The FSA has published its final rules designed to enhance firms' liquidity risk management practices.
The overhaul is based on the lessons learned since the start of the credit crisis in 2007.
The FSA's new requirements are designed to protect customers, counterparties and other participants in financial services markets from the potentially serious consequences of imprudent liquidity risk management practices.
Specifically, the rules include:
• An updated quantitative regime coupled with a narrow definition of liquid assets;
• Over-arching principles of self-sufficiency and adequacy of liquid resources;
• Enhanced systems and controls requirements;
• Granular and more frequent reporting requirements; and,
• A new regime for foreign branches that operate in the UK.
Paul Sharma, FSA director of prudential policy, said:
"We must learn the lessons of the financial crisis and we believe that implementing tougher liquidity rules is essential to ensure we are in a better position to face future crises.
"In the current crisis some firms weathered the storm better than others. These firms tended to be those that had policies that were similar to those that we are introducing today."
The FSA plans to phase in the quantitative aspects of the regime in several stages, over an adjustment period of several years. This is to take into account the fact that all firms at present are experiencing a market-wide stress.
The qualitative aspects of the regime will be put into place by December 2009.
Last week Axa SA's CEO Henri de Castries said European insurers should not be required to increase capital reserves as they play a "stabilizing" role in the financial system and pose "no systemic risk" to markets.
In an interview with newswire Bloomberg, he said: "It's not worth raising capital requirements. This crisis has proved it. No insurance company suffered from a liquidity problem or from a lack of capital because of its insurance activities."
De Castries, who said the industry should "apply the letter and the spirit of Solvency II," joined Swiss Re's CRO Raj Singh in saying the European insurance industry should be better represented in the European Supervisory Authority for insurance and pensions, a new supervisory panel proposed by the European Commission to centralize European financial regulation.
