Global regulators have been quiet over the last few months in terms of intraday liquidity guidance, perhaps in hibernation. But, with the onset of spring, the UK PRA has begun to stir and has updated its intraday liquidity guidance with immediate effect.
This is important, as the UK PRA is generally seen as the bellwether for intraday matters – where it leads, others will follow. I’ll summarise the guidance itself in a moment, but it’s worth reflecting on why this update is important in and of itself.
Regulators are going beyond plain reporting
The UK PRA has had public guidance on intraday and BCBS248 for a number of years now.What is becoming clear is that it want firms to take the guidance more seriously.Firms must provide data in their returns that can be re-used by the PRA when assessing intraday risk during the regular supervisory review process.This is why it is pushing for each firm’s intraday returns to be accurate and comparable to peer returns.
When the PRA is reviewing a firm’s activity it will be digging deeper into interesting pointers in the returns – what caused that spike in credit usage? Show me the transactions? What action did you take as a result?
So it is vital that a firm’s BCBS 248 returns are sourced from the same data and system that is used to manage the business on an intraday basis.I have many anecdotes of a firm being embarrassed when unable to justify, or even replicate, the formal returns when being quizzed by a regulator.
Global regulators continue to engage
This isn’t stated anywhere formally, but the reason the UK PRA is continuing to gently push its own process is due to the problems of working across Europe at the moment.
Remember that the original intention was for the European Banking Authority (EBA) to roll out an intraday regime across Europe, with the UK a key part of this.The EBA has been sluggish on this. Due to budget constraints, it had to delay introducing the regime in 2016 which is why the UK decided to proceed cautiously on its own.But the EBA will proceed and there is still a lot of good sense being talked about building on the UK’s experience and expertise when formulating the EBA regime.
(By the way, Brexit throws up extra confusion– will the UK always need to follow the EBA guidelines?That will depend on any post-Brexit financial services deal within the UK / Europe divorce settlement, potentially only a couple of years away. Watch this space!)
In the US, the Fed is really starting to bare its teeth on intraday.Although it is publicly quiet on implementing a BCBS248 regime, it is more challenging in private.In its discussions with banks, it has shown an increasing understanding of intraday and is forcing banks to step up to the plate on intraday capability.This is evident in the RRP processes, where intraday risk is seen as a key element of a bank’s resolution plans, and in the special attention being given to the FBOs (Foreign Banking Organizations).Expect similar intraday questioning to spread more widely across firms in the US in 2017.
Updated guidance removes hiding places
The new PRA guidance can be seen here. It’s not very long, but straight into the technical detail.There are a few pointers to a tighter regime:
- Firms can’t ‘hide’ intraday usage by avoiding the appearance of overdrafts through some form of pre-funding.
- Firms can’t fudge intraday usage by using alternative, non-reported accounts to ‘store’ negative balances while the reported accounts look healthier.
- There is a movement towards increasing the scope of reporting, rather than the firm being able to simply claim they don’t need to report on certain currencies due to theoretical materiality thresholds.
By the way, the updated guidance hasn’t fixed a problem in the original template, with some confusion over when to use minimum or maximum…
What do you have to do next?
If you are already part of the UK regime, then:
- get ready for deeper dives into the detail on supervisory visits; make sure the system you manage your intraday business is the same one you use to generate data for the returns.
- make sure your current systems and processes meet the new guidance and are calculating correctly.
The Planixs Realiti system already meets the new guidance (it always did, and resolved the minimum/maximum issue) and we continue to commit that we will update Realiti to fit the evolving intraday agenda.
If you want to talk, then please give me a shout onpete.mcintyre@planixs.com
(Make sure you don’t miss out on similar articles and more information on Intraday Liquidity by visitingplanixs.com.)
FAQs
The BCBS 248 involves a review and strengthening of processes, data availability, data quality, and calibrating of internal models. It also requires banks to review counterparty behaviour through current state assessments and stress tests.
What is the intraday liquidity limit? ›
Daily maximum intraday liquidity usage is a measure of the bank's usage of an intraday credit extension. It is the ratio of the day's most significant net negative balance relative to the size of the committed or uncommitted credit line. The peak and average of this metric are monitored over some time.
What is the PRA intraday liquidity risk? ›
The PRA defines intraday liquidity risk as 'the risk that a firm is unable to meet its daily settlement obligations, for example, as a result of timing mismatches arising from direct and indirect membership of relevant payments or securities settlements system.
What is the risk of intraday payments? ›
Intraday Liquidity Risk: the risk that a bank fails to manage its intraday liquidity effectively, which could leave it unable to meet a payment obligation at the time expected, thereby affecting its own liquidity position and that of other parties.
What is regulatory liquidity requirement? ›
Banks must meet quantitative regulatory liquidity requirement at all times. These are the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR requires a bank to at all times to hold sufficient HQLAs to cover net cash outflows during a 30-day liquidity stress scenario.
Can a bank monitor your bank account? ›
Transaction monitoring is the means by which a bank monitors its customers' financial activity for signs of money laundering, terrorism financing, and other financial crimes.
What is the intraday limit? ›
There is no such limit on the number of shares you can buy intraday, however, you need to keep a check on the fact that trading on more than one share at once can be risky and you may not be able to focus on the trends and patterns of one specific share.
What is minimum in intraday? ›
The Initial Margin (IM) required is 20% and Minimum Margin (MM) is 15%. In the above example, you just require Rs. 20,000 (Initial Margin). Minimum Margin (Rs 15,000) is the margin amount that you have to maintain with I-Sec at all points of time for your open Margin position.
How much liquidity is enough? ›
A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.
What is intraday risk? ›
The largest risk of intraday trading is the risk of losing large amounts of money. Day trading comes with high levels of risk as prices fluctuate. It can be difficult to earn any level of long-term profit, especially for new or inexperienced traders.
Intra-day Liquidity Facility or “ILF” means the facility to provide funds to a Participant by the Central Bank for the duration of a Business Day against securities provided as collateral by the Primary Dealer as described in the System Rules. Sample 1.
What are the three types of liquidity risk? ›
There are essentially three types of liquidity risks:
- Central Bank Liquidity Risk. It is a common misconception that central banks cannot be illiquid due to the widespread belief that they will always provide cash when required. ...
- Funding Liquidity Risk. ...
- Market Liquidity Risk.
Risk of Volatility in Markets - As it is, volatile markets and fluctuations in stock prices are risky for even long-term investors. Sudden price shifts are very risky if you wish to close your trades in one day. You may choose the appropriate stocks, but unexpected fluctuations in price may still occur.
Why do people lose in intraday? ›
Too much panic in the market
When you panic in intraday trading, you tend to cut your positions too soon. You require a basic amount of risk appetite for intraday trading, but your risk should be properly managed. The key rule is not to panic just because the market is showing signs of volatility.
Who Cannot do intraday trading? ›
Government personnel are particularly prohibited from engaging in intraday trading. Conversely, occasional investment is allowed. This is the practice of making little investments over a longer period of time, such as five or ten years, using strategies like stock or mutual fund SIPs.
What is the liquidity management rule? ›
Liquidity Management Rules: Current and Proposed
Currently, the SEC requires funds to classify each portfolio investment into one of four buckets—highly liquid, moderately liquid, less liquid, and illiquid—at least monthly.
What is the insurance limit for IntraFi? ›
When you submit funds for placement through Security Federal using IntraFi Network Deposits, that deposit is divided into amounts under the standard FDIC insurance maximum of $250,000 and placed in deposit accounts at other network banks.
What is liquidity coverage requirement? ›
Credit institutions must maintain a liquidity coverage ratio of at least 100%. This is equal to the ratio between its liquidity buffer* and net liquidity outflows* over 30 days. A credit institution is under stress* in the following situations (non-exhaustive list):
What is the liquidity coverage ratio LCR regulation? ›
The liquidity coverage ratio (LCR) is a measure intended to force financial institutions to set aside enough highly liquid capital to get them through the early stages of a financial crisis. If successful, that could prevent the crisis from spreading and causing greater economic harm.
