Cash & Liquidity Management
Published  6 MIN READ

Key Takeaways: A Treasurer’s Checklist

A Treasurer’s Guide to the Latest Investment Trends

These checklists are part of a playbook, created by TMI and Northern Trust Asset Management, which explores current trends in short-term investing.

Investment policy

  • In the current environment, the investment policy should be regularly reviewed – at least every quarter – and amended where appropriate.
  • By broadening the suite of permitted investment instruments, treasurers can better combat current investment risks.

Stepping out along the yield curve

  • Fixed term deposits may not be the optimal solution in a rising rate environment.
  • Rather than locking cash in for too long, it is important to examine what the short-duration financial markets spectrum offers in terms of product mix.
  • Solutions to consider include conservative ultra-short and ultra-short products, which offer T+2 liquidity.
  • However, treasurers should always look ‘underneath the hood’ of any products to ensure they are getting the best liquidity the market has to offer.
  • MMFs, when used tactically, can also be more responsive to a changing rate environment than fixed term deposits – and offer T+0 liquidity.
  • It is also important to remember that stepping out along the yield curve comes with some elements of risk – including the inability to withdraw funds on the same day.
  • If a corporate investor has volatile cash balances, then a money market T+0 settlement product is most suitable.
  • But if a treasurer has a three- or six-month view that their cash is going to be stable (with the help of cash segmentation – see below) stepping out into ultra-short products may be appropriate.

Cash segmentation

  • Treasurers can split their cash into operational (1 day – 3 months), reserve (3-9 months), and strategic (9-18 months) buckets. This is known as cash segmentation.
  • Cash forecasting is essential to setting up cash segmentation, but corporate treasurers require a deep understanding of their cash flows to optimise the strategy and the level of cash placed in each bucket.
  • Many corporates will partner with an asset manager to tap into their market expertise and help to optimise their cash segmentation approach.
  • Using MMFs and ultra-short bond funds in a diversified portfolio of investments, enabled by a cash segmentation strategy, helps lower counterparty risk while maintaining liquidity within a short- term investment portfolio.
  • A cash segmentation strategy also has the potential to generate greater returns than a one-size-fits- all approach to investing, and the cash follows the treasurer’s business cycle and objectives.
  • NTAM’s cash segmentation platform enables treasurers to optimise their forecasting and cash allocations, with additional capabilities such as cash flow analysis.

Explore ESG investing

  • Examine the range of ESG investments available, and how the risk/return profile stacks up versus non-ESG investments.
  • Explore the differences between Article 8 and 9 ESG funds under the Sustainable Finance Disclosure Regulation (SFDR).
  • Also, carefully examine how Article 8 funds vary among themselves. This may require candid dialogue with fund providers. see ESG checklist on page 31.

Keep up with regulation

  • Regulators in the US and Europe are again proposing regulatory reforms for MMFs in ways that could challenge the viability of certain funds.
  • Arguably the biggest point of consternation in the US is the proposed introduction of swing pricing for institutional prime and municipal MMFs.
  • The main challenge is that when redemptions are made, investors will not know the exact dollar price they are getting out of an MMF until the end of the day.
  • In Europe, the effective prohibition of the stable NAV component of the LVNAV fund type may have deeply negative implications for investors – especially treasurers who value the utility of the stable NAV LVNAV.
  • If treasurers want to preserve the utility of MMFs and investor choice, the key time to speak out about this, and engage with regulators and industry bodies, is right now.

Embrace evolving technology

  • To make the most of the short-term markets, treasurers often have to pivot between banking or money market portals, or even make phone calls to brokers. Then all of the detail of an investment trade has to be keyed into the TMS.
  • Automation of some of these processes is now being delivered by certain TMS vendors – and treasurers would do well to lobby for further enhancements.
  • Other specialised providers are also now enabling deeper connectivity between these disparate systems using APIs. As well as seamlessly connecting systems, APIs deliver information in real-time.
  • Technology inevitably incurs a certain level of risk, and investment. But the elimination of manual processes, which are prone to error, and the time-savings should outweigh any considerations.
  • Investment technology does not disintermediate banks. Treasurers can still call up their banks, brokers and other FIs. Automation is only about limiting the manual interventions around the trade; technology enhances rather than replaces the relationship.
  • A final important aspect of the evolving technology landscape is the rise of crypto assets. With the rapid pace of development, treasurers should pay attention to crypto assets (in their various forms) as a potential alternative short-term investment tool for the future.

For Europe and Asia-Pacific markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.