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Intraday liquidity management has become a highly topical issue, with the addition of BCBS further complicating the task of meeting regulatory requirements. This article offers an analysis of how financial institutions are rising to the challenge. Although implementation of the reporting standards was originally due in January — in conjunction with LCR — the effort required from banks towards meeting both standards saw a successful petition for the deadline to be extended.
BCBS added several challenges in terms of investment in technology and the availability of data collection.
Banks face various costs for augmenting existing databases and IT infrastructure, in order to implement the technical standards required by the individual regulators for reporting. Moreover, the current systems offer limited access to the granularity of data required by BCBS , often segregated for each clearing and settlement infrastructure.
In addition, BCBS exercise mostly requires further investment in the training of internal resources. In the current scenario, payments issued from or to nostro accounts are difficult to track in terms of the timing of submitting and processing.
Most banks are able to provide their corresponding banking clients with end-of-day statements, while it is not common practice to produce intraday statements or real-time settlement notifications necessary for the calculation of the monitoring tools. This would require reviewing bilateral agreements with correspondent banks. On the other hand, direct large-value payment system LVPS participants have full visibility over their payment flows, including accurate information on the timing of settlement.
By taking advantage of the data availability, banks have flagged the need to measure the ancillary systems settlement activities, considered crucial in the overall daily operability. The challenges to consolidating all information and running the requested calculations require a significant change in the current operational model.
Intervening over the course of the business day on an ad hoc basis in order to mitigate potential liquidity and counterparty risk is costly and inefficient. With the introduction of appropriate monitoring tools, banks should be able to switch from analysing data primarily on an intraday or an end-of-day basis, to analysing and foreseeing activities on a short- to medium timeframe. The research involved 14 Italian financial institutions representing the major share of cash handled by the Italian banking system, which in successfully joined the first TARGET2-Securities T2S migration wave.
These included the expected changes to liquidity management, such as intraday liquidity monitoring and the operational model in the light of the new securities settlement platform T2S. The results showed Italian banks are investing considerably in order to efficiently manage their liquidity on an intraday basis, and their operational model is moving rapidly towards a centralised and integrated management of liquidity and collateral. The research highlighted ongoing qualitative analysis, which led Italian treasuries to have full visibility over their payment flows and collection of data with minimum manual intervention.
A significant action point required from an operational and strategic perspective is the ability to produce accurate stress testing to mitigate potentially incurring operational, liquidity and counterpart credit risks. TAS Group designed the Aquarius platform to collect and aggregate data according to, but not limited to, BCBS standards and allowing the user to implement in-house reporting.
Aquarius provides an analytical infrastructure delivering the required level of visibility, near real-time calculation process and access to historical data; breaking down into the full set of details necessary to define the simulations of stress test scenarios, monitoring actively per single entity, subsidiary and customers. The versatile and highly flexible configurations allow the user to flag and store sensitive information by counterpart or payment type, while setting alerts and reports for customers.
Central bank payments are fully compliant with market standards whilst the complexity of calculating the intraday liquidity usage near real-time is mainly related to nostro accounts. As a result, calculation of the daily maximum intraday usage is based on a single, and not fully reliable, timestamp — usually the statement receipt time.
Concerning the liquidity sources at the start of a business day, clients offered different perceptions of the data required by the regulator. In a scenario where the bank operates across multiple jurisdictions and currencies, Aquarius facilitates the configuration of individual reports per currency, single LVPS, correspondent bank and individual customer bank, allowing the user to closely monitor each counterpart exposure.
Data used to measure the LCR buffer could be inconsistent with calculation of the available liquidity at the start of each business day. The collateral needed to support normal intraday liquidity flows and the collateral calculated to mitigate financial stress situations are subject to different ratings or haircuts. The only intersection is the production of stress testing scenarios, which can be run in parallel with the LCR ones — as undertaken earlier by the dedicated staff of each bank.
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