In 2022, businesses have faced ongoing supply chain disruption along with an increasingly volatile currency market which has altered the needs of the modern-day treasurer. Laurent Descout, Founder and CEO at Neo, looks at trends that treasury professionals should be prepared for in 2023
In 2022, businesses have faced ongoing supply chain disruption along with an increasingly volatile currency market which has altered the needs of the modern-day treasurer. Laurent Descout, Founder and CEO at Neo, looks at trends that treasury professionals should be prepared for in 2023 Read more
Greater collaboration between banks and fintechs is expected in 2023, enabling corporate treasurers to benefit from the latest digital technologies Read more
One of the more ‘interesting’ aspects of 2022 for a treasurer has been dealing with huge interest rate increases with the expectation they won’t be coming down any time soon. Figure 1 shows how GBP base rates have changed over the last 10 years, other major currencies show similarly painful patterns.
Figure 1 - source: Bank of England database
I am going to concentrate on how rising rates influence intraday liquidity (IDL). I’ll start with a reminder on what is IDL, why it’s important, explain how rising rates cause problems, and suggest how you might respond. IDL is generally more important for bank treasuries than corporates, but ultimately higher IDL costs for banks will find their way back to those clients using this IDL!
What do we mean by intraday liquidity?
Imagine you are a vanilla financial institution, like a bank clearing in local currency with nostros at agent banks for your business in other currencies. You might have deposit accounts at venues to manage securities, but for now let’s just think about your cash accounts.
These accounts allow you to pay and receive money to support your bank’s business activities. Since you might have to pay money out before receiving money in, you need access to liquidity during the day. You access such IDL either via an account overdraft or by providing enough prefunding to make payments before money starts to arrive. Figure 2 shows how pay early/receive late behaviour requires significant IDL to complete the day.
Figure 2 - Intraday balance profile
Why does this matter?
Because it’s existential, costly and of interest to regulators.
Why existential? Because liquidity is the lifeblood of the firm. Firms go bust if they don’t have liquidity when they need it most, i.e., when they need to make payments intraday. Lehman Brothers died as it didn’t have enough liquid assets to meet its outflows and couldn’t source enough intraday credit to fill the gap.
It’s costly for multiple reasons associated with using too much liquidity: certain account providers charge daylight overdraft fees; there are costs associated with securing a credit line; there are overnight interest costs if inaccurate funding assumptions mean you finish short at the end of day.
Depending on your location, regulators focus on ensuring you understand your intraday needs, how requirements might increase under stress and hence how much (expensive!) liquidity buffer should be dedicated to cover intraday needs.
What’s the impact of rising interest rates?
When rates are low so are liquidity costs. Your bank might have spare liquidity available for IDL, as you have limited options to use excess cash. Similarly it's easy to access cheap credit from account providers as they too have excess liquidity with little appetite in the market to buy it. But interest rates are now rising while central banks introduce quantitative tightening to remove liquidity from the economy.
This is when ‘lazy liquidity’ becomes problematic. Lazy liquidity is where, because liquidity is almost ‘free’, you simply park cash at the central bank and also deposit large cash balances into nostros at the start of day just-in-case it might be needed. But with rising rates lazy liquidity starts to cost you. Now you can make money on any spare liquidity rather than leaving liquidity trapped earning minimal returns. As rates increase, opportunity costs increase too as the front office can do much more with available liquidity rather than treasury leaving it trapped in low-yield locations.
For similar reasons, your account providers will be much more reluctant to provide free intraday liquidity and will take actions to address this. This could be one or more of: explicit charging for ILD usage, charging for providing a credit line, asking for your IDL usage to be collateralised. All of these actions increase your costs of funding your account activity.
Where you have an intraday liquidity buffer, rising rates means the costs of providing such a buffer will be more expensive. Such buffers can be eye-wateringly expensive; for each $1bn of liquidity buffer an extra 100 bps on buffer charges will add $10m of annual cost!
For all the reasons just discussed here you should expect counterparties to become expert at managing their IDL usage and payment profiles. If you are exposed to the other side of their smart behaviour you might end up providing counterparties with free intraday liquidity. It’s an expensive mistake to be the unknowing patsy allowing others to freeload on your IDL.
What can I do about all of this?
IDL only really became a mainstream topic after the Global Financial Crisis. Since then interest rates have been historically low, but no longer. For many people working in treasury today this is the first time they have been thinking about IDL while also worrying about rising rates.
Given higher rates are now here and are likely to stay high, treasury must optimise actual IDL usage. This starts with understanding IDL profiles and identifying drivers of ILD usage. You can then, as much as possible, reduce that intraday usage. All this starts by gaining what is known as Intraday Control. Intraday control means you can monitor all your accounts of interest in real time, compare what is actually happening intraday to what you think should have been happening at this moment (the forecast) and if there is a difference then manage the intraday risks as they crystallise. Intraday control gives you intraday insight and you can use this insight to make the best decisions possible in terms of allocating liquidity, funding accounts and supporting settlements.
Once you have intraday control then you can start to influence high IDL usage. There are a range of options here: transferring costs of IDL to those business units generating the IDL usage hence driving behaviour change, finding ways of profiling payments to minimise IDL short positions, encouraging customers to optimise their IDL behaviour etc. Intraday control relies on having the right data, systems and processes.
Please take a look at Realiti® from Planixs for inspiration!Read more
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The Covid-19 pandemic caused major disruption for many industries, but with lockdowns implemented around the world, supply chains certainly bore the brunt of this disruption.
Although managing and financing supply chains has always been a challenge for corporates and financial institutions, the disruptions caused by the pandemic shone exacerbated these ingrained issues. While the initial disruption affected the manufacturing process for many businesses, the post-pandemic effects have been more widespread, affecting the logistical chain too. And with global interest rates rising, the cash conversion of corporates is being stretched.
In addition, as globalisation continues, the challenges faced by treasurers have become even more tricky to navigate; supply chains are more dispersed, political conflict wages between Russia and Ukraine, and many economies are bracing themselves for an impending recession. Whether small are large, each of these disruptions is having an impact.
Meanwhile, corporations continue to look to create efficiency gains within their business to improve their bottom line. One corporation that found itself juggling these competing challenges was tech giant, Lenovo. Grappling with the disruptions saw the company find a solution in digitalisation.
“We went through [a period of] digitalisation at the beginning of the pandemic. With people working from home, we started implementing electronic processes, prior to that our supply chain financing was done manually. Going the digital route meant that our financing solutions became a lot more automated and efficient,” says Joseph Chua, head of global treasury operations at Lenovo.
Full visibility of the supply chain in an automated way means that everyone is working towards the same goal and is always on the same page. Lenovo accomplished this by using TASConnect, a secure supply chain finance platform that provides end-to-end automation and visibility of organisations that was launched by Standard Chartered’s SC Ventures this year.
“TASconnect creates an ecosystem between the anchors, the suppliers, and the financing institutions in a fully automated and digital way. Our approach was to develop a technology that was tailored to the anchor so that the implementation of the technology is easy,” says Gautam Jain of SC Ventures.
According to Chua, as the need for better efficiency within the treasury increases, the solution is to embrace digitalisation.
Index
00:00 Introductions
01:57 The effects of the Covid-19 pandemic on the supply chain
05:23 The challenges faced by treasury functions
06:44 The importance of full visibility of the supply chain
07:44 How do you supply full visibility
08:37 What is TASConnect and its purpose
13:01 How do businesses benefit Read more
Post-pandemic, the need to ensure businesses are building out sustainable growth channels is more important than ever before. For the treasury industry, this means providing their businesses with new ways to invest and manage their funds. But aligning cash management strategies with broader sustainability objectives is no mean feat – especially as many prepare for an impending global recession.
While many corporates have committed to the United Nations’ Sustainable Development Goals (SDGs), the goals are not designed to be applied at the treasury level.
“Normal business activity that occurs at the treasury level must be aligned with an SDG and that’s a formal process,” explains George Lee, Head of Transaction Banking at Standard Chartered Americas.
“It has to be auditable and accredited; you can’t just decide one day that you are doing it, you have work to do to be able to accredit yourself in that space and that’s a challenge.”
Standard Chartered recently launched its ‘Sustainable Account’; a new investment product, that has the characteristics of a Demand Deposit Account. It provides large corporates with the opportunity to contribute to sustainable development through the investment of surplus cash, whilst maintaining daily access to their finances.
“Sustainable demand accounts provide corporates with an opportunity to participate in sustainable development agenda by having their short-term surplus cash, […] referenced against Standard Chartered sustainable loans and projects,” says Lee.
“It is a simple way but fully automated and auditable solution that can be used to prove to the market that they are conducting sustainable activities.”
The options for where to inject this surplus cash are endless and while they can be industry-specific, that does not always need to be the case. Surplus cash can be used in tackling some of the world’s most significant long-term threats, including climate change, quality education, clean energy, and financial exclusion.
Lee highlighted the importance of these products for treasurers moving forward, and the risks to your business of not using them are high.
“You risk potential opportunities if sustainability is not a priority in your business. The more sustainable you are, the more applicable you are to new opportunities so it’s a growth tool,” says Lee.
“As the world turns more socially and sustainably conscious, you want to be on the right side of the fence and more especially if you have a mission statement that speaks to such a pursuit”.
INDEX:
00:00 Introduction
00:57 Why treasures have difficulty aligning with sustainability objectives
02:00 Advantages for businesses who meet their sustainability objectives
03:30 What exactly is a sustainable demand account
04:20 How demand accounts differ from other products in the market
05:20 What corporates risk by not aligning their cash management and sustainable objectives Read more
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Figure 1 - source: Bank of England database
