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Optimising liquidity in a
shifting world
From negative interest rates to significant currency volatility and geopolitical risk, today’s treasurers are
operating in largely uncharted territory. Exploring and exploiting this new liquidity landscape will require
skilful navigation – and an open mind.
With ongoing speculation around the future of the Eurozone, crisis-driven regulation still being
implemented across the financial sector, and emerging economies continuing to outperform their
Western counterparts, any casual observer could be forgiven for thinking that little has changed in
the macro business environment over the last five years. But as any treasurer will tell you, nothing
could be further from the truth.
The first and perhaps hardest hitting change – at least for those in the corporate treasury profession
– is the introduction of negative interest rates. “Whilst interest rates have been extremely low across
Europe and the US in recent years, the move by the European Central Bank (ECB) in June 2014 to
lower the deposit rate from zero to -0.1% took us into a new phase in the interest rate cycle,” explains
Amit Agarwal, EMEA Head of Liquidity Management Services, Treasury and Trade Solutions, Citi.
This triggered a domino effect of rate cuts across Europe with the Danish, Swedish and Swiss
National Banks all choosing to follow suit in an effort to protect their currencies and reduce market
volatility. “For treasurers, the impact of these changes in monetary policy is wide-reaching,” says
Agarwal. “We are entering new territory when it comes to the traditional treasury priorities of
security, liquidity and yield. Liquidity is being challenged by regulations such as Basel III, and yields
on investments and currencies are scarce, but capital preservation is even trickier.
“Take investment policies, for example. These typically dictate that treasurers must retain capital
and maintain the value of that capital, but doing so in a world where deposit rates are suddenly
negative poses a real challenge.” As a result, many treasurers are left questioning the validity of
their investment policies and priorities, as well as their accounting practices.
Treasurers are also still wondering where interest rates will go next, as they do not appear to have
bottomed out yet. As Steven Elms, EMEA Head of Industrials Sector Sales, Treasury and Trade
Solutions, Citi observes, “this uncertainty around rates is a genuine challenge for corporates trying to
navigate the new business environment. Not only are they trying to understand where the policy
moves are heading but also as to how banks are responding and how this will impact their deposits,
investments and wider currency market movements.”
Against this backdrop of uncertainty, there is one safe bet, says Elms, namely that this new territory for interest and FX rates is here to
stay, for the foreseeable future at least. “This is the new normal – and it is this environment that treasurers and banks need to be
comfortable operating in.”
Adapting to change
What this means is that whilst it is important to continue to build on the best practices that have been honed within treasury
departments in recent years, forward-looking treasurers must also examine ways to adapt and optimise their liquidity
structures accordingly.
“One very noticeable trend that we are observing among leading treasuries is the conscious decision to exclude certain pockets of
daily liquidity from global liquidity structures in response to the lower rate environment,” says Elms. After all, why should a company
move balances away from a jurisdiction and incur an FX cost, only then to be impacted by the negative rate environment?
“As long as there is complete visibility over the cash and at a near-term use of that local liquidity, then leaving it in-country may be the
best course of action,” he notes. “That said, it is still fundamentally important that the liquidity structure the company has in place
Amit Agarwal
EMEA Head of Liquidity
Management Services,
Treasury and Trade Solutions
Steven Elms
EMEA Head of Industrials
Sector Sales, Treasury and
Trade Solutions
in association with
Smarter Treasury
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Adam Smith Awards © August 2015