Under IFPR all investment firms are required to have a minimum level of liquid assets on the balance sheet to fund its ongoing business and ensure it can fund a wind-down process should that become necessary. This should be determined in the Internal Capital Adequacy and Risk Assessment, or ICARA, process. See our other video for information on the ICARA process.
The IFPR states that firms need to meet their liquidity requirements with cash or quickly retrievable assets.
At least one-third of a firm’s Fixed Overhead Requirement must be held in core liquid assets. This is known as basic liquid assets requirement (or BLAR).
The rules are definitive on what counts as a core liquid asset. For example, loans cannot be used towards liquid assets and trade receivables can only be used if they are receivable within 30 days, even then they are subject to a ‘haircut’ of at least 50 per cent and can only count toward 1/3 of the BLAR. Other core liquid assets include cash on demand, government securities and money market fund holdings.
If an investment firm in a group relies on a centralised treasury function for liquidity the firm will need to make sure it holds adequate liquid assets on its own balance sheet.
We support firms in calculating their liquidity requirements and can advise on what can be included as a core liquid asset.