Optimising liquidity and capital costs: What banks and brokers need to succeed

Financial Intermediaries are under intense pressure to make the best use of liquidity and capital. Camille Papillard and Alexandre Espinar examine how BNP Paribas Securities Services’ solution mix can help.

Regulatory and market demands continue to intensify financial intermediaries’ cost, liquidity and capital pressures. An evolving range of solutions are now available though to help firms optimise their liquidity and financial needs.

Growing resource challenges

Banks’ intraday liquidity risk management practices have taken on added importance since the Basel Committee on Banking Supervision introduced its rules on monitoring intraday liquidity (known as BCBS 248). Under the regime, which came into force in 2019, institutions need to identify and report on their intraday liquidity use to show they can meet their payment and settlement obligations under both business-as-usual and stressed conditions.

This emphasis is not unique to European regulation or banks in particular. In Hong Kong, the Financial Resources Rules require organisations such as securities houses to monitor their obligations and maintain sufficient liquid assets to cover their exposure. Similarly, whilst regulatory capital requirements in Australia depend on the particular type of entity and activity undertaken, the level of liquid capital required is generally commensurate to the intraday and overnight obligations the entity is exposed to on a given day.

Transparency is essential. Affected institutions need frequent and reliable information on their liquidity usage to determine the liquidity available and demonstrate to regulators how resilient they are from a liquidity stress perspective. Tools that enable intraday liquidity control and optimise liquidity use are key in helping minimise liquidity risk and making funding more efficient.

The introduction of mandatory ‘buy-ins’ and cash penalties for settlement fails as part of the Central Securities Depositories Regulation’s (CSDR) Settlement Discipline Regime will further impact on market participants’ liquidity and costs when it is implemented in 2022. To counter the increased risk of being bought in, market-makers and broker dealers are expected to reduce coverage and widen bid-offer spreads. Settlement fails will likely bring significant penalties, while settlement agents will require clients to post increased collateral to support their settlement activities.

How BNP Paribas Securities Services can help

BNP Paribas Securities Services is helping our bank and broker clients to optimise their liquidity and reduce costs in a number of ways.

Third-party clearing

Third-party clearing enables clients to achieve meaningful counterparty risk reductions, and cost and capital savings. As a clearing provider, we absorb the fixed costs and handle the complexity around market infrastructure connectivity, interoperability and technology development, enabling clients to focus on their core activities. High levels of automation, scalability and settlement efficiency deliver further operating cost advantages. In addition, we take on responsibility for all market and CCP adaptations, with our local experts managing the shifting maze of regulations across markets and any changes that occur in the clearing space (e.g. mergers and acquisitions, launch of new trading venues, adaptations to rule books).

Supported by the global strength and reach of the BNP Paribas Group, we also optimise clients’ funding requirements. We monitor intraday client positions and risk, with single netting per CCP and a centralised margin call process across CCPs. Clients can cover changes in exposure with their collateral of choice, while our liquidity optimisation tool enables brokers to finance their daily CCP margin calls in the most efficient way possible and according to their individual needs.

Liquidity optimisation

We don’t simply provide clients with fixed credit lines. For certain clients, our innovative technology assesses in near real time the liquidation value of their assets and pending transactions across locations – factoring in each trade’s status and the characteristics of the market – to determine the risk measure related to that client’s portfolio at any point in time, and thus our exposure as a bank.

This unique technology tool is supported by dedicated risk analysts to provide further comfort around the model’s calculations and the funding support we can extend to clients. In addition, our settlement analysts examine clients’ activity in near real time to propose solutions should any settlement issues arise.

By gathering and valuing all a client’s long positions, collateral, cash balances and in-flight transactions in a single platform, and cross margining the flows and positions, we can optimise use of the collateral the firm has posted with us, providing the intraday funding it needs and smoothing the processing of its daily transactions. And because the solution has significant capacity, we can continue to support clients through periods of market stress and volatility.

Settlement fails

Helping clients minimise their settlement fails is crucial in mitigating the risk of punitive penalties under the CSDR Settlement Discipline Regime. It also reduces firms’ overdraft financing exposure with us, and thus the costs incurred from this use of liquidity. One way BNP Paribas Securities Services is helping clients reduce the risk of settlement failure is to provide real time, automated, clearly formatted settlement status updates for every instruction received. These updates provide clarity on the current status of the transaction and allow clients to focus on exception management for any transactions that appear likely to fail, rather than proactively monitoring all transactions – particularly those that are fully matched for settlement as expected.

As an additional safeguard to reduce the market impact of failed settlements, our global securities lending programme incorporates a fails coverage solution that further enhances the smooth day-to-day processing of clients’ transactions. Where a client lacks a requisite security, BNP Paribas Securities Services’ securities lending teams will source that security on the market to prevent a possible settlement fail and decrease the costs associated with CSDR.

Balance sheet netting

The European market is highly fragmented, so financial intermediaries are keen to take advantage of balance sheet netting where possible to minimise their capital costs.

Our netting facility is available whenever a broker partners with BNP Paribas Securities Services on multiple markets across Europe’s TARGET2-Securities (T2S) platform, since it is a single settlement system with payments made from one dedicated cash account. For instance, where a client’s repo trades on German, French, Italian or Spanish debt are cleared on LCH SA (the major European central counterparty for European debt), they can be cross-netted if we are the broker’s sub-custodian in all those European markets.

Optimising for the future

Evolving regulations, market dynamics and financial resource demands mean financial intermediaries are increasingly looking to their custodians to help them keep pace. At BNP Paribas Securities Services, we are committed to providing that support, now and going forward. So while our liquidity management solutions are proving to be highly effective, we recognise the importance of continually investing in and improving our capabilities to make them faster, more reliable and more efficient.

The resource challenges facing market participants will never be ‘solved’. But by partnering with clients and adapting our solution developments to their needs, we can provide the vital grease that will help them run their businesses as smoothly and profitably as possible.

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