When it comes to bank liquidity management, a lack of reliable real-time data has always stood in the way of informed decision-making. Without this data, it’s almost impossible to optimise on an intra-day basis. Once available, this data can also be used to predict confidently when specific counterparties will meet their payment obligations, based on their historic patterns of activity. This creates a pathway to plan liquidity and funding throughout the day, improving control and reducing costs.
Aaron Ayusa, Director of Client Success at Baton Systems, explains the benefit of using data derived from real-time reconciliations to optimise intraday liquidity management.
The approach of banks to intraday liquidity management has traditionally been a reactive one owing to a shortage of real-time information. Without the visibility that this information can provide, a firm will typically look at all of its projected payments for a given value date for each currency and fund around 20% of that value for each currency, at a specified time within a day.
Often, however, the liquidity manager, whose responsibility it is to ensure that all currencies are funded, is unaware of any potential funding problems until they become apparent, typically, close to cut-off. Options at this point are limited. Making a trade with an agent bank using credit lines or overdrawing a nostro account are costly solutions, further exacerbated by today’s high interest rates and the funding shortages that are all too frequent for a number of currencies.
Not only does poor liquidity management give rise to reputational risk as the possibility of defaulting on obligations becomes greater, but there can be repercussions from regulators and central banks for example, for holding too much or too little of a given currency. Forced liquidation may occur, while regulators may impose fines on firms that allow accounts in certain currencies to become overdrawn.
It’s therefore becoming increasingly important for banks to have technologies or solutions put in place to better manage their intraday liquidity needs: they are looking for real-time balance visibility and the ability to identify peaks and troughs, to avoid inadvertent overdrafts and to mitigate excess balances.
Real-time reconciliation is key
Crucial to informed decision-making on intraday liquidity management is real-time reconciliation.
For many years, the market convention has been that reconciliations are generally done on a value date (VD) +1 basis. This is largely due to the inconsistencies of the messages used for payments and the sheer volume going through the various accounts that are being used. The earliest most banks can be sure that a counterparty has met its payment obligation is the start of VD +1. However, It can sometimes be multiple days or even weeks before the bank is aware that a payment has failed.
Real-time reconciliation, however, means that account, payment, and relationship statuses are updated throughout the day leading to more meaningful decision-making processes and more efficient funding decisions.
“The earliest most banks can be sure that a counterparty has met its payment obligation is the start of VD +1. However, It can sometimes be multiple days or even weeks before the bank is aware that a payment has failed”
The role of data in forward planning for intraday liquidity
By consuming SWIFT messages in real-time and using a combination of simple matching, machine learning, and AI to match them against a bank’s obligations and exposures, over a period of several months, it’s possible to build profiles and develop insights into counterparty behavior. This includes the timing that they are likely to settle their obligations for specific products and/or currencies.
Although some banks have begun to create models based on historical information around inbound receipts of payments, without reconciling this data back to the counterparty, agent bank, and product this information is nothing more than a simple average. The characteristics of obligations change from day to day (think of dimensions like counterparty, notionals, agent banks etc.) such that each day may differ markedly from a generic long-term average. However, with the benefit of detailed historical analytics derived from the real-time reconciliation process, banks can predict when counterparties will meet their payment obligations and what the balances will be at any given point during the day.
These predictions can be used in the creation of ‘settlement cycles’ throughout the day, giving banks the capability to account for inbound payments when deciding whether or not funding is required at any given point throughout the day and thus avoiding tying up funds for longer than necessary.
“However, with the benefit of detailed historical analytics derived from the real-time reconciliation process, banks can predict when counterparties will meet their payment obligations and what the balances will be at any given point during the day”
Smart data supports smart workflows in real time…
The value of reliable real-time data in the process of liquidity management shouldn’t be underestimated. Baton’s real-time reconciliation capabilities – a pillar of Baton’s Core-Payments™ and Core-Liquidity™ solutions – coupled with our smart workflows allow this data to be used effectively by liquidity managers, who can match up the inbound and the outbound flows optimally, and schedule efficient payment runs.
The availability of workflows via Core-Payments allows users to layer in their own configurable rules and alerts and to check, hold, or release payments according to these rules. Payments can therefore be sequenced independently in response to events in the course of the day, as well as to the appetite of the individual firm for credit risk and its funding ability. Connectivity can also be built with a firm’s customers so that users can collaborate to sequence real-time or instantaneous settlement processes at predetermined times, reinforcing predictability and helping liquidity managers plan more efficiently.
“The availability of workflows via Core-Payments allows users to layer in their own configurable rules and alerts and to check, hold, or release payments according to these rules”
…and provides supervisors and managers with key intelligence
In a forthcoming blog post, we will explain how the data revealed through Baton’s real-time reconciliation process serves as a crucial source of intelligence concerning counterparty performance and funding positions.
I hope that you have found this blog useful in explaining how data derived from real-time reconciliation can help firms with better intraday liquidity management. To learn more about Core-Liquidity, please don’t hesitate to contact me at [email protected]