Citi TTS SeminarBASEL III Intraday Liquidity Carolina Caballero Global Clearing Risk & Regulatory Strategy Manager Intraday Liquidity Management – New Basel Spotlight Basel Liquidity Risk Management Framework Liquidity Net Stable Monitoring tool Coverage Ratio Funding Ratio for Intraday (LCR) (NSFR) Liquidity Mgmt End of Day 30 day funding ratio Relationship between Set of monitoring tools Banks required to bank’s settlement intended for reporting hold high-liquid assets obligations (longer banks’ intraday liquidity amounts equal to or term) and funding risk in normal and stress greater than their net Requires stable conditions cash over a 30 day funding available Enable banking period amount to exceed supervisors to monitor Intraday cash and required amount over banks’ intraday liquidity collateral sufficient to a one-year period of risk and its ability to meet survive net cash extended stress payment and settlement outflows caused by Assesses value of all obligations on a timely crisis events asset types held basis Deadline: 2015 Deadline: 2018 Deadline: 2015 (Coincide with LCR) 2 . Basel Monitoring Indicators – How we got here • Sept 2008 – Lehman Brothers filed for Chapter 11 bankruptcy • Sept 2008 – Basel Committee on Banking Supervision (BCBS) published it Principles for Sound Liquidity Management and Supervision • Principle 8: “A bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems” • July 2012 – BCBS released a consultation paper on Monitoring Indicators for Intraday Liquidity Management • April 2013 – Monitoring tools for intraday liquidity management • Jan 2015 – Implementation Date?? 3 . Prescriptive application of the tools will be at discretion of national supervisors 4 .Intraday Liquidity Monitoring Objectives Significance of New Rules • Key objectives are: – Promote further sound intraday liquidity management and complement the qualitative guidance of the Sound Principles to ensure that a bank can meet payment and settlement obligations on a timely basis under both normal and stressed conditions – Enable banking supervisors to monitor Internationally active banks’ intraday liquidity risk and their ability to meet payment and settlement obligations on a timely basis under both normal and stressed conditions – Intraday liquidity should lead to closer co-operation between banking supervisors and the overseers in the monitoring of banks’ payment behaviour – Promotion of sound liquidity management practices for domestic banks. overall payments 4) Time Critical Obligations Assess concentration in Provide dimension on banks Bank’s correspondent Establish trend on Bank’s payments activity and activity and extent of average payment settlement intraday liquidity usage and exposure on intraday credit to identify any changes that availability in normal times lines might occur Own Financial Stress: a bank suffers or is perceived from suffering from a stress event Stress Counterparty Stress: Major Counterparty Scenarios A Customer Bank’s stress – Correspondent Bank (Guidance) Market-wide credit or liquidity stress 5 .The Monitoring Tools Correspondent Bank Direct All Banks Service Providers Participants 1) Daily max intraday liquidity usage (Largest net 5) Value of payments made on negative position) behalf of correspondent 7) Intraday throughput – banking customers daily average across a 2) Available intraday liquidity bank’s settlement account at the start of the day 6) Intraday credit extended to with an average hourly view correspondent banking reported as a percentage of 3) Total payments customers. Correspondent multiple clearing Reserve system and correspondent relationships (often for same currency) and across homeBanking and host Daily regulators based on legal entity structure Management Credit Facilities • Risk of certain banks ‘gaming the system’ exists by delaying payments to improve intraday liquidity positions 6 . Data collation efforts are very significant • Visibility in correspondent banking space is an issue • Central across Internationally active banks need to tackle reporting requirements Bank currency. Uncertainty Interdependence remains as to Obligations how data will be applied by relevant supervisors • Level of transactional detail required to facilitate reporting is more significant than other Basel liquidity requirements. there remain implementing challenges • Meaningful supervisor engagement has not yet occurred with industry focus to date primarily on LCR and NSFR • Focus is on monitoring as opposed to controls with significant opportunity cost to creating required RTGS Participants Time reporting infrastructure Participants Critical • Data is backward looking and may not be timely in identifying stress points.Intraday Liquidity Reporting Challenges While efforts to promote sound intraday liquidity practices across the industry should be welcomed. Intraday Liquidity – Changing Landscape There are numerous factors outside of Basel Monitoring Tools that are changing the landscape and increasing focus on Intraday Liquidity • DODD Frank and EMIR continue to mitigate counterparty and settlement risk on OTC derivatives by pushing settlement into clearing system but these times payments place additional strain on intraday liquidity RTGS Participants Time • Regulators are placing restrictions around co-mingling of collateral pools across different legal becomes more expensive Critical Participants entities. Economies of scale are therefore lost and collateral Interdependence Obligations • General pressure on banks net income lines are triggering banks to review collateral cost where there are massive differences across the industry in terms of efficiency management and potentially significant savings • Momentum in discussions around intraday liquidity is causing Banks to re-think their internal transfer pricing policy where charge was not previously not passed back to the business • Central Bank Correspondent Emerging currencies can often initially have heightened intraday liquidity constraints that need to be carefully managed Reserve Banking Daily Management Credit Facilities 7 . Client Intraday Analysis: Practical Examples Client A EOD balance Client B on par with SOD $2B Peak Closely aligned $750MM payment flows starting balance m m m m m m on pm pm pm pm pm pm m m m m m m on pm pm pm pm pm pm 6 a 7 a 8 a 9 a 10 a 11 a 2 no 1 2 3 4 5 6 6 a 7 a 8 a 9 a 10 a 11 a 2 no 1 2 3 4 5 6 1 1 ($800MM) Net Account Balance • Payment flows are consistent and closely aligned • Payment flows are inconsistent and Liquidity required for outgoing payments throughout most of the day misaligned over the day • Account balance is large enough to cover spikes in the • Early inflows provide a positive balance but subsequent day outflows and spikes require liquidity utilization • Client ends the day with a positive account balance on par • Client ends the day with a zero or positive balance with the start of day balance • Additional collateral pledging required with the RTGS • No additional collateral pledging required with RTGS system due to large peak usage system 8 . g. data and reporting complexity and deadline (Jan 2015) Developing Monitoring Certain Correspondent Banks developing tools to meet reporting Tools requirements and provide reporting capabilities to clients Technology Vendors also developing monitoring dashboards Assess underlying costs and risk for intraday funding Focus on transfer charges (within entity) and pledging costs Pricing Liquidity Reassess payments mandates considering: – Transaction processing requirements (e. urgency) – Flow volume impact on intraday 9 .Implications for the Banking Industry Banks looking to mitigate risk through active liquidity management Re-thinking Catalysts to break down Business units silos and apply end to end Intraday Business Management principles to Intraday Liquidity Liquidity Optimize workflows and matching incoming and outgoing flows at a more granular and business level. Become more efficient and Rethink FIFO approach Challenges to develop in-house: tech spend. resource availability. GBP and CHF – Provide regulatory reporting capabilities to FI clients per BASEL requirements • Continuing discussions with regulators to gain insight on interpretation of BASEL III guidance • Working with Industry Groups to raise awareness on complexity of new requirements with Central Banks 10 .Where is Citi in terms of Intraday Liquidity Requirements? • Investing in development of Intraday Liquidity Monitoring tools – Monitoring capabilities available in USD. EUR. GBP and CHF Strategy • Engaged with regulators and industry groups to raise complexity and fine tune requirements scope 11 .Summary We aim to be at the forefront of Intraday Liquidity Management space. engaged with regulators. industry groups and service providers • 2013 BCBS Intraday Liquidity Monitoring impact direct and indirect clearing participants Background • All participants to develop monitoring dashboards and reporting capabilities • Local regulators still interpreting of BASEL and defining compliance deadlines • Possibility for deadline to be extended or phased out • Industry will manage liquidity utilization tighter and assume less credit exposure Industry • Look to achieve payment flow alignment and minimize collateral pledging costs Implications • Pricing through the banking chain for intraday liquidity value is inevitable • Development of monitoring and reporting tools complex and cost intensive • Citi expanding internal capabilities to meet BASEL reporting requirements Citi • Offer intraday liquidity reporting capabilities to clients in USD. EUR. Thank you 12 .
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