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CEBS Technical Advice on Liquidity Risk Management Summary

Core Content

The Committee of European Banking Supervisors (CEBS) issued Technical Advice to the European Commission on Liquidity Risk Management, focusing on the management of liquidity risks within payment and securities settlement systems. The APACS Liquidity Managers Group, representing major liquidity providers in the UK, responded to this advice with specific comments on Recommendations 11 and 18.

Main Points

Recommendation 11

• Objective: The recommendation aims to ensure that liquidity managers have sufficient cash and/or collateral reserves to meet potential shortfalls.
• Group's Concern: The wording of the recommendation may lead to misinterpretation of the role of liquidity managers in gross payment systems.
• Clarification Needed: In practice, funds flow between payment banks such that timely inflows allow for steady outflows. Liquidity managers work to forecast payments flows and manage reserves effectively.
• Intraday Offset Importance: The group emphasizes that intraday offsetting of payments flows between members is a critical function that reduces the cost of operating gross payment systems.
• Alignment with Basel Principles: The group suggests that the recommendation should align more closely with Principle 8 of the Basel Committee's "Principles for Sound Liquidity Risk Management and Supervision", which focuses on the management of liquidity risk through liquidity coverage ratios and netting.

Recommendation 18

• Objective: The recommendation calls for the disclosure of liquidity risk management strategies.
• Group's View: While qualitative disclosure is acceptable and informative, quantitative disclosure is not appropriate and may be counter-productive.
• Risks of Quantitative Disclosure:
  • Timeliness: Publishing quantitative data requires significant investment in publication techniques.
  • Misinterpretation: There is a risk of misinterpretation, which could harm the firm's reputation.
  • Systemic Impact: In some cases, quantitative disclosures might lead to systemic damage if not handled carefully.
• Suggested Modification: The group recommends that the recommendation should only refer to qualitative information and avoid quantitative disclosures.

Key Information

• The APACS Liquidity Managers Group represents major liquidity providers in the UK, including net payments schemes (Bacs, Cheque and Credit, Faster Payments) and RTGS systems (CHAPS, CREST).
• The group does not have comments on the bulk of the recommendations, but focuses on Recommendations 11 and 18.
• The final settlement in net systems is gross, but it is distinct from the underlying net payments.
• The group believes that aligning with Basel principles is essential for clarity and consistency in liquidity risk management.
• Quantitative disclosures should be avoided due to the potential risks and operational costs associated with them.

Conclusion

The APACS Liquidity Managers Group supports the general framework of CEBS's technical advice but highlights the need for clarification and alignment with Basel principles. They specifically advise that Recommendation 11 should be reworded to avoid misinterpretation and that Recommendation 18 should focus only on qualitative information to prevent unintended consequences. Their feedback reflects the practical challenges and operational realities of managing liquidity in major payment and settlement systems.