Real-time information management - a practitioners view

1. Real-time information management - a practitioners view Richard Pattinson Senior Director, Barclays Treasury CCFEA City Associates Board, Friday 25 November 2005

2. Liquidity Risk-A definition

3. Liquidity risk • Liquidity risk is manifested when an organisation is unable to meet its payment obligations when they fall due and to replace funds when they are withdrawn; in particular, its obligations to repay depositors and fulfil commitments to lend. • The appropriate and efficient management of liquidity is essential to an organisation to ensure confidence of the financial markets in order to pursue its identified business strategy through organic, acquisition and growth targets.

4. A liquidity cushion • Regulators increasingly demand we stress test our ability to raise funds in all market conditions • Actually doing this would cause immense damage to a banking organisation • Demonstrating/modelling the ability to raise funds in all market conditions with an appropriate unsatisfied demand for your name is the most sensible method • Building this picture requires facts, forecasts, market conditions, company rating, relationship overlay and a finger in the air

5. Essential policy elements from a firm’s perspective • Maintain the confidence of the financial markets in order to pursue identified business strategy • Manage mismatched funding of medium/long term assets by short term or retail liabilities • Manage the addition of the Firm’s name to tradable paper in credit enhancement programmes which may impact the ability to raise funds directly in times of stress • Meet regulatory requirements at all times • Stress test on a regular basis

6. Intraday liquidity management Maintain a stock of regulatory assets Maintain a stock of marketable assets Diversification of depositor base Capacity to borrow in wholesale markets Unfulfilled appetite for the Firm’s name Commitments to lend Medium/long term mismatch limits Swapped in funds ratios - Requires significantly improved MI - Static stock is useless stock! - Concentration is dangerous } -It only takes a few weeks to ruin a } name but a few years to get it back } - Never give them everything they want - What is a commitment worth in a stressed situation? - Whilst actively managing the short term don’t forget the medium/long term position - What about exchange controls? How to do it! Lip service or managed policy?

7. A virtual single pot approach

8. The simple version of plumbing in major markets For simplicity the many hundreds of users, SWIFT and custodial links are not shown. Even so, the result is a complex web of linked real-time settlement systems.

9. The 21st century model • The CREST Model – connecting the domestic securities settlement silo to the domestic clean payment silo • Only one primary source of intraday liquidity, the settlement banks via their central bank accounts • Similar models around the leading financial centres • CLS Bank International connects global RTGS’s together, simultaneously • Separate vertical silos to horizontally integrated cross-border model in one go!

10. Immediate/real-time liquidity • Its now real-time • Its not which value date its when on a particular value date • Much greater demand on time specific payments • No longer are securities and clean payments in separate silos • Liquidity has to be available at the right time, in the right place in the correct currency • The world is ‘hard-wired’

11. Reputational risk in a real-time world • In the legacy environment by and large we had all day to meet our payment obligations • In the new world we have specific time obligations to meet • Failure is now a very public and immediate event: • Reputational • Regulatory • Financial

12. Drivers for change • Regulatory demands • Customer demands • Time value of liquidity • Intraday charging emerging – directly/indirectly • The cost of fails • Increasing pressure on credit limits • The longer settlement day (FedWire May 2004) • Sarbanes/Oxley • BASLE II – operational risk

13. The liquidity trap • Most things to date have concentrated on eliminating/controlling settlement risk • The chosen method is settling in central bank money and settlement banks ‘guaranteeing’ that liquidity will be available in certain systems, at certain times and in specific currency • Have we just squeezed one end of the balloon and outs pops another systemic risk or two? • The industry has a track record of dealing with credit issues but what about liquidity gridlock and cross-system contagion?

14. Collateral risk • How many roles can it play? • An outright tradable asset • Repo market asset • Stock borrowing/lending asset • Support for derivatives exposure • Support for credit exposures • Support for loss sharing agreements • Support for payment systems

15. So how do we respond, what is available?

16. Industry initiatives/collaboration

17. Real-time information • SWIFT Real-time Nostro Account Information • The ‘distributed’ model • Customised solutions • SWIFTNet connections • Industry standard formats • Cable & Wireless • The ‘hosted’ model • Hosted solution • Data can be provided and accessed over SWIFTNet • Industry standard formats

18. An example of integration – Barclays Bank • RTN is being integrated in to our wholesale and retail reconciliation process – TeleMatch/Smartstream • RTN is only part of a comprehensive suit of realtime liquidity management capabilities • In partnership with a leading technology supplier we have developed a capability to ‘crunch’ huge amounts of data in realtime utilising vector technology • Embracing this new technology will deliver leading edge solutions for our own business and that of our customers

19. Optimal liquidity management • Within a single application we will be able to:- • Consolidate expected and actual cash flow and collateral information • Monitor intraday liquidity utilisation • Reconcile expected and actual events • Analyse liquidity information on a granular basis • Optimise and forecast liquidity positions tactically and strategically

20. Before – manual inputs

21. Multiple Feeds

22. Liquidity bridges – system specific • Through-put guidelines • Liquidity re-cycling arrangements • Contingency (manual) payments • EBA – Cross-system Swap (proposed liquidity bridge) • CLS – Inside/Outside Swap • Liquidity Provider Schemes • Bi-lateral assistance

23. Liquidity bridge – across system • New York Payments Risk Committee - Task Force Report on ‘Global Payment Liquidity’ • The proposals (working with the public sector) • a) cash model • b) collateral model • c) guarantee model • Report published April 2003 (www.ny.frb.org/prc/) • A call to arms

24. Liquidity Bridge – private sector solutions • Intraday FX Swap • Possibly settling through CLS • Intraday collateral swap • Using the ICSD’s

25. Global Communication Bridge • With a local difficulty by and large everyone knows each other • With a global problem who do I contact where • The creation of a Standing Committee for times of stress would be enormously beneficial to both public and private sector • Why waste time trying to find the right person in the right place? • These are non-competitive areas. You can only compete and trade efficiently when you have a stable platform

26. Thank you.richard.pattinson@barclaysgt.com