In our last blog, we introduced the idea of a Treasury Middle Office Operations as a key component to the intraday liquidity management operating model. As a function, this group serves as the bridge between operations functions and Treasury, and allows interlock with lines of business, risk and finance functions on a day-to-day basis, enabling a coordinated and holistic approach to cash and securities management in line with Treasury’s strategic goals.
In this new operating model, Treasury Middle Office Operations would be responsible for the daily execution of the following key areas of intraday liquidity management:
- Limits: Monitoring limits and managing escalations and remediation activities in coordination with impacted stakeholders based on methodology and guidance set forth by Treasury and Risk within the governance policy
- Daily coordination: Facilitating the pre-positioning and intraday cash and securities movements across various FMUs and correspondent banks based on limits, reporting and metrics as well as ongoing input into intraday credit line extensions, in line with Treasury’s policy
- Data analytics: Running reporting on historic cash and securities settlement data to identify trends and provide an attribution of any variances or otherwise unexpected intraday events. The “explain” should be performed by financial market utility (FMU), entity, currency, business line, customer/counterparty and product to support balance sheet management, intercompany reporting and effective allocation of charges via funds transfer pricing and new product pricing activities. Traditionally run by operations, historical analysis was superficial due to the narrow purview and data availability. In this new model, Treasury Middle Office Operations has the ability to perform a more meaningful analysis to understand risk drivers through the granular view of holistic data
- Forecasting: Similar to data analytics and explain, forecasts should provide an aggregate view of cash and security settlements by different views (e.g., FMU, entity, etc.). This view would be based on the settlement forecasts sourced from various operations teams, but would be more than a simplistic “sum” as it would provide linkages between cash and securities
- Stress testing: Running the intraday scenario daily to ensure that the adequate amount of liquidity is held at various FMUs, correspondent banks, etc. by currency
- Reporting and metrics: Producing planned and ad-hoc reporting in coordination with lines of business, operations, risk and finance
- Reconciliations: Performing reconciliations between cash and security legs of transactions.
The key to success with the launch of a Treasury Middle Office Operations team is two-fold: staffing the right folks and establishing clear roles and responsibilities that account for interlock with various stakeholders. Given the diverse responsibilities of the team, firms will need to identify resources familiar with liquidity risk management to monitor limits, support data analytics and coordination with liquidity managers and credit risk, among others. In parallel, firms must identify strong operations resources with a good knowledge of payment, clearing and settlement systems for critical functions such as forecasting, reconciliations and reporting. Once the right team has been identified, firms should ensure members have a clear mandate around responsibilities and hand offs with other stakeholders. Engaging finance, risk, and lines of business in this exercise early on in the process will promote buy in and facilitate a more effective intraday liquidity management framework once the new operating model has been implemented.