(a) Responsibilities
of the U.S. risk committee.
(1) The U.S. risk committee established
by a foreign banking organization pursuant to section 252.155(a) (or
a designated subcommittee of such committee composed of members of
the board of directors (or equivalent thereof)) of the U.S. intermediate
holding company or the foreign banking organization, as appropriate
must:
(i) Approve
at least annually the acceptable level of liquidity risk that the
foreign banking organization may assume in connection with the operating
strategies for its combined U.S. operations (liquidity risk tolerance),
with concurrence from the foreign banking organization’s board
of directors or its enterprise-wide risk committee, taking into account
the capital structure, risk profile, complexity, activities, size
of the foreign banking organization and its combined U.S. operations
and the enterprise-wide liquidity risk tolerance of the foreign banking
organization; and
(ii) Receive
and review information provided by the senior management of the combined
U.S. operations at least semi-annually to determine whether the combined
U.S. operations are operating in accordance with the established liquidity
risk tolerance and to ensure that the liquidity risk tolerance for
the combined U.S. operations is consistent with the enterprise-wide
liquidity risk tolerance established for the foreign banking organization.
(iii) Approve the contingency funding
plan for the combined U.S. operations described in paragraph (e) of
this section at least annually and whenever the foreign banking organization
revises its contingency funding plan, and approve any material revisions
to the contingency funding plan for the combined U.S. operations prior
to the implementation of such revisions.
(b) Responsibilities of the U.S. chief
risk officer.
(1) Liquidity risk. The U.S. chief risk officer
of a foreign banking organization subject to this subpart must review
the strategies and policies and procedures established by senior
management of the U.S. operations for managing the risk that the financial
condition or safety and soundness of the foreign banking organization’s
combined U.S. operations would be adversely affected by its inability
or the market’s perception of its inability to meet its cash
and collateral obligations (liquidity risk).
(2) Liquidity
risk tolerance. The U.S. chief risk officer of a foreign banking
organization subject to this subpart must review information provided
by the senior management of the U.S. operations to determine whether
the combined U.S. operations are operating in accordance with the
established liquidity risk tolerance. The U.S. chief risk officer
must regularly, and, at least semi-annually, report to the foreign
banking organization’s U.S. risk committee and enterprise-wide
risk committee, or the equivalent thereof (if any) (or a designated
subcommittee of such committee composed of members of the relevant
board of directors (or equivalent thereof)) on the liquidity risk
profile of the foreign banking organization’s combined U.S.
operations and whether it is operating in accordance with the established
liquidity risk tolerance for the U.S. operations, and must establish
procedures governing the content of such reports.
(3) Business
lines or products.
(i) The U.S. chief risk officer of a
foreign banking organization subject to this subpart must approve
new products and business lines and evaluate the liquidity costs,
benefits, and risks of each new business line and each new product
offered, managed or sold through the foreign banking organization’s
combined U.S. operations that could have a significant effect on the
liquidity risk profile of the U.S. operations of the foreign banking
organization. The approval is required before the foreign banking
organization implements the business line or offers the product through
its combined U.S. operations. In determining whether to approve the
new business line or product, the U.S. chief risk officer must consider
whether the liquidity risk of the new business line or product (under
both current and stressed conditions) is within the foreign banking
organization’s established liquidity risk tolerance for its
combined U.S. operations.
(ii)
The U.S. risk committee must review at least annually significant
business lines and products offered, managed or sold through the combined
U.S. operations to determine whether each business line or product
creates or has created any unanticipated liquidity risk, and to determine
whether the liquidity risk of each strategy or product is within the
foreign banking organization’s established liquidity risk tolerance
for its combined U.S. operations.
(4) Cash-flow
projections. The U.S. chief risk officer of a foreign banking
organization subject to this subpart must review the cash-flow projections
produced under paragraph (d) of this section at least quarterly (or
more often, if changes in market conditions or the liquidity position,
risk profile, or financial condition of the foreign banking organization
or the U.S. operations warrant) to ensure that the liquidity risk
of the foreign banking organization’s combined U.S. operations
is within the established liquidity risk tolerance.
(5) Liquidity
risk limits. The U.S. chief risk officer of a foreign banking
organization subject to this subpart must establish liquidity risk
limits as set forth in paragraph (f) of this section and review the
foreign banking organization’s compliance with those limits
at least quarterly (or more often, if changes in market conditions
or the liquidity position, risk profile, or financial condition of
the U.S. operations of the foreign banking organization warrant).
(6) Liquidity
stress testing. The U.S. chief risk officer of a foreign banking
organization subject to this subpart must:
(i) Approve the liquidity stress testing
practices, methodologies, and assumptions required in section 252.157(a)
at least quarterly, and whenever the foreign banking organization
materially revises its liquidity stress testing practices, methodologies
or assumptions;
(ii) Review
the liquidity stress testing results produced under section 252.157(a)
of this subpart at least quarterly; and
(iii) Approve the size and composition
of the liquidity buffer established under section 252.157(c) of this
subpart at least quarterly.
(c) Independent review function.
(1) A foreign banking organization
subject to this subpart must establish and maintain a review function,
which is independent of the management functions that execute funding
for its combined U.S. operations, to evaluate the liquidity risk management
for its combined U.S. operations.
(2) The independent review function must:
(i) Regularly, but no less frequently
than annually, review and evaluate the adequacy and effectiveness
of the foreign banking organization’s liquidity risk-management
processes within the combined U.S. operations, including its liquidity
stress test processes and assumptions;
(ii) Assess whether the foreign banking
organization’s liquidity risk-management function of its combined
U.S. operations complies with applicable laws and regulations, and
sound business practices; and
(iii) Report material liquidity risk-management issues to the U.S.
risk committee and the enterprise-wide risk committee in writing for
corrective action, to the extent permitted by applicable law.
(d) Cash-flow projections.
(1) A foreign banking
organization subject to this subpart must produce comprehensive cash-flow
projections for its combined U.S. operations that project cash flows
arising from assets, liabilities, and off-balance sheet exposures
over, at a minimum, short- and long-term time horizons. The foreign
banking organization must update short-term cash-flow projections
daily and must update longer-term cash-flow projections at least monthly.
(2) The foreign banking organization
must establish a methodology for making cash-flow projections for
its combined U.S. operations that results in projections which:
(i) Include cash flows
arising from contractual maturities, intercompany transactions, new
business, funding renewals, customer options, and other potential
events that may impact liquidity;
(ii) Include reasonable assumptions regarding the future behavior
of assets, liabilities, and off-balance sheet exposures;
(iii) Identify and quantify discrete
and cumulative cash-flow mismatches over these time periods; and
(iv) Include sufficient detail
to reflect the capital structure, risk profile, complexity, currency
exposure, activities, and size of the foreign banking organization
and its combined U.S. operations, and include analyses by business
line, currency, or legal entity as appropriate.
(e) Contingency funding plan.
(1) A foreign banking organization
subject to this subpart must establish and maintain a contingency
funding plan for its combined U.S. operations that sets out the foreign
banking organization’s strategies for addressing liquidity needs
during liquidity stress events. The contingency funding plan must
be commensurate with the capital structure, risk profile, complexity,
activities, size, and the established liquidity risk tolerance for
the combined U.S. operations. The foreign banking organization must
update the contingency funding plan for its combined U.S. operations
at least annually, and when changes to market and idiosyncratic conditions
warrant.
(2) Components of the contingency funding plan.
(i) Quantitative
assessment. The contingency funding plan for the combined U.S.
operations must:
(A)
Identify liquidity stress events that could have a significant impact
on the liquidity of the foreign banking organization or its combined
U.S. operations;
(B) Assess the level
and nature of the impact on the liquidity of the foreign banking organization
and its combined U.S. operations that may occur during identified
liquidity stress events;
(C) Identify
the circumstances in which the foreign banking organization would
implement its action plan described in paragraph (e)(2)(ii)(A) of
this section, which circumstances must include failure to meet any
minimum liquidity requirement imposed by the Board on the foreign
banking organization’s combined U.S. operations;
(D) Assess available funding sources and needs
during the identified liquidity stress events;
(E) Identify alternative funding sources that
may be used during the identified liquidity stress events; and
(F) Incorporate information generated
by the liquidity stress testing required under section 252.157(a)
of this subpart.
(ii) Liquidity event management process. The contingency funding plan for the combined U.S. operations must
include an event management process that sets out the foreign banking
organization’s procedures for managing liquidity during identified
liquidity stress events for the combined U.S. operations. The liquidity
event management process must:
(A) Include an action plan that clearly describes
the strategies that the foreign banking organization will use to respond
to liquidity shortfalls in its combined U.S. operations for identified
liquidity stress events, including the methods that the organization
or the combined U.S. operations will use to access alternative funding
sources;
(B) Identify a liquidity stress
event management team that would execute the action plan in paragraph
(e)(2)(i) of this section for the combined U.S. operations;
(C) Specify the process, responsibilities,
and triggers for invoking the contingency funding plan, describe the
decision-making process during the identified liquidity stress events,
and describe the process for executing contingency measures identified
in the action plan; and
(D) Provide
a mechanism that ensures effective reporting and communication within
the combined U.S. operations of the foreign banking organization and
with outside parties, including the Board and other relevant supervisors,
counterparties, and other stakeholders.
(iii) Monitoring. The contingency funding plan for the combined U.S. operations must
include procedures for monitoring emerging liquidity stress events.
The procedures must identify early warning indicators that are tailored
to the capital structure, risk profile, complexity, activities, and
size of the foreign banking organization and its combined U.S. operations.
(iv) Testing. A foreign banking organization must periodically test:
(A) The components of the
contingency funding plan to assess the plan’s reliability during
liquidity stress events;
(B) The operational
elements of the contingency funding plan, including operational simulations
to test communications, coordination, and decision-making by relevant
management; and
(C) The methods it
will use to access alternative funding sources for its combined U.S.
operations to determine whether these funding sources will be readily
available when needed.
(f) Liquidity risk limits.
(1) General. A foreign banking organization must monitor sources of liquidity
risk and establish limits on liquidity risk that are consistent with
the organization’s established liquidity risk tolerance and
that reflect the organization’s capital structure, risk profile,
complexity, activities, and size.
(2) Liquidity risk limits established by
a Category II foreign banking organization or Category III foreign
banking organization. If the foreign banking organization is
not a Category IV foreign banking organization, liquidity risk limits
established under paragraph (f)(1) of this section must include limits
on:
(i) Concentrations
in sources of funding by instrument type, single counterparty, counterparty
type, secured and unsecured funding, and as applicable, other forms of liquidity
risk;
(ii) The amount of liabilities
that mature within various time horizons; and
(iii) Off-balance sheet exposures and
other exposures that could create funding needs during liquidity stress
events.
(g) Collateral, legal entity, and intraday liquidity risk monitoring. A foreign banking organization subject to this subpart or more must
establish and maintain procedures for monitoring liquidity risk as
set forth in this paragraph (g).
(1) Collateral. The foreign banking organization must establish and maintain policies
and procedures to monitor assets that have been, or are available
to be, pledged as collateral in connection with transactions to which
entities in its U.S. operations are counterparties. These policies
and procedures must provide that the foreign banking organization:
(i) Calculates all
of the collateral positions for its combined U.S. operations according
to the frequency specified in paragraph (g)(1)(i)(A) or (B) of this
section or as directed by the Board, specifying the value of pledged
assets relative to the amount of security required under the relevant
contracts and the value of unencumbered assets available to be pledged:
(A) If the foreign banking
organization is not a Category IV foreign banking organization, on
at least a weekly basis; or
(B) If
the foreign banking organization is a Category IV foreign banking
organization, on at least a monthly basis;
(ii) Monitors the levels of unencumbered
assets available to be pledged by legal entity, jurisdiction, and
currency exposure;
(iii) Monitors
shifts in the foreign banking organization’s funding patterns,
including shifts between intraday, overnight, and term pledging of
collateral; and
(iv) Tracks operational
and timing requirements associated with accessing collateral at its
physical location (for example, the custodian or securities settlement
system that holds the collateral).
(2) Legal entities,
currencies and business lines. The foreign banking organization
must establish and maintain procedures for monitoring and controlling
liquidity risk exposures and funding needs of its combined U.S. operations,
within and across significant legal entities, currencies, and business
lines and taking into account legal and regulatory restrictions on
the transfer of liquidity between legal entities.
(3) Intraday
exposure. The foreign banking organization must establish and
maintain procedures for monitoring intraday liquidity risk exposure
for its combined U.S. operations that are consistent with the capital
structure, risk profile, complexity, activities, and size of the foreign
banking organization and its combined U.S. operations. If the foreign
banking organization is not a Category IV banking organization these
procedures must address how the management of the combined U.S. operations
will:
(i) Monitor
and measure expected gross daily inflows and outflows;
(ii) Manage and transfer collateral
to obtain intraday credit;
(iii)
Identify and prioritize time-specific obligations so that the foreign
banking organizations can meet these obligations as expected and settle
less critical obligations as soon as possible;
(iv) Manage the issuance of credit to
customers where necessary; and
(v) Consider the amounts of collateral and liquidity needed to meet
payment systems obligations when assessing the overall liquidity needs
of the combined U.S. operations.
