FBE GUIDELINES ON LIQUIDITY MANAGEMENT

Transcription

1 FEDERATION BANCAIRE DE L UNION EUROPÉENNE FBE GUIDELINES ON LIQUIDITY MANAGEMENT BRUSSELS September 1999 BANKING FEDERATION OF THE EUROPEAN UNION Rue Montoyer 10 B BRUSSELS

2 Scope of these guidelines FEDERATION BANCAIRE DE L UNION EUROPEENNE FBE GUIDELINES ON LIQUIDITY MANAGEMENT The following guidelines are intended to cover all euro payments made through TARGET and any other euro payment system. They are not intended to supersede guidelines or rules agreed in domestic systems, nor any bilateral agreement. Monitoring observance of the FBE Guidelines will be left to market forces. Accordingly, these Guidelines do not give rise to any legally enforceable rights or obligations. 1 st Guideline a) Euro payments related to interbank transactions such as the payment leg of money market, foreign exchange and derivative transactions which are traded before the value date (i.e. on date X-1 or prior) should be sent on value date (i.e. Day X) with sufficient liquidity coverage as early as possible in the day and no later than CET-time. b) Commercial payments received from the ordering party before the value date (i.e. on date X-1 or prior) should be sent on value date (i.e. Day X) with sufficient liquidity coverage as early as possible in the day and no later than CET-time. 2 nd Guideline a) Euro payments related to interbank transactions such as the payment leg of money market, foreign exchange and derivative transactions which are traded on the value date before CET-time, should be sent on the value date, with sufficient liquidity coverage as fast as possible and, at the latest, before CET-time. Any of those euro payments related to interbank transactions traded on the value date after CETtime, should be sent on the value date, with sufficient liquidity coverage as fast as possible and, at the latest, two hours after the transaction has been agreed, or before CET-time, whichever is earlier. b) Commercial payments received from the ordering party on the value date should be sent on the value date with sufficient liquidity coverage as fast as possible and, at the latest, two hours after the payment is received, or before CET-time, whichever is earlier. c) Euro payments related to interbank liquidity position squaring transactions (for ESCB accounts) which are traded on the value date at CET-time or later should be sent on the value date with sufficient liquidity coverage as fast as possible and, at the latest, two hours after the transaction has been agreed, or before the cut-off time of CET-time, whichever is earlier. 3 rd Guideline A receiving Clearing Bank is not obliged to give same day value for a Late Payment (payment with a Debit/Execution time stamp of CET-time or later) of a non Own Account Receipt with two exceptions: a) The Sending Clearing Bank pre-agrees with the receiving Clearing Bank that same day value will apply (pre-agreed Late Payment). If pre-agreed Late Payment arrives on the agreed day, no compensation is due. However, if pre-agreed Late Payment does not arrive on the agreed day, the Sending Clearing Bank will pay special compensation, based on a minimum of the ECB Lending Rate plus an administrative fee. b) If the Receiving Clearing Bank, at its own discretion, chooses to give same day value for a non preagreed Late Payment, or is obliged to do so according to local law/guidelines. In these instances, the Sending Clearing Bank will pay special compensation to the Receiving Clearing Bank based on the ECB Lending Rate less the ECB Deposit Rate, plus an administrative fee. RUE MONTOYER 10 B BRUXELLES TEL 02/ FAX 02/

3 FEDERATION BANCAIRE DE L UNION EUROPEENNE J9038LEJ EXPLANATORY MEMORANDUM Background The introduction of the euro in the interbank markets as of 4 th January 1999 has dramatically affected intraday liquidity management within individual banks. The end of the traditional payment system model, where banks settle in the country of issue over a maximum of one, possibly two, systems (gross & net settlement systems), has undoubtedly complicated liquidity management since each bank now has the choice of up to twenty different payment systems (15 RTGS systems, the TARGET interlinking, 3 domestic-based netting systems and the EBA EURO1 system) to settle their payments in euro, with all the consequences it has on liquidity pooling. It is important for any effective high-value payment system, and in particular RTGS systems, to manage liquidity effectively. Poor liquidity management will immobilise liquidity which could be used elsewhere, and it can cause transaction delays or gridlock. However, central banks are not planning to impose solutions but expect industry bodies to take initiatives to avoid liquidity problems from arising in the euro-environment - e.g. by agreeing on market conventions which would encourage market participants to recirculate liquidity in a timely fashion, reducing the amount of liquidity which needs to be injected into the system, whilst avoiding gridlock. The EU Banking Federation therefore welcomes the initiatives which have recently been taken by various groups of market practitioners - such as the Euro Banking Association and the "Heathrow Group" - to help smooth liquidity in the euro-environment. The decisions of banks, and indirectly their customers, on the most efficient way to handle payments and to manage liquidity will be decisive for the future EMU-wide payment infrastructure. If the development over time of this future infrastructure may involve some "trial and error", everything possible must be done to avoid putting market confidence in the infrastructure at risk. No bank will be able to compete effectively in the field of payment systems unless it has a stable platform at the start. The EU Banking Federation has therefore decided to issue a series of guidelines to ensure that flows channelled through euro payment systems are maintained at an acceptable level, as recommended by the European Central Bank. Because these guidelines were primarily intended to smooth the changeover to the euro, they were planned to be reviewed, strengthened or even revoked, according to the experience gained by the banks with the launching of the euro. Based on proposals made by the Heathrow Group, the Federation has decided to update them based on the experience drawn from the first six months and on the comments received by practitioners. To ensure that a single message is delivered to the market, these guidelines have been discussed with and are consistent with the views of the Heathrow Group. Scope and nature of the FBE guidelines RUE MONTOYER 10 B BRUXELLES TEL 02/ FAX 02/

4 2 The objective of this Federation initiative is to enhance market discipline. The Federation guidelines are in no way intended to impinge upon guidelines and/or rules already agreed in other cross-border or domestic systems and groups, nor on any bilateral agreement concerning the processing of payments. Methods of preventing incoming and outgoing payments from being unevenly distributed across euro payment systems were lacking. Although these guidelines should not supplement the market conventions in place at domestic level, they could be beneficial to domestic RTGS systems and, to a lesser extent, to any euro payment system, the aim being to ensure consistency of timing and notification for all systems processing transactions in euro. This is an issue which will need to be considered on a domestic level. It has to be noted, moreover, that these guidelines are not binding in nature: there will be no authorised body monitoring compliance. Instead, the evaluation of compliance with the guidelines and any measures to be taken in cases of divergent practices will be left to market forces. Accordingly, these guidelines do not give rise to any legally enforceable rights or obligations. Contents A. LIQUIDITY MANAGEMENT THROUGHOUT THE DAY The first two guidelines concentrate on the liquidity management in the course of the day, trying to find a European approach for sending euro payments in the various systems offered to member banks across the euro area. A synchronised schedule for sending euro payments throughout the day will clearly alleviate liquidity gridlock in different systems since payments themselves will bring enough liquidity in the market and ensure automatically coverage for subsequent payments to be done. Additionally, these first two guidelines for timely delivery of funds will greatly facilitate discipline in the later part of the day, by keeping those late payments to a minimum. As explained, it not only concerns payments related to interbank transactions (such as payment leg of money market, foreign exchange and derivative transactions) but also commercial payments received from third parties, third party being defined as all types of account holders in the books of the sending bank and/or the receiving bank, both being participants of a euro payment system. Furthermore, this would not only apply to payments going through the TARGET interlinking (i.e. where two national central banks which are members of TARGET are involved), but also to any euro payment systems (domestic RTGS systems, netting systems): since euro liquidity covers the payment leg of commercial and interbank transactions sent through any euro system, these guidelines should be recommended to all systems working in euro, irrespective of its internal structure, liquidity being represented as the sum of all clearing systems in Euroland. Sufficient liquidity coverage will simply mean that these payments should be covered, be it via eligible assets, credit balance on a central bank account or simply via incoming payments. This recommendation only relates to the sending of the payment into a payment system, not its proper execution (sending payments at the same time will bring enough liquidity in the market and coverage will be automatically ensured). Therefore reference to debit time stamp is not considered appropriate in the first two guidelines while crucial in the third one. 1. Transactions traded before value date

5 3 The first guideline concerns on the one hand euro payments related to interbank transactions traded before value date, and, on the other hand, commercial payments received from the ordering party before the value date. To relieve liquidity pressure in the course of the day, it encourages participants in the market to send such payments on the value date with sufficient liquidity coverage, as early as possible in the day and no later than CET-time. Operational problems on one hand, and the fact that some banks are located in another time zone on the other hand, explain the extension of the cut-off until CET-time. This will ensure smooth movement of liquidity within any euro payment system and avoid banks retaining payments until later in the day. It would clearly not apply to intra-day liquidity transactions because such transactions are normally based on bilateral agreements. On the other hand, risk exposure or operational problems may temporarily prevent banks from respecting this guideline. 2. Transactions traded on the value date The second guideline concerns on the one hand euro payments related to interbank transactions traded on the value date, and, on the other hand, commercial payments received from the ordering party on the value date: for euro payments related to interbank transactions, it recommends that the payment leg of such transaction should be sent as fast as possible, with a maximum time lag of two hours or by CET-time, whichever is earlier. However, for those euro payments related to interbank transactions traded on the value date before CET-time, it is recommended that the payment leg of such transactions should be sent as fast as possible and, at the latest, before CET-time. This, in order to avoid any discrimination compared with the treatment of payments in respect of transactions traded before value date. for euro commercial payments received from the ordering party on the value date, it also recommends that the payment leg of such transaction should be sent as fast as possible, with a maximum time lag of two hours or by CET-time, whichever is earlier. for euro payments related to interbank liquidity position squaring transactions, usually taking place after CET-time, the cut-off time corresponds to the ECB cut-off time of CET-time. However, credit institutions of the non-euro area, which are direct TARGET participants, should take into account the CET-time deadline after which they can only make payments out of positive balances. B. LIQUIDITY MANAGEMENT AT THE END OF THE DAY The objective of the third guideline is to impose discipline in euro payment systems for late payments 1, in the spirit of the ECB TARGET service level whose aim is to impose a cut-off time for customer payments at CET-time. These restrictions have been imposed by the central banks by preventing use of MT100 SWIFT messages by clearing banks in the last hour of the day in order to reserve at least one hour for clearing banks to square their end-of-day positions within TARGET. Clearing banks need this second period because a significant part of their position is made up of the sum of their customers positions. It will allow them to minimise their liquidity requirements and to more accurately predict their final end of day balances therefore reducing the possibility of poorly performing funds. 1 Late Payment means a payment which has a debit/execution stamp at or after CET-time (see annex for definitions)

6 4 A receiving clearing bank is therefore not obliged to give same-day value for a late payment of a non own account receipt 2. However, the receiving clearing bank may/will apply same-day value in two exceptional situations: in the case where the sending clearing bank pre-agrees with the receiving clearing bank that same day value will apply (pre-agreed Late Payments). However if the funds do not arrive on the agreed day, the sending bank will be liable to pay the full cost of compensation, based on a minimum of the ECB lending rate plus an administrative fee: = ((amount in euro) X (ECB Lending rate) X (number of calendar days funds are outstanding))/360 in the case where the receiving clearing bank gives same-day value at its own discretion for a non Pre-agreed Late payment, or is obliged to do so due to local law or guidelines. In this situation, the sending clearing bank will have to compensate the receiving clearing bank based on the opportunity cost (ECB lending rate deposit rate), calculated as if the funds did not arrive until the next TARGET working day, in addition to an administrative fee: = ((amount in euro) X (ECB lending rate-deposit rate) X (number of calendar days calculated as if the funds were received on the next TARGET working day)) / 360 The only late payments allowed are payments of own account receipts related to settlement deals of late same-day position where the sending and the receiving clearing banks are the two parties involved in the deal. The sending clearing bank will pre-notify the receiving clearing bank of any other late payment relating to own account receipts. The notification of the counterpart should be made by telephone/reuter. In this context, any private/public initiative aimed at establishing a database containing a list of all staff members in charge of liquidity management throughout the European Union (contact point for the purposes of pre-agreement and pre-notification) would be welcome. In order to clearly identify the contact person for pre-agreed late payments, the Federation will establish a data base with all its member banks adhering to this discipline, available on its website, including contact points for pre-agreement, at the request of the banks wishing to adhere to this principle, either directly or via their local banking associations. To what extent compensation according to the third guideline applies in case of interruption or breakdown of the TARGET system (including one or more national RTGS systems) has still to be discussed with the European System of Central Banks. In the meantime, banks should keep to the spirit of these Guidelines under these circumstances See definition of Non-Own Account Receipt in Annex

7 5 FEDERATION BANCAIRE DE L UNION EUROPEENNE ANNEX 1 GLOSSARY Administrative fees fees such as the fee linked to the agreement currently in place in the market for compensation (Euro interbank compensation guidelines) Debit/Execution time stamp the stamp showing the time at which the account of the sending clearing bank is irrevocably debited by the National Central Bank of the sending RTGS for the payment in question Late payment payment which has a debit/execution time stamp of CET-time or later. Own account receipt Non own account receipt Pre-agreed Late Payment Receiving Clearing Bank payment to be credited to the account of the Receiving Clearing Bank (its own account) payment which is not directly addressed for the account of the receiving clearing bank (where the final beneficiary is somebody else: non own account). This includes receipts for accounts of other parties who have accounts with the Receiving Clearing Bank, including indirect participants; receipts for other branches, subsidiaries, affiliates or parents associated with the Receiving Clearing Bank which have accounts on the books of the Receiving Clearing Bank; receipts for account of the Sending Clearing Bank (or its branches or subsidiaries) in the books of the Receiving Clearing Bank; cover messages for account of the Receiving Clearing Bank where funds are for ultimate credit to another party - details of the other party would normally be provided via a direct message. payment on which the Sending Clearing Bank has contacted the appropriate person at the Receiving Clearing Bank to seek agreement that the payment will be given same-day value without any compensation being paid, and the Receiving Clearing Bank has agreed. head office or specific branch or subsidiary whose account is credited at the receiving National Central Bank

8 6 Sending Clearing Bank head office or specific branch or subsidiary whose account is debited at the sending National Central Bank

9 7 FEDERATION BANCAIRE DE L UNION EUROPEENNE ANNEX 2 QUESTIONS AND ANSWERS (Q&As) Q1 What does this third Guideline try to achieve? A1 - This Guideline is meant to become the market standard in Euroland to give to all banks, be they small or large, which are direct participants of any euro payment system, an equal starting point of CET-time, in line with the intentions of the ECB to finish the liquidity management process at the end of the day. Q2 - Do these rules apply for both payments settled in a single RTGS and those through TARGET. A2 - Yes. The wording covers both by simply referring to Sending and Receiving Clearing Bank. Q3 - Why are the obligations in the 3 rd Guideline less strongly defined for Own Account Receipts? A3 - There were three factors: 1) this is not where the significant problem lies; 2) Receiving Clearing Banks are much better able to track these receipts and follow up on non receipts on day of value; 3) concerns about the meaning of 'same day value' in relation to an Own Account Receipt. Whilst the obligations may not be as strongly defined, Sending Clearing Banks are fully expected to adopt the same approach as on non Own Account Receipts. Q4 - What is the relationship between the 1 st and 2 nd FBE Guidelines and the 3 rd which relates to the to CET period? A4 - The only way in which discipline will be improved at end of day is if discipline is improved during the course of the day e.g. it is important for clearing banks: 1) to have sufficient liquidity in relation to their non position squaring flows; 2) to present these payments to the clearing systems in a timely fashion. Q5 - What about payment delays caused by liquidity trapped within the non RTGS settlement processes? A5 - It is important for Clearing Banks to manage down positions in non RTGS settlement systems towards the end of the clearing day such that liquidity does not become trapped in the vital to CET time period. Q6 - Doesn t the 3 rd Guideline put excess obligations on the Receiving Clearing Bank and wouldn t the use of the Credit Time Stamp at the receiving NCB be better to ensure that the onus for delivery remains with the Sending Clearing Bank? A6 - The 3 rd Guideline does not put excess obligations on the Receiving Clearing Bank (RCB). Where the Debit/Execution Time Stamp is CET or later, it is at the RCB s discretion to accept the payment with same day value either with compensation (no preagreement) or without compensation (pre-agreement). If a transaction is delayed in TARGET for more than 30 minutes, there are no additional issues i.e. no comments have been made re those before 17.00; where pre-agreement applies, the RCB will not fund to cover and therefore a delay through TARGET will not matter; at or after without pre-agreement, it is RCB discretion.

10 8 In principle it would be better to use the Receiving Time Stamp at the receiving NCB. However, there are practical difficulties given that the service level relating to TARGET and the RTGSs is not 100% defined. The wording used is viewed as a major and valuable step forward in increasing certainty in the to CET window. It is based on an expected maximum delivery time through TARGET and the RTGSs of 30 minutes, but also recognising that current normal elapsed time is in the 1 to 3 minute range. It is also expected that the ECB/NCBs will look sympathetically on situations where the 30 minutes is exceeded. The ECB is developing a compensation policy framework which will be communicated to banks in due course, based on past experiences. Use of the Debit/Execution Time Stamp recognises that the Sending Clearing Bank is not responsible for excess delays between the Debit/Execution and Credit Time Stamps - but neither is the Receiving Clearing Bank. Q&A 7 recognises the importance of both the Sending and Receiving Clearing Banks working together to progress a claim for a delay of over 30 minutes. Q7 - Who would pursue the claim with the NCBs/ECB if a clearing system problem affected delivery. A7 - As currently understood, it may well be the Receiving Clearing Bank which has to claim. However, Sending Clearing Banks are expected to give their full support to any actions which are necessary, including approaching their own NCB. These Guidelines should reduce the number of payments in the to window and reduce the risk of this being necessary. Nonetheless, the EBF should work with the NCBs/ECB to try to define a procedure for this. Q8 - Where does one obtain the Debit/Execution Time Stamp? A8 - In the short term this may need to be requested from the receiving/sending NCB (it is contained in the Interlinking message). In the longer term, the EBF should strongly encourage the NCBs to onward deliver the Debit/Execution Time Stamp and Credit Time Stamp in the credit message sent to the Receiving Clearing Bank. Q9 - Do these Guidelines imply that same day value is expected to be given on all payments with a Debit/Execution Time Stamp before 17.00? A9 - No specific statement is made. It will depend on the arrangements which Receiving Clearing Banks have with their customers, and may also depend on local clearing rules. Q10 - Why have the special compensation structures in the 3 rd Guideline been chosen? Wouldn t it have been easier to use the existing Heathrow Group compensation structure which is increasingly being used as a market standard? A10 - These compensation structures are for special circumstances relating to Late Payments, and should only need to be used on a very limited number of occasions. They are specifically designed to encourage good behaviour and to ensure that Receiving Clearing Banks are fully protected under all circumstances. The ECB rates have been used to ensure that full protection. Note also that the special compensation structures apply for all values of transactions. This guideline, however, does not intend to include mass payments. Q11 - How many days will the compensation structure in the 3 rd Guideline a) apply for? A11 - From the pre-agreed value date of the payment in question to one calendar day before the date on which the funds are finally received e.g. if the funds were expected on Friday and were finally received on Monday, 3 days compensation will be paid. Q12 - What are the implications of indirect membership of clearing systems? A12 - The definitions of Sending and Receiving Clearing Bank are specific in mentioning the account which is debited or credited at the NCB. This is hopefully adequate to cover

11 9 the different indirect participation which may arise. Own Account Receipt excludes receipts for onward credit to indirect participants Q13 - Why refer to late position squaring deals rather than late Money Market deals? A13 - Because other instruments can be used for squaring, like an FX swap. Q14 - Are these Guidelines intended to be legally enforceable? A14 - No. Nonetheless, all banks are strongly encouraged to follow them to create an orderly end of day process for the market. Evaluation of compliance with the guidelines and any measures to be taken in case of divergent practices will be left to market forces. Q15 - What are the next steps? A15 - : 1) To notify these Guidelines to the European Commission and national anti-trust authorities; 2) To officially recommend the guidelines to euroland-based banks; 3) To work with the ECB/NCBs in the following areas: to incorporate the Guidelines as far as possible in the clearing system rules for the RTGSs to finalise the TARGET compensation policy framework, including the procedure for banks to use for onward delivery of the Debit/Execution and Credit time stamps to the Clearing Banks involved 4) To collate details of suggested changes to the Guidelines such that a review can be done at the beginning of December. Q16 - How will a bank which has a system failure late in the day be able to cope with all the calls? A16 - There are many different situations which may arise. However, there is no reason why a Sending Clearing Bank should be able to export its problem by being able to send late funds. Typically banks with such a failure will try to pre-agree delivery of funds on an aggregate basis with Receiving Clearing Banks. Q17 - The 3 rd Guideline seems very complex and the process of pre-agreeing appears difficult. Is it workable? A17 - The numbers of late non Own Account Receipts has been steadily falling and some banks report that it is no longer a problem. However, there continue to be some problems AND the structure from to continues to be unclear. The primary aim of this Guideline is to bring clarity and this clarity means that Receiving Clearing Banks are in full control on non Own Account Receipts which have a Debit/Execution Time Stamp of or later. Similarly Sending Clearing Banks can simply choose not to send non Own Account transactions which are settled in their NCB at or later. These disciplines will inevitably reduce the number of these transactions and Sending and Receiving Clearing Banks can decide the extent that they are willing to be involved in them. Q18 - There is no mention of National Currency Units (NCUs). How should these be treated? A18 - NCUs are simply denominations of the euro, with the euro being the legal currency. Use of the word euro in these Guidelines incorporates all of its denominations. Q19 - Are there any conflicts with the ECB Information Guide For Credit Institutions Using TARGET A19 - None have been identified. Q20 - What is the process for a Pre-agreed Late Payment?

12 10 A20 - Due to the short time and need for positive agreement by the Receiving Clearing Bank, the Sending Clearing Bank should contact the Receiving Clearing Bank by phone or Reuters Dealing, and always directly to the appropriate contacts in the Liquidity Management and/or Treasury departments. The Receiving Clearing Bank may refuse to agree. Q21 - Will the ordering customer of an Own Account Receipt always be the Sending Clearing Bank? A21 - No. Thus an Own Account Receipt could have a Debit/Execution Time Stamp of CET or later and have a third party as ordering customer - but this would only be a payment relating to a late position squaring deal. Q22 - Please show examples of the special compensation in accordance with the third guideline. A22.1 Example where a Pre-agreed Late Payment does not arrive on the agreed day: Pre-agreed Late Payment of EUR 150 million with an agreed day of a Friday and the payment does not arrive until the following Monday. Compensation will be a minimum of 150 million at the ECB Lending Rate (say 3.5%) for 3 calendar days plus the administration fee (EUR 200 for example) i.e. minimum compensation would be ((150 million x 3.5% x 3 days) divided by 360) plus 200 = EUR 43,950. An additional compensation amount would apply if the Receiving Clearing Bank could evidence additional external charges directly associated with the failure to receive the Pre-agreed Late Payment. A22.2 Example where the Receiving Clearing Bank chooses to give same day value on a non Pre-agreed Late Payment: Receipt of EUR 120 million on a Friday where the next TARGET working day is on the following Monday. Assume ECB Lending Rate as 3.5% and ECB Deposit Rate as 1.5%. Compensation will be: ((120 million x (3.5% - 1.5%) x 3days) divided by 360) plus the administration fee (EUR 200 for example) = EUR 20,