The UK FSA has published its final rules on the liquidity requirements expected of firms. The new rules will require changes to firms' business models and is expected to bring about substantial long-term benefits to the competitiveness of the UK financial services sector. The qualitative aspects of the regime will be put into place by December 2009.

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, says: "The FSA is the first major regulator to introduce tighter liquidity requirements for firms. 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."

He adds: "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 [now] - including holding assets that were truly liquid, such as government bonds. Phasing the period in which firms will build up their liquidity buffers should mitigate the knock-on effects to bank lending."

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 market-wide stress. The precise amount of liquidity that each firm will need to hold will be refined over time to ensure that the combined impact of higher capital and liquidity standards is proportionate, the regulator says.

It has noted that London's competitive position depends on counterparties' perception of the financial soundness of the firms that operate in the UK. Low-levels of financial soundness cannot provide sustainable long-term competitive advantage. The FSA explains that the 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.