Financial institutions manage intraday liquidity to ensure they have adequate reserves to meet obligations as they settle throughout the day, as well as manage intraday exposures which result from trading and settlement activities. Traditional intraday liquidity management practices are resource-intensive and costly for banks, as they rely on overnight repo, collateral buffers, and unsecured or secured credit lines which are sub-optimal for managing intraday exposures.
However, the intraday liquidity management landscape is evolving - the move towards T+1 settlement, increased regulatory scrutiny, and the need for greater operational agility create a new environment in which a more dynamic and efficient approach to intraday liquidity management is needed. Bank requirements are becoming more specific, where they not only need to have adequate liquidity reserves, but these reserves need to be in certain currencies at certain locations at specific moments in the day. Elisa Poutanen, in discussing these developments, emphasizes that "the traditional models are becoming increasingly inefficient and lead to suboptimal use of capital while heightening costs and operational risks."
Thus, the need for more robust intraday liquidity management is more prevalent than ever as liquidity managers are looking for innovative, flexible solutions. Banks are looking for additional sources of funding and increased control around intraday liquidity while striving to be as cost effective as possible. Streamlining intraday liquidity management can lower operational expenses associated with collateral movements, custodian fees, and regulatory compliance. This is why new intraday liquidity markets are forming using new technologies such as DLT which bring these capabilities to the market.
“Our stress window is an hour or so per day, so we don’t need to manage that with a year’s worth of buffers.”
Client quote from HQLAᵡ recent intraday liquidity thought leadership roundtable
The initial focus for banks in the development of a new intraday liquidity market has been executing intraday repo. Intraday repo is a transaction which opens and closes on the same day, with the opening time and closing time specified by the participants. This allows financial institutions to precisely borrow cash for periods in the day in which they have a liquidity need. For example, if an institution is short EUR in the beginning of the trading day, say from 8am-10am, they could borrow EUR cash for two hours each day to cover that shortfall, rather than transact in the overnight repo market, utilize liquidity buffers, or borrow from credit lines. By borrowing what they need when they need it, banks reduce their costs of managing intraday liquidity. This also allows them to diversify sources of liquidity by providing access to additional cash providers, creating more liquidity in the market and reducing borrowing costs. Overall, intraday repo can help firms better manage liquidity risk by providing access to flexible and responsive funding sources. It can also reduce reliance on static buffers and enable more accurate forecasting of liquidity needs down to the minute.
"Intraday repo presents a promising tool," notes Erica De Rosa, "offering enhanced capital efficiency, reduced operational costs, and improved risk management by transforming liquidity management processes." This translates into meaningful bottom line impact for large institutions, to the tune of EUR tens of millions cost savings per year.
On the cash provider side, it's important to note there are benefits as well, as they can generate incremental revenue by deploying cash intraday. Given there are benefits for both sides of the trade, the development of this market is promising, and we’re seeing positive momentum from both cash borrowers and providers.
Furthermore, a major motivation for banks to source cash via intraday repo is to reduce reliance on unsecured credit lines which receive punitive treatment in liquidity stress-testing models and regulatory ratios. Intraday repo is one way to solve this, but another can be collateralizing unsecured credit lines, making them secured. A blocker to this being done today is lack of collateral mobility, where securities are in one place and cash needs to be in another, creating difficulty in mobilizing collateral against the borrow of cash. But by using DLT, it’s possible to immobilize assets sitting in one location and use them against a borrow of cash in another. This allows for the transformation of unsecured credit lines into secured, which alleviates a major pain point of many banks.
Whilst the benefits of intraday repo are appealing, there are few challenges that need to be addressed to ensure those benefits can be materialised. That’s why we’re hosting roundtable discussions and working groups to ensure market participants can voice their views, requirements, and preferences as we work to deliver technology which can facilitate the development of the intraday markets.
One common requirement we’re hearing from cash borrowers is to receive a term commitment from lenders to provide intraday liquidity over extended periods of time, i.e. every day from 10am to 2pm, over a 3 month time period. Receiving such term commitments enables cash borrowers to recognize intraday funding as a stable source of funding, especially until these markets are fully developed and liquid with cash from many different providers. It is paramount for regulators and risk managers to recognize intraday repo as a valid source of funding to facilitate long-term market adoption.
Another challenge (and opportunity) is for intraday cash borrowers to mobilize “hard-to fund” collateral, which would otherwise sit idle and remain trapped as unencumbered assets. Standardizing rules and procedures concerning collateral eligibility and pricing mechanisms is vital, as well as finding common settlement times across market participants. There are also new operational requirements which financial institutions need to integrate, including the use of a timestamp throughout the trade lifecycle. For technology providers, it’s important to ensure there is interoperability across platforms to prevent disparate pools of liquidity from forming.
As emphasized by Erica De Rosa, “Collaboration across market participants, regulators, and technology providers is key to ensure these markets are built for purpose and meet the requirements of all stakeholders.”
Furthermore, Elisa Poutanen highlights that collaboration across the industry is crucial for refining these emerging practices. "At HQLAᵡ, we are committed to delivering innovative intraday liquidity solutions by enabling our clients to interoperate seamlessly between our collateral ledger and multiple cash ledgers (including DLT-based cash ledgers and legacy cash rails), and we will continue to evolve our suite of intraday repo solutions based on market demand."
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