INDEX

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TOPIC
Introduction Purpose Definition Liquidity policies in bank Importance of liquidity management Features of liquidity management Control procedures Liquidity management programme

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Funding policy Role of board of director in L.M Role of management in L.M Best friend for financial institution Interest rate risk Management of foreign exchange risk Benefits of liquidity management

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Bassel committee on bank liquidity management

RBI latest view on liquidity management

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RBI liquidity management measures Dynamic analysis Experts views on liquidity management Conclusion Reference Webliography Thank you!!!!!!!!!!!!!!!!

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Glossary Terms in liquidity management

Assets/Liability Management The management and control, within set parameters, of the impact of changes in the volume, mix, maturity, quality, and interest and exchange rate sensitivity of assets and liabilities on an institution. Concentrated Funding Occurs when an institutions liabilities contain an excessive level of exposure to individual depositor, type of deposit instrument, market source of deposit, term to maturity, and if the institution has liabilities (either on- or offbalance sheet) in foreign currencies, currency of deposit. Credit Risk The risk of financial loss resulting from the failure of a debtor, for any reason, to fully honour financial or contractual obligations to an institution. Liquid Assets

Cash and securities and other assets readily convertible to cash.

Liquidity Liquidity is the availability of funds, or assurance that funds will be available, to honour all cash outflow commitments (both onand off-balance sheet) as they fall due. Liquidity Management Managing assets and liabilities (on- and offbalance sheet), both as to cash flow and concentration, to ensure that cash inflows have an appropriate relationship to approaching cash outflows. Liquidity Planning Assessing potential future liquidity needs, taking into account changes in economic, regulatory or other operating conditions and weighing alternative asset/liability management strategies to ensure that adequate cash inflows will be available to an institution to meet these needs. Operating Liquidity The liquidity required to meet day-to-day cash outflow commitments, taking into account

asset/liability management techniques for controlling liquidity through the management of cash flows, supplemented by assets readily convertible to cash or by the institutions ability to borrow.

LETS EXPLORE IT!.!.!.!.!.!.!

Introduction
We often hear the word liquidity used in combination with cash management. Liquidity is a firms ability to pay its short-term debt obligations. In other words, if the firm has adequate liquidity, it can pay its current liabilities such as accounts payable. Usually, accounts payable are debts owe to our suppliers. There are methods we can use to measure liquidity. Financial ratio analysis will help us determine how liquid firm is or how successful it will be in meeting its short-term debt obligations. The current ratio will help us determine the ratio of current assets to current liabilities. Current assets include cash, accounts receivable, inventory, and occasionally other line items such as marketable securities. We need to have more current assets than current liabilities on our balance sheet at all times. The quick ratio will allow determining if we can pay your short-term debt obligations, or current liabilities, without having to sell any inventory. Its important for a firm to be able to do this because, if we sell have to sell inventory to pay bills that means we have to find a buyer for that inventory. Finding a buyer is not always easy or possible. There is various other measure of liquidity that you will want to use to determine our cash position. When your business is just starting up, we essentially run it out of a check book, which is an example of cash accounting. As long as there is cash in the account, our business is

solvent. As business becomes more complex, we will have to adopt financial accounting. However, we have to keep a focus on liquidity and cash management even though our track net income through financial accounting.

PURPOSE

This document sets out the minimum policies and procedures that each institution needs to have in place and apply within its liquidity management programme, and the minimum criteria it should use to prudently manage and control its liquidity. Although this document focuses on the institutions responsibility for managing liquidity, and is intended to address liquidity management within the context of a strategic liquidity plan under ordinary or reasonably expected business conditions, liquidity management cannot be conducted in isolation from other asset/liability management considerations, such as interest and foreign exchange rate risk, or other risks. However, since liquidity determines the day-ti-day viability of an institution, it must remain the principal consideration of asset/liability management. Moreover, this document presents the management of liquidity undifferentiated as to currency denomination, since in principal, through the foreign exchange markets, commitments in one currency

may be met by the availability of funds in another. However, institutions that conduct substantial business in foreign currencies need to make distinctions between the management of liquidity in domestic currency and that in other currencies

DEFINITION

honors all cash outflow commitments (both onand off-balance sheet) as they all due. These
Liquidity is the availability of funds, or assurance that funds will be available, to commitments are generally met through cash inflows, supplemented by assets readily convertible to cash or through the institutions capacity to borrow. The risk illiquidity may increase if principal and interest cash flow related to assets, liabilities and off-balance sheet items are mismatched.

Liquidity for bank means the ability to meet financial obligations as they come due. Bank lending finances investments in relatively liquid assets, but it fund its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions.

LIQUIDITY POLICIES IN BANK

Sound and prudent liquidity policies set out the sources and amount of liquidity required to ensure it is adequate for the continuation of operations and to meet all applicable regulatory requirements. These policies must be supported by effective procedures to measure, achieve and maintain liquidity. Operating liquidity is the level of liquidity required to meet an institutions day-to-day cash outflow commitments. Operating requirements are met through asset/liability management techniques for controlling cash flows, supplemented by assets readily convertible to cash or by an institutions ability to borrow.

Factors influencing an institutions operating liquidity include: cash flows and the extent to which expected cash flows from maturing assets and liabilities match; and The diversity, reliability and stability of funding sources, the ability to renew or replace deposits and the capacity to borrow. For regulatory purposes an institution is required to hold a specific amount of assets classed as liquid, based on its deposit liabilities. Generally, undue reliance should not be placed on these assets, or those formally pledged, for operating purposes other than as a temporary measure, as legally they may not be available for encashment if needed. In assessing the adequacy of liquidity, each institution needs to accurately and frequently measure: the term profile of current and approaching cash flows generated by assets and liabilities, both on- and offbalance sheet;

the extent to which potential cash outflows are supported by cash inflows over a specified period of time, maturing or liquefiable assets, and cash on hand; the extent to which potential cash outflows may be supported by the institutions ability to borrow or to access discretionary funding sources; and The level of statutory liquidity and reserves required and to be maintained.

Essentially, operating liquidity is adequate if the institutions approaching cash inflows, supplemented by assets readily convertible to cash or by an institutions ability to borrow are sufficient to meet approaching cash outflow obligations. In this context, because the timing and amount of these cash flows are not completely predictable because of risks such as credit defaults, and events including honouring customer drawdowns on credit commitments, deposit redemptions, and prepayments, either on mortgages or term loans, sound and prudent liquidity policies must deal with this uncertainty by carefully controlling the maturity of assets, ensuring

assets are readily convertible to cash, or securing sources to borrow funds.

Liquid assets should have the following attributes: diversified, residual maturities appropriate for the institutions specific cash flow needs; readily marketable or convertible into cash; and Minimal credit risk. Holding assets in liquid form for liquidity purposes will often involve some loss of earnings capacity relative to other investment opportunities. Nevertheless, the primary objective with respect to managing the liquid asset portfolio is to ensure its quality and convertibility into cash. Liquidity lines and funding facilities may also have a role within an institutions liquidity programme by helping an institution protect

itself against temporary difficulties that might occur when honouring cash outflow commitments. Examples are the need to draw on credit facilities to meet unforeseen clearing commitments, and to meet credit commitments with drawdown at the customers option. Undue reliance should not be placed on these facilities (including those that may be irrevocable or for which a fee is paid) as substitutes for traditional funding sources, as they are generally very short term in nature, they are costly compared with other funding sources, and their availability could be withheld by the provider of the facility. Institutions using these sources for liquidity need to ensure that the provider of a facility has an appropriate credit standing and capacity.

Importance of liquidity management :

1.Review the contractual terms of borrowing contracts and indentures to assess any liquidity implications. Determine whether the contracts

and indentures contain options and other option-like features that could have adverse liquidity implications. 2. Ensure that management is aware of the terms, triggers and parameters of borrowing relationships with the FHLB and FRB, especially as they relate to lending curtailments and nonfunding under various scenarios. Verify that management has appropriately considered and incorporated, as applicable, these features into its stress test and scenario analysis and contingent funding plan. Obtain the results of the most recent FHLB and FRB current ratings and onsite loan reviews from bank management and assess the steps taken by management to address concerns and documentation exceptions. 3. Verify that management periodically tests the availability of funds under its various borrowing relationships especially those involving nongovernment entities, such as other banking organizations. Ensure that such testing becomes more frequent when there is evidence or indications of approaching stressful market conditions.

4. Determine the trend and stability of deposits. Ensure that management is aware that the FDIC is unlikely to grant brokered deposit waivers to savings associations falling below well-capitalized status, and has considered this in its contingent funding plan. 5. Determine the ability of the savings association to securitize and sell certain pools of assets including nontraditional mortgage products, less than prime loans, home equity loans, credit card receivables, automobile loans and commercial real estate loans.

Remember the crisis in 2008

Features of liquidity management:

1.Banks need liquidity to meet deposit withdrawal and to fund loan demands. The variability of loan demands and variability of deposits determine banks liquidity needs. It represents the ability to accommodate decreases in liability and to fund increases in assets.

2.

3.It demonstrates the market place that the bank is safe and therefore capable of repaying its borrowings. It enables bank to meet its prior loan commitments, whether formal or informal.

4.

5.It enables bank to avoid the unprofitable sale of assets. 6.It lowers the size of the default risk premium the bank must pay for funds.

Control procedures:

Each licensee needs to develop and implement effective and comprehensive procedures and information systems to manage and control liquidity in accordance with its liquidity and funding policies. These procedures must be appropriate to the size and complexity of the institutions liquidity and funding activities.

Internal inspections/audits are a key element in managing and controlling an institutions liquidity management programme. Each institution should use them to ensure that liquidity management complies with liquidity and funding policies and procedures. Internal inspections/audits should, at a minimum, randomly test all aspects of liquidity management in order to: ensure liquidity and funding policies and procedures are being adhered to; ensure effective managing liquidity; controls apply to

verify the adequacy and accuracy of management information reports; and ensure that personnel involved in the liquidity management fully understand the institutions liquidity and funding policies and have the

expertise required to make effective decisions consistent with the liquidity and funding policies.

Assessments of the liquidity management operation should be presented to the institutions Board of Directors on a timely

basis for review.

Liquidity management programme:

Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Sound liquidity management involves prudently managing assets and liabilities (on- and off-balance sheet), both as to cash flow and concentration, to ensure that cash inflows have an appropriate relationship to approaching cash outflows. This needs to be supported by a process of liquidity planning which assesses potential future liquidity needs, taking into account changes in economic, regulatory or other operating conditions. Such planning involves identifying known, expected and potential cash outflows and weighing alternative asset/liability management strategies to ensure that adequate cash inflows will be available to the institution to meet these needs.

The objectives of liquidity management are: honouring all cash outflow commitments (both on- and off-balance sheet) on an ongoing, daily basis;

 avoiding raising funds at market premiums or through the forced sale of assets; and satisfying statutory liquidity and statutory reserve requirements. Although the particulars of liquidity management will differ among institutions depending upon the nature and complexity of their operations and risk profile, a comprehensive liquidity management programme requires: establishing and implementing sound and prudent liquidity and funding policies; and developing and implementing effective techniques and procedures to monitor measure and control the institutions liquidity requirements and position.

Funding policy:

Deposit liabilities are the primary source of funding for all institutions. In this context, an important element of an institutions liquidity management programme is the diversification of funding by origination and term structure. Each institution needs to have explicit and prudent policies that ensure funding is not unduly concentrated with respect to: individual depositor; type of deposit instrument; market source of deposit; term to maturity; and currency of deposit, if the institution has liabilities (both on- and off-balance sheet) in foreign currencies. The primary funding risk is the unplanned deposit withdrawal or the reduced rate of deposit renewal at the time of maturity. Deposits may decline due to a loss of confidence in the institution, a general decline

in savings, more attractive investments elsewhere, or as a result of other factors. Concentrated funding sources leave the institution open to potential liquidity problems as a result of such unexpected deposit withdrawal and may also restrict an institutions flexibility in managing its cash flow. Institutions with excessive funding concentrations may require additional liquid assets. In the context of foreign currency deposits, funding policies also need to ensure that foreign currency cash flows are prudently managed and controlled within the policies and procedures set out under the institutions foreign exchange risk management programme.

Role of board of directors :

The Board of Directors of each institution is ultimately responsible for the institutions liquidity. In discharging this responsibility, a Board of Directors usually charges management with developing liquidity and funding policies for the boards approval, and developing and implementing procedures to measure, manage and control liquidity within these policies. A Board of Directors needs to have a means of ensuring compliance with the liquidity management programme. A Board of Directors generally ensures compliance through periodic reporting by management and internal inspectors/auditors. The reports must provide sufficient information to satisfy the Board of Directors that the institution is complying with its liquidity management programme. At a minimum, a Board of Directors should: review and approve liquidity and funding policies based on recommendations by the institutions management;

 review periodically, but at least once a year, the liquidity management programme; ensure that an internal inspection/audit function reviews the liquidity and funding operations to ensure that the institutions policies and procedures are appropriate and are being adhered to; ensure the selection and appointment of qualified and competent management to administer the liquidity management function; and outline the content and frequency of management liquidity reports to the board.

Role of management management:

in

liquidity

The management of each institution is responsible for managing and controlling the day-to-day liquidity of the institution according to the liquidity management programme. Although specific liquidity management responsibilities will vary from one institution to another, management should be responsible for: developing and recommending liquidity and funding policies for approval by the Board of Directors; implementing the liquidity and funding policies; ensuring that liquidity is managed and controlled within the liquidity management and funding management programmes; ensuring the development and implementation of appropriate reporting systems with respect to the content, format and frequency of information

concerning the institutions liquidity position, in order to permit the effective analysis and the sound and prudent management and control of existing and potential liquidity needs; establishing and utilizing a method for accurately measuring the institutions current and projected future liquidity; monitoring economic and other operating conditions to forecast potential liquidity needs; ensuring that an internal inspection/audit function reviews and assesses the liquidity management programme; developing lines of communication to ensure the timely, dissemination of the liquidity and funding policies and procedures to all individuals involved in the liquidity management and funding risk management process; and reporting comprehensively on the liquidity management programme to the Board of Directors at least once a year.

S friend for financial institution:

BE T

Setting tolerance level for a bank: To manage the mismatch levels so as to avert wide liquidity gaps-The residual maturity profile of assets and liabilities will be such that mismatch level for time bucket of 114 days and 15-28 days remain around 20% of cash outflows in each time bucket. To manage liquidity and remain solvent by maintaining short-term cumulative gap up to one year(short term liabilities-short term assets at 15% of total outflow of fund Measuring and Managing Liquidity Risk

Stock Approach Flow Approach Stock Approach is based on the level of assets and liabilities as well as off balance sheet exposures on a particular date. The following ratios are calculated to assess the liquidity position of the bank: Ratio of core deposits to total assets Net loans to total deposits ratio Ratio of time deposits to total deposits Ratio of volatile liabilities to total assets Ratio of short term liabilities to liquid assets Ratio of liquid assets to total assets Ratio of short term liabilities to total assets Ratio of prime assets to total assets Ratio of market liabilities to total assets. Flow Approach

Measuring and managing net funding requirements. Managing Market Access Contingency Planning Measuring and Managing net funding Requirements: Flow method is the basic approach followed by Indian Banks. It is called as gap method of measuring and managing liquidity. It requires the preparation of structural liquidity gap report.

Interest rate risk management

Interest rate risk is the volatility in net interest income(NII) or in variations in net interest margin(NIM). Gap: The gap is the difference between the amount of assets and liabilities on which the interest rates are reset during a given period. Basis risk: The risk that the interest rate of different assets and liabilities may change in different magnitudes is called basis risk.

Embedded option: Prepayment of loans and bonds and/or premature withdrawal of deposits before their stated maturity dates.

Yield curve: It is a line on a graph plotting the yield of all maturities of a particular instrument. Changes in interest rates also affect the underlying value of the banks Raise in interest rates the market value of that Asset and fall in interest rate the market value Of assets or liabilities. The gap is the difference between the amount of assets and liabilities on which interest rates are during a given period Mismatch occurs when assets and liabilities fall due for a different periods The economic value of a bank can be viewed as the present value of the banks expected

Estimates derived from a standard duration generally focus on just one form of interest rate risk exposure . The adverse impact on NII due to mismatches can be minimized by fixing appropriate on interest rate sensitivity gaps.

Management exchange risk

of

foreign

Foreign exchange risk-Risk arising out of adverse exchange rate movements during a period in which it has open position in an individual foreign currency. Transaction exposure: Change in the foreign exchange rate between the time the transaction is executed and the time it is settled. Forwards-Agreement to buy or sell forex for a predetermined amount, at a predetermined rate on a predetermined date.

Open position: The extent to which outstanding contracts to purchase a currency exceed liabilities plus outstanding contracts to sell the currency & vice versa. Overnight position-A limit on the maximum open position left overnight, in all major currencies. Day-light position-A limit on maximum open position in all major currencies at any point of time during day. Such limits are generally larger than overnight positions.

Benefits of liquidity management :

If an appropriate liquidity management solution is effectively implemented, the corporation stands to enjoy a range of benefits (these otherwise representing opportunity costs): Balance consolidation: This is realized by eliminating the cost of maintaining cash deficits and surpluses in the same currency that could otherwise have been offset. In financial terms, it is determined by the differential between the interest rates applicable to the credit and debit balances that are offset. Balance aggregation: Increasing the size of the aggregate cash position attracts better interest terms than those achievable on individual balances left idle or invested separately. It is a function of the interest-rate differential between the rates achieved with and without aggregation. Balance stability: Connecting multiple accounts into a larger liquidity structure has the portfolio

effect of reducing overall net balance volatility. As a result, it becomes easier to identify and isolate a stable liquidity "core" within this net balance. This confers two primary advantages:

The structure is better able to absorb unexpected cash flow events and mitigate their impact, thereby also minimizing the effect of any inaccuracies in the cash forecasting process. Determining accurate "time slicing" of available cash is easier, thereby facilitating more efficient distribution of investments across the maturity spectrum.

(An accurate assessment of this type of benefit is more complex and requires the utilization of statistical concepts.) Net balance utilization: This is the minimization of the opportunity cost of being unable to extract the maximum value from the aggregate net cash flow. The scale of this benefit depends upon various factors, including:

The size and stability of the core element; Medium-term cash forecasting accuracy; and The corporate's financial position (i.e. whether typically a net depositor or borrower).

In financial terms, the net balance utilisation benefit results from the interest-rate differential between the current and the alternative usage of the net liquidity (i.e. reduced funding cost or enhanced investment yield). Other benefits: Other potential benefits derived from effective liquidity management include:

Management cost/time savings, particularly when using passive and fully automated techniques; Increased visibility and control of cash flows; More rigorous counterparty risk management, such as on idle balances or balances invested locally with institutions not validated/approved by treasury; Reduced dependency on local credit facilities; Improved enterprise-wide liquidity risk management; and Greater strategic financial flexibility.

Bassel committee on bank liquidity management:

The Committee believes that liquidity - the ability to fund increases in assets and meet obligations as they become due - is crucial to the ongoing viability of any banking organisation. But the importance of liquidity transcends the individual bank since a liquidity shortfall at a single organisation can have systemic repercussions. The management of liquidity is therefore among the most important activities conducted at banks. Over time, there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial markets has posed new challenges for liquidity management. In light of these developments, the Committee is replacing the existing 1992 paper on liquidity - A framework for measuring and managing liquidity - with updated guidance. The paper is organised around a set of 14 principles falling in the following key areas: Developing a structure for managing liquidity

Measuring and monitoring net funding requirements Managing market access Contingency planning Foreign currency liquidity management Internal controls for liquidity risk management Role of public disclosure in improving liquidity Role of supervisors The paper is not being issued formally for consultation, but if you have strong views our Risk Management Group would be pleased to receive them.

RBIs Latest view on liquidity management:

On a review of the current liquidity situation in the context of global and domestic developments, it has been decided to reduce the CRR from its current level of 9.0 per cent of net demand and time liabilities (NDTL) by 50 basis points to 8.5 per Cent of NDTL with effect from the fortnight beginning October 11, 2008. As a result of This reduction in the CRR, an amount of about Rs 20, 000 cores would be released Into the system. This measure is ad hoc, temporary in nature and will be reviewed on A continuous basis in the light of the evolving liquidity conditions. Active liquidity management is a key element of the current monetary policy Stance. Liquidity modulation through a flexible use of a combination of instruments has, to a significant extent, cushioned the impact of the international financial turbulence on domestic financial markets by absorbing excessive market pressures and ensuring orderly conditions In view of the evolving environment of heightened

uncertainty, volatility in global markets and the dangers of potential spillovers to domestic equity and currency markets, liquidity management will continue to receive Priority in the hierarchy of policy objectives over the period ahead. The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal Flexibly, as and when the situation warrants. The overall stance of monetary policy in 200809 accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum, as set out In the Annual Policy Statement and reiterated in the First Quarter Review of July 2008. The overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.

RBI liquidity management measures:

RBI announces Monetary Policy and Liquidity Management Measures Monetary Policy Measures On an assessment of the current macroeconomic situation, it has been decided to take the following monetary policy measures as a part of the calibrated exit from the expansionary monetary policy: to increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis Points from 5.25 per cent to 5.50 per cent with immediate effect. To increase the reverse repo rate under the LAF by 25 basis points from 3.75 per Cent to 4.0 per cent with immediate effect. Liquidity Management Measures Also, on the basis of an assessment of the current liquidity situation, the Reserve Bank has decided to extend the following liquidity management measures: i) The additional liquidity support to scheduled commercial banks under the LAF to the extent of up to 0.5 per cent of their net demand and time liabilities (NDTL)

currently set to expire on July 2, 2010 is now extended up to July 16, 2010. For Any shortfall in maintenance of statutory liquidity ratio (SLR) arising out of availment of this facility, banks may seek waiver of penal interest purely as an ad Hoc measure. ii) The second LAF (SLAF) will be conducted on a daily basis up to July 16, 2010. Rationale for Monetary Policy Measures There have been significant macroeconomic developments since the April 2010 Monetary Policy Statement. At the global level, the recovery is strengthening. However, the outlook continues to be clouded by uncertainty in the Euro area. On the domestic front, the revised growth estimates by the Central Statistical Organisation (CSO) for 2009-10 and for Q4 of 2009-10 suggest that the recovery is Consolidating. The manufacturing sector has recorded robust growth in recent months, Aided among others, by expanding exports. The strong underlying growth momentum is also evidenced by the sharp upturn in the capital goods sector, acceleration in credit Growth and the widening current account deficit. The monsoon situation so far has

been decidedly better than during last year holding prospects for good agriculture Growth. In its April policy review, the Reserve Bank projected real GDP growth for 201011 at 8 per cent with an upside bias. More recent data suggest that the upside bias has Largely materialised. The growth projection will be reviewed in the First Quarter Review On July 27, 2010. The developments on the inflation front, however, raise several concerns. Overall WPI inflation increased to 10.2 in May 2010, up from 9.6 per cent in April 2010. Food price inflation and consumer price inflation remain at elevated levels. There have 2 Been some moderation in food price inflation, but the price index of food articles continues to increase. More importantly, the prices of nonfood manufactured goods and fuel items have accelerated in recent months. Year-on-year WPI non-food manufacturing products (weight: 52.2 per cent) inflation, which was (-) 0.4 per cent in November 2009 and 5.4 per cent in March 2010, rose further to 6.6 per cent in May 2010. Year-on-year fuel price inflation also surged from (-) 0.8 per cent in November 2009 to 12.7 per cent in March 2010 and further to 13.1 per cent in May 2010. Although

entirely justified in terms of long-term fiscal and energy conservation objectives, the recent increase in fuel prices will have an immediate impact of around one percentage point on WPI inflation, with second round effects being felt in the months ahead. Significantly, two-thirds of WPI inflation in May 2010 was contributed by non-food items, suggesting that inflation is now very much generalised and that demand-side pressures are evident. Timing of the Action This mid-cycle policy action has been warranted by the evolving macroeconomic situation. Even as data for real GDP growth and WPI inflation became available by mid-June 2010, it was considered inadvisable to raise the policy rates as the financial system was dealing with liquidity pressures triggered by sudden build-up in government cash balances occasioned by the larger than anticipated level of 3G spectrum and broadband wireless access auction realisations. Through the month of June, liquidity under LAF operations remained in deficit mode. Consequently, the call rate moved up significantly, resulting in an effective

tightening at the short end of the yield curve. The liquidity situation has since begun to ease. Rationale for Extension of Liquidity Management Measures In late May 2010, in anticipation of the liquidity pressures on account of payments for 3G spectrum and advance taxes, the Reserve Bank took certain liquidity easing measures. Even as the liquidity situation has begun to ease, these measures are being extended since liquidity tightness may persist. Expected Outcomes The above monetary measures should contain inflation and anchor inflationary expectations going forward, while not hurting the recovery process. Easing liquidity and raising rates at the same time may seem apparently inconsistent. It should be noted in this context that the liquidity easing measures have become necessary to manage what is essentially a temporary and unanticipated development. In no way should they be viewed as inconsistent with the monetary policy stance of calibrated exit, which remains focussed on containing inflation and anchoring inflationary expectations without hurting growth. The Reserve Bank will continue to monitor the macroeconomic conditions,

particularly he price situation, and take further action as warranted.,

Dynamic analysis

Future Business Assumptions

The first step in achieving a more accurate picture of exposure based on current figures above a normal (not stressed) scenario is to include planned roll-overs and reinvestments that are an integral part of ordinary operations. Products such as

Algorithmics ALM, with its Dynamic Trading Strategy (DTS) functionality, permit users to integrate planned transactions into the liquidity picture. Large liquidity gaps are highly likely to disappear, mismatches will be reduced, and the probability distribution of mismatches will reflect a more realistic view of future exposures

Funding Alternatives

Since a firm is a living entity, exposure to liquidity risk is subject to continuous change as a consequence not only of past operations, but also of new business. Effective management of liquidity risk must ensure that the company can raise enough finance to support the planned development of business in an orderly manner. Failure to do so could jeopardize the growth of the firm or, in the worst case, strain

its financial structure and increase risk exposure. The ability to assess the impact of different funding alternatives on the balance sheet is also crucial for optimizing debt and capital and boosting value creation. Firms should have the ability to integrate business development strategies as well as inherent business constraints into their liquidity planning activities.
Stress Simulations Simulation exercises can help optimize business and funding strategies. The growth of assets implies greater funding needs, and affects variables such as asset maturity and duration. New finance can be drawn from different sources, with varying impacts on the firms liquidity equilibrium and capital structure. Funding sources include: cash flow from ordinary business; new deposits; issue of senior or subordinated debt; share capital increases; securitizations, and others. Inherent constraints to consider include internal or regulatory targets such as: limits; maturity duration gaps; amount of (senior or subordinated) outstanding debt; amount of minimum available spare liquidity; risk indicators as Cash Flow at Risk or Liquidity at Risk, and others. Stress simulations can produce a comprehensive view of a firms current exposure to liquidity risk, as well as the potential evolution of liquidity risk within the business

Planning horizon. They also set the stage for effective crisis management planning. In this way, a firm can assess how capable it is of maintaining stability even under unforeseen, severe adverse events, both firm-specific and systemic. Algorithmic ALM contributes here as well, providing a comprehensive picture of liquidity exposures over time in both normal and stress contexts.

Why liquidity management important? (EXPERT VIEWS)

is

so

MR. Yan de Kerland, Head of KTP Product Management There is no magic solution but the pressure is on for treasurers to implement a treasury process that provides a comprehensive view of their cash position at any point of time. We anticipate that real Front to Bank type organizations will emerge from this situation. And there is no doubt they will have sophisticated treasury business processes and systems that resemble manufacturing companies in terms of efficiency.

MR. Arun Kaul, Chief of Treasury at PNB A: Inflation is a worry and he has clearly said that the risk of inflation continues from high oil prices and food grain prices coupled with the fact that the base effect is going to wear off in the next couple of weeks. The focus is on the liquidity management and that led to CRR increase by about 50 bps. MR. Ali pichavi, CEO of quod financial Liquidity is becoming ever more dynamic. As competition increases price wars are becoming more frequent and pricing models are being altered to attract more and more liquidity. For instance, the rebate model for passive orders (i.e. by resting a passive order, you can receive a fee) has often been used as an effective marketing tool for new alternative trading systems. Clients are therefore moving their

execution on a real-time basis from venue to venue, as pricing evolves within a competitive landscape, making liquidity ever more dynamic.

MR. Richard de Roos Standard Bank is believed to be the first bank in Africa to implement systematic FX liquidity management. This strategic move has already improved profitability, reduced transaction costs and reduced risk. The bank responded to an industry need for systems that effectively manage client flow by collaborating with Client Knowledge. The advisory support and expert technical and quant development was undertaken by Client Knowledges Managed Models team. By working in tandem with

Standard Bank, connections to feeds and their client flow were established. Richard de Roos, Director and head of Standard Bank foreign exchange, said that: 'Selecting Client Knowledge to facilitate this process was an important strategic decision. As experts in the wholesale financial services industry, Client Knowledge has provided us with unique insight into improving our performance, efficiencies and our profitability.'

Conclusion

The liquidity landscape is fluid at both a corporate and an environmental level; a company's liquidity profile obviously changes over time, while liquidity techniques and combinations thereof continue to evolve. Therefore, designing and maintaining a corporate-specific implementation of liquidity best practice is the proverbial challenge/opportunity. Nevertheless, achieving this delivers a range of benefits - financial, operational and strategic. While the path to this goal may be demanding and require combining a variety of liquidity techniques, external expertise from banks and other professionals is available.