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Liquidity management

TARGET2 is a single point of access to central bank liquidity, offering users a range of high-quality tools for optimising and managing their euro liquidity.

Provision of intraday collateralised credit

TARGET2 participants can obtain an intraday credit facility that is automatically secured against the assets and securities pledged to the Banque de France via the overall collateral management system (3G).

Implemented in 2008, the 3G system allows participating banks to manage all the financial instruments and assets they have pledged to the Banque de France. The guarantees are pooled together and can be used in three different ways:

  • for monetary policy operations;
  • to create a credit reserve which acts as a buffer in the event of a fluctuation in the value of the participant's collateral, avoiding the need for an additional haircut;
  • guarantees not used for the credit reserve or for monetary policy operations can be used to secure an intraday credit facility in TARGET2.

Participating institutions can use this intraday credit facility as often as needed throughout the day, giving them extra flexibility in their liquidity management.

However, if the credit facility is not reimbursed at the end of the day, or the participant’s account balance is negative, the intraday loan is converted into an overnight marginal lending facility, which charges interest at the marginal lending rate.
  

Liquidity optimisation tools

TARGET2-Banque de France is a gross real time settlement system (RTGS) which means that transactions are settled order by order, on a continuous basis, without netting. One of the key advantages of this system is that it reduces systemic risk: all payments are final as soon as they are settled by the system. However, prompt finality can only be achieved if there is sufficient liquidity available and efficient settlement mechanisms are implemented.

To this end, TARGET2 provides its users with high-performance liquidity management tools:

  • Payments are assigned a priority level (highly urgent, urgent or normal), depending on their importance, and then placed in the corresponding queue to await processing. Participants can switch normal priority payments to urgent and vice versa, but they cannot modify the priority level of payments defined as highly urgent.
  • Payment timing: the time of the payment is specified in advance. If no settlement time is indicated, payment orders are settled immediately.
  • Liquidity reservation: participants have the option of reserving liquidity for urgent and/or highly urgent payments, or for the settlement of ancillary systems.
  • Sender limits on outflows of liquidity to a given participant (bilateral limit) or to all TARGET2 participants (multilateral limit).
  • Active management of payment queues. Each account has three payment queues, corresponding to the three levels of priority. In order to optimise their liquidity management, participants can change the order of the payments in their queues

Optimisation procedures and algorithms to save liquidity. These identify queued payments intended for the same counterparty, and pair or group them together so they can be executed simultaneously.
 

 

Liquidity pooling

TARGET2 consists of a single shared platform and a harmonised legal, organisational and payment framework. This architecture allows credit institutions to centralise their liquidity management and account relationship with the central bank that best suits their needs and activities.

It also allows banks based in more than one European country to consolidate their different accounts into groups so they can be managed centrally and in a harmonised manner. There are 2 types of account groups:

  • Consolidated information groups where the bank’s treasurers only have access to consolidated information on the TARGET2 accounts defined as belonging to the group.
  • Virtual account groups, where the liquidity in each of the TARGET2 accounts in the group is aggregated during the business day and managed centrally. Payments can be debited from individual accounts in the group provided there is sufficient liquidity in the aggregated virtual account (the sum of liquidity in the individual accounts plus any credit facilities).

 

Updated on: 12/13/2016 16:27