Sound Practices for the Management of Liquidity Risk at Securities Firms

Sound Practices for the Management of Liquidity Risk at Securities Firms Report of the Technical Committee of the International Organization of Securities Commissions May 2002 Table of Contents INTRODUCTION .....................................................................................................................1 Purpose...................................................................................................................................1 Approach................................................................................................................................2 Scope......................................................................................................................................2 Structure .................................................................................................................................2 SECTION A: IDENTIFYING LIQUIDITY RISK....................................................................2 The definition of liquidity ......................................................................................................2 The definition of liquidity risk ...............................................................................................3 Sources of liquidity ................................................................................................................3 Major sources of liquidity risk ...............................................................................................4 Liquidity risks of particular importance to securities firms...................................................4 Reliance on credit-sensitive liquidity sources....................................................................4 Contingent commitments ...................................................................................................5 Leverage.............................................................................................................................5 Firms that are part of a universal banking group ...............................................................6 SECTION B: HIGH-LEVEL MANAGEMENT OF LIQUIDITY RISK .................................6 Board and Senior Management Responsibilities ...................................................................7 The role of the board of directors ..........................................................................................7 The role of senior management..............................................................................................7 SECTION C: MEASUREMENT OF LIQUIDITY RISK.........................................................8 Measurement techniques and other quantitative indicators ...................................................8 Target liquidity ratios and other quantitative indicators ........................................................8 Mismatched cash flows, foreign exchange and derivatives exposures..............................9 Value-at-Risk (VaR) ..........................................................................................................9 Liquidity at Risk (LaR) ....................................................................................................10 SECTION D: MONITORING LIQUIDITY RISK .................................................................10 Strategies, policies and procedures ......................................................................................10 Management information systems .......................................................................................12 SECTION E: CONTROLLING LIQUIDITY RISK ...............................................................12 Limit setting .........................................................................................................................13 Concentration limits and diversification ..........................................................................13 Other limits ......................................................................................................................13 Scenario testing ....................................................................................................................14 Contingency Planning and Crisis Management ...................................................................15 Use of collateral ...................................................................................................................15 SECTION F: REGULATORY REQUIREMENTS ................................................................16 Capital and Reporting Requirements ...................................................................................16 Intra-Group Liquidity Transfers ..........................................................................................17 CONCLUSION........................................................................................................................17 Comme