Cash & Liquidity Management

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Understanding the Liquidity Landscape Having cash in the right place at the right time has never been a more pressing concern. However, when companies decide to expand their group of cash management banks, there are inevitably consequences where liquidity management is concerned.

Understanding the Liquidity Landscape

by Yera Hagopian, Global Head of Liquidity Solutions, Barclays

Liquidity management continues to be a fundamental aspect of the corporate treasurer’s role. Having cash in the right place at the right time has never been a more pressing concern. However, when companies decide to expand their group of cash management banks, there are inevitably consequences where liquidity management is concerned.

On the one hand, a multi-banking arrangement offers a number of benefits, such as enabling companies to diversify their risk exposures and focus on appointing the best bank for each country. On the other, this type of structure comes with a trade-off: companies adopting a multi-banking model are likely to sacrifice some of the simplicity and efficiency which can be achieved when working with a smaller group of banks.

Such companies will therefore need to work harder than ever to manage their liquidity as effectively as possible. As a result, there is a growing focus on gaining visibility over the company’s cash. First of all, however, treasurers must gain a thorough understanding of the liquidity landscape and the factors which are shaping it.

Liquidity trends

A number of drivers are affecting the liquidity management landscape at a global level. The first of these is the various regulatory changes currently in the pipeline, both at a global and a regional level. The most notable effect of these changes – particularly those associated with Basel III – are changing the way that banks think about their clients’ deposits. Deposits resulting directly from an operational relationship receive better treatment at the hands of the new regulations and are therefore considered more valuable than discretionary balances. Banks that provide transactional services have long known the value of stable funding from a robust cash management business, but for the corporate treasurer, the implications can present a dilemma. Now, the operational imperative to centralise and consolidate has to be weighed against the benefits of a more de-centralised structure that allocates operational business across a broader banking group. Other market factors are also influencing the way that corporates manage their liquidity. It is undeniable that a large amount of liquidity has come into the market in the last couple of years. Several factors have been driving this, such as quantitative easing in the UK and the US. While the Fed has begun to indicate that it may taper its quantitative easing programme, it is still pumping $85 billion into the economy each month. This, combined with the absence of any material economic uplift, has led to depressed yield curves and limited options for enhancing yield.

Meanwhile, the closure of the Transaction Account Guarantee (TAG) programme in the US has meant that investors no longer benefit from unlimited Federal Deposit Insurance Corporation (FDIC) guarantees on their deposits – a factor which has mobilised around $650 billion dollars as companies look to revisit their investment strategies.

Meanwhile, other instruments favoured by treasurers may look less attractive in the light of regulation. The recent announcement that money market funds in the US will now have to be run on a variable net asset value (VNAV) basis, rather than a constant NAV basis, means that money market fund deposits can no longer be treated as a near-cash instrument on the balance sheet. Money market funds in the US are also looking at the possibility of applying liquidity buffers to their funds in order to discourage outflows from the funds. As a result of these changes, many investors are becoming less comfortable with money market funds than in the past – and in some cases are looking to move their cash elsewhere.

The impact of all of these factors is to bring much more liquidity into the market, particularly in the US. As a result, yield curves have more or less flattened, while credit rating downgrades to countries including the US and the UK has reduced the supply of AAA-rated bonds. Clients who have stated that they will only invest in AA rated assets are increasingly restricted in terms of the number of banks they can invest with, and are therefore revisiting their treasury policies.

Multi-banking platforms

Liquidity pours into the market from a number of different sources, managing that liquidity effectively continues to be one of the greatest challenges faced by corporate treasurers.

Against the backdrop of a rapidly changing liquidity landscape, a growing number of companies are choosing to adopt a multi-banking approach in order to mitigate counterparty risk. However, a multi-banking approach tends to lead to increased complexity and inefficiency from a liquidity management point of view. For companies working with multiple banks, there is a keen desire to have greater visibility over intra-group and inter-company liquidity positions utilising products such as notional and physical pooling – particularly because many corporate treasury teams are under-resourced and are looking to streamline processes wherever possible. Fortunately the offering from banks has improved vastly in this regard and much of the reporting and interest settlement can be automated. Along with regular reporting, the burden on often thinly resourced Corporate Treasury is greatly reduced.

For investment management, companies have always tended to adopt a multi-bank approach as they looked to diversify their counterparty risk and distribute their liquidity across several suitably rated institutions and instruments in line with their investment policy. This is ever more important in the current environment where AAA grade investments are becoming scarcer and companies are being forced to re-visit treasury policies and distribute across a wider range of counterparties.

Technology is increasingly being designed to support this and companies are making increasing use of multi-banking platforms such as 360T or MyTreasury – a multi-bank, multi-currency portal designed specifically to meet the cash management needs of corporate treasurers coupled with the ability to trade and settle electronically and maintain fully automated audit trails.

On the other hand liquidity management platforms, that allows the consolidation of Corporate cash through techniques such as sweeping and pooling have tended to be provided by a single bank or a small group of regional banks, on a global or regional basis, even when the underlying accounts are held with a diverse group of regional banks. There is a reason for this. Liquidity structures and the platforms that support them are complex to implement, requiring well documented procedures, comprehensive legal documentation, They also need to be supported by credit lines to allow cash to be consolidated without jeopardising the day to day operation of the underlying accounts and business operations. It is worth noting that such platforms are becoming increasingly sophisticated and are able to offer corporate treasurers a growing range of liquidity management products, including multi-currency pooling, cash concentration including from third- party banks, notional pooling. These platforms may also support reporting through host-to-host connections which feed directly into the company’s ERP system.

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