1. 1
With
continuing
market
volatility
and
the
associated
reductions
in
available
funding,
risk
managers
have
to
stay
firmly
on
top
of
their
liquidity
requirements.
Careful
system
selection
that
delivers
the
appropriate
reporting
tools
is
an
essential
component
in
a
successful
liquidity
risk
management
strategy
-‐
without
this
in
place,
there
is
a
very
danger
of
getting
caught
without
the
appropriate
cash
flow
required
for
efficient
operation.
The
risk
landscape
is
getting
ever
rockier,
as
the
global
market
turmoil
continues
and
regulation
gets
even
tougher.
The
fact
remains
that
regulation
is
only
going
to
get
tougher,
irrespective
of
whether
organisations
have
failed
to
apply
sufficient
risk
mitigation
strategies
in
the
past,
or
whether
the
new
regulations
demand
too
much
complexity
too
quickly.
This
process
is
certainly
going
to
be
further
accelerated
by
the
damaging
impact
of
activities
as
illustrated
in
the
recent
UBS
news
headlines.
Organisations
that
fail
to
face
up
to
the
new
regulatory
world
are
at
best
only
postponing,
or
at
worst
augmenting
the
cost
and
challenges
of
addressing
it.
It
is
therefore
no
surprise
that
'risk
framework'
is
the
corporate
buzzword
of
the
moment.
Everyone
wants
one,
reflecting
recognition
of
the
pressing
need
to
ensure
that
liquidity
risk
strategies
are
robust,
effective
and
flexible.
Risk
needs
to
be
properly
tasked,
funded
and
governed.
There
are
a
myriad
of
options
to
weigh
up,
and
ever
more
complex
regulations
to
contend
with
-‐
as
illustrated
by
the
introduction
of
Basel
III,
with
its
potentially
conflicting
implications
for
both
liquidity
and
solvency.
Liquidity
operations
represent
a
key
element
to
any
risk
framework.
Overall,
the
challenge
is
to
develop
an
effective
risk
management
policy
that
reduces
exposure
without
constraining
business
flexibility,
matching
an
appropriate
structure
and
risk
appetite
to
an
organisation's
selected
markets,
trading
environment
and
business
objectives.
The
Impact
of
Recent
Events
Post
Lehman's
bankruptcy,
the
financial
market
suffered
a
liquidity
crisis
that
had
not
been
experienced
since
the
Great
Depression
of
the
1920s.
With
financial
institutions'
balance
sheets
heavily
exposed
to
sub-‐prime
debt,
inter-‐bank
liquidity
disappeared
as
institutions
felt
that
they
could
not
expose
themselves
further
to
possible
bankruptcy
from
others.
Central
banks,
as
lenders
of
last
resort,
created
financial
facilities
(through
the
Troubled
Asset
Relief
Programme
(TARP)
and
quantitative
easing
(QE))
to
enable
liquidity
by
purchasing
any
securities,
regardless
of
rating.
This
led
to
a
crisis
of
confidence,
where
the
normal
overnight
market
no
longer
trusted
each
other's
ability
to
meet
their
funding
commitments.
Three
years
on,
the
market
still
has
liquidity
issues,
due
to
the
possible
default
of
European
2. 2
sovereigns.
Central
banks
have
again
stepped
in
to
provide
US
dollar
funding
that
institutions
need
in
order
to
ensure
their
funding
commitments
are
maintained.
The
credit
crisis
taught
us
that
there
was
a
clear
need
for
fundamental
changes
in
risk
management
practices.
And
the
learning
curve
is
still
continuing.
It
is
too
early
to
tell
whether
the
recent
UBS
issue
was
due
to
a
lack
of
a
structured
approach
to
risk
or
was
purely
brought
on
by
fraudulent
activity.
A
risk
framework
cannot
prevent
such
eventualities
such
as
the
lack
of
adhering
to
controls,
fraudulent
activities
or
rogue
traders.
It
can,
however,
highlight
them
at
a
much
earlier
stage
through
accurate
reporting
based
on
a
structured
framework,
thereby
limiting
the
impact.
It
stands
therefore,
that
any
risk
framework
needs
to
have
the
correct
level
of
controls
associated
to
it,
taking
into
account
organisation's
operation
and
its
appetite
for
risk.
Devising
an
Effective
Risk
Framework:
The
Considerations
There
is
no
easy
route
to
realising
a
liquidity
solution.
The
often-‐adopted
belief
that
implementing
a
liquidity
risk
control
will
result
in
a
liquidity
solution
is
completely
false.
It
is
essential
to
define
a
structured
approach
to
risk
as
a
whole,
throughout
an
organisation,
and
as
such
liquidity
risk
forms
in
integral
part
of
an
entire
risk
framework.
Even
the
Financial
Services
Authority
(FSA)
has
demonstrated
its
acceptance
that
it
is
not
possible
to
remove
risk
entirely
from
the
financial
system.
It
does,
however,
regularly
review
how
much
risk
it
is
prepared
to
tolerate.
The
same
applies
to
corporations
-‐
where
risk
will
always
exist
to
a
certain
degree.
The
level
needs
to
be
effectively
determined,
managed
and
reviewed
via
a
well-‐conceived
and
executed
structured
risk
framework.
When
dealing
specifically
with
liquidity
risk,
the
regulations
clearly
state
that
committed
credit
or
liquidity
facilities
cannot
be
leveraged.
During
the
2007-‐2008
credit
crises,
many
organisations
decided
to
conserve
their
own
liquidity
or
reduce
their
exposure
to
other
banks.
This
strategy
can
cause
a
knock-‐on
effect
that
sends
shockwaves
through
the
financial
institutions,
making
those
that
are
over-‐leveraged
in
serious
danger
of
default
or
collapse.
As
a
result,
the
ability
to
report
clearly
on
current
status
and
liquidity
exposure
has
never
been
more
important.
The
regulations
clearly
stipulate
that
an
organisation
must
not
be
over-‐leveraged.
It
follows
that
in
order
to
effectively
manage
its
liquidity
risk,
an
organisation
must
ensure
that
it
has
the
effective
means
of
which
to
monitor
and
report
on
it.
This
requires
the
correct
monitoring
tools
and
metrics
to
be
put
in
place,
with
readily
available
reporting.
As
liquidity
risk
covers
the
reflection
and
management
of
open
market
positions
and
commitments,
it
is
a
prerequisite
to
implement
an
effective
system
in
which
to
report
such
positions.
This
is
where
an
effective
risk
framework
comes
into
its
own,
providing
the
tools
to
not
only
highlight
the
risk,
but
also
to
report
on
and
provide
meaningful
up-‐
to-‐the
minute
information.
Never
has
the
phrase
"knowledge
is
power"
been
more
appropriate.
With
the
correct
knowledge
base,
it
is
within
an
organisation's
power
to
manage
and
mitigate
any
upcoming
risks
truly
effectively.
3. 3
We
have
also
seen
another
paradigm
shift
with
the
recognition
that
liquidity
is
no
longer
restricted
to
just
emerging
markets
or
obscure
stock,
but
can
in
fact
be
widespread.
This
has
been
witnessed
with
increasing
regularity
even
in
the
most
established
of
markets.
As
already
stated,
a
successful
risk
framework
must
effectively
control,
manage,
escalate
and
in
turn
mitigate
or
process
any
associated
risk.
A
miss-‐sold,
incorrectly
designed
or
wrongly
implemented
framework
can
have
long-‐lasting,
detrimental
and
potentially
catastrophic
effects
-‐
actually
reducing
a
large
corporation's
revenue
stream
if
it
is
too
risk
averse,
or
placing
unnecessary
risk
on
a
trading
structure
that
witnesses
very
little
gain.
Devising
an
appropriate
risk
framework
is
about
achieving
balance
and
harmony
within
an
organisation,
enabling
proactive
risk
management
without
restricting
growth
or
adding
layers
of
red
tape
to
any
trading
process.
Figure
1:
An
Effective
Risk
Framework
System
Considerations
There
are
many
risk
platforms
and
systems
in
the
market,
offering
varying
degrees
of
complexity
and
solution-‐based
processes
in
and
around
risk
management.
Finding
the
most
appropriate
solution
for
a
particular
organisation
relies
on
a
careful
process
of
review
and
needs
assessment.
There
is
a
very
real
danger
associated
with
driving
risk
management
by
system
selection,
leading
to
the
misconception
that
investing
in
4. 4
the
'best'
system
is
a
simple
way
of
resolving
all
risk
management
issues.
As
with
enterprise
risk
planning,
customer
relationship
management
(CRM)
and
other
business
enterprise
systems,
it
is
imperative
to
understand
both
your
business
and
the
data
you
need
in
order
to
get
the
best
out
of
the
system.
There
are
many
systems
on
the
market,
but
experience
shows
us
that
when
defining
an
all
encompassed
risk
management
framework,
it
is
imperative
to
understand
the
business
requirement
before
going
down
the
system
selection
route.
Getting
to
Grips
with
Liquidity
Risk
Management
With
regulators,
investors,
shareholders
and
boards
all
demanding
a
much
more
structured
and
transparent
approach
to
risk
management,
what
are
the
options
on
the
table?
There
are
many
risk
management
systems
in
existence
that
offer
the
ability
to
develop
and
build
specific
scenarios
relating
to
liquidity
risk,
thereby
ensuring
that
any
funding
gaps
are
negated.
A
system
also
needs
to
be
able
to
forecast
funding
and
liquidity
requirements
accurately
over
various
time
horizons.
In
the
future,
liquidity
risk
will
only
become
more
regulated,
with
tighter
controls
being
enforced
on
organisations
to
ensure
they
have
adequate
funding
and
reserves
to
meet
their
cashflow
commitments.
The
painful
lessons
of
the
past
three
years
have
demonstrated
the
need
to
ensure
that
not
only
are
interbank
facilities
in
place
to
ensure
that
funding
can
be
met,
but
also
that
internal
controls
are
well-‐defined,
supported
by
good
systems
to
enable
the
liquidity
risk
profile
to
be
well
understood
by
all
levels
of
management.
This
latter
point
was
recently
enforced
by
London
risk
manager
Daniel
Geoghegan,
when
he
was
quoted
as
saying:
"Best
practice
in
risk
management
through
a
well-‐defined
risk
framework
needs
to
be
constantly
monitored
and
refined,
so
that
it
is
in
adherence
to
any
new
regulations;
and
therefore
it
is
imperative
that
any
new
framework
be
allowed
to
reflect
any
new
regulations.
This
requires
organisations
to
take
a
strong,
dynamic
and
pragmatic
approach
to
their
liquidity
risk
operations
to
ensure
that
there
is
no
exposure
to
the
organisation
in
mitigating
any
potential
risk
losses."
Conclusion
With
continuing
market
volatility
and
the
associated
reductions
in
available
funding,
risk
managers
have
to
stay
firmly
on
top
of
their
liquidly
requirements.
Careful
system
selection
that
delivers
the
appropriate
reporting
tools
is
an
essential
component
in
a
successful
liquidity
risk
management
strategy
-‐
without
this
in
place,
there
is
a
real
danger
of
getting
caught
without
the
appropriate
cashflow
required
for
efficient
operation.
