Washington DC, New York, London, March 12, 2007 — Leading financial institutions have made great progress in liquidity risk management over recent years. It is therefore useful to define good practice standards and intensify the dialogue with regulators on a modernization of liquidity risk management rules. This is the view expressed by a Special Committee of leading executives from 40 major global firms convened by the Institute of International Finance (IIF).

Mr. Ahmass Fakahany, Chairman of the IIF's Special Committee on Liquidity Risk and Vice Chairman and Chief Administrative Officer of Merrill Lynch, said, "Today we are releasing a report, Principles of Liquidity-Risk Management, which has been developed over the last year by industry leaders. It contains more than 40 recommendations on liquidity risk management to the financial services industry and to the regulatory authorities. Given the recent growth and breadth of asset classes globally, this is a good time to review risk management approaches and to raise the bar, as and where appropriate."

He added, "A fundamental premise of the report is that firms should deliver, and supervisory and regulatory approaches should recognize, risk management frameworks that are tailored to each firm's business model and market position. There is no one-size-fits-all formula. We are highlighting key principles to guide risk management approaches that include an emphasis on oversight, on detailed internal reporting and control systems, and on meaningful public disclosure."

The IIF is the global association of financial services firms with more than 360 member institutions. Dr. Josef Ackermann, Chairman of the Board of Directors of the IIF and Chairman of the Management Board and the Group Executive Committee of Deutsche Bank AG, said, "This crucial report, developed by leaders in the financial services industry, is especially relevant as it underlines the importance of sound risk management practices at a time of rapid developments in financial markets. The application of these practices will help to provide resilience in the event that more challenging financial market conditions emerge."

Mr. Chris Grigg, Vice Chairman of the IIF's Special Committee and Chief Executive, UK Business Banking at Barclays, noted that, "We see merit in closer co-operation between regulators across national boundaries to meet the challenges in today's global markets. New technologies, new instruments, and new risk management capabilities have created a more integrated and responsive market around which we have positioned our principles-based recommendations with a 'comply or explain' ethic."

Mr. Grigg said, "We are proposing that central banks should seek to expand and harmonize eligibility of central bank collateral to enable firms to manage liquidity more effectively in today's integrated markets."

IIF Managing Director Charles Dallara noted, "The last few years have seen innovations in global finance, with rising roles for hedge funds and private equity groups, growth of derivative instruments, and sizable increases in capital flows to emerging markets. Against this background we considered it prudent to reexamine risk management practices. The recommendations for financial services firms in our new report came out of that reexamination and we hope that they will be of great benefit to the firms themselves and also to the regulators."

The report stressed that both effective governance and organizational structure for managing liquidity are critical given that liquidity issues arise in various ways for firms with different mixes of business, funding structures, market characteristics, and risk appetites. The report noted that internal governance and controls are the keys to reducing liquidity risk for a firm since no formulaic approach will yield appropriate or prudential results across different firms. More specifically the Special Committee advocated that:

• Firms should have an agreed strategy for the day-to-day management of funding of all kinds of liquidity risks that they may need to manage.
• Such strategies should be approved by the Board of Directors and reviewed by it on a regular basis.
• Senior management should promote the firm-wide coordination of risk management frameworks.

The report also recommended that firms should have in place:

• Contingency plans to respond to the potential early warning signals of a crisis.
• Strategies and tactics in the normal course of business that prevent liquidity concerns from escalating.
• Possible strategies for dealing with the different levels of severity and types of liquidity events that could cause liquidity shortfalls, with the breadth and depth of these strategies incorporating recovery objectives that reflect the role each firm plays in the operation of the financial system.
• A clear understanding of the role of central bank facilities and the limits on these facilities.

With regard to regulation, the recommendations in the new report reflect approaches that could both facilitate liquidity management for firms and make the system more robust overall. These include issues of supervision concerned with:

• Home-host coordination.
• Harmonization of regulations.
• Principles-based" not "rules-based" liquidity regulations that, for example, focus on qualitative risk management guidance, rather than on prescriptive and quantitative requirements.
• Expansion and harmonization of the range of collateral accepted by central banks and settlement systems.

Mr. Dallara pointed out, "The IIF recently commenced a comprehensive strategic dialogue with the regulators of the financial industry, including a set of key principles designed to frame relationships between regulators and the financial industry. The suggestions for regulators that are made in today's Special Committee report, particularly those relating to cross-border issues, will be part of the new strategic dialogue with the authorities."