Challenges and Opportunities of the New Liquidity Regulation

The role of treasurer has never been more important. In this environment of market volatility, nominal interest rates, scarce funding and reduced demand for goods and services, the treasury function has become critical to the continued survival of the entity.

Coming hot on the heels of the single euro payments area (SEPA) directive, the new liquidity regulation currently in consultation with the Financial Services Authority (FSA) poses another set of complex challenges for treasurers. Unlike SEPA, this is not a directive focussed on just a couple of instruments and one currency. Instead, the liquidity regulation encompasses a number of instruments, is cross-silo and multi-currency.

For financial services groups, the ability to provide ‘instant’ regulatory reporting and demonstrate robust management through all levels of the firm is the main thrust of the regulation. For non-financial services, the regulation sets out good practices, such as limits and controls, diversifying sources of funds and ‘stress testing’ these sources. By adopting some of these practices and demonstrating sound management, entities may find their banking relationships improve and that there is scope to negotiate on fees.

It is clear that the regulation, while mandatory for financial services groups, will have an indirect effect on non-financial services. Just as with Basel II, corporates should expect banks to look at their client-risk ratings, ensure balance sheets and cash flow are being managed effectively and that access to required funding is forecasted and available.

So, like SEPA, the new liquidity regulation is not about making money – it is about effective strategy, data flow and decision-making. This is not so much an opportunity as an exercise in ‘survival of the fittest balance sheet’, ensuring a healthy future for the entity with less reliance on wholesale markets and leverage.

Cannot Measure It? Then You Cannot Manage It

Without doubt, the most important factor in a treasury function that is successfully tackling the regulation is good business information (BI). Identifying the correct data sources to build an overview of liquidity positions is important, but defining the measurement and method of presenting this information is crucial. Having good BI to measure corporate liquidity is critical to effective balance sheet management.

But measurement alone does not equal management.

Having the data readily available and measured does not mean that liquidity management is effective. It will allow for enhanced decision-making, as any improvement in data availability creates an opportunity to forecast, plan and react in a reduced timeframe. In some cases, having a complete view of all instruments will be an improvement on current practices where activities are managed in silos. Some treasurers will need to evolve their thinking – taking into account new areas – and some treasurers will embrace the opportunity to change their overall scope of control. Either way, the importance of not just providing information but defining and managing strategy will come to the fore.

For financial services, having a clearly documented and understood liquidity strategy will be vital because it is apparent from the regulator’s consultation that they are not certain what constitutes best practice. Being able to demonstrate robust method and strategy following the implementation deadline will help shape the regulator’s views on market and industry best practice, and it is likely to be better to lead the best practice debate rather than follow it.

Providing confidence in the monitoring and strategy for the entity’s cash and funding positions is critical to daily management and continued success. Treasurers have a unique opportunity to present their skill at the top table, but at the same time will have to endure the scrutiny and focus that the current trading conditions are creating.

Understand the Solutions Out There

Numerous vendors offer very different solutions to the regulation. It is critical that the treasurer understands the types and features of systems offered, and how they might dovetail with existing capability. It is highly unlikely that entities will embark on a full end-to-end legacy system change – particularly given the technology and resource costs of such a changeover. It is, however, important to speak to suppliers and vendors and formulate a plan for getting the most out of available technology and resources.

For financial service firms to evidence controls and meet regulatory reporting on the timescales indicated will be a challenge. Feeds will need to be as close to real time as possible, and, given the potential need to report daily on demand, calculations and submissions will need to be fully automated. The new regime will not be achieved using multiple spreadsheets driven off static databases. For all entities, getting the data together, be it to the regulator or the management board, can enable improved monitoring and decision-making. The business strategy can be accomplished by combining existing assets with some of the technology solutions on the market. Key will be to understand which system does what, for how much and what combination is good for the entity’s specific circumstances.

Understand the Costs

At the same time as drawing up a plan of action, advisors and solution providers can assist with assessing the costs of any change or implementation. Identifying the skills gaps and change management required for such programmes, not just the IT implementation cost, are vital to developing a pragmatic approach to the challenge. It is important to take the time to create an independent and agnostic view with short, medium and long-term options for successfully meeting the regulatory challenge in the most cost-effective manner.

Use established full-service IT service providers to monitor, advise on and implement market-leading technology, review technology and resources assets and provide priced options for enhancing the treasury’s ability to meet the new regulatory challenge. This will ensure that meeting the challenging timescales being set by the regulation does not diverted from running the business .

Take a Pragmatic Approach

This process is not about ‘building Rome in a day’. We are already seeing slippage on the implementation deadline from the regulator, and as yet no global regulatory consensus. However, there is no doubt that UK implementation will take place. Corporates are also experiencing the most difficult funding conditions in memory.

Starting the design process now is key to successfully negotiating this challenge. Starting small but thinking big – to deliver the maximum cost-effective funding and meet the automated regulatory reporting challenge – will take considerable effort. The sooner the process is started, the more options for implementing and effectively planning any transition will be available. Last minute researched approaches should be avoided at all costs.

Given that most entities will be experiencing a shortage in project staff as they downsize the workforce to reflect current operating conditions, the longer the lead time to assess current status, systems, potential vendors, advisors and identify options for implementation, the better. ‘Seek advice and negotiate on price’ is a good approach. The earlier plans are drawn up, the longer the time to negotiate on implementation and ensure that the deadline is met.

Conclusion

The new liquidity regulation will force entities to focus on survival before prosperity. Capturing, measuring, understanding and managing the liquidity flows of the organisation are key responsibilities of the treasury function, which are now under even greater and more intense focus.

For financial institutions, the new liquidity regulation represents a challenge that needs to be tackled immediately. To address this, treasurers should:

• Plan and prioritise an approach to meet the implementation deadline and beyond.
• Examine internal capabilities and resources and assess the gaps.
• Talk to solution providers, implementers and advisors – it costs nothing to get beauty parades. Plus there is no ‘one size fits all’ solution for this regulation.
• Prepare the organisation for the process change and cost implications.

For non-financial institutions, treasurers should focus on:

• Improving the organisation’s BI on liquidity, and evaluate the current systems and capabilities.
• Talking to solution providers, implementers and advisors to see where technology could be used to enhance existing systems and processes.
• Promote the increased importance that the treasury function has to play in the current environment.

The liquidity landscape has changed forever and the challenges faced in meeting new regulations or securing funding are numerous. There are no great rewards for cost-effective liquidity management outside of the continued prosperity of the entity, but it is the treasury function that will provide the solid foundation for successfully navigating this period of change.

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