sibos 2011 target2 liquidity saving features

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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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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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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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 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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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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Liquidity pooling

There are 14 groups of accounts in TARGET2 regrouping 78 accounts i.e.around 8% of RTGS accounts opened in the system.


• 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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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).


• 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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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

sibos 2011 target2 liquidity saving features

Economy & Finance