Live Webinar for Risk and Liquidity Managers

Learn how our Core-Payments solution provides the real-time payments intelligence and automated, controlled payment release needed to more effectively mitigate risk and increase financial resiliency. May 22nd at 3pm UK / 10am ET.

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 the 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.

So when these incidents occur, banks typically instigate payment controls designed to hold outbound payments to the firm in question. Unfortunately, payment processes and policies are often controlled at the individual business area level, versus on a firm-wide basis, with each business area activating their own individual set of controls. Some faster than others (depending on the degree of manual intervention required) and some proving more effective in actually stopping all outgoing payments to the specified counterparty than others. The hope being that the few payments that slip through the net are not for significant amounts.

As is apparent, these non-standard, and to a degree, manual processes are not perfect and, in and of themselves, generate the potential for financial and reputational risk. However, moreover they’re becoming a regulatory concern because should the controls fail and mistakenly allow the release of one of more high value payments, the firm could find that they lack sufficient liquidity to meet their other obligations in the market – thus generating potential systemic risk.

So there’s that aspect to contend with, as banks really do need automated firm-wide controls so they can more effectively hold all required payments. But what I really want to talk about here is how do you work out your current exposure at this point in the day? 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 – after all, if all of their counterparties simply refuse to pay then…..we’ve all seen this movie play out before, haven’t we? 

“How do you work out your current exposure at this point in the day? And, what about the payments the counterparty in question has already made to your firm?”

So working out your firm’s exposure and the payments you can now safely reciprocate, that’s easy 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.

how do you work out your current exposure at this point in the day? And, what about the payments the counterparty in question has already made to your firm?

“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”

Payment Reconciliations: The Heart of the Issue

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. So in a few days their treasury team could very easily identify which payments they’ve received and proceed in releasing the corresponding outbound payments – but that’s tomorrow or the next day, not today, not now. 

Today that 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 – so 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. 

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 now that you may not want to hear, but let’s be honest – if your firm isn’t making good on its payment obligations to a counterparty that is recognised as facing a liquidity squeeze, but that has already met its obligations to you, then are you contributing to its demise? Or to rephrase this as a question – 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 that is recognised as facing a liquidity squeeze, but that has already met its obligations to you, then are you contributing to its demise?”

For this reason (along with a whole host of others), banks need to stop deprioritising the need to upgrade post-trade payment processes based on “if it isn’t broke don’t fix it” type thinking. The reality is these manual, outdated post-trade processes, such as delayed payment reconciliations, are broken, they’re 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 payment Insight

Business, risk, treasury and operations teams all need access to real-time payments insight. It’s critical. We need to stop accepting payment reconciliations as a process that involves a degree of manual intervention and takes a few days. These teams need to make decisions based on a real-time understanding of the status of inbound and outbound payments and this can only be achieved if you’re conducting payment reconciliations as you go.

“Teams need to make decisions based on a real-time understanding of the status of inbound and outbound payments and this can only be achieved if you’re conducting payment reconciliations as you go”

To provide this real-time insight we’ve designed our Core-Payments solution to continuously reconcile inbound and outbound payments on a statement versus ledger basis in real-time. This means Core-Payments can provide access to real-time payment intelligence, so users can see exactly which payments have been received from any given counterparty on both a real-time and historical basis. Users can then use this insight to drive informed decisions about which payments to release as a matter of BAU settlement risk controls or in times of market stress to protect from more systemic implications.

“Core-Payments provides access to real-time payment intelligence, so users can see exactly which payments have been received from any given counterparty on both a real-time and historical basis”

Furthermore, to strengthen operational resilience across the entire payments process, Core-Payments provides users with automated no-code payment hold and release rules that  can be quickly created and instantly implemented across all business areas and payment flows.

“Automated no-code payment hold and release rules can be quickly created and instantly implemented across all business areas and payment flows” 

Configurable by counterparty, currency, product, notional and value date level, these rules can be easily created or modified to enable users to immediately stop all payments and settlements that meet the required criteria, from being executed. Therefore, providing a comprehensive and standardised firm-wide approach to implementing effective payment controls.

Then from a release perspective, the no-code rules can be configured to effectively manage the structured and controlled release of payments and settlements, and the levels of approval required.

Combining the power of continuously reconciling payments, with access to real-time payments intelligence and effective payment hold-and-release rules means a firm faced with a counterparty in stress could:

  • Identify immediately the “live” status of payments and receipts with that counterparty and hence accurately understand the size of any exposure
  • Quickly instigate comprehensive firm-wide payment hold controls across all payments being processed across all business areas and flows to the specified counterparty
  • Use the real-time payment information to determine which outbound payments should be released
  • Use no-code rules to activate the informed and controlled release of all identified payments to the counterparty and to prevent payments slipping through in an uncontrolled manner.
  • Confidently demonstrate to regulators your firm’s ability to insure resiliency during critical market events

Meaning, as a firm you could hold your hands up and confidently say you’ve put in place the processes and controls necessary to ensure you’re contributing towards maintaining an orderly market.