Cash & Liquidity Management

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Global Liquidity: Faster, Deeper, Greater Liquidity management is undergoing a period of major change. Liquidity is (re)circulating more quickly, major opportunities are emerging in ‘big data’ analysis and the global economy looks set to push liquidity levels higher.

Global Liquidity: Faster, Deeper, Greater

Global Liquidity: Faster, Deeper, Greater 

By Nick Powell, Global Head of Commercialisation and Ray Suvrodeep, Global Head of Deposit and Investments Product Management, Global Liquidity and Cash Management, HSBC

HSBC

Liquidity management is undergoing a period of major change. Liquidity is (re)circulating more quickly, major opportunities are emerging in ‘big data’ analysis and the global economy looks set to push liquidity levels higher. Nick Powell, Global Head of Commercialisation and Ray Suvrodeep, Global Head of Deposit and Investments Product Management, Global Liquidity and Cash Management at HSBC examine some of the opportunities arising from this situation and how treasuries might best maximise them.

 

Increasing Liquidity Velocity

Instant Payments, Faster Clearing
Liquidity is moving faster. Innovations such as instant payment systems are seeing clearing cycles shrinking to the point of being almost instantaneous. At the same time, the advent of mobile payments is triggering 24x7 cash flows at far higher frequencies. Furthermore, this acceleration doesn’t just apply locally: various SWIFT initiatives mean that it also pertains to cross-border and global flows as well. The net result is that the velocity of liquidity is increasing and is likely to continue doing so.

In general terms this may be beneficial to corporations, as their cash conversion cycles diminish, along with latency in their payment execution and the amount of contingency cash buffer needing to be held in their bank accounts. This could result in less pressure on cash flow planning and forecasting, as well as assisting working capital efficiency.

On the other hand, this new faster liquidity environment also throws up some challenges for treasuries. For treasurers, getting cash to the right place, in the right currency, at the right time, is a fundamental task. However, as payments become faster, outflows also accelerate, so the response times for fulfilling this obligation become more demanding.

Next Generation Virtual Accounts
A major obstacle here is liquidity fragmentation. An efficient method for viewing and mobilising liquidity is an absolute must for addressing this. Fortunately, such a method now exists in the form of the next generation virtual account (ngVA).

In addition to the traditional advantage of virtual accounts – the ability to improve reconciliation rates by giving customers their own dedicated account details to pay to – ngVAs also include a self-service element. This enables clients to open/close virtual accounts quickly to suit their immediate needs, such as to track balances and transactions for respective customers/ entities. This is faster and more efficient than opening physical accounts individually and managing/reconciling them on an ongoing basis.

When using ngVAs, all the liquidity is automatically concentrated in the single physical account that heads each group of virtual accounts. This makes rapid liquidity mobilisation far easier to achieve than if multiple physical accounts were involved. Essentially, ngVAs address some of the most fundamental liquidity fragmentation challenges by supporting speed of execution, as well as providing an architecture that more generally facilitates high speed liquidity management.


Real Time Liquidity Management
Higher velocity liquidity opens the door to the challenge/ opportunity of intraday cash forecasting and liquidity management. On the one hand, this is concerned with making sure that the most effective use is made of internal sources of liquidity throughout the day. On the other, it involves managing any external sources of credit on a cross-bank basis. Given that cash is recirculating faster, this involves balancing a situation where there may be relatively few liquidity banks versus payment banks involved.

Dealing with this effectively in a real (or near real) time environment makes access to similarly timely data essential. Some treasuries already poll their banks for intraday statements. Some banks already offer an even better real time alternative to this, whereby data is streamed to the client continually. While this offers a great opportunity to improve real time liquidity forecasting and management, it comes with the caveat that the client’s technology infrastructure must obviously be capable of capturing and processing the resulting data stream.


Mining for Gold: Big Data Analytics

The application of specialised liquidity management techniques and functions (partly in response to higher liquidity velocity) is contributing to the generation of valuable data that can be analysed to enhance treasury-specific processes, as well as developing more general business intelligence. In view of the progress made by many corporate treasuries in recent years, this is a particularly timely development. For some time now the primary goal for many treasurers has to been to achieve visibility and control of all corporate liquidity. While this may not be technically possible in some cases, a growing number have nevertheless already achieved this, or made major steps forward. As a result, they are now able to take advantage of the next stage in optimising liquidity management: using that visibility and control to deliver insight and effectiveness. Armed with the right data and tools, this is now achievable.

 

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