Beyond Efficiency: Maximising the Value of Liquidity

Do you believe there has been a change in
attitude towards liquidity management among corporates since the 2008 global
financial crisis? If so, what has triggered this change?

With access to bank and capital market funding reduced, corporates have
been increasingly focusing on liquidity management – becoming more self-funded
and reducing the need to rely on external financing.

The
macro-economic environment, risk aversion, ultra-low interest rates and
evolving regulations are all driving corporate attitudes towards liquidity
management and optimisation.

The economic climate affects growth and
expansion plans, as corporates weigh the associated risks and benefits.
Appetite for growth is leading corporate expansion into emerging markets where
the consumer markets are growing but pace of growth is starting to slow down.
Inadequate infrastructure, and the fragmented nature of some geographies means
that the need for improved liquidity management is even greater for companies
as they expand to take advantage of emerging-market growth.

Another
driver of liquidity optimisation is an increased corporate focus on risk
management. Inefficient liquidity processes can weaken a company, leaving it
vulnerable in a volatile economic environment. Interest rates have been
declining for the better part of the past four to five years, and we are in an
effectively zero-rate environment with some likelihood of negative rates.
Managing investment and counterparty risk becomes critical against this
backdrop.

The pace of regulatory changes across national borders is
also forcing a reassessment of corporate strategy, which in turn impacts the
management of liquidity. Centralising liquidity in a region with favourable
regulatory environment could facilitate a company’s expansion agenda.

All of these are key drivers behind the need for efficient liquidity
management. But corporates want to go beyond simply improving the efficiency of
liquidity processes – they want to maximise the value of their liquidity. This
is where our role as a provider of liquidity solutions is evolving, in creating
solutions that do more for a corporate than simply add efficiency.

How could corporates improve their liquidity management
practices?

The role of corporate treasury is evolving
beyond traditional functions of managing the liquidity, interest rate and
foreign exchange [FX] risk of the company. Instead, treasury needs to look
across the supply chain and be an end-to-end partner – from procurement to
sales and collections. Understanding the company’s trading and working capital
construct as well as organisational culture should enable the appropriate
design of a treasury structure for – to give just one example – choosing
centralised or decentralised structure, and establishing treasury policies with
clear roles and responsibilities.

Once the company has established
the right structure of its treasury it could move on to liquidity management
and optimisation. One way this can be done is through cash pooling, using
physical pooling at the domestic level, cross-border physical pooling to a
centralised account, and, eventually, notional pooling.

What is notional pooling?

Notional
pooling enables the offset of long and short balances to create financial,
operational and liquidity efficiency without the need to commingle funds,
helping companies maintain autonomy of various operating entities.

Notional pooling is typically the final stage in a process that includes
physical pooling. Generally, a cash pool structure will first physically sweep
up the liquidity from the lowest point in the chain – whether it is in one
country, across various countries, or across various currencies – and will pool
the liquidity first at a domestic level, then move it across borders and
finally into a pooling centre where it can eventually be notionally pooled.
Physical pooling adds efficiency to a company’s liquidity management and
notional pooling helps maximise the value of that liquidity.

Which corporates stand to benefit the most from notional pooling?

All companies regardless of their structure must have
efficient liquidity management operations and therefore stand to gain from
identifying pockets of unused liquidity, making them visible, accessible, and
deployable. And all companies stand to gain from solutions that help them do
more with their liquidity and maximise its value. Pooling in general
centralises funds – thereby increasing visibility as well as improving working
capital, cash and liquidity management.

Companies that are
expanding to countries with an established notional pooling infrastructure will
benefit as they have choice as to where to pool their funds. Recently, for
instance, many corporates, particularly emerging market companies have started
moving their treasury centres to Amsterdam, driven by a favourable regulatory
and tax environment.  Given this, we have been extending our notional pooling
capabilities to Amsterdam, allowing corporates to choose between Amsterdam or
another of our notional pooling centres, such as London. 

Why Amsterdam?

Regulators in the city
have been leading a number of initiatives like eliminating paper cheques, and
creating paperless financial system. What’s more, corporates operating in
Amsterdam will stand to benefit from the single euro payments area (SEPA) –
focused on unifying payments and eliminating the need for multiple bank
accounts in Europe.

SEPA will encourage a trend around
centralisation, in general, with cash pooling an extension of payment
centralisation. As mentioned, Amsterdam’s favourable regime makes it the
location of choice for many of our clients’ treasury centres. Our goal is to
follow our clients’ expansion plans and be their trusted partner in most of the
markets.

What else can banks such as Citi do to help
corporates improve the efficiency of their liquidity management and maximise
the value of their liquidity?

We operate across the
spectrum of liquidity management services –  starting with treasury advisory
and benchmarking for our clients to help them establish best-in-class treasury
construct to providing cash analytics, cash forecasting, liquidity visibility
and optimisation, and investment solutions.

We continue to invest in our
infrastructure to support our clients’ agends; for example expanding the
jurisdictions in which we can offer liquidity solutions, adding more currencies
to our capability sets, and adding features and functionality for greater
visibility and control.

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