FinTechBlockchainEnterprise blockchain technology: the future of intraday liquidity management?

Enterprise blockchain technology: the future of intraday liquidity management?

Intraday liquidity management continues to be a top priority for many bank treasurers and operations functions. As institutions increasingly seek out the tools to enable more robust measuring and monitoring capabilities, could a blockchain-enabled intraday market hold the key to more efficient and effective liquidity management?

Intraday liquidity is regularly ranked within the top three concerns for bank treasurers. This specific type of liquidity is critical to enable cash and securities to be accessed during a business day, helping banks to meet their payment and settlement obligations.

Despite this, compared with end of day liquidity management, intraday management continues to be a struggle due to data issues and budget and talent constraints that can impair the important collaboration with operations, risk and IT functions.

To fully understand the potential for blockchain in this space, it is first important to consider the structural changes taking place in global financial markets that continue to have an impact on the demand for and supply of intraday liquidity.

First, in the macroeconomic environment, low and slowly rising interest rates globally, coupled with liquidity and capital regulation, have led banks to hold excess cash and collateral at central banks. Typical investment avenues, such as short-term placements and highly liquid securities, have continued low yields that make them less attractive investment options in the current market.

As central banks look to normalize monetary policies with gradual increases in interest rates, banks are reviewing the opportunity costs of holding excess liquidity. Additionally, recent volatility in emerging markets such as Argentina and Turkey, combined with historic stock market highs, increase the possibility of a risk adjustment.

Second, banks’ underlying legacy infrastructure is under pressure while clients, especially indirect clearers, are striving for greater transparency and control over their intraday net cash usage patterns. These institutions are typically at the mercy of their agent banks to manage all their intraday payments and receipts to clients, custodians, central counterparty clearing and financial market utilities.

These new, evolving and potentially opposing market trends continue to put pressure on bank treasurers to explore the efficacy of the funding model for intraday liquidity. The unique attributes of blockchain technology can help the intraday management industry update and align itself with these trends by creating a real-time updating digital ledger that records data changes to support instantaneous payment and settlement.

Finteum, one of R3’s entrepreneurs in residence, aims to support treasurers in this environment by offering an additional source of intraday liquidity funding with the creation of a transparent financial market for intraday borrowing using blockchain technology.

Intraday borrowing on the blockchain

Leveraging blockchain technology as an enabling technology to create a borrower and lender market would enable a more efficient marketplace by allowing faster, more fluid, and exact matching of excesses and deficits.

Consider this scenario – a bank trader agrees an overnight interbank unsecured money market transaction for same-day value. Currently, unless the operations departments of the two banks separately coordinate on a specific settlement agreement, the receiving bank often has very little transparency on what time today those funds will arrive.

Furthermore, the settlement might fail due to incorrect trade details entered on one side of the transaction which could take hours to reconcile and amend. Sometimes, the trade could even settle the following day, and a borrowing bank could still need to pay the interest, even without receiving the funds on the day the bank requested.

Anticipating incoming payments requires substantial guesswork, and significant resources are currently devoted towards anticipating the timing of incoming payments.  These difficulties make intraday liquidity managers’ jobs today extremely difficult when considering their many different counterparties.

Having a shared record between counterparties on a blockchain network could allow counterparty nodes to increase payment timing certainty between each other. From the moment trade details are entered by the two counterparties, they can be agreed so that both have a shared data record of the trade details.

Counterparties could then more easily check transaction status with fewer manual confirms, as each counterparty would be certain that their node reflects the same information as a counterparty’s node.  We expect there to be, firstly, benefits from improved clearing on-ledger, followed by further improvements with settlement of value directly on ledger between nodes as digital fiat currency initiatives continue to mature.

Increased payment certainly could reduce the excess intraday liquidity held as a “safety buffer” – a bank may be more able to instead earn an additional return by instead lending that currency for a few hours. On the other side, a borrowing bank could reduce the maximum net debit for the day by borrowing more efficiently, due to increased liquidity mobility afforded by a blockchain network relative to existing market infrastructures.

Blockchain technology can also help reduce the burden of regulatory reporting demands. Enterprise platforms such as R3’s blockchain platform Corda enable certain nodes to be “read-only”, which, for example, could allow regulators to access certain details from all transactions, such as the value and interest rate.

Challenges ahead

There is clear potential for the application of blockchain technology to revolutionise intraday liquidity management, but it is also important to recognise the challenges which could slow its widespread adoption for certain use cases.

Decentralization has many layers.  There needs to be careful thought given to the degree of decentralisation employed across governance and operation of the network.  There must be a pragmatic balance for the industry; avoiding the historic problems introduced by disparate and siloed centralized market infrastructures, while ensuring each entity on a decentralized network has sufficient decision-making power, autonomy and accountability.

Leveraging R3’s Corda platform and working with a group of major banks, Finteum has already progressed towards developing potential market structures and options that will deliver solutions to these challenges.


About the authors

Kevin Rutter is research lead at R3; Brian Nolan is CEO of Finteum; and Cindra Maharaj is director of capital markets at Baringa.

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