The RMA Journal Features Article on Intraday Risk Management

The July-August issue of The RMA Journal will feature an interview with RMA Director of Market Risk and Securities Lending Fran Garritt on the very important and timely topic of intraday liquidity risk management.

Garritt defines intraday liquidity as “the funds available to settle transactions on an intraday basis on behalf of a firm and its clients, while intraday liquidity risk is the potential for a firm to be unable to make payments or settle transactions in a timely manner.” He discusses why the concept of the three-legged stool of liquidity―cash balances, credit provision, and collateral― is so important to the liquidity process.

The interview touches on the financial crisis and how it’s changed a number of things related to liquidity. He said in 2008 there were liquidity constraints. Although there may have been sufficient liquidity that was available by the end of the day, it was not available in some scenarios intraday. Therefore, the implications of the interdependencies among institutions became apparent. As a result, regulators and financial institutions started to focus on intraday liquidity discretely because it became more apparent that having an understanding of the general liquidity position, which was historically more of an end-of-day concept, was not enough.

Garritt also comments on the key guidance and regulations on intraday liquidity, specifically noting the Basel Committee on Banking Supervision’s (BCBS) series of guidelines entitled, “Principles for Sound Liquidity Risk Management and Supervision,” which focused on the need for institutions to have the ability to measure intraday liquidity exposure. More recently, in 2013, Basel published specific guidelines on reporting capabilities concerning intraday positions. BCBS 239, “Principles for Effective Data Aggregation and Risk Reporting,” made clear that intraday liquidity must be part of a data strategy. Garritt mentioned that regulators have started asking institutions to supply details about their intraday liquidity capacity.

Finally, the interview delves into availability and costs associated with intraday liquidity. Garritt notes that, “in time, the amount of liquidity available in the marketplace should come back to a normalized level.” With regard to pricing of intraday liquidity, he believes there will be technology investments and overhead costs for monitoring, and building technology to support global regulatory requirements will also increase costs. 

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