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  • 1. The 2012 guide to September2012 Published in conjunction with: J.P. Morgan RBS SEB Standard Chartered Bank Liquidity Management OFC_2012.indd 1 06/09/2012 15:03
  • 2. J.P. Morgan - Euromoney - Advert.pdf 1 06/09/2012 14:05
  • 3. Looking to the long term 2 Faced with an unusually broad and persistent range of challenges, treasurers are looking for sustainable solutions Moving to the next level in liquidity 4 management SEB Liquidity Management Survey 2012 6 Liquidity management: Managing the risks 8 Standard Chartered Bank Is your treasury ready for the new 12 global rules? J.P. Morgan Contents This guide is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge. Euromoney Trading Limited Nestor House Playhouse Yard London EC4V 5EX Telephone: +44 20 7779 8888 Facsimile: +44 20 7779 8739 / 8345 Directors: Padraic Fallon (chairman and editor-in-chief), Sir Patrick Sergeant, The Viscount Rothermere, Richard Ensor (managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Diane Alfano, Christopher Fordham, Jaime Gonzalez, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany Editor: Philip Ayres Director of research guides: Soledad Contreras Journalist: Laurence Neville Cover illustration: Daniel Palmer Printed in the United Kingdom by Wyndeham Group © Euromoney Trading Limited 2012 Euromoney is registered as a trademark in the United States and the United Kingdom. 210x286Contents.indd 1 05/09/2012 15:47
  • 4. Liquidity Management Survey 2012: looking to the long term Faced with an unusually broad and persistent range of challenges, treasurers are looking for sustainable solutions. By Laurence Neville Liquidity management has never been more important. Four years on from the onset of the financial crisis, treasurers continue to intensify their efforts to improve the flow of liquidity across their corporate structures. Meanwhile, the ongoing and seemingly intractable debt crisis in the eurozone – and the threat to the euro itself – has added to treasurers’ headaches in managing counterparty risk. Working capital, funding requirements and the ability to react to eco- nomic and political developments – and continue to function in spite of them – are companies’main concerns. As Lisa Rossi, global head of liquid- ity management at Deutsche Bank, notes, this has widened the breadth of treasurers’once chiefly functional roles and forced them not only to think more strategically, but also to find solutions that enable them to do more with less across their organizations. As further constraints are placed on resources, the management of time, costs, budgets and human capital is requiring the use of technology to enhance and promote operational efficiencies.“Fortunately, technology has become generally cheaper and more readily available, as well as being easier to apply,”notes Willem Dokkum, global head of sales payments and cash management at ING. Indeed, advances in technology are ac- celerating, according to most bankers interviewed for this article, and are delivering practical benefits in the forms of increased transparency and control over working capital and liquidity.“It means organizations are able to better manage risk and maximize internal funding across time zones, currencies and numerous banking relationships,”adds Rossi. Practical steps The economic and financial environment has necessarily prompted treasurers to make changes to how their departments operate. However, Yera Hagopian, liquidity solutions executive, treasury services EMEA, at JP Morgan, says the broad range of challenges facing treasurers – an even deeper and more sustained period of low interest rates and a number of economic tremors ranging from sovereign downgrades to the threat of eurozone member exits – has prompted treasurers to take a longer-term view.“Corporates are looking for sustainable approaches to address their liquidity management challenges rather than a series of knee-jerk reac- tions,”she notes. In practical terms, corporates are aiming to achieve broadly the same goals they have pursued for the past few decades – only more effectively.“Cli- ents are increasingly looking to manage their liquidity risks more tightly, and take control of unproductive surplus cash within the organization as they seek more efficient means to channel the funding of their working capital needs,”explains Martijn Stocker, global head, liquidity manage- ment, transaction banking, at Standard Chartered.“Therefore, there has been a greater demand for more diverse capabilities in liquidity manage- ment products as clients’needs grow.” However, as trade flows evolve – with emerging markets becoming relatively more important to the global economy – the range of challenges that liquidity management must address is also changing.“One of the key trends in the market today is the increasing demand and complexity of liquidity management as companies expand beyond their home or current operating sphere,”says Elyse Weiner, global head, liquidity and investments, at Citi. Even companies formerly considered best in class are revisiting their processes to take advantage of new technologies and, in some situations, deregulation, according to Weiner.“In the midst of a succession of financial crises, now primarily centred on the eurozone, risk management is top of mind with treasurers as they consider ways to mitigate both funding and supply chain risk through rationalization of bank relationships and accounts and re-engineering of operational processes, and trade finance options. There is a laser-like focus on de-risking the business and contin- gency planning.” The 2012 Liquidity Management Survey A total of 16 banks participated in Euromoney’s 2012 survey, the seven global network banks plus nine leading cash management banks: Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Commerzbank, Deutsche Bank, HSBC, ING, JP Morgan, KBC, RBS, Santander, SEB, Société Générale, Standard Chartered and UniCredit. Each bank completed a questionnaire covering its cash position reporting services, liquidity management infra- structure, sweeping and cash pooling services, investment services and liquidity management support (see table 1). Cash position reporting The strained financial environment continues to highlight the importance of using existing cash from the business more effectively. The growing corporate use of Swift reflects this trend: it had around 900 corporate users at the end of 2011 and has an ambitious goal of 5,000 corporate users by 2015. As a result of difficult financial conditions, cash position reporting has as- sumed greater importance and forecasting has become a paramount con- Laurence_V3.indd 2 05/09/2012 15:50
  • 5. LIQUIDITYMANAGEMENTSURVEY2012•Lookingtothelongterm 3 cern for treasurers: unless they know where cash is, they cannot deploy it effectively.“There is a growing emphasis on accurate cash forecasting and in-depth reporting to enable treasurers to do their job even more effectively than before,”says Dokkum at ING. Weiner at Citi agrees:“The ability to visualize, mobilize and optimize cash throughout the organization is a prerequisite to improved funding efficiency, full utilization of internal cash assets and improved invest- ment returns,”she says.“In addition, transparency is key to governance of corporate policy, ensuring operating subsidiaries are compliant and oper- ating in a risk-aware manner. As companies expand globally, maintaining control is becoming more challenging. [Equally], newly acquired compa- nies may be operating on disparate platforms for some time before they can be fully integrated.” At many banks, improving visibility of cash for clients has been a priority for transaction banking investment.“We have continued to invest in prod- ucts and solutions [to facilitate] ever increasing visibility of cash,”explains Jan Rottiers, head of liquidity management products at BNP Paribas.“We are delivering enhanced visibility and forecasting functionality within the liquidity management module of our electronic channels.” All the banks participating in the survey now provide end-of-day reports from their own branches. As in previous surveys, Citi has the largest number of own bank branch countries reporting (101) with HSBC second at 71 – both have added a single country since last year. Ten of the banks – compared to eight last year – provide services to monitor and chase missing reports. All of the banks provide some intra-day reporting of transactions. Liquidity management infrastructure Only half of the participating banks offer a single account for all cash management and only 10 provide pooling on the same liquidity manage- ment platform for all regions – although JP Morgan does now have all locations except the US on a single international platform. Opinions on the benefits of a single global platform are divided.“In- creasingly, clients are moving to managing a global liquidity position,” explains Thomas Schickler, global head of liquidity, global payments and cash management at HSBC.“This makes it important for them to have a consistency of service across the markets in which they operate but, most importantly, it ensures robust connectivity between the developed and developing markets.” Electronics giant centralizes liquidity into regional hub One of the world’s largest global electronics companies wanted to consolidate its Asia Pacific liquidity position for multiple currencies from multiple entities and countries into its regional treasury centre in Singapore on a daily basis. The company’s goals were to ensure regional visibility of daily liquidity, fund regional daily payment needs and build on its existing structure with minimum disruption to daily business. The use of multiple currencies and multiple accounts for multiple entities – with many different banks – made a solution challenging. Bank of America Merrill Lynch worked with the electronics company to leverage its existing liquidity management structures and layer a multi- currency notional pool on top of the existing structures. This solution combined a hybrid of domestic sweeps, a single currency notional pool, cross-border sweeps and a multi-currency notional pool. The solution successfully consolidates the company’s Asia Pacific liquid- ity into its in-house bank. Moreover, it maximizes the yield on surplus daily cash in different currencies in different countries and in different entities and offers real-time visibility on balances. Bank of America Merrill Lynch’s solution addressed the challenges of managing the cash flow mismatches that result from multiple entities in multiple currencies. An entity makes an ad-hoc local currency payment within the multi-currency notional pool: the Singapore-based treasurer only executes FX conversions periodically to hedge the position. The solution combines two multi-currency notional pools with cross-border sweeps. Liquidity is maintained in each account to meet global working capital requirements in both locations and transparency and reporting for all bank accounts is delivered on a real-time basis. As a result of the solution, the electronics company has consolidated multiple currencies to achieve a net notional position. Entity 1 BAML SG USD Entity 1 BAML SG EUR Entity 1 BAML SG SGD Entity 1 BAML SG GBP Resident A/Cs Non-resident A/Cs (foreign currency) Entity 2 BAML SG SGD Entity 3 BAML SG NZD Entity 4 BAML SG EUR Entity 6 BAML SG EUR Entity 2 BAML SG HKD Entity 3 BAML SG AUD Entity 5 BAML SG GBP Entity 2 BAML SG EUR Non-resident A/Cs (USD) Entity 3 BAML SG USD Entity 10 BAML SG EUR Entity 4 BAML SG SGD Entity 10 BAML SG GBP Entity 7 BAML SG USD Entity 8 BAML SG EUR Entity 2 BAML SG SGD Entity 6 BAML SG GBP Entity 9 BAML SG GBP Balances notionally converted to USD into header A/C MCNP Header A/C USD Entity 2 BAML HK HKD Cross-border sweep Entity 1 A/C 1 Entity 1 A/C 2 Entity 1 A/C 1 Dom estic sw eep Domestic sweep Entity 1 A/C 1 Domestic sweep Entity 1 A/C 1 Domestic sweep Entity 1 A/C 1 Domestic sweep Entity 7 Asia restricted country Entity 8 Asia restricted country Entity 2 BAML HK Entity 6 Asia restricted country Cross-border sweep Cross-border sweep Cross-border sweep Cross-border sweep Asia-Pacific liquidity consolidated to in-house bank Source: Bank of America Merrill Lynch Laurence_V3.indd 3 05/09/2012 15:50
  • 6. Moving to the next level in liquidity management Having centralized liquidity, the next priority for treasurers is to quantify how much liquidity the company actually needs, and how to minimize the costs and risks associated with managing it. By Robert Pehrson, global head of product management (corporate segment), and Patrik Bergström, financial strategy, client relationship management, SEB Merchant Banking Over the past couple of years, treasurers and finance managers have proved very successful in leveraging cash concentration and notional pooling structures to optimize access to liquidity both regionally and globally. In most cases, large multinationals now have solutions in place to enable the efficient concentration of liquidity, cost-effective internal financing and the best use of cash resources. Having centralized liquidity, the next priority for treasurers is to quantify how much liquidity the com- pany actually needs, and how to minimize the costs and risks associated with managing it. Prioritizing liquidity There are a variety of reasons why liquidity has become such a significant area of focus, both operationally, making sure that cash is available for use across the business and, strategically, in terms of managing balance sheet and counterparty risk. The first factor is the scarcity of liquidity in the market, particularly for lower-rated companies. This situation has existed since 2008 and with ongoing volatility, a lack of market confidence and tightening regulations, the availability of liquidity is unlikely to increase. Interest spreads have increased, while interest rates are very low, and even negative in some currencies, such as DKK and CHF. In addition, certain types of corporate deposits are less attractive for banks compared with retail deposits, further depressing returns available to corporate investors. While these factors are all significant in elevating the importance of liquid- ity management, perhaps the most important issue of all is liquidity risk, which was rarely mentioned five years ago. Volatile markets, such as in the Eurozone, combined with uncertainty over banks’interpretation of Basel III, mean that treasurers can no longer be complacent about where their funding will come from in the future. This is resulting in corporates seek- ing alternative forms of funding, such as accessing the markets directly through corporate bond and commercial paper issuance, as opposed to relying on bank funding. In addition, they are increasingly leveraging their financial assets both to fund working capital requirements and manage liquidity risk, such as receivables financing and supply chain financing. Six steps to strategic liquidity management Liquidity optimization does not simply involve accessing as much cash as possible, however, it requires a careful assessment of how much liquidity is available, how much is required and therefore how much cash can be invested more strategically. Treasurers need to balance the need to maximize net interest income whilst continuing to support the business in the best way. 1. How much liquidity do we have? A corporation’s liquidity position comprises more than the cash held in bank accounts, short-term investments and unutilized committed credit facilities. Treasurers need to establish a deep understanding of the company’s cash flows (figure 1) and how these are likely to change over a 12- to 24-month time horizon. They also need to have a clear view of the proportion of this cash that is trapped in entities and accounts in regulated jurisdictions, or as cash collateral tied to long-term credit or derivative agreements. 2. How much liquidity do we need? This is a question that few treasurers have explored in the past, partly as the‘right’answer will be different for every company. A corporation needs enough liquidity to cover for the future cash outflows in the form of mini- mum capital expenditures, working capital at its highest seasonal point, committed dividend payments and short-term debt maturities. Calculat- ing working capital needs should be relatively straightforward by taking a holistic approach to the financial supply chain. Other factors are specific to each industry and each company, such as external rating requirements and targets, cash flow risk and volatility, equity analysts’view of cash holdings, cash flow risk and volatility, corporate investment strategy and benchmarking with industry companies. Spending time in this area can be highly advantageous, giving treasurers and finance managers greater confidence in the company’s ability to channel cash into strategic business investments that will bring long-term value to the business and enhance competitiveness. 3. How should we hold our liquidity? As figure 1 illustrates, companies can hold and generate liquidity in different ways: funds from operations; excess cash in bank accounts and financial instruments, and in the form of committed facilities from bank- Funds from operations Excess cash Committed facilities CapEx Working capital Dividends Short-term debt maturities 1x Minimum ?x 5. What should we do with surplus cash? 4. Who will provide liquidity? 3. How should we hold our liquidity? 2. How much liquidity do we need? 1. How much liquidity do we have? 6. How should we manage the associated risks? Sources of liquidity Uses of liquidity Figure 1: Key questions in liquidity management Source: SEB SEB_Liquidity_to print.indd 4 05/09/2012 15:52
  • 7. 5 JPMorgan•Isyourtreasuryreadyforthenewglobalrules? ing partners. Again, there is no‘right’way to hold cash as it will differ by industry and individual company. In making the decision treasurers should balance costs and benefits for holding liquidity. Key areas in this respect include: cash flow dynamics; future potential investment opportunities; li- quidity risk (eg, reliability of long-term bank financing); the cost of facilities and interest rates obtainable in the market. Ongoing market volatility also means that this is a question treasurers should revisit regularly. 4. Who will provide liquidity? Related to the previous question, treasurers should identify the most reli- able sources of liquidity, which could be internal funding, banks, financial markets, suppliers and/or customers. As we have established previously, liquidity risk can come in a variety of forms, requiring a multi-faceted risk management approach. For example, we have noted the trend for corporate bond issuance, but also alternative sources of financing such as receivables financing and supply chain financing, leveraging companies’ own financial assets as sources of liquidity. Again, as the business evolves, and the shape of the financial supply chain shifts, the liquidity solutions that are optimal for a particular company are likely to change over time. 5. What should we do with surplus cash? Working through the previous questions will give treasurers a clear view about short-, medium- and long-term cash requirements, and the liquidity buffer that is required to mitigate risk. Treasurers can therefore divide their cash between operating cash that is required in the short term, and cash that can be invested for a longer period. During the early months of the global financial crisis, we saw a flight to liquidity, with companies placing large amounts of cash in short-term instruments. Low interest rates and enhanced counterparty risk management techniques are now motivat- ing treasurers to invest their cash more strategically to enhance yield. This issue has become further accentuated with the introduction of Basel III, as banks value some types of deposit more than others. Treasurers who have undertaken detailed calculations and scenario analysis to understand their liquidity needs will have more confidence in seeking the most favourable deposit terms and counterparties. 6. How should we manage the associated risks? We have mentioned liquidity risk, which is a key factor in deciding on the tenor of investments, but other forms of risk, such as counterparty and sovereign risk, are also key decision criteria. One way of managing these risks is to diversify investments across counterparties, tenors, instrument types and locations, and leverage inherently diversified instruments such as money market funds. In addition, risks related to the supply chain need to be managed. Managing complexity The outcome of a more strategic approach to liquidity management is a greater appreciation of the complexity of the financial value network of which banks, bondholders, shareholders, suppliers and customers are all a part (figure 2). All of these stakeholders need to be considered as part of an integrated liquidity management strategy, as each brings various risks and opportunities in liquidity terms. This means that any decision that affects liquidity, such as sourcing funds through a syndicated loan, or ex- tending payment terms to suppliers, needs to be considered in terms of its overall implications on liquidity risk. Consequently, a portfolio approach to liquidity, including a variety of financing sources, such as committed and uncommitted facilities, direct issuance, trade finance and working capital financing, combined with a diversified approach to investment, is typically the most successful. A portfolio approach to liquidity is inevitably more complex than a straightforward syndicated facility, so companies are turning to banks to simplify and streamline the way that these various techniques are man- aged. For example, with a financial value network that is likely to be large, diverse and extend over multiple continents, it is important to standard- ize the way in which this community exchanges information. This has led to the development and increasing adoption of XML-based standards, such as ISO 20022 for financial messaging. In addition, corporates are increasingly making use of bank-agnostic, multi-bank connectivity chan- nels such as SWIFTNet for corporate-to-bank communication, and global platforms for programmes such as receivables financing to streamline global processes. Another way of simplifying the financial value network is to rationalize the number of stakeholders within it. In some cases, it may be beneficial to reduce the total number of suppliers, for example, to manage supplier risk and create economies of scale. In addition, many multinational corpo- rations are rationalizing their bank relationships, and appointing regional banks that demonstrate best-in-class capabilities. This reduces counter- party risk, streamlines processes and also helps to mitigate liquidity risk by establishing reciprocal value relationships with banks that provide financing. Working with the right bank that has a clear appreciation of the liquidity considerations that exist within the company, and an understanding of the wider industry dynamics, is essential. In doing so, treasurers and their banking peers can work together to build an optimized working capital and long-term finance model that reflects the current funding market and future regulatory changes, and enhances the company’s competitive position. 5 For further information, please contact Robert Pehrson global head of product management (corporate segment), SEB Merchant Banking +46 (0)8 763 8786 Patrik Bergström financial strategy, client relationship management, SEB Merchant Banking +46 (0)8 763 8794 SEB•Movingtothenextlevelinliquiditymanagement 1 Treasury Purchasing Accounts payable Accounts receivable Local business units Bank Supplier Customer Financial systems vendor External Value Network Internal Value Network Risk assessment provider Figure 2: The financial value network Source: SEB SEB_Liquidity_to print.indd 5 07/09/2012 14:40
  • 8. Bank Name Bank of America Merrill Lynch Barclays BNP PARIBAS Citibank Commerzbank AG Deutsche Bank Cash Position Reporting Intra-day reporting of transactions: How many own bank branch countries reporting? 25 7 60 101 20 34 AreThird Party Banks' transactions accepted and processed? : Yes Yes Yes Yes Yes Yes End Of Day Reports: How many own bank branch countries reporting? 25 21 60 101 20 35 Are thereThird Party report monitoring & chasing services? Yes No Yes Yes Yes No Is there real-time reporting of account balances? Yes No Yes Yes Yes Yes What reporting channels are used? (SWIFT, Online Portal, Email, Other - if other, please indicate) SWIFT, Online Portal, Email, Other SWIFT / Internet SWIFT, Online Portal, Other SWIFT, Online Portal, Email, Other SWIFT, Online Portal, Other SWIFT, Online Portal, Email What is the level of liquidity forecasting service functionality? Medium None None Medium Comprehensive Medium Liquidity Management Infrastructure Do you provide a single global DDA for all cash management? Yes No No No Yes No Do you provide pooling on the same liquidity management platform for all regions? Yes No Yes Yes Yes No Sweeping and Pooling Services Header/MasterAccountLocations Single Currency Pool (No. of countries): - physical 37 7 30 69 16 35 - notional 36 2 19 11 14 29 No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies Multi-Currency Notional Pool: Asia-Pacific: 12 44 0 0 0 0 2 9 2 11 14 16 Europe: 21 44 1 15 19 23 1 23 13 11 14 50 Latin America: 2 44 0 0 0 0 0 0 0 0 1 1 NAFTA: 2 44 0 0 0 0 0 0 1 11 1 4 Middle East & Africa: 0 0 0 0 0 0 0 0 0 0 0 0 Cross-BorderSweepingBetweenOwnBranches End Of Day Sweeps: No. of countries where sweep can be last transaction* of day: 37 6 26 40 16 35 Automated back-values for transactions with previous value date Yes No Yes Yes Yes Yes Overnight return sweeps Yes Yes Yes Yes No Yes Intra-day sweeps within cut-off times: - No. of countries 36 6 30 43 16 18 - How swept: Automated Manual / Automated Automated Automated Automated Automated - How sweeps triggered: By Balance &/OrTime By Balance By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime Cross-BorderMulti-BankSweeping No. of existing MT 101 agreements: 100-199 200+ 200+ 200+ 200+ 50-99 Target End Of Day Sweeps - No. of countries: 36 32 29 38 25 26 - How swept: Automated Manual / automated Automated Automated Automated Automated - How sweep triggered: By Balance &/OrTime By Balance By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime Cross-border, cross-currency sweeping with auto FX-conversion Yes No No Yes Yes No Intra-day sweeps: - No. of countries: 36 0 29 Unlimited 25 14 - How swept: Automated N/A Automated Manual/Automated Automated Automated - How sweep triggered: By Balance &/OrTime N/A By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime NotionalPoolingServices Single Country (all accounts in same country) Single Currency - Full off set (No. of countries): 35 3 6 11 14 14 % optimisation (No. of countries): 36 0 19 25 14 29 Multi-Currency - Full off set (No. of countries): 35 1 6 3 14 3 % optimisation (No. of countries): 36 0 19 25 14 29 No. of pooling currencies supported 44 15 23 25 10 50 Multi-Country (leave funds in each country) Single Currency - % optimisation (No. of countries): 36 0 19 25 14 29 Multi-Currency - % optimisation (No. of countries): 36 0 19 25 14 29 No. of pooling currencies supported 44 0 23 26 10 50 Investment of Excess Cash Bank Risk Profile: Credit rating of bank (S&P or Moody rating): S&P BANA A A2 AA- A-1 A/A-1 Moodys A2/S+P A+ Tier One Capital Ratio (%) 10.78% 10.90% 12.20% 14.4% 12.30% 12.90% Investment Options: No. of currencies accepted for cash investments 44 40 4 19 11 26 Money Market Funds No. of funds - freely negotiable currencies 0 12 158 4 26 No. of funds - restricted currencies 0 Yes 0 0 0 0 Investment Channels: Dedicated Investment Desk Yes Yes Yes Yes Yes Yes On-line Portal: - provided Yes Yes Yes Yes Yes Yes - instruments available Bank & third party instruments Bank only instrument Bank & third party instruments Bank & third party instruments Only bank instruments Bank & third party instruments To Money Market Funds - automated sweeps to Yes No No Yes No Yes - automated redemptions from Yes No No Yes No Yes To Other Instruments - automated sweeps to Yes No Yes Yes No Yes - automated redemptions from Yes No Yes Yes No Yes Liquidity Management Support Dedicated operational and customer support: Yes Yes Yes Yes Yes Yes Liquidity models for client's private use - Analysis of cost of holding cash: Yes No No Yes No No Showing impact of new structures: No No No Yes No No Contact Information Contact Name: Greg Kavanaugh Andy Rudge Jan Rottiers ElyseWeiner Jasmin Maraslioglu Matthew Sagat Country: United States United Kingdom Belgium United States Germany United States Telephone Number: +1 312 904 8123 +44 7826 945146 +322 565 00 82 +1 212 816 0470 +49 136 46966 +1 212 250 5312 Email Address: greg.kavanaugh@ andrew.rudge@ jan.rottiers@ elyse.weiner@ jasmin.maraslioglu@ matthew.sagat@ Notes:*=exceptforinvestment Source:Cashmanagementbanks.Copyright©2012Euromoney Table 1 - Euromoney 2012 Liquidity Management Survey
  • 9. e Bank HSBC ING bank J.P. Morgan KBC RBS Santander SEB Standard Chartered Bank Societe Generale UniCredit Bank 71 21 28 9 42 7 14 48 19 16 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 71 21 28 9 42 7 16 48 57 21 Yes Yes No Yes No Yes Yes No No Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes ne Portal, il SWIFT, Online Portal, Email and other (host to host connection) SWIFT, Online Portal, Other SWIFT, Online portal, Host-to-Host connection SWIFT, Online SWIFT, Online Portal, Other SWIFT, Online portals, Other SWIFT, Online Portal, Email, Other SWIFT, Email, Online Portal SWIFT, Online portals, Other SWIFT, Online Portal, Other um Medium, BTR reporting and links to client ERP systems Comprehensive Comprehensive Medium Balance & transaction reporting can be exported into liquidity forecasting systems None Comprehensive None Little Medium Yes Yes No No Yes Yes No Yes Yes No Yes No All locations except the US are on a single international platform No Yes Yes Yes Yes Yes No 51 10 27 9 35 2 15 48 29 16 30 28 6 9 16 2 11 48 16 14 No.of urrencies No.ofSites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies No.of Sites No.of Currencies 16 10 26 0 0 2 sites; 13 currencies 0 0 2 29 1 45 19 50 0 0 0 0 50 4 50 1 location; 43 currencies 1 site; 24 currencies 9 50 2 29 9 45 2 50 1 country, 5 currencies 12 14 1 2 14 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 1 18 0 0 0 0 0 0 0 0 1 45 1 50 0 0 0 0 0 5 10 0 0 0 0 0 0 0 0 0 0 18 50 0 0 0 0 19 28 20 9 23 7 8 48 19 13 Yes Yes Yes Yes Yes Yes No Yes Yes Yes Yes No Yes No Yes No Yes Yes No Yes 30 28 25 9 35 6 11 48 16 13 ated Automated Automated Automated Both Automated Automated Automated Automated Automated Both /OrTime By Balance &/OrTime ByTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime 9 200+ 200+ Circa 1000 200+ 400+ >50 100-199 100-199 380 200+ 18 28 0 9 0 21 19 48 15 13 ated Automated Manual/Automated NA Both NA Automated Automated Automated Automated Both /OrTime By Balance &/OrTime By Balance NA By Balance &/OrTime NA By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime Yes Yes Yes No Yes No No 8 28 0 9 88 No 19 48 11 0 ated Automated Manual/Automated NA Both Fully Automated Automated Automated Automated /OrTime By Balance &/OrTime By Balance &/OrTime NA By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime By Balance &/OrTime 20 2 6 9 16 11 18 16 14 30 2 1 9 5 2 11 40 0 14 10 43 3 9 4 11 1 0 0 22 43 1 9 5 2 11 40 1 0 50 28 24 50 29 1 45 50 5 0 53 15 13 9 35 12 40 0 0 53 9 13 0 35 12 40 0 0 50 4 17 50 29 45 50 0 0 /S+P A+ A+ on HSBC Holdings plc Moody's A3, S&P A A (S&P) A3 stable A (S&P) S&P: A- A+ AA- (S&P) A S&P & A2 Moodys Moody: A3 % 10.40% 9.2% 10.4% 12.30% 10.80% 9.00% 16% 13.70% 9.4% 10.9% 50 12 28 50 30 21 23 50 50 50 5 3 64 0 20 21 10 3 0 50 4 0 0 0 0 0 0 0 0 0 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes d party ents Bank only instruments Bank only instruments Bank & third party instruments Only bank instruments Bank & third party instruments Bank only instruments Bank & third party instruments Only bank instruments Bank & third party instruments Bank & third party instruments Yes No Yes No No No No Yes No Yes Yes No Yes No No No No No No Yes Yes Yes Yes No Yes No Yes Yes No No Yes Yes Yes No Yes No Yes Yes No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No Yes Yes No No Yes No No Yes No No Yes Yes No Yes Yes No No Sagat Alkie Gan Willem Dokkum Clyde Muir Kristiaan Probst Rachel Kerrone Jose Luis Calderon Robert Pehrson Martijn Stoker SophieTarralle Markus Straußfeld tates Hong Kong Netherlands United Kingdom Belgium United Kingdom Spain Sweden Singapore France Germany 0 5312 +852 2822 4062 +31 206523300 +44 207 134 4950 +32 2429 7925 +44 207678 3814 +34 91 289 4329 +46 705158786 +65 964189 +33142144284 +49 211 89 86 780 agat@ m alkiehkgan@ willem.dokkum@ clyde.e.muir@ kristiann.probst@ rachel.kerrone@ josecalderon@ robert.pehrson@ martijn.stoker@ sophie.tarralle@ markus.straussfeld@ 2012GUIDETOLIQUIDITYMANAGEMENT 7 Table Daniel 280812.indd 7 05/09/2012 15:54
  • 10. Liquidity management: Managing the risks Corporate treasurers and their bank counterparts are starting to employ similar strategies in dealing with liquidity risk. Both have learned valuable lessons over the past few years, and now it’s time to put them to good use. by Martijn Stoker, Director, Global Head Liquidity Management, Transaction Banking, at Standard Chartered Bank Liquidity risk management can be seen as two sides of the same coin. Increasingly, the needs of both banks and corporates are converging as liquidity is the life blood for the survival of both. Developing an effective risk governance structure involves measuring your organization’s risk appetite, defining strategies to limit these risks and testing the efficacy of your oversight measures. All of this will need to be supported by the right systems and procedures. Corporate treasury is rapidly evolving from a task-based department into the financial‘nerve’centre of the organization. At the same time, treasurers at corporates and banks are becoming more and more aligned in terms of risk management practices, as both need to be fully aware of the impact of liquidity risks on their business activities. Invisible risk The collapses of Northern Rock and Bear Stearns prove that profitability and capital are no defence against liquidity risk. Both made profits in the quarter before they defaulted and both were well-capitalized businesses. And yet, as a result of their failure to deal with their liquidity risk issues, they vanished. The fact is, no one talked much about liquidity risk and as a result, liquidity was largely an invisible risk for many firms. Corporate treasurers and their bank counterparts are starting to employ similar strategies in dealing with liquidity risk. Both have learned valuable lessons over the past few years, and now it’s time to put them to good use. We see that‘best in class’treasury organizations are outpacing their peers by addressing the following items in a structured manner: 1. Cash management fundamentals n Cash visibility; n Cash management; n Liquidity management tools; n Cash deployment. 2. Liquidity risk analytics n Cash forecasting; n Liquidity stress-testing. 3. Liquidity risk management n Benchmarking your liquidity risk; n Execution to limit liquidity risk. Cash management fundamentals Cash visibility Effective cash management has been a key priority for the corporate treasury over the past few years and this obviously starts with full visibility on the organization’s worldwide cash positions. This requires access to a system that provides you with timely and accurate information on all your cash positions, preferably on a real-time basis. It includes insights into balance levels, transactions within the clearing cycle and capital trapped in your supply chain. If you can see it you, can manage it. Cash management This is basically about gaining full control over your cash flows. The pay- ments and collection processes are like the arteries through which the blood (liquidity) of the company flows, so ensuring‘best of class’practices are used in each country is critical. Full control to move funds (internally and externally) also requires a clear access authorization process – without it you might have visibility but you are still unable to manage the cash effectively. With this control in place the organization is able to take a well- founded short-term funding or investment decisions. Liquidity management tools A key part of the fundamentals are the various tools that help free up internal liquidity. Besides the basic‘leading and lagging’of their collections and payments there are also others tools such as; n Supply chain finance solutions – such as receivable services, bill dis- counting, vendor pre-payment services and an efficient collateral manage- ment service – will free up internal liquidity that would otherwise be stuck in a company’s supply chain. n Physical sweeping and notional pooling are tools that allow a company to automatically concentrate and utilize operating cash positions across different entities and locations. This can be either in a domestic or cross- border structure within a single currency or in multiple currencies. Cash deployment Treasuries that have complete global visibility of their cash positions, effective control mechanisms in place and utilize the right liquidity tools Risk analytics Risk management Treasury management fundamentals - cash visibility - cash management - liquidity management tools - cash forecasting - liquidity stress testing - benchmark liquidity risk - execution to limit risk Liquidity manangement risk Source: Standard Chartered Bank StanChart_Liquidity_V4.indd 8 06/09/2012 15:00
  • 11. 9 StandardCharteredBank•Liquiditymanagement:Managingtherisks are in a better position to deploy their cash where and when it’s needed. Intercompany lending provided to operating companies, either directly or indirectly via multi-entity physical sweeping structures, limits the need for external funding. Based on the lessons learned in the financial crisis, cash will be even more valuable in the future. These changes also bring opportunities for corporate treasurers. With upcoming regulatory changes around Basel III, balances linked to operating business may provide a valuable alternative to other short-term investments as banks will start to provide more incen- tives in order to hold on to operating account balances. Liquidity risk analytics Over the past year many banks have been reviewing their liquidity policy statements and contingency funding plans and are challenging the as- sumptions made that underpin their behavioural modelling and funding mismatch guidelines. These items should also be a vital part of any corpo- rate liquidity risk analytics toolkit and could be linked to the company’s cash flow forecasting and liquidity stress testing. Cash forecasting Industry-leading treasuries have all the cash management fundamentals in place and are currently focusing on improving their cash forecasting methodologies and systems. The quality rather than quantity of data is the critical factor. Industry leaders tend to use the following framework: n Senior management support – top management needs to acknowl- edge the strategic importance of cash flow forecasting and give incen- tives to encourage the right behaviour. n Decide what data will be used – it is critical that an organization identi- fies the most relevant data that will provide the needed information. The data is usually captured from multiple sources. n Automatically link the above data sources to the forecasting tool – most organizations spend more time on bringing all the information together than they spend on validating, analyzing and acting on the information. n Performance testing – understand how accurate your forecast is and find out what the critical drivers are.You need to understand the differ- ence between the forecast and the actual results. Optimizing the model could take up 80% of your time spent on cash flow forecasting and this is usually underestimated. This is where most corporate treasuries stop, but taking the next step is just as important. To be able to understand the impact of changes in the underlying drivers you need to perform a scenario analysis or stress test. Liquidity scenario-testing All treasurers are struggling to better understand and monitor the inter- relationships between market, credit and liquidity risk. A practical way of dealing with scenario testing is to follow a three-step approach: n Identify liquidity risk drivers such as: Decreasing sales margins and increased costs of goods; Evaporating funding; Decline in value of liquid assets. n Design scenarios and assign probabilities: External scenarios such as a market shock in your line of business, market risk (rates, FX or commodi- ties); Internal scenarios such as operational risks resulting in claims, rating downgrade impacting your loan covenants; Ad-hoc scenarios covering industry or country specific events. n Model the scenarios: Step 1: Quantify the liquidity outflows in all scenarios for each of the defined risk drivers; Step 2: Identify the potential cash inflows to mitigate the liquidity shortfalls identified; Step 3: Deter- mine what your net liquidity position is under each scenario. Liquidity risk management Even with having the cash management fundamentals in place and being able to forecast your cash positions, plus what the impact of different scenarios on those positions will be, you are only half way there. The next step is to determine what the acceptable risk levels are and, more importantly, what is not an acceptable risk level any more. This requires benchmarks that are clearly communicated within the organization. Benchmarking your liquidity risk The benchmark for liquidity management tools should be the most ef- ficient method of freeing up internal cash. Depending on the company’s operating model, solutions such as supply chain financing and physical sweeping and notional pooling structures should be optimized. In the current environment companies should consider a careful review of their investment objectives, portfolio characteristics, risk tolerance, invest- ment credit quality, limits and performance. Clear investment guidelines and benchmarks will provide a common basis for understanding the investment practices within your company. Execution to limit liquidity risk Liquidity risk management is entering a new and much more demand- ing era whereby speed of execution is of the utmost importance. This requires the support of a bank that understands your business model and the specific markets you are in, and that is able to provide you the latest technology and advice to grow your business. Too often the systems capturing information on operational/business risks, counterparty/credit risks and market risks are separated. It’s time to combine these, remove the silos created by banks and corporates alike and have a more holistic view on how to manage liquidity risks. Conclusion In the end it’s all about an effective risk governance structure – what is your risk appetite, what are your limits, what are your strategies to limit these risks and how effective is your oversight? Due to the changed market circumstances some corporates and most banks are changing their risk policies. They are all changing the way they work today. Most companies have a management committee made up of the top senior managers and the treasurer, and their main responsibility is the formulation of risk management policies for the company. Treasur- ers are mostly charged with the implementation of such policies, with the committee having oversight responsibility. Besides efficient systems and processes there is a need to weave this new risk awareness attitude into the social fibre of the organization, to create a real liquidity risk management culture. 9 For further information, please contact Martijn Stoker Tel: +65 6596 4189 StandardCharteredBank•Liquiditymanagement:Managingtherisks StanChart_Liquidity_V4.indd 9 06/09/2012 15:00
  • 12. Deutsche Bank does not provide pooling on the same liquidity manage- ment platform for all regions. Despite this, Rossi says that the bank does manage concentration and pooling services on a global basis but chooses to offer them based on strategic regional financial hubs to sup- port and address local market regulatory and legal requirements.“Many of our clients prefer to combine the two by having a locally managed regional structure that works in conjunction with a centrally managed global overlay,”she says.“The chief advantage of this is that transaction- related information and reporting can be viewed centrally or regionally, depending on our clients’individual requirements.” Sweeping and pooling services If visibility of cash is essential to be able to deploy cash effectively, then it is sweeping and notional pooling that provide the control that treasurers increasingly require (see boxes on electronics and retailer case studies). “Our clients are operating in an environment of multiple currencies, jurisdictions and legal entities,”says Greg Kavanaugh, head of global liquidity at Bank of America Merrill Lynch, which has re-launched its single-currency and multi-currency notional pooling offering recently.“By offering both notional and physical cash concentration options, we can help them improve the value they receive from their liquidity balances around the globe.” All the participating banks offer both single-currency physical and notional cash pools. Citi has the largest number of locations for physical pools (69) and Standard Chartered the largest number for notional pools (48). Europe continues to offer the largest number of locations for banks offering multi-currency notional pools: within the region Bank of America Merrill Lynch offers the greatest number of sites (21) while Deutsche Bank, KBC and Standard Chartered tie to offer the greatest number of currencies (50). In Asia, Standard Chartered has the most multi-currency notional pooling locations with 19 (up from 14 last year).“Enhancements – to deliver fully integrated liquidity management solutions globally – are being made to cross-currency cash concentration, integrated multi-bank sweeping capabilities and multi-currency notional pooling solutions,”says Stocker. Interestingly, Standard Chartered also offers online‘simulation pooling’ capabilities for clients that want to analyse various pooling options. Weiner at Citi says that expanding and enhancing the bank’s cross-border cash concentration services to provide clients with the highest level of coverage across their operating networks has been the most important liquidity management development at Citi in the past 12 months.“Over the last year, we have extended the application of our concentration engine to over 44 countries, with even more imminently available,”she says.“Along with that expansion comes a host of features that allow our clients to customize liquidity structures in respect of regulations and tax considerations as well as unique operational requirements.” Sweeping All of the banks in the survey can now ensure that a sweep is the last transaction of the day (last year one bank could not): Standard Chartered continues to offer the largest number of countries where this service is available. Two banks do not provide automated back values for transac- tions with previous value dates. 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, most triggered by bal- ance or time. All the participating banks have multiple MT101 partner bank drawdown agreements, 11 banks with 200 partners or more compared to last year’s nine.“This increase may reflect an increasing emphasis by corporates of the need to improve visibility and control while managing counterparty risk,”says Steve Everett, global head of cash management and head of transaction services products EMEA at RBS.“The idea that efficiency can Retailer creates new Asia liquidity solution A global retailer wanted to take a modular approach to building its li- quidity management solution. The company already operated a treasury and shared service centre (SSC) in China and wanted to concentrate all of its Asian liquidity in Hong Kong. An important requirement for the company was that at periodic intervals group liquidity would need to be concentrated back to its home country. The solution devised by Standard Chartered uses in-country sweeping for local currency and US dollar accounts with all the funds concen- trated into a single account for each currency. A regional cash pool in Hong Kong uses a target balance sweeping structure to ensure that all participating accounts have sufficient operating balances. The cash pool header account in Hong Kong is included in an interest optimization solution with in-country header accounts in restricted countries that cannot sweep cross-border. Standard Chartered supports the company’s SSC in China and Hong Kong using its Straight2Bank FX Payments solu- tion which supports 130 currencies. The company’s FX hedging needs are served through a dedicated foreign exchange trading desk located in Hong Kong. The global retailer has gained a solution that automates the concen- tration of balances into Hong Kong and offers complete visibility of balances at regional level. It enables yield enhancement for accounts (both US dollars and local currency) where cross border sweeping is not permitted due to regulation. It also offers comprehensive payment and receivable on-behalf-of capabilities to centralize and streamline treasury operations and a one-stop shop for all of the company’s FX needs. USD NR Company LCY NR Company LCY R LCY R Liberal countries Australia, Egypt, Hong Kong, Japan, Lebanon, New Zealand, Singapore, UAE LCY R Local entity LCY R LCY R Moderately regulated countries Philippines, South Africa USD R USD R Highly regulated countries China, Korea, Taiwan1 , India1 , Indonesia, Malaysia, Vietnam1 , Thailand1 Hong Kong LCY R Local entity LCY R LCY R USD R Local entity* * USD NR Local entityLiberal countries USD NR Local entityModerately regulated countries Accounts participating in Notional Aggregation. Due to regulatory restrictions, balances in India are excluded Legend: Domestic sweeping * While non-resident account can be opened, domestic sweeping between resident and non-resident account is not allowed so sweeping to resident account is recommended 1 Note: Domestic sweeping in USD not allowed USD R Local entityHong Kong Concentration of balances in Hong Kong Source: Standard Chartered Laurence_V3.indd 10 05/09/2012 15:51
  • 13. 11 LIQUIDITYMANAGEMENTSURVEY2012•Lookingtothelongterm only be delivered by working with one bank is no longer widely held.” JP Morgan has one of the largest numbers of MT101 agreements (over 1,000) in place for multi-bank sweeping. The bank’s Hagopian says that bilateral agreements are important for the bank’s capabilities.“Multi- bank sweeping leverages these bilateral agreements by issuing MT101 drawdown messages to automatically concentrate funds from a client’s global relationship banks into a single position with an overlay bank, thus enabling more efficient use of the consolidated global position,”she explains. JP Morgan can also concentrate funds in countries where Swift is not the standard method of bank-to-bank communication. The importance of multi-bank sweeping is increasingly reflected in the design of other products. Among the services launched in the past year by Société Générale’s newly created Global Transaction Banking business line is a re-designed cross-border cross-currency notional pooling solu- tion, which allows clients to notionally manage their global cash position in a unique reference currency, without any need for FX transactions or swaps. Crucially, it“can adapt to any multi-bank cash concentration structure already in place and include the countries of the clients’choice,” notes Sophie Tarralle, head of cash pooling products, global transaction banking, at the bank. Additional enhancements in the coming months will include an integrated reporting service to facilitate intercompany loans management in a multi-bank environment. More generally, sweeping has come to the fore in the past year with a number of leading companies announcing – presumably for the benefit of investors – that they are taking precautions against the threat of an exit by a eurozone member or even a break-up of the currency union: Voda- fone says it sweeps funds daily; GSK that it keeps nothing in the eurozone overnight and WPP says that it not only keeps nothing in the eurozone overnight, but swaps it all to dollars every night (see box on Diageo case study).“For global companies with the ability to sweep and hold cash in different countries, the quest for security means that cash balances are frequently being swept out of continental European countries and into UK bank accounts on a nightly basis by many of the world’s largest companies,”says David Manson, global head of liquidity management at Barclays. Investment This year’s liquidity management survey shows that all but one of the banks accept a range of 10 currencies or more for cash investments. A handful of banks – HSBC, KBC, Société Générale, Standard Chartered and UniCredit accept 50 currencies.“Our cash investment capabilities complement our cash management services,”explains HSBC’s Schickler. “As we offer deep local payable and receivables solutions in nearly every market in which we operate, it is necessary to offer local currency services that correlate accordingly. As most developed market interest rates remain low if not close to zero, some companies are choosing to accept heightened FX exposure in order to generate increased returns on their cash portfolio.” In line with the 2011 survey, this year’s survey shows that all the banks provide both an investment desk and an investment portal, with just over half providing investment instruments from other financial institutions as well as their own bank. For corporates, the turbulent macro-economic and financial environment has created a conundrum in relation to investment. According to Tarralle at Société Générale, they have been unwilling to invest in the business Diageo plans for any eurozone eventuality With storm clouds darkening over the eurozone, the extreme volatility of market and economic conditions has been a concern for corporate treasury teams worldwide, especially for those that operate in Europe. Specifically, fears have mounted regarding the potential for assets to be effectively frozen should problems in a country in the eurozone deepen. Diageo’s treasury team wanted to plan to reduce the impact of such a scenario. Its treasury function operates as an in-house corporate bank and all cash is concentrated in London. To minimise its exposure, the company wanted to find a reliable and risk-managed solution to enable consolidation of cash flows, while establishing centralised control in London. Diageo’s solution was to partner with Bank of America Merrill Lynch to work through the impact of different scenarios on its cash manage- ment structures to enable it to put in place the right contingency planning to make sure it could minimise potential disruption. The solution allows Diageo to configure parameters according to its exact requirements to provide unprecedented control over its in- country cash positions. Specifically, it enables the company to refine existing sweeping functionality to incorporate real time benefits and to automatically calculate and pull balances from third-party bank accounts in specific countries for repatriation to the UK, where regula- tions are supportive. It also allows Diageo to instantly restrict any outgoing payments in the event of a sudden change in the market conditions, in line with its cash management policy. Implementation of the solution has ensured that Diageo could retain its local bank accounts in the countries with both Bank of America Merrill Lynch and its various third-party banks, for its daily payables/ receivables management. The seamless flow of funds in and out of the centralised liquidity structure enables it to effectively manage its risk and limit exposure. However, the structure significantly reduces the risk of losing any cash associated with the intra-day movement of funds. In these unprecedented economic times, Diageo’s foresight provides treasury teams with a smart solution to protect their cash in the event of a crisis incident. Martijn Stocker, global head, liquidity management, transaction banking, Standard Chartered Laurence_V3.indd 11 05/09/2012 15:51
  • 14. Is your treasury ready for the new global rules? For most of the past decade, treasurers have coped with challenges to their corporations’ liquidity management – from financial markets melting down to a global recession, potential national defaults and regional debt imbalances. In response to these increased stresses and a sustained low interest rate environment, these finance executives have accumulated historically unprecedented levels of cash The objective of the cash accumulation has been to maintain a cushion against future challenges to their organizations’access to capital and pro- vide flexibility to fund strategic opportunities. A recent Treasury Strategies study placed corporate cash holdings by US companies at $2.23 trillion, €1.9 billion for companies in the eurozone and £785 billion for those in the UK (as of 31 December 2011). And, in the US, corporations hold almost 75% of total liquidity in overnight investments, money funds and bank deposits, according to the treasury consulting firm’s study. Although a survey last year by the Association for Financial Professionals (AFP) indicates that the drive to build cash has abated somewhat as eco- nomic conditions have improved, most corporations still find themselves awash with short-term funds. Now, however, they face more limited options for cash placement, thanks to a host of shifting market conditions and impending rule changes. Rather than another global challenge, finance executives are about to confront a raft of new global and US regulations instituted in the wake of the economic collapse and designed to strengthen the overall stability of the markets. Ostensibly aimed at financial institutions to prevent some future unknown threat from spilling over into the broader economy, these new rules are also likely to drive treasurers to rethink investment choices for short-term cash in terms of risk profile, liquidity and return. A quick look at the regulations In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act mandates, among other things, unlimited Federal Deposit Insur- ance Corporation (FDIC) protection for balances in non-interest bearing transaction accounts. However, that protection may expire at the end of this year. The end of this insurance coverage may add a degree of risk to an otherwise conservative cash strategy. The Basel III Accord will take effect over the next several years. It will establish new global standards on bank capital adequacy and market risk. Banks will be required to maintain strong liquidity buffers of high-quality assets – mainly government-backed – against a portion of any deposit that does not have a term of greater than 30 days. In cases where deposits are not considered operating funds this new requirement may significantly limit the value and desirability of short- term funds for banks. Finally, there is also the potential for new regulations affecting money market funds. The changes under consideration include capital require- ments, holdback provisions and variable fund net asset values. Preparing your treasury While the full impact of the rule changes has yet to play out, their aim is to require a higher degree of precision in liquidity and investment management. Here is a checklist of questions treasurers may want to consider, not only to protect short-term funds and invest them wisely, but also to maximize their value in this changing environment. The list is simply an attempt to raise awareness about some initial issues facing treasuries, and help to begin a dialogue within your companies and with your bankers about the impact of change. Operating cash at banks First, take a 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 your operating relationships, particularly in times of market stress, and the importance placed on having the right partnership with your primary operating bank. n Have you adequately assessed the resilience of your operating banks? Have you examined their capital strength? n Have you explored how the expected removal of unlimited FDIC insurance at the end of 2012 for non-interest bearing balances will impact your management of counterparty limits? n Should full FDIC coverage expire, will you require additional counterparties? If yes, have you calculated the risks and costs of managing a larger number of counterparties? n Have you identified the implied term extension of your operating cash? "While the full impact of the rule changes has yet to play out, their aim is to require a higher degree of precision in liquidity and investment management.” JPM_Liquidity_V8.indd 16 06/09/2012 14:11
  • 15. 17 JPMorgan•Isyourtreasuryreadyforthenewglobalrules? n Where possible, have you explored how cash concentration structures – within a currency and cross-currency – can help provide visibility into counterparty exposures and mobilize cash quickly? n Are you regularly reviewing your investment policy to ensure that there is enough flexibility to make changes quickly? n When looking at counterparty limits vis-à-vis investment duration, have you analyzed your level of liquid versus term cash in determining limits? n Have you maximized the return on your bank operating balances through earnings credit rate (ECR) programmes? n Have you explored extending your ECR programmes globally to get more value for operating cash? Have you talked to your bank about extending ECR value to non-traditional operating product classes? Non-operating short-term deposits at banks Under Basel III, financial institutions will have to maintain liquidity buffers of high-quality assets against a portion of any deposit that does not have a term of greater than 30 days.  In many cases, this may significantly limit the value of these funds to both banks and corporations. n Have you discussed with your counterparties the disposition of non- operating balances post-Basel III? n Have you asked if pro-forma reporting by banks in 2012 through 2014 could accelerate the impact of Basel III regulations prior to full industry adoption in 2015? n Have you examined your balances and sources of cash to determine which funds might qualify as operating balances? n Are there other options for these funds, such as laddered contractual terms or other means of extending contractual term while retaining liquidity? Money market fund placements Money market mutual funds are still among the most popular investments for corporate cash, providing an excellent source of liquidity and diversification. However, the new rules being considered, especially for funds operating in FINRA jurisdictions, may ultimately affect their overall utility and raise questions about how and when to appropriately use them. n Have you considered expanding your money market fund programme to include additional currencies? n For non-operating short-term cash, how do you balance diversification while effectively monitoring counterparty investment limits? n Are you considering changes in response to the new regulations? For example, will you alter the amount of money you will put into money market funds given new liquidity requirements? n Have you considered the implications for your investment guidelines of floating net asset values or holdback provisions? What Enterprise Risk Management (ERM) or other systems (eg, tax) updates would you require? n Have you looked at the potential impact on operating accounts if funds are swept to a floating Net Asset Value (NAV) programme? On reconciliation systems? Secured investment alternatives The regulatory changes and market dynamics, including the proposed expiration of unlimited FDIC insurance, may also drive financial managers to consider alternative, high-quality secured investments. n Are you appropriately positioned in terms of credit and concentration risk? Will your positioning change if unlimited FDIC insurance expires for transaction balances? n Are you prepared as short-term market rates trend negative in a growing number of currencies? n Have you explored secured short-term investments, such as non- traditional repo or collateralized commercial paper, as part of a diversified cash management strategy in light of expiring unlimited FDIC coverage? The time seems ripe to assess how best to prepare for the impending changes and begin to review the innovative ways available to meet these new challenges. J.P. Morgan stands ready to assist. If you would like to discuss these issues further, contact your local relationship manager or e-mail: 13 For further information, please contact e-mail: JPMorgan•Isyourtreasuryreadyforthenewglobalrules? Phillip Lindow, Head of J.P. Morgan treasury & securities services liquidity solutions JPM_Liquidity_V8.indd 17 06/09/2012 14:11
  • 16. because of uncertain macro-economic conditions and consequently have relatively elevated cash levels. It is estimated than European corporates have as much as €1.3 trillion in cash while Apple alone is reported to have $100 billion of cash. Barclays’Manson agrees:“With economic uncertainty seemingly the new norm, businesses have become significantly more conservative. Indeed, over the past four years it has been much easier to say no to major invest- ment, no to ambitious growth plans and, conversely, yes to building up cash as a buffer to protect operations in case things were to take a major turn for the worse,”he notes.“What to do with this built-up cash, particu- larly where to put it, has become one of the key questions of the day.” The same turbulent macro-economic and financial environment condi- tions make it more challenging to invest that cash. As a result, many corporates have reassessed their investment policies, which detail which markets, instruments and counterparties are acceptable, according to JP Morgan’s Hagopian.“How quickly can they access their cash? They know now that even hours may be critical. Does the yield pick-up of longer- dated investments adequately compensate for reduced liquidity? Almost certainly not. Are there potential regulatory changes that could create new challenges for a market or instrument? The inevitable result of all these deliberations is almost certainly a reduction in the number of eligi- ble instruments and counterparties and ever shorter weighted average maturities, all putting further pressure on yield.” Given the environment, companies are understandably continuing to prioritize security and liquidity over yield when choosing the best place to hold their deposits. Suzanne Barry, EMEA head of liquidity and invest- ments, GTS, at Bank of America Merrill Lynch says that the optimism evident in mid-2011 that macro-economic conditions would improve in 2012 prompted some corporate treasurers to search for yield.“However, this optimism was short-lived,”she adds.“With continued signs of global stalling, corporates continue to seek low-risk bank deposits to safely harbour their excess liquidity.” Indeed, Barry notes that“ongoing discussions on proposed regulatory reform for other investment alternatives such as money market funds [in the US] and the closure of some funds in certain regions to new clients as a result of deteriorating market conditions and falling interest rates [in Europe]”has prompted“an increasing shift to bank liabilities”and a reduc- tion in money market fund exposure over the past 24 months. Counterparty risk The increasing shift to bank deposits poses additional problems for treas- urers. Counterparty risk has been a dominant theme since the onset of the financial crisis and the collapse of Lehman Brothers but the eurozone crisis has exacerbated the problems facing corporates given the dramatic lowering of many banks’credit rating. The transaction banks that partici- pated in this year’s survey have not been immune from downgrades. But all have maintained the investment grade ratings that are essential to retain the confidence of corporates with regard to investment. “Given the market conditions and unprecedented regulatory change, corporates are reviewing their current counterparties,”says Manson at Barclays.“This increased focus on counterparty risk management and the current ratings of banks has led treasurers to review their policies. There is an increasing view however that banks are treated in many ways as just another debtor, as some financial institutions have lower credit ratings than their corporate clients. The current emphasis on counterparty risk is leading companies to look more closely at where they are placing depos- its, depending on the nature of their business flows, payment obligations and geographical footprint,”he adds.“Many clients are then placing their structural cash surpluses into a banking location of choice, based on their “One of the key trends in the market today is the increasing demand and complexity of liquidity management as companies expand beyond their home or current operating sphere” Elyse Weiner, global head, liquidity and investments, at Citi Steve Everett, global head of cash management and head of transaction services products EMEA at RBS Laurence_V3.indd 14 05/09/2012 15:51
  • 17. 15 LIQUIDITYMANAGEMENTSURVEY2012•LookingtothelongtermLIQUIDITYMANAGEMENTSURVEY2012•Lookingtothelongterm treasury policy and risk appetites.” Of course, counterparty risk is just one consideration for treasurers when devising an investment policy. They also are faced with the difficult task of optimizing surplus liquidity in an extremely low interest rate environ- ment.“As current interest rates are effectively negligible across the globe – and even turning negative – it has become increasingly challenging for treasurers to earn any yield on their investments,”says Deutsche Bank’s Rossi.“This means that many are often left with large amounts of idle cash, and it is of the utmost importance that banks develop investment options to provide clients with higher interest rates on stable, longer- term cash balances.” Impact of regulatory change Fortunately, regulatory changes – most notably Basel III – are prompt- ing major change in the world of bank deposits and spurring innovation among bank providers.“While risk is a top concern, innovation in the world of bank deposits is offering companies some new opportunities – most notably the ability to improve yield by drawing on the more flexible products on offer,”explains Barclays’Manson. Manson says that once security and liquidity requirements have been satisfied, treasurers have to make their money work.“With banks compet- ing for deposits to boost balance sheets, there are excellent rates that can be secured on even overnight money today,”he notes.“Rates depend on several factors, but the overall relationship a corporate has with its banks and what else this business wants from its cash deposits is key.” One crucial change is that under Basel III, stable operational corporate balances have the greatest value for banks.“Balances which are more volatile (such as discretionary balances) will attract lower returns because banks holding those deposits will have higher capital requirements to ensure sufficient liquidity in times of stress,”says Manson.“As Basel III moves closer there will be an increasing polarisation between how we value operational balances and discretionary balances. This will in time lead to a dilution of the return on investment for discretionary balances, increasingly forcing the hand of corporate treasurers to either surrender yield for liquidity; or conversely to term out deposits for greater returns. Operational cash balances will be increasingly the bedrock of the bank/ client relationship and will represent an increasing source of value be- tween clients and their bankers.” Changing relationships The 2012 Liquidity Management Survey provides a number of insights about the capabilities of the participating transaction banks that are helpful to any corporate treasurer considering their liquidity management options. However, as a quantitative survey it does not track an increasingly important factor in liquidity management – how the customer is supported and how a relationship is built with clients. To be sure, all participating banks in this year’s survey offer dedicated operational and customer support. But many banks say that clients now expect their banks to go further in supporting them. “In the context of changing cash management requirements, busi- nesses are looking to build strong relationships with their banks,” says Manson at Barclays. “Banks that can demonstrate a solid understand- ing of their clients’ requirements and business environment are better placed to support a risk-conscious cash management policy.” He adds: “Service quality is a top priority for the majority of companies and many are making more strategic decisions based on service, technology, reporting and management information.” Deutsche Bank’s Rossi says that, over the past year, the changing reg- ulatory and credit landscape has heightened the need for corporates to manage their banking relationships more closely, and underscored the importance of strong banking partnerships. “While further regula- tory oversight has been created to strengthen the global banking system and financial landscape, navigating the resulting changes is a significant challenge,” she says. “Understanding and preparing for the impact of the proposed measures requires increased dialogue between corporates and their bank partners – and this dialogue must be maintained as regulatory requirements continue to evolve.” Inevitably, deepening relationships will continue to be a major focus of investment for transaction banking. Barry at Bank of America Merrill Lynch says that the bank’s most significant development in liquidity management over the past year is the growth of its client- focused liquidity management advisory services business. “In good times, efficient liquidity management across countries, currencies and regulations is complex,” she notes. “So in our continued chal- lenged environment, corporate treasurers are increasingly looking to their banking partners to provide strategic advice and solutions on a global scale.” Suzanne Barry, EMEA head of liquidity and investments, GTS, at Bank of America Merrill Lynch Sophie Tarralle, head of cash pooling products, global transaction banking, SG Laurence_V3.indd 15 05/09/2012 15:51