Liquidity Management: Corporates Go Back To The Drawing Board

Cash is still king, and unlocking trapped cash or investing it for higher yield remains one of the major preoccupations of most corporate treasurers. Historically, treasurers tended to invest their excess cash and liquidity in time deposits, treasuries or money market funds. However, the negative interest-rate environment and regulations such as Basel III are forcing treasurers to rethink their investment strategies.

The 2008 global financial crisis and the downgrading of banks saw treasurers dust the cobwebs off well-oiled investment strategies. Preservation of capital and yield still remain the overriding investment objective, but further changes are likely to be needed in light of the impact of regulation on the way banks treat deposits.

Speaking at the annual EuroFinance International Cash & Treasury Management conference in Budapest in October, Ender Tanar, managing director and head of Central Europe at Lloyds Bank, said corporate treasurers need to take a longer-term view when it comes to estimating their future liquidity requirements. “What’s happening to liquidity in two years if banks are changing the way they’re operating? What will the pricing be in two, three, four year’s time for backup facilities and deposits?” Questions like these are becoming increasingly important in light of Basel III, which encourages banks to seek out longer-term deposits. But what does this mean for treasurers who have typically invested their excess cash with banks overnight in short-term or time deposits?

Tanar says treasurers need to look at alternative forms of investment: repos, for example; keeping more of their liquidity buffer in cash; relying less on revolving credit facilities from banks and investing for the longer term rather than the short term. “Banks have always had to manage cash for the short and long term, and corporates could benefit from this knowledge,” he asserts.

Chris Jameson, head of global transaction services corporate sales for Western Europe at Bank of America Merrill Lynch, says money market reforms and the liquidity coverage ratio under Basel III are forcing treasurers to reassess where they place their excess cash. Once upon a time they may have put surplus funds into bank time deposits, but Jameson says the LCR means banks need to hold additional high quality liquid assets to support excess cash balances on their balance sheet.


Treasurers fear, however, that Basel III could spell the end of time deposits. They also anticipate changes in the way banks sell derivatives, which corporations use to hedge risk (foreign exchange, interest rate, commodity). Although treasurers managed to escape onerous collateralization requirements for derivatives trades under European Market Infrastructure Regulation, they still have to report these trades. Speaking at the EuroFinance conference, François Masquelier, senior vice president and head of treasury and corporate finance at RTL Group Luxembourg, says reporting requirements under EMIR can help treasurers eke out further automation efficiencies and improve their systems. However, a number of large companies are still not EMIR-compliant, he noted. Masquelier says Basel III and other regulatory initiatives, such as segregation of banks’ retail and investment banking divisions, could result in corporations having to pay more for using derivatives to hedge their risk.


With such major cash management projects as SEPA—the Single Euro Payments Area—largely out of the way, treasurers are now turning their attention to enhancing working capital. “Treasurers are keen to work more closely with their procurement departments so they can better understand what their organizations are buying and selling and in turn better manage the cash flows and risks of the company,” says Dermot Canavan, trade product head for EMEA at RBS. Canavan says corporate treasurers are now more interested in discussing working capital solutions such as supply chain finance.

Given the number of intermediaries (buyer, seller, shipping, customs) in the transaction chain, trade is more challenging to automate than cash. Nevertheless, there are various online initiatives in the B2B space for automating procurement and such shipping documentation as bills of lading, and in the financial supply chain, SWIFT—the Society for Worldwide Interbank Financial Telecommunication—has rolled out the MT798 message to automate L/Cs [letters of credit] and trade guarantees exchanged between banks and corporations over its network. It also introduced the Bank Payment Obligation—a letter-of-credit style instrument for open account trade—to help automate the exchange of information between banks. However, the BPO and the MT798 are still not widely used. “If corporates aren’t going to come on board, do banks push or corporate’s pull?” asks RBS’s Canavan, whose bank was one of the first to exchange an MT798 message end to end. He says clients will choose to either move to the MT798, which is bank agnostic with messages exchanged over SWIFT, or elect to use proprietary electronic banking trade portals.