Managing liquidity is getting more and more difficult in the current environment of looming regulatory changes and general market uncertainty. But members of The NeuGroup’s Global Cash & Banking Group (GCBG), with the help of meeting sponsor J.P. Morgan, took a stab at determining the best way to go about it. One conclusion? Keep it simple and safe.
Members also discussed counterparty risk strategies and ways of identifying risk and ways to mitigate it.
Dealing with liquidity pressures.
Results from the GCBG’s pre-meeting survey showed that members almost unanimous prefer the use of time deposits and money market funds for the management of their liquid cash. Although ease of execution was mentioned as a reason for choosing money market funds, others saw it as an effective tool for risk mitigation across a landscape of many different asset classes as a result of the various assets held within the particular fund. By having an investment in a money market fund, members felt diversified across a variety of investment classes without having to handle the direct trade to hold that asset within their portfolios.
Ease of access to funds was also a primary reason for holding time deposits and money market funds. Proposed changes in MMF regulations could significantly impact their usage going forward however, so members will be monitoring regulations carefully.
Safety trumps yield.
Cash balances are at a 50 year high, yet most funds (72 percent) are invested with an overnight maturity, primarily because of the ongoing economic uncertainty and the impending regulatory changes. Regulations and the current market environment are increasing counterparty risk concerns as members evaluate the impact of recent bank downgrades on their current investment policy exposure limits. With a low (or zero) interest rate environment expected to continue at least until 2014, members will continue to be challenged with finding any meaningful yield on the investment balances.
Innovation of new products.
As treasury managers continue to navigate the low (or zero) interest rate environment, they can expect to see new products introduced by their banks to help provide greater flexibility for the management of liquid cash. Many banks are improving their earnings credit product offering by adding multiple currencies and international jurisdictions to the overall program to accommodate the build of cash across your organization, both domestically and internationally. Liquidity Management Accounts and Rules-Based Investment accounts are two additional examples of new products being developed by J.P. Morgan to meet the needs of its customer base.
Counterparty risk strategies.
Sponsor J.P. Morgan presented the group with a matrix for measuring counterparty risk across a variety of categories including: Liquidity, Operational Risk, and Credit. According to the presentation, it is important to view the overall risk using a holistic approach to the various touch points they have with each counterparty. There are models being developed to automate much of the quantitative analysis of such a holistic approach, and JPMorgan offered to share its model with the group for use within their individual organizations
Alternative data.
Most members use a variety of data sources as a basis for their counterparty risk analysis. Although corporates have increased the use of CDS to supplement agency ratings in measuring bank counterparty risk, the correlation between Agency Ratings and CDS is not strong, as shown by the data provided by J.P. Morgan. It was suggested that using additional metrics to cover both forward looking indicators, capital strength, asset quality, growth, profitability, and historical performance was a way to enhance their overall counterparty risk model.
In these challenging times, corporates are facing ever shrinking returns for their liquid cash portfolio and limited strategy choices for their needs in ease of execution and risk mitigation. While the economic and regulatory landscape ahead is not completely clear, treasury practitioners are seeking more efficiency from streamlining their global operations while continuing to monitor ongoing counterparty risk and other systemic challenges that might exist.