This is the first of a series of posts that will focus on the key challenges that face risk professionals and related stakeholders. It explains how Baton’s proven Core-Payments® solution will enable your firm to achieve real-time, effective and proactive risk management and control across your entire business, allowing you to:
- IDENTIFY emerging operational, counterparty, liquidity and payment risks.
- ASSESS different types of risk with the power of historic and real-time data.
- MITIGATE with robust, automated workflows powered by conditional rules and controls.
Firms have invested millions of dollars in real-time tools for monitoring and managing market risk. But what about counterparty, operational, payments and liquidity risks? These same businesses struggle to put in place the processes and capabilities necessary to effectively manage and control these risks. This is accentuated by the legacy infrastructure that underpins most capital market firms, including:
- The proliferation of siloed systems, processes and data.
- Batch-generated data that’s simply too slow for risk decisions.
- Many escalation and operational processes continue to require manual intervention.
By way of example, let’s focus our attention on how these constraints impact a bank’s ability to effectively manage and control the risks associated with the potential failure of a large market participant. Once the rumours start becoming a reality and it’s increasingly evident that one of your counterparties is facing a liquidity crunch – it’s natural to slam on the brakes. No firm wants to be in a position where they’re unduly exposed to settlement risk and continuing to make payments when there’s a heightened risk that their counterparty won’t be reciprocating.
In this situation – how do you reliably assess your current exposure at this point in the day, across all relevant business and operational silos? And, what about the payments the counterparty in question has already made to your firm? These now require reciprocation to avoid adding to the counterparty’s existing liquidity challenge.
“In this situation – how do you reliably assess your current exposure at this point in the day, across all relevant business and operational silos? And, what about the payments the counterparty in question has already made to your firm?“
Identifying and assessing which payments can be safely reciprocated should be straightforward, right? Having held all outgoing payments to the counterparty, you simply release those that are the opposite leg to payments received. But here’s the thing – how do you work out which payments have been received so far that day? And this is where the challenge lies.
“But here’s the thing – how do you work out which payments have been received so far that day? And this is where the challenge lies”
This is just one example of the challenges that risk managers face as they battle with batch-based, siloed information while making decisions in real-time under enormous stress. However, it doesn’t need to be this way. Use payment reconciliations to illustrate the value delivered by real-time and comprehensive post-trade information.
Risk Managers need real-time information and alerts.
Real-time Payment Reconciliations: Most banks only start to fully reconcile inbound and outbound payments a day after the value date, in some cases the process isn’t completed until two or even three days after settlement. In contrast, risk managers need to identify breaks and fails, as well as completed payments and evolving counterparty exposure much faster if they are to make the right decisions.
Today the treasury team simply has access to a record of what they expect to receive and pay (in fact, in many cases even this information will be spread across multiple systems) and that’s not good enough. It doesn’t provide the confidence needed to confirm payments have actually been received or the bank’s current level of exposure. As a result, through an understandable abundance of caution, the bank could decide to continue to hold all payments and default on its own obligations.
“We need to stop relying on information that requires manual intervention or is slow”
Whilst this approach protects the firm postponing the payments from further settlement risk – it fails to protect the counterparty that may now be on the brink of collapse. They can’t wait two days to receive these payments, they need funds now. I’m going to say something that may be hard to hear, but let’s be honest – if your firm isn’t making good on its payment obligations to a counterparty facing a liquidity squeeze, despite meeting its obligations to you, then are you contributing to its demise? To rephrase, is your bank meeting its commitments and playing its part in maintaining an orderly market with reduced systemic risk?
“If your firm isn’t making good on its payment obligations to a counterparty facing a liquidity squeeze, despite meeting its obligations to you, then are you contributing to its demise?”
For this reason (along with a host of others), banks need to prioritise upgrading their post-trade and payment processes. The reality is that these manual, outdated post-trade processes, such as delayed payment reconciliations, are broken. They are risk-inducing and coming into sharp focus from regulators.
“Manual, outdated post-trade processes, such as delayed payment reconciliations, are broken, they’re risk-inducing and coming into sharp focus from regulators”
The need for real-time Insight
Business, risk, treasury, and operations teams all need access to real-time post-trade insight. It’s critical. We need to stop relying on information that requires manual intervention or is slow. Risk stakeholders need to be made aware of material risk events as they evolve, not the next day. This includes external events, such as counterparty performance as well as internal ones, such as system performance or available liquidity. Functional and risk teams must make decisions based on a real-time understanding of all of the key attributes of the post-trade ecosystem. This includes the need for configurable alerts that identify new risks and advise of counter-balancing risk-reducing events (such as the successful receipt of a large inbound payment).
“Functional and risk teams must make decisions based on a real-time understanding of all of the key attributes of the post-trade ecosystem. This includes configurable alerts that identify new risks and advise of counter-balancing risk-reducing events“
To provide this real-time insight, we’ve designed our Core-Payments® solution to continuously record all state-changes across the post-trade lifecycle. This means Core-Payments can provide access to real-time intelligence in the form of configurable dashboards and alerts, ensuring that risk and functional teams have the capability to be made aware of risk developments in a timely and automated way.
“Core-Payments can provide access to real-time intelligence in the form of configurable dashboards and alerts”
Importantly, the solution is already proven and in production with a design that follows three key principles:
Transform how your business manages risk the way you want: We put the user in control with no-code configurations. Users choose how they set their workflows, the rules they apply, what to be alerted on, what the thresholds are.
Liberate from legacy: We do this in a way that eliminates legacy constraints by non-intrusively connecting to your existing systems and processes.
Powered by capital markets native technology: We do this with robust and secure cloud-based solutions that allow for scalability.
Firms can’t fix what they can’t see
In summary, capital market firms need to demonstrate to their regulators that they can identify and remediate vulnerabilities which could impact their ability to deliver important business services. Improvements must be made for identifying risk with clients, products or processes spanning the organisation. The quicker problems are identified, understood and corrected, the more resilient a firm can be. This is a universal truth and technology is bearing evidence to this. Let Baton’s low-code, cloud-based, and capital markets native technology be your way to a safer organisation.
“The quicker problems are identified, understood and corrected, the more resilient a firm can be”