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allows the treasurer to move and mobilise that cash when needed – not least because of the level of geopolitical unrest today.
Trapped cash is a growing concern in politically unstable countries, as is significant FX volatility, so having a flexible and nimble
liquidity structure is now more important than ever.”
Liquidity is being challenged by regulations such as Basel III, and yields on investments and currencies
are scarce, but capital preservation is even trickier.
Amit Agarwal, EMEA Head of Liquidity Management Services, Treasury and Trade Solutions, Citi
Offsetting the negative
When we overlay all of these challenges – the negative rate, low yield environment; the geopolitical challenges which are creating
further FX swings, sovereign and counterparty risk concerns; and of course the liquidity constraints of Basel III, “this creates a perfect
environment for clients to sit down around the table with their banks and discuss the optimal liquidity structure that brings together
the right mix of cash management, investment and the risk management tools, whilst observing best practice,” says Agarwal.
A good example of this is the work Citi has been undertaking with clients to help them meet their goal of capital preservation in this era of
negative rates. “From an investment point of view, we have introduced smart investment options, such as the minimum maturity deposit,
which provides enhanced returns over short tenor time deposits with a minimum notice period before funds can be withdrawn,” he explains.
Elsewhere, multicurrency cash pools – as part of a global liquidity structure – are proving extremely popular among Citi’s clients as a
means to gain liquidity and operational efficiencies, whilst also replacing or at least reducing the need for FX swaps. “With a
multicurrency pool, it is possible to offset charges in certain low-yielding currencies by changing the mix of the company’s assets and
increasing those currencies which have a wider spread. Furthermore, for the day-to-day operating business, rather than having to
spend resources and investment dollars executing FX transactions, they can effectively use the multicurrency cash pool as an implicit
way of executing their FX swap transactions. With that in mind, we are seeing double digit growth in the adoption of cash pools, in
particular the multicurrency cash pool,” notes Agarwal.
Recently, Flextronics, a leading end-to-end supply chain solutions company, worked with Citi to create a multi-currency pool for its
EMEA operations. By automating the FX conversion and draining of pool funds to the US, 90% of the cash in Europe is now available
to the US – including US dollars in Israel for the first time.
We are seeing more and more requests to set up actions that occur without manual intervention when a
particular currency – typically a negative yielding one – reaches a specified amount.
Steven Elms, EMEA Head of Industrials Sector Sales, Treasury and Trade Solutions, Citi
Regulatory change is another driver behind the focus on multicurrency cash pools. According to Elms, a common request is to
include the renminbi as part of a multicurrency pool structure, not only because it is an additional currency that can help to offset
negative yields, but also because banks such as Citi have grown their capabilities in the currency (since it has been gradually
liberalised by the Chinese authorities) to ensure that locally generated liquidity that was previously trapped in-country can now be
brought up into a company’s central liquidity structure, even through automated sweeping options.
“Automation is another huge theme in this new liquidity environment,” Elms continues. “We are seeing more and more requests to set
up actions that occur without manual intervention when a particular currency – typically a negative yielding one – reaches a specified
amount.” Once the level is hit, Citi can then help to push some of that liquidity into a different destination; whether that be a higher
yielding account with a longer maturity, or a money market fund, for example.
Embracing the positive
“These kinds of innovations are only going to become more popular as people adjust to the new normal,” predicts Elms. And over the
last five years, treasurers have already demonstrated great flexibility in their mind-sets, adjusting their investment comfort zones to
include instruments such as tri-party repos and secured lending, so thinking outside the box has almost become part of the job
description for those at the top of the profession.
Nevertheless, if innovation is to succeed, it must be built on solid foundations – in this case best practice. “Now is not the time for
treasurers to start undoing all of the hard work they have put in post-crisis, centralising, rationalising and automating their liquidity
management. Rather, this is the time to examine how external market influences, such as negative interest rates, actually present
opportunities for further efficiency,” concludes Agarwal.
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Adam Smith Awards © August 2015 | 13