The Changing Dynamics of Managing Liquidity


The Changing Dynamics of Managing Liquidity

by Chandragupta Acharya


11 May 2015

Pentair is a U.K. based $7.5 billion water management & engineering company with 30,000 employees and operations across the globe. Working with their bankers Citibank, the Pentair Treasury Team recently completed an automatic Renminbi (RMB) sweep from China to London, integrating cash balances in China with their treasury in London. “It was refreshing to accomplish something new in China, where there isn’t a manual for operating a perfect system”, said an excited Terri Scherber, Senior Treasury Director, Pentair. Scherber had reasons to be happy, his company is a net borrower and using the cash “trapped” in China will help him bring down interest cost and improve company profitability.

Pentair is not the only one looking for such an arrangement. There are several others desperately looking to optimize their liquidity, many of them bulging with cash and reluctant to invest. A striking fallout of the Financial Crisis, and the slow or no economic recovery even 7 years after the event, is the dramatic increase in corporate cash levels across the globe. As economies limp, and confidence to invest in the future fails to return, corporate cash balances across the world have increased dramatically in recent years. Reports say U.S. corporate cash levels have touched a staggering $2 trillion by the end of 2014. Similarly, cash balances continue to pile up in the Eurozone, U.K., Japan and elsewhere in the world. Ultra-low and even negative interest rates now widely prevalent in several parts of world are not helping either. Not just the government debt, bonds of even large corporations such as Nestle and Shell have reportedly seen negative yields in Europe. Clearly, there is too much cash lying around. Meanwhile, treasury managers remain ultra-sensitive to counterparty risk as possibility of another Black Swan event hangs over their head like a sword of Damocles. How to manage so much of cash efficiently, minimizing the risk while maximizing returns, is a problem every corporate treasurer is grappling with.

Meanwhile, the regulatory environment is changing rapidly. China, a market of particular interest to corporate treasurers, has liberalized the field significantly in recent years, taking steps such as relaxing controls on cross border cash pooling arrangements in Renminbi (RMB). Regulations also keep changing elsewhere, such as in Latin America where economic or currency crisis often leads to tightening of rules. In the developed world too, regulations have been evolving and differ from country to country. For example, notional pooling regulations in Hong Kong, U.K. or Netherlands differ significantly from each other. SEPA has created new opportunities in Europe, where Pay-on-behalf-of (POBO) & Collect-on-behalf-of (COBO) models are reportedly gaining ground. Liquidity optimization is thus a continuous process, as the corporate treasurer needs to align structures to changing regulations and market dynamics. An efficient technology solution has become an imperative for the corporate treasurer.

While several corporates have jumped at relaxing controls in China to integrate their “trapped cash” with global treasuries, there are others who see merit in keeping cash in Asia itself. They point out that interest rates are significantly higher in Asia than elsewhere in the U.S. or Europe. Surplus cash can thus earn significantly higher returns if the currency risk is managed effectively.  Corporates are also resorting increasingly to inter-company loans to manage currency volatility and higher interest cost in Asia, say reports.

On the other hand, for the corporate banker aiming to target a larger share of business from its corporate clients, Basel III has thrown up newer challenges. For example, Basel regulations, inter alia, require banks to classify corporate deposits into “operational deposits” and “non-operational deposits”. This is going to have a deep impact on the way a banker approaches her corporate balances, and consequently the overall corporate relationship itself. The volatility of the cash flow, the accuracy of the cash forecast, the extent of corporate wallet share that the bank gets and the nature of business activity of the corporate - will all go into determining the value a bank places on each corporate relationship. In the coming years, banks are expected to revisit the entire corporate banking relationship model itself as a result of these developments. There is also a view that Basel III will make offering Money Market Funds (MMF) more attractive for banks than corporate deposits. Similarly, controversy surrounds efficacy of Notional Pooling models in Basel III regime. While some have called the death of Notional pooling under Basel III, others are more sanguine. “Notional pooling fulfills a particular business need which continues to exist independently of regulatory changes”, says Jan Rottiers of BNP Paribas. It is also expected that different regulators may approach the issue differently, adding to the confusion. What bankers need therefore, is a system that is not only comprehensive, but also extremely customizable to suit specific business needs.

As bankers face pressure on their traditional lending businesses, the importance of fee based incomes has never been higher. Intellect’s Liquidity Management System (LMS) offers a banker an ideal way of developing a customized liquidity management solutions suitable to each corporate’s unique needs. Its various modules run independently, and can also integrate with one another. The system is an algorithmic engine that offers complete flexibility to deal with a rapidly changing environment and unique business needs. LMS enables the bank to become principal banker to its corporate clients. You will find more information about the system elsewhere on this website.

When Pentair completed the RMB sweeping arrangement with Citi, it added an important link to their treasury optimizing model across its global offices. The Pentair cash now works non-stop, starting its day in New Zealand, working westwards through London, all the way to the company’s main office in Minneapolis in the United States. When business closes for the day in the U.S., the cash is already in New Zealand where it starts a new day again. To know more about how to set up “follow-the-sun” model for managing corporate cash, kindly get in touch with our sales team.


About the Author:

Chandragupta Acharya is a Techno - Finance professional with an MBA in Finance & degree in Banking. With over 18 years of rich experience across BFSI & Technology industry he has worked with several leading Tier I banks in India & abroad, helping design, implement & support technology solutions.

Date Modified: 

Monday, May 11, 2015
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