The Value of an Integrated Approach to Liquidity and Risk

The Value of an Integrated Approach to Liquidity and Risk

by SunGard

With a sophisticated financial services sector underpinned by a well-developed regulatory and legal framework, burgeoning corporate sector and a stable economy, South Africa continues to be an attractive destination for both domestic and foreign banks, non-bank financial institutions (NBFIs) and corporations. However, with increasing competition, an evolving regulatory environment, structural constraints that threaten growth, and complex, volatile world markets, these organisations are placing a far greater emphasis on sophisticated liquidity and risk management capabilities than ever before.

Adopting best-in-class financial technology is an important priority for banks, NBFIs and corporations in South Africa

Adopting best-in-class financial technology is becoming an increasingly important priority for banks, NBFIs and corporations headquartered or operating in South Africa, with a view to optimising operational efficiency and controls, strengthening compliance, and enhancing risk management. In some cases, these organisations are replacing existing legacy systems whereas others, particularly smaller or newly emerging players, are implementing these solutions for the first time. One of the difficulties for organisations embarking on either new or replacement financial technology projects is how to support the often quite distinct requirements for both efficient, automated treasury management capabilities and sophisticated asset and liability management (ALM) tools.

The functional dilemma

The value of specialist treasury management systems (TMS) for efficient transaction processing and reporting across a wide range of instruments, liquidity and risk management is widely accepted amongst banks, NBFIs, mid-cap and large corporations in all industries. These solutions, such as SunGard’s Treasury solutions, typically excel in process automation, controls, reporting and integration with both internal and external systems to create a complete, accurate and timely view of liquidity and risk.

While many treasury management systems provide extensive risk management capabilities, they take a static value effect approach to assets and liabilities which does not meet the more sophisticated modelling needs of financial institutions and asset-rich or liability-heavy corporations. Amongst financial institutions, this includes mortgage originators, insurers and development banks, amongst many others. From a corporate perspective, companies with large ALM requirements include those with large asset portfolios, such as financial investments or real estate, and those in industries such as infrastructure, utilities and commodities extraction that are funded through the capital markets.

These organisations need a dynamic approach to ALM to fully quantify the potential impact of interest rate and FX fluctuations on future earnings, balances, market values, yields and cash flows according to a wide range of scenarios. In addition, the ability to measure earnings effects, liquidity risk and product-inherent optionality risk, create powerful simulations, capture customer behaviour to model future flows and develop stochastic rate scenarios for earnings at risk calculations are becoming increasingly important.

Achieving breadth and depth of capability

The difficulty for organisations that have both treasury and ALM requirements is that they cannot access this functionality through a single TMS. Large financial institutions and NBFIs often have separate business functions for treasury and ALM, with dedicated technology in each case, but smaller or newer players and most corporations lack the appetite, scale and resourcing to invest in, and manage solutions from different suppliers. To overcome this issue, SunGard has been proactive in combining its specialist TMS and ALM solutions into an offering that provides best-in-class capabilities across both disciplines.

SunGard’s combined proposition offers a unique opportunity to leverage specialist treasury and ALM capabilities without the need to acquire separate solutions. Firstly, clients can work with a single technology partner with whom they can form a close relationship based on a detailed understanding of their current needs and future aspirations. Secondly, given that every organisation has a different balance of functional needs and internal resourcing, SunGard offers different deployment models tailored to each client. In some cases, clients will choose to implement both treasury and ALM capabilities upfront, either installed on-site or on a hosted basis. Other clients may prefer to implement the TMS but obtain advanced scenario analysis and modelling via SunGard’s ALM bureau service rather than installing a full ALM solution. Over time, as their functional requirements develop, they may choose to migrate from the bureau service to their own ALM solution.[[[PAGE]]]

Seamless integration, consistent calculations

A single-vendor solution through an experienced provider also offers functional and integration benefits

A single-vendor solution through an experienced provider also offers functional and integration benefits. An issue that banks, NBFIs and corporates that have installed separate TMS and ALM solutions often face is the difficulty in transferring data between systems. It is quite common for at least 25% of an implementation project to be spent on integration, and maintaining the interface over time is often a full-time role. Conversely, by adopting an integrated SunGard solution, flows and positions can be transferred seamlessly between the TMS and ALM without the need for lengthy integration projects or onerous maintenance. This means that transaction data can be transferred from the TMS to the ALM for modelling, for example, whilst flows can then be passed back to the TMS to allow better cash flow forecasting.  The solution can also accept input from the company’s current ‘asset book of register’.

A partnership approach

A growing number of banks, NBFIs and corporations in South Africa are taking advantage of an integrated treasury and ALM approach. Implementing any business-critical financial technology solution can be a daunting prospect, however, particularly if multiple systems and vendors are involved, and complex integration needs exist. Not only does SunGard offer a solution with best-in-class functionality and flexible deployment, but it also offers a structured, phased approach to implementation. This allows clients to derive value quickly, and then expand their use of functionality over time. For example, many clients start with the TMS to support transaction management, compliance, segregation of duties and reporting, and then expand into ALM. This approach offers the scalability that clients need, whilst providing them with the breadth and depth of functionality that will enable them to meet their liquidity, risk and compliance objectives both now and in the future.