Introduction

• The universe of investable instruments
• Pools of liquidity and benchmark securities, off the run and illiquids
• Normal market sizes, bid-offer, block trades
• Repo and the funding of illiquid instruments
• Liquidation and “fire-sales”
• Liquidity risk in banking, securities trading and insurance
• Introduction to Liquidity Funds Transfer Pricing (LFTP) problem
• Key relationships between funding, collateral, ALM and mark to market

Securities Pricing in the Presence of Illiquidity

• Random walks and the assumption of continuous trading
• Gap risk
• The effect of jumps on the pricing framework
• Risk premiums and risk neutrality
• Impact on derivatives pricing and mark to market

Building a Framework for Treasury Liquidity Risk Management

• Mismatch, duration and other approaches
• Key roles of FTP and funding/pricing curve generation
• Foreign currency liquidity management
• Internal controls for liquidity risk management: stress testing
• Internal controls for liquidity risk management: scenario analysis
• Double default and the analysis of collateralised transactions
• Basel III and liquidity risk
• New stresses and rules post credit crunch
• LCR and NSFR stress test minima

Contingent Liquidity Risk

• The need for contingency planning
• Written contingency plans
• Crisis management plans for assets
• Crisis management plans for liabilities
• Internal and external communication

Liquidity Stress Testing

• Why stress test liquidity?
• Empiricism vs. rocket science
• General considerations
• Current stress testing priorities
• Assumption sensitivity
• Additional considerations

Liquidity Risk in the Balance Sheet Framework

• Metrics and measures of liquidity risk
• Liquidity gap analysis and the bank’s liquidity profile
• Expected and unexpected loss analysis in the presence of illiquidity
• Liquidity-adjusted VaR (LVaR)
• Liquidity Adjusted Expected-Shortfall (LES)
• Liquidity management policy
• Regulatory requirements for liquidity management
• The use of conduits and other sheet vehicles
• Contingent liquidity using capital market instruments and other techniques

Systemic Changes in Liquidity and Volatility

• Risk capital and illiquidity
• The effect of VaR models on liquidity cycles
• Liquidity and volatility
• Predicting volatility changes: GARCH models
• The perspective from implied volatility
• Implied probability distribution and tail risk