LM-7 LM-7 Intraday Liquidity Risk Management
LM-7.1 LM-7.1 Overview
LM-7.1.1
Intraday liquidity risk management is an important component of a bank's broader liquidity risk management strategy. Banks must actively manage their intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions, and, as such, contribute to the smooth functioning of payment and settlement systems.
August 2018LM-7.1.2
Aside from direct participation in payment and settlement systems, banks may incur intraday liquidity risk through their provision of correspondent and custodian banking services. Where a bank relies on other correspondent or custodian banks to conduct payment and settlement activities, operational or financial disruptions at those banks will also affect the bank's own liquidity position and should have alternate arrangements in place to ensure it is able to meet its obligations.
August 2018LM-7.1.3
A primary objective in intraday liquidity risk management is for banks to identify, prioritise and meet time-specific and other critical obligations when they become due, and to settle other, less critical obligations as soon as possible. In satisfying this objective, banks must be aware of, and be able to address, various challenges associated with intraday liquidity risk management.
August 2018LM-7.1.4
A key challenge in intraday liquidity risk management lies in the uncertainty in both the amount and timing of a bank's gross cash inflows and outflows during the day, in part because such cash flows may reflect the activities of its customers or counterparties which are beyond the bank's control, especially where the bank provides correspondent or custodian services. Moreover, the timing of the cash flows may be dictated by the rules governing payment and settlement systems (e.g. payment obligations may be due by specific times during the day). Because a bank's daily gross cash outflows can often far exceed the bank's gross cash inflows at different points of time during a day, or its net overnight balances even under normal circumstances, differences in the timing of its inflows and outflows could result in significant intraday liquidity shortfalls. These shortfalls may necessitate the bank borrowing funds on an intraday basis, prioritizing its outflows to meet critical payments, or borrowing additional overnight funds (if certain expected cash inflows are not received before the end of the working day).
August 2018LM-7.2 LM-7.2 Risk Management Controls
LM-7.2.1
Banks must have effective policies, procedures, systems and controls for managing their intraday liquidity risks in all of the financial markets and currencies in which they have significant payment and settlement activities. Such systems and controls must, among other things, ensure a bank's capacity, to:
(a) Measure expected daily gross cash inflows and outflows, anticipate the intraday timing of these cash flows where possible, and, as such, forecast the range of potential net funding shortfalls at different time points during the day;(b) Monitor intraday liquidity positions against expected activities and available resources (including liquidity balances, remaining intraday credit capacity, and available collateral) and prioritise payments, if necessary; and(c) Manage intraday liquidity positions so that there is always sufficient intraday funding to meet the bank's intraday liquidity needs.(d) Manage and mobilise collateral as necessary to obtain intraday funds. A bank must have sufficient collateral available to acquire the level of intraday liquidity needed to meet its intraday objectives.(e) Manage the timing of its liquidity outflows in line with its intraday objectives. A bank must have the ability to manage the payment outflows of key customers and, if customers are provided with intraday credit that credit procedures must be capable of supporting timely decisions.(f) Manage unexpected disruptions to its intraday liquidity flows. A bank's stress testing and contingency funding plans must reflect intraday considerations. A bank also must understand the level and timing of liquidity needs that may arise as a result of the failure-to settle procedures of payment and settlement systems in which it is a direct participant. Robust operational risk management and business continuity arrangements are also critical to the effectiveness of a bank's intraday liquidity management.August 2018LM-7.2.2
Intraday liquidity risk management demands cooperation between the front and back offices, as it typically requires close monitoring of expected payments and direct contacts with customers, where necessary, to quickly verify the reasons for delayed payments. A clear assignment of tasks and responsibilities to personnel involved is, therefore, important, particularly as time-critical decisions need to be made, for instance, to meet the settlement cut-off times.
August 2018LM-7.2.3
The tools and resources applied by a bank in managing intraday liquidity risks must be tailored to the bank's business model and role in the financial system. This relates to, for example, whether the bank participates in a payment or settlement system directly or through correspondent or custodian banks, and whether it provides correspondent or custodian services and intraday credit facilities to other banks, firms or systems. If a bank relies heavily on secured funding markets, the bank must have adequate systems and procedures in place to monitor positions in securities settlement systems.
August 2018
