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

A CHAPS direct participant observes that most of its large payments are released only in the afternoon, and that its payments to other participants are heavily concentrated near the end of the settlement day. From an intraday liquidity management standpoint, what is the principal risk this pattern creates?

Paying late in the day slows the recycling of liquidity, because recipients receive funds late and may delay their own payments. This can cause queues and gridlock across the system and raises intraday liquidity needs for all participants.

  1. AReduced recycling of liquidity in the system, since other participants receive funds late and may delay their own payments, raising the chance of gridlockCorrect
  2. BHigher credit risk from the central bank's collateral valuation
  3. CLower overall settlement finality for payments made earlier in the day
  4. DIncreased FX principal risk because CHAPS settles in multiple currencies

Explanation

Liquidity received early is reused to fund outgoing payments. If a participant pays late, recipients get funds late and may hold their own payments, which can cause gridlock and system-wide liquidity strain. Finality in RTGS is not weakened by timing, and CHAPS is a sterling system.

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