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The challenge
Liquidity risk has been an evolving subject in recent years, creating new operational challenges due to the COVID-19 pandemic, market disruptions and new derivatives and collateral regulatory requirements that have had to be managed against the background of heightened market volatility. Increased regulatory focus on liquidity risk has made this an even more pressing topic.
“We adapted our liquidity risk management framework to take advantage of tactical opportunity and manage cash efficiently, whilst effectively managing emerging risks, and provide strategic guidance to management,” explains Gary Gray, Head of Treasury Operations.
The solution
AIA has modernised its liquidity risk management framework. We are using standardised data, metrics and reporting across 18 markets in Asia to deliver clear, consistent and timely information to management. This supports real-time decision-making, which proved especially important in managing liquidity risk during the initial phase of the COVID-19 pandemic.
Best practice and innovation
Leveraging the treasury infrastructure and the expertise of the treasury shared services teams, AIA has integrated a modern liquidity risk management framework with the management of daily liquidity and a longer-term view of structural liquidity across markets. This provides insights into the liquidity characteristics of each market, supporting real-time decision making. This proved especially beneficial during the market liquidity stresses which emerged during the COVID-19 pandemic.
There are four key pillars that are managed holistically as part of AIA’s integrated liquidity risk management framework:
- Daily liquidity adequacy – leveraging its daily cash forecasting capabilities, AIA calculates a daily liquidity adequacy level that forecasts each market’s liquidity outlook for the proceeding ten business days on a rolling basis. This strengthens day-to-day liquidity management by delivering insights to the characteristics of each market and enables specific, actionable real-time decisions.
- Structural liquidity adequacy – integrating daily liquidity with a longer-term view of structural liquidity adequacy over the next 12-months helps ensure that AIA Group can continue to meet its financial obligations. This enables more time for the development of strategic views on requirements for secondary and contingent sources of liquidity, ensuring all financial obligations can be met in different scenarios.
- Investment portfolio liquidity – AIA Group’s fixed income portfolios make up a significant portion of its liquidity sources. The new liquidity risk management framework enables the company to calculate the liquidity of these investment portfolios a daily based on observed fixed income market inputs. This delivers real-time visibility to the level of liquidity risk in its fixed income portfolios amid rapidly changing market conditions.
- Liquidity management and contingency plans – with a centralised list of liquidity sources and options by market, AIA can identify any potential capacity shortfalls and ensure each market has the capability to systemically design plans and operating procedures to meet unforeseeable liquidity needs. Best practices are also shared across the region to ensure consistency and standardisation.
“With this modernised framework in place, AIA is well-positioned to manage liquidity for the benefit of all stakeholders by responding faster and smarter as and when required,” says Gray.
Key benefits
- Provide precise, standardised and consistent liquidity metrics.
- Enable better decision making.
- Improve cash management.
- Enhance cost efficiency.
