Flow: can you really control your payments?

Happy New Year to all of you. The first post this year focuses on matters of controls over payments; the kinds you probably want to have, and those you actually should have.

Last March, your financial institution (FI) might have been challenged to answer the questions: a) are we making any payments to Credit Suisse (CS) and b) can we stop them? My bet is that across all FIs close to 100% said yes to a) and for b) the most common answer was “not easily”. Figure 1 illustrates why. The timing and destination of payments is typically controlled by the “product silos”. Payments are released downstream according to a schedule, for example, at 18:00 CET all payments for value date tomorrow are sent out. So, if in March 2023 you had wanted to hold up payments to CS, in most FIs there would be multiple places to throw a spanner in the works, and in large parts payments for any one day are already in the outside world.

Figure 1: Typical Payment Flow

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I am reliably informed that when Lehman declared bankruptcy, the only way the IT team could stop payment instructions going out via SWIFT was to pull the power plug out of the wall. Lessons have been learned and there are now some regulatory requirements specific to Intraday Liquidity Management (ILM). The principles are set out in something known as BCBS[1] 248. There are broadly two parts to the guidance: reporting stuff and capability stuff. In the latter, requirement #5 is: “Have a robust capability to manage the timing of its liquidity outflows in line with its intraday objectives.” If your answer to this was “we’d have to scramble to stop payments”, then your processes and tools are not up scratch.

My colleague at Planixs Nick Nicholls and I have been noodling on this topic of how to properly control payments on a firmwide basis. We’ve dubbed this: “flow control”. We asked ourselves what we would want to do, and how we might you go about doing that.

Our first pass view is that flow control is the ability to do one or more of the following:

1.????????? Be the central control point for when payments are made and from which “pot of money”; so no upstream decisions on cut-off times, or even choice of Nostro.

2.????????? Decide when single payments or groups of payments are sent to the “real world” for actual payment based on a ”release schedule hierarchy” per currency which may be:

a.???????? Size driven - i.e. small payments first, large later.

b.???????? Time driven - all remaining payments as soon as a time is reached.

c.???????? Credit driven:

i.?????????? Payments are made if unsecured limit for counterparty X is below Y.

ii.????????? Deferred payment; waiting for incoming funds prior to release to same counterparty.

d.???????? Liquidity driven. Deferred payment based on available liquidity (reserves/ buffers or limits).

Returning to the “Typical Payments Flow”. we then thought about how the “systems configuration” would need to be changed. Figure 2 illustrates the changes we think would be needed. Product processes are simplified; payments & receipts are forwarded as soon as booked (1). Cash Mgmt Systems (CMS) (2) have “all the logic”. Control over any throttling which has been done at the gateway (3) is moved to the CMS.

An evolution along the lines we have illustrated here offers a number of operational benefits. Firstly, it is part of empowering the FI to have full control over intraday liquidity and secondly, it adds resilience, confidence in a firm’s ability to stay in control in the event of adverse events on any day. And, it does get a tick in the regulatory compliance box as it very much answers the challenge about capability #5 mentioned above.

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Figure 2: Payments with Flow Control

Thanks for reading.

If you would like to talk more about things liquidity, please just type: “Can we talk?” into the comments box.

I am a long-time and long-in-the-tooth hawk on matters liquidity. I work closely with a great team of people at Planixs where I am the Liquidity Futurologist. Planixs is in the business of making sure FS firms can avoid what happens when liquidity dries up aka the right tool set. I hope that together we can make liquidity sexy.?

Please feel free to get in contact: https://www.dhirubhai.net/in/bankersplumber/ and [email protected].

Liquidity matters. I recently taught a course on Intraday Liquidity Management, or as I prefer to title it: Real-Time Liquidity Management. The materials are available here.

If you are interested in matters of liquidity, the materials are available to download. It’s a lot cheaper than the course and you can go at your own pace. This was 10 hours of teaching and 130 slides.

Now it’s not the same as listening to my dulcet tones for a few hours and not as interactive as covering the materials with your fellow students, but it’s a pretty good set of materials. In particular, it shares some views on how important operational capabilities are; those are the things which drive your ability to manage your business today, making you ready for any storms and disruptions. Tuning those capabilities is a valuable thing across the board in wholesale banking, for sell-side to buy-side to corporates.

If you’d prefer to have me come and talk about real-time liquidity management to you and your team, or to your clients. please just get in contact.

Click here for the materials.

#Liquidity #LiquidityManagement #LiquidityMatters #FinancialServices?#RegulatoryConfidence #Planixs #Realiti

[1] The BCBS, the Basel Committee on Banking Standards.