a.IBs, regardless of their nature and complexity, must have a CFP that delineates the strategy, action plan and procedures for dealing with liquidity stress events, including making up cash flow in adverse circumstances. Such a plan must be prepared with input from all relevant functions of the IB, while carefully incorporating the results from stress tests, including scenario analyses and considering any limitations to sourcing funding in the future.
b.The CFP must establish a clear designation of roles and responsibilities and backup of key functions, with a suitable internal and external communication plan addressing various stages of stress events. The plan must include regular monitoring of related triggers, with appropriate escalation procedures.
c.Key objectives of a CFP are to reduce the effects of liquidity shocks, maintain going-concern status, and send market signals that the IB is in reasonable health.
d.The main components of a CFP include:
i.definition of the triggering events that will activate the CFP;
ii.governance of the CFP during the various stages of stress events, including describing the roles and responsibilities of various functions and committees;
iii.escalation procedures explaining when to consider, and how to take, additional measures for generating funds;
iv.internal and external communication plans, including major counterparties, customers, investment account holders, auditors, media and the Central Bank; and
v.the frequency and parameters used as a basis for revising the CFP.
e.CFPs must have the following characteristics:
i.Be commensurate with a IB’s complexity, risk profile, scope of operations and role in the financial systems in which the IB operates.
ii.Include a clear description of a diversified set of contingency measures for preserving liquidity and making up cash flow shortfalls in various adverse situations.
iii.Articulate available potential contingency funding sources and the amount of funds a bank estimates can be derived from these sources; clear escalation/prioritisation procedures detailing when and how each of the actions can and must be activated; and the lead time needed to tap additional funds from each of the contingency sources.
iv.The CFP's design, plans and procedures must be closely integrated with the IB’s ongoing analysis of liquidity risk and with the results of the scenarios and assumptions used in stress tests.
v.It must prepare the IB to manage a range of scenarios of severe liquidity stress that include both IB-specific and more generalised market-wide stress, as well as the potential interaction between them.
vi.It must include a diversified menu of options to allow management to have an overview of the potentially available contingency measures. Banks must also examine the time periods for which measures can be carried out under various assumptions and stresses.
f.IB’s CFP must be closely integrated with the overall strategy, policies and procedures for managing liquidity risk and must be proportionate with the IB’s size, nature of products, risk profile and level of tolerance. It must also address constraints on obtaining Shari’ah compliant funding.
g.During the process of preparation of the CFP, an IB must take input from all relevant functions and bodies, and most importantly from the senior management, treasury, and risk management and finance departments. It must be then formally approved by the Board of the IB.
h.IBs must also define the triggering events that will activate the various stages of the CFP. Such events may include events related to the IB, such as a downgrade in its credit rating or that of Sukuk that it has originated or for which it is an obligor; problems in specific products or lines of business (e.g. issues affecting an important market segment resulting in a reduction of cash flows to the IB from losses of customers and collectability problems); and/or the default or a rating downgrade of Sukuk it is holding, etc.
i.There might be some external events that can cause the need for activation of CFP, such as a lower rating or defaults in its holding of Sukuk or other Shari’ah-compliant securities, deterioration of overall market conditions, negative publicity about its Shari’ah compliance, or changes in legal, accounting and tax regulations that might impact negatively on the IB’s liquidity position. IB is expected to perform regular monitoring of related triggers that will activate the CFP with related reporting to the senior management and relevant committees such as ALCO.
j.IBs must clearly designate the roles and responsibilities of the various personnel involved in the management of the CFP during each stage of the liquidity crisis. An IB must define the classification of these stages and may consider delimiting various stages, such as:
i.recognition of various triggering events where withdrawals do not follow predictable patterns;
ii.a liquidity crunch where unsecured funding might be partially inaccessible and there is a need to liquidate assets or investments in an orderly manner; and
iii.a condition of severe liquidity shock where unsecured funding is not available and securing funding is difficult to obtain.
k.During the course of each defined stage, the IB must lay down the roles and responsibilities of the relevant board and senior management committees, as well as other staff, in order to prevent any confusion and misconception about their roles. IB can also consider the establishment of a crisis management team with clearly assigned leadership roles to increase internal coordination and decision-making during a liquidity disruption.
l.The IB CFP must illustrate the decision-making process to be adopted at different stages of the liquidity crisis. The process must outline the nature and timing of action to be taken by the personnel responsible for managing liquidity disruptions with respect to their assigned roles. It must also elaborate the parameters for escalating any issue to higher senior management. The procedures must explain the nature and extent of internal and external communication.
m.The communication plan of the IB, as defined in the CFP, must ensure clear, timely and regular internal communication to warrant timely decision-making and avoid any misconception or confusion about the appropriate steps to be taken during the crisis and roles of the various personnel.
n.Senior management must review and update the CFP at least every year for the Board’s approval, or more often as business or market circumstances change. The review must take place in order to assess its effectiveness and to ensure that it remains relevant and up to date in the changing market conditions. An IB may consider assessing the efficacy of CFP during the simulation of stress conditions, if conducted and make appropriate changes to reflect the applicability of the CFP if needed.
o.IBs must also conduct regular contingency tests to ensure that key exposures are taken into account, contingency procedures are well understood, and relevant expectations from each function are clear during times of crisis. The testing procedure must also assess the reliability of key contacts, the effectiveness of legal and operational documentation, the availability of credit lines, and the marketability of its Shari`ah-compliant asset portfolio by selling or through any collateralised mechanism. Key aspects of these tests include:
-ensuring that roles and responsibilities are appropriate and understood,
-confirming that contact information is up to date,
-proving the transferability of cash and collateral,
-ensuring that the necessary legal and operational documentation is in place to execute the plan at short notice,
-proving ability to sell or purchase certain assets or periodically draw down credit lines.
p.The CFP must be consistent with the IB’s business continuity plans and must be operational under situations where business continuity arrangements have been invoked.