sibos 2011 target2 liquidity saving features
DESCRIPTION
TRANSCRIPT
TARGET2
Liquidity Saving Features
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TARGET2 Liquidity saving featuresIntroduction
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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
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TARGET2 Liquidity saving featuresList of Content
• Features available to banks
• Settlement algorithms
• Usage by TARGET2 participants
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TARGET2 Liquidity saving featuresFeatures available to banks
I. Payment priority and liquidity reservation
II. Liquidity pooling
III. Active queue management
IV. Timed payments
V. Sender limits
Available features
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TARGET2 Liquidity saving featuresFeatures available to banks
I. Payments priority and liquidity reservation
Participants can reserve part of their payment capacity for the settlement ofhighly urgent and urgent transactions as well as the settlement of a specific ancillarysystem (sub-account).
Three priority levels are available:normal: standard categorisationurgent: assigned by participant according to payment criticalityhighly urgent: settlement of ancillary systems, Central Bank operations, CLS
Ava
ila
ble
liq
uid
ity =
1,0
00
Reserved for
AS = 150
Urgent
reserve = 200
Highly urgent
reserve = 200
Capacity for
normal payments
= 450 Capacity for urgent
payments
= 650Capacity for
highly urgent payments
= 850
Capacity for AS
= 150
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TARGET2 Liquidity saving featuresFeatures available to banks
II. Liquidity pooling
Virtual account: Intraday aggregation of liquidity available on single accounts of agroup in form of a “virtual account”. Payments of single RTGS account can draw onglobal liquidity of the group. Limits, reservations or ordering of queued itemscentrally managed for the entire group, as if it was a single “virtual” account.
Consolidated information: Consolidated information and individual informationabout all accounts of the group available to the group-of-accounts manager. Eachgroup member has individual information about its account plus consolidated view.
Virtual account
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TARGET2 Liquidity saving featuresFeatures available to banks
IV. Timed paymentsParticipants 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 latestdebit time are either rejected or trigger a warning.
V. Sender limits
Participants can set an upward limit to the net flow of payments exchanged withanother individual participants (bilateral limit) or with all participants for which nobilateral limit is defined (multilateral limit). I.e. the amount the participant is willing topay to another participant(s) without having received payments from it.
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 inthe queue, ii) change priority of a queued payment, iii) change execution time ofpayments or iv) revoke any unsettled/queued payments.
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TARGET2 Liquidity saving featuresList of Content
• Features available to banks
• Settlement algorithms
• Usage by TARGET2 participants
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TARGET2 Liquidity saving featuresSettlement algorithms
Limits
Reservations
Liquidity
Algorithms 1 – 4
Liquidity increase Queue mgmt.
- event driven -
- time driven -
Algorithm 5
- for sub-a/c only -
Entry disposition
Optimisation: Entry disposition & Settlement algorithms
Queues
Queue resolution
Immediate settlement
- incl. offsetting -
Payments Ancillary system
transactions
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TARGET2 Liquidity saving featuresSettlement algorithms
Algo2 “partial optimisation” tries to settle all queued payments from allpriorities. It identifies transactions that when set aside would allow to turnnegative positions in to positive ones. Can be unsuccessful due to lack ofliquidity or breached limits;
Algo3 “multiple optimisation” aims at resolving all queues with the highestpossible settlement volume and low liquidity need using a combination ofbilateral resolution and multilateral settlement. Can end unsuccessfully ifinsufficient liquidity or breached limits;
Algo4 “partial optimisation for ancillary system settlement” is similar to Algo2with the difference that payments stemming from ancillary systems with asimultaneous 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 othersettlement processes.
(*)Algo1 “all-or-nothing” was disabled in July 2011.
Available settlement algorithms in TARGET2(*)
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• Features available to banks
• Settlement algorithms
• Usage by TARGET2 participants
TARGET2 Liquidity saving featuresList of Content
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TARGET2 Liquidity saving featuresUsage by TARGET2 participants
Prioritisation of payments and liquidity reservation facilities
Normal81%
Urgent9%
Highly urgent10%
Around 20% of transactions are marked with apriority, evenly distributed between highlyurgent and urgent.
Main business cases:
• A bank can ensure that the liquidity is usedfirst for its most critical transactions, e.g. forsettling of other market infrastructures, urgentbank-to-bank or customer transactions.
• Allows limiting the “morning effect” in TARGET2when on average 75,000 transactions arewaiting for settlement at the time the daytrade phase starts at 7 a.m.
(2010 data)
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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 featuresupports their specific governance structure.
• Virtual accounts for multi-country groups, as the feature supports acentralised treasury management across all the countries where they arepresent.
• Consolidated accounting information for multi-country groups, as this featureallows them to benefit from the digressive pricing structure i.e. group pricing.
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TARGET2 Liquidity saving featuresUsage by TARGET2 participants
Optimisation algorithms
Algorithm5.3%
Entry disposition with offsetting82.1%
Algorithm17.9%
In volume
In value
Around 18% of the system’s value and 5% of thesystem’s volume is settled thanks to the fouroptimisation algorithms. The remainder is settledimmediately in the entry disposition (incl.offsetting).
Main business cases:
• Queued normal payments.
• Transactions of other market infrastructures likeACHs or CSDs.
• Night-time settlement of ancillary systems.
(2010 data)
(2010 data)
Entry disposition with offsetting94.7%
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TARGET2 Liquidity saving featuresUsage by TARGET2 participants
Timed paymentsAround 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
Active queue managementOn average around 12 transactions are revoked by participants every day.
Around 1,000 limits are defined, mainly bilateral. Most participants howevermanage their limits outsideTARGET2.
Usage of other features (as of June 2011)
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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.
TARGET2
Liquidity Saving Features