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Payment prioritization methodology
The prioritization methodology is the systematic approach used to determine the order in which payments are processed. This methodology should consider various factors such as counterparty and client relationships, intraday credit arrangements with customers, negative market signaling, and regulatory considerations. High-priority payments, such as those related to market settlements or critical business operations, are processed first to reduce risk and maintain business continuity.
There should be a clear linkage between the prioritization methodology and the throttling triggers. Such a linkage should consider the stress continuum. As an example, a minor deterioration in the firm’s liquidity position (trigger level) may not warrant a throttling action and only serves as an alert level for heightened monitoring. However, as the bank moves along the stress continuum, reflecting further decline in its liquidity position, it can initiate throttling of certain non-priority payments to preserve liquidity while continuing to process time-critical payments.
Operational processes, controls and testing
Payment-throttling processes include the mechanisms for monitoring intraday liquidity position and payment flows, initiating throttling and subsequently managing the payment release when the liquidity improves. Automation plays a key role in establishing that these processes are efficient, accurate and scalable. Banks should look to configure their systems to classify payments by their relative priority and execute throttling in line with the prioritization framework approved by the governance committee. Triggers and alerts should be automated such that a breach in approved threshold results in payments being throttled until reviewed and approved for release per the escalation protocol.
Regular testing of the throttling capability is crucial to verify that systematic configuration and controls are effective. In addition to operational tests, banks should test the governance and coordination of payment throttling through tabletop exercises. Results should be documented and made available to the governance committees for their review. Lessons learned should be applied in improving the capability and informing trigger calibrations.