Taking Advantage of Innovation

by Faisal Ameen, Head of Product Management, Global Transaction Services, Asia Pacific, Bank of America Merrill Lynch

In the past decade, liquidity management has developed from a peripheral to a mainstream treasury priority in Asia Pacific. This transition has been fuelled by a number of factors including geographic expansion and currency diversification, coupled with a shift to more strategic treasury.

The good news is that in 2015 this transition remains in full swing. But when analysing market forces, the factors pushing ongoing transition are different. While companies continue to face a number of liquidity management challenges, recent technical innovations are bringing new opportunities to overcome regulatory and currency hurdles and help treasurers better optimise company cash.

To understand the transition, we need to take a step back. By their very nature, many of these liquidity challenges are regionally-specific and complex. From a treasury perspective, Asia Pacific is arguably the world’s most difficult region, a fact recognised globally. Comprising numerous markets and cultures, multiple currencies and diverse regulatory climates, Asia Pacific presents a variety of challenges whereby liquidity management is concerned that do not exist in the treasury space of other regions such as the European Union and North America.

For one thing, in light of the region’s disparate markets, companies operating in multiple countries across Asia Pacific tend to work with a range of different banks, both local and international. As a result, treasurers need to aggregate information from a number of different electronic platforms in order to determine their overall regional cash position. Collating this information is a time-consuming exercise though, often as consuming as the subsequent analysis and decision-making processes.

Numerous developments are driving a transition towards smarter liquidity management practices in Asia Pacific. Bank-agnostic solutions, such as SWIFT for Corporates, can help companies achieve real-time visibility over the relevant information. Alternatively, companies can also access platforms provided by global banks in order to achieve the required level of visibility. These platforms enable companies to spend less time on analytics and more time on making strategic decisions.

Visibility is not the only challenge faced by treasurers in the region. Benchmarked with other geographies, managing trapped cash remains a significant consideration for the Asia-based treasurer. For one thing, cash flow constraints can prevent companies from deploying cash as needed. Furthermore, trapped cash has potential financial ramifications for a company if local investment vehicles offer lower returns than the company could achieve in other markets.

As treasurers understand, trapped cash is often beyond the control of the treasury function. For example, regulatory constraints can prevent companies from readily moving cash out of certain markets, such as India and Malaysia. Encouragingly though, trapped cash is becoming less of an issue in China following regulatory relaxations which have made it easier for companies to mobilise their cash.[[[PAGE]]]

While trapped cash is one of the most significant challenges, other issues may also need to be factored in by companies reviewing and enhancing their liquidity management structures. For example, the stricter capital and liquidity requirements brought by Basel III mean that banks may be more focused on shoring up their balance sheets than on lending money. As a result, companies may find credit facilities are less readily accessible than in the recent past – making it even more important to maximise internal sources of cash.

Liquidity management structures

To address these challenges, it is becoming imperative for treasurers to establish the right liquidity management structures. By obtaining greater control over cash balances at a regional level, treasurers can make better use of their liquidity – particularly as many companies have a cash surplus in some countries and a deficit in others. Adopting appropriate liquidity management structures further enables treasurers to offset balances against each other and thereby reduce financing costs or increase interest on positive balances.

As a sign of the upward transition of liquidity management strategies in Asia Pacific, structures such as sweeping and notional pooling are used very effectively by companies across the region. In our experience though, the majority of companies use physical sweeping structures rather than notional pooling.

There are several factors driving this regional treasury practice of utilising physical sweeping structures. While notional pooling provides certain benefits by avoiding the co-mingling of funds, true control can only really be achieved when balances are physically concentrated. For example, if a company needs to access internal cash in order to invest in an M&A transaction, notional pooling is less advantageous than a physical pooling structure which localises funds in one place and allows them to be used for the necessary capital injections.

Tailored solutions can also be suited to markets where trapped cash is an issue. Interest optimisation solutions, which are similar to notional pooling, enable companies to receive an enhanced interest yield on balances across different markets, even if those balances are trapped. A recent development has been the arrival of solutions that reduce the cost of borrowing across deficit positions.

Leveraging innovation

Technology is a further game changer and is enabling liquidity management to make the transition towards a more strategic treasury function regionally. Banks are typically taking the lead in bringing innovative, technological solutions to provide treasurers with next generation liquidity management structures.

When regulations change in a particular country, banks tend to review their underlying infrastructures and adjust them to enable the use of particular products. In the past, this tended to happen on a country-by-country basis in Asia Pacific. More recently, select banks began addressing liquidity solutions in a more universal way – as long as certain local variations are allowed for. By building a utility to sit above different country infrastructures, solutions can be consistent between different geographies, while also providing greater flexibility to meet local regulatory requirements.

Beyond liquidity management structures, technological developments are helping companies gain greater control over their cash in other ways. One of the lessons that many treasurers have learned is the need to understand their customers’ payment behaviour in greater detail. In many cases, companies cannot make a new cycle of sales to a customer until the previous cycle has been paid for and the reconciliation process has been completed. By using sophisticated analytics, companies may be able to speed up this process, thereby improving working capital management and expediting future sales.[[[PAGE]]]

Furthermore, analytics can be used to segment customers into different categories, differentiating between companies that always pay on time (category A), those that sometimes pay on time (category B) and those that never pay on time (category C). During times of economic difficulty, the company may adjust the way in which different segments are handled. For example, credit lines could be increased for category A, while category C customers will be required to pay cash on delivery. By setting up the right processes during less challenging times, companies may be better prepared to weather more difficult market conditions.

Making the most of liquidity

No two liquidity management solutions are the same. Every company has unique needs: some are in investment mode while others are at a more mature stage of development. Some companies may have surplus balances in particular markets while others may have a deficit. Consequently, every liquidity management solution has to be fully customised to the individual company’s needs.

Once created, liquidity solutions should be reviewed every couple of years to make sure that they continue to be fit for purpose. A company’s underlying cash flows will evolve over time, while local regulatory environments can change. It is essential to build liquidity management solutions which are flexible enough to adapt to these types of changes, while also being scalable enough to support companies if they expand into new markets.

In conclusion, liquidity management is now firmly entrenched at the heart of any corporate treasury department. More frequently the greatest transition is being seen by Asian corporations, which are increasingly managing this area just as effectively as large multinationals. Clearly, innovation is bringing new opportunities for companies to harness internal liquidity in a more effective way. By taking advantage of these developments, companies now have better options to increase interest income, reduce their external funding needs and make better use of their cash.