Guidance Notes on the Maintenance of Capital, Net Assets and Liquidity (July 2022)

Summary

This is BMA guidance interpreting the Investment Business (Prudential Standards) (Standard Licences, Test Licences, and Class A Registered Persons) (Capital, Net Assets and Liquidity) Rules 2022, made under section 10A of the Investment Business Act 2003. It explains how the Authority assesses minimum net assets, the market-risk based capital requirement, liquidity adequacy, and the position of Class A Registered Persons, and sets out detailed instructions for completing the Prudential Information Return (PIR).

• Net assets: Investment providers should maintain net assets sufficient to safeguard clients, deducting intra-group claims, investments in subsidiaries/associates and intangible assets when calculating net assets.
• Market risk capital: Where the Authority requires additional capital beyond the static minima, it may set a higher fixed net asset amount or require capital of at least 8% of Risk Weighted Assets calculated using a Basel III-based standardised methodology (Appendix 1); the minimum net assets for any provider required to hold additional capital is $250,000, and Tier 2 capital cannot exceed 50% of Tier 1 capital.
• Liquidity: Providers must monitor liquidity on an ongoing basis; assets are generally treated as liquid only if convertible to cash within 30 days, with specific treatment rules for receivables and connected-party balances; including any asset not listed in the Rules as liquid requires the Authority's prior written consent.
• Class A Registered Persons: Even though not subject to a minimum liquid asset requirement, these persons are still expected to maintain sufficient liquidity at all times to meet liabilities as they fall due.
• Reporting: Appendix 2 sets out detailed Prudential Information Return instructions covering credit risk categories, credit risk mitigation techniques, risk weightings by counterparty and ECAI rating mappings, and market and commodity risk capital charge calculations.

The guidance is interpretive and supplements, rather than replaces, the underlying Rules; it does not itself impose new statutory deadlines but describes the Authority's expectations and calculation methodologies that licensees and registered persons must apply in ongoing compliance and PIR reporting.

Key obligations

• Investment providers required by the Authority to hold additional capital must maintain minimum net assets of at least $250,000.
• Tier 2 capital instruments are limited to a maximum of 50% of Tier 1 capital.
• Investment providers must obtain the Authority's prior written consent before including any asset not listed in paragraph 6 of the Rules as a liquid asset.
• Investment providers should closely and continuously monitor their net asset and liquidity positions, having regard to specified risk factors.
• Class A Registered Persons must maintain sufficient liquidity at all times to meet liabilities when due, even without a prescribed minimum liquid asset requirement.
• Where required to apply the market-risk based capital methodology, providers must complete Prudential Information Return reporting in accordance with the credit, market and operational risk guidance in Appendices 1 and 2.

Applies to

investment providers, standard licensees, test licensees, Class A Registered Persons