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I’ve just come back from a week in New York and it was great to understand the latest thinking and progress on intraday liquidity in the US and Canada. As well as meeting up with industry colleagues across the city, I was chairing and presenting at a conference - Automation & Real-Time Treasury in Financial Institutions - which was very successful with lots of interaction and debate. This conference appears to be the only one that encompasses all of the following: liquidity risk, treasury technology, the business management of funding & liquidity and client-facing activity including the activities of corporates.
In this article I summarise six reflections from the conference and conversations across the week. They cover thoughts on how firms are addressing the intraday challenge - please keep reading to the end where reflection six details the latest moves from the Fed that show how it is increasing the intraday pressure.
1) Intraday liquidity is now too narrow a definition
I know that I go on about intraday liquidity all the time. In fact, I’ve even been accused of proselytising, which I was quite proud of (after I managed to look up its definition) but I’ve started to realise that the phrase ‘intraday liquidity’ can be too narrow in summarising the problems and opportunities in this space. Some people (those I’ve not yet managed to convert) might see ‘intraday’ as something for risk management to look at ‘after the fact’ i.e. break down yesterday’s liquidity activity into minute by minute periods so that peaks and troughs can be identified and reported on. But in fact, this is only the first step in the process as it doesn’t put you in control of events as they happen.
Instead, I think we should consider intraday liquidity as only one component of a much wider topic that I refer to as real-time treasury i.e. being able to understand what is happening on all your treasury activity in real-time. If you have a real-time treasury capability then you can monitor, manage, control and optimise your intraday liquidity and this is where the real challenges and opportunities lie.
2) Machine Learning is coming
There was lots of discussion at the conference about how Machine Learning (or Artificial Intelligence if people want to get really adventurous) should be able to help firms understand the ‘what next’ for liquidity positions. We’ve seen it adopted already in the client-facing space, particularly the retail customer world e.g. instant credit applications, real-time fraud analytics, KYC activities.
The consensus of the conference was that we expect to see similar uses of Machine Learning in the areas of funding and liquidity in the next wave of industry transformation. In particular, firms are building up days/months/years of rich data history on their intraday activities. Machine Learning can exploit this history to predict future patterns of liquidity usage and create intraday liquidity projections. These projections can be used to identify problems ahead of time and to provide early warning indicators of stresses if actual profiles stray too far from expected.
3) The customer is king
Whether your customer is a corporate, a complex financial institution or a consumer, their activities are fundamental to shaping your own intraday liquidity profiles. After all, you have to maintain enough liquidity throughout the day to be able to process your customer payments when they come to settle. Understanding, anticipating and forecasting these customer activities is increasingly expected to shape firms’ intraday liquidity management actions.
Ultimately, influencing how your customers behave will be essential to optimising your own use of intraday liquidity, but this is easier said than done. For some customer groups ‘good behaviour' can be encouraged e.g. through pricing policies. But in many markets, it might not make commercial sense to charge for intraday liquidity and in other markets it can be unrealistic e.g. in instant payments schemes where a bank needs to provide liquidity to the settlement scheme to allow its customers to make payments 24x7. As a minimum, a firm needs to have a great understanding of its actual and expected customer intraday profiles to be able to take appropriate action and optimise liquidity.
4) Don’t forget about corporates
I had more discussions than I anticipated about corporates and how corporates with complex treasury infrastructures need their own intraday/real-time treasury capabilities. For example, if a corporate has business in many countries around the world then it will need the ability to make and receive payments in multiple currencies. This implies a multiple nostro, multiple provider bank model. Such corporates will need more sophisticated nostro management capabilities than those many banks who only operate in one or two countries.
Just as for a bank, liquidity is precious and as the corporate moves to a 24x7 world, it will require its own sophisticated intraday systems plus support from their provider banks to create the intraday insight that is needed. Provider banks might be able to deliver all required intraday insight as a (revenue-generating?) service but the more complicated corporates with multiple banking providers will need their own intraday infrastructures just as in a sophisticated bank treasury.
5) North American payments architectures are being overhauled which will impact intraday controls
It is well established that change is needed and is coming in the world of payments. Payments Canada is in the middle of rolling out a new RTGS, instant payments and other enhancements to the retail payments architecture. The US authorities are making similar noises through the FedNow initiative.
Firms need to understand that this will change fundamentally the current liquidity management orthodoxies. The funding and liquidity management landscape will be very different when customers can take advantage of 24x7 payments, nimble challengers offer new solutions taking share from established players and there are new opportunities for treasuries to manage assets in real-time. Those who respond well will have huge advantage over the laggards.
6) North America is slowly, finally, waking up to Intraday - the Fed is a big driver for this
As with the rest of the world, it is regulatory attention that tips firms over the edge in improving intraday (even though the non-regulatory business case is enormous!). In the US, the major institutions have long been investing in intraday, mainly due to resolution planning requirements where intraday liquidity is a key component. But I saw this Fall how the next tier of firms down are now engaging with the intraday agenda and the reasons why are interesting.
First, intraday volatility. There has been a lot of noise in recent months about the scarcity of intraday liquidity in the market. There were some uncomfortable days in September where the Fed had to step in to inject liquidity into the market. These liquidity challenges have been publicly discussed at senior levels by such luminaries in the US as Jamie Dimon of JP Morgan and Steve Mnuchin, the US Treasury Secretary. The headlines mean that treasurers are in the spotlight internally and externally to prove they understand their intraday liquidity requirements and can act quickly to source liquidity quickly when times get tough.
Second, the game is changing. Firms are expecting that the established rules of the intraday game will soon change. In the US many organisations, particularly Foreign Banking Organisations (FBOs), typically park a huge amount of their group’s assets as cash in a USD account at the Federal Reserve. This means the US legal entities/branches retain oodles of liquidity so don’t worry too much about running out of intraday cash. But the US government is starting to think and say that locking up this liquidity is not helping the economy. The word on the street is that we should expect changes. I can’t say yet whether such changes will be with regard to interest rates provided on long (or short) balances at the Fed or more technical means of disincentivising sluggish liquidity management, but forward-thinking liquidity managers are starting to anticipate needing much more active control of their intraday positions.
Third, regulatory pressure. The most direct driver for the US waking up to intraday is that the Fed is now ramping up the regulatory pressure. They have already addressed intraday for the very large and systemically important banks; now they are moving to their next set of targets. The Fed has just announced a horizontal review of intraday liquidity. These horizontal reviews see a standard set of questions issued to categories of regulated institutions to check industry compliance with supervisory policies. The relevant firms are now scrambling around to pull together responses by early December.
By the way, this pattern of regulatory attention moving down from the most important firms to the next tier is completely normal. It’s already happened in the UK, where smaller entities have been snapped out of their intraday lethargy as the Prudential Regulation Authority (PRA) plots its inevitable course towards them.
I have a pretty good understanding of the intraday capabilities of many US firms and FBOs in the US. Having now understood the horizontal review questions, I fully expect that many firms will receive Matters Requiring Attention (MRAs) as their current capabilities will not be up to scratch. As I learned of more of these review questions, I began nodding to myself in an increasingly self-satisfied manner, given the many conversations I’ve had with banks previously reluctant to make the leap to intraday improvement. The Fed really has left no place to hide. If you are a firm needing to respond to the review you need to be able to:
If you already have great intraday capability then you have nothing to worry about, but if you don’t then start preparing your business case to invest very soon.
It was a very productive few days in New York and it’s telling just how much intraday requirements, regulations and firms’ responses are starting to standardise across both sides of the Atlantic - in particular between the UK, US, Canada and the major European countries. I look forward to my next visit in early 2020 to see how much progress will have been made and how the Fed has responded to their horizontal review.
I hope you found this a helpful summary of recent developments in North America. Keep checking back for new posts and please give your thoughts below.
If you would like to have a discussion about your intraday liquidity management and find out how technology can ensure your treasury is prepared for intraday requirements and regulations, just contact us and we will be in touch.