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Gaining a critical perspective on cash and liquidity management

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Given the widespread disruptions caused by the COVID-19 pandemic, it has become critical that corporates improve the transparency and visibility within their treasury functions explain Priyanka Rath, EMEA head and Amy Eckhoff, APAC head of Liquidity Product Solutions Specialists, J.P. Morgan.

There are many reasons why corporates have had to free up cash during the coronavirus crisis. Those that cannot mobilize liquidity on a global basis may find themselves reliant on potentially costly short-term credit facilities.

Corporates need to integrate business flows, increase visibility of their liquidity and minimize pockets of ‘idle’ but accessible cash, which represent an opportunity cost. This is the nirvana of treasury - to be able to see and get your hands on every dollar, whether it is to be used for yield enhancement, self-funding or further deployment for something such as an acquisition.

Now is not the time to be building up high levels of debt, so utilizing liquidity as much as possible is vital.

Isolated and fragmented liquidity buffers represent unutilized cash, which could be recycled and redeployed internally to reduce the need to raise capital or debt externally. With some corporates, subsidiaries can end up building up large amounts of such cash that is neither visible nor usable by treasury.

Instating a rules-based engine that manages this liquidity on a globally consistent basis reduces the level of idle cash corporates need to hold. It also enables the corporate to pump cash into its subsidiaries just in time, which is much more efficient.

Isolated and fragmented buffers represent unutilized cash which could be recycled and redeployed internally to reduce the need to raise capital or debt externally

There have been periods of high volatility in overnight currency markets this year. To minimize the impact of this volatility, corporates that are not running fully automated liquidity structures can use a multi-currency notional pool, to concentrate and notionally convert multiple currencies into a single position, with flexibility to redeploy as needed.

Such a solution enables corporations to virtually offset long and short positions across their operational accounts; centralize liquidity across multiple currencies; reduce the need for effecting physical currency conversions to cover funding shortfalls; and diminish the need to execute frequent FX swaps.

Complementing existing strategies

A multi-currency notional pool may also be used to notionally extract the net cash position across multiple currencies into a single currency. Many corporates utilize their multi-currency notional pool like a ‘synthetic swap’, to complement and work in tandem with their wider currency management strategy.

This is a useful tool to run alongside a conventional corporate FX management program, providing a stable source of cross-currency funding when the company needs it. It is an efficient mechanism, akin to a “backstop” for absorbing currency fluctuations without the need to unwind a swap or FX trade, allowing for proper sizing and timing of currency trades to align with and support the corporate’s overall multi-currency strategy.

Digitization and automation is also important. There is a trend to deploy and streamline operating processes and minimize physical bank account management because when cash starts to move at a large scale, manual processes are simply not sustainable.

Virtual account structures support real-time reconciliation. Further, corporates can leverage APIs to feed data directly into treasury systems. Virtual account management enables the consolidation of transactional activity under a single, centralized structure while retaining the visibility and reporting needed to facilitate reconciliation and internal accounting.

Efficient short term funding management

A real-time settlement ecosystem that allows cash to move around the globe on a same-day basis allows large corporates to minimize short-term overdrafts and manage operational funding needs more efficiently.

The potential benefits can be considerable. Victor Grado, Vice President of Treasury Operations, Hewlett Packard Enterprise (HPE) observes that J.P. Morgan’s virtual account management solution helped HPE Singapore reduce its physical accounts by 50% without disrupting operations.

Amy Eckhoff, APAC head of Liquidity Product Solutions Specialists at J.P. Morgan, says: “We have seen an increased trend towards automation and digitization of liquidity management and reporting, not just by region but globally for multinational corporates. In our recent COVID-19 client webinar, almost two thirds (64%) of participants chose ‘increased focus on digital’ as a key takeaway from the unfolding crisis”.

Priyanka Rath, the bank's EMEA head of Liquidity Product Solutions Specialists, adds: “The coronavirus pandemic has led to increased use of digital tools such as e-signatures to establish fully automated global liquidity structures.

"Combining established liquidity management techniques - such as pooling - with virtual account management effectively creates a ‘digital treasury in a box’ solution. This is absolute low-hanging fruit for corporate treasuries, straightforward to implement as a layer on top without necessarily disrupting the underlying set-up; driving immediate, tangible gains for their organizations”.

A key enabler of effective liquidity management is near real-time visibility across all accounts and regions via a single unified global platform. By improving visibility, a flexible cash management structure provides access to funds and can aid companies in managing periods of irregular activity.

Corporates and banks should partner to enable and drive such change, with the potential to transform the way cash and liquidity is managed – the future is now. Banks that invest in and proliferate technology programs empowering such transformation, therefore, will stand the test of time, in terms of continuing to be relevant for their clients in the years to come.

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