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Intraday liquidity risk – are you prepared?

Our latest analysis of readiness and maturity of intraday liquidity management shows that many financial institutions run the risk not to meet payment and settlement obligations, if they don’t manage their intraday liquidity effectively. There are ways to make up for the necessary investments to that end by optimizing the intraday liquidity management.

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Intraday liquidity risk – are you prepared?

  1. 1. Intraday Liquidity Survey Analysis of readiness and maturity of intraday liquidity management Mai 2017
  2. 2. Agenda Background 3 Key findings 5 Survey results 6 Conclusions and outlook 15
  3. 3. Page 3 The flow of cash throughout the day causes intraday liquidity risk, which needs to be managed Intraday liquidity risk is the risk that the bank fails to manage its intraday liquidity effectively, which could leave it unable to meet payment [and settlement] obligations at the time expected, thereby affecting its own liquidity position and that of other parties ► Unencumbered collateral (firm long positions, collateral received to secure intraday facilities, collateral received from FMU participants) ► Central bank reserves (cash & securities) ► Unused intraday facilities available to the firm ► Collateral (cash & securities) posted to clearing banks and FMU participants ► Collateral posted to secure intraday facilities available to the firm ► Draws on intraday facilities provided to customers, and payments Available Intraday Lines Inflows/Outflows from cash payments and settlement systems Inflows/Outflows from securities settlement and clearing systems Available Liquidity including uncommitted intraday credit lines Intraday Sources Intraday Uses EY intraday liqudity survey
  4. 4. Page 4 The business model causes the extent of various dimensions of the intraday liquidity risk Expected Capabilities Organisation ► Clearly defined limits and management of explicit and implicit intraday liquidity risks across the organization ► Board oversight and defined roles and responsibilities for functions Expected Dimensions Methodology ► Projected cash and collateral positions for all sources/uses ► Develop specific stress testing scenarios for intraday exposures Systems ► Real time monitoring of intraday cash and collateral requirements across the organization ► Capability to measure intraday needs on a currency, legal entity, and business line basis Management Actions ► Tracking and escalating risk indicators and alerts – Board oversight ► Collateral optimization including automated collateral allocation (cheapest to deliver, CSA eligibility) The new wave of intraday liquidity management regulations require capabilities across a series of dimensions. Most G-SIB’s are in the beginning or intermediate stages of capability maturities. Jurisdiction Line of Business Legal Entity Products Time specific payments at central banks, CCPs, and FMUs can vary across jurisdictions Limitations in liquidity transferability across legal entities Identify source and use of funding and monitor funding shortfall by key products EY intraday liqudity survey
  5. 5. Page 5 Key findings ► All reporting institutions feel in a comfortable position regarding the intraday liquidity monitoring ► There is room for improvement with respect to liquidity and data management in that field ► There is an obvious need for development and implementation of stress scenarios ► Regarding time stamps and managing of time specific obligation there is room for improvement amongst a number of institutions ► The majority of institutions is not in a position to centrally determine time specific obligations ► Ensuing the above, various institutions are not in a position to forecast a potential funding short fall at all times EY intraday liqudity survey The following short survey summarizes key findings from 6 financial institutions in Germany*) on questions about organization, monitoring tools, stress testing and data/systems concerning intraday liquidity management. *) we are in the process of increasing the number and also roll out the survey to EMEA. The list does include however, institutions of various sizes and thus representative for the German market
  6. 6. Page 6 1. Management and organizational structure (1) EY intraday liqudity survey 100% Management of intraday liquidity in relation to currency Currency-by-currency Cross-currency 20% 40% 40% Organizational level of report Corporate level Individual legal entity level Both 100% Are you able to manage and mobilize collateral as necessary to obtain intraday funds? Yes No 100% Are you capable of managing the timing of your liquidity outflows in line with the intraday objectives? Yes No
  7. 7. Page 7 1. Management and organizational structure (2) EY intraday liqudity survey 100% Are you prepared to deal with unexpected technical disruptions to your intraday liquidity flows? Yes No 100% Are you prepared to deal with unexpected disruptions caused by large unexpected cash flows to your intraday liquidity flows? Yes No 50%50% Do you hold a separate intra day liquidity buffer from the HQLA/ILAAP liquidity buffers? Yes No 50%50% When do you expect to be compliant with BCBS 248? 2017 2018 Later than 2018
  8. 8. Page 8 2. Monitoring tools EY intraday liqudity survey Are you in a position to report the following KPIs as required by monitoring tools for all reporting banks? 80% Daily maximum intraday liquidity usage Yes No 100% Available intraday liquidity at the start of the business day Yes No 100% Total payments Yes No 80% Time-specific obligations Yes No 20% 20%
  9. 9. Page 9 3. Stress and Scenario testing EY intraday liqudity survey Have you defined the following stress scenarios? Own financial stress Yes No 25% Counterparty stress Yes No Customer bank's stress Yes No 25% 40% Market-wide credit or liquidity stress Yes No 60% 75%75% 75% 25%
  10. 10. Page 10 Additional questions relating to stress and scenario testing For the following questions, the number of answers received did not allow for a representative pie chart presentation Are the intraday stress tests separated from the present ones for regulatory purposes (ILAAP) Are your stress tests for ILAAP and Intraday Liquidity the same Are your stress tests regarding own financial stress for ICAAP and Intraday Liquidity the same To what extend do you stress unexpected large EOD cash outflows To what extend do you stress non receipt of large EOD cash outflows ► From the institutions replied, the general guidance was, that the stress tests for used for ILAAP and intraday liquidity are the same and not seperated ► Specifically, the stress test regarding own financial stress for ICAAP and Intraday Liquidity was, however, different ► A stress test on large unexpected cash flows, respectively non receipt of a large unexpected cash flow, is only conducted at one participating institution. The remainder of institutions does not see a need to stress this scenario. EY intraday liqudity survey
  11. 11. Page 11 4. Data & Systems (1) EY intraday liqudity survey 100% Do your systems used by treasury have the capacity to measure expected inflows and outflows at all times? Yes No Does RC have the necessary data to monitor intraday liquidity at all times? Yes No 40% Do your systems have the capacity to provide each cash flow with a time stamp? Yes No 60% 50% Do your systems have the capacity to anticipate cash flow timings? Yes No 100% 50%
  12. 12. Page 12 4. Data & Systems (2) EY intraday liqudity survey 100% What is your default assumption for cash flows, which are not timed? EOD Arrival time 60% Do your systems have the capacity to forecast the range of potential funding shortfalls at all times? Yes No Do your systems have the capacity to monitor the maximum, minimum and average net cash flow for a give period? Yes No 50% Do your systems have the capacity to monitor unexpected intraday cash flows against expected cash flows intraday in a timely manner? Yes No 20% 50% 80% 40%
  13. 13. Page 13 4. Data & Systems (3) EY intraday liqudity survey 60% Do you have a centralized system in order to gain oversight for time-specific obligations? Yes No Are you in a position to demonstrate your ability to manage all time specific obligations? Yes No 75% Are your systems able to report intraday liquidity requirements per subsidiary and currencies? Yes No 25% 100% 40% 60% Do you possess a centralized data base compliant with BCBS 239 to ensure data availability, consistency and comprehensiveness? Yes No 40%
  14. 14. Page 14 5. Main challenges  Regulator expectation/missing specification of regulatory requirements  Technical implementation due to heterogeneous IT environment  Ascertainment of historic data, optimization of data and further processing in stress testing  Smooth running of system  have organized approach amongst market participants to time stamp swift codes (MT 900, MT 910) EY intraday liqudity survey where do you see the main challenges regarding intraday liquidity?
  15. 15. Page 15 Conclusions and Summary ► Decentralized data availability, reference data, systems and stress testing are currently the main challenges regarding intraday liquidity management at institutions ► Development as well as the forced holding of costly liquidity buffers comes with cost on capital ► Efficient management of this liquidity buffer presents the major area of cost savings ► The current systems generally are not aligned between the various business lines and legal entities ► Having to tackle the challenge, this poses a good opportunity for institutions to make up for the necessary spending via implementing an efficient front to back solution ► EY can assist in all methodological and data management matters as well as in the front to back solution EY intraday liqudity survey
  16. 16. Page 16 Cash flow patterns Stress Testing Challenges EY Approach ► Availability of time stamp ► Determine cash flow patterns in non-stress situations – availability of data: ► Inflows/outflows ► Central Bank Credit lines ► Collateral ► Identification of time sensitive cash flows ► Bench marking of IT solutions ► Analysis to obtain cash flow patterns in normal times and in extreme times ► Modeling of cash flows ► Completeness of liquidity in- and out flow sources ► Optimization towards target state ► Stress scenarios ► Own stress ► Customer stress ► Counterparty stress ► Market-wide stress ► Model appropriate and specific stress scenarios for institution ► (Back-) Testing of Stress Scenarios ► Modelling / Testing of stress scenarios ► Benchmarking and adaption to specific situation ► Development of early indicators ► Incorporate interconnectedness between counterparties and liquidity sourcing ► Incorporate concentration risk ► Optimization towards target state Outlook – main areas for improvement Front to Back Solution ► Dynamic presentation of Intraday liquidity in dashboard ► Comparison of liquidity actual vs history on currency, correspondent banking level ► Including payment and securities transaction ► Show deviation to thresholds and targets ► Process stress test as per defined model ► Simulation of various specific scenarios and measurement against different Benchmarks ► Include early indicators in test scenario ► Reports and statistics, like concentration risk, deviation of target state EY intraday liqudity survey
  17. 17. Page 17 Manage -ment of intraday liquidity Cost savings Challenges EY Approach ► At all times abreast of liquidity situation ► At all times able to act ► T+0, T+1, T+2 look through of aggregated cash flows for friction- less management ► Implement necessary interfaces/IT solution ► Various Payment and settlement systems for different products/markets ► Install relevant IT/-business processes ► Define thresholds for action ► Define process and reporting lines for action ► Incorporates all interconnectedness with regards to business partners as well as concentration of business partners ► Embed intraday liquidity management into wider scope of ILAAP ► Trade off between credit lines and liquidity buffer ► Optimal composition and management of intraday liquidity buffer ► Aggregation of cash flows in various front- and back office systems in order to guarantee frictionless intraday liquidity management ► EY tool for liquidity buffer optimization ► Benchmarking of credit lines and liquidity buffer trade off ► Incorporate specific institutional situation Outlook – main areas for improvement Front to Back System ► Automatic notification, alerts, warning for violation of thresholds ► Dashboard shows critical state of liquidity by currency, counterparty and settlement systems, including drill down function ► Monitor development of specific Nostro / Vostro accounts ► Hold and release function of transaction for active management of intraday liquidity. ► Appropriate liquidity transaction management to minimize liquidity buffer ► Transparent view on cash balances allows active collateral-, cash- and credit line management ► Include all business area, with intraday liquidity impact EY intraday liqudity survey
  18. 18. Page 18 Your contacts Dr. Heike Dengler Manager EMEIA Financial Services Mobile: +49 (160) 939 21493 E-mail: Steffen Laufenberg, CFA Executive Director EMEIA Financial Services Mobile: +49 (160) 939 14761 E-mail: EY intraday liqudity survey
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