26 JanIntraday Liquidity. How to Address the Intraday Measurement Requirement

With new rules coming into effect on Jan 1 2015, this is the third in a series of posts on how banks and FI’s might adapt.

Ask the Nostro

For those who do not self-clear, the first question is one of where to obtain the data and how to do that on an on-going basis. If intraday messages have not been coming in from all the Nostros, which is the case far more often than not, then there will no internal database or data warehouse to tap in to. The next alternative that might be considered is to ask the Nostro to provide the details. This might work and it is possible that the Agent Bank has systems that can “snap” a balance periodically. Nonetheless, this is more likely to be something the Nostro needs to build, than it is to be something that is readily available as a regular service to all clients. It would also be something that the Nostro would seek to charge for as a special service.

If an FI seeks to delegate or impose this requirement on its agent banks or Nostros, it will still have the challenge of aggregating that data across many Nostros and reporting to its regulator on it. Even being moderately successful at this would require all the agent banks to offer a service and a similar one at that. That is really unlikely and achieving it might require that the FI change its agent bank, which is not a process that can be executed overnight. Even if it were achievable, having the data alone will not help address the requirements about reconciling settlement of non-PvP FX.

Ask SWIFT

The next point along in the process would be to look to SWIFT to provide a service. This is theoretically possible; they have all the data. Historically, SWIFT has taken a narrow view of the services they should offer, especially in terms of data analysis and aggregation. “Too much insight might be a dangerous thing” would be how I would express this.

A few years back, I was trying to gauge the value and volume of inter-company activity for a client. There the many entities used a variety of different Nostros, so there were many payment messages passing through SWIFT with my client saying “Our entity A is sending a message to SWIFT BIC CRASCHZZ80A to pay our entity B EUR 10’000’000”. So we asked SWIFT if they could aggregate those payments by beneficiary. “Not a chance,” they said, maintaining they were merely a postman and moved the envelope from the sender to the receiver.

Actually, an understandable approach; well at least as a starting point. And, to make this work, an FI would need to ask every single one of its Nostros to send intra-day messages, and potentially have to switch providers if the incumbent Nostro could not supply the messages. Again, this would provide little help in regards to the requirements around non-PvP FX.

A Third Party

If SWIFT themselves do not provide the data, the next solution would be to have them provide a copy of the data to somebody who could do something with it.

In the mid 2000’s an attempt was made to create just such a service. Real Time Nostro Service (RTNS) was a joint venture between Cable & Wireless and Gresham Computing. The idea was that the RTNS service would gather up all your data in one place. The idea did not generate enough traction, failing to be widely accepted. It did have a few wrinkles; it was about what had actually happened and not about the plan vs. actual and there were some data protection issues about storing details in a third country. Certainly for the Swiss banks this was a not insignificant issue.  In hindsight, RTNS was actually a possible answer to a question the industry was not yet asking. An idea in search of a problem. Today, the concept might find more traction, albeit even this service would not address the issues around non-PvP FX and being certain the payments had settled, because to know that, you would need to connect up the outside world event with the expected, planned movement. The data protection issues were specific, but are no longer insurmountable.

Next week we will look at just what such a service would look like.

Lessons Learned: Measuring is a lot harder than you think. And, time is running out. Time as the saying goes is money. In the case of liquidity, this is oh so true. If an FI cannot measure as required by Jan 1 2015, it is pretty much certain that the regulators will push up the liquidity buffer. That puts costs up by $15mm for every $1 billion.

One major UK bank has its intraday requirement at some 20% of its overall requirement, at about $30 billion. If the shareholders and outside directors really understood that cost, they ought to be manning the barricades demanding action; no amount of restructuring, outsourcing, right-sizing, near shoring can have anything like the impact of reducing this buffer.

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