The Basel Committee finalised the BCBS 248 Intraday liquidity monitoring tools requirements in 2013 as an extra add-on to the regulatory standards Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) defined three years earlier. The implementation of the reporting standards was due last January 2015 in conjunction with LCR, however, the effort requested to banks to meet both standards, has led to the postponement of the deadline.
The BCBS 248 added a number of challenges in terms of investment in technology and availability of data collection. Banks are facing several costs to augment existing databases and IT infrastructure in implementing the technical standards required by the individual regulators for reporting.
Moreover, the current systems offer limited access to the granularity of data required by BCBS 248, often segregated for each clearing and settlement infrastructure. In addition, BCBS 248 exercise mostly requires further investments for training of internal resources.
After initial general concern regarding the benefits of providing the aggregation of such data already available at Central Bank and direct participant level, the feedback provided by financial institution representatives highlighted how banks would ultimately benefit from increasing the current analytics and not limiting the calculation of liquidity buffers to 30 days but instead on an intraday basis.
The Financial Industry also brought attention to some critical points:
· Providing the intraday calculation of maximum negative and positive liquidity positions can lead to potential systemic risks caused by withholding and delaying outbound payments as well as further reducing or even eliminating intra-day credit to customers in the attempt to optimize the daily maximum negative values.
· The calculations requested may be not reliable due to the settlement timestamp information missing for several types of payments, especially in correspondent banking. In the current scenario payments issued from/to Nostro accounts are difficult to track in terms of the timing of submitting and processing. Most banks are able to provide their corresponding banking clients with end-of-day statements whilst it is not common practice to produce intraday statements or real-time settlement notifications necessary for the calculation of the monitoring tools. This would require reviewing bilateral agreements with correspondent banks.
On the other hand, direct LVPS participants have full visibility over their payment flows, including accurate information about timing of settlement. By taking advantage of the data availability, banks have flagged the need to measure the ancillary systems settlement activities, considered crucial in the overall daily operability.
The challenges to consolidating all information and running the requested calculations require a significant change in the current operational model. Intervening over the course of the business day on an ad hoc basis in order to mitigate potential liquidity and counterparty risk is costly and inefficient. With the introduction of appropriate monitoring tools, banks should be able to switch from analysing data primarily on an intraday or an end of day basis, to analysing and foreseeing activities on a short/medium timeframe.
Intraday Liquidity Management has been a hot topic and was analysed during last year’s research by TAS Group conducted jointly with The Research Centre on Technology, Innovation and Financial Services (CeTIF) of Catholic University in Milan. The research involved 14 Italian financial institutions representing the major share of cash handled by the Italian banking system, which in 2015 successfully joined the first T2S migration wave. The study’s objectives were to produce a report based on a detailed questionnaire where each treasury head of a participating Financial Institution was asked to measure the degree of efficiency in different areas of concern. These included the expected changes to liquidity management, such as intraday liquidity monitoring, and the operational model in the light of the new securities settlement platform T2S.
The results showed Italian banks are investing considerably in order to efficiently manage their liquidity on an intraday basis, and their operational model is moving rapidly towards a centralized and integrated management of liquidity and collateral. The research highlighted ongoing qualitative analysis, which lead Italian treasuries to have full visibility over their payment flows and collection of data with minimum manual intervention. Amongst the most relevant results that emerged was the desire to improve current IT infrastructures in order to produce detailed and reliable forecasting not limited to short/medium timeframes, but preferably on a long-term basis leveraging the statistical analysis.
Depending on the client’s business, the complexity experienced in collecting and aggregating data relates to the payment settlement timestamp. Central bank payments are fully compliant with the market standards whilst the complexity of calculating the intraday liquidity usage near real-time is mainly related to Nostro accounts. Experience shows correspondent banks bilaterally agree to generate only end-of-day statements at the expense of intraday settlement notifications (MT900/910) or intraday statements (MT942). As a result, the calculation of the daily maximum intraday usage is based on a single and not fully reliable timestamp – usually the statement receipt time.
Concerning the liquidity sources at the start of a business day, clients offered different perceptions of the data required by the regulator. Given the nature of the individual bank and the jurisdiction, the value of the unencumbered assets is usually supplied by the respective central bank on a start-of-day basis or, alternatively, acquired from an internal bank’s back and front office applications data. Integration with the internal bank’s resources will mitigate other outstanding data gaps such as the value of collateral pledged at the respective central bank or ancillary system, where the counterpart provides little or no access to standard communication protocol.
Data used to measure the LCR buffer could be not consistent to calculate the available liquidity at the start of each business day. The collateral needed to support normal intraday liquidity flows and the collateral calculated to mitigate financial stress situations are subject to different ratings or haircuts. The only intersection is the production of stress testing scenarios, which can be run in parallel with the LCR ones, as undertaken earlier by the dedicated staff of each bank.
By Alessandra Riccardi, Business Expert, Capital Markets and Treasury, TAS Group.
Download TAS Group's Overview on how to Effectively Manage Intraday Liquidity