Cash & Liquidity Management

Page 1 of 2

North American Liquidity: Change, Challenge, Opportunity Potential cross-border cash efficiencies associated with NAFTA trade growth and the availability of innovative balance sheet investment options mean that treasurers in the region are not short of opportunities. Michael Havraniak, HSBC outlines these opportunities and examines some of the ways in which treasurers can maximise them.

North American Liquidity: Change, Challenge, Opportunity

North American Liquidity: Change, Challenge, Opportunity

Over the past year, the interest rate environment in North America has been markedly different from that in regions such as Europe. Coupling this with potential cross-border cash efficiencies associated with NAFTA trade growth and the availability of innovative balance sheet investment options, means that treasurers in the region are not short of opportunities. Michael Havraniak, Regional Head of Liquidity, Global Liquidity and Cash Management, HSBC outlines these opportunities and examines some of the ways in which treasurers can maximise them.

Interest Rates

Interesting Times

While interest rates in regions such as Europe have remained low (and in some cases negative), rates in North America have recently been following a very different trajectory. In the US there have been six rate rises over the past 22 months, with Federal Reserve officials projecting a steeper path for rate rises in 2019 and 2020 [1], while in Canada there have been four increases in the policy rate since July 2017 [2].

Corporate treasurers in North America have been quick to respond to this in their expectations of the credit interest rates they are seeking from their banks. There is now much more emphasis on maximising yield across the maturity spectrum of surplus corporate liquidity. This is the most recent development in the way treasurers’ attitudes to liquidity have evolved over the past decade. Back in 2008, the Association of Finance Professionals (AFP) annual Liquidity Survey [3], made it very clear that treasurers’ emphasis was overwhelmingly on security and far less on yield or liquidity. However, based upon HSBC client discussions, it is evident that treasurers are now also looking to maximise yield and liquidity. Consequently, there is a lot of pressure from North American corporate treasurers on banks to pass on any central bank rate increases in their entirety.

A further incentive for treasurers to maximise yield is that corporate liquidity levels continue to rise. According to annual research by S&P Global [4], US corporate holdings of cash and short- and long-term liquid investments hit a record USD1.9tr as of year-end 2016. In some cases this liquidity increase is causing treasuries issues with the credit risk limits allocated to their banks in their treasury investment policy.

As yet, it is unclear whether this – coupled with lessening emphasis on security – will result in treasuries extending the number of banks they are prepared to place deposits with, or whether they will simply increase the risk limits on banks with which they already place cash.

Changing Buckets

Apart from interest rate rises, another interesting liquidity dynamic at present is the change in treasury behaviour in relation to segmentation of liquidity. Historically, many treasuries have tended to allocate their liquidity into three ‘buckets’: short, medium and long term. Allocation across buckets has usually been done on the basis of availability requirements. Short-term liquidity would need to be instantly available for working capital, while long-term liquidity might only need to be tapped very occasionally and so could be placed in instruments such as 90-120 day notice accounts.

It appears that this behaviour is now changing in two ways. Some treasuries are retaining the same three bucket model but are reassessing the segregation of cash across the buckets.

Others are considering adding new buckets to achieve a more granular approach to their liquidity investment. In both cases, maximising yield is a core objective.

An important factor behind this shift is Basel III. While a few banks, such as HSBC, were quick to draw the attention of their treasury clients to the implications of the forthcoming regulation for efficient liquidity management, others were not.

As a result, a considerable number of corporate treasuries have until recently tended to assume that Basel III was an issue purely for banks, and failed to appreciate the knock-on effect on their own liquidity management.

This situation is now changing and more treasuries now understand the significance for them of Basel III measures, with the Liquidity Coverage Ratio (LCR) being an important example. The purpose of the LCR is to support the short-term resilience of the liquidity risk profile of banks by ensuring that banks have an adequate stock of unencumbered high quality liquid assets that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario [5]. This effectively means that large corporates’ deposits that can flow out a bank within 31 days (and that are not linked to transactional products) have zero liquidity value to any bank accepting the deposit. As a result, banks have minimal incentive to attract these deposits.

Growing awareness of this among treasuries has had two consequences. Firstly, as mentioned above, treasuries are re- examining the way they bucket their liquidity. More specifically, they are considering how much of it they can re-allocate to beyond 30 days. Secondly banks are launching products to target this shift: for instance, HSBC has introduced a 31 day notice account to extend its liquidity product offering, which offers client an uplift in yield over shorter-term products.


Notwithstanding current political uncertainties over NAFTA, the fact remains that it accounts for very substantial trade value: USD1.1tr in 2016 [6]. From a treasury perspective, this means that NAFTA-related trade can easily result in substantial liquidity balances accruing that are distributed across several currencies in several different countries. Given treasury’s fundamental task of ensuring that the corporation has the right liquidity in the right place in the right currency at the right time, this can represent a considerable challenge.

Cash concentration

Dealing with this effectively requires an efficient method for cash concentration. While it is perfectly possible to accomplish this manually, this is inefficient in that this sort of low level transactional activity diverts treasury resources from more important strategic concerns. This applies in two important respects: the actual individual instructions for moving cash, but also the tax-compliant and accurate administration of any resulting intercompany loans.

Automated solutions are available for running cash concentration structures. All the treasury has to do is specify the necessary balance thresholds and sources/destinations for sweeping cash. The necessary movements of funds then take place automatically without requiring further intervention. If there is a need to adjust any of the parameters, the treasury can simply log in and make the necessary adjustments - other than this, operating an automated cash concentration scheme of this type is a comparatively low maintenance affair.

Intercompany loan accounting

The same degree of automation can also be applied to the accounting process for any resulting intercompany loans. A large international corporate operating in different locations across NAFTA is likely to have different legal entities operating across that geographic base. If funds are flowing across the organisation and internal sources of liquidity are being used, then that will inevitably result in intercompany lending.

Historically, many corporate treasuries have opted to handle accounting for this themselves in-house. They have tracked the loans, calculated and applied the relevant internal company interest rates to those loans, and settled them across the bank account. As with issuing individual payment instructions with a cash concentration structure, this is hardly the most efficient approach – especially if a reliable automated alternative is available. HSBC’s inter-company solutions offer this facility, freeing up treasury resources for more crucial strategic tasks.


3 2008 AFP Liquidity Survey


Next Page   2 

Save PDFs of your favorite articles, authors and companies. Bookmark this article, or add to a list of your favorites within mytmi.

Discover the benefits of myTMI

Register Today for FREE!

 Download this article for free

Latest Articles from HSBC

Older Articles from HSBC