Citi Highlights Key Trends for Future of Liquidity Management

By Joseph Neu

Citi’s Liquidity Management Services Team highlights key priorities for today and how they will shape the future of liquidity management for large MNC treasuries. 

In the battle to maintain market- and mind-share in vital global transaction banking services, banks seeking to differentiate themselves with “consulting services and problem solving” is a trend that is again on the rise, according to NeuGroup members.

Citi is no exception in this regard and its Treasury and Trade Solutions (TTS) liquidity management team, led by Elyse Weiner, put its insights and solutions on display at an event last month. With contributions from each of its team leaders, including Ron Chakravarti Treasury Advisory Group global head; CindyGerhard, head of Global Product, Liquidity Management Services and regional heads Amit Agarwal, EMEA Liquidity Management Services; Michael Berkowitz, North America Liquidity Management Services; Odette Izquierdo, LatAm Liquidity Management Services and Sandip Patil, Asia Liquidity Management Services offered varied perspectives from around the globe.

Ms. Weiner, who will be retiring from Citi after 11 years with the bank and a distinguished career in banking and financial services, spanning three decades, leaves a fantastic legacy to build upon with more integrated services and solutions that will help meet the future needs of MNC liquidity management. Here are some of the key trends that will be shaping these future needs.

Trends for today and tomorrow

• ZIRP to NIRP. Ron Chakravarti of the Treasury Advisory Group used the slide below to prompt big-picture considerations of what MNCs with treasury operations in Europe need to think about concerning the transition from Zero Interest Rate Policy (ZIRP) to Negative Interest Rate Policy (NIRP). For starters, with the normalization of a negative interest rate environment, every treasury operations manager should be going through their cash pool set up with their transaction banking coverage officer.

  With so many different pooling structures, banks are likely to have different means of calculating the net interest charge and determine whether there will be a net payment to the bank (likelihood of pool charges increases with negative rates). If NIRP continues—as the outlook suggests—companies need to consider the impact not only on cash pooling but the way liquidity should be structured going forward. Another thought with NIRP is that cash concentration and pooling becomes more of an operational efficiency and control business case—less an interest-expense/interest-income optimizer.

  And, as the slide suggests, NIRP raises many rather broader considerations for the longer term, especially if it continues as the US proceeds with a transition from ZIRP to PIRP (Positive Interest Rate Policy).

• FX and liquidity management. The resulting disparity in interest rate differentials and the volatility of global market adjustments between negative and positive rates will complicate FX management, especially crossing the dollar.

  This will also impact liquidity as US firms respond to a long-cycle of USD strength that is creating headwinds for reported earnings and firms globally seek yield in the most liquid PIRP currency. The need to integrate FX with liquidity management makes the decision by Citi to better integrate its FX services capability into its treasury advisory practice especially timely.

• Managing USD headwinds. Ade Odunsi of CitiFX Client Solutions noted that when it comes to FX management most US MNCs will focus on protecting the plan/budget rate as well as achieving some smoothing in earnings.

  The difficulty here is that a strategy that is effective in achieving one objective will often result in greater risk with respect to the other objective. For example, a layering approach to hedging which involves “averaging” into the hedge ratio over time, while effective at smoothing risk, would do a poor job at mitigating, VaR as averaging over time implies that at any given juncture a proportion of the exposure will remain unhedged.

  On the other hand, a rolling approach where the corporation hedges most of the risk for a pre-determined maturity and then repeats the hedge in successive months, would do more to protect the plan rate but likely provide less smoothing benefits than layering.

  The other consideration is that because rolling has a greater VaR reduction effect, it reduces the flexibility of being able to benefit from favorable moves in FX rates compared to a layered approach which would only increase the hedge ratio gradually over time. The best approach would be a rolling approach with longer duration to improve the smoothing effect, but using long-dated options to maintain flexibility, per his recommendation.

• Integrating China into global liquidity. It makes little sense to have the liquidity of one of the top three economies isolated from your global liquidity pool. Thanks to ongoing reforms in China and the internationalization of the RMB, it no longer has to be. Sandip Patil, head of Asia Liquidity Management Services outlined several solutions Citi can offer to help MNCs concentrate cash in China and connect China to their global liquidity structure, including the use of SSCs or IHBs to cover China with centralized payments and collections.

  One major technology multinational presented their RMB pooling structure, which consolidates RMB cash (through a domestic pool) in their SFTZ entity, which then swaps to USD and sweeps it to the non-resident header account at Citi run by their global IHB. The cash remains ultimately owned by the Chinese entity.

  While promotion of RMB internationalization is what is dismantling currency controls, this MNC does not pool RMB cross-border, because their pool is USD functional and they don’t see a use for RMB offshore. Connecting China does not mean you have to change the global liquidity pool. Citi says this MNC is the first company to do the RMB-Dollar swap onshore and sweep it out to link it with a global IHB.

• LCR impact on deposits. Per Elyse Weiner of Citi TTS Liquidity Management Services, banks are working on formulating account options that provide higher liquidity and economic value to the bank, i.e. lower LCR run-off, and better return to the client. Transaction accounts are not necessarily considered operating in nature, i.e., total balances may be split between operating and excess/non-operating categories based on analyses of cash flow.

  Corporates should discuss this with their banks, but, in general, there is an incentive to optimize the transaction volume in cash management accounts to show operational activity sufficient to make the balances (more) likely to be classified as operating. With respect to cash pools, the analysis will vary from bank to bank depending on the specific structure. “At Citi,” according to Ms. Weiner, “we are looking at the set of accounts in a given structure and relating transaction flow across all accounts to the balances in the header account.”

  As balance sheets come under pressure, banks will have little appetite to receive large inflows of non-operating balances. As an alternative to leaving non-operational reserve cash in transaction accounts, a popular new product is a time deposit with a minimum 31-day notice of withdrawal. In return for tying up cash–which helps the bank from an LCR standpoint—companies can receive better rates.

• Further regulatory challenges. Unfortunately the regulatory challenges for bank deposits do not end with the Liquidity Coverage Ratio (LCR). The LCR focuses on a 30-day or shorter time horizon, while the Net Stable Funding Ratio (NSFR) will analyze stable funding over a longer period of time and add another set of considerations for deposit funding appetite. Since this rule is not yet finalized, bank treasurers have not focused as much on the implications, but expect pricing and deposit appetite to be further adjusted to reflect NSFR as well as LCR in the near future. Also impacting deposits and rates paid are local regulatory requirements, as banks must increasingly meet singular liquidity requirements within a jurisdiction.

  For example, a national regulator would seek to protect local depositors from the impact of a failure, or risky assets, outside of their jurisdiction by ring-fencing local assets and liabilities. Creditor preference, where local depositors would get payout preferences, is also a concern where banks hold offshore deposits. The regulatory challenges on deposits also are playing out in an environment where money market reforms are changing the liquidity and return profiles of money funds for the worse. Thus, the liquidity management in the future will require some non-traditional thinking and continued product innovation. 

• Tax and transfer pricing concerns. Further complicating the liquidity management picture going forward are the tax and transfer pricing changes being proposed by the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. Deloitte’s John McNally noted that the interest deductibility proposals alone will be a game changer for many liquidity management structures, including cash pools, and the related impact on financial transaction transfer pricing will change the ability to manage multinational’s liquidity both internally and externally. After BEPS, no corporate treasury center will look the same and, in the process of restructuring them, MNCs will have to be concerned that they don’t end up falling under the scope of some of the regulation aimed at banks and other financial institutions. 

• Rethinking centralization. While centralization of liquidity remains a good idea, and London remains the largest global cash centralization hub according to Citi, NIRP, bank regulation, currency differentials and tax/transfer pricing changes are merging to make the traditional economic benefits of centralization less attractive. Accordingly, coordination, risk management, process efficiency and control are becoming stronger reasons to centralize and this should be reflected in centralization project KPIs. Further, in regions like Latin America, where centralization has been more challenging, this means that MNCs may have 2-3 liquidity structures in play to get 25-30 percent cash centralization and may have to reevaluate how many they will need for the region in 2-3 years to get 60-70 percent.

  Also, to optimize yield, it may be wiser to leave cash in branches in jurisdictions where banks need liquidity or where the rate environment enables them to pay up—i.e., multi-domestic pooling.  The key will be to invest in technology with maximum connectivity in order to coordinate cash centrally across multiple places and structures.

Taken together, these trends clearly impact MNC liquidity management now and into the future. Indeed, they upend some of the traditional ways of thinking about corporate liquidity and the interplay with FX management, funding, cash investment, along with asset-liability management and capital planning.

In a coming installment, iTreasurer will delve into the ways Citi is looking to work across liquidity and markets in “Thinking More Bank-Like on Liquidity Management.”