Turning Up the Liquidity Volume

Structures for Maximum Impact

With so much macroeconomic ‘noise’ to contend with, not to mention the resultant volatility, treasurers are naturally reassessing their liquidity structures. Here, Mariya Tretyak, Head of Liquidity Solutions for Corporates, BNP Paribas, outlines some innovative approaches to help treasury teams stay ahead of the game.

In an environment where uncertainty has become the ‘new normal’, the pressure is on for treasurers to create robust liquidity structures and have a focus on durability at the same time.“ Our treasury clients have been investing a significant amount of time and resources into designing a liquidity structure to ensure they don’t have to worry about their resilience, no matter how uncertain the operating environment may be,” she explains.

To further optimise liquidity, MNCs that bank with multiple institutions are looking to reduce the number of FIs they work with, she adds. “We are not seeing all of our large corporate clients doing this, but we estimate around half are looking into it.”

Rationalising banks is not an easy exercise, and the approach will differ between corporates, she notes. Factors for consideration include how the treasury is organised, its internal flexibility, which tools are being used, and the extent of the treasury’s dependence on the different banks it uses.

For corporates that find rationalisation their next challenge, an interesting option is to establish one main liquidity partner. “From purely a liquidity perspective, having one main partner can benefit a corporate in different ways and also means the treasury department eventually can profit from simpler, less costly and less time-consuming daily treasury management,” says Tretyak. “At BNP Paribas, we call it an “integrated liquidity structure” where one lead bank manages the entire liquidity chain, from operational flows to centralisation, and eventually to investments in best-in-class financial instruments, aiming to withstand fluctuations in interest rates and unpredictable macro events such as another pandemic,” she says.

Any such discussions will raise concerns about counterparty risk. In most RFPs that Tretyak now sees, corporates are expressing a desire to concentrate and optimise liquidity but are, at the same time, concerned about the risks of using one bank for all their needs. “For some corporate treasurers, having one bank may seem inconceivable, but limiting the number of partner banks can be a useful option for streamlining liquidity,” she points out.

In pursuit of harmony

With a strong focus on working capital and liquidity optimisation, treasurers are looking at centralising their operational flows, “and utilizing one lead partner remains the most efficient technique to embrace cash centralisation”, says Tretyak. “Such cash pooling enables them to consolidate balances from multiple accounts into a central account, providing better control of cash positions and interest expenses.”

“A cash pool between the company’s operational secondary accounts and the centralising master account, all held with BNP Paribas will benefit from the preservation of the value dates on their sweep, with no cut-off times such as in classical payments, and none of the sizeable costs they might have with international transfers on a regular basis,” she observes. “The bank provides harmonised liquidity solutions across 50 countries worldwide and operates thousands of liquidity structures globally.”

For accounts held with other banks, mechanisms such as multi-bank cash pooling will also help achieve the liquidity efficiencies that treasurers are seeking.

“Additional accounts with third-party banks can also be integrated into a BNP Paribas cash pooling structure in a similar way but wire transfers would have to be used instead of internal sweep messages, for example. The treasurer would lose the flexibility of internal sweeping but will still benefit from an automated centralisation. Across the world, we have hundreds of agreements with other banks that enable us to do this seamlessly,” she says.

Unlocking higher yields for securing the future

“Another benefit of an integrated liquidity is that cash centralisation provides a sharpened visibility on the corporates balances, creating a good basis throughout the day to help treasury clients with optimal investments solutions.”

Even if usually, cash pool sweeps occur at the end of the day, the bank already has intraday real-time visibility on the pool transactions and can create a projected view on the central account to anticipate where the cash can best be invested. “This can all be done seamlessly via automated investment solutions, too,” she points out.

Corporate clients still hold a lot of cash : it has become an important asset class in the past years with the high interest rates and sustains even with the estimated rates cut by the end of the year in Europe and in the US.

Investments are therefore the ultimate component towards a full integrated liquidity structure, “and BNP Paribas can give its clients all of the instruments they need so that they are fully autonomous” in making investment decisions. The treasurers can invest automatically as well as via self-investment tools from one central location, view all their current allocations and set-up the parameters they desire “with one click”, says Tretyak.

“Recently, BNP Paribas has been integrating these capabilities into its electronic banking portal, Connexis Cash. So we can truly call this a one-stop shop for our clients,” she says, “where they have full visibility of on their liquidity structure : cash and investments, combined to direct initiation”.

The entire liquidity chain can be handled in a more seamless way when it is centralised into one lead bank than if the different aspects of liquidity were scattered between different participants in the chain, she notes. “If everything liquidity-related is kept within the same bank, treasurers do not have to perform transfers to other banks for investment purposes. These are additional benefits of having such an integrated liquidity structure.”

Seeking stable returns in an unsettled climate

Having the right liquidity structure plays a key role in how treasurers create resilience for their organisations. Also, there is a focus on to what end liquidity is allocated, particularly regarding ESG and sustainability. The automated investment solutions mentioned above are typically applied to sight deposits, term deposits and MMFs, the two latter being the most popular investment instruments for European Corporates.

Of particular interest to BNP Paribas’ clients are the range of Sustainable Finance Disclosure Regulation (SFDR) Article 8 classified MMFs, which are designed to meet the rising demand for sustainable investing solutions. Article 8 funds are those that promote environmental or social characteristics, which are distinct from regular Article 6 funds that don’t have a focus on sustainability.

In February 2024, BNP Paribas Asset Management reported that ESG clients had been investing heavily in sustainable MMFs, attracted by stable returns in the volatile environment. More generally, in April last year Fitch Ratings estimated that AUM in Article 8 MMFs had increased from 47% to 56% of total European AUM in the second half of 2022. Such investments totalled €913bn at end 2022.

Earlier this year, however, Fitch cautioned that the increase in investment in Article 8 MMFs may slow as regulatory updates are expected in 2024 in the EU, Switzerland and the UK. These updates may include changes to ESG-labelling guidelines, including a minimum requirement for sustainable investments held in the fund based on its name or any sustainability-related label it carries. The second is related to standardised fund reporting and the integration of ESG considerations into investment strategies.

“Sustainable investing is now an important aspect of a treasurer’s investment strategy,” acknowledges Tretyak. She notes that some banks are packaging liquidity solutions with investment in sustainable MMFs as ‘green pooling’, with excess liquidity invested in sustainable MMFs. “BNP Paribas does not package its sustainable investments in this way, but the result is the same.”

Listening and learning

The relationship between BNP Paribas and its corporate treasury clients is not a one-way street and co-creation of bespoke solutions is a significant feature. “The integrated liquidity solutions have very much been a co-creation exercise with our corporate treasury clients. We engaged with stakeholders to harness their creativity in the process of new product development” Tretyak explains.

It is important that treasurers discuss with their banks how they can improve their liquidity structures because FIs are “very willing to listen”, she notes. “Working on co-creation provides banks with precious sources of information allowing them to anticipate the clients’ needs. Tretyak says treasurers can now be “in the driving seat” when it comes to liquidity management, expressing their requirements and having a greater chance of creating solutions that will be “beneficial for everyone”.