4(2), an Authorised Firm should:
          a. identify significant concentrations within its asset portfolio; and
          b. value the assets conservatively, taking into account the likely deterioration in the value of assets under market-wide stress conditions.
          2. For the purposes of PIB Rule 9.2.4(4), an Authorised Firm should consider factors including:
          a. the term structure of its liabilities;
          b. the credit-sensitivity of its liabilities;
          c. the mix of secured and unsecured funding;
          d. concentrations among its liability providers or related Groups of liability providers;
          e. reliance on particular instruments or products;
          f. the geographical location of liability providers; and
          g. reliance on intra-Group funding.
          3. As appropriate, an Authorised Firm would be expected to consider the amount of funding required by:
          a. commitments given;
          b. standby facilities given;
          c. wholesale overdraft facilities given;
          d. proprietary derivatives positions; and
          e. liquidity facilities given for securitisation transactions.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
          [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

    • Measuring and Monitoring Liquidity Risk

      • PIB 9.2.5 PIB 9.2.5

        (1) An Authorised Firm must ensure that the method referred to in PIB Rule 9.2.1(3)(b) for measuring Liquidity Risk is capable of:
        (a) measuring the extent of the Liquidity Risk it is incurring
        (b) tracking early warning indicators to aid the Liquidity Risk management processes;
        (c) dealing with the dynamic aspects of the Authorised Firm's liquidity profile;
        (d) where appropriate, measuring the Authorised Firm's Exposure to Foreign Currency Liquidity Risk; and
        (e) where appropriate, measuring the Authorised Firm's Exposure to PSIA and Islamic Contract Liquidity Risk.
        (2) An Authorised Firm must establish and maintain a system of management reporting which provides relevant, accurate, comprehensive, timely, forward looking and reliable Liquidity Risk reports to relevant functions within the Authorised Firm.
        (3) The method for measuring Liquidity Risk under (1)(a) must enable the Authorised Firm to forecast prospective cash flows for assets, liabilities, off-balance sheet commitments and contingent liabilities over a variety of time horizons, under both normal conditions and a range of stress scenarios, including scenarios of severe stress.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
        [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

        • PIB 9.2.5 Guidance

          1. An Authorised Firm, in measuring its Liquidity Risk under PIB Rule 9.2.5 should ensure that:
          (a) the variety of time horizons cover changes in liquidity needs and funding capacity on an intra-day, daily, short-term, medium-term and long–term basis;
          (b) it considers the vulnerabilities of cash flows to events, activities and business strategies;
          (c) its dynamic cash flow forecasts are carried out at a sufficiently detailed level and include assumptions on the actions of key counterparties in response to changes in operating conditions;
          (d) cash flows in all significant foreign currencies are measured on an aggregate basis, as well as at the individual currency level, taking into account stressed conditions affecting foreign exchange markets;
          (e) it captures the impact of providing correspondent, custody and settlement activities on cash flows; and
          (f) assumptions used to determine future liquidity and funding needs are realistic and reflect the complexities of the underlying businesses, products and markets.
          2. Early warning indicators should be designed to assist the Authorised Firm to identify any negative trends in its liquidity position and to assist its management to assess and respond to mitigate its exposure to those trends.
          3. Management information should include the following:
          a. a cash-flow or funding gap report on an aggregate basis and by currency, legal entity and country;
          b. a funding maturity schedule;
          c. a list of large providers of funding;
          d. reports on Collateral and encumbered assets to enable compliance with PIB Rule 9.2.8;
          e. a liquidity costs, benefits and risks allocation report to assist compliance with PIB Rule 9.2.9;
          f. intra-day liquidity reports to assist compliance with PIB Rule 9.2.10;
          g. where appropriate, a schedule of Islamic funding sources;
          h. a limit monitoring and exception report;
          i. asset quality and trends;
          j. earnings projections; and
          k. the Authorised Firm's reputation in the market and the condition of the market itself.
          4.An Authorised Firm should be able to generate critical liquidity reports on a daily basis, including in times of stress.
          5.Where an Authorised Firm is a member of a Group, it should be able to assess the potential impact on it of Liquidity Risk arising in other parts of the Group.
          6. Where an Authorised Firm has subsidiaries or branches, it should be able to monitor and control Liquidity Risk at the individual branch or subsidiary level and on a consolidated level taking into account legal, operational, regulatory, reputational and other relevant constraints.
          Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
          [Amended] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
          [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

    • Controlling Liquidity Risk

      • PIB 9.2.6

        An Authorised Firm must ensure that the system referred to in PIB Rule 9.2.1(3)(c):

        (a) enables the Authorised Firm's Governing Body and senior management to review compliance with limits set in accordance with PIB Rule 9.2.7 and operating procedures; and
        (b) has appropriate approval processes, limits and other mechanisms designed to provide reasonable assurance that the Authorised Firm's Liquidity Risk management processes are adhered to.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

      • PIB 9.2.7 PIB 9.2.7

        (1) An Authorised Firm must hold sufficient liquidity resources and ensure that its Governing Body sets appropriate liquidity limits to manage its Liquidity Risk effectively under both day-to-day and stressed conditions.
        (2) An Authorised Firm must periodically review and, where appropriate, adjust the limits referred to in (1) when its Liquidity Risk policy changes.
        (3) An Authorised Firm must promptly escalate and resolve any policy or limit exceptions according to the processes described in its Liquidity Risk policy.
        Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]
        [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

        • PIB 9.2.7 Guidance

          An Authorised Firm should set limits to control its liquidity risk exposure and vulnerabilities. Limits and corresponding escalation procedures should be reviewed regularly. Limits should be relevant to the business in terms of its location, complexity of activity, nature of products, currencies and markets served. If an Authorised Firm breaches a liquidity risk limit, it should implement a plan to review its exposure and reduce it to a level that is within the limit.

          [Added] DFSA RM148/2014 (Made 1st January 2015). [VER23/01-15]
          [Amended] DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

    • Management of collateralised and encumbered assets

      • PIB 9.2.8

        (1) An Authorised Firm must prudently manage its collateral positions using a collateral management system.
        (2) The Authorised Firm's collateral management system must be able to:
        (a) distinguish between pledged and unencumbered assets, including during periods of liquidity stress;
        (b) take into account the legal entity in which liquid assets reside; and
        (c) identify, in a timely manner, the countries where assets are legally recorded and any restrictions imposed on their transfer or liquidation.
        (3) An Authorised Firm must manage its encumbered balance sheet assets within prudent limits to minimise the impact on its liquidity position and funding cost.
        (4) For the purposes of (3), the Authorised Firm's system supporting the management of encumbered assets must be able to provide information on:
        (a) the current and expected level and types of asset encumbrance and related transactions;
        (b) the nature of unencumbered assets including amount, location and credit quality;
        (c) the capacity for further asset encumbrance, including available unencumbered assets and the potential liquidity that can be generated; and
        (d) the expected amount, level and type of additional encumbrance that may result from stress scenarios.
        Derived from DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

    • Allocation of liquidity costs, benefits and risks

      • PIB 9.2.9

        An Authorised Firm must ensure that the system referred to in PIB Rule 9.2.1(3)(e):

        (a) incorporates liquidity costs, benefits and risks in internal pricing, performance measurement, and new product approval processes for all significant business activities both on- and off-balance sheet;
        (b) assigns appropriate liquidity charges to positions, portfolios and transactions. The liquidity charge must incorporate factors relating to the holding period of assets and liabilities, market liquidity characteristics, stability of the funding source and any other relevant factor;
        (c) provides quantification and attribution of Liquidity Risk that is explicit, transparent and takes into account liquidity under stressed conditions; and
        (d) is reviewed periodically to reflect changing business and market conditions.
        Derived from DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]

    • Intra-day liquidity

      • PIB 9.2.10

        (1) An Authorised Firm must manage its intra-day liquidity positions prudently to ensure that it is able to meet its settlement and payment obligations in a timely manner under business as usual and stressed conditions, in all material currencies and active markets.
        (2) For the purposes of (1), an Authorised Firm must be reasonably able to:
        (a) identify and prioritise the most time critical payment and settlement obligations;
        (b) measure daily gross liquidity inflows and outflows and any potential funding gaps;
        (c) identify cash flow timings and shortfalls at different points in time during the day;
        (d) manage the timing of cash outflows to give priority to time critical payments; and
        (e) obtain sufficient intra-day funding, including intra-day liquidity facilities from correspondent banks or Central Banks.
        Derived from DFSA RM209/2017 (Made 25th October 2017). [VER30/01-18]