The Basel Committee on Banking Supervision (BCBS) finalised the BCBS 248 intraday liquidity monitoring tools requirements in 2013 – as an add-on to the regulatory standards Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) defined three years earlier. Although implementation of the reporting standards was originally due in January 2015 – in conjunction with LCR – the effort required from banks towards meeting both standards saw a successful petition for the deadline to be extended.
BCBS 248 added several challenges in terms of investment in technology and the availability of data collection. Banks face various costs for augmenting existing databases and IT infrastructure, in order to implement 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 investment in the training of internal resources.
After initial general concern when BCBS 248 appeared – centring on the benefits of providing the aggregation of such data already available at central bank and direct participant level – feedback from financial institutions’ 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 drew attention to several critical issues:
•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 reduction or even elimination of intra-day credit to customers – in order to optimise 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 or 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, while 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 large-value payment system (LVPS) participants have full visibility over their payment flows, including accurate information on the 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- to medium timeframe.
A hot topic
Intraday liquidity management has become a hot topic and was analysed last year as part of 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 TARGET2-Securities (T2S) migration wave.
The study’s objectives were to produce a report based on a detailed questionnaire, with each treasury head of a participating financial institution 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 centralised and integrated management of liquidity and collateral.
The research highlighted ongoing qualitative analysis, which led Italian treasuries to have full visibility over their payment flows and collection of data with minimum manual intervention. Among the most relevant results to emerge 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.
A significant action point required from an operational and strategic perspective is the ability to produce accurate stress testing to mitigate potentially incurring operational, liquidity and counterpart credit risks. As a technology partner, TAS Group liaised closely with clients in order to measure all possible implementation issues, which spanned from understanding an individual client’s geography and business, direct or indirect access to local cash clearing systems, and current IT infrastructures and capabilities.
TAS Group designed the Aquarius platform to collect and aggregate data according to, but not limited to, BCBS 248 standards and allowing the user to implement in-house reporting. This can be further used to measure historical data, counterpart exposures, integrating forecast information and monitoring correspondent banking clients’ intra-day funding usage.
Aquarius provides an analytical infrastructure delivering the required level of visibility, near real-time calculation process and access to historical data; breaking down into the full set of details necessary to define the simulations of stress test scenarios, monitoring actively per single entity, subsidiary and customers. The versatile and highly flexible configurations allow the user to flag and store sensitive information by counterpart or payment type, while setting alerts and reports for customers.
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 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, calculation of the daily maximum intraday usage is based on a single, and not fully reliable, timestamp – usually the statement receipt time.
Differing perceptions
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 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.
In a scenario where the bank operates across multiple jurisdictions and currencies, Aquarius facilitates the configuration of individual reports per currency, single LVPS, correspondent bank and individual customer bank, allowing the user to closely monitor each counterpart exposure.
Based on the experience gained from ongoing customer reporting, TAS Group has verified the possibility of leveraging a common source of information for LCR and BCBS 248. Data used to measure the LCR buffer could be inconsistent with calculation of 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.
•This article is an edited version of a piece originally published by bobsguide.
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