Liquidity Management Strategies: Moving Towards Integration, Visibility and Agility Martijn Stoker Head of Global Liquidity and Escrow Services, Asia Pacific Treasury Services J.P. Morgan
Agenda 1. The Need to Think Differently About Liquidity a. Regulatory, Policy and Market Drivers b. Technology Innovation enabling New Liquidity Management Approaches 2. The Implications of Basel III 3. Solutions for a New Age in Liquidity Management a. Today s Value-added Solutions for the New Liquidity Environment b. Tomorrow s Long-Term Vision and Strategic Investment 4. Conclusions
Think Differently: a New Paradigm for Liquidity Management First iphone released Blockchain concept Web 2.0 + Cloud + apps Big Data from terabyte to exabyte Disruptive technology Liquidity management enablers 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Financial Crisis Quantitative Easing Money Market Fund (MMF) Reform (U.S.) Negative interest rates (ECB, Japan, etc.) Brexit Converging forces: the need to manage liquidity actively along with the tools to do it Regulatory fencing 2
Changes in Short-Term Liquidity Markets Deleveraging Post-crisis, the US banking system was flooded with cash. Prime Fund - VNAV Corp & Bank Paper Fund The end of Quantitative Easing coupled with Money Market Fund reform could now reduce overall market liquidity in the US. Liquidity remains in the Banking System Government Fund - SNAV The impetus to go to government funds is expected to reduce liquidity in the system Fund Gov t Paper Liquidity removed from the Banking System
Changes in Market Supply and Demand for USD Liquidity Regulatory Ring Fencing Recovery and resolution Increasing USD Demand: Drivers Liquidity Availability Demand Supply 40bps 25bps 10bps Time Regulatory Impact 4
Basel III: Guidelines on LCR & NSFR Liquidity Coverage Ratio (LCR) The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario. According to Basel III guidelines, the LCR has two components: (a) Value of the stock of HQLA in stressed conditions; and (b) Total net cash outflows, calculated according to the scenario parameters outlined below. Stock of HQLA Total net cash outflows over the next 30 calendar days 100% Net Stable Funding Ratio (NSFR) NSFR supplements the LCR and has a time horizon of one year. It has been developed to provide a sustainable maturity structure of assets and liabilities. Basel III guidelines defined it as the amount of available stable funding relative to the amount of required stable funding. Available amount of stable funding Required amount of stable funding 100% 5
Basel III: LCR & NSFR Implementation Roadmap in Asia Pacific Liquidity Coverage Ratio (LCR) Net Stable Funding Ratio (NSFR) Country Key Regulators Effective Date Effective Date Singapore MAS (Monetary Authority of Singapore) effective Jan 2016 Consultative paper published Australia APRA (Australia Prudential Regulation Authority) effective Jan 2015 effective Jan 2018 Hong Kong HKMA (Hong Kong Monetary Authority) effective Jan 2015 Consultative paper published BOJ (Bank of Japan) / Japan Japan FSA (Financial Services Agency) / Preliminary rules published Nothing published SESC (Securities and Exchange Surveillance Commission) China PBOC (People's Bank of China) / CBRC (China banking Regulatory Commission) / SAFE (State Administration of Foreign Exchange) effective Jan 2015 effective Jan 2017 India RBI (Reserve Bank of India) effective Jan 2015 effective Jan 2018 Indonesia BI (Bank Indonesia) / OJK (Indonesia Financial Services Authority) effective Jan 2016 Consultative paper published Korea Korea FSS (Financial Supervisory Service) effective Jan 2015 Nothing published Malaysia BNM (Bank Negara Malaysia) effective Jun 2015 effective Jan 2018 The information above are correct as of Mar 2017, and are for reference only. Effective date refers to the 1 st date of implementation, and does not include the subsequent phased implementations. 6 Please consult with the regulators or your consultants on the implementation roadmap of the respective countries.
Basel III: Continuing to Evolve the Focus Unreliable Reliable Non-Operating Liabilities Operating HQLA Assets Loans/ Securities Limited Return Increased Return 7
Impact of Stable Funding on Liquidity Management QUALITY CONSISTENCY TIMELINESS Effectively employ operating balances for bank funding. Ensure stable funds. Smooth volatility. Reduce reliance on intraday liquidity. Avoid intraday credit line usage. Considerations: Increased focus on operating products Certain products deemphasized Considerations: Deposit spike management Balancing natural fluctuations of operating business and predicting funding levels Considerations: Currency liquidity Potential for capital allocations Inflow Outflow Net Unreliable Reliable Deposits Days Non-Operating Liabilities Operating 8:00 AM 9:00 AM 10:00 AM 11:00 AM 12:00 PM 1:00 PM 2:00 PM 3:00 PM 4:00 PM 5:00 PM Payments INTRADAY OVERDRAFT Days 2019 Basel III global deadline for financial institutions necessitates thinking differently about liquidity 8
Adapting to a New Environment Treasury Involved in Clearing Decisions Match Funding and Liquidity Comprehensive cash control for today and in stress periods Yield/Cost Optimization Integration, Visibility and Agility Key 9
Solutions for a New Age in Liquidity Management TODAY INTEGRATION VISIBILITY AGILITY Link payments, FX and liquidity flows A new level of information and insight Towards a just-in-time liquidity ecosystem OPTIMIZATION Impact the income statement across geographies TOMORROW Strategic investment in technology innovation as foundation for new solutions APIs Blockchain Big Data View, control and optimize cash: what you need, how and where you need it
Today s Value-Added Solutions for the New Liquidity Environment Real-time Account Services Cross-Currency Sweeping Just-in-Time Funding Core Cash Management Account
Real-Time Account Services Facilitates balance and transaction reconciliation from end-of-day to any time of day Ordering Payment Bank JP Morgan Real-time feed Real-time Connection API ERP / TMS / Apps Customer side processing One standard solution for all the regions with a direct feed to client ERP Reconcile incoming funds with purchase orders and release the goods/complete the order Facilitate central treasury / HUB to establish confirmed intraday liquidity positions Confirms transaction and balance information at any time of the day
Just-in-Time Funding Automate funding to facilitate payment execution in local currencies Centrally fund local currency payments precisely when needed Automate funding, FX and forecasting processes where possible Eliminate residual, idle balances in non-functional currencies Minimize management of non-core currencies for payments Manage currency exposures while increasing payment efficiency efficiency cost savings risk management liquidity optimization Use liquidity to support and drive payment flows
Cross-Currency Sweeping Automatically convert and centralize balances efficiently while reducing FX exposures USD GBP USD GBP EUR CHF USD SGD GBP SGD SGD YEN HKD Fund local currency accounts in non-functional currencies from one central account in your functional currency Retain onshore local currency accounts for local currency payments and collections without compromising central liquidity Enable real-time FX conversion and reduce FX exposure Reduce the number of non-functional currency accounts held centrally efficiency cost savings risk management liquidity optimization Use automated FX tool to support and drive payment flows 14
Core Cash Management Account Earn enhanced yields on operating balances Payment Flows Average Balances Tier 1 Tier 2 Tier 3 Tier 4 0-100 Rate A Rate B Rate C Rate D 100-200 Rate B Rate B Rate C Rate D 200-300 Rate B Rate C Rate C Rate D Increases in operating payment values drives size of benefit. Accounts can benefit from participation Provides daily liquidity; operating cash is available for use throughout the business day Automatically applied benefits offer a simple cash management solution Enjoy similar operational functioning to standard demand deposit accounts efficiency cost savings liquidity optimization Benefit from consolidating payments and liquidity
Tomorrow s Long-Term Vision and Strategic Investment Quick and easy connections Virtual Account Management Mobile Apps Regulatory Reports Client Analytics Master Account Alerts Sub ledger account Sub ledger account Sub ledger account Sub ledger account Agile delivery Actionable Business Intelligence Live Analytics Billing Statements Micro-Services Reference Data Sweeps Tax 10100100100100110001 11001001100101100101 100110101 0010010011 10010010011010100100 0011001 010101010011 10001001101010101011 100010010101 1000100 011100101101001010111 100100 1111101001011 011100101101001 10111 1001001111101001011 example: netting opportunity Enabling global cash management
It s time to think differently about liquidity management Liquidity is coming out of the system The cost and the availability of liquidity is changing Integration Visibility Agility Optimization More tightly manage payment and liquidity flows Deepen understanding of your global liquidity position Mobilize liquidity to the right place at the right time Optimize yields while minimizing liquidity management costs
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