Sibos 2011 TARGET2 liquidity saving features


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Sibos 2011 TARGET2 liquidity saving features

  1. 1. TARGET2Liquidity Saving Features
  2. 2. TARGET2 Liquidity saving featuresIntroduction 2
  3. 3. TARGET2 Liquidity saving featuresIntroduction Objectives of liquidity saving features in TARGET2 • Reduce banks’ liquidity needs and support their liquidity management • Allow banks to better control their liquidity flows • Set incentive for banks to not delay payments and optimise overall use of available liquidity 3
  4. 4. TARGET2 Liquidity saving featuresList of Content • Features available to banks • Settlement algorithms • Usage by TARGET2 participants 4
  5. 5. TARGET2 Liquidity saving featuresFeatures available to banks Available features I. Payment priority and liquidity reservation II. Liquidity pooling III. Active queue management IV. Timed payments V. Sender limits 5
  6. 6. TARGET2 Liquidity saving featuresFeatures available to banks I. Payments priority and liquidity reservation Three priority levels are available: normal: standard categorisation urgent: assigned by participant according to payment criticality highly urgent: settlement of ancillary systems, Central Bank operations, CLS Participants can reserve part of their payment capacity for the settlement of highly urgent and urgent transactions as well as the settlement of a specific ancillary system (sub-account). Capacity for Available liquidity = 1,000 normal payments = 450 Capacity for urgent payments Capacity for = 650 highly urgent payments = 850 Urgent reserve = 200 Highly urgent reserve = 200 Reserved for Capacity for AS AS = 150 = 150 6
  7. 7. TARGET2 Liquidity saving featuresFeatures available to banks II. Liquidity pooling Virtual account: Intraday aggregation of liquidity available on single accounts of a group in form of a “virtual account”. Payments of single RTGS account can draw on global liquidity of the group. Limits, reservations or ordering of queued items centrally managed for the entire group, as if it was a single “virtual” account. Virtual account Consolidated information: Consolidated information and individual information about all accounts of the group available to the group-of-accounts manager. Each group member has individual information about its account plus consolidated view. 7
  8. 8. TARGET2 Liquidity saving featuresFeatures available to banks III. Active queue management Queues per payment priority, “FIFO principle” for (highly)urgent payments, “FIFO by- passing” for normal payments. Participants can: i) re-order pending transactions in the queue, ii) change priority of a queued payment, iii) change execution time of payments or iv) revoke any unsettled/queued payments. IV. Timed payments Participants can indicate the time from which its payment can be executed (“from” earliest debit time indicator) or the time up to which its payment can be executed (“till”: latest debit time indicator). Timed payments, which are not executed after the latest debit time are either rejected or trigger a warning. V. Sender limits Participants can set an upward limit to the net flow of payments exchanged with another individual participants (bilateral limit) or with all participants for which no bilateral limit is defined (multilateral limit). I.e. the amount the participant is willing to pay to another participant(s) without having received payments from it. 8
  9. 9. TARGET2 Liquidity saving featuresList of Content • Features available to banks • Settlement algorithms • Usage by TARGET2 participants 9
  10. 10. TARGET2 Liquidity saving featuresSettlement algorithms Optimisation: Entry disposition & Settlement algorithms Immediate settlement Payments Entry disposition Queue resolution Ancillary system - incl. offsetting - transactions Liquidity increase Queue mgmt. Queues - event driven - Liquidity Limits Reservations Algorithms 1 – 4 - time driven - Algorithm 5 - for sub-a/c only - 10
  11. 11. TARGET2 Liquidity saving featuresSettlement algorithms Available settlement algorithms in TARGET2(*) Algo2 “partial optimisation” tries to settle all queued payments from all priorities. It identifies transactions that when set aside would allow to turn negative positions in to positive ones. Can be unsuccessful due to lack of liquidity or breached limits; Algo3 “multiple optimisation” aims at resolving all queues with the highest possible settlement volume and low liquidity need using a combination of bilateral resolution and multilateral settlement. Can end unsuccessfully if insufficient liquidity or breached limits; Algo4 “partial optimisation for ancillary system settlement” is similar to Algo2 with the difference that payments stemming from ancillary systems with a simultaneous multilateral settlement are included in the executable batch; Algo5 exclusively aims at settling ancillary system transactions (all-or- nothing) on dedicated sub-accounts. It is independent from the other settlement processes. 11 (*) Algo1 “all-or-nothing” was disabled in July 2011.
  12. 12. TARGET2 Liquidity saving featuresList of Content • Features available to banks • Settlement algorithms • Usage by TARGET2 participants 12
  13. 13. TARGET2 Liquidity saving featuresUsage by TARGET2 participants Prioritisation of payments and liquidity reservation facilities Around 20% of transactions are marked with a priority, evenly distributed between highly Normal urgent and urgent. 81% Main business cases: Highly urgent • A bank can ensure that the liquidity is used 10% first for its most critical transactions, e.g. for Urgent settling of other market infrastructures, urgent 9% (2010 data) bank-to-bank or customer transactions. • Allows limiting the “morning effect” in TARGET2 when on average 75,000 transactions are waiting for settlement at the time the day trade phase starts at 7 a.m. 13
  14. 14. TARGET2 Liquidity saving featuresUsage by TARGET2 participants Liquidity pooling There are 14 groups of accounts in TARGET2 regrouping 78 accounts i.e. around 8% of RTGS accounts opened in the system. Main business cases: • Virtual accounts for cooperative banks located in one country, as the feature supports their specific governance structure. • Virtual accounts for multi-country groups, as the feature supports a centralised treasury management across all the countries where they are present. • Consolidated accounting information for multi-country groups, as this feature allows them to benefit from the digressive pricing structure i.e. group pricing. 14
  15. 15. TARGET2 Liquidity saving featuresUsage by TARGET2 participants Optimisation algorithms In value (2010 data) Algorithm Around 18% of the system’s value and 5% of the 17.9% system’s volume is settled thanks to the four optimisation algorithms. The remainder is settled Entry disposition with offsetting immediately in the entry disposition (incl. 82.1% offsetting). Main business cases: In volume (2010 data) Algorithm • Queued normal payments. 5.3% • Transactions of other market infrastructures like ACHs or CSDs. • Night-time settlement of ancillary systems. Entry disposition with offsetting 94.7% 15
  16. 16. TARGET2 Liquidity saving featuresUsage by TARGET2 participants Usage of other features (as of June 2011) Active queue management On average around 12 transactions are revoked by participants every day. Timed payments Around 4,000 timed payments sent per day for a value of 125 bn €, representing approximately 1% of the volume and 5% of the value in TARGET2. Sender limits Around 1,000 limits are defined, mainly bilateral. Most participants however manage their limits outside TARGET2. 16
  17. 17. TARGET2 Liquidity saving features • TARGET2 offers comprehensive optimisation and liquidity management tools. • Usage of features depends on various aspects, like liquidity situation or practices in the different banking communities. • The Eurosystem with the service providing central banks (3CB) continuously reviews the effectiveness of the current set-up. 17
  18. 18. TARGET2Liquidity Saving Features