VIDEO | As financial institutions face increasing regulatory demands and shifting market dynamics, intraday liquidity management has come into sharp focus. At the PostTrade 360° Nordic 2024 session “Intraday liquidity management, part 2: The investor-side and corporate view”, panelists explored how the industry is responding to challenges like T+1 settlement, collateral optimisation, and the rise of digital assets. The session underscored the need for a proactive approach to liquidity management that balances regulatory compliance with operational innovation.
Reflecting on the 2022 “LDI crisis,” which exposed systemic risks in the UK’s defined benefit pension sector, Imran Razvi, senior policy adviser at The Investment Association, described the scenario where pension funds struggled to meet sudden margin calls. “The concentration of 6,000 investors essentially following the same approach led to a cascading effect when things went wrong,” Razvi explained, noting that the sector’s dependence on the gilt market left it highly vulnerable to market shifts. The crisis prompted intervention from the Bank of England and highlighted the need for increased regulatory oversight.
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Following the crisis, the Bank of England introduced higher collateral buffers for pension funds, increasing requirements from around 100 basis points to between 300 and 400 basis points. Razvi explained that while these changes are critical for stability, they also present a trade-off. “Having those buffer levels too high potentially makes those strategies unusable for pension schemes because it just creates an enormous amount of cash drag,” he noted. To ease these pressures, some LDI managers have begun working with broader collateral pools, including “credit-collateralised gilt repos,” which Razvi described as “quite helpful” for providing more flexible options for margin calls.
T+1 settlement
The industry’s shift to T+1 settlement, requiring transactions to settle within one business day, has further amplified liquidity management challenges. James Sehgal of Tonic Consultancy explained how this accelerated settlement cycle is reshaping both pre-deal and post-deal processes, stating, “What T+1 is doing is reinforcing the cycle in a faster way.” Sehgal highlighted the pressure this creates on asset managers to constantly reassess pricing, funding, and collateral to ensure they meet next-day settlement requirements. As he put it, firms must consider, “Am I getting the right price? Am I optimising my collateral and margin requirements?”
With T+1 settlement cycles becoming the norm, many asset managers are moving collateral optimisation from the back office to the front. Sehgal noted that “larger asset managers are beginning to get that light turned on,” recognising the importance of efficient collateral management as they seek to adapt to faster settlement demands.
Impact of Uncleared Margin Rules (UMR) on liquidity
Mark Croxon, co-founder of reifi, discussed the impact of Uncleared Margin Rules (UMR) on liquidity. Intended to encourage centralised clearing, UMR has led to a significant increase in voluntary clearing, especially for non-deliverable forwards (NDFs). Croxon pointed to data showing a “4x increase in the voluntary clearing of NDFs,” suggesting that regulatory pressure is indeed shifting liquidity strategies. However, UMR’s administrative requirements are significant, pushing firms to seek creative solutions for compliance.
Central Bank liquidity facilities
As digital assets and tokenisation gain traction, panelists explored their role in liquidity management. Razvi discussed how tokenising money market funds could reduce operational friction by allowing “net off through the use of digital tokens.” This innovation, he explained, could lessen reliance on traditional liquidity buffers during high-demand periods, potentially easing market pressure.
The panel also debated the merits of central banks offering emergency liquidity facilities to the buy side, similar to those available to banks. Razvi clarified that while such a facility might be helpful in crisis situations, the industry has not formally requested it, explaining that asset managers “can then access [liquidity] via bank counterparties.” Sehgal added that making such facilities costly could serve as an incentive for firms to build their own liquidity buffers rather than relying on public support.
Panelists:
Imran Razvi, senior policy adviser, Pensions & Institutional Market, The Investment Association
Mark Croxon, co-founder, reifi
James Sehgal, SME, Risk and XVA, Tonic
Moderator: Olaf Ransome, director, 3C Advisory
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