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Cash & Liquidity Management
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The Changing Landscape of Cash Management and Investment

by Travis Barker, Head of Liquidity Business Development, HSBC Asset Management

The global financial crisis highlighted the importance of a disciplined approach to cash investment, with many corporate treasurers taking a more conservative view of how they invested their cash, with a clear emphasis on capital security and liquidity. Although the crisis in the financial markets eased over the latter part of 2009, the landscape for cash management and investment had fundamentally altered, shaped by a new approach to counterparty and market risk, and a changing regulatory environment. Furthermore, the emerging crisis in Europe emphasises that treasurers need to continue to be vigilant in ensuring that cash is invested appropriately and in accordance with the needs of the business.

Using MMFs to manage investment priorities

As every financial text book will emphasise, investors consider three key priorities when making investment decisions: security of capital (credit risk); availability of cash when required (liquidity risk) and a return on capital to protect the relative value of cash (interest rate risk). These are frequently summarised as: security liquidity and yield. Treasurers increasingly recognised-long before the crisis – that while it is possible to manage these objectives in-house, such as by using a combination of deposits and repo instruments, few companies have surplus cash balances that are large enough, or sufficient treasury resources to undertake such a strategy effectively. Consequently, a simpler solution for many treasurers was to outsource their cash investment into constant net asset value (NAV) money market funds (MMFs). These initially took hold in the United States, and have since become popular in the United Kingdom, Europe and increasingly in Asia.

The emerging crisis in Europe emphasises that treasurers need to continue to be vigilant in ensuring that cash is invested appropriately and in accordance with the needs of the business.

The concept of MMFs is that they comprise the pooled assets of a number of institutions, invested in a variety of high quality assets with a short-term maturity. In addition to providing the necessary diversification on the asset side to protect investors’ capital, investors also retain immediate access to liquidity, due in part to diversification on the liability side, as investors have different financial drivers, and so withdraw money at different times.