Corporate TreasuryCentralisationGeneralCentralizing Liquidity Management

Centralizing Liquidity Management

A variety of financial organizations need systems to manage the use of funds, including central banks, treasury departments of investment banks, commercial banks, asset managers, pension funds, co-operatives and regional banks, credit card companies, and hedge funds. While each of these institutions has a different operating model, they share the same challenges around managing liquidity:

  • The need to maintain sufficient working capital levels.
  • Manage internal risk to reduce fraud.
  • Ability to centralize processes.
  • Integration of systems to solve integration issues.

Restructuring Cash Management

To meet the demands of customers, these firms have had to restructure the way their cash management services are bundled and delivered. While in the past each business unit (e.g. cash management or treasury department) would focus on its own requirements, in the last couple of years banks have had to centralize and standardize liquidity management services.

Treasurers need to expand their existing liquidity structures, while increasing the automation of their operations. Questions such as what is the best way to optimize cash and how much cash one can invest and forecast are some of the major answers banks and firms are looking for today. With a decentralized structure it becomes difficult to manage funds across borders and have a uniform view of holdings.

Servicing the Corporates

We refer to cash management and treasury management systems that can be used, not only internally at banks, but also for servicing corporate clients. Treasury management systems are used by banks to manage liquidity, capture and process money market and foreign exchange deals, and increase overall operational efficiency. These systems offer some of the functionalities that are either offered by trading and cash management systems, or are sometimes integrated into such systems. Front-, middle-, and back-office staff use these systems, each with their own distinct functions. Users include traders, sales people, risk managers, treasurers, assistant treasurers, cash managers, dealers, financial controllers, operations support staff, and staff from finance and IT.

These services are then sometimes delivered to the corporate customer via a web browser. Treasury solutions are generally broken down into front-, middle-, and back-office capabilities, each with its own functions and users. In some cases, the capabilities of middle- and back-office modules may differ somewhat, depending on how the institution is structured. These systems may have interfaces with third-party solutions such as web-based trading systems, external data feeds, and other back-office systems. The need to increase process efficiency by using straight-through processing and decreasing operational delays will encourage the replacement of several systems with one integrated solution as well as the adoption of modular systems that allow users to add functionalities as necessary.

Integrated Solution

Current technology cannot handle the hundreds of thousands of trades exchanged today by banks. While banks use multiple systems to support various instruments, such as foreign exchange or money markets, many lack support for more advanced products such as equities or derivatives. This has led banks to either upgrade current systems or replace them completely.

This cash management evolution from a de-centralized to a centralized structure has acquired some ground at major financial institutions across the globe. Banks are constantly trying to reduce costs by improving IT infrastructure and allocating personnel more effectively. Most current systems rely on old technology and are not designed in a modular fashion. Banks are seeking all-in-one systems and centralizing operations at fewer locations. To do this, some banks will leverage solutions built in-house while others will replace their systems with a vendor-provided solution, which is customized to meet the ongoing requirements of the organization.

There is no right or wrong formula as to how financial institutions embrace the integration of cash management and treasury management solutions. The aim is to provide a single point of access for liquidity management needs. Three different approaches have emerged from early adopters in the market:

  1. Division specific – addressing one area of the firm (e.g. cash management or treasury departments).
  2. Enterprise approach – covering multiple areas (e.g. cash management, treasury management and trade finance).
  3. End-to-end solutions – combining offerings from other institutions to offer a comprehensive global service to clients (e.g. Lloyds TSB/Citigroup alliance).

In Europe and across the globe, banks are competing to provide the best service to their customers. To increase profits, larger firms have expanded into new geographic regions or through acquisition or merger; these expansions have in turn intensified the need for flexible systems. In addition, banks are facing demand from their corporate clients to extend treasury support via the Internet to become a truly global liquidity provider; the market will have to adjust to these requirements.

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