Cash Concentration and Short-term Investments

With enhanced boardroom focus on balance sheets, the corporate treasurer is under increased pressure to maximise the yields on firm’s liquid assets. In order to enhance returns on cash investments it is critical for corporate treasurers to understand the impact of regulatory reform on banks and the investment options that they have available to them.

In order for the corporate treasurer to maximise their returns on liquid assets, it is vital for them to understand how regulatory reforms will impact the value which banks will apply to certain deposit products. The Bank for International Settlements (BIS)1 makes it plains that the Basel III liquidity reforms will be phased into domestic Australian – and indeed international – prudential standards from January 20132.

Of key interest is the fact that banks will attribute a higher value towards any liabilities they can raise with maturity tenures longer than one year, in addition to customers’ working capital deposits used for their clearing, settlement and custodial requirements. Going forward, traditional overnight cash and term deposits carrying maturities of less than three months will be of lesser value to banks.

Banks are currently using duration analysis to measure the behavioural maturity of deposits, with pricing of deposit products typically reflecting account behaviour and price elasticity: ‘Sticky’, longer duration deposits are rewarded. Furthermore, banks are starting to distinguish between their customer types and industry segments. Segment-specific deposit product propositions are being customised to corporate and retail investors.

Investment Options

Corporate treasurers have an exhaustive suite of products available for their cash investment and must determine the appropriate deposit product mix for their organisations. In general, when investing cash, there is a trade-off faced between return and liquidity.

At-call investments
  • Working capital transactional accounts are highly liquid, can be drawn down at any time and have a wide range of settlement products attached to the accounts. However, due to their accounts payables (A/P) and accounts receivables (A/R) functionality, and their demand deposit nature, they yield the firm a low return.
  • At-call investment accounts, and money market 11am styled products, typically receive a higher return than working capital transactional accounts, but are limited in their functionality in conducting transactional settlements. The value proposition associated with these products is in their at-call nature, their rate of return and the ease of channel access; be that via online or telephone access.
Longer-dated investments

Further along the yield curve a corporate treasurer has the option to invest directly into the bank by investing in term deposits or alternatively by purchasing primary or secondary market tradeable securities. Once again there is a trade-off between liquidity and return. Term deposits and tradeable securities currently provide investors differing returns, despite being offered by the same issuer.

  • Tradable securities, such as negotiable certificates of deposit (NCD), are currently displaying lower returns than term deposit investments of the same tenure in Australia. An NCD is highly liquid, being able to be traded in secondary markets where there are at present active buyers and sellers of this product. These products can be consistently marked-to-market.
  • Basic term deposit products are taken out in an organisations’ name with the view of being held to maturity. Although a term deposit can be broken with the issuing bank, there are break costs associated with the early redemption. Australian banks are currently attempting to bolster their deposit-to-loan ratios and are paying a premium to tradeable securities for corporate term deposits.

There is also a trade-off between short-dated term deposits and long-dated term deposits. Typically, the longer the tenure of the investment, the greater the interest rate margin, or ‘spread’ above daily bank bill settings (BBOR or LIBOR). For the corporate, investing in longer dated term deposits will require a greater amount of liquidity forecasting than short dated deposits, due to the costs involved in redeeming a deposit.

Tailored deposit investments

The accumulation of liquid asset holdings on corporate balance sheets has led to corporate treasurers seeking innovative tailored deposit solutions. Treasurers are now considering these products to maximise returns, with due consideration to the liquidity of such investments. These products can help them manage their asset and liability positions over the short- and longer-term, with investment options including:

  • Coupon select deposits: These enable the investor to enjoy a tailored fixed interest rate for one period of the deposit and a floating (variable) interest rate for another period of the deposit’s contract. The benefit for investors is that they have the flexibility to tailor the sequence and term of these two different periods in-line with their firm’s view on interest rates.
  • Inflation linked deposits: These allow the investor to receive interest payments that vary with the rate of inflation. This product may help protect the purchasing power of future coupon payments. Consumer Price Index (CPI) plus deposits have been attractive to investors who are concerned that inflation may erode the purchasing power of their future coupon payments, while wanting to receive regular coupon payments that are closely matched to CPI.
  • Range accrual deposits: These are tailored term deposits that are designed to enable investors to enjoy an enhanced rate. The deposit accrues interest for each day the reference rate is within a specified range. The product provides a tailored return, while allowing investors to select the range in-line with their interest rate view and risk appetite.

Managing Cash Investments

Before a corporate treasurer looks to start investing in cash and short-term Investments, it may make economic sense to attempt to pay down debt and strengthen their balance sheet. Given individual situations, this may allow the firm to be in a better position once global economic growth starts to get stronger.

A prudent treasurer should be forecasting liquidity, on a daily, weekly, monthly and yearly basis. This will allow the corporation to move its working capital into higher returning investments, which better align with its liquidity needs. When managing working capital, the corporate treasurer should utilise liquidity management tools provided by the bank. Some liquidity management tools to assist with liquidity management could include:

  • Notional pooling arrangements: These are useful if the corporation operates a large number of bank accounts for its working capital. The set-off structure can be applied across bank accounts so that any overdrawn amounts can be offset against credit balances in other accounts. The set-off allows the corporation to avoid paying overdraft interest on individual accounts, managing balances at an aggregate level. The treasurer should then be able to reduce their working capital holdings and invest in higher returning cash pools.
  • Physical pooling arrangements: These allow the corporation to sweep excess funds from subsidiary transactional accounts to a main or ‘header’ account. The treasurer should also consequently be able to reduce their working capital holdings and invest in higher returning cash pools.

Finally, investors need to look for any trends within their businesses around cash behaviour in order to maximise the return on their investments. For example, financial institutions continuously experience large cash holdings, but retailers often have a few peak periods in the year where balance sheet cash is high. If the corporate treasurer becomes aware of overriding trends, better information can be provided to banks who can then price cash investments more efficiently. When placing investments, corporate treasurers should understand:

  • The length of time they will be holding the cash.
  • If the investment can potentially be rolled over in its current state or into another product.
  • If the funds will remain with the bank upon maturity.
  • Sharing this information with banks can often allow sharper pricing and enhanced returns for corporate cash investments.


As banks seek to transform their balance sheets for the Basel III capital adequacy regulatory reforms, they have started shifting the values which they place on various deposit products. Consequently corporate treasurers are experiencing changing yields on their cash investments.

With the proportion of corporate balance sheet cash reserves being at its highest level in decades, treasurers must have knowledge of their immediate liquidity requirements, placing their surplus funds in alternative investments (pending individual investment parameters). Often when banks receive an improved understanding from corporate investors around the behaviour of investments, superior pricing can result.

1Bank of International Settlements (2010), Basel III: International framework for liquidity risk measurement, standards and monitoring, Basel, Switzerland.

2Australian Prudential Regulatory Authority (APRA), (2011), Draft Prudential Standard APS 210: Liquidity, Sydney, Australia.


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