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Blockchain Platform -Scope for Intraday Liquidity Management

Across the globe, Liquidity Management continues to be key function for bank treasurers. As Corporate Banks / Financial Institutions seeks to have safe and secured platform to enable more robust measuring and monitoring capabilities of cash management. Blockchain platform enables banks to have secured network and enable real time / Intraday / End of day Liquidity Management System.

We will elaborate various participants who are using in Liquidity Management system in the banking system.

Corporate Customers:

As Corporate Customer, avail intraday sweeping and end of day sweeping method in liquidity Management system to pool their funds from different sub account to respective master accounts. As per the customer contract agreement bank will setup the sweeps like currency, sweep frequency timings, source and target accounts, and system automatically initiates sweep transactions via swift message (MT940 / MT 942 intraday) to the respective account based on frequency setup.  These are traditional method bank follow across the globe with help of swift network.

Banks:

As banks are involved in treasury operations for their day-to-day operation-involving buy / selling / foreign exchange and Securities. Bank would like to have intraday liquidity management system to access cash / securities during the day-to-day treasury operation. This will help bank to meet the payment and settlement obligation with counterparts / banks Custodians / Central Banks and other financial institutions.

Current state - Liquidity Management system:

Central Banks across the globe monitors the liquidity situations and gradually increase or decrease interest rate to manage capital regulation and Forex position of the country.

Banks create treasury position across the markets were there are opportunities identified as per their requirements based on various factors such as interest rate , political stability and liquidity position. Corporate customers levy on bank to manage all their intraday payments and receipts to clients, custodians, central counterpart clearing houses and financial markets.

Blockchain Platform - LMS:

             Bank Treasury team needs a robust and secure system to have seamless real time integration with securities and treasury system. As blockchain, technology has the capability by creating a real-time digital ledger that records data changes to support instantaneous payment and settlement between the parties involved in respective market (Treasury / Securities).

However, Bank should ensure all the related parties like custodian, central counterpart clearing houses and financial markets should also be in the blockchain platform for seamless payment and settlement in the platform.

Intraday LMS with Blockchain:

Across the globe, Banks are adopting to blockchain platform for various banking operations like trade finance, letter of credit etc. Banks can capitalize with help of blockchain technology to implement the intraday liquidity management solutions. These will help banks to have the following advantages

1.     Bank can borrow / lend money seamless on the blockchain platform.

2.     Real time payment and settlement across the globe.

3.     Reconciliation of account and settlements will be faster.

4.     Risk of failure of counterpart payments/ receivables are reduced.

5.     Transaction status captured real-time and confirmed to back office by both the parties’ lender / borrower.

6.     Ease of Regulatory Reporting with accurate data received from blockchain platform.

7.     Audit Trail is capture for all transaction involved in the blockchain platform for future references.

At the same time, there are few challenges, which are mentioned below for reference.

1.     Banks / Financial institutions / custodian should invest in blockchain platform, which is cost expensive initially.

2.     If there are any technical snag in the system, this could lead to delayed reconciliation and payments.

3.     Regulatory approvals from central banks are mandatory required and understanding of current regulation across markets for using blockchain technology.

4.     Data security and privacy has to be addressed as per central bank regulation standards.

5.     Awareness of blockchain technology is required across banks and institutions.

6.     Integration with legacy system.

Overall Blockchain platform have provided great features like security, real-time recording of transaction, Audit and accuracy. As this platform is new to market, banks / financial institutions / custodian / Financial Markets need to have detailed analysis before implementation.  Regulatory approvals as per country standards has to be adhered to avoid any regulatory fine and compliance issues for the transaction performed on the platform.

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Arunachalam N

Arunachalam N

Senior consultant

Mindtree

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Location

Bangalore

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