Blockchain Technology -Scope for Intraday Liquidity Management

Fibo Quantum

Across the globe, Liquidity Management continues to be key function for bank treasurers.  As Corporate Banks / Financial Institutions seeks to have safe and secured network to enable more robust measuring and monitoring capabilities of cash management. Blockchain
network 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 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 / 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 counterparty clearing houses and financial markets.

Blockchain Technology LMS:

              Bank Treasury team needs a robust and secure system to have seamless real time integration with securities and treasury system. Blockchain technology has the unique to meet the bank treasury requirements. As blockchain, technology has
the capability by creating a real-time updating digital ledger that records data changes to support instantaneous payment and settlement.

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

Intraday LMS with Blockchain technology:

Across the globe, Banks are adopting to blockchain technology 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 network.
  2. Real time payment and settlement across the globe. 
  3. Reconciliation of account and settlements will be faster.
  4. Risk of failure of counterparty 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 network.
  7. Audit Trail is capture for all transaction involved in the blockchain network 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 technology and create the platform, which is
    complex and expensive initially.
  2. If there can be any network or technical snag in the system, this could lead to delayed reconciliation and payments.
  3. Regulatory approvals from central banks are mandatorily 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 technology have provided great features like security, real-time recording of transaction, Audit and accuracy. As this technology 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 network.

 

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