Regulations Impacting Liquidity Management


Regulations Impacting Liquidity Management


There is a corporation in Asia, to be more precise, in China. The industrial revolution in China helped this corporation to expand its boundaries and it chose to open offices in Singapore, Hong Kong and Malaysia over the past 6 years. It now plans to expand into America and Europe. Sounds like a cake walk for the corporation. But imagine being the treasurer.

The Charge: Can the treasurer compromise on regulations?

The treasurer is bound to work by certain regulations framed not just internally but also the external regulators. Any deviation from internal rules might result in the treasurer looking for his or her next job - but any deviations from external regulations will likely result in the corporation paying a hefty fine to the regulators, as well as having to spend a huge amount of corporate time and cost being investigated and rectifying any resultant problems. Being a treasurer in a corporation operating cross border is like walking on hot coals, expected to think on your toes and take business critical decisions abiding by all the restrictions and regulations.

The Law

Regional restrictions

Corporations are directly affected by regional restrictions. For example, Asia. In Singapore, there is no restriction on liquidity management structures. Notional pooling is not allowed in India and Korea. Notional pooling is allowed in Thailand - but only domestic cash concentration is allowed. Domestic notional pooling is allowed in China - but regulations make it hard to set up and operate. Cross border notional pooling is not allowed in China. So the Central Bank of China has allowed entrust loans, in which the bank will act as the intermediary between two legal entities – but giving rise to many complex legal processes.

Dodd-Frank has an impact on the corporations based in US. This regulation results in reduction in working capital as corporations will be expected to use the cash for margin calls and collateral posting at the central clearing house and will this in turn will place a huge responsibility on the corporate treasurer, including ensuring that the appropriate documents are in place.

SEPA, the European Union’s initiative to create a synchronous set of Euro-denominated payment instructions across Europe, is serially delayed but will happen. Treasurers of corporations will have to make sure that ERP and TMS systems will be able to initiate credit transfers in the prescribed format, and will rely on their banks who may themselves not be ready. This regulation might actually be an angel in disguise since one by-product is to improve the efficiency and effectiveness of corporate treasury units.

Global regulation

Basel lll has a direct impact on corporations globally. Since banks will have to have maintain huge cash reserves, banks will pass on the cost of meeting higher capital requirements to the corporations. The price of financial products will go higher. The cost of borrowing will be steep when a corporation opts for a short/long term borrowing with the bank. Cost of hedging will also rise. Corporations will be forced to manage the cash in hand effectively. Indeed, not just manage but also optimize.

Banks have started making tailored solutions for corporations based on regional and global regulations. The bank’s customers are more demanding and they will not choose to work with an incompetent bank  - or even a competent bank - who does not offer innovative liquidity solutions. Not to forget the fact that 1 in every 5 corporations changes banking partners for better cash management offerings.  Those banks that can roll out new innovative offerings have more chance of becoming the principal bank of the corporation.

The Verdict

The treasurer has to consider all the above mentioned regulations to utilize cash in hand optimally.

The treasurer has two options. Either to choose a bank that has highly automated algorithmic liquidity management solution and can not just manage but also optimize the corporation’s liquid assets - or to keep running on his toes, trying to optimize cash in hand and wondering where the ideal balances are.

There can never be a compromise on regulations, but there are solutions..

Date Modified: 

Tuesday, September 30, 2014
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