Cashflow

Introduction

The PRA recently issued their policy statement on Pillar 2 Liquidity and have finalised the reporting requirements for Cashflow Mismatch Risk (CFMR). This followed the consultation papers released in May 2016 and July 2017. While the policy statement covers CFMR, franchise viability, intraday liquidity and other liquidity risks, this blog focuses on CFMR given the significant implications for firms.

The reporting requirements can be summarised as follows:

  • Introduction of the PRA110 return to monitor and measure daily cashflow mismatches1 from 1st July 2019 which will be applicable at both individual and consolidated levels, including ring-fenced entities
  • Submission of the PRA110 on a weekly basis with a one day submission deadline2 ; however firms will require the capability to report on a daily basis in times of stress
  • The PRA will apply stress scenarios and tools to the data received from firms, with the Granular LCR stress scenario used to inform the Individual Liquidity Guidance (ILG)
  • The PRA110 return must be submitted in consolidated and significant currencies and will supersede the FSA047 and FSA048

Cashflow mismatch risk

The guidance provided by the policy statement is consistent with the PRA’s expectations that firms should be able to accurately monitor and report on daily liquidity. The PRA110 builds upon the EBA’s C66 Maturity Ladder by doubling the number of rows in the return and expanding the maturity buckets for daily cashflows from day 8 to day 92.

Cashflow

PRA110_return
Given that the PRA110 builds on the EBA’s C66 return, we’ve highlighted below some of the key additional reporting requirements established by the PRA:

Outflows

  • Retail deposits – split by 3%, 5%, other retail (10%) and higher LCR outflows – each of these categorised by the portion not covered by deposit guarantee schemes
  • Secured financing – updated to reflect repos with central banks

Inflows

  • Retail inflows split by principal and interest
  • Inflows from banks and financial institutions classified as operational deposits
  • Reverse repos – additional granularity where collateral received is used to cover short positions – requiring expected maturity of shorts

Counterbalancing capacity

  • No major changes from C66 – inclusion of intragroup facilities where the regulator has agreed a higher inflow rate

Contingencies

  • Significantly expanded from C66 to provide increased visibility of off-balance sheet: committed facilities, pipeline (mortgages, cards, overdraft), downgrade triggers, derivatives collateral – excess, sleeper, internalisation (prime brokerage clients)

Memorandum items

  • Intragroup flows – split by secured (with underlying L1 collateral) and unsecured, collateral swap flows, initial margin and variation margin given/received on derivatives; for non-margined derivatives: in-the-money and out-of-the-money MTM exposure

Three new sections in the PRA110:

Monetisation actions

  • Firms to report their intended monetisation of non-cash HQLA during stress via outright sale or secured financing

Cumulated liquidity resources post firm actions

  • Firms to report their expected end of day total HQLA cash and securities positions on a cumulative basis

Pillar 2 add-on

  • Report Pillar 2 add-ons as per firm’s ILG across time buckets and aligned to assumptions prescribed by PRA (e.g. intraday risk to materialise on day one and liquidity systems and controls to materialise uniformly over the business days within the first thirty calendar days)

Key imp

SST

The PRA’s CFMR framework is composed of a set of stress scenarios and tools of different severity and duration to assess whether firms have sufficient liquidity on a daily basis and to monitor liquidity mismatches during stress events. These can be summarised as follows:

Stress scenarios and tools

Survival horizon

A. Granular LCR

30 days

B.1 Benchmark retail

90 days

B.2 Benchmark wholesale

90 days

B.3 Benchmark combined

90 days

C.1 Granular LCR with monetisation

30 days

C.2 Benchmark retail with monetisation

90 days

C.3 Benchmark wholesale with monetisation

90 days

C.4 Benchmark combined with monetisation

90 days

D. Enhanced Retail

90 days

E. Enhanced Wholesale

90 days

The PRA has prescribed that, of these scenarios and tools, only the Granular LCR (without the monetisation profile) will be used by the PRA to inform ILG while the others will be used for monitoring purposes, including HQLA monetisation risk. In evaluating these scenarios, the PRA projects daily available liquidity by applying the prescribed LCR inflow and outflow rates to:

  • Contractual cashflows that reach maturity over the 30 day or 90 day horizon of the scenario; and
  • Non-contractual claims and obligations which may be called during the 30 day horizon, either on day one or distributed uniformly over the 30 days.

Key imp

Under the enhanced stress tools, the PRA will apply the maximum outflow rates observed during the crisis (enhanced retail stress) and assume a complete shutdown of secured and unsecured wholesale funding (enhanced wholesale stress). In determining the available liquidity for these scenarios, the PRA will require firms to assess the speed and scale with which they expect to be able to monetise different types of non-cash HQLA.

Key imp

In calculating the monitoring metrics detailed below, the PRA has prescribed the timing of Pillar 2 risks to materialise. For example, intraday Pillar 2 add-ons are to materialise on day one, prime brokerage outflows are to materialise uniformly over the business days within the first seven calendar days and liquidity systems and controls (L-SYSC) add-ons are to materialise uniformly over the business days within the first thirty calendar days.

Monitoring

Once the PRA has applied the aforementioned stress scenarios and tools, the following monitoring metrics will be calculated:

  • Survival days
  • Net liquidity position
  • Worst net liquidity position
  • Peak cumulative net outflows

Key imp

Conclusion

The PRA110 return provides a standardised stress testing framework for the PRA to determine firms’ liquidity positions and better monitor financial stability. This continues the UK regulator’s requirement for firms to have the capability to accurately measure and monitor daily liquidity, which will have a significant impact on firms’ data, Treasury and reporting functions.

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1Expands from 7 days in the EBA’s C66 Maturity Ladder to 92 days and covers maturity buckets from 3 months to greater than 5 years.
2This frequency of submission applies to large firms with total assets above €30 billion. Firms with total assets below €30 billion must submit the PRA110 on a monthly basis with a fifteen day submission deadline.

 

Photo - Tom Spellman




Thomas Spellman - Partner, Risk Advisory

Tom is a Partner within our Risk Advisory Practice. He has over 17 years’ experience working and leading major risk transformation programs at tier 1 UK and global financial institutions. His specialist skills include (1) all topics related to prudential regulation (including capital, liquidity and leverage), (2) related governance, process, systems and controls work and (3) delivery of major change programmes for risk and finance.

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Photo - Dilip Menon

Dilip Menon - Director, Risk Advisory

Dilip is a Director in Deloitte’s Risk Advisory practice based in London. Dilip has over 13 years of experience in delivering treasury transformation programmes covering the implementation of liquidity requirements (Pillar 1 and 2), operating models for treasury and liquidity reporting and stress testing.

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Photo - Kelvin Fryer


Kelvin Fryer - Senior Manager, Risk Advisory

Kelvin is a Senior Manager in Deloitte’s Risk Advisory practice, specialising in treasury, liquidity risk and regulatory reporting. Kelvin has seven years’ experience in delivering large liquidity risk programmes covering the implementation of Basel III liquidity standards (LCR and NSFR) as well as interpreting PRA and EBA liquidity risk regulations.

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