Document ID: chunk:federal_register_of_legislation:F2022L01620:front:0:p4
Version: federal_register_of_legislation:F2022L01620
Segment Type: other
Provision Reference: 
Character Range: 8635–11748

its liquidity risk management processes;

       (e)          ensure that stress tests, contingency funding plans and holdings of liquid assets are effective and appropriate for the ADI;

       (f)           establish a set of reporting criteria specifying the scope, manner and frequency of reporting for various recipients (such as the Board, senior management and the asset/liability committee) including the parties responsible for preparing the reports;

       (g)          establish specific procedures and approvals necessary for exceptions to policies and limits, including escalation procedures and follow-up actions to be taken for breaches of limits;

       (h)          closely monitor current trends and potential market developments that may present significant, unprecedented and complex challenges for managing liquidity risk so that appropriate and timely changes to the liquidity management strategy may be made as needed; and

       (i)            continuously review information on the ADI's liquidity developments and report to the Board on a regular basis.

    20.         Senior management and the Board must be able to demonstrate a thorough understanding of the links between funding liquidity risk (the risk that an ADI may not be able to meet its financial obligations as they fall due) and market liquidity risk (the risk that liquidity in financial markets, such as the market for debt securities, may reduce significantly), as well as how other risks, including credit, market, operational and reputation risks, affect the ADI's overall liquidity risk management strategy.

Liquidity risk management framework

    21.         An ADI's liquidity risk tolerance defines the level of liquidity risk that the ADI is willing to assume. An ADI's liquidity risk tolerance must be documented and appropriate for the ADI's operations and strategy and its role in the financial system.

    22.         The liquidity risk tolerance must be reviewed, at least annually, to reflect the ADI's financial condition and funding capacity.

    23.         In setting the liquidity risk tolerance, the Board and senior management must ensure that the risk tolerance allows the ADI to effectively manage its liquidity position in such a way that it is able to withstand a prolonged period of stress.

    24.         The liquidity risk tolerance must be articulated in such a way that clearly states the trade-off between risks and profits.

    25.         An ADI's liquidity risk management framework must clearly set out the organisational structure as it relates to liquidity for the ADI on both a Level 1 and Level 2 basis, and define the responsibilities and roles of management involved in managing liquidity risk.

    26.         An ADI's liquidity risk management framework must be formulated to ensure that the ADI maintains sufficient liquidity, including a cushion of unencumbered liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. The source of liquidity stress could be