Why Intraday Liquidity Management Needs to be More Active and Granular

Optimising intraday liquidity management across cash and securities is crucial to the business of any bank. Firms ultimately need to ensure they have the right access to the right assets throughout the course of each day to meet their obligations and the ability to control the release of settlements based on a range of binding constraints.

In this blog, I’ll examine how treasury managers can overcome the challenges of siloed and inefficient legacy post-trade systems and processes to operate effectively and safely

In order to optimise intraday liquidity management, treasury managers need to be able to capture balances, credit facilities, exposures and obligations at the start and then throughout each business day. This data needs to be visualised and interpreted through the lens of each of the firm’s legal entities, each of their counterparties, and each of the products for which they are settling. Only then can a firm accurately and holistically consider its current and expected end-of-day position.

However, treasury managers often find themselves challenged by inefficient, outdated, and siloed legacy post-trade systems and batch-based processes, which are unable to produce the sort of uniform, comprehensive, and informative picture they need to identify:

• All of the assets currently available to them
• Which obligations have been met already
• And their present level of exposure 

The cost banks are paying for intraday liquidity management inefficiencies

Firstly, there’s the prudential aspect. Regulators require that banks have sufficient intraday liquidity to meet their obligations. However, this comes at a considerable cost – in fact, funding these buffers costs many firms hundreds of millions of dollars annually.

These intraday liquidity buffers are impacted by a bank’s ability to efficiently aggregate, net, sequence and instruct payment on a timely basis with certainty of settlement. The inability to do any of these things can increase the size of the buffer required. Without a real-time view of all available sources and uses of liquidity, and a high degree of control, there will always be considerable room for improvement.

“Intraday liquidity buffers are impacted by a bank’s ability to efficiently aggregate, net, sequence and instruct payment on a timely basis with certainty of settlement”

The second aspect relates to the cost of raising the funds. While it’s true that interest will usually be earned on the value deposited in a central bank account to support a required buffer, a bank will likely have raised those funds at a higher cost in an external market, especially if market sentiment on the firm raising the funds is negative.

How does intraday liquidity management need to change?

Banks need to move from a broad-brush, backwards-looking, passive approach to a more granular and active one.

Currently, most banks rely on historical reports that show, on a broad level, the evolution of an account’s intraday balance, highlighting high and low points. However, without the ability to drill down and understand the individual factors that contributed to that intraday liquidity profile, it’s difficult for the bank to truly understand why liquidity was impacted in the way it was on a given day and learn from past events. This leads to a lack of confidence in day-to-day liquidity usage and makes it more difficult to easily and accurately model and deploy enhanced liquidity strategies to increase liquidity resilience. These factors prevent firms from reducing their intraday liquidity buffers and associated costs.

“Without the ability to drill down and understand the individual factors that contributed to that intraday liquidity profile, it’s difficult to truly understand why liquidity was impacted in the way it was and learn from past events”

From a resiliency testing perspective access to this data also allows for more effective intraday liquidity stress testing for financial resilience at the counterparty, market or product level.

The need for real-time visibility of all liquidity sources

Baton’s new intraday liquidity management tools, available as part of our Core-Payments® solution, have been designed to enable treasury managers to identify and consolidate all available sources and uses of liquidity in real-time, enterprise-wide. By interoperating with the firm’s existing systems and processes, these tools aggregate and normalise all data required to provide the consolidated real-time view treasury managers require to optimise available liquidity and mitigate intraday liquidity risk.

“Baton’s new liquidity tools, enable treasury managers to identify and consolidate all available sources and uses of liquidity in real-time, enterprise-wide”

This level of visibility allows optimal liquidity flows to be assessed and determined by testing different strategies and running them parallel to production data. All of these elements can be viewed and managed via a dedicated dashboard specifically configured to meet the treasury manager’s particular requirements. 

This real-time view is possible because the technology continuously reconciles inbound and outbound receipts on a statement vs. ledger basis, enabling recently reconciled and unencumbered liquidity to be quickly identified and more easily put back to work.

Traceability

In addition to providing a real-time view of current balances, obligations and exposures, these new tools also enable treasury managers to accurately trace the factors on their side or on the side of their counterparties that are influencing intraday liquidity availability. This insight can prove invaluable in developing more robust liquidity management strategies and proactively managing risk. 

“Treasury managers can accurately trace the factors on their side or on the side of their counterparties that are influencing intraday liquidity availability”

This is achieved by automatically linking timestamped data for all key state changes captured from various siloed systems. This insight can then be used as the basis for predicting intraday cash ladders based on specific rather than generic data. It also allows users to understand how a liquidity profile has been impacted by factors such as late payments and develop a stronger understanding of counterparty behaviour during market events. 

“Insight can then be used as the basis for predicting intraday cash ladders based on specific rather than generic data”

By overlaying these historical behaviours with the real-time data being continuously captured, treasury managers can be immediately alerted when the behaviour of specific counterparties, accounts, or even markets as a whole deviates from previous trajectories. From a resiliency testing perspective, access to this granular data also allows the firm to more effectively stress test intraday liquidity profiles, on the fly, at the counterparty, market or product level.

Smart, Automated and Controlled Payment Orchestration

Baton’s Core-Payment’s solution enables payment logic to be programmed to optimise and control the release of settlement instructions. Payments can be automatically sequenced according to a combination of factors such as priority, counterparty performance and available liquidity. Furthermore, important throughput data is presented and maintained for both production and simulation. Delivering increased confidence, this level of control can then enable firms to reduce excessive intraday liquidity buffers whilst maintaining throughput at a level acceptable to counterparties and regulators. 

“Payments can be automatically sequenced according to a combination of factors such as priority, counterparty performance and available liquidity”

In summary, with access to aggregated and normalised data detailing all exposures, obligations and balances across cash and securities, along with controlled and automated settlement orchestration Baton’s new intraday liquidity management capabilities deliver advanced visibility and control across all liquidity sources. The whole enterprise benefits from better forecasting, more informed decision-making and the timely adjustment of liquidity strategies – ensuring that firms can more easily and effectively achieve the level of financial resiliency desired by regulators and the broader capital markets and the economic benefits generated by optimising liquidity use.

“The whole enterprise benefits from better forecasting, more informed decision-making and the timely adjustment of liquidity strategies”