Cash & Liquidity Management

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Achieving Counterparty, Concentration and Liquidity Risk Management Objectives Treasurers are generally responding successfully to the challenge of identifying investment solutions that satisfy security and liquidity requirements. The author looks at some of the ways in which they are doing this.

Achieving Counterparty, Concentration and Liquidity Risk Management Objectives

by Hugo Parry Wingfield, Director, Head of EMEA Market Management, Liquidity & Investments, Citi

Cash and liquidity have proved hard to manage in recent years, in particular to find an appropriate balance between risk and efficiency. Furthermore, identifying investment solutions that satisfy treasurers’ security and liquidity requirements, whilst still generating a return on cash, may also be a complex process. These challenges have both external and internal origins. Externally, sovereign and counterparty risk concerns create the dilemma of where cash should be held, and with which counterparties. On one hand, treasurers seek to streamline their bank relationships and investment counterparties, but on the other, they wish to avoid the risk of fragmented cash, processes and technology. This problem is exacerbated by internal operational, organisational and political issues that restrict treasurers’ ability to centralise cash and risk, and standardise processing. This article considers some of the ways in which treasurers are successfully responding to these challenges, and having concentrated cash more effectively, how they can invest cash successfully to satisfy their security and liquidity objectives. 

Prerequisites to effective liquidity management

With the crisis now receding in many parts of the world, corporates are embarking on more ambitious investment strategies, including geographic expansion, M&A and business partnerships, particularly in emerging markets, which in turn create further challenges from a cash and liquidity management perspective. The first of these is achieving visibility over cash, which is the prerequisite to any liquidity management strategy. Fragmented processes, technology and banking relationships all impact on treasurers’ ability to achieve a timely, accurate and complete view of cash; however, this is an area on which treasurers have been heavily focused in recent years. According to Citi’s Treasury Diagnostics research1, 2010 saw 53% of treasurers surveyed achieving daily visibility over 95% of their cash, compared with 42% in 2009 (figure 1). This increase has been assisted by analytical tools such as Citi’s TreasuryVision®, and a reduced number of bank relationships with whom they have a more strategic relationship, and better co-ordination of resources internally.

Mobilisation and centralisation

Having achieved visibility over cash, treasurers are in a better position to control and mobilise cash to the locations where it is required. Cash pooling techniques have a major role to play in achieving this, and again, as treasurers consolidate and enhance their internal and external relationships, they are making progress in their ability to leverage cash pooling solutions, not only regionally but also globally. Citi’s Treasury Diagnostics research indicates that while in 2009, 24% of treasurers surveyed were able to pool cash globally, this increased to 31% in 2010. The amount of cash centralised through cash pools is also increasing. According to the same research, 27% of treasurers indicated that more than 95% of operating flows were included in a cash pool, compared with only 16% in 2009. At Citi, we have seen a notable increase in cash pooling amongst corporates over the past 18 months (figure 1), both in single currencies and across multiple currencies, resulting in direct financial, efficiency and control benefits. 

These statistics illustrate treasurers’ ongoing focus, and success, in aligning internal business units and external banking partners to achieve the company’s overall cash and liquidity management objectives, and enables firms to reduce borrowings, monitor counterparty risk more effectively and maximise the use of surplus cash. Furthermore, with recent geopolitical concerns in markets in the Middle East and North Africa, having full visibility and access to liquidity in those countries is again proving to be critical.

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