Published: January 01, 2000
In the aftermath of the financial crisis, corporations and the banks that serve them have built up increasingly large cash reserves that have recently risen to record historical levels. As a result, companies have been looking at how these positions can best be managed, with a particular focus on counterparty risk and the need for real-time information on cash and securities holdings. The integration of cash management, custody, escrow and foreign exchange-related services have become more widely accepted as standard best practices to help ensure the integrity, security and real-time visibility of these critical functions.
Like many areas of corporate and transaction banking, cash management, custody, escrow and foreign exchange services have been on a lengthy trend of integrating across functional and service platforms. This process was greatly accelerated, however, due to the financial crisis following the collapse of Lehman Brothers in 2008. This crisis produced not only concerns about counterparty risk but also caused companies to further build out large cash positions to cushion themselves against any potential future financial shocks. These factors led to many treasury and finance areas diversifying their portfolios, spreading the risks across multiple counterparties, currencies and instruments, and multiple time zones which has led to more complex reporting and management needs.
Once upon a time, treasury management, custody of securities, escrow, foreign exchange and other services were very much managed in silos both by companies and by the banks that serviced them. Due to the factors mentioned above, the ability to manage all of this important and complex information has become extremely time consuming and difficult — and if not done correctly, can lead to the impairment of the financial condition of a company and even create real losses affecting performance. Therefore, there has been a trend fueled both by the need of corporations in this new and developing environment and the desire of global financial institutions to provide these services.
Examples of this abound, but certainly the variety of cash and securities holdings of companies around the world is one of the more complex aspects of this continuum. A global multinational corporation may hold US Treasury bills in New York, Eurobonds in London, RMB cash deposits in Shanghai and short-term CDs in Sao Paulo. All of these liquid cash holdings can have different reporting formats, settlement processes, banking intermediaries and a host of other complexities that the corporate treasurer sitting in the head office needs to know, understand, and decide on every single day across multiple time zones. Add event-driven flows related to mergers and acquisitions that require large, timed and complex payments, and you can see how even the simplest transaction can be an execution nightmare.
Hence, many banks and other service providers have, over recent years, developed highly sophisticated front-end internet-related platforms to manage this activity. Therefore, liquidating a US Treasury Bill position in New York and a Eurobond position in London, and converting Mexican pesos to USD to fund the acquisition of a company in Brazil — all while monitoring a global cash position — is complicated in the best of conditions, but even more so if the firm is using multiple banks and systems. The large global banks are trying to make this process as simple as possible for the corporate treasurer. No single provider has a perfect system for every single company or situation around the globe, but you are seeing more global financial institutions integrating treasury management systems, with foreign exchange services, custody, securities processing, and escrow with information reporting, layered on top so that companies can execute in real time.[[[PAGE]]]
Information reporting requirements have also evolved to include much more risk-orientated information to help enable effective monitoring of a portfolio’s risk exposure, together with a demand for increased automation, to minimise manual risk and controls, drive significant investment in platforms to create competitive global offerings. This investment helps to enable the opportunity of a client to leverage a bank’s entire franchise on one client-facing platform. This technology investment includes clients’ requirements to have access to real-time reporting on various media, including tablets and android phones.
Latin America, and truly most of the large emerging markets, have been receiving ever-increasing attention from companies in this new environment. For many years the emerging markets, and in particular Latin America, were considered at times a risky side bet for global multinational companies, but in recent years they have been absolutely core to internal growth aspirations, earnings and stock price. Truly understanding and having real-time information on cash and securities exposures in New York, London, Hong Kong, Mexico City, Sao Paulo, Bogota and Santiago, for example, can be critical to a treasurer needing to liquidate a position in order to finance the expansion of a new plant or the acquisition of a company in a new market. The integration of cash management, custody, securities processing, foreign exchange, escrow and other transaction banking services, via global banks for large multinationals, has taken on this new dimension in order to allow these transactions to happen seamlessly and effortlessly, decreasing risk (and a lot of anxiety!) along the way for corporate treasurers and CFOs around the world. With the US and European economies still in a slow or no growth phase, and as cash positions continue to pile up around the world and in emerging markets like Latin America, this trend is destined to continue for years to come.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
