The Critical Path to a Global Liquidity Structure

The milestones on the path to an efficient global liquidity structure will be different for every company. But the considerations that determine these milestones are common. All firms will be constrained by the tax, legal and banking infrastructures of the countries in which they operate, and will take decisions based on their own culture, structure and client / supplier relationships. In this Q&A, Michael Golden, Senior Vice President, and Richard Rust, EMEA Treasury Product Manager at Bank of America, map out some of the critical factors that ever treasurer should bear in mind.

gtnews: What attributes and processes must a company have in place to be legitimately described as managing liquidity globally?

Rust & Golden: A firm that has implemented a truly global liquidity management structure will exhibit, among others, the following attributes and processes:

Attributes

• Centralised control (visibility and use) of all liquidity, regardless of its global location
• A corporate culture that considers the treasury operation to be of a global, not a regional, concern
• A tax and legal structure designed to maximise the efficient use of global liquidity within the constraints of multi-jurisdictional flows
• Maximum automation across the entire financial supply chain from interfacing external providers to feeding internal enterprise-wide systems (AP/AR/Inventory/etc)
• A common systems infrastructure (for example an ERP platform implemented across the entire company) makes global liquidity far easier to achieve. It is recognised however that this vision remains a utopian one for most companies and that effective integration of existing systems is perhaps the most realistic target in the near to medium term
• Timely, accurate cash flow forecasts
• Significant senior management commitment

Processes

• A process ensuring standard policies and procedures applied to the entire global treasury organization & operation
• A process of incentives and/or rewards for the various entities/subsidiaries to actively participate in the global structure
• A fully automated process marshalling all global liquidity to its point of maximum utility

gtnews: Are there firms for whom the effort and cost of adopting a truly global approach would outweigh the benefits and savings and what are the pros and cons that should be included in a cost/benefit analysis?

Rust & Golden: Yes, for a host of reasons there are firms who may not benefit significantly from the implementation of a global structure. Factors such as tax structures, local regulations, cross border payment restrictions, fx/swap costs, operational jurisdictions, etc all influence the ability and benefit of implementing a global structure. For these and other reasons, there will be circumstances whereby a purely local or regional structure is optimal – essentially, the law of diminishing returns applies to global liquidity management. Treasury can maximise its overall effectiveness by focusing on those significant pockets of liquidity that will produce the greatest returns – the 80/20 rule applies.

The cost/benefit analysis around implementing a truly global liquidity management structure should encompass variables such as:

Potential Savings

• Minimize short-term borrowing/overdraft costs
• Opportunity costs of idle cash
• Internal cost of capital associated with excess cash/working capital on the balance sheet
• Operational/FTE savings at the local/regional treasury centers
• FX swap costs – spreads, settlements, operational risk
• Rationalized banking relationships and associated fees

Potential Incremental Costs

• Increased local bank fees due to reduced balances and/or volumes shifted to global bank
• Cross-border lifting fees/stamp duties
• Increased transaction volume to centralise/move liquidity
• Tax impact – withholding, income tax associated with repatriation and/or distributions
• Cost of necessary automation (interfaces, etc)

gtnews: What scale of cost savings can be achieved by corporates that implement a global liquidity management solution?

Rust & Golden: Depending upon the firm’s cash flow values and volumes, as well as its overall working capital management efficiencies, the scale of cost savings is extremely wide and could be significant. Remember too, the firm that meets the cost/benefit hurdle of implementing the global structure is typically a top tier multinational corporation. With overall global revenues and balance sheets in the billions of USD (equivalent), savings can range anywhere from thousands to millions of USD per annum.

gtnews: Are there countries that are still liquidity blackspots? What kind of workarounds are employed to mitigate difficult territories?

Rust & Golden: There are a number of countries across the globe that can still present liquidity management challenges. This condition can be caused by a variety of factors across the tax, legal and regulatory spectrums. For example, prohibitions on in-country and/or cross-border pooling, resident/account type restrictions, cross-border payment flow restrictions, prohibitions on paying credit interest, lack of multi-legal entity structures, withholding taxes, lack of tax treaties, etc.

For jurisdictions such as these, global providers utilize liquidity management services that can provide a ‘virtual value’ for this trapped liquidity without the use of either physical or notional pooling structures. Depending upon jurisdictional restrictions, provider capabilities and client objectives, variables such as single or multi-currency, regional or global views, credit and/or debit positions, single or multi-legal entity structures, etc can be applied to the ‘virtual’ positions such that all liquidity enjoys optimal rates.

gtnews: What are the main barriers, from a cross border, multiple currency perspective, to a global liquidity management approach?

Rust & Golden: There remain a number of barriers to implementing global liquidity management structures:

• Local regulations restricting account ownership, ability to pool and/or cross-border payment flows
• Geography/timing – i.e. West to East liquidity flows
• Limited number of jurisdictions permitting banks to offer single and/or multi-currency pooling with full balance sheet offset
• Limited number of global providers with local pay and receive presence as well as state-of-the-art liquidity management capabilities

gtnews: Where do today’s liquidity management options fall down and what new developments and trends are emerging?

Rust & Golden: Today’s liquidity management options can fall down through a combination of factors. The various jurisdictional constraints previously mentioned, coupled with a provider’s limited scope surrounding capabilities and/or local presence many times can result in a less than optimal structure. Also too, the firm must be clear on its liquidity management objectives. These objectives and their respective priorities should dictate to a large degree the overall structure and its key options. Since there are very few truly global providers who possess all the key value-added elements required, the choice of provider becomes that much more of a key critical success factor. Once the trusted partner is identified, the proper, efficient global liquidity management structure can be custom-built with the sustainability to meet treasury’s needs today as well as in the future.

About the co-author:Michael Golden is Senior Vice President responsible for defining and coordinating the strategic direction of the Global Treasury Services’ global liquidity management solutions. Michael coordinates all client liquidity-related product management initiatives across both the geographic and organizational boundaries of Global Product Management. Michael has spent over 20 years in a number of senior banking roles in product strategy, relationship management, operations and client services. He received both his B. S. and MBA degrees from the University of South Carolina.