The 2013 guide to Liquidity Management: Staying liquid, staying alert

How companies manage their liquidity – both in terms of how they move it between subsidiaries and how it is invested – is affected by a myriad of forces. The operational goals of the company inevitably dictate many of its treasury decisions. However, broader economic forces, regulatory changes, shifts in the banking landscape and advances in technology all have an impact on corporations’ liquidity management strategies. All of these forces are subject to change – and in recent years that change has been accelerated by the impact of the financial crisis and its aftermath. For example, many multinationals have responded to the economic downturn in many developed markets by expanding in faster-growing emerging markets, introducing greater complexity into their operating and treasury models. More generally, the global economic outlook remains uncertain: the US economy is at last gaining momentum and there are even tentative signs of recovery in the eurozone. At the same time, growth in some emerging markets, most notably China, is slowing.

The regulatory environment is central to what companies can achieve in their liquidity management: structures are defined by what is permissible. The extent of regulatory change in the post-crisis period – including changes that indirectly affect corporates, such as Basel III, and those with direct implications, such as the liberalization of China’s renminbi – is unprecedented. While regulatory change can present significant challenges and require sizeable investment, it can also offer huge opportunities to improve liquidity management.

Meanwhile, advances in technology continue to lower costs and increase the granularity of data and its immediacy. Banks are still investing in new products and enhancing the functionality of existing offerings. As importantly, many are working to deliver global consistency and visibility across their liquidity management services (and integrate liquidity management more fully with cash management, trade, foreign exchange and other services to align more accurately with how corporate treasuries work).

Elyse Weiner, global head of liquidity management services, treasury and trade solutions, at Citi, sums up the liquidity environment in three words: "Complex. Changing. Challenging." She explains: "In an environment of continuing economic uncertainty and huge shifts in markets where companies are generating and using cash, a prime focus for treasurers of global enterprises is making better use of internal liquidity and funding." While the depths of the crisis are over and in some instances companies are looking to grow (potentially changing their liquidity management strategy), liquidity – however it is to be used – remains of critical importance for companies.

Strategic imperatives

One hallmark of the post-crisis era has been growing cash reserves at many companies. This growth has been driven by corporates’ negative experiences during the crisis, when access to liquidity was constrained, relatively strong continuing cashflows (despite weak global economic growth) and limited opportunities to put cash to work for organic or inorganic growth given poor visibility of the economic outlook. "Companies have parked more than £1 trillion at banks, including £500 million in demand deposit accounts," says Yera Hagopian, head of liquidity product management at Barclays. "Corporate clients are deliberately keeping their balance sheets liquid even as corporate profits rebound."

Increasing cash piles at corporates has resulted in a greater emphasis on ensuring proper structures are devised to facilitate the efficient management of cash positions, notes Lee Swee Siong, global head of global corporate product, transaction banking, at Standard Chartered (see Creating a global multi-currency notional pool). According to Jan Rottiers, head of liquidity management at BNP Paribas, corporates continue to pile up cash but the drivers for doing so are changing. "While safety and flexibility remain key, considerations for seizing new opportunities are becoming increasingly important." The nascent recovery of the US economy has prompted corporates to become "slightly more active with their cash and cash reserves by using funds more for capital investments," notes Suzanne Janse van Rensburg, EMEA head of liquidity and investments and managed treasury liquidity services at Bank of America Merrill Lynch. In addition, many companies are looking to emerging markets as sources of future growth. Necessarily, emerging markets present greater liquidity management challenges and banks are investing accordingly. "As companies expand into new markets, they must keep up with rapid changes in capital and currency controls, especially in emerging and frontier markets, given their direct impact on treasury’s ability to manage cash efficiently and alleviate trapped cash," explains Weiner. Tarek Elyafi, managing director, transaction banking, at Standard Chartered, says that in the past year the bank has launched a global liquidity management system designed to cater to local nuances and offer sophisticated intercompany lending and limit management functionality.

The impact of regulations

The liquidity management environment is in a continual state of flux – largely due to the onset of new regulatory initiatives, according to Lisa Rossi, global head of liquidity management, global transaction banking at Deutsche Bank. "With regulation impacting business lines in different ways and according to different time frames, it is all too easy to focus on the sum of regulation’s parts rather than the whole," she notes. "However, we must not overlook the importance of determining – or doing our best to determine – what the cumulative effect of new local and global adherence measures will be, particularly where overlaps and disconnects appear to exist."

Uncertainty over the cumulative impact of regulations means questions remain over the short-term impact of regulation on liquidity management, the longer-term effect on banks’ balance sheets and the impact on liquidity products and solutions for corporate treasurers, according to Rossi. "These are, undoubtedly, difficult issues, but hypotheses are beginning to emerge as to how the industry may address the combined impact of regulation across the entire liquidity management landscape."

Basel III in particular looks set to shake up the liquidity environment, according to Barclays’s Hagopian, given its requirements for high levels, and better quality, of capital, appropriate levels of stable liquidity for funding, matching of long-term assets with liabilities and the need to manage pricing to account for the increased capital, liquidity and leverage requirements. "As banks come under pressure to be more vigilant in their use of capital and maximize their return on equity they will, inevitably, be more expensive to run," she explains. "This will have a knock-on impact for corporates, increasing the price for certain banking services. Just as banks have done, corporates need to adapt to a post-Basel III era and to do so will mean taking a fresh look at cash pooling and even their operating relationship with their bank." Tom Schickler, global head of liquidity and investments, global payments and cash management, at HSBC, says that combined with continuing concerns about sovereign and counterparty exposure, the expectation of increasing bank borrowing costs is a major influence on decisions made by treasurers and CFOs about liquidity management. "As a response, corporates have heightened their focus on securing alternative liquidity sources and accelerating the globalization of their self-funding solutions to enable timely access to cash and optimize the interest returns and costs," he notes.

Rossi says that the increased importance of regulation to liquidity management is also having other consequences. "Historically, corporate liquidity management has concentrated on automation and efficiency, and the simplification of cash concentration, pooling and investment options," she says. "As a result, the points of interface were largely driven by systems and technological requirements. However, the present focus on regulatory and economic changes has stimulated a renewed emphasis on the value of relationships and the need for increased communication between corporates and their bank partners."

Impact on investment options

Corporates’ investment options are being directly and indirectly affected by changing regulations, notes Hagopian at Barclays. "Expiration of unlimited Federal Deposit Insurance Corporation [FDIC] deposit insurance has increased the challenge of managing bank counterparty risk while safely deploying excess cash for US-based entities," she notes. BAML’s Janse van Rensburg says that FDIC deposit insurance caused some reallocation but overall changes were less than many had predicted. "Recently, the unanticipated sharp uptick in long-term rates coming off the back of taper talk has somewhat jolted the market," she adds. "Talk of rising rates can now be done with a straight face, though with short-term rates continuing to be anchored this may not translate into an increased demand for deposit rates any time soon. In the near term, time deposits could start to rise." Money market reform also remains on the horizon, which could further limit access to a perceived safer and more flexible cash management alternative, resulting in money market funds no longer being seen as fungible with bank deposits, according to Hagopian. "Banks are already motivated to comply with Basel III’s more stringent liquidity rules, even though full implementation is a few years off," she adds. Janse van Rensburg agrees: "Staying on top of these changes is critical to ensure that we are adjusting our product offerings appropriately to sustain and grow our liability balance and investment market share."

A historical change

China’s liberalization of its currency – the renminbi – began three years ago but has accelerated recently, according to Lee at Standard Chartered. "In July, the People’s Bank of China pilot scheme for cross-border renminbi intercompany loan from key China cities was broadened significantly to one that has a pan-China coverage which also encompassed a greatly reduced regulatory oversight requirements where banks can exercise ‘Know Your Customer’ initiatives."

As Elyafi at Standard Chartered notes, liberalization represents a significant opportunity for many corporates (see Taking advantage of renminbi liberalization). "Trapped cash in China is often cited by many global corporates as a key area of inefficiency for their intergroup liquidity utilization," he notes. "This deregulation will open up the option for multinationals to tap their China liquidity for utilization across other group entities globally."

Adam Hayter, head of iLIM market management, EMEA, at RBS, agrees: "The loosening of exchange controls in China is very positive given the ongoing focus on releasing trapped cash. At RBS, we have enhanced our capability to automate sweeping of renminbi from China to Hong Kong, Singapore, the Netherlands or UK, where this currency can be included in centralized physical or notional pooling." New technology and strategies

Many large corporates continue to organize and manage banking by region, often implementing a single or multi-currency liquidity pool at the consolidation level. However, Citi’s Weiner notes that, with the growing deployment of advanced treasury structures (such as in-house banks), rapid shifts in regulation, and rising trade flows and cash generation in emerging markets, many companies are re-evaluating existing structures and strategies (see Global in-house banking).

"Today’s optimal global liquidity management strategy often calls for concentration of cash by key currencies into the IHB, agnostic to the regional organization," says Weiner. "This is complemented by coordinated management of local liquidity and funding requirements by the central/regional treasury organization and deployment of structured techniques to alleviate trapped cash in regulated markets."

Schickler at HSBC agrees that the continued focus on efficiency has seen leading corporate treasuries striving to achieve improvements in liquidity management through more advanced treasury structures, driving down costs and achieving consistent, integrated liquidity management practices. "Banks offering best-in-class liquidity management services have the products and footprint to deliver efficiency and value to an enterprise’s trading, treasury and working capital models, enabling corporate treasury to broaden their control over advanced treasury models such as in-house banks, payments/receipts on behalf of structures and shared service centres."

The 2013 Liquidity Management Survey

A total of 18 banks participated in this year’s Euromoney Liquidity Management Survey: ABN Amro, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Commerzbank, Danske Bank, Deutsche Bank, Handelsbanken, HSBC, ING, KBC, PostFinance, RBS, Santander, SEB, Société Générale and UniCredit. Each bank completed a questionnaire covering its cash position reporting services, liquidity management infrastructure, sweeping and cash pooling services, investment services and liquidity management support.

Companies’ experiences during the financial crisis continue to inform many of their actions in relation to liquidity management. For example, the scarcity and increased cost of liquidity during the worst periods of the crisis made it more important for companies to understand where their cash was (and be able to predict with some accuracy where it would be in the future). This has prompted banks to enhance their reporting capabilities so as to improve corporates’ visibility of cash and ability to forecast cashflows.

"A global economy necessitates international systems and the cross-border dissemination of reliable market and transaction-related data and information," explains Rossi at Deutsche Bank. "Given that this is impossible without technology, Deutsche Bank has continued to prioritize platform development to allow us to offer clients global visibility over cash positions." Rottiers at BNP Paribas says that the bank has also continued to develop "state-of-the-art electronic channels with global reach in order to increase visibility and control on cash positions, and to support decisions on investment and financing". All the participating banks in the survey now provide end-of-day reports from their own branches. Many banks that took part in the survey now offer own bank branch intra-day reporting in as many countries as end-of-day reports, highlighting the increased importance of up-to-the-minute information. "We continue to enhance our reporting capabilities to provide greater visibility and control," says Janse van Rensburg at BAML. "We made a substantial enhancement early in the year which dramatically improved our cut-off times, helping clients around the globe to obtain earlier reporting on US balances and achieve greater benefit across a number of other currencies outside the US."

Liquidity management infrastructure

The composition of this year’s survey differs from that of 2012, making comparison difficult, but around half of the participating banks now offer a single account for all cash management and 13 provide pooling on the same liquidity management platform for all regions. BAML’s Global Liquidity Platform (recently extended to all Asian branches) "continues to be one of our most important technology developments, offering a level of liquidity control and flexibility that is unavailable in off-the-shelf products," says Janse van Rensburg.

The mechanics of moving cash – either physically or notionally – is at the heart of liquidity management. Banks have continued to invest in liquidity structure capabilities: Barclays has expanded the number of locations it offers for single-currency physical pooling from seven last year to 22 this year, while BNP Paribas, KBC and Santander have also increased physical pooling locations. Other banks have widened the range of countries that can be included in single currency notional pools. "With the Chinese regulations loosening, RBS has developed the inclusion of mainland China liquidity in an offshore liquidity management solution," says Hayter at RBS. "Onshore renminbi can now be included in a balance compensation solution at any of our central hubs in Asia or Europe."

For a number of banks, increasing the number of currencies that can be included in a multi-currency notional pool in Asia has been a priority, with BNP Paribas increasing from zero last year to 23 currencies this year. "An additional number of countries in our Asian-Pacific network are part of our global cash pooling solutions both for cash concentration and notional pooling," explains Rottiers at the bank. "As a result, cash [from] less regulated countries can be part of cross-border sweeping solutions while surplus cash in more regulated countries can be included in interest and balance optimization schemes."

Weiner at Citi says that the bank’s most important development in liquidity management in the past year has been its Global Concentration Engine. "This next-generation platform ties together Citi’s worldwide branch network and liquidity management services into a single global network for liquidity management," she says. "Citi’s cash aggregation services provide clients with cash centralization and pooling across some 50 countries, mobilizing trillions of dollars a month in liquidity flows." The platform provides multiple tiers and sweep parameters, including proportional sweeps and interest reallocation. It will be extended to emerging markets as regulations evolve, so that clients have a consistent set of services to the widest extent possible. Citi’s investment in global platforms, locally delivered, produces results, according to Weiner, providing clients with "a common experience across markets, offering fully automated, cross-border cash centralization and pooling across more countries than any other bank. As a consequence, Citi clients have optimized full end-of-day global liquidity across countries and regions, without loss of value or the limitations faced when dealing with a bank’ reliance on partner bank networks and cut-offs. Our clients’ adoption of cross-border sweeping and pooling structures has increased at an average annualized growth rate of over 20% for each of the past two years."

Citi has also placed great emphasis on using data effectively. "Pooling and concentration services are linked into Citi’s liquidity analytics capabilities," says Weiner. "While Citi clients generally have treasury workstations, our web-based information delivery platforms provide companies with customized views of their global liquidity/pooling structures and consolidated liquidity positions throughout the business day." Additional modules and workflow tools support cash flow forecasting and intercompany loan management. "With access to online trading of investments and FX, clients can efficiently determine cash positions and place trades to manage investments, benefiting from greater control and financial efficiency," she adds.

All of the banks in the survey can now ensure that a sweep is the last transaction of the day and many have increased the number of countries where this service is available (Citi offers the largest number in this year’s survey). Just one bank does not provide automated back values for transactions with previous value dates. As in last year’s survey (which had slightly different participants) all but five of the banks offer overnight return sweeps, most triggered by balance or time. All the banks offer automated intra-day sweeps within cut-off times, with the vast majority being conducted automatically.

Investment capabilities

This year’s survey shows that all but two of the banks accept a range of 10 currencies or more for cash investments. Five banks – Danske Bank, HSBC, KBC, Société Générale and UniCredit – accept 50 currencies. In line with previous year’s surveys, this year’s shows that all the banks provide both an investment desk and an investment portal, with two-thirds providing investment instruments from other financial institutions as well as their own bank.

The investment climate remains difficult for corporates. "Corporate treasurers remain liquidity-conscious, maintaining significant surplus liquidity, which given extended low rates is a challenge for revenue and yields," explains Hayter at RBS. "While corporate treasurers continue to balance this yield challenge with counterparty risk, we are still seeing this translating into increased pressure to ensure the most optimal account and liquidity structures to consolidate operational cash and ensure maximum return." Deutsche Bank has expanded its end-of-day investment offerings to align with corporate investment policies that require broader diversification, according to Rossi. "Different investment choices comprise different risks (proprietary and non-proprietary) and we are able to offer access to not only a broader range of investment vehicles, but also the information that these investments require – including non-Deutsche Bank specific data," she says. "This enables us to offer a true view of liquidity and investment allocation beyond Deutsche Bank products."

However, despite the breadth of investment options available, corporate treasurers remain conservative, notes Rossi. "Low interest rates and a propensity for lower-risk investments have been the norm since the global financial crisis of 2008, and sparked a trend among corporates for accumulating large cash positions," he says. "As a result, we continue to see corporates with substantial cash positions and, for such corporates, the key to future changes will be linked to how cash can be best optimized and deployed in an efficient and prudent manner. A positive development – which comes despite some ongoing concerns over the effects of regulation – is a return to cautious optimism among corporates."

Large cash positions mean that corporates continue to pay close attention to counterparty risk. "There is now more focus on the operating relationships that corporates have with banks," says Barclays’ Hagopian. "If you look at operating cash being held at banks, this is cash that can provide a tremendous source of value in times of crisis. Key elements to consider are the complexity of managing cash flows across operating relationships, particularly in times of market stress, and the importance placed on having the right partnership with your primary operating bank."

Combined with the evolving regulatory landscape, counterparty risk concerns mean that the inter-dependence of banks and their corporate clients is increasing. "By working more closely together to determine the optimal duration of liquidity, banks and corporates can reach mutually-beneficial solutions," says Rossi. "They allow corporates to receive maximum rates of return, and banks to optimize balance sheet management." At many banks, this reciprocal relationship is reflected in new products that invest a set amount of cash for a defined period that rolls over until called by the client (see KrisEnergy). "The advantage of such accounts is that corporates can benefit from improved working capital – as they know the deposit amount will be fully invested earning a higher rate due to the pre-agreed notice period for their reserve or strategic cash," says Rossi. "Banks, for their part, can retain strong balance sheet management by capturing longer-dated, stable deposits which are given increased liquidity value by regulators."

Such a partnership approach to liquidity management – more akin perhaps to trade finance – is largely related to Basel III and its stringent capital adequacy requirements that may restrict banks’ ability to lend, and thereby reinforce the need for companies to maximize available resources, according to Rossi. "Assessing corporate liquidity management in a more structured, mutually-beneficial way, therefore, is arguably the next step for the industry, and is one that requires considerable technology capability to support."