By Joseph Neu
How do you get more treasurers on the non-financial end of the corporate spectrum comfortable with thinking outside their traditional sandbox to try new liquidity management solutions.
Should corporate treasurers be learning to be a little bit more like bank treasurers? In a story in iTreasurer’s March issue, “Citi Highlights Key Trends for Future of Liquidity Management,” we noted how the largest global transaction bank is responding to key trends and preparing for the future by bringing more of its expertise in banking to bear on multinational corporate client challenges resulting from them.
Some of these solutions will be more familiar to bank treasurers and others with financial institution treasury experience. Thus, one challenge for Citi and its effort to integrate treasury advisory solutions aimed at corporate liquidity management with other parts of the bank is to get more treasurers on the non-financial end of the corporate spectrum comfortable enough with thinking outside their traditional sandbox to try some of these solutions—even if they have to push their boards for policy changes where needed.
Those that do will be better able to manage liquidity optimally in the new environment using a more holistic approach integrating FX, funding, investment, asset-liability management (ALM) and capital planning and take advantage of the opportunities presented by it.
To get this change in mind-set started, we are able to share just a few examples from a presentation and discussion led by a team from Citi Markets to Citi’s Liquidity Management Services team. The discussion was led by Carolyn Weinberg, who heads Citi’s US Corporate Solutions Group, with input from Jason Pizer, the Head of US Rates Structuring and Sanjay Reddy, Head of North America Finance Desk.
The aim was to help bring “cash management” advisory services to the next level by establishing ways that they could work with Citi’s TTS Liquidity and Advisory teams to help clients with these growing areas of challenge and opportunity.
Examples for the new era
1) ALM /cross-currency hedges. A major Tech MNC was cited as an example of an MNC that shifted its European pool from EUR to USD functional (in time to benefit from strengthening USD). Going forward, while it now is pooling cash assets in currency of its expenses (liabilities) this creates a need to hedge the EUR flows coming in commercially.
Other firms that are not changing to USD-functional have an ALM mismatch that they can hedge with Citi using a long-term swap. More generally, the solutions group can do net investment and other types of hedges to protect the currency-related changes that result in asset liability mismatches.
2) Structured lending and investment opportunities. Citi has been helping clients deal with some of the issues that arise in funding in highly regulated markets. Equally, there are opportunities for corporates to enhance yields on their centralized cash investment portfolios currently parked in T-Bills. These structured investing and funding arrangements can offer attractive opportunities to enhance returns and reduce funding costs.
3) Doc-friendly Repo investment. The group also is looking at SPVs and equity fund arrangements for corporates to invest in tri-party repos and is working on simplifying the legal and documentation process to transact with them in a traditional way.
Bank-like without being banks
The general theme of this innovation is that cash–rich corporates with huge balance sheets should be thinking more like banks in how they manage and generate liquidity, but not to the extent that they become subject to bank regulation.
Since bank regulations favor corporates over other financial institutions, banks have an incentive to use them as other financial institutions have in interbank liquidity markets, capital trading and the like.
All the structured notes and rehypothecation done to generate real and synthetic liquidity in bank markets (aka shadow banking) is something that corporates can benefit from—and in many ways banks need them to participate because they bring big (unregulated) balance sheets and sources of High Quality Liquidity Assets (HQLA), also valued as collateral for use with structured transactions that is in increasingly short supply.
This is in line with our view that corporates should not be so quick to sit on their regulatory exemptions (see derivatives reform). Nor should they be content to forgo the potential pricing and other advantages that can come with collateralized financial transactions and other derivatives of structured finance that are the norm in the interbank marketplace.
Similarly, to manage liquidity optimally in the new normal, corporates have to bank on their regulatory advantages.