Senior management should develop well documented, sound and prudent strategy, policies and practices to manage liquidity risk in accordance with the risk tolerance and to ensure that the company maintains sufficient liquidity.
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The risk tolerance level should be adequately documented, expressed in qualitative and quantitative terms, consistent with the size, sophistication, business objectives, relevant funding markets and overall risk appetite of the company. The risk tolerance should reflect the company's assessment of the sources of liquidity risk it faces and should ensure that the company prudently manages its liquidity in normal times and is also able to sustain an extended period of stress. The liquidity risk tolerance should be reviewed, at minimum, on an annual basis. The quantitative measures may include but are not limited to liquid asset holdings, maturity mismatches, concentration of funding and contingent liquidity obligations, and other limits on liquidity indicators used for controlling different aspects of liquidity risk.
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The liquidity risk management policies of the company should include below in detail, among other things:
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| | a. | Sources of liquidity risks; |
| | b. | Liquidity risk appetite and tolerance established by the Board; |
| | c. | Liquidity risk management strategy, including the goals and objectives underlying the strategy; |
| | d. | Asset, liability and off-balance sheet composition; |
| | e. | Diversification of funding sources; |
| | f. | Liquidity risk management responsibilities, with clearly defined lines of authority, responsibilities and reporting structure; |
| | g. | Liquidity risk management systems and tools for measuring, monitoring, controlling and reporting liquidity risk, including the setting of various liquidity limits and ratios, the rationale for establishing limits and ratios and the process for escalating exceptions; |
| | h. | The policy for conducting cash-flow projections over an appropriate set of time horizons; |
| | i. | Liquidity stress testing requirements including the roles and responsibilities, frequency, techniques, scenarios and related key assumptions to be used; |
| | j. | The size and composition of liquid assets that are readily available in a stressed environment; |
| | k. | Contingency funding plans; and |
| | I. | Collateral management including pledging and assignment.
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Finance companies should establish appropriate procedures to implement their liquidity policies. The procedure document should explicitly narrate the necessary operational steps and processes to execute the relevant liquidity risk controls. The procedures should be periodically reviewed and updated to take into account new activities, changes in risk management approaches and systems.
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