High volatility means firms can be surprised by margin calls and intraday liquidity issues when the market changes fast. Tucker Dona, head of Business Development and Customer Success for Baton Systems, discusses how real-time visibility and increased automation can improve the accuracy and effectiveness of both collateral and wholesale payment management in general.
Financial resource managers, including collateral and liquidity managers, face a number of volatility stressors today, many of which are unpredictable. No one discussed the yen carry trade until it caused dramatic market volatility in early August. At the same time, there continues to be the possibility of geopolitical unrest. The ongoing wars in Ukraine and the Middle East could see flashpoints at any point in time, and upcoming elections, especially in the US, could create a lot of volatility.
In terms of regulation, there has been much focus on T + 1, which went live on May 28, 2024. This shortened settlement cycle may well impact liquidity with knock on effects on collateral management.
Collateral managers are also focused on the rise of the FMX Futures Exchange, which has received backing from several investment banks and could potentially rival the Chicago Mercantile Exchange (CME). FMX will bring cross-margining between LCH swaps (a huge margin portfolio) and FMX-cleared futures. Challenging the incumbent futures exchange has always been difficult, but if liquidity starts to build on FMX, there is potential for large margin savings with LCH swaps portfolios. The fact that some of the major liquidity providers are investing in FMX shows they may be angling to solve that liquidity problem.
The need for real-time processing
Given all these drivers, collateral management and liquidity operations need to be more real-time—especially when it comes to understanding and mobilising the actual inventory of unencumbered assets and resources that could be utilised. Let me explain. Firms may have a real-time view of certain products, counterparties, or asset classes, but the inability to see across the board when it comes to the status of payment receipts, credit lines and other liquidity-related activities in real-time is a challenge for many firms.
A bank that can perform real-time reconciliation of inbound and outbound movements of assets can use this to generate the real-time information needed, about current balances, for example, to make more effective and informed liquidity, risk and collateral management decisions. Next, consider a firm that can use this data to automatically adjust the timing or sequencing of its payments – this firm is going to be in a better position than one that releases all its outgoing payments regardless of the financial health of the counterparty or current balances. There are currently very few market participants that have this level of real-time visibility of asset movements and balances or the controls needed for this level of automated and contingent payment sequencing.
In periods of stress, firms are attempting to get a real-time sense of their settlement and collateral exposures, but they are often doing this manually, which takes a lot of manpower, time and effort. The ability to automate the aggregation of real-time balances, exposures, obligations and available resources would take a lot of pressure off the desks that are optimising the use of liquidity, as well as the settlements and collateral teams. It would also reduce the potential for human error and operational risk inherent in manual processes.
Real-time processing will also be important for firms hoping to make margin savings using FMX. Say a firm trades out of an interest rate swap that was providing a significant offset, the next day they lose the offset and have a large margin call. Knowing what is happening in real-time would be very helpful in proactively managing and controlling margin.
Specifications for a real-time payments solution
Ideally, all key information would be centralised, with appropriate dashboards for specific users – configured to provide the specific requirements of different teams. Those who are responsible for the overall management of financial resources require a view that incorporates all of the relevant sources and uses of high-quality liquidity assets (HQLAs), for example. A team managing settlements would need a more granular dashboard than the person who manages the team doing the work. But the visibility of what is happening at any point in time is very important – Real-time is the keyword.
Systems need to be able to ingest data as quickly as possible to manage both inbound and outbound payments, that means real-time reconciliation and tagging back to expected incoming payments. This allows firms to automate conditional payments, with a list of counterparties or products where they will not pay out until the inbound payment has been received – providing an increased level of control.
With real-time automation, firms could more easily manage to predefined limits on their deficit balances. They would pay out to that deficit balance, then put a freeze on all non-essential payments until more incoming payments have been received. With automation firms could much more easily manage this, including across currencies. Doing it manually is extremely personnel intensive, often with long delays and errors.
“Collateral payments are often in the form of securities as well as cash, and it is equally important to be able to tag an incoming security back to the client and understand the balance with a counterparty in real time. Fundamentally it is the same problem as a settlement process.”
We recently launched a set of intraday liquidity management tools designed to enable banks to achieve this level of real-time visibility and control across all available sources of liquidity so they can optimise liquidity use and increase financial resilience.
The similarities between payments and collateral management
Collateral payments are often in the form of securities as well as cash, and it is equally important to be able to tag an incoming security back to the client and understand the balance with a counterparty in real time. Fundamentally, it is the same problem as a settlement process.
However, margin requirements and swings are going to be much greater during periods of volatility. Firms need to understand who has paid them and know what their collateralised exposure is to a counterparty.
As with payments, a real-time collateral management system provides firms with more efficiency and agility and enables them to expedite the movement of cash and securities more cost-effectively.
To find out more about Baton’s new intraday liquidity capabilities, please go here: https://batonsystems.com/real-time-intraday-liquidity-management/
