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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: