FINMA Circular 2015/2 Liquidity Risks - Banks

Laupenstrasse 27, 3003 Bern
Tel. +41 (0)31 327 91 00, Fax +41 (0)31 327 91 01 www.finma.ch Circular 2015/2 Liquidity Risks - Banks Qualitative requirements for liquidity risk management and quantitative requirements for liquidity holding Reference: FINMA-RS 15/2 "Liquidity Risks - Banks" Issued: 3 July 2014 Entry into force: 1 January 2015 Last amendment 8 March 2023 [Amendments are marked with * and listed at the end of the document] Concordance: formerly FINMA-RS 13/6 "Liquidity Banks" of 1 January 2013 Legal basis: FINMA Act Art. 7 para. 1 lit. b Banking Act Art. 4 para. 2 Liquidity Ordinance Art. 1 para. 2, Art. 3, 5, 6, 7, 8, 9, 10, 14, 15 para. 2, 3 and 4, 15a, 15b, 15c, 15d, 15e, 16, 17, 17a, 17b, 17c, 17d, 17h, 17i, 17j, 17k, 17l, 17m 17n, 17p, 17q
Annex 1: Netting mechanisms and secured financing transactions
Annex 2: Liquidity proof: Simplifications for small banks
Annex 3: Netting mechanisms and secured financing transactions: Calculation example for small banks
Annex 4: Funding proof: Simplifications for small banks
Annex 5: Glossary
Addressees
Banking Act
Insurance Supervision Act
Financial Market Infrastructure Act
Financial Markets Act
Collective Investment Schemes Act
Anti-Money Laundering Act
Others
Banks
Financial groups and conglomerates
Other intermediaries
Insurers
Insurance groups and conglomerates
Intermediaries
Asset managers
Trustees
Managers of collective assets
Fund management
Custodial securities firms
Non-custodial securities firms
Trading venues
Central counterparties
Central securities depositories
Transaction registers
Payment systems
Participants
SICAV
KmG for KKA
SICAF
Custody banks
Representatives of foreign KKA
Other intermediaries
SRO
SRO-supervised
Audit firms
Rating agencies x

Table of Contents
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I. Subject matter Para 1
II. Qualitative requirements for liquidity risk management
Para 2-103
A. Scope Para 2-7
B. Principles Para 8-10 a) Principle of proportionality Para 8-8.1 b) Ensuring continuous solvency Para 9-10
C. Leadership, control and steering functions Para 11-29
a) Tasks and responsibilities of the management Para 11-26 b) Allocation of liquidity risk to business activities Para 27-29 D. Risk measurement and control systems Para 30-50 a) Processes for identifying, assessing, controlling and monitoring liquidity risk Para 30-38 b) Control of liquidity risk of significant legal entities, business lines and currencies Para 39-46 c) Requirements for intraday liquidity holding Para 47-49 d) Custody of assets abroad Para 50 E. Mitigation of liquidity risk Para 51-71 a) Requirements for the limit system Para 51-58 b) Diversification of the funding structure Para 59-62 c) Requirements for holding liquidity reserves against short-term deterioration of the liquidity situation Para 63-71 F. Stress tests Para 72-90 G. Contingency plan Para 91-103
III. Quantitative requirements (Liquidity Coverage Ratio, LCR) Para 104-363
A. Scope Para 104-110
B. LCR calculation method Para 111-112
C. Explanations on assets of category 1, 2a and 2b Para 113-138
D. Characteristics of HQLA Para 139-150
E. Operational requirements for HQLA management Para 151-165

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F. Requirements for adequate diversification Para 166-168 G. Netting Para 169-173.2 H. Outflows - Explanations to Annex 2 LiqV Para 174-286.3 a) Deposits from private customers Para 174-206 b) Unsecured financial resources provided by business or large customers Para 207-248.1 c) Derivatives and other transactions Para 249-271 d) Credit and liquidity facilities Para 272-281.2 e) Other contingent obligations to provide funds such as guarantees, letters of credit, revocable credit and liquidity facilities Para 281.3 f) Short positions of customers, covered by collateral from other customers Para 282-285 g) Other contractual outflows within 30 days Para 285.1-286.3
I. Inflows - Explanations to Annex 3 LiqV Para 287-298.3
a) General requirements Para 287-294.4 b) Secured financing transactions Para 295 c) Operational deposits at other financial institutions and deposits at the central institution of a financial group Para 296-297.4 d) Derivatives Para 298-298.1 e) Securities maturing within 30 calendar days that are not HQLA Para 298.2-298.3 J. Fulfillment of the LCR in Swiss Francs Para 299-320.1 a) Crediting additional foreign currency HQLA Para 303-314.3 b) Crediting category 2a HQLA in Swiss Francs beyond the upper limit of 40 percent Para 315-320.1 K. LCR in significant foreign currencies Para 321-325
L. Temporary undershooting of the LCR under extraordinary circumstances
Para 326-335
M. Liquidity proof Para 336-341.1
N. Setting specific, lower outflow and/or higher inflow rates for intra-group liquidity flows Para 342-349 O. Simplifications in filling out the liquidity proof for small banks Para 350-363

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IV. Quantitative requirements (Net Stable Funding Ratio, NSFR)
Para 364–422
A. General Para 364–368
B. Secured financing transactions Para 369–373
C. Liabilities and claims from derivative transactions Para 374–381
D. Calculation: ASF Para 382–388
E. Determination of the remaining maturity of equity instruments and liabilities Para 389–391 F. Calculation: RSF Para 392–410 G. Determination of the remaining maturity of assets and off-balance sheet items Para 411 H. Interdependent liabilities and claims Para 412–418
I. Funding proof Para 419
J. Simplifications in filling out the funding proof for small banks Para 420–422

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I. Subject matter
This circular specifies the provisions of the Liquidity Ordinance regarding the qualitative minimum requirements for liquidity risk management, as well as the quantitative requirements for the Liquidity Coverage Ratio (Liquidity Coverage Ratio, LCR) and the Net Stable Funding Ratio (Net Stable Funding Ratio, NSFR). Reporting on further monitoring indicators will be regulated at a later date.
II. Qualitative requirements for liquidity risk management
A. Scope
The qualitative requirements for liquidity risk management are generally to be met both at the level of the individual institution and at the level of the financial group. Exempt are:
a. Group companies in Switzerland, provided that it is ensured by contractual and/or statutory means that the parent company has access to all relevant information and documents for assessing the liquidity position of the group company at the individual institution level at all times; b. Banks within a central organization according to Art. 17 of the Banking Ordinance (BankV; SR 952.02), provided that it is ensured by contractual and/or statutory means that the central institution has access to all relevant information and documents for assessing the liquidity positions of the member banks at the individual institution level at all times; or
c. foreign branches in Switzerland, provided they have been exempted by FINMA from fulfilling the LCR, the parent company abroad must meet comparable qualitative requirements for liquidity risk management, and it is ensured by contractual and/or statutory means that the foreign parent company has access to all relevant information and documents for assessing the liquidity position of the foreign branch in Switzerland at all times.
In all cases, it must be ensured that there are no restrictions regarding the free transfer of financial funds and collateral.
The body for overall leadership, supervision and control, hereinafter "supervisory body", and the management of a group company or those of a bank attached to a central organization are responsible for ensuring that the parent company or the central organization fulfills the requirements for qualitative liquidity risk management for the group company or for an institution attached to a central organization. The prerequisite is that

6/70 it is ensured by contractual or statutory means that the specific service relationships between the parent company and the group company are defined (e.g. within the framework of a Service Level Agreement) and that the parent company has access to all relevant information and documents for assessing the liquidity position of the group company at the individual institution level. B. Principles a) Principle of proportionality The requirements of the second chapter of this circular are to be implemented depending on the size of the bank as well as the nature, scope, complexity and risk content of the business activities. Opening clauses in the marginal numbers of the second chapter point to the proportional application by exempting small banks from their implementation. Small banks within the meaning of Para 8 are banks of categories 4 and 5 as well as securities firms.1 FINMA may order relaxations or tightening in individual cases. 8.1* b) Ensuring continuous solvency The bank must have a liquidity risk management system that is effectively integrated into the bank-wide risk management processes. Liquidity risk management must in particular pursue the goal of ensuring continuous solvency, especially during bank-specific and/or market-wide stress periods, in which secured and unsecured financing opportunities are severely impaired.
C. Leadership, control and steering functions
a) Tasks and responsibilities of the management Repealed 11* The risk tolerance for liquidity risk corresponds to the liquidity risk tolerance and is to be regulated in the framework concept for institution-wide risk management by the supervisory body (FINMA-RS 17/1 "Corporate Governance - Banks"). The liquidity risk tolerance is the starting point for the operationalization of the bank's internal strategies for managing liquidity risk, the 1 See Annex 3 BankV

7/70 liquidity-related directive system as well as risk control processes and risk controlling processes.
Strategies for managing liquidity risk can be developed and implemented by the management or a committee directly subordinate to the management.
The management makes specifications, where appropriate, 14 a. on the degree of centralization of liquidity management; 15 b. on the organizational structure and workflow of liquidity management, in particular on the establishment of risk control and controlling processes;
c. on the composition and maturity profile of assets, liabilities and off-balance sheet items;
d. on the allocation of liquidity risk to business activities; 18 e. on intraday liquidity management; 19 f. on collateral management; 20 g. on limit setting and escalation procedures; 21 h. on the diversification of funding sources and restriction of concentrations;
i. on the amount and composition of a reserve of liquid assets that can be sold or pledged in times of stress;
j. on processes for setting, approving, applying and reviewing stress tests and the underlying assumptions; k. on the contingency plan 25 and regularly reviews the appropriateness and operational readiness to apply the corresponding specifications, at least annually. b) Allocation of liquidity risk to business activities The bank sets up a suitable liquidity transfer pricing system for cost-based internal allocation of the respective liquidity costs and risks as well as, if applicable, liquidity earnings, depending on its funding structure. The determined transfer prices are to be applied in the control of business activities and the price calculation of balance sheet and off-balance sheet transactions

8/70 are to be taken into account. Suitable assumptions are to be made for uncertain cash flows.
The liquidity transfer pricing system is to be controlled and monitored by an unit independent of the market and trading areas. The currently valid transfer prices are to be made transparent to the affected employees. The comparability and consistency of the transfer pricing systems used within the group must be guaranteed. The transfer prices are to be regularly reviewed for their appropriateness. Banks determine the design or waiver of their implementation of the allocation of liquidity costs to business activities based on the principle of proportionality (Para 8). The decision must be comprehensibly justified and documented. D. Risk measurement and control systems a) Processes for identifying, assessing, controlling and monitoring liquidity risk The risk control and controlling processes include in particular comprehensive, bank-specific liquidity risk measurement systems for risk identification and quantification, which are integrated into the liquidity management strategies and the contingency plan. These include a. the creation of a meaningful liquidity overview with a suitable breakdown into time bands, in which the expected inflows are compared to the expected outflows, taking into account the usual fluctuations in cash flows even in normal market phases, and the assumptions underlying the inflows and outflows are to be defined and documented, and b. the holding of a liquidity reserve of unencumbered, first-class and highly liquid assets against short-term deterioration of the liquidity situation. The requirements for holding the liquidity reserve are set out in Para 63–71. The risk control and controlling processes further include: 33 a. an effective contingency plan, which is coordinated with stress events according to Para 84; b. a limit system and controls in line with the articulated risk tolerance; 35

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c. specifications to ensure that the incentives of all business areas to take on risks are in line with the liquidity risks caused thereby for the bank as a whole;
d. specifications for controlling access to well-diversified funding sources and funding maturities; and e. IT systems and qualified employees to ensure timely measurement, monitoring and reporting of the liquidity position compared to set limits. b) Control of liquidity risk of significant legal entities, business lines and currencies A bank with significant business activities and/or legal entities 39* a. controls and monitors liquidity risk independently of the organizational structure of liquidity management at central and decentralized levels, while at the same time a minimum level of central supervision is required; b. ensures that all legal entities have access to liquidity even in the event of a liquidity shortage;
c. regulates, where appropriate, limitations between group companies; 42
d. records internal agreements on liquidity support between group companies; and e. examines to what extent corporate law, regulatory and operational restrictions stand in the way of the transfer of liquid funds and unencumbered assets within the group. A bank for which a significant part of the assets or liabilities is denominated in foreign currencies and at the same time significant currency or maturity mismatches exist between the respective foreign currency assets and liabilities, implements appropriate procedures for controlling foreign currency liquidity in the significant currencies to ensure its payment obligations. This includes at least a separate liquidity overview, separate foreign currency stress tests and an explicit consideration in the contingency plan for liquidity shortages for the respective currencies. Significance is determined according to Para 325. A bank with significant liquidity risks from various currencies according to Para 45 must be able to recognize changes in liquidity on foreign currency swap markets and the fungibility of currencies early and initiate countermeasures.

10/70 deviations on foreign currency swap markets, which increase currency mismatches and unexpected price volatilities, are to be taken into account in their stress tests. c) Requirements for intraday liquidity holding The bank must be able to reliably demonstrate that it can reliably estimate and control the impact of an intraday stress event on the liquidity situation during the day. Suitable stress tests must be set up for this purpose to simulate such events. The instruments and resources used to control and monitor intraday liquidity must be aligned with the risk profile, business activities and the significance of the bank in the financial system. It must be taken into account whether the bank participates directly in payment or settlement systems, restricts itself to a correspondent or custodial bank representation, or provides correspondent or custodial bank services to other banks, companies or systems. If a small bank can comprehensibly justify and document that it is not exposed to substantial risks in intraday payment traffic, it does not need to operate an intraday liquidity risk management beyond the normal precautions. d) Custody of assets abroad Banks with significant business activities and/or legal entities in Switzerland and abroad must be able to assess the access rights to assets and provide FINMA with information on access within a reasonable period of time in stress situations. E. Mitigation of liquidity risk a) Requirements for the limit system The specifications on the requirements for the limit system are regulated in FINMA-RS 17/1 "Corporate Governance - Banks". Repealed 52*-58* b) Diversification of the funding structure The bank must limit and monitor concentrations of certain funding sources and maturities by appropriate measures. Short-, medium- and long-term financings, depositor classes, investors, counterparties, instruments, markets or currencies are criteria for adequate diversification. Suitable measures can be, for example, limitations.

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Exempt from the requirement of a well-diversified funding structure are small banks without capital market and trading activities, small banks that do not refinance themselves on the money and capital market or through institutional investors, and subsidiaries of foreign banks that finance themselves through the group pool. The bank regularly estimates how quickly liquidity can be generated from the relevant funding sources that it can draw on in stress situations. Banks with a high concentration of money and capital market financings through institutional investors such as other banks, insurance companies, hedge, money market, pension funds or other larger companies must estimate the impact of the loss of financing by important counterparties and make provisions for a loss. c) Requirements for holding liquidity reserves against short-term deterioration of the liquidity situation The bank ensures that the amount and composition of the liquidity reserve consists of sufficiently sized and sustainable assets that a. is sufficiently sized in relation to the business model, the risk content of the balance sheet and off-balance sheet transactions operated, the liquidity degree of assets and liabilities, the extent of existing funding gaps and the funding strategies; b. is aligned with the defined risk tolerance and appropriately diversified; 65
c. is aligned with the liquidity needs resulting from conducted stress tests; and
d. takes into account the distribution across jurisdictions and currencies and the associated risks and market-specific characteristics.
The bank values the assets prudently and makes conservative valuation and security discounts on market prices. In particular, it must be taken into account that the valuation of assets can deteriorate in stress periods and/or that the sale or pledging of assets may be restricted or impossible in stress periods. The valuation of the assets and the valuation and security discounts are to be reviewed regularly. The bank ensures that no legal, regulatory or operational restrictions stand in the way of using the liquidity reserves. The assumptions about the transferability of assets or collateral must be presented transparently.

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The bank makes an assessment of the extent to which assets can be pledged as collateral in stress situations for secured financing transactions to counterparties and central banks or accepted by them. Access to the assets of the liquidity reserves by the organizational unit responsible for controlling liquidity must be ensured in the event of a liquidity shortage. F. Stress tests The bank has 72 a. to regularly conduct stress tests on the respective relevant levels to identify, quantify and analyze the burdens from potential, extreme events and their impact on its inflows and outflows and the liquidity position; b. to appropriately define stress test specifications regarding scope, methods, scenario diversity, severity of scenarios, chosen time horizons and shocks, and frequency of implementation;
c. to comprehensibly justify, document the choice of its stress tests and regularly review its stress tests for their appropriateness and relevance or after the occurrence of a stress event.
Repealed 76*
The results of stress tests are to be documented appropriately and used as follows:
a. Comparison between defined liquidity risk tolerance and liquidity risk position; 78 b. Comparison with the amount and composition of the liquidity reserve; 79
c. Inclusion in the limit setting process; 80
d. Inclusion in the allocation of liquidity risk to business activities, 81 where small banks according to Para 29 are exempt from fulfilling Para 81. 82 The management is closely involved in liquidity stress testing. Stress test results are to be reported to the supervisory body regularly, at least annually. The results of stress tests serve as the basis for the management to assess the need for action to limit risks in accordance with the specifications from Para 77–82. The

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