Can compliance be more than just a cost to the business?

Ever since the financial crisis of 2007-2009 and the Euro crisis of 2010-2012, there has been a relentless focus on compliance within the financial services sector. There seems to be a never-ending stream of new regulations from governments, central banks, monetary authorities and supranational financial regulators – Basel III, and in particular BCBS248, being just …

by | September 5, 2016 | TAS Group

Ever since the financial crisis of 2007-2009 and the Euro crisis of 2010-2012, there has been a relentless focus on compliance within the financial services sector. There seems to be a never-ending stream of new regulations from governments, central banks, monetary authorities and supranational financial regulators – Basel III, and in particular BCBS248, being just one of the most recent in this long line of regulation and advisory guidance which has hit the financial services industry.

In addition to the constant increase in regulatory pressure, the financial and Euro crisis have brought about a significant change in market behaviour. Due to the pressure on balance sheets and the allocation of scarce capital resources, banks are much less active in the general funding markets. The result of this is day-to-day funding in the money markets is harder to come by and markets are much less liquid than in previous times. Credit availability, even for very short term transactions, is increasingly tight and only the best rated institutions have complete access to the full range of funding options.

In the long run, Asset & Liability Management has ultimately been an integral part of a bank’s operations. This has often been a reactive exercise, which focuses on the mismatch between assets and liabilities and identifying risks in the sources of funding to ensure the bank can meet its obligations. Increasingly, this activity has taken on a more proactive stance, with banks setting up liquidity management operations to monitor daily peaks and troughs of liquidity. Additionally, the costs of maintaining adequate liquidity buffers on NOSTRO accounts and at Central Banks highlights a real cost to the business and, as such, the efficient management of these balances is paramount. In trying to put in place an effective and efficient programme of liquidity monitoring and management, one of the key challenges most organisations face is systems do not exist to support this. Most rely on a collection of spreadsheets and manually compiled data to try to form an accurate picture of the liquidity position and requirements on a daily basis. In the era of BCBS248 this will not be sufficient.

This new market paradigm makes the effective management of liquidity vitally important for the long-term health of any organisation no matter how large or small.

Working with a broad range of market participants including commercial banks, central banks and academic institutions for the past 5 years, we have formulated a technology response to the needs of Intraday Liquidity Management. One of the over-riding conclusions of this work has been that the market needs a fundamental change in the way cash and liquidity is managed on a day-to-day basis. The previous operational model of managing cash on an end-of-day basis needs to be replaced by a much more rigorous regime of intraday liquidity management and reporting. Banks will have to demonstrate to their regulator that at any time during the day, they are liquid and able to meet the obligations of customers and the market.

This focus on continual monitoring will take a mind-shift from many institutions and require a robust response in terms of the operational model employed. As part of this new approach, collateral is set to play a far greater role in the day-to-day funding operations of financial institutions. Driven by T2S, securities collateralisation will become central to the efficient running of the cash management operation. The use of collateral to access Central Bank funding on an intraday basis, will increase the funding options of many market participants whilst at the same time also increasing the liquidity for intra-Europe, cross border securities transactions. This will become especially important if and when the ECB in particular starts to be less accommodating in the provision of liquidity and markets return to a more “normal” funding environment.

The adoption of technology will drive many of these efficiencies and changes to the operating model, such that in the future the compliance with BCBS248 will be seen as natural and efficient way of doing business. The ability to accurately predict in a centralised system the intraday movement of cash across the whole business, including cash accounts, securities portfolios, correspondent banking facilities and money market operations will have a significant impact on the efficient management of the cash resources of the bank.

In conclusion, the improved access to accurate cash information will enable short and medium term funding decisions to be made with greater confidence and certainty. It is likely that many institutions, by adopting a rigorous approach to intraday liquidity management and reporting, will see a reduction in the overall cost of funding.

By Robin Preston, Head of International Business Development – Capital Markets & Treasury, TAS Group.

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