Navigating the New Liquidity Landscape: Putting Cash in Its Place
By Eleanor Hill, Editor
From money market fund (MMF) reform to new technologies, the way in which treasurers manage liquidity is evolving – or rather, it should be. Here, TMI examines some of the key changes happening in the liquidity landscape across Europe, the US and Asia. Industry experts also outline how corporate treasurers can prepare for these developments, embrace best practice, and future-proof their liquidity management strategy.
There has already been a lot of noise around changes in the liquidity landscape. But given that treasury teams are typically overstretched, not all treasurers have yet had time to think about or plan for the evolving environment. As Jim Fuell, Head of Global Liquidity Sales, International at J.P. Morgan Asset Management notes, “The key factors impacting today’s short-term investment landscape won’t come as much of a surprise to treasurers. They range from European MMF reform to interest rate changes and Brexit. What some companies aren’t necessarily planning for, though, is the possible knock-on effect of these factors – whether directly or indirectly – on their investments.”
As an example, “When fundamental tax reform changes were approved in the US last December, there were likely a few non-US corporations who didn’t pay much attention to the new rules,” Fuell points out. “However, with some USD 2.1tr held offshore by US corporations, the money put in motion by these reforms was one of several factors leading to the elevated USD LIBOR levels seen in the first half of 2018. So, the impacts might not necessarily be obvious, but they still bear thinking about.”
Czeslaw Piasek, EMEA Head of Liquidity Management Services, Citi, thinks that “geopolitical factors are certainly on corporates’ liquidity radar.” In addition to US tax reforms, Piasek says that sanctions in Russia remain a concern, and in Turkey currency devaluation and capital controls are top of mind for treasurers. “So, each country has its associated challenges, and these can have a knock-on effect elsewhere in the world,” he observes.
Regardless of geography, however, Piasek believes that what treasurers really want is efficient liquidity management processes that allow for automated funding, return optimisation, simplified structures and treasury risk management. But how can they go about achieving this?
Beyond cash segmentation
Fuell says that “To be in a good position to respond to these market challenges, treasurers should have the ability to accurately forecast their expected cash flows. In turn, this will allow them to segment their cash – or as we like to say, to ‘put cash in its place’”.
Part of this process involves looking at operating cash and how it can be best put to use within the company; or invested in short-term instruments that offer more or less instant liquidity. One powerful external factor that is already impacting this cash segment, and will only do so more in the future, is real-time payments.
As Piasek comments, “The advent of instant payments is already impacting the way treasurers manage their liquidity. The outside world is accelerating, and treasury functions need to keep pace. They have to be ready for 24/7/365 payments and the subsequent speeding up of the working capital cycle.”
In such a fast-paced environment, optimising funding across the group also becomes critical, he notes. “Global and regional treasurers need to carefully assess trapped liquidity – and how to optimise the company’s needs versus that trapped liquidity.”
Fig 1 - An evolving cash landscape creates challenges and opportunities for short-term investors
Source: J.P. Morgan Asset Management, as at 31 August 2018.