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

A UK bank is a direct participant in CHAPS, the UK's RTGS payment system. Its treasurer is concerned that other banks delay sending payments until late in the day. Which risk-management consequence is most directly associated with this behaviour?

Late payments by other banks reduce the bank's intraday receipts, so it must hold more liquidity or postpone its own payments. Because banks rely on recycled inflows, widespread delay can spread and cause gridlock in the RTGS system.

  1. AReduced incoming liquidity during the day can force the bank to hold more intraday liquidity or delay its own payments, potentially causing gridlockCorrect
  2. BPayments are automatically netted, so liquidity needs fall
  3. CThe bank's settlement finality is removed for late payments
  4. DPayments sent late are settled at lower cost, benefiting all participants equally

Explanation

In RTGS, banks recycle incoming receipts to fund outgoing payments. If counterparties delay payments, receipts arrive late, the bank must hold more liquidity or delay its own payments, which can propagate and cause gridlock. The other options misstate netting, finality or cost effects.

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