Liquidity management: real-time nostro time?

Liquidity management: real-time nostro time?

As part of its global payments innovation initiative, Swift and a group of banks have been trialling distributed ledger technology (DLT) in the reconciliation of nostro databases in real-time.

In total, 33 global banks have taken part in Swift’s blockchain proof of concept (POC), designed to validate whether the technology could help banks reconcile their international nostro accounts in real-time. The POC is part of Swift’s global payments innovation (gpi) service for cross-border payments. Swift will present the findings from the POC during a SwiftLab session tomorrow at 10:15.

Preliminary conclusions indicate that the Swift-developed DLT application delivers the business functionalities and data richness required to support real-time liquidity monitoring and reconciliation. Issues remain, however, including data confidentiality, governance and identification framework.

“While significant progress has been made on the technology side, one must realise that it is still early days for the newer generation of blockchain and that it will still take some time before it is ready for mission-critical applications,” said Damien Vanderveken, head of research and development at SwiftLab and of user experience at Swift.

Banks hold nostro accounts with each other, usually in a foreign country and in a foreign currency. Typically, the banks receive nostro account information at the end of the day. The information is often from disparate sources and must be aggregated overnight. This means reconciliation of accounts is done using end of day statements. From a liquidity management perspective, this is far from optimal.

Attempts to bring real-time to nostro accounts started more than a decade ago. Back in the early 2000s, a group of banks chose the Cable & Wireless Real Time Nostro product as a standard infrastructure for sharing nostro account information. Later, the product became Gresham Computing’s Clareti Cash Reporting Services, and was ultimately integrated with SunGard’s Real Time Liquidity Management solution. (SunGard was acquired by FIS at the end of 2015.)

Fast forward to today and developments are continuing apace. In July, Swift and the Liquidity Implementation Task Force – a group of large and medium sized custodian banks and global brokers – released an industry standard for intraday liquidity. The standard is designed to help banks comply with intraday liquidity regulatory frameworks and optimise liquidity monitoring of their correspondent banking accounts positions, through the provision of debit and credit confirmations at transactional level in real time.

Swift says around 35% of the cost of an international payment transaction is related to nostro-vostro reconciliation and liquidity, including the opportunity cost related to trapped liquidity. To manage their positions more efficiently – avoiding liquidity excess or unnecessary overdrafts – financial institutions first need better visibility of their liquidity positions on those accounts, on an intraday basis. The intraday liquidity standard is a “crucial component” to allow banks to exchange this information on a transactional level in real time, says Swift.

The standard was developed by Swift in consultation with more than 20 liquidity users and providers, providing a common set of business rules and technical specifications applying to cash reporting in the interbank space. It includes nostro and custodian cash accounts. It supports real-time transactions by transaction liquidity reporting and resolves data challenges caused by the lack of real-time reporting, timed confirmations and data accuracy.

At the launch of the standard, David Gaselee, head of agency and intraday liquidity, financial institution product management at Barclays Corporate Banking, said the standard would help the bank’s clients to manage their liquidity positions more efficiently. “Through more streamlined and standardised reporting across the industry, we hope to be able to make real-time reconciliation much simpler and reduce costs.”

The standard is also used as the basis for Swift’s gpi distributed ledger PoC, which leverages the common rulebook provided by the intraday liquidity standard. It explores the use of DLT to help banks manage their intraday positions and reconcile those nostro accounts more efficiently and in real-time, optimising intraday liquidity, lowering costs and reducing operational risk.

Didier Balland, head of marketing for correspondent banking, at Société Générale, which is a participant in the PoC, says standardisation will help to reduce costs and build the necessary base for new services. The bank will adopt the standard during 2018, he says.

Launched in January 2017, the gpi PoC aims to help banks overcome significant challenges in monitoring and managing their international nostro accounts, which are crucial to the facilitation of cross-border payments. At present, banks cannot monitor their account positions in real time because they lack intraday reporting coverage. The PoC recognises the need for banks to receive real-time liquidity data to manage funds throughout the business day. At its core, the PoC builds on the rulebook defined by Swift as part of the intraday liquidity standard.

“The potential business benefits ensuing from the PoC are clear,” says Vanderveken. “If banks could manage their nostro account liquidity in real time, it would allow them to accurately gauge how much money is required in each account at any given point, ultimately enabling them to free up significant funds for other investments.”

Carolyn Burke, head, enterprise payments at Royal Bank of Canada, agrees. She says blockchain’s ability to enable all partners to see data in real time should bear fruit in liquidity management. A PoC, she adds, is a “learning tool” that enables participants to determine which tools work best in which areas.

In developing the PoC, Swift leveraged Hyperledger Fabric v1.0 technology, and combined it with key Swift assets, to ensure that all the information related to nostro and vostro accounts is kept private and seen only by the account owner and its correspondent banking partner. The PoC application used a private permissioned blockchain in a closed user group environment, with specific user profiles and strong data controls. User privileges and data access was strictly governed.

Nigel Dobson, general manager, transformation projects at ANZ, says the POC leverages a bilateral trial the bank did with Wells Fargo in the third quarter of 2016 for cross-border payments. “That trial showed how DLT can be used for real-time nostro reconciliation to make payments more efficient. A wider multilateral trial was then tested through Swift’s GPI, which aims to help banks improve their liquidity, as well as make payments faster, more transparent and more traceable.”

While other technologies could be just as effective, says Dobson, DLT “covered the items on our checklist” balancing the need for security, scalability, transparency and protecting confidentiality.

The PoC is just one of a series of phases planned for gpi. More than 110 transaction banks from Europe, Asia Pacific, Africa and the Americas have signed up to the gpi initiative, which opened for live payments in January 2017. The first phase of the initiative is focused on business to business payments. A second phase will encompass digitisation of cross-border payments, followed by an exploration of the potential of new technologies such as distributed ledger, in the third phase.

Wim Raymaekers, head of banking markets and gpi at Swift, says in its initial phase, gpi uses existing payments rails, which enabled the initiative to be rolled out quickly. “Now that gpi is up and running, we can assess other technologies such as blockchain for related activities like settlement.”

Nostro and vostro accounts lend themselves to DLT because they are ledgers between banks of what they have on account with each other.

For the PoC, a smart contract application has been developed on top of a DLT protocol. This is connected to debit and credit events and passes through the relevant parties allowing banks to determine their exposures and balances at any time.

gpi is very much the start of a journey, adds Raymaekers. “We will bring more value over time like blockchain, DLT and rich payments data. We will respond to each challenge banks face in a significant way.”

Paula Roels, head of market infrastructure and industry initiatives, institutional cash management at Deutsche Bank – another institution involved in the PoC – agrees gpi is a journey that is just beginning. “But this initiative shows that, although banks compete with each other in the correspondent banking business, collaborative efforts are indeed vital to benefit international trade as a whole.”

This article is also featured in the Daily News at Sibos 2017 – Day 1 edition. 
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