Central Bank of Luxembourg Regulation 2009/No. 4 of 29 April 2009 on Liquidity Surveillance

BANQUE CENTRALE DU LUXEMBOURG
Central Bank of Luxembourg Regulation 2009/No. 4 of 29 April 2009 on Liquidity Surveillance

The Management of the Central Bank of Luxembourg,

Having regard to the Treaty establishing the European Community, and in particular Articles 105(2) and (5) thereof;

Having regard to Article 108bis of the Constitution;

Having regard to the Law of 23 December 1998 on the monetary status and the Central Bank of Luxembourg, as last amended by the Law of 24 October 2008, in particular Articles 2(4), 2(5), 27-2 and 34(1);

Having regard to the opinions of the European Central Bank of 15 April 2008 and 10 September 2008;

Having regard to the Technical Opinion of 18 September 2008 of the European Committee of Banking Supervisors (ECBS) on liquidity risk management (second part; ECBS 2008 147);

Having regard to the Principles for the management and supervision of liquidity risk of the Basel Committee on Banking Supervision of September 2008;

Having regard to the Memorandum of cooperation between the financial supervisory authorities, central banks and finance ministries of the European Union on cross-border financial stability of 1 June 2008;

Considering that, in accordance with Article 2(4) of the aforementioned Law of 23 December 1998:

“The Central Bank is responsible for monitoring the general situation of liquidity on the markets as well as for evaluating market operators in this regard. The modalities of coordination and cooperation for the exercise of this mission are the subject of agreements between the Central Bank and the Financial Sector Supervisory Commission as well as the Commission for the Supervision of the Insurance Sector, in respect of the legal competencies of the parties”;

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Decides:

Art. 1. Definitions

1. Liquidity generally consists of a market operator's ability to finance its assets, satisfy the demands of its counterparties, and meet maturing obligations without incurring excessive costs.

2. Liquidity risk comprises both funding liquidity risk and market liquidity risk:

• funding liquidity risk is the risk that a market operator will not be able, without affecting its daily operations or financial soundness, to meet current and anticipated cash flow needs, whether planned or unplanned, as well as collateral needs;

• market liquidity risk is the risk that an operator cannot easily offset or eliminate a position at the market price due to insufficient market depth or due to a market disruption.

Art. 2. Scope of Application

1. The following may be considered as “market operators” within the meaning of this Regulation:

• credit institutions, monetary policy counterparties,

• monetary and non-monetary collective investment undertakings,

• other financial sector professionals (FSP),

• insurance companies,

• pension funds,

• venture capital companies (SICAR),

• securitization entities,

• payment instrument issuers,

• other operators not listed above, accepted by the Central Bank as monetary policy counterparties.

2. The Central Bank's surveillance of market operators primarily targets credit institutions acting as monetary policy counterparties. It may apply, on a case-by-case basis, to other operators listed in Article 2(1) of this Regulation to the extent that the activities of the latter are likely to have a significant impact on the liquidity situation of credit institutions, on the general liquidity situation of the markets, or on the proper conduct of monetary policy operations.

3. The Central Bank may, within the framework of market liquidity surveillance, take measures against other professional operators, in particular actors managing market infrastructures, such as payment systems, securities settlement systems, central counterparties, or multilateral trading facilities.

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Art. 3. Liquidity Surveillance

1. The Central Bank monitors the general liquidity situation of the markets and evaluates market operators using all information available to it under its various missions and through cooperation with other central banks and prudential supervisory authorities.

2. The general framework of liquidity surveillance and its implementation modalities are in accordance with the rules and decisions of the European Central Bank as well as with provisions adopted by international organizations in the field of financial stability; it also takes into account the recommendations of the European Committee of Banking Supervisors and the principles established by the Basel Committee on Banking Supervision.

3. The Central Bank ensures the implementation of this Regulation in cooperation with other financial sector supervisory authorities. It concludes cooperation agreements with these authorities for this purpose.

4. This Regulation is supplemented by technical annexes, regularly updated and published on the Central Bank's website (www.bcl.lu). The annexes are developed following consultation with operators or their representative organizations.

5. The Central Bank adapts its surveillance to the markets and to the market operators under surveillance, respecting general principles and in particular the principle of proportionality.

6. For the purposes of liquidity surveillance, the Central Bank conducts the controls it deems appropriate; it is authorized, if necessary, to conduct on-site inspections of market operators.

7. For the purposes of liquidity surveillance, the Central Bank may issue individual or collective instructions to market operators.

8. Any decision of the Central Bank is communicated directly to the concerned market operator in accordance with Article 4(4) of this Regulation.

9. The Central Bank may request a monetary policy counterparty to justify the use of liquidity it obtains or intends to obtain from the Central Bank. In accordance with Eurosystem rules, the Central Bank may impose specific limits or conditions, taking into account prudential requirements when granting credit or accepting financial collateral.

10. The Central Bank may report any contravention of the provisions of this Regulation to other financial sector supervisory authorities. It may restrict the counterparty's access to the Central Bank's operations. The Central Bank may make public the measures it is led to take.

11. The Central Bank takes necessary measures to protect the confidentiality of the information it possesses and undertakes to use it within the limits of its competencies.

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Art. 4. Obligations of Market Operators

1. Market operators are required to comply with measures taken by the Central Bank based on Article 3 of this Regulation.

2. Each market operator puts in place an appropriate framework for the prospective management of its liquidity in order to be able to honor its financial obligations. This framework includes monitoring and risk management regarding liquidity appropriate to the volume and complexity of the operator's activity. It is based on an internal organization enabling effective control of liquidity risk, including policies and procedures regarding liquidity management, including the management of financial collateral, as well as independent control.

3. Market operators communicate to the Central Bank any information regarding their liquidity management that the Central Bank deems useful for the performance of its missions.

4. Market operators respect the communication and transmission modalities established by the Central Bank for the purposes of this Regulation.

5. If an operator's liquidity is managed centrally within the group to which it belongs, the operator must be able to respond at all times to the Central Bank's requests and to fulfill the obligations incumbent upon it under this Regulation.

6. Monetary policy counterparties communicate, upon request by the Central Bank, the amount of their assets deposited in Luxembourg for the exercise of the privilege of the Central Bank registered in Article 27-1(1) of the aforementioned Law of 23 December 1998.

In the event of a remedial measure taken against a monetary policy counterparty, the operators referred to in Article 2(1) of this Regulation holding assets of this counterparty communicate to the Central Bank the amount of these assets.

Art. 5. Publication

This Regulation is published on the website of the Central Bank of Luxembourg (www.bcl.lu). It is also published in the Mémorial.

BANQUE CENTRALE DU LUXEMBOURG
The Management