PIB 9.2A PIB 9.2A Funding Strategy, Stress Testing and Contingency Funding Plan
PIB 9.2A.1 PIB 9.2A.1(1) An
Authorised Firmmust develop a funding strategy that provides effective diversification in the sources and nature of its funding.(2) An Authorised Firmmust ensure that the funding strategy is in writing and is approved by its Governing Body.(3) The funding strategy must be in line with the Authorised Firm'sstated Liquidity Risktolerance and supported by robust assumptions that are consistent with the Authorised Firm'sbudgeting and business planning process.(4) The funding strategy must be supported by systems that allow the Authorised Firmto identify, measure, manage and monitor funding positions.(5) An Authorised Firmmust 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 Authorised Firm'sstrategy.(6) An Authorised Firmmust notify the DFSAin writing immediately of any material changes to the Authorised Firm'sfunding strategy.
PIB 9.2A.1 Guidance1. The diversification under PIB Rule 9.2A.1(1) should include, for example, different counterparties, instruments, currencies, geographies and markets.2. The assumptions in PIB Rule 9.2A.1(3) should be forward looking and take into account the macroeconomic and market conditions in which the
Authorised Firmoperates and any other factors that are likely to impact its funding position.3. The DFSAexpects that funding positions referred to in PIB Rule 9.2A.1(4) would cover both present and projected positions across multiple time horizons generated from both on- and off-balance sheet items.4. In order to formulate the funding strategy properly, an Authorised Firmshould pay attention to other risks, including, for example, credit market, operational and reputational risk and their impact of funding requirements.5. An Authorised Firmshould maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers.
PIB 9.2A.2(1) An
Authorised Firmmust assess market access under a variety of normal and stressed conditions.(2) An Authorised Firmmust assess regularly its capacity to raise funds quickly including on a secured and unsecured basis.(3) An Authorised Firmmust:(a) identify the main factors that affect its ability to raise funds; and(b) monitor those factors closely to ensure that estimates of fund raising capacity remain valid.
PIB 9.2A.3 PIB 9.2A.3(1) An
Authorised Firmmust conduct stress tests regularly to identify sources of potential liquidity strain and to ensure that its exposures remain within its Liquidity Risktolerance.(2) When using stress testing in accordance with (1), an Authorised Firmmust:(a) use scenarios based on varying degrees of short-term and protracted institution-specific and market-wide stress (individually and in combination); and(b) 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 Authorised Firm'sfunding needs and sources.(3) An Authorised Firmmust fully document its stress test scenarios and related assumptions, and review the scenarios and assumptions, at least annually to ensure they remain appropriate.
PIB 9.2A.3 Guidance1. An
Authorised Firmshould consider carefully the design of stress scenarios and the variety of shocks used. Regardless of how strong its current liquidity situation appears to be, it should take a conservative approach when setting stress testing assumptions. It should consider the potential impact of severe stress scenarios and how they would affect the following Liquidity Riskdrivers as applicable to the firm's operations:a. retail funding risk;b. wholesale secured and unsecured funding risk;c. risks arising from funding markets;d. lack of diversification between funding types;e. off-balance sheet funding risk;f. risks arising from the firm's funding tenors;g. risks associated with a deterioration of the firm's credit rating;h. cross-currency funding risk;i. risk that liquidity resources cannot be transferred across entities, sectors and countries;j. funding risks resulting from estimates of future balance sheet growth;k. reputational risk;l. marketable and non-marketable assets risk; andm. intra-day payment and settlement risk.2. Market-wide stress scenarios under PIB 9.2A.3(2)(a) should include:a. a simultaneous drying up of market liquidity in several previously highly liquid markets;b. severe constraints in accessing secured and unsecured funding;c. restrictions on currency convertibility; andd. severe operational or settlement disruptions affecting one or more payment or settlement systems.3. The identification of the possible balance sheet and off-balance sheet impact referred to in PIB Rule 9.2A.3(2)(b) should take into account:a. possible changes in the market's perception of the Authorised Firmand the effects that this might have on the Authorised Firm'saccess to the markets, including:i. where the Authorised Firmfunds its holdings of assets in one currency with liabilities in another, access to foreign exchange markets, particularly in less frequently traded currencies;ii. access to secured funding, including by way of repurchase agreement transactions; andiii. the extent to which the Authorised Firmmay rely on committed facilities made available to it;b. whenever applicable the possible effect of each scenario tested on currencies whose exchange rates are currently pegged or fixed; andc. that:i. general market turbulence may trigger a substantial increase in the extent to which persons exercise rights against the Authorised Firmunder off-balance sheet instruments to which the Authorised Firmis party;ii. access to OTC derivative and foreign exchange markets is sensitive to credit-ratings;iii. Early Amortisationin asset securitisation transactions with which the Authorised Firmhas a connection may be triggered;iv. its ability to securitise assets may be reduced; andv. there may be a potential need to buy back debt or honour non-contractual obligations to mitigate reputational risk.4. An Authorised Firmis required to conduct stress tests regularly. The frequency with which an Authorised Firmshould conduct stress tests will depend on the risks to the particular Authorised Firm. For some Authorised Firms, it may be adequate to conduct tests annually, but, for others, it may be necessary to conduct tests more frequently e.g. quarterly.
Authorised Firmmust ensure that stress tests conducted under PIB Rule 9.2A.3 enable it to analyse the impact of stress scenarios on its liquidity positions, as well as on the liquidity positions of its individual business lines.
PIB 9.2A.5 PIB 9.2A.5(1) An
Authorised Firmmust ensure that results of the stress tests are integrated into its strategic planning process and its day-to-day risk management practices.(2) An Authorised Firmmust apply the results of the stress tests:(a) to adjust its liquidity management strategy, policies and positions, including to determine an appropriate buffer of HQLA;(b) for the setting of internal limits; and(c) for the purpose of the IRAP and ICAAP assessments under chapter 10, where applicable.(3) An Authorised Firmmust incorporate the stress test results in assessing and planning for related potential funding shortfalls in its Contingency Funding Plan.(4) An Authorised Firmmust ensure that the stress test results and vulnerabilities and any resulting actions are reported to, and discussed with, its Governing Bodyand the DFSA.
PIB 9.2A.5 Guidance
DFSAconsiders that an Authorised Firmhas not carried out effective stress tests under Rules PIB 9.2A.3 to PIB 9.2A.5, it may use its power under Article 75A of the Regulatory Lawto require the Authorised Firmto maintain a buffer of liquid assets in addition to that required under section PIB 9.3.
Contingency Funding Plan
A Contingency Funding Plan, or CFP, is a compilation of policies, procedures and action plans for responding to severe disruptions to an
Authorised Firm'sability to meet its liabilities as they fall due or its ability to fund some or all of its activities quickly and at a reasonable cost.
PIB 9.2A.6 PIB 9.2A.6(1) An
Authorised Firmmust have a documented Contingency Funding Plan (CFP) that sets out clearly its strategies for addressing liquidity shortfalls in emergency situations.(2) An Authorised Firmmust ensure that its CFP is in writing and is approved by its Governing Body.(3) The CFP must be commensurate with an Authorised Firm'scomplexity, risk profile and scope of operations and its role in the financial systems in which it operates.(4) The CFP must:(a) list the events or circumstances that will lead the Authorised Firmto put any part of the plan into action;(b) set out available potential contingency funding sources and the amount of funds an Authorised Firmestimates can be derived from these sources;(c) estimate the lead time needed to tap additional funds from each of the contingency sources;(d) set out the extent to which the plan relies upon:(i) asset sales, using assets as Collateralon secured funding (including repurchase agreements), securitising its assets or otherwise reducing its assets;(ii) modifying the structure of, or increasing, its liabilities; and(iii) the use of committed facilities; and(e) contain clear administrative policies and procedures that will enable the Authorised Firmto manage the implementation of the plan, including:(i) the roles and responsibilities of senior management, including who has the authority to invoke the CFP;(ii) the names, location and contact details of members of the team responsible for implementing the plan;(iii) the details of who is responsible for contact with the Authorised Firm'shead office (if appropriate), analysts, investors, external auditors, media, significant customers, regulators and others; and(iv) the mechanisms that enable senior management and the Governing Bodyto receive relevant, accurate, comprehensive, timely and reliable management information.
PIB 9.2A.6 Guidance1. The CFP should provide a framework with a high degree of flexibility so that an
Authorised Firmcan respond quickly in a variety of situations.2. The CFP's design, plans and procedures should be closely integrated with the Authorised Firm'songoing analysis of Liquidity Riskand with the results of the scenarios and assumptions used in stress tests.3. The CFP should assist the Authorised Firmto manage a range of scenarios of severe liquidity stress that include both firm-specific and more generalised market-wide stress, as well as the potential interaction between them.4. The CFP should, for each of the tested scenarios, demonstrate that the Authorised Firmhas sufficient liquid financial resources to meet its liabilities over a range of different time periods, including intraday.
Authorised Firmmust ensure that its CFP accounts for:(a) the impact of stressed market conditions on its ability to sell or securitise assets;(b) the link between asset liquidity and funding liquidity;(c) second round and reputational effects related to execution of contingency funding measures; and(d) the potential to transfer liquidity across Groupentities, borders and lines of business, taking into account legal, regulatory, operational and time zone constraints.
PIB 9.2A.8 PIB 9.2A.8(1) An
Authorised Firmmust review and test its CFP regularly to ensure it is effective and operationally feasible.(2) For the purposes of (1), an Authorised Firmmust review and update its CFP at least annually for approval by its Governing Body, or more frequently if required by business or market circumstances.
PIB 9.2A.8 Guidance1. Key aspects of CFP testing include ensuring that roles and responsibilities are appropriate and understood, confirming that contact information is up to date, proving the transferability of cash and collateral (especially across borders and entities) and ensuring that the necessary legal and operational documentation is in place to execute the plan at short notice.2. An
Authorised Firmshould test key assumptions regularly, such as its ability to sell or repo certain assets or periodically draw down credit lines.
PIB 9.2A.9 PIB 9.2A.9
Authorised Firmmust 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.
PIB 9.2A.9 Guidance1. See GEN chapter 5 regarding requirements relating to an
Authorised Firm'sbusiness continuity and disaster recovery arrangements.2. An Authorised Firmshould ensure effective coordination between teams managing issues surrounding liquidity crises and business continuity. Liquidity crisis team members and alternates should have access to CFPs on-site and off-site.