Global Liquidity Management in the Future
Nynke Doornbos
De Nederlandsche Bank
4th Conference on
Payments and
Securities Settlement
Systems
Ohrid, Republic of Macedonia, 21 June 2011
Appetizer
The financial crisis was/is
a liquidity crisis
and the world becomes smaller
Today’s presentation: do we need new infrastructures
or new central bank arrangements given current trends
in international liquidity / collateral?
2
Appetizer
Basis: internal research and
discussions with banks
• Dutch liquidity seminar
• European liquidity seminar
(hosted by RBS) – 20 banks
Work in progress, not
necessarily a DNB opinion!
3
Outline of this presentation
1. Introduction
2. Trends in international liquidity and collateral (+
banks’ observations on these trends)
3. Existing cross-border arrangements for transfer of
cash and collateral (+ banks’ view on them)
4. Ideas for new infrastructural solutions
4
I Introduction
Overview of liquidity problems
This presentation is about liquidity mismatches:
1. a currency mismatch (bank is sufficiently liquid in one
currency, but not in another)
2. a collateral location mismatch (enough securities
collateral but issued/located in the “wrong” country)
Solutions are usually easy in normal circumstances: your
network of correspondents and custodians can help
Your
bank
5
I Introduction
Liquidity mismatches
But what if “the shit hits the fan”?
6
I Introduction
Liquidity mismatches
Then Central banks / infrastructures can help !
Your
bank
1. Accept foreign cash as collateral to address a
currency mismatch
2. Accept foreign securities as collateral to deal with a
collateral location mismatch
7
II Trends in international liquidity
Overview
1. The money market has changed fundamentally
after the default of Lehman Brothers
2. Bad collateral drives out good collateral – at the
central bank!
3. The Basle Committee on Banking Supervision
(BCBS) has proposed new liquidity standards
4. Financial market infrastructures (FMIs) performed
well during the crisis. Hence, authorities like FMIs
to play a greater role, e.g. CCP-clearing of OTC
derivatives
8
II Trends in international liquidity
The money market
1. After Lehman Brothers’ default the unsecured
market collapsed. Since then it has only partially
recovered
2. The secured market has filled part of this gap….
3. … but the secured market also shows signs of
stress
4. Central bank intermediation was/is necessary
5. …. but leads to “crowding-out” of private
intermediation
6. The recent sovereign crisis aggravated some
problems
9
II Trends in international liquidity
Bad collateral drives out good collateral
Source: ECB Annual report 2009
I Eligible collateral
II Used collateral
10
Source:
ECB annual report
II Trends in international liquidity
New liquidity standards
1. The proposed liquidity coverage ratio (LCR)
Stock of highly liquid assets
1
Expected net cash outflows
2. The proposed net stable funding ratio (NSFR):
Uses with maturity > 1 year should be funded by
means expected to be available for a period > 1
year
11
II Trends in international liquidity
Infrastructural change
1. Despite high volumes during the crisis, FMIs have
performed very well. Two FMIs even played a
stabilizing role: CLS and CCPs. Hence, authorities
propagate the use of FMIs if private arrangements
have weaknesses
2. Recent initiatives in US and Europe to promote CCPclearing of OTC derivatives
3. Further development of Eurosystem infrastructure
(CCBM2, T2S)
12
II Trends in international liquidity
Banks’ observations
•
•
•
•
•
•
Banks recognised above-mentioned trends
No return of the “good old days” on the money
market return with an active unsecured market
More collateral needed for secured lending,
especially when central banks exit
Range of high-quality collateral has narrowed
Liquidity standards may make collateral scarce (+
possibly fierce competition from non banks)
Banks indicate they may need more collateral for
OTC derivatives and loss-sharing arrangements
13
III Cross-border arrangements
Theoretical overview – cash transfer
1. Foreign exchange swaps between central banks
2. Acceptance of foreign cash as collateral
14
III Cross-border arrangements
Foreign exchange swaps
Home central
bank (HCB)
Foreign central
bank (FCB)
Inter-central bank swap
Domestic
counterparty
Foreign
Branch or
Corresponden
t
Domestic counterparty is short of foreign currency cash. In this
case the HCB delivers the foreign currency to the counterparty on
the basis of domestic collateral (securities or cash). The HCB
obtains the foreign currency via a swap with the FCB.
15
III Cross-border arrangements
Foreign cash as collateral
Home central
bank (HCB)
Foreign central
bank (FCB)
FCB gets credit at HCB
Domestic
counterparty
Foreign branch
of Domestic
counterparty
Domestic counterparty is short of foreign currency cash. In this
case the FCB delivers the foreign currency to the counterparty.
The FCB receives home currency cash as collateral (on an
account with the HCB).
16
III Cross-border arrangements
Theoretical overview – foreign securities transfer
1.
2.
3.
4.
5.
Correspondent central banking model (CCBM)
Guarantee model (resembles CCBM)
Links between securities settlement systems (SSS)
Remote access to securities settlement system
Collateral management system (CMS) - collateral
pooling by central banks or Tri-Party services by SSS
or CSD
17
III Cross-border arrangements
Correspondent central banking model (CCBM)
Home country
Foreign country
Information on
collateral
Foreign central bank
Home central bank
Information
on collateral
Domestic
credit
Collateral
Domestic
counterparty
Custodian
Transfer
instruction
18
Foreign
CSD
III Cross-border arrangements
Guarantee model
Home country
Foreign country
Inter centralbank guarantee
Home central bank
Information
Information
on collateral
guarantee
on
Information on
collateral
Domestic
credit
Collateral
Domestic
counterparty
Custodian
Transfer
instruction
19
Foreign central bank
Foreign
CSD
III Cross-border arrangements
Links between SSS/CSDs
Home country
Home central bank
Domestic
credit
Domestic
counterparty
20
Foreign country
Information
on collateral
Domestic
CSD
Transfer
instruction
Foreign
CSD
Domestic CSD
Account with
Foreign CSD
III Cross-border arrangements
Remote access to SSS/CSD
Home country
Home central bank
Domestic
credit
Domestic
counterparty
21
Foreign country
Information on collateral
Information on
collateral
Foreign
CSD
Transfer instruction
III Cross-border arrangements
Collateral management system
Home country
Home central bank
Domestic
credit
Domestic
counterparty
Foreign country
Information on collateral
Collateral
Management
System (in any
country)
Transfer instruction
22
Foreign
CSD
III Cross-border arrangements
Current practice
Within the Eurosystem
• CCBM, to be further developed into CCBM2
• Links between SSS (+/- 20% of X-border transactions)
• Tri-Party CMS by Euroclear Bank, Clearstream
Banking Frankfurt and Clearstream Banking
Luxembourg – NCBs limited access until CCBM2
Eurosystem vis a vis other currency areas
• SWAP agreements of Eurosystem with a.o. Fed, SNB
• Emergency liquidity arrangements of DNB with HKMA
and MAS; similar arrangements by other NCBs
Note: Cross-currency-area arrangements are for
emergency purposes only and based on cash
23
III Cross-border arrangements
Banks' observations
1. Settlement times should be reduced, also within Europe
2. Tri-Party collateral services by CSDs or SSS are also
found attractive, especially if CBs are connected
3. DNB-type liquidity arrangements are valuable
4. Banks prefer a global single list of eligible collateral and
more harmonised operational/legal procedures
5. For European banks CCBM2 is an important step BUT a
global collateral pool, to which the major CBs worldwide
are linked, would be a big leap forwards
Now let us look at these 5 ideas
24
IV Improving cross-border arrangements
1. Reduction of settlement times
Is that possible?
25
IV Improving cross-border arrangements
2. Tri-Party collateral services
•
Existing Tri-Party systems (XEMAC/GC Pooling - CBF,
CMAX - CBL and Tri-party services – Euroclear Bank)
work well
•
Currently only domestic banks can use the collateral
at their central bank
•
CCBM2 will provide a solution for cross-border use
26
IV Ideas for new infrastructural solutions
3. Emergency liquidity arrangements
Emergency liquidity arrangements are politically sensitive
BECAUSE
Prompt emergency liquidity assistance is vital but which
authority lends the global bank a helping hand?
Also: moral hazard issues and possible monetary policy
implications
27
IV Improving cross-border arrangements
4. A single global list of eligible collateral
Foreign collateral exposes a central bank to risks: (1)
exchange rate risk, (2) operational risk and (3) legal risk
How to deal with these risks ? A “global” CCBM seems
unrealistic
Foreign cash is usually considered less risky than
foreign securities and is easier to transfer
28
IV Ideas for new infrastructural solutions
5. A global cash pool
Rationale for a global cash pool
• Systems interdependencies are high and
problems travel fast
• Hence, it is essential to have collateral and liquidity
available at all times and banks should be able to
settle promptly
• Different time zones make this difficult for an
internationally active bank
• The interbank cross-currency market works well in
normal times but these markets disappeared during
the last crisis
29
IV Ideas for new infrastructural solutions
5. A global cash pool
Intraday Liquidity Market
USD
Settlement
BOE
Settlement
EUR
Settlement
JPY
Settlement
Collateral
Central
bank
Collateral
Central
bank
Collateral
Central
bank
Collateral
Central
bank
Securities
CSD
Securities
CSD
Securities
CSD
Securities
CSD
SIBOS – A gobal Cash & collateral pool
IV Ideas for new infrastructural solutions
5. A global cash pool
Intraday Liquidity Market
USD
Settlement
BOE
Settlement
EUR
Settlement
JPY
Settlement
Central Cash Pool
Central bank
Securities
CSD
SIBOS – A gobal Cash & collateral pool
Securities
CSD
Securities
CSD
Securities
CSD
IV Ideas for new infrastructural solutions
5. A global cash pool
FEDwire
CHAPS
BOJ-NET
T2
215
Central Cash Pool Central bank
50
100
5
60
Local Collateral
Local Collateral
Local Collateral
Local Collateral
FED
BOE
ECB
BOJ
SIBOS – A gobal Cash & collateral pool
IV Ideas for new infrastructural solutions
5. A global cash pool
FEDwire
CHAPS
BOJ-NET
T2
40
215
175
Central Cash Pool Central bank
50
100
5
60
Local Collateral
Local Collateral
Local Collateral
Local Collateral
FED
BOE
ECB
BOJ
SIBOS – A gobal Cash & collateral pool
IV Ideas for new infrastructural solutions
5. A global cash pool
FEDwire
CHAPS
BOJ-NET
T2
40
175
Central Cash Pool Central bank
50
100
5
60
Local Collateral
Local Collateral
Local Collateral
Local Collateral
FED
BOE
ECB
BOJ
SIBOS – A gobal Cash & collateral pool
IV Ideas for new infrastructural solutions
5. A global cash pool
FEDwire
CHAPS
T2
BOJ-NET
80
60
40
35
Central Cash Pool Central bank
50
100
5
60
Local Collateral
Local Collateral
Local Collateral
Local Collateral
FED
BOE
ECB
BOJ
SIBOS – A gobal Cash & collateral pool
IV Ideas for new infrastructural solutions
5. A global cash pool
FEDwire
CHAPS
T2
80
60
BOJ-NET
35 40
75
Central Cash Pool Central bank
50
100
5
60
Local Collateral
Local Collateral
Local Collateral
Local Collateral
FED
BOE
ECB
BOJ
SIBOS – A gobal Cash & collateral pool
IV Ideas for new infrastructural solutions
5. A global cash pool
FEDwire
CHAPS
T2
40
80
60
35
BOJ-NET
175
Central Cash Pool Central bank
50
100
5
60
Local Collateral
Local Collateral
Local Collateral
Local Collateral
FED
BOE
ECB
BOJ
SIBOS – A gobal Cash & collateral pool
IV Ideas for new infrastructural solutions
5. A global cash pool
CLS
CLS
CLS
CHAPS
FEDwire
CLS
T2
CLS
CLS
BOJ-NET
215
Central Cash Pool Central bank
50
100
5
60
Local Collateral
Local Collateral
Local Collateral
Local Collateral
FED
BOE
ECB
BOJ
SIBOS – A gobal Cash & collateral pool