Harnessing the power of data to optimise intraday liquidity management

Aaron Ayusa, director of client success at Baton Systems, explains the benefit of using data derived from real-time reconciliations to optimise intraday liquidity management

When it comes to bank liquidity management, a lack of reliable real-time data has always prohibited informed decision-making. Without this data, it is almost impossible to optimise on an intraday basis. Once available, this data can also be used to confidently predict when specific counterparties will meet payment obligations based on historical patterns of activity. This creates a pathway to plan liquidity and funding throughout the day, improving control and reducing costs.

Banks’ approaches to intraday liquidity management have traditionally been reactive, owing to a shortage of real-time information. Without the visibility this information can provide, firms typically look at all of their projected payments for a given value date (VD) for each currency, and fund around 20% of that value for each currency, at a specified time within a day.

Often, however, liquidity managers, whose responsibility it is to ensure all currencies are funded, are unaware of potential funding problems until they become apparent – typically, close to cutoff. Options at this point are limited. Making a trade with an agent bank using credit lines or overdrawing a nostro account are costly solutions, further exacerbated by today’s high interest rates and the funding shortages that are all too frequent with a number of currencies.

Not only does poor liquidity management give rise to reputational risk as the possibility of defaulting on obligations becomes greater, but there can be repercussions from regulators and central banks – for example, for holding too much or too little of a given currency. Forced liquidation may occur, while regulators impose fines on firms that allow accounts in certain currencies to become overdrawn.

It is therefore becoming increasingly important for banks to have technologies or solutions in place to better manage intraday liquidity needs: they are looking for real-time balance visibility and the ability to identify peaks and troughs, to avoid inadvertent overdrafts and to mitigate excess balances.
 

Real-time reconciliation is key

Crucial to informed decision-making on intraday liquidity management is real-time reconciliation.

For many years, the market convention has dictated that reconciliations are undertaken on a VD+1 basis. This is largely due to the inconsistencies of the messages used for payments and the sheer volume going through the various accounts being used. The earliest most banks can be certain a counterparty has met its payment obligation is the start of VD+1. However, It can sometimes be days, or even weeks, before the bank is aware a payment has failed.

Real-time reconciliation, however, means that account, payment and relationship statuses are updated throughout the day, leading to more meaningful decision-making processes and more efficient funding decisions.

 

The role of data in forward planning for intraday liquidity

By consuming Swift messages in real time and using a combination of simple matching, artificial intelligence and machine learning to match them against banks’ obligations and exposures over a period of several months, it is possible to build profiles and develop insights into counterparty behaviour. This includes the timing in which they are likely to settle obligations for specific products and/or currencies.

Although some banks have begun to create models based on historical information around inbound receipts of payments, without reconciling this data back to the counterparty, agent bank and product, this information is nothing more than a simple average. The characteristics of obligations change from day to day – think of dimensions such as counterparty, notionals, agent banks, and so on – such that each day may differ markedly from a generic long-term average. However, with the benefit of detailed historical analytics derived from the real-time reconciliation process, banks can predict when counterparties will meet payment obligations and what the balances will be at any given point during the day.

These predictions can be used in the creation of ‘settlement cycles’ throughout the day, giving banks the capability to account for inbound payments when deciding whether or not funding is required at any given point, thus avoiding tying up funds for longer than necessary.
 

Smart data supports smart workflows in real time

The value of reliable real-time data in the process of liquidity management should not be underestimated. Baton’s real-time reconciliation capabilities – a pillar of Baton’s Core-Payments and Core-Liquidity solutions – coupled with smart workflows, allow this data to be used effectively by liquidity managers, who can match up the inbound and the outbound flows optimally, and schedule efficient payment runs.

The availability of workflows via Core-Payments allows users to layer in their own configurable rules and alerts and to check, hold or release payments according to these rules. Payments can therefore be sequenced independently in response to events over the course of the day, as well as to the appetite of the individual firm for credit risk and its funding ability. Connectivity can also be built with a firm’s customers so users can collaborate to sequence real-time or instant settlement processes at predetermined times, reinforcing predictability and helping liquidity managers plan more efficiently.
 

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