1 sandia national laboratories performance and resilience to liquidity disruptions in interdependent...
TRANSCRIPT
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SandiaNationalLaboratories
Performance and resilience to liquidity disruptions in interdependent
RTGS payment systemsFabien Renault1 Morten L. Bech2
Walt Beyeler3
Robert J. Glass3
Kimmo Soramäki4
1Banque de France
2Federal Reserve Bank of New York
3Sandia National Laboratories
4Helsinki University of TechnologyJoint Banque de France / European Central Bank conference on
"Liquidity in interdependent transfer systems"Paris, 9 June 2008
The views expressed in this presentation are those of the authors and do not necessarily reflect those of their respective institutions
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Motivation• The 2001 Group of Ten “Report on Consolidation in the Financial Sector” (the
Ferguson report) noted a possible increased interdependence between the different systems due to:
– The emergence of global institutions that participate to many systems– The emergence of global service providers offering services to many systems– The development of DvP procedures linking RTGS and SSS– The development of CLS
• The report suggested that these trends might accentuate the role of payment and settlement systems in the transmission of disruptions across the financial system.
• To complement this previous work, the CPSS (Committee on Payment and Settlement Systems) commissioned a working group to:
– describe the different interdependencies existing among the payment and settlement systems of CPSS countries
– analyze the risk implications of the different interdependencies
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• Could a modeling approach provide any useful additional information to the regulators ?
• So far, payment and settlement system modeling has been mainly limited to a single system, with a few exceptions
• We want to model the interactions between two payment systems and understand how interdependencies arise
• We wish to understand how disruptions in one system manifest in the other
System-based Interdependencies
System System
Financial Institution
Institution-based Interdependencies
System System
IT service provider
Environmental Interdependencies
System System
Motivation
Dealt with in this presentation
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RTGS€Extended core
CoreSmaller € local
players
E20 E4
E21
E22
E5
E23
E6
E3
E1 E2
EiE97
RTGS$
Core
Extended core
Smaller $ local playersA3
A1 A2
A5
A6
A23
A21
A4 A22A20
Ai
A97• Two RTGS systems in two different currencies: $ and €
• Both systems are similar in structure with 100 banks
• Six “global banks”. Top three banks in each system have a presence also in the other system
• The global banks make FX trades (at constant exchange rate) among each other
• All banks make local payments
Coupled RTGS modelModel description
E3E1
E2
A3
A2A1
FX market
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• Payment instructions arrive according to a non-homogenous Poisson process– intuition: customers who have received funds issue payments more frequently than bank customers
who have already sent many payments
• FX trades arrival is similar as above, now taking into account balances in both currencies– E.g. banks with high euro positions are likely to sell euro and vice versa
• Those two systems are linked– Via the dual participation of some global banks that can make FX trades (institution-based
interdependency)– Via a possible PvP (Payment versus Payment) constraint on the FX trades (system-based
interdependency), the alternative being a non-PvP settlement
Coupled RTGS modelModel description
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Correlation dynamics
Local $ payment orders
Local € payment orders
FX trades
$ legs of FX trades
€ legs of FX trades
High liquidity PvP or non-PvP
Correlation: 0.22(institution-based interdependency)
Local $ payment orders
Local € payment orders
FX trades
$ legs
€ legs
Settled payments
Settled payments
Congestions and
cascades
Congestions and
cascades
Low liquiditynon-PvP
Correlation: -0.02(none)
PvP link
Local $ payment orders
Local € payment orders
FX trades
$ legs
€ legs
Settled payments
Settled payments
Congestions and
cascades
Congestions and
cascades
Low liquidityPvP
Correlation: 0.83(system-based
interdependency)
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Summary of main results
• PvP– increases queues– eliminates exposures
• Lower liquidity– increases queues– Increases exposures (in case of non-PvP)
• Liquidity differences in the two systems– Reducing liquidity in one system increases queuing in the other (in case of PvP)– Banks selling the more liquid currency face higher exposures (in case of non-
PvP)
• Higher priority for FX trades – Decreases queues in the more liquid system (in case of PvP)– Does not affect queues when both systems have same liquidity– Substantially reduces exposures (in case of non-PvP)
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Operational disruption• An operational disruption affects a significant local € bank
– The affected bank does not participate in RTGS $, nor engage in FX transactions
– The affected bank is unable to submit its € local payments for a certain duration
– The affected bank acts as a liquidity sink for RTGS €
• To which extent will the disruption affect RTGS $ ?– Four different cases:
• PvP or non-PvP
• High Liquidity or Low Liquidity (the same in both systems)
• What are the channels of propagation through which the crisis spreads from one RTGS to the other ?
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Operational disruption
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Euro System
A B C D E F G H
PvP, High Liquidity
PvP High Liquidity
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Operational disruption
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A B C D E F G H
PvP, High Liquidity
PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-50 %)
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Operational disruption
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/Tim
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Dollar System
Euro System
A B C D E F G H
PvP, High Liquidity
PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-50 %)• Recovery: settlement rate in RTGS $ overshoots
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Operational disruptionPeriod A• Steady state
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Euro System
A B C D E F G H
PvP, High Liquidity
PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-50 %)• Recovery: settlement rate in RTGS $ overshoots
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Operational disruptionPeriod A• Steady state
Period B• € balances vanish
• € local payments are queued
• Both legs of FX trades are queued, RTGS $ deprived of FX activity
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Euro System
A B C D E F G H
PvP, High Liquidity
PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-50 %)• Recovery: settlement rate in RTGS $ overshoots
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Operational disruptionPeriod A• Steady state
Period B• € balances vanish
• € local payments are queued
• Both legs of FX trades are queued, RTGS $ deprived of FX activity
Period C• RTGS $ down to local activity
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Euro System
A B C D E F G H
PvP, High Liquidity
PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-50 %)• Recovery: settlement rate in RTGS $ overshoots
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Operational disruptionPeriod A• Steady state
Period B• € balances vanish• € local payments are queued• Both legs of FX trades are queued,
RTGS $ deprived of FX activity
Period C• RTGS $ down to local activity
Period D• Because of the queuing of FX
trades (PvP), customers have lower $ funds and make fewer $ local payments
Period E-F• Queued € local payments settle• Queued FX trades settle
Period G• Return to equilibrium generates
extra trades
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aym
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/Tim
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Dollar System
Euro System
A B C D E F G H
PvP, High Liquidity
PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-50 %)• Recovery: settlement rate in RTGS $ overshoots
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Operational disruptionPeriod A• Steady state
Period B• € balances vanish• € local payments are queued• Both legs of FX trades are queued,
RTGS $ deprived of FX activity
Period C• RTGS $ down to local activity
Period D• Because of the queuing of FX
trades (PvP), customers have lower $ funds and make fewer $ local payments
Period E-F• Queued € local payments settle• Queued FX trades settle
Period G• Return to equilibrium generates
extra trades
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aym
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/Tim
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Dollar System
Euro System
A B C D E F G H
PvP, High Liquidity
PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-50 %)• Recovery: settlement rate in RTGS $ overshoots
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Operational disruptionPeriod A• Steady state
Period B• € balances vanish• € local payments are queued• Both legs of FX trades are queued,
RTGS $ deprived of FX activity
Period C• RTGS $ down to local activity
Period D• Because of the queuing of FX
trades (PvP), customers have lower $ funds and make fewer $ local payments
Period E-F• Queued € local payments settle• Queued FX trades settle
Period G• Return to equilibrium generates
extra trades
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Set
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e (P
aym
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/Tim
e)
Dollar System
Euro System
A B C D E F G H
PvP, High Liquidity
PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-50 %)• Recovery: settlement rate in RTGS $ overshoots
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0
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Sett
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(Pay
men
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Dollar System
Euro System
PvP, Low Liquidity
Operational disruption
PvP Low Liquidity
A B C D E
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Euro System
PvP, Low Liquidity
Operational disruption
PvP Low Liquidity• Outage: settlement rate in RTGS $ decreases (-65 %)
A B C D E
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Sett
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ate
(Pay
men
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ime)
Dollar System
Euro System
PvP, Low Liquidity
Operational disruption
PvP Low Liquidity• Outage: settlement rate in RTGS $ decreases (-65 %)• Recovery: settlement rate in RTGS $ overshoots
(reaches maximum rate)
A B C D E
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Sett
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ate
(Pay
men
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ime)
Dollar System
Euro System
PvP, Low Liquidity
Operational disruptionPeriod B• € balances vanish
• € local payments are queued
• Both legs of FX trades are queued, RTGS $ deprived of FX activity
Period C• The queuing of FX trades
decreases $ deposits. Agents are uncertain about their $ position, fewer $ local payments emitted
• The distribution of $ deposits is brought out of equilibrium because of the disruption. In this low liquidity context, this causes $ local payments to be queued
Period D• Queued € local payments settle
• Queued FX trades settle
• Queued $ local payments settle
Period E• Return to equilibrium marginally
affects settlement rate
PvP Low Liquidity• Outage: settlement rate in RTGS $ decreases (-65 %)• Recovery: settlement rate in RTGS $ overshoots
(reaches maximum rate)
A B C D E
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Operational disruption
Non-PvP High Liquidity
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aym
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/Tim
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Dollar System
Euro System
non-PvP, High Liquidity
A B C D E F G
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Operational disruption
Non-PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-17 %)• Recovery: no overshoot in RTGS $
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aym
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/Tim
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Dollar System
Euro System
non-PvP, High Liquidity
A B C D E F G
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Operational disruption
Non-PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-17 %)• Recovery: no overshoot in RTGS $
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e (P
aym
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/Tim
e)
Dollar System
Euro System
non-PvP, High Liquidity
A B C D E F G
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Operational disruptionPeriod B• € balances vanish
• € local payments are queued
• € leg of FX trades are queued$ leg of FX trades still settle
Period C• The queuing of € local payments
decreases € deposits. Agents are uncertain about their € position, fewer FX trades emitted. RTGS $ is deprived from FX activity
Period D• Only local activity in RTGS $
Period E• Queued € local payments settle
• Queued € leg of FX trades settle
Period F• Return to equilibrium generates
extra trades
Non-PvP High Liquidity• Outage: settlement rate in RTGS $ decreases (-17 %)• Recovery: no overshoot in RTGS $
0
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e (P
aym
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/Tim
e)
Dollar System
Euro System
non-PvP, High Liquidity
A B C D E F G
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Operational disruption
Non-PvP Low Liquidity
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Se
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te (
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)
Dollar System
Euro System
non-PvP, Low Liquidity
A BC D E F
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Operational disruption
Non-PvP Low Liquidity• Outage: settlement rate in RTGS $ decreases (-25 %)
0
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Euro System
non-PvP, Low Liquidity
A BC D E F
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Operational disruption
Non-PvP Low Liquidity• Outage: settlement rate in RTGS $ decreases (-25 %)• Recovery: settlement rate in RTGS $ overshoots
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Euro System
non-PvP, Low Liquidity
A BC D E F
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Operational disruptionPeriod B• € balances vanish
• € local payments are queued
• € leg of FX trades are queued$ leg of FX trades still settle
Period C• The queuing of € local payments
decreases € deposits. Agents are uncertain about their € position, fewer FX trades emitted. RTGS $ is deprived from FX activity
Period D• Only local activity in RTGS $
• The distribution of $ deposits is brought out of equilibrium because of the disruption. In this low liquidity context, this causes $ local payments to be queued
Period E• Queued € local payments settle
• Queued FX trades settle
• Queued $ local payments settle
Non-PvP Low Liquidity• Outage: settlement rate in RTGS $ decreases (-25 %)• Recovery: settlement rate in RTGS $ overshoots
0
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Euro System
non-PvP, Low Liquidity
A BC D E F
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Exp
osu
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llar
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uro
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Dollars Owed
Euros Owed (maximum at 101.000)
non-PvP, High Liquidity
Operational disruption
Non-PvP High Liquidity, FX exposures
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Dollars Owed
Euros Owed (maximum at 101.000)
non-PvP, High Liquidity
Operational disruption
Non-PvP High Liquidity, FX exposures• Outage: huge increase in € owed (1 000 times
normal exposures)
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Exp
osu
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Dollars Owed
Euros Owed (maximum at 101.000)
non-PvP, High Liquidity
Operational disruption
Non-PvP High Liquidity, FX exposures• Outage: huge increase in € owed (1 000 times normal
exposures)• Recovery: large increase in $ owed (15 time normal
exposure)
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0
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Simulation Time
Exp
osu
re (
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Dollars Owed
Euros Owed (maximum at 101.000)
non-PvP, High Liquidity
Operational disruption
Non-PvP High Liquidity, FX exposures• Outage: huge increase in € owed (1 000 times normal
exposures)• Recovery: large increase in $ owed (15 time normal
exposure)
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Cross-currency channels of disruption propagation
• Channel 1: Low € balances at the CB prevent settlement of € leg of FX transactions (PvP) or create FX exposures (non-PVP)
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• PvP: – All FX settlement
activity stops, RTGS $ is deprived from FX settlement activity
Cross-currency channels of disruption propagation
• Channel 1: Low € balances at the CB prevent settlement of € leg of FX transactions (PvP) or create FX exposures (non-PVP)
0
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e (P
aym
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/Tim
e)
Dollar System
Euro System
PvP, High Liquidity
36
• PvP: – All FX settlement
activity stops, RTGS $ is deprived from FX settlement activity
– Because of the queuing of FX trades (PvP), customers have lower $ funds and make fewer $ local payments
Cross-currency channels of disruption propagation
• Channel 1: Low € balances at the CB prevent settlement of € leg of FX transactions (PvP) or create FX exposures (non-PVP)
0
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/Tim
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Dollar System
Euro System
PvP, High Liquidity
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Exp
osu
re (
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llar
s o
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uro
s O
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Dollars Owed
Euros Owed (maximum at 101.000)
non-PvP, High Liquidity
• PvP: – All FX settlement
activity stops, RTGS $ is deprived from FX settlement activity
– Because of the queuing of FX trades (PvP), customers have lower $ funds and make fewer $ local payments
• Non-PvP:– Very high exposures
(unsettled € legs) during crisis
Cross-currency channels of disruption propagation
• Channel 1: Low € balances at the CB prevent settlement of € leg of FX transactions (PvP) or create FX exposures (non-PVP)
38
Cross-currency channels of disruption propagation
• Channel 2: Low € customer funds lead to fewer emitted FX trades– Banks customers’ € liquidity is trapped within queued payments. Therefore, customers
emit fewer FX trades
39
Cross-currency channels of disruption propagation
• Channel 2: Low € customer funds lead to fewer emitted FX trades– Banks customers’ € liquidity is trapped within queued payments. Therefore, customers
emit fewer FX trades
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Euro System
non-PvP, High Liquidity
This leads to RTGS $ being eventually deprived of FX activity, even in the non-PvP case
40
Cross-currency channels of disruption propagation
• Channel 3: As not all banks are similarly affected, the system becomes unbalanced
– The FX banks for which the disrupted bank is an important counterparty see their level of € customer funds decrease more rapidly.
– These banks become net € buyers ($ sellers) on the FX market. RTGS $ becomes unbalanced.
41
Cross-currency channels of disruption propagation
• Channel 3: As not all banks are similarly affected, the system becomes unbalanced
– The FX banks for which the disrupted bank is an important counterparty see their level of € deposits decrease more rapidly.
– These banks become net € buyers ($ sellers) on the FX market. RTGS $ becomes unbalanced.
0
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Se
ttle
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nt
Ra
te (
Pa
ym
en
ts/T
ime
)
Dollar System
Euro System
non-PvP, Low Liquidity
• Low Liquidity: – this leads to the
queuing of several $ local payments, even in the non-PvP case…
42
Cross-currency channels of disruption propagation
• Channel 3: As not all banks are similarly affected, the system becomes unbalanced
– The FX banks for which the disrupted bank is an important counterparty see their level of € deposits decrease more rapidly.
– These banks become net € buyers ($ sellers) on the FX market. RTGS $ becomes unbalanced.
0
2000
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Simulation Time
Se
ttle
me
nt
Ra
te (
Pa
ym
en
ts/T
ime
)
Dollar System
Euro System
non-PvP, Low Liquidity
• Low Liquidity: – this leads to the queuing of
several $ local payments, even in the non-PvP case…
– And to an overshoot at recovery, even in non-PvP case
43
0
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Simulation Time
Exp
osu
re (
Do
llar
s o
r E
uro
s O
wed
)
Dollars Owed
Euros Owed (maximum at 101.000)
non-PvP, High Liquidity
Cross-currency channels of disruption propagation
• Channel 3: As not all banks are similarly affected, the system becomes unbalanced
– The FX banks for which the operationally disrupted bank is an important counterparty see their level of € deposits decrease more rapidly.
– These banks become net € buyers ($ sellers) on the FX market. RTGS $ becomes unbalanced.
• Low Liquidity: – this leads to the queuing of
several $ local payments…– And to an overshoot at
recovery, even in non-PvP case
• Non-PvP:– This creates a peak in $
owed exposures at recovery, event at high liquidity
44
Conclusions• A simple model of interconnected RTGS was developed
• During normal operation, the two RTGS are shown to be interdependent
• When a liquidity crisis affects one RTGS, the crisis propagates to second RTGS in all considered cases– PvP:
• sharp decrease in activity (local and FX) in second RTGS
– Non-PvP: • Decrease in activity in second RTGS due to fewer FX trades emitted
• At low liquidity, local payments in second RTGS are also affected
• Large increase of FX exposures during crisis and recovery