The introduction of the Investment Firms Prudential Regime (IFPR) marked a significant shift for investment firms, establishing a minimum quantitative liquidity requirement for all MiFID investment firms. Since then, the FCA has maintained a strong focus on ensuring firms accurately calculate and monitor their liquidity positions in line with prudential standards.

Collective Portfolio Management Investment (CPMI) firms in the UK face an additional layer of complexity, as they are subject to both MiFID and AIFMD requirements. This dual regulatory framework obliges them to maintain adequate financial resources including capital and liquidity under each regime. While both frameworks share the objective of promoting resilience, key differences in liquidity calculations and the classification of liquid assets continue to present challenges for CPMI firms.

These contrasting requirements often lead to confusion and misapplication of the rules, resulting in heightened regulatory scrutiny and additional obligations. To mitigate these risks, firms must not only understand the rules but apply them consistently and accurately.

Liquidity rules under MiFID

Under the Investment Firms Prudential Regime, MiFID firms must comply with two key liquidity requirements:

1. Basic liquid asset requirement (BLAR)

Calculation: BLAR = 1/3 of the fixed overhead requirement (FOR).

The FOR is based on the latest audited financial statements, meaning the requirement reflects the previous year’s cost base and is updated annually after audit completion.

Eligible assets: The basic liquid asset requirement must be met with core liquid assets as defined in MIFIDPRU 6.3. The most common core liquid asset is GBP short term deposits held at UK authorised institution. Other key core liquid assets include trade receivables and non-GBP deposits, however these are to be adjusted in line with some restrictions:

• Trade receivables can count toward core liquid assets up to the lower of: 50% of the trade receivable balance, or 1/3 of the BLAR

• Deposits denominated in any currency other than pound sterling must be no greater than the proportion of relevant expenditure incurred in that currency

2. Liquid asset threshold requirement (LATR)

As part of the Internal Capital Adequacy and Risk Assessment process, a firm must estimate the maximum amount of liquid assets required to fund its ongoing business and ensure it can be wound down in an orderly manner. In carrying out this assessment each firm will arrive at the liquid asset threshold requirement which must be maintained at all times.

Calculation: LATR = BLAR + the higher of: Additional liquidity for ongoing operations, or Additional liquidity for an orderly wind-down.

Eligible assets: The liquid asset threshold requirement can be met with core and non-core liquid assets. Common types of non-core liquid assets include non-GBP deposits held at a UK institution (residual balance) and financial instruments.

Liquidity rules under AIFMD

Under AIFMD, liquidity requirements are generally higher because they align with the full capital requirement. However, the definition of liquid assets under AIFMD is much broader.

Calculation: Liquid asset requirement = Higher of the funds under management requirement less base own funds, or the fixed overhead requirement plus the professional negligence requirement measured under IPRU-INV 11.3.11.

Eligible assets: Any asset readily convertible to cash within one month qualifies as liquid under AIFMD. Unlike MiFID, there are no haircuts or restrictive caps.

Practical actions

Firms should look to adopt the following operational actions to ensure liquidity monitoring is integrated into their risk management processes.

Regular forecasting: Implement forward-looking liquidity forecasting and stress testing to anticipate changes in expenditure and asset eligibility.

Governance alignment: Embed liquidity adequacy reviews into the ICARA and wind-down process to ensure thresholds are met under all scenarios and monitored on an ongoing basis.

Accurate reporting: Accurate quarterly reporting remains critical to effective supervision. It is vital that firms interpret the rules correctly and report information to the regulator with care and consistency.