Intraday liquidity rtgs system
Committees at the Bank for International Real-Time Gross Settlement Systems. Real-Time Gross Settlement Syst Overview of RTGS systems. Components, measures intraday liquidity rtgs system management of l The design of RTGS systems: Real-Time Gross Settlement Systems: It first describes each of four possible components of liquidity available to participants in RTGS systems and then considers the different measures of liquidity that can be constructed from these components.
It then discusses the management of liquidity from, respectively, an individual bank's point of view and the system's point of view. Finally, it looks at how structural factors can affect liquidity and its management. Balances maintained at the central bank can be a basic source of liquidity for the purpose of making funds transfers during the day.
Starting intraday liquidity rtgs system may be generated by reserve requirements that are usually imposed for monetary policy reasons. The importance of required balances may, however, vary between countries, depending on the nature of the reserve maintenance regime e. Incoming transfers can also be an important source of intraday liquidity. The importance of incoming transfers depends on the patterns and predictability of payment inflows and outflows.
If, for instance, payment flows tend to result in a specific pattern for a particular bank such as net payment outflows or if the intraday timing of incoming and outgoing transfers tends to be asymmetrical, incoming transfers may be less reliable as a funding source for outgoing transfers. Furthermore, the usefulness of incoming transfers may also be affected by the availability of information on them; the more information that is available in real time, the more effectively banks may be able to use incoming transfers in their liquidity management.
Intraday liquidity may be provided by the central bank through credit extensions. As already noted, Fedwire charges a fee for the use of the uncollateralised intraday overdraft facility that it provides up to a limit based on a bank's creditworthiness and capital. Central banks may also intraday liquidity rtgs system some kind of overnight central bank liquidity facility that RTGS participants may access under certain conditions.
However, overnight credit extensions from the central bank e. Banks in an RTGS system may also be able to obtain funds by borrowing intraday liquidity rtgs system other banks through the interbank money markets. Money market credit extensions such as overnight and term loans may allow banks to fund intraday payment flows, depending on the time of day that market conventions set out for loans to be arranged, made available and repaid.
For example, if banks can borrow from overnight interbank markets throughout the operating hours of the RTGS system, the loan proceeds could be available to fund transfers intraday i. While credit extensions from the central bank can be regarded as external liquidity support that injects additional liquidity into the system, money markets can only serve to redistribute funds already within the system, although that may nevertheless make an important contribution to reducing the reliance on banks' reserve intraday liquidity rtgs system and central bank credit extensions.
Intraday money markets could also act as a private sector liquidity source in the RTGS environment. In such markets banks would lend reserve balances on an intraday basis provided that the intraday timing of loans being arranged and repaid could be assured and the transaction costs of such arrangements were not prohibitive.
If such a market existed, banks could operate with lower balances because of the ability to redistribute balances across banks during the day. From a bank's perspective, intraday liquidity may be taken to be the bank's ability to settle a given value and number of transfers within a given time constraint.
As already noted, a bank's actual balance intraday liquidity rtgs system the central bank at a given point in time during the day is determined by the starting balance as well as any payment or monetary activities and credit extensions that have intraday liquidity rtgs system place by that time. This actual balance, however, may not necessarily represent the liquidity immediately available for the bank to initiate new outgoing transfers at that time, because some or all of the transfers that it has already initiated may be queued within its internal system or in the centrally located queue.
A bank's net intraday liquidity, which may correspond more closely to its ability to settle its outgoing transfers at a given point in time, could be defined as the actual balance minus the value of all pending transfers. Alternatively, a bank's net intraday liquidity could be defined on the basis of the sum of actual and potential cash flows. Such a intraday liquidity rtgs system has been adopted in some RTGS systems as a measure of available liquidity, although in some other cases it has been felt that incorporating potential cash flows may be too difficult.
Potential cash flows refer to intraday liquidity rtgs system funds which a bank could mobilise or use for cover. For example, a bank might include queued incoming intraday liquidity rtgs system as a source of liquidity that it expects to be available shortly for its own outgoing transfers.
In this case, a bank's net intraday liquidity is defined as the actual balance plus the value of queued incoming transfers minus queued outgoing transfers. As potential sources of liquidity, a bank might also include, for example, unused credit lines or intraday liquidity rtgs system collateral.
If net intraday liquidity is negative, the bank can be viewed as being illiquid in the sense that it is unable to settle some or all of its queued outgoing transfers. However, intraday liquidity rtgs system needs to be taken in interpreting the concept of a intraday liquidity rtgs system illiquidity. The scope for such liquidity management will vary, and intraday liquidity rtgs system will narrow towards the end of the day. In practice, therefore, for illiquidity to have a intraday liquidity rtgs system impact on a bank, it must occur over some "significant" interval of time.
System liquidity and gridlock. From a system perspective, the concept of intraday liquidity could be related to the "amount" of funds that enables the system to process transfers between all or most of banks in a timely manner. However, intraday liquidity rtgs system is more difficult to analyse system liquidity because it is not simply the sum of each bank's net intraday liquidity as defined above.
Whether the system is liquid or not also depends crucially on the distribution or concentration of liquidity among banks in relation to their payment needs. For instance, gridlock could be characterised as a case of system illiquidity in which the failure of some transfers to be executed prevents a substantial number of other transfers from other participating banks intraday liquidity rtgs system being executed.
Of course, gridlocks could occur when the aggregate liquidity is insufficient, but they might occur even if the liquidity in the intraday liquidity rtgs system, taking into account all queued incoming and outgoing transfers, was adequate overall but poorly distributed.
Suppose two systems had the intraday liquidity rtgs system aggregate sum of bank liquidity: Because of this, intraday liquidity rtgs system systems provide banks with ways of breaking gridlock. Another important issue in connection with system liquidity is that there might be negative externalities relating to the use of a bank's liquidity. For instance, a bank may deliberately be slow in processing transfers in order to economise on its own liquidity by relying on the receipt of incoming transfers from others.
Banks therefore have incentives to manage intraday liquidity by attempting to minimise it subject to certain constraints. Constraints on intraday liquidity intraday liquidity rtgs system vary from system to system.
For these purposes, for example, banks may hold precautionary balances to guard against urgent and unexpected transfers. Reserve requirements could also be a constraint, particularly if the requirement has to be met each day. An optimal level of intraday liquidity for an individual bank may be determined by the balance between the costs of obtaining or maintaining liquidity and the costs of delaying settlement.
The opportunity cost associated intraday liquidity rtgs system collateral for obtaining intraday liquidity could be relatively low if banks already hold the relevant types of asset in sufficient quantities, which they might do as part of intraday liquidity rtgs system portfolio strategy or for other reasons.
Given the level of liquidity costs, banks are likely to have intraday liquidity rtgs system incentives to obtain or maintain intraday liquid funds as delaying settlement becomes more costly. Of these possibilities, sequencing transfers is a way of controlling intraday payment flows by scheduling the timing of outgoing transfers according to the supply of liquidity provided by incoming transfers. Importantly, to the extent that incoming and intraday liquidity rtgs system transfers are successfully sequenced, it could generate virtual intraday liquidity rtgs system effects" on RTGS intraday liquidity rtgs system and hence contribute to substantially reducing the necessary liquidity.
The most common way of sequencing is to use queuing arrangements. Regardless of whether it is centralised or decentralised, queuing allows banks to sequence transfers in a systematic way. Another method intraday liquidity rtgs system sequencing transfers may involve message codes indicating the time of day that an individual outgoing transfer should be settled. Even if they attempt to coordinate incoming and outgoing transfers as closely as possible, banks may still face several limitations in minimising intraday liquidity requirements.
Second, individual transfer orders are often very large. Breaking down a particularly large transfer into two or more smaller amounts may facilitate sequencing, and in some RTGS systems this is actually done as a standard means of liquidity management.
Nevertheless, the resulting transfers can still be large, which would make closer sequencing difficult. Third, banks cannot have complete information about the transfers they are due to receive and send on that day, so that they have to sequence transfers more or less on the basis of predictions. For the former purpose, the central bank may typically provide individual banks with credit directly for settlement purposes or indirectly through monetary operations according to its policy.
It is possible that the optimal liquidity management from an individual bank's perspective may not necessarily be best for the system as a whole. As noted earlier, a bank may make a deliberate attempt to delay the processing of transfers to economise on its own liquidity by relying on the expected receipt of liquidity from others. One way is to lay down rules governing banks' outgoing payment flows, such intraday liquidity rtgs system guidelines requiring banks to send a certain proportion of their daily payment messages by specified times.
Such a rule would discourage banks from delaying transfers. However, it may be inappropriate in some cases; for instance, some banks may have atypical intraday patterns of transfers, making it unrealistic for them to observe such a rule.
Or it may be that the rule is incompatible with the pattern of transfers deriving from DVP or future PVP arrangements, where the timing of transfers is critical.
At the least, therefore, some flexibility may be needed in setting and applying such a rule. An alternative method may be to apply a transaction pricing policy that would encourage the early processing input and settlement of transfer orders.
For instance, SIC applies a pricing schedule for sending banks that penalises i. Some proposed systems are also considering the possibility of adopting a pricing policy that would set a higher charge on queued or late transfers i. Charging a penalty fee on the transfers that remain unsettled at the end of the day could be used to complement such a transaction pricing policy.
Central banks or system centres are in many cases concerned with monitoring and managing liquidity in RTGS systems so as to maintain a smooth flow of payments and to detect and prevent possible gridlocks. There are significant differences in central banks' technical approaches to monitoring system liquidity. The indicators intraday liquidity rtgs system be used to observe the queues and intraday liquidity in the system as a whole and also to identify any potential gridlocks which may require further investigation of an individual bank's net liquidity position.
On the other hand, the Bank of France will take a more "micro approach" whereby it will monitor in real time each bank's net intraday liquidity. This reflects its view that monitoring liquidity is mainly the responsibility of participants and intraday liquidity rtgs system there should be no intervention by the central bank or the system in the centrally located FIFO queue.
First, the number of participants may be of significance. Such a system may also have more concentrated, offsetting payment flows between banks and thus incoming transfers would be a relatively more important source of liquidity. Furthermore, it might technically be less complicated for banks to monitor, control and sequence payment flows in a system with relatively fewer participants.
Second, the relative market size in terms of payment activity or asset size of participants may affect liquidity. An RTGS system with a mixture of large, medium and small participants may have a different set of intraday liquidity requirements from a system consisting of participants of broadly equal size.
Larger banks may also find it easier to obtain the necessary liquidity if they have better access to funding and credit intraday liquidity rtgs system or a larger deposit base than smaller banks. Third, participants' areas of specialisation may matter. Typically, net settlement obligations resulting from other settlement systems e. At the same time, since the settlement of foreign exchange transactions accounts for a substantial part of the total value handled by many RTGS systems, intraday liquidity rtgs system or proposed netting arrangements for such transactions e.
Fifth, the structure of central bank accounts may be an important factor influencing RTGS liquidity. Moreover, central bank accounts may be centralised i.
In general, the structure of central bank accounts in a country is determined by a number of different considerations and therefore an optimal account structure will not necessarily depend only on the settlement arrangements for RTGS systems.
This may suggest that a more centralised structure is sometimes a more efficient and straightforward structure for an RTGS environment, in particular in terms of liquidity management.
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