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

Laurence Neville
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At a time of continuing economic uncertainty and unprecedented regulatory change, corporates are focusing on how to make their cash work more efficiently even as they move into sometimes challenging new markets. Euromoney’s 2013 Liquidity Management Survey shows how their banks are adapting their offerings in response.

The 2013 guide to Liquidity Management

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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."

Lee Swee Siong, global head of global corporate product, transaction banking, at Standard Chartered
Lee Swee Siong, global head of global corporate product, transaction banking, at Standard Chartered
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."