Optimizing Intraday Liquidity Management

In this white paper, in collaboration with JD Risk Solutions, we examine how Distributed Ledger Technology (DLT) could help make same day settlement the new normal for payment infrastructures.

We start by unpacking the significant costs faced by banks today in managing intraday liquidity risk, arising from limitations with, and in part created by, current payment technologies and mechanisms. The lack of real-time settlement and the absence of standardization and interoperability across different systems and jurisdictions hampers control and efficiency across post-trade, highlighting further the requirement and opportunity to deliver much-needed modernization and optimization.

We further discuss why the transition to a digital payments platform based on Distributed Ledger Technology (DLT) has the potential to significantly cut intraday liquidity requirements, and thus systemically lower costs and risk across market participants. DLT provides a transparent and decentralized ledger for post-trade settlement, reducing counterparty risks and enhancing control. This increased visibility and potential automation contributes to more controllable and intelligently orchestrated settlement and the optimal use of liquidity.

The sustainable solution, in our view, is controllable, programmable and even atomic settlement – the ability for parties to handshake on payments simultaneously, instantly when required, and with the knowledge that pre-settlement all funds are ready to be exchanged with finality. We believe the evolution of DLT solutions involving central bank accounts will transform institutional payments models.

One system driving innovation and efficiency across the wholesale post-trade landscape, and offering the potential for PvP settlement, is Fnality Payment System (FnPS). FnPS went live in the UK in late 2023 and is the world’s first regulated means of payment on blockchain for institutions. The system’s efficiency and immediate settlement finality will allow financial institutions to optimize their intraday liquidity usage, minimizing the need for large buffers and improving overall liquidity management. As a wholesale digital — and regulated — payment system, FnPS unlocks the potential for truly digital business models within and between institutions and helps accelerate transformation towards digital capital markets.

Not a product of UBS research and does not constitute a financial promotion. UBS AG (London Branch) is a shareholder of Fnality International.