14 September 2012

EBF: TARGET Working Group response to the BCBS consultation on monitoring indicators for intraday liquidity management

The TARGET Working Group (TWG), representing the European payments industry in discussions with the ECB/Eurosystem on issues relating to the TARGET 2 (T2) payment system, replies to this consultation.

Whilst the availability of adequate intraday liquidity is an essential component of the smooth operation of RTGS payment systems, it is also required for any system or arrangement for the transmission of funds. It follows that the management of intraday liquidity is not only subject to multiple variables but these are likely to differ dependent on the business mix of individual firms notwithstanding being underpinned by the same underlying principles. It is also affected by the features of Financial Market Infrastructures (FMI) in which a firm participates, particularly where these involve time critical payments. TWG believes, therefore, that whilst closely linked, there are fundamental differences between the concepts of Liquidity Coverage Ratio (LCR) and intraday liquidity.

As is evident from definitions, LCR is a more stable medium-term measure under the control of the responsible firm, whereas intraday liquidity may not only be potentially far more volatile in nature but is also dependent on the actions of counterparties from whom incoming funds are received. Whilst it is not disputed that quantitative analysis of the type described in the paper has an important part to play, historical data of this nature is likely to be far less relevant in a crisis situation where many of the biggest problems may well occur, hence the need for LCR. Also, TWG believes it is also important to supplement the quantitative approach with a qualitative approach. The relationship between quantitative indicators, knowledge of the business and controls enabling a firm to monitor, manage and influence payment flows and liquidity levels in times of stress are key to assessing and influencing a firm’s liquidity risk situation.

In summary:

• TWG believes that the nature of intraday liquidity management, as described above, means that it needs to be treated differently from LCR
• Specifically, historical quantitative analysis needs to be supplemented by experienced judgement based in part on the business mix of the firm, its internal organisation and operational capabilities.
• Due to different patterns of activity arising from the differences in business between individual firms, TWG is strongly of the opinion that the prime responsibility for managing intraday liquidity should rest with individual firms with supervisors only requiring limited core data unless they have reason to be concerned e.g. a firm is not able to explain clearly how it is managing relevant issues from the Annex 3 checklist.
• It is considered important to develop cooperation and coordination between supervisors and regulators to ensure firms and offices of firms in different countries are treated in like manner and the possibility of regulatory arbitrage is avoided.

Full response

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