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FRM Part II · FRM Exam Part II · Intraday Liquidity Risk Management

A bank's treasury team notes that its customers' payment instructions arrive late in the day, while the bank must make payments through a real-time gross settlement (RTGS) system throughout the day. Which feature of RTGS most directly explains why this timing pattern increases the bank's intraday liquidity needs?

RTGS settles each payment individually and immediately in central bank money, so a bank needs funds available when it releases each payment. If incoming receipts arrive late, the bank must cover outgoing payments from reserves or intraday credit, raising its intraday liquidity needs.

  1. APayments are settled individually and immediately in central bank money, so each payment requires available funds when releasedCorrect
  2. BPayments are netted at the end of the day so only the net position needs funding
  3. CPayments are settled the following business day, creating overnight credit exposure
  4. DPayments are guaranteed by a central counterparty that funds shortfalls

Explanation

In RTGS each payment is settled gross and in real time, so the paying bank needs sufficient central bank balances or intraday credit at the moment of release. Delayed receipts therefore raise funding needs. End-of-day netting describes deferred net settlement, which is a different design.

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