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19 Juni 2018

Intraday liquidity management and the case for Treasury Middle Office Operations

Intraday liquidity management continues to be a struggle for bank treasurers due to data and dependencies with Operations, Risk and IT, among others. Sizing the intraday liquidity buffer appropriately to efficiently meet operational need and regulatory ask remains a challenge, and firms often revert to a conservative estimate

Regulatory feedback via the Federal Reserve Board’s horizontal exam, Regulation YY and the Prudential Regulatory Authority’s (PRA) Basel III Pillar 2 policy statement reinforce the need to develop intraday capabilities beyond the historical view of cash outflow timings and balances as outlined by Basel Committee for Banking Supervision (BCBS) “Monitoring tools for intraday liquidity management” (BCBS 248). Despite new clarity on regulatory expectation and leading practices, firms still struggle to implement a robust intraday liquidity management program for a few reasons.

The first, and most critical, issue is the current operating model. Firms are still operating under legacy roles and responsibilities, established based on historic business activities and market conditions. For example, today, cash management and securities settlement teams remain in distinct siloes in the back office. Each team manages settlement in their respective domains, cash management with the cash leg of a transaction and securities settlement teams with the security leg of the same transaction. With larger trading volumes, shorter settlement periods and taxing reporting requirements, it is increasingly important to match the two legs of a single trade, and yet it remains a challenge. This issue is exacerbated by a mirrored fragmentation of underlying IT infrastructure and data limitations. There is a need for firms to approach intraday liquidity management in an increasingly strategic manner. However, in addition to educating operations teams on how settlement activities impact the firm’s intraday liquidity position, liquidity managers will need to understand how financial market utility (FMU) requirements and operational constraints must be considered when developing methodology and policies.

Firms should begin enhancements to the intraday liquidity management framework by rethinking their operating model. The identification of opportunities to rationalize processes and systems, enhancing data and breaking down siloes will enable a more cohesive intraday liquidity management approach. One such potential efficiency is the consolidation of cash management and securities settlement teams’ data into a single team’s purview. This team, Treasury Middle Office Operations, would leverage a more connected platform and have the ability to review cash and securities positions across various payment, clearing and settlement systems and correspondent banking relationships in order to effectively coordinate with Risk and Treasury and enable timely decisioning in line with strategy.

The design and implementation of this new operating model is not the only hurdle, or even the most challenging one. The implications of a new operating model, and the subsequent changes to organizational models and roles and responsibilities, will have far reaching implications across the firm. Ensuring that all impacted stakeholders are a part of the journey, and not just a recipient of the target state design, is essential for successful adoption.

With a new, more functional operating model in place, enhancements to data and technology infrastructure will act as an enabler to further support the desired intraday liquidity capabilities.