09 FebIntraday Liquidity. Internal Integration

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

Internal Integration

The next stage in terms of sophistication would be to take in these messages and match them up with the FI’s internal records. The prospect is a mouth-watering one, which has a great deal of appeal, even without the oncoming necessity of having to measure in order to meet the new regulatory requirements.

Imagine that your entire payments world for value Thursday was 100 outgoing payments and 85 incoming payments. As a minimum, FI’s will have the values associated with those transactions in their “Cash Management System” as planning values.  If you are now able to receive and consume intra-day messages from the Agent bank, then at a glance you would be able to answer the question: “it is 14:00. What is the balance on my GBP Nostro, what is still open?” You would see something like the illustration, where you could clearly see payments and credits still open, as well as any unexpected debits or credits.

Cash Mgmt Exception Screen

A little more sophistication would be needed in order to properly reflect the cash proceeds from securities transactions: most likely some filtering would be needed to ensure that there is no double counting of securities driven messages, the MT548’s, and the cash account ones, the MT900 and 910’s. There will always be some degree of unexpected activity; certainly on the credit side, because you are powerless to stop the Nostro crediting something to your account that they believe belongs there.

At that level of sophistication, two birds would be killed with the proverbial single stone. First bird; much more precise information about what is happening. So you can “fund to actual” and not “fund to plan”. Second bird; a tick in a “regulatory must do box”. With this degree of integration you will be able to measure the numbers required by your regulator, such as balances at hourly intervals, and derive the required measures of peak overdraft usage.

 

There would also be an added bird or two in the hand; having intra-day sight of the settlements would enable the FI to meet the enhanced requirements around non-PvP FX settlements. With the ability to reconcile on value date, there would be no need to reduce credit limits and no additional capital charge.n”. Second bird; a tick in a “regulatory must do box”. With this degree of integration you will be able to measure the numbers required by your regulator, such as balances at hourly intervals, and derive the required measures of peak overdraft usage.

One more side-effect, perhaps not intended, is that with some simple analytics, it would be very straight forward to determine counterparty behaviour; those who might consistently pay late in the day on value date, or even consistently paying after value date. This would lead to a case of “what gets measured gets managed” and allow you to get your revenge in first.

Sophisticated integration of this kind leads to the ability to really extract very valuable information from all the data. This is something that IBM has termed “cognitive computing”. Using the latest technology would enable FI’s to go beyond the simple kind of observation, such as “who pays late”, to far more insightful analysis, such as whether there are seasonally related differences in payments flows, or whether payments of a certain size or in a certain currency have a tendency to flow later than in others.

Lessons Learned: With the drive to force banks & FI’s to be able to measure their intraday liquidity positions, integration is key to riches, the big prize. Without measuring, if there is no measuring then the liquidity buffer will be forced up a lot, with measuring, but no internal integration, there is insight with only limited ability to react. It is the internal integration that will allow an institution to manage its processes.

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