4. Liquidity Requirements
4.1. Introduction
64. These liquidity requirements outlines SAMA’s requirements for liquidity risk management and reporting by FBBs.
4.2. Liquidity Risk Governance - Senior Management Responsibilities
65. A FBB’s senior management is ultimately responsible for the sound and prudent management of the liquidity risk of the FBB. An FBB must maintain a liquidity risk management framework commensurate with the level and extent of liquidity risk to which the FBB is exposed from its activities.
66. The liquidity risk management framework must, at a minimum, include the following;
i. A statement of the FBB’s liquidity risk appetite and tolerance, approved by the GM/CEO in charge of the FBB;
ii. The liquidity management strategy and policy of the FBB, approved by the GM/CEO in charge of the FBB;
iii. The FBB’s operating standards (e.g. in the form of policies, procedures and controls) for identifying, measuring, monitoring and controlling its liquidity risk in accordance with its liquidity risk tolerance;
iv. The FBB’s funding strategy, approved by the GM/CEO in charge of the FBB; and
v. A Contingency Funding Plan (CFP).
67. The FBB must ensure that:
i. Senior management and other relevant personnel have the necessary experience to manage liquidity risk; and
ii. The FBB’s liquidity risk management framework and liquidity risk management practices are documented and reviewed at least annually.
68. The senior management of the FBB must review regular reports on the liquidity position of the FBB and, where necessary, information on new or emerging liquidity risks.
69. An FBB’s senior management must, at a minimum;
i. Develop a liquidity management strategy, policies and processes in accordance with the Head Office-approved liquidity tolerance;
ii. Ensure that the FBB maintains sufficient liquidity at all times;
iii. Determine the structure, responsibilities and controls for managing liquidity risk and for overseeing the liquidity positions of the FBB, and outline these elements clearly in the FBB’s liquidity policies;
iv. Ensure that the FBB has adequate internal controls to ensure the integrity of its liquidity risk management processes;
v. Ensure that stress tests, contingency funding plans and holdings of liquid assets are effective and appropriate for the FBB;
vi. Establish a set of reporting criteria specifying the scope, manner and frequency of reporting for various recipients including the parties responsible for preparing the reports;
vii. Establish specific procedures and approvals necessary for exceptions to policies and limits, including escalation procedures and follow-up actions to be taken for breaches of limits;
viii. Closely monitor current trends and potential market developments that may present significant, unprecedented and complex challenges for managing liquidity risk so that appropriate and timely changes to the liquidity management strategy may be made as needed; and
ix. Continuously review information on the FBB’s liquidity developments and report to the senior management on a regular basis.
70. Senior management must be able to demonstrate a thorough understanding of the links between funding liquidity risk (the risk that an FBB may not be able to meet its financial obligations as they fall due) and market liquidity risk (the risk that liquidity in financial markets, such as the market for debt securities, may reduce significantly), as well as how other risks, including credit, market, operational and reputation risks, affect the FBB’s overall liquidity risk management strategy.
4.3. Liquidity Risk Management Framework
71. An FBB’s liquidity risk tolerance defines the level of liquidity risk that the FBB is willing to assume. An FBB’s liquidity risk tolerance must be documented and appropriate for the FBB’s operations and strategy.
72. The liquidity risk tolerance must be reviewed, at least annually, to reflect the FBB’s financial condition and funding capacity.
73. In setting the liquidity risk tolerance, the senior management must ensure that the risk tolerance allows the FBB to effectively manage its liquidity position in such a way that it is able to withstand a prolonged period of stress.
74. The liquidity risk tolerance must be articulated in such a way that clearly states the trade-off between risks and profits.
75. An FBB’s liquidity risk management framework must be formulated to ensure that the FBB maintains sufficient liquidity, including a cushion of unencumbered liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. The source of liquidity stress could be specific to the FBB or market-wide or a combination of the two.
76. An FBB’s liquidity risk management framework must be well integrated into the FBB’s overall risk management process.
77. An FBB’s liquidity risk management oversight function must be operationally independent and staffed with personnel who have the skills and authority to challenge the FBB’s treasury and other liquidity risk management businesses.
78. The liquidity management strategy must include specific policies on liquidity management, such as:
i. The composition and maturity of assets and liabilities;
ii. The diversity and stability of funding sources;
iii. The approach to managing liquidity in different currencies, across borders, and across business lines; and
iv. The approach to intraday liquidity management.
79. The liquidity management strategy must take account of the FBB’s liquidity needs under normal conditions as well as periods of liquidity stress. The strategy must include quantitative and qualitative targets.
80. The liquidity management strategy must be appropriate for the nature, scale and complexity of the FBB’s operations. In formulating this strategy, the FBB must consider its key business lines, the breadth and diversity of markets, products and home and host regulatory requirements.
81. The liquidity management strategy, key policies for implementing the strategy and the liquidity risk management structure must be communicated throughout the organisation by senior management.
82. An FBB must have adequate policies, procedures and controls in place to ensure that the senior management are informed immediately of new and emerging liquidity concerns. These include increasing funding costs or concentrations, increases in any funding requirements, the lack of availability of alternative sources of liquidity, material and/or persistent breaches of limits, a significant decline in the cushion of unencumbered liquid assets or changes in external market conditions that could signal future difficulties.
83. Senior management must be satisfied that it is fully aware of all activities that have an impact on liquidity and that it operates in accordance with approved policies, procedures, limits and controls.
84. The liquidity risk management framework must be subject to effective review on an ongoing basis.
4.4. Management of Liquidity Risk
85. An FBB must have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process must include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off- balance sheet items over an appropriate set of time horizons.
86. An FBB must set limits to control its liquidity risk exposure and vulnerabilities. Limits and corresponding escalation procedures must be reviewed regularly. Limits must be relevant to the business in terms of its complexity of activity, nature of products, currencies and markets served. Where a liquidity risk limit is breached, an FBB must implement a plan of action to review the exposure and reduce it to a level that is within the limit.
87. An FBB must actively manage its collateral positions, differentiating between encumbered and unencumbered assets.
88. An FBB must design a set of early warning indicators to aid its daily liquidity risk management processes in identifying the emergence of increased risk or vulnerabilities in its liquidity risk position or potential funding needs. Such early warning indicators must be structured so as to assist in the identification and escalation of any negative trends in the FBB’s liquidity position and lead to an assessment and potential response by management to mitigate the FBB’s exposure to these trends.
89. An FBB must have a reliable management information system that provides the senior management and other appropriate personnel with timely and forward-looking information on the liquidity position of the FBB.
90. An FBB must actively manage its intraday liquidity positions and risks in order to meet payment and settlement obligations on a timely basis under both normal and stressed conditions, thus contributing to the orderly functioning of payment and settlement systems.
91. An FBB must develop and implement a costs and benefits allocation process for funding and liquidity that appropriately apportions the costs of prudent liquidity management to the sources of liquidity risk and provides appropriate incentives to manage liquidity risk.
92. An FBB active in multiple currencies must:
i. Maintain liquid assets consistent with the distribution of its liquidity needs by currency;
ii. Assess its aggregate foreign currency liquidity needs and determine an acceptable level of currency mismatches; and
iii. Undertake a separate analysis of its strategy for each currency in which it has material activities, considering potential constraints in times of stress.
4.5. Funding Strategy
93. An FBB must;
i. Develop and document a three-year funding strategy, which must be provided to SAMA on request;
ii. Maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers; and
iii. Regularly gauge its capacity to raise funds quickly. It must identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund-raising capacity remain valid.
94. The funding strategy must be reviewed and approved by the GM/CEO of the FBB, at least annually, and supported by robust assumptions in line with the FBB’s liquidity management strategy and business objectives.
95. The funding strategy must be reviewed and updated, at least annually, to account for, at a minimum, changed funding conditions and/or a change in the FBB’s strategy. An FBB must advise SAMA of any material changes to the FBB’s funding strategy.
4.6. Contingency Funding Plan (CFP)
96. An FBB must have a formal Contingency Funding Plan (CFP) that clearly sets out the strategies for addressing liquidity shortfalls in stressed situations. The plan must outline policies to manage a range of stress environments, establish clear lines of responsibility and include clear invocation and escalation procedures.
97. An FBB’s CFP must be commensurate with its complexity, risk profile, scope of operations and role in the financial systems. The plan must articulate available contingency funding sources and the amount of funds an FBB estimates can be derived from these sources, clear escalation/prioritisation procedures detailing when and how each of the actions can and must be activated and the lead time needed to tap additional funds from each of the contingency sources. The CFP must provide a framework with a high degree of flexibility so that an FBB can respond quickly in a variety of situations.
98. The plan’s design, scope and procedures must be closely integrated with the FBB’s ongoing analysis of liquidity risk and with the assumptions used in its stress tests and the results of those stress tests. As such, the plan must address issues over a range of different time horizons, including intraday.
99. For an FBB that has significant retail deposits, the plan must address a retail deposit run and must include measures to repay retail depositors as soon as practicable. The retail run contingency plan must not rely upon closing distribution channels to retail depositors. The retail run contingency plan must seek to ensure that, in the event of a loss of market confidence in the FBB, retail depositors wishing to retrieve their deposits may do so as quickly and as conveniently as is practicable in the circumstances, and within the contractual terms and conditions applicable to the relevant deposit products.
100. An FBB’s CFP must be reviewed and tested, at least annually, to ensure its effectiveness and operational feasibility. An FBB’s GM/CEO must review and approve the contingency funding plan, at least annually, or more often as changing business or market circumstances require.
4.7. Liquidity Coverage Ratio (LCR)
101. A FBB that takes significant retail deposits or is a systematically important wholesale FBB shall be subject to minimum LCR requirements and shall be referred to as an LCR FBB. Such FBBs are required to report their LCR position in accordance with Attachment B. FBBs should refer to SAMA’s general guidance concerning ammended LCR that can be found in SAMA’s website.
102. An LCR FBB must maintain an adequate level of unencumbered high-quality liquid assets (HQLA) to meet its liquidity needs for a 30 calendar day period under a severe stress scenario, in accordance with (Attachment B):
103. For an LCR FBB, the ratio of the LCR must not be less than 100 percent on an all currencies basis.
104. SAMA may require an LCR FBB to maintain a higher minimum LCR if it has concerns about the FBB’s liquidity risk profile or the quality of its liquidity risk management.
4.8. SAMA Statutory Liquidity and Reserve Ratios
105. All FBBs must maintain the required statutory reserves and a minimum holding of its liabilities in specified liquid assets, in accordance with Article 7 of the Banking Control Law and in line with SAMA reserving requirements.
106. SAMA may require an FBB to maintain higher minimum liquidity holdings if it has concerns about the FBB’s liquidity risk profile or the quality of its liquidity risk management.
4.9. Net Stable Funding Ratio (NSFR)
107. An FBB with significant retail activities or is a systemically important wholesale FBB must meet minimum NSFR requirements and shall be referred to as an NFSR FBB. Such FBBs are required to report their NSFR position in accordance with Attachment B. FBBs should refer to SAMA’s guidance document concerning Basel III: NSFR- based on BCBS document of October 2014 that can be found in SAMA’s website.
108. An NFSR FBB must maintain an NSFR of at least 100 percent at all times.
109. SAMA may require an FBB with significant retail activities to maintain a higher minimum NSFR where SAMA considers it appropriate to do so, including if it has concerns about the FBB’s funding or liquidity risk profile or the quality of its liquidity risk management.
4.10. Liquidity Risk Stress Testing
110. A FBB must conduct stress tests on a regular basis for a variety of short-term and protracted institution-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential liquidity strain and to ensure that current exposures remain in accordance with the FBB’s liquidity risk tolerance.
111. The stress test outcomes must be used to adjust the FBB’s liquidity management strategy, policies and positions and to develop effective contingency plans to deal with events of liquidity stress.
112. Stress tests must enable the FBB to analyse the impact of stress scenarios on its overall liquidity positions, as well as on the liquidity positions of individual business lines.
113. An FBB’s stress test scenarios and related assumptions must be well documented and reviewed together with the stress test results. Stress test results and vulnerabilities and any resulting actions must be reported to, and discussed with, the FBB’s Senior Management. Results of the stress tests must be integrated into the FBB’s strategic planning process and its day-to-day risk management practices. The results of the stress tests must be explicitly considered in the setting of internal limits.
114. An FBB must decide how to incorporate the results of stress tests in assessing and planning for related potential funding shortfalls in its CFP.
4.11. Local Operational Capacity (LOC)
115. A foreign FBB must perform an assessment of its Local Operational capacity (LOC) to liquidate assets and make or receive payments without assistance from staff located outside KSA, at least annually, and provide the results of the assessment to SAMA upon request.
116. An FBB, in performing a LOC assessment, must ensure at a minimum, it considers a scenario involving a combination of time zones, different public holidays and an offshore operational risk event under which the foreign FBB would operate, including making and receiving payments, for a minimum of three business days without assistance from staff located outside KSA.