Monitoring intraday liquidity risks in a real-time gross settlement system

Neville Arjani, Fuchun Li and Leonard Sabetti

Journal of Financial Market Infrastructures

Abstract: We propose an intraday liquidity risk indicator (LRI) for each participant in a realtime gross settlement system (RTGS). The LRI is constructed by comparing the evolution of the expected intraday liquidity sources used by a participant for settling payments with the evolution of that participant’s expected intraday liquidity requirements in the remainder of the payment day. Using the data from Canada’s RTGS-equivalent payment system, the large-value transfer system (LVTS), to evaluate the forecasting performance of the LRI, we find that it performs reasonably well. Further, based on the LRI, we propose an early warning indicator (EWI) that can predict the likelihood of an intraday liquidity risk event occurring in the remainder of the payment day. Both the LRI and EWI are applied to monitor intraday liquidity risks for participants in the LVTS. The empirical results suggest that the participants manage their intraday liquidity positions well, allowing them to meet payment and settlement obligations on a timely basis, which contributes to the smooth functioning of the LVTS.

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