By Geralyn Frances
JP Morgan comes up with some creative answers to treasury’s changing and challenging investment environment.
While cash managers are busy handling their companies’ surge in cash balances, changes triggered by regulatory reform and a host of other external factors could be threatening their liquidity. With this in mind, one bank has used this as motivation to create innovative products in response to treasurers’ search for liquidity solutions to counter the challenges these changes bring about. Flexibility, automation and global reach have resulted in some smart answers to these threats.
With corporate cash balances at an all time high partly brought on by post-crisis reform, and unlimited FDIC coverage for noninterest-bearing accounts scheduled to end this year, treasurers may be left over-exposed and taking bigger risks for smaller returns. The need is to place their excess cash safely, keep it relatively liquid, and yet still maximize the value of that liquidity. Basel III, credit downgrades, and the uncertain future of money-market funds as well as other pending reforms could result in changes to liquidity and investment products and a tougher environment for short-term liquidity. And many treasurers remain in the dark about the implications of the changing regulatory environment. For instance, uncertainty around proposed money market mutual fund reforms and whether it will remove them as a viable option for investment diversification while still maintaining liquidity and stability.
Simplicity Sells It
For JP Morgan, these changes offer bright prospects for more business. “The new regulations and the structural changes in the market have created opportunities for banks to develop new products for corporate treasurers to manage their short-term liquidity,” said Rick van Wijngaarden, Managing Director at JP Morgan.
The new and innovative liquidity products that JP Morgan has introduced have the ability to meet the needs of treasury in three areas: return, process efficiency and fees, by building flexibility into their clients’ demand deposit accounts (DDAs).
For instance, the Liquidity Management Account (LMA) automatically identifies the embedded term in daily balances and provides the corresponding term yield. It does this without impacting the fully liquid nature of an operating account. It makes the LMA solution very well suited to attract and properly value operating balances in a Basel III world. Rules-based investing automates processes for short-term investing, streamlining the daily cash investing by utilizing the clients’ preset parameters to trigger investment transactions. This is especially important when looking at the increased focus on risk management that has become ingrained in the market psychology. Coming in 2013, treasurers will be able to expand the use of ECR by reducing merchant service fees including interchange in addition to the traditional cash management fees.
These flexible liquidity solutions are the bank’s answers to a changing market where treasurers’ investment choices are being limited by tighter regulations and increased capital requirements. As Mr. van Wijngaarden noted, “Since the products are DDA-based and capture operational liquidity, they work well in the spirit of the Basel regulations. The most opportune time to introduce new products is in changing times. Clients are looking for better solutions as traditional investment choices such as MMFs and very short-time deposits may soon be much less sustainable within investment policies due to regulatory reform.”
JP Morgan is meeting these needs in a variety of ways, each aiding treasury in the deployment of cash. Some of these new solutions have been introduced to treasury clients with quick adoption and success due to the ease of pairing with existing DDAs. Others are in development stage and will be launched in 2013.
In the coming year, clients will need more options for managing their excess cash while maintaining liquidity and safety. As James McKenzie, executive director, JP Morgan explained, “Preserving principal, liquid flow and yield remain key drivers for treasury in managing excess operational cash. A fourth element, ease of management, is now being demanded.”
What happens to these products if proposed regulations end up more market friendly? JP Morgan has built enough flexibility into these liquidity products that they are efficient from a bank’s perspective, as well as that of a corporate treasury, and they fit into Basel rules regardless of outcome.
Challenges
JP Morgan liquidity products offer viable alternative solutions. However, adept treasurers traditionally do not put all their eggs in one basket, and so it is with excess cash. These products clearly present themselves as more beneficial the larger the cash balances held at JP Morgan, i.e., term yields offered and earnings credit rates on global balances. J. P. Morgan encourages treasurers to view counterparty risk differently in this new environment. For example, Global Systemically Important Financial Institutions like JP Morgan are held to stricter capital rules and have more stringent reporting rules to meet.
A new approach to liquidity management is required in light of the changing regulatory, economic and risk environment that corporate treasury deals with today. According to JP Morgan, operating cash balances remain high and 72 percent of excess cash sits at 31 days or less, despite low yields.
Treasury staffs struggle to keep up with regulatory impact on their dwindling investment choices and day-to-day liquidity management. JP Morgan is stepping up to offer creative ways to earn higher yields and utilize all cash balances without sacrificing liquidity, and for those products launched, adoption has been well-received.