1. De Nederlandsche Bank
Global Liquidity Management in the Future
Nynke Doornbos
Ohrid, Republic of Macedonia, 21 June 2011
4th Conference on
Payments and
Securities Settlement
Systems
2. 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?
Appetizer
2
3. 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
Appetizer
4. 4
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
5. 5
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
7. 7
Then Central banks / infrastructures can help !
1. Accept foreign cash as collateral to address a
currency mismatch
2. Accept foreign securities as collateral to deal with a
collateral location mismatch
Your
bank
I Introduction
Liquidity mismatches
8. 8
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
9. 9
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
10. 10
Source: ECB Annual report 2009
II Trends in international liquidity
Bad collateral drives out good collateral
I Eligible collateral II Used collateral
Source: ECB annual report
11. 11
1. The proposed liquidity coverage ratio (LCR)
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
1
outflows
cash
net
Expected
assets
liquid
highly
of
Stock
II Trends in international liquidity
New liquidity standards
12. 12
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 CCP-
clearing of OTC derivatives
3. Further development of Eurosystem infrastructure
(CCBM2, T2S)
II Trends in international liquidity
Infrastructural change
13. 13
• 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
II Trends in international liquidity
Banks’ observations
15. 15
III Cross-border arrangements
Foreign exchange swaps
Home central
bank (HCB)
Domestic
counterparty
Foreign central
bank (FCB)
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.
Inter-central bank swap
Foreign
Branch or
Corresponden
t
16. 16
III Cross-border arrangements
Foreign cash as collateral
Home central
bank (HCB)
Domestic
counterparty
Foreign central
bank (FCB)
Foreign branch
of Domestic
counterparty
FCB gets credit at HCB
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).
17. 17
III Cross-border arrangements
Theoretical overview – foreign securities transfer
1. Correspondent central banking model (CCBM)
2. Guarantee model (resembles CCBM)
3. Links between securities settlement systems (SSS)
4. Remote access to securities settlement system
5. Collateral management system (CMS) - collateral
pooling by central banks or Tri-Party services by SSS
or CSD
18. 18
III Cross-border arrangements
Correspondent central banking model (CCBM)
Information on
collateral
Collateral
Transfer
instruction
Information
on collateral
Domestic
credit
Home country Foreign country
Home central bank Foreign central bank
Domestic
counterparty
Foreign
CSD
Custodian
19. 19
III Cross-border arrangements
Guarantee model
Transfer
instruction
Collateral
Information
on collateral
Domestic
credit
Information on
collateral
Inter central-
bank guarantee
Information
on guarantee
Home country Foreign country
Home central bank Foreign central bank
Domestic
counterparty
Foreign
CSD
Custodian
20. 20
III Cross-border arrangements
Links between SSS/CSDs
Domestic
credit
Home country Foreign country
Home central bank
Domestic
counterparty
Foreign
CSD
Domestic
CSD
Transfer
instruction
Information
on collateral
Domestic CSD
Account with
Foreign CSD
21. 21
III Cross-border arrangements
Remote access to SSS/CSD
Domestic
credit
Home country Foreign country
Home central bank
Domestic
counterparty
Foreign
CSD
Information on collateral
Transfer instruction
Information on
collateral
22. 22
III Cross-border arrangements
Collateral management system
Domestic
credit
Home country Foreign country
Home central bank
Domestic
counterparty
Foreign
CSD
Collateral
Management
System (in any
country)
Information on collateral
Transfer instruction
23. 23
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
24. 24
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
26. 26
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
27. 27
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
28. 28
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
29. 29
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
30. SIBOS – A gobal Cash & collateral pool
Securities
CSD
Collateral
Central
bank
USD
Settlement
Securities
CSD
Collateral
Central
bank
BOE
Settlement
Securities
CSD
Collateral
Central
bank
EUR
Settlement
Securities
CSD
Collateral
Central
bank
JPY
Settlement
Intraday Liquidity Market
IV Ideas for new infrastructural solutions
5. A global cash pool
31. SIBOS – A gobal Cash & collateral pool
Securities
CSD
USD
Settlement
Securities
CSD
BOE
Settlement
Securities
CSD
EUR
Settlement
Securities
CSD
JPY
Settlement
Intraday Liquidity Market
Central Cash Pool
Central bank
IV Ideas for new infrastructural solutions
5. A global cash pool
32. SIBOS – A gobal Cash & collateral pool
FED BOE ECB BOJ
Central Cash Pool Central bank
Local Collateral
Local Collateral
Local Collateral
Local Collateral
BOJ-NET
T2
CHAPS
FEDwire
50 100 5 60
215
IV Ideas for new infrastructural solutions
5. A global cash pool
33. SIBOS – A gobal Cash & collateral pool
215
FED BOE ECB BOJ
Central Cash Pool Central bank
Local Collateral
Local Collateral
Local Collateral
Local Collateral
BOJ-NET
T2
CHAPS
FEDwire
50 100 5 60
40
175
IV Ideas for new infrastructural solutions
5. A global cash pool
34. SIBOS – A gobal Cash & collateral pool
FED BOE ECB BOJ
Central Cash Pool Central bank
Local Collateral
Local Collateral
Local Collateral
Local Collateral
BOJ-NET
T2
CHAPS
FEDwire
175
40
50 100 5 60
IV Ideas for new infrastructural solutions
5. A global cash pool
35. SIBOS – A gobal Cash & collateral pool
FED BOE ECB BOJ
Central Cash Pool Central bank
Local Collateral
Local Collateral
Local Collateral
Local Collateral
BOJ-NET
T2
CHAPS
FEDwire
50 100 5 60
40
60
80
35
IV Ideas for new infrastructural solutions
5. A global cash pool
36. SIBOS – A gobal Cash & collateral pool
35
FED BOE ECB BOJ
Central Cash Pool Central bank
Local Collateral
Local Collateral
Local Collateral
Local Collateral
BOJ-NET
T2
CHAPS
FEDwire
50 100 5 60
60
80
75 40
IV Ideas for new infrastructural solutions
5. A global cash pool
37. SIBOS – A gobal Cash & collateral pool
FED BOE ECB BOJ
Central Cash Pool Central bank
Local Collateral
Local Collateral
Local Collateral
Local Collateral
BOJ-NET
T2
CHAPS
FEDwire
50 100 5 60
60
80
40
35 175
IV Ideas for new infrastructural solutions
5. A global cash pool
38. SIBOS – A gobal Cash & collateral pool
FED BOE ECB BOJ
Central Cash Pool Central bank
Local Collateral
Local Collateral
Local Collateral
Local Collateral
BOJ-NET
T2
CHAPS
FEDwire
50 100 5 60
215
CLS CLS CLS CLS CLS CLS
IV Ideas for new infrastructural solutions
5. A global cash pool