LMR Guidance

Summary

This is technical guidance from the Guernsey Financial Services Commission explaining how banks should complete the Liquidity Mismatch Ratio (LMR) module of the regulatory Form LMR return. The LMR is an alternative short-term liquidity standard to the Liquidity Coverage Ratio (LCR), used only where the Commission has approved a bank to apply it instead of the LCR. The guidance sets out how to classify High Quality Liquid Assets (HQLA), calculate stressed cash inflows and outflows over a 30-day stress period, and populate the automated reporting form.

• Applicability: Guernsey incorporated banks must normally apply the LCR as their minimum liquidity standard; the LMR may only be used with the Commission's prior approval as an alternative approach.
• HQLA assessment: Banks must assess and document (in their Liquidity Management Policy, or LMP) which assets qualify as HQLA based on fundamental characteristics, market-related characteristics, and operational requirements, including control, unencumbrance, and monetisation testing.
• Inflows and outflows: The form calculates the LMR from stock of HQLA plus qualifying group inflows and other projected inflows (capped at 75% of projected outflows), divided by total cash outflows over the next 30 calendar days, using standard regulatory weightings.
• Deposit categorisation: Banks must determine and document methodologies for identifying operational versus excess deposits, and must treat correspondent banking or prime brokerage deposits as non-operational for run-off factor purposes.
• Form integrity: Data may only be entered in designated yellow shaded cells; orange (calculation) cells must not be altered and worksheets must not be modified.
• Personal Investment Companies (PICs): Deposits from PICs, as defined in Appendix 3, are treated as non-financial corporate deposits eligible for a 40% outflow rate.

The guidance is primarily explanatory and operational, closely following the Basel III LCR framework, and applies specifically to those Guernsey incorporated banks permitted to report under the LMR approach rather than the LCR.

Key obligations

• Banks using the LMR approach must have obtained the Commission's approval to apply it instead of the LCR.
• Banks must document their HQLA assessment process, including fundamental and market-related characteristics, in their Liquidity Management Policy (LMP).
• Banks must determine and apply a methodology for identifying excess (non-operational) deposits excluded from operational deposit treatment.
• Deposits arising from correspondent banking or prime brokerage services must be treated as having no operational activity when determining run-off factors.
• Banks must periodically monetise a representative proportion of HQLA assets through repo or outright sale to test market access and monetisation processes.
• Data on Form LMR may only be entered in the designated yellow shaded input cells; calculation cells and worksheets must not be modified.
• PIC deposits must be treated as non-financial corporate deposits eligible for a 40% outflow rate.

Applies to

Guernsey incorporated banks