Liquidity Risk Management. Baird Stephen

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СКАЧАТЬ scenario development, stress testing, and limit structure into a robust CFP escalation process.

      In designing and updating CFPs, institutions typically look to their existing business and risk profiles, risk monitoring capabilities, and external market conditions. While this helps establish a strong CFP at a particular point in time, the relevance and effectiveness of the CFP will likely change given the evolving nature of the institution and changing market conditions; therefore, ensuring the relevance and alignment of the CFP to the institution's business and risk profile and evolving external market conditions is key.

      In addition to the periodic updates to the CFP, leading institutions are taking a more proactive stance on the development of the CFP by incorporating it as part of, or in parallel with, their strategic planning exercises, thereby positioning the CFP to be more forward-looking and flexible. As a result, the CFP's key features such as escalation triggers, EWIs, contingent actions, and strategies are more attuned to the institution's current activities as well as its projected areas of growth including new businesses, products, client segments, and geographies.

      Further, the collaboration among relevant stakeholders from management, businesses, finance, risk, operations, and other supporting functions enables an improved forum for effective challenge discussions of key business forecasting assumptions and their associated impact on liquidity risk and operational strategies – particularly with respect to crisis response, alternative crisis funding arrangements, and relevant market dynamics – during potential periods of severe stress periods and market disruptions.

      Align and Integrate CFP to Business and Risk Continuity Strategies

      While the CFP serves as a critical component of the liquidity risk management framework, it should be considered not as a stand-alone instrument but rather as a tool within the suite of capabilities and resources for managing the institution through a liquidity crisis.

      For leading institutions, the alignment and integration of related capabilities, such as their business continuity planning (BCP) and recovery and resolution planning (RRP) strategies with the CFP, helps to standardize and streamline governance models, operating processes, and reporting tools and infrastructure, and further enhance management's decision-making capabilities, particularly during critical periods of severe market disruptions. This alignment requires common data taxonomies for defining/classifying the business and functional group segments and associated activities to ensure consistency across the enterprise. Additionally, institutions will need to define a comprehensive list of liquidity risk management applications and related systems, including front office activities, analytics, and reporting support, to ensure continuity of critical services under BAU and stressed operating environments.

      Planning, Preparing, and Practicing for the Unexpected

      In a liquidity crisis, the importance and robustness of the CFP's design needs to be matched by the institution's ability to execute the playbook. Its people need to understand their roles and responsibilities under the streamlined command structure and its communication protocols so they can implement the steps needed to prepare for and manage the liquidity crisis.

      The effectiveness in executing the CFP is further enhanced through periodic testing. While not all components/strategies of the CFP may be tested, leading institutions that perform frequent exercises which best simulate the potential liquidity crisis environment will improve the CFP's operational effectiveness and response times – aspects that are critical during a crisis. Further, the test simulations may also identify potential gaps and/or improvement opportunities that would otherwise be undetected if the CFP were left collecting dust on the bookshelf.

      Liquidity Risk Management Information Systems

      Enhance Ownership and Accountability of Liquidity Risk Data

      As regulatory reporting requirements have increased over the past several years, institutions have been challenged to keep pace with the ever-growing regulatory requirements for additional and more granular information. In stretching to meet pending regulatory deadlines while simultaneously juggling the needs to manage the ever-increasing portfolio of systems and applications, institutions have had little time to develop and implement a holistic approach to the management of liquidity data. Consequently, this has resulted in data quality challenges, including incomplete or duplicated data, variations in reported results due to the use of multiple data sources, and increased manual and time-consuming efforts in reconciling and enriching information needed for reporting across the different parts of the enterprise.

      Recognizing such challenges, leading institutions have often designated risk data “czars” to lead and coordinate data management practices across the enterprise, and spanning the risk data management lifecycle – including data capture, enrichment, quality maintenance, analytics, reporting, and archiving.

      Manage Liquidity Data Comprehensively: From End-to-End and Top-to-Bottom

      Institutions leading the charge to improve their liquidity risk management capabilities have invested significantly in developing a comprehensive view of liquidity information, improved data quality, and “data lineage” as information is captured, enriched, analyzed, and reported.

      Leading institutions have undertaken a spectrum of initiatives along the following focus areas:

      i. Integration of risk, asset liability management, funds transfer pricing, transaction processing, and forecasting systems to enable more comprehensive data sets and shared common analytic engines/modules (e.g., trade capture systems, collateral management systems, G/L and financial systems)

      ii. Standardization of liquidity data definitions and attributes through improved reference and position data collection (e.g., detailed features of product and asset class characteristics, contractual maturities of existing positions, overlay of behavioral assumptions), regulatory reporting classifications, and other segmentations (e.g., holding company, lines of business, legal entities/jurisdictions)

      iii. Development of integrated analytics and reporting suites for multiple purposes (e.g., CFP dashboard metrics and thresholds, resolution planning, strategic planning and forecasting)

      Develop a Vision and Continue to Build on a Scalable and Flexible Liquidity Risk Architecture

      As institutions continue to enhance their liquidity risk architecture and platform(s), they should remain mindful of the interconnections between liquidity risk systems and applications, ensuring that IT initiatives at the enterprise level and at other parts of the organization properly consider potential implications and considerations for liquidity risk as part of their planning and scoping exercises.

      In this context, leading institutions demonstrate strong capabilities in several areas. First, they have a strong understanding of the information technology, systems, and data “blueprint” – both the current and the future state design, along with detailed phased implementation and change management strategies and plans. Second, there is an executive owner, such as the chief information officer or a risk data czar, who provides oversight and drives coordination, ensuring a comprehensive view of liquidity risk data and how such information is used across the enterprise. Finally, there is a strong business case and well-defined requirements for IT investments, coupled with the support and buy-in from senior management.

      Recovery and Resolution Planning

      Embed Liquidity Needs for Resolution Planning into BAU Liquidity Reserves

      Resolution planning requires firms to identify and measure the liquidity necessary to resolve the firm in an orderly manner. Leading institutions use the liquidity estimates at the firm-wide and legal entity levels that are produced for resolution planning to assess the СКАЧАТЬ