Liquidity risk – the top 5 issues financial institutions should be thinking about now for FSA compliance, says Algorithmics

14 April 2009

Algorithmics today outlined the Top 5 issues that banks must think about now to assess their policies, procedures and systems for compliance with the FSA’s new liquidity risk regime, which will be finalized in April. The new rules are planned to be in force by October 2009 leaving banks little time to comply.

In Algorithmics’ view, banks will need to assess their current capabilities, compare them to the FSA’s expected requirements and then assess if they can bridge their liquidity risk gaps before the FSA’s deadline.

The biggest priority for most firms will be the need to demonstrate simultaneous excellence in data management, cash flow/pricing models, optionality behavioural models, scenario generation, simulations and reporting.

Dr Mario Onorato, Senior Director of Balance Sheet Risk Management Solutions at Algorithmics and Senior Lecturer, Cass Business School in London, said: ”The FSA’s consultation paper (CP08/22) outlines a new regime for liquidity risk supervision in the UK and one that is likely to be followed around the world. UK banks face an aggressive implementation deadline that goes far beyond simple reporting and entails bank-wide systems necessary to meet these new requirements. I would urge institutions to consider if their current systems will be fit for purpose, where they are deficient, and to start planning their liquidity risk compliance projects – across finance, risk, ALM, treasury and IT departments. They need to start now if they are to be able to meet the deadlines.”

The Top 5 issues that financial institutions should be thinking about for compliance with the expected new FSA rules are:

1. Management oversight: Do we have an effective liquidity risk management framework? It must include limit management, dissemination of risk-related information and management reporting.

2. Technology: Do we have a strong technical framework to deliver on the complex scenario generation, stress testing and dynamic simulations required under the FSA requirements? Can information from all potential sources across the institution be incorporated?

3. Functionality: Do our existing systems have the ability to analyze the risk from multiple perspectives? To do so requires the availability of multiple risk analytics, flexibility of scenario setting, definition of new information aggregation criteria, and an easy way to set up new set reports.

4. Timeframe: Do we have the ability to deploy in an aggressive timeframe – possibly as short as four months?

5. Best practice: Can we future-proof our investment in compliance and be prepared for further regulatory developments?

Algo Liquidity Risk is a liquidity risk management solution designed to meet all the FSA’s current and new requirements. The solution includes pre-defined reports and pre-configured templates enabling extremely rapid deployment in any institution. With its superior liquidity risk analytics, framework for data management and pre-configuration, it can be deployed by the mandated October 2009 deadline.

Dr. Andrew Aziz, Executive Vice President of Risk Solutions at Algorithmics, added: “Financial institutions will be under increasing pressure from regulators to demonstrate they are measuring and managing their liquidity risk. The FSA’s focus on stress testing as the basis of the new liquidity requirements aligns with our established comprehensive approach to managing liquidity risk. For many institutions, this will be an opportunity not just to comply with the requirements but to use this as the starting point to take a much more holistic view of the risk across the entire balance sheet, integrating market, credit and liquidity risk.”

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