Managing intraday liquidity risk in times of market volatility and economic uncertainty

liquidity market volatility
Pete McIntyre, the liquidity expert

Written by Pete McIntyre

September 21, 2016

I write this in the evening UK time, reflecting that when I wake up tomorrow morning the US electorate will have spoken. Depending on the collective electorate decision, a great many people in financial firms across the globe could be in for a chaotic day…A few months ago we faced similar challenges after the Brexit referendum. At that point my friend Dawn Loo (from Baringa Partners LLP) and I blogged around how intraday insight is vital to manage in times of volatility & uncertainty. We didn’t put the post on LinkedIn then, but I think it’s a good time to bring it to your attention so I repeat it below.

In this blog, Baringa and Planixs, explain the importance of day-on-day management of intraday liquidity risk, particularly in times of market volatility and economic uncertainty and the tools available to support intraday liquidity management.

Intraday liquidity risk has emerged as a key area of focus on regulators’ (including the Federal Reserve (Fed), Prudential Regulatory Authority (PRA) and European Central Bank (ECB)) agendas for financial institutions over the last few years. In response to this, financial institutions have been actively adopting either tactical or strategic approaches to responding to regulators’ requirements on intraday liquidity.

Beyond regulations, the economic climate continues to be fluid, and the correspondent banking environment remains challenging in light of the regulatory and market pressures faced by correspondent banks, leading to indirect participants having fewer options in terms of the number of correspondent banks offering them access and liquidity. To add to this, with Brexit now on the table and providing very recent experience of uncertainty in the market, it is even more imperative that day-on-day management of intraday liquidity risk becomes the focus rather than just meeting regulatory requirements.

For both direct and indirect participants, in times of volatility and uncertainty there are increased risks of potential delays in expected receipts, and withdrawal or reduction of intraday credit lines. Any lack of visibility in cash and collateral positions intraday will exacerbate these risks.

There has been an evolution in thinking around the intraday challenge over the last few years. As firms begin to think about intraday they typically only focus on compliance i.e. providing regulators with after-the-event reports on peak intraday liquidity usage. However, as their thinking matures, firms are realising they need to actively manage liquidity on an intraday basis.

Simply put, a firm has intraday control when it can monitor its external account activity, compare this to its predicted activity and manage any risks that arise – all in real time. And it is no great surprise that such intraday control is extremely valuable when stresses occur. After all, being able to see all payment and receipt activity for the entire firm in one place, along with the real-time balance of all central bank and agent-provided nostros in real-time has to be a good thing.

In times of uncertainty this intraday insight proves extremely helpful in a range of areas. Firms can understand their true use of credit and be well prepared as to their options should intraday credit lines be removed at short notice. Both payments and receipts can be monitored in a timely fashion. The financial institution can have granular insight into credit risk exposures and can decide if it really wants to have very long positions with an agent bank early on in the day in the hope those balances are still accessible later on.

By developing profiles of intraday activity across the entire correspondent network, a financial institution can see exactly how the network is being used in reality. This understanding is vital when developing strategic responses under the Risk and Resolution Planning and Structural Reform agendas.

One thing is for sure. As Brexit looms, there will be increased volatility and market uncertainty. Financial institutions should take the time now to ensure their systems and data are fit for purpose, providing the required insight.

For more information on how we can help you control your cash and liquidity in real-time, please contact us.

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