Most large organisations, including the major banks, operate across a number of distinct legal entities, each with its own designated bank accounts. However, fund transfers between entities are often time-consuming, hard to synchronise, and expensive. Alex Knight, Baton Systems’ Head of EMEA, explains how, by using distributed ledger technology (DLT), firms can improve their use of intraday liquidity and achieve real-time visibility and control over the movement of funds between their affiliates and externally, as well as reducing operational and third-party costs.
The process of managing liquidity on an intraday basis is highly complex: the movement of assets frequently involves extended ‘hops’ in a chain and relies on legacy, often batch-based, technology, without the benefit of perfect information.
Processing via a range of batch-based, legacy server-based ledger systems, creates challenges in terms of visibility and the ability of firms to respond. Today’s markets have operating hours with hard cutoffs, but they also have periods where liquidity is available and periods where it isn’t. Organisations are reliant on their agent banks (be they internal or external) to process payments in a timely manner.
Without the benefit of detailed historic analytics, it’s generally not possible to anticipate with any degree of confidence when external parties will meet their payment obligations to fund the appropriate account and to predict what the balances will be at any given point during the day. In fact, for many organisations it’s even a challenge to have up-to-date information on current (rather than anticipated) payments and balances. Firms frequently find themselves crossing large spreads on interest payments and charges when in fact they are sufficiently funded at an overall level and could avoid these costs through more precise and nimble management of their assets. Banks frequently choose to avoid this expense by holding large balances in their accounts; again, a point of inefficiency that should be rectified
These economic considerations apart, it’s essential that banks remain sufficiently well-funded at all times to meet their obligations. Enhancing these processes is a key objective for almost all banks, for their own needs and ultimately so that they can better service their underlying customers who face many of the same challenges.
“Firms frequently find themselves crossing large spreads on interest payments and charges when in fact they are sufficiently funded at an overall level and could avoid these costs through more precise and nimble management of their assets”
Solving the problem
To begin with, banks need to ensure that they have timely access to information that crosses business silos. The information needs to be as near to real-time as possible in order for the right decisions to be made. At the other end of the process, payments that have been instructed need to be completed quickly, efficiently, and transparently, as unconstrained as possible by the various bank or market cutoffs that exist. So, in short, they need first to be able to understand what’s needed and then to be able to do what’s needed.
The opportunity for optimisation lies between these two pillars.
It’s important not to underestimate the value of reliable real-time data alongside the capacity to analyse timestamped historic cashflows and balances. With these tools, a liquidity manager can match up the inbound and the outbound flows optimally, i.e. how it nets, aggregates, sequences or schedules payment runs to be as effective as possible, given the organisation’s own profile and the operational and financial constraints against which it is operating (these may, of course, differ from institution to institution).
“At the other end of the process, payments that have been instructed need to be completed quickly, efficiently, and transparently, as unconstrained as possible by the various bank or market cutoffs that exist”
How can Baton’s technology help?
Like all of Baton Systems’ solutions, Baton Core-Liquidity™ sits on a foundational bedrock of excellent interoperability (Baton’s technology integrates seamlessly with core ledgers, payment gateways, and messaging systems) and a robust connection into the financial markets infrastructure. Our ability to interrogate our clients’ accounts and to reconcile payments in real-time means that account, payment, and relationship statuses are updated throughout the course of the day to provide reliable input into the decision-making processes.
The organisation’s own rules operate against a structure that is maintained using Baton’s shared permissioned ledger. At present, this is deployed using existing payment rails, but we stand ready to integrate with and orchestrate payments using native digital assets. On the ledger, every participating legal entity is a separate node. Each node has access to the information that relates to its own transactions and balances. Where relevant, users can be given permission to view and manage data across multiple nodes. Each node has real-time visibility of, physical cash accounts maintained at banks. Users have a detailed view of each individual ledger entry with an exact timestamp of each ownership change and a reflection of the opening and closing balances of the wallets in question.
Core-Liquidity is backed by the Baton Rulebook, which defines the rules relating to the exchange of assets and liabilities and has been designed to comply with requirements in multiple jurisdictions.
The shared ledger with the rulebook enables the balances which are held in wallets within the physical accounts to be tied back with legal certainty to the individual participants. Changes in ownership that take place are represented on the Baton ledger. This is also carried out with legal certainty.
Since changes of ownership are all taking place within one physical account per currency, and since the ledger is running and maintaining the balances and, indeed, instructing the changes based on workflows, they are immediate. They’re transparent, they’re fully auditable, they’re legally enforceable, and they can operate effectively 24/7.
“Our ability to interrogate our clients’ accounts and to reconcile payments in real-time means that account, payment, and relationship statuses are updated throughout the course of the day to provide reliable input into the decision-making processes”
Already proven
Core-Liquidity leverages many of the same account structure and workflows and ownership change processes that are already live and proven with Baton’s Core-FX™ solution. So we’re re-using established Baton components in a way that is not specific to the settlement of foreign exchange transactions, but rather, is more general in terms of Baton’s ability to orchestrate payments safely, quickly, and reliably. This applies not only to payments between affiliated entities but also allows the combined resources of a bank or a client of that bank to be utilised optimally to meet external obligations, using available funding as effectively as possible.
I hope that you have found this blog useful in explaining how DLT can help firms support better liquidity management. To learn more about Core-Liquidity, please don’t hesitate to contact me at [email protected]