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5.3 The Role of Senior Management

C 33/2015 STA Effective from 3/1/2022
  1. a.Senior management is to develop a strategy, policies and practices to manage liquidity risk in accordance with the Board approved risk tolerance and ensure that IB maintains sufficient liquidity. The strategy should include specific policies on liquidity management, such as:
    1. -the composition of assets and liabilities;
    2. -the diversity and stability of funding sources;
    3. -the approach to managing liquidity in different currencies, across borders; across business lines and legal entities;
    4. -the approach to intraday liquidity management; and
    5. -the assumptions on the liquidity and marketability of assets.

    The IB’s strategy should be continually reviewed and compliance must be reported to the Board on a regular basis.

  2. b.The strategy should take account of liquidity needs under normal conditions as well as under periods of liquidity stress as a result of IB specific or a market wide crises, and a combination of these two. The strategy may include various high-level quantitative and qualitative targets. The strategy should be appropriate for the nature, scale and complexity of the IB’s activities. In formulating this strategy, the IB must take into consideration Shari’ah compliance; its legal structures; key business lines; the breadth and diversity of markets, products, and jurisdictions in which it operates; and the regulatory requirements it is subject to. The Board must approve the strategy and critical policies and practices and review them at least annually.
  3. c.Senior management must ensure that liquidity is effectively managed on a regular and timely basis and that appropriate policies and procedures are established to limit and control material sources of liquidity risk.
  4. d.Senior management must have ongoing and active involvement in order to effectively manage liquidity on a regular and timely basis.
  5. e.IBs must designate responsibility for monitoring and managing liquidity risk to an appropriate committee e.g. the Assets and Liabilities Committee (“ALCO”), the Executive Risk Committee and/or the Risk Management Committee, etc.
  6. f.The ALCO or any other committee assigned to monitor an IB’s liquidity risk must actively monitor the IB’s liquidity risk profile and have adequate broad representation within the IB, including finance, treasury, senior managers, credit, deposits and investments, financing and risk management. The Board must define the mandate of this committee in terms of planning, directing and controlling the flow, level, mix, cost and yield of the IB’s funds and investments.
  7. g.The committee must ensure that the system set up for liquidity risk management is able to adequately identify and measure the risk exposure. The committee must also ensure that the IB has an information system which is sufficiently flexible and able to prepare and provide timely, accurate and relevant reports to senior management, the Board and the Central Bank about the institution’s liquidity risk exposure.
  8. h.Senior management must observe the changes in market conditions and new developments that can present significant challenges in terms of the smooth management of liquidity risk in the IB. Senior management must present to the Board regular reports on the liquidity position of the bank. The Board should be informed immediately of new or emerging liquidity concerns. These include increasing funding costs or concentrations, the growing size of a funding gap, the drying up of alternative sources of liquidity, material and/or persistent breaches of limits, and/or a significant decline in the cushion of unencumbered, highly liquid assets. The Board must ensure that senior management takes appropriate remedial actions to address the concerns. Senior management must be able to recommend to the Board any necessary amendments to the strategy and policies for managing liquidity risk.
  9. i.Senior management is responsible for determining the structure, responsibilities and controls for managing liquidity risk in all legal entities, branches and subsidiaries in the jurisdictions in which IB is active, and outline these elements clearly in the IB’s liquidity policies. The management structure of an IB must be established in such a way that it provides for segregation of duties between operational and monitoring functions, which can minimise the chances of conflicts of interest. It is expected that the primary responsibility for monitoring liquidity risk management must be independent of business units that are involved in the financing, investment and trading functions.
  10. j.It is the responsibility of the Board and senior management to ensure that adequate internal controls and internal audit mechanisms are in place to protect the integrity of the established liquidity risk management process. Senior management must define the specific procedures and approvals necessary for exceptions to policies and limits, including the escalation procedures and follow-up actions to be taken for breaches of limits.
  11. k.The active involvement of senior management is vital to the stress testing process in the IB. Senior management must demand that rigorous stress scenarios be considered, even in times when liquidity is plentiful.
  12. l.The strategy, key policies for implementing the strategy and the liquidity risk management structure must be communicated throughout the organisation by senior management. All individuals within business units conducting activities that have a material impact on liquidity must be fully aware of the liquidity strategy and operate under the approved policies, procedures, limits and controls.
  13. m.Individuals responsible for liquidity risk management must maintain close links with those monitoring market conditions, as well as with other individuals with access to critical information, such as credit risk managers. Individuals with direct responsibility over liquidity risk management at the banks must meet the fit and proper criteria set by the Central Bank including appropriate academic qualifications, good understanding of Shari’ah compliant activities and its liquidity related risks, good character and sound financial position.
  14. n.Senior management must ensure that independent oversight and verification is performed by middle office and/or risk management staff who are capable of assessing treasury’s adherence to liquidity limits, policies and procedures. The independent control functions must have the skills and authority to challenge information and modeling assumptions provided by business lines. In addition, internal audit must regularly review the implementation and effectiveness of the agreed framework for controlling liquidity risk.