Liquidity Risk – International Regulatory Convergence Unlikely Until Regulators Agree on Interpretation of Liquidity Risk Management Best Practice, says Algorithmics

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Algorithmics comments on FSA Consultation Paper 09/13. While welcoming the FSA’s international objectives for standardized reporting and supervision of liquidity risk (Consultation Paper (CP) 09/13), Algorithmics, the leading provider of enterprise risk management systems, recognizes that this will be difficult for regulators to achieve. Algorithmics predicts that for the foreseeable future, institutions operating across regulatory jurisdictions will continue to face different interpretations of funding liquidity risk requirements from regulators.

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Large institutions, faced with satisfying different reporting and compliance requirements for each jurisdiction in which they operate will need robust liquidity risk systems with enterprise liquidity risk frameworks and solid data infrastructures, in order to comply across a number of geographies.

While welcoming the FSA’s international objectives for standardized reporting and supervision of liquidity risk (Consultation Paper (CP) 09/13), Algorithmics, the leading provider of enterprise risk management systems, recognizes that this will be difficult for regulators to achieve. Algorithmics predicts that for the foreseeable future, institutions operating across regulatory jurisdictions will continue to face different interpretations of funding liquidity risk requirements from regulators.

There is now consensus that the main tools of liquidity risk best practice should include stress testing and dynamic scenarios, as Algorithmics proposed in its 2007 White Paper*. However, between regulatory jurisdictions there is currently a lack of consensus on how these risk measures should be interpreted in terms of regulatory requirements, specifically around the amount of liquidity funding that institutions are required to hold.

“We have seen a high level of international convergence around regulatory capital requirements for Basel II. However, we do not see this same level of convergence happening for liquidity risk because, currently, regulators are interpreting the requirements for holding funding liquidity differently," said Dr Mario Onorato, Senior Director of Balance Sheet Risk Management Solutions at Algorithmics and Honorary Senior Lecturer, Cass Business School in London. "Large institutions, faced with satisfying different reporting and compliance requirements for each jurisdiction in which they operate will need robust liquidity risk systems with enterprise liquidity risk frameworks and solid data infrastructures, in order to comply across a number of geographies."

In its response to the FSA CP 09/13, Algorithmics has requested early clarification of the criteria and weighting for the Individual Liquidity Guidelines (ILG) to help decision makers in firms understand the cost/benefit relationship that exists between investment in risk infrastructure and the corresponding lower cost for maintaining liquid assets.

Besides international convergence and definition of ILG, Algorithmics’ response also covers the FSA’s implementation timetable, reporting proposals, feedback of data, balance between quantitative and qualitative elements of the new regime, standardized reporting and the usage of behavioural data.

For a copy of Algorithmics’ response to the FSA please email:
liquidityrisk@algorithmics.com

For Algorithmics’ white papers* on liquidity risk management see:
http://www.algorithmics.com/EN/publications/whitepapers/

ENDS

For further information please contact:
Heather Smith, Senior Communications Manager, Algorithmics (UK) Ltd
Direct line +44 (0) 20 7392 5820 Mobile +44 (0) 7515 974223
E-mail Heather.smith@algorithmics.com

Notes to Editors:

Algorithmics is the world's leading provider of risk solutions. Financial organizations from around the world use Algorithmics' software, analytics and advisory services to help them make risk-aware business decisions, maximize shareholder value, and meet regulatory requirements. Supported by a global team of risk experts based in all major financial centers, Algorithmics offers proven, award-winning solutions for market, credit and operational risk, as well as collateral and capital management. Algorithmics is a member of the Fitch Group. http://www.algorithmics.com

Turner Review, March 2009
Lord Turner, Chairman of the FSA, stated in the Turner Review of March 2009 that 'managing bank liquidity risk is as important as capital/solvency risk management'. FSA CP 09/13, Strengthening liquidity standards 2: liquidity reporting, sets out the FSA’s proposals for a new liquidity reporting regime, being part of the proposed overhaul of UK liquidity regulation, as set out in CP 08/22, Strengthening liquidity standards.

Algorithmics' Balance Sheet Risk Management solution looks at those risks in an institution that require simultaneous attention to, and coordination of, both sides of the balance sheet. This means coordinating funding (liability side of the Balance Sheet) with the investments (the asset side) in order to achieve the desired level of returns within the defined and accepted risk tolerance level. This enables management to make informed decisions affecting sustainable growth within balance sheet risk policies to achieve long term gains in capital value.

Liquidity risk management approach
Algorithmics' comprehensive approach to liquidity risk management, described as early as December 2007 in two white papers (see http://www.algorithmics.com/EN/publications/whitepapers/), stresses the need for stress testing in the management of liquidity risk and convergence of local supervisory regimes.

Other media announcements on liquidity risk issues are here:
Submission to Basel Committee: http://www.algorithmics.com/EN/news/pressreleases/284-press.cfm
Comments on earlier FSA CP: http://www.algorithmics.com/EN/news/pressreleases/279-press.cfm

Algo Liquidity Risk is equipped with a state-of-the-art suite of functionalities especially designed in view of recent developments in best practice for liquidity risk management, including integration of market liquidity risk and monitoring of liquid assets, a flexible environment for stress testing, integration of behavioral models, and scenario-based dynamic simulation of future business. Liquidity risk analytics, both static and dynamic, are available, including ability to compare probability distributions of expected cash flows and liquid assets values to obtain an amount of liquid assets that is deemed sufficient to cover even unexpected cash outflows over a selected time horizon.

With its extensive instrument coverage and industry leading inventory of models and structured product building tools, Algo Liquidity Risk’s can handle all assets, securities or derivatives, including the most complex products. Coupled with advanced simulation capabilities, any additions or refinements made to the modeling assumptions and scenarios are inherited throughout the solution, thereby ensuring ease of maintenance and consistency across measurement.

The flexibility of portfolio hierarchies and reporting views in Algo Liquidity Risk enables institutions to manage liquidity across legal entities, business lines and currencies. Moreover, the FTP functionality allows institutions to address the requirement for internal pricing of liquidity risk.

Fitch Group is the parent company of Fitch Ratings, a global ratings agency committed to providing the world's markets with independent, timely and prospective credit opinions. With 49 offices worldwide, Fitch Ratings’ global expertise spans across capital markets in over 150 countries. Fitch Ratings is headquartered in New York and London.

The Fitch Group also includes Fitch Solutions, a distribution channel for Fitch Ratings products and a provider of data, analytics and related services; and Algorithmics, the world's leading provider of enterprise risk solutions.

The Fitch Group is a majority-owned subsidiary of Fimalac, S.A., headquartered in Paris, France.
For additional information, please visit http://www.fitchratings.com http://www.algorithmics.com and http://www.fimalac.com

© 2009 Algorithmics Software LLC. All rights reserved. ALGO, ALGORITHMICS, Ai & design, ALGORITHMICS & Ai & design, KNOW YOUR RISK, MARK-TO-FUTURE, RISKWATCH, ALGO ALM, ALGO COLLATERAL, ALGO CREDIT ADMINISTRATOR, ALGO CREDIT DATA SERVICES, ALGO CREDIT ECONOMIC CAPITAL, ALGO CREDIT EXPOSURE, ALGO CREDIT LIMITS, ALGO CREDIT REGULATORY CAPITAL, ALGO CREDITVANTAGE, ALGO ETREASURY CREDIT, ALGO FIRST, FIRST 500, ALGO MARKET ANALYTICS, ALGO OPDATA, ALGO OPVAR, ALGO RECONCILIATION, ALGO RISK, ALGO RISK SERVICE, and ALGO SUITE are trademarks of Algorithmics Trademarks LLC.

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Algorithmics
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