The trend towards centralising liquidity pools is growing at an annual rate of 25% said Amit Argawal, EMEA head of liquidity management services at Citi. “About 10 years ago we centralised around US$10bn per day; today it is about US$75bn per day,” he told his audience at the bank’s recent briefing in London.
The centralisation trend is being enabled by technology, with Citi having implemented a consistent platform across the majority of the countries in which it operates. This provides a seamless, cost-efficient mechanism for centralisation. The bank operates more than 700 notional pooling structures in London and more than 18,000 to be announced (TBA) accounts.
Argawal said some of the “most complex” liquidity structures had been built in London. He identified the city’s geographic location, tax and regulatory environments as factors in its growth as a liquidity hub.
This year’s introduction of the single euro payments area (SEPA), integrated, competitive and innovative internal market for retail payment services in euro in the European Union (EU), has been a catalyst for treasury centralisation in Europe. Many large corporates and public sector entities have created shared services centres (SSCs) as part of their SEPA strategies. Although the UK doesn’t become a full participant in SEPA until October 2016, firms are choosing to take advantage of some of the country’s other strengths.
London has certainly ramped up its efforts in recent years to attract multinationals’ treasury centres. Among its efforts is the establishment of the city as the Western world’s financial centre for the renminbi (RMB). The City of London Corporation, the public authority that administers the ‘Square Mile’ of the UK capital’s financial and business district, is working with its financial markets on technical, infrastructure and regulatory issues relevant to the development of the RMB product market in London.
Risk Management and Assessment
The Corporation will also develop a private sector dialogue on the international RMB market with regulators in Hong Kong and mainland China, to complement that which is maintained by the UK public sector. In June, the People’s Bank of China (PBC) appointed China Construction Bank (CCB) in London as the first clearing bank outside Asia for the RMB.
Accompanying the strong push for RMB centre status, London also offers attractive corporation tax rates – with a uniform rate of 20% for big and small companies due to be introduced in 2015. Additionally, UK-based multinationals pay no UK tax on dividends they receive from their overseas operations.
In addition to the centralisation into a London hub, there are other liquidity management trends in EMEA that Citi thinks are worth watching and have an impact on corporates’ treasury activities. For example, treasurers are adopting a more comprehensive approach to risk management. An increasing number of multinationals, said Citi, are employing methodologies to set, monitor and calculate the usage of counterparty risk. Based on research as part of the bank’s benchmarking tool, Citi Treasury Diagnostics, Citi found 67% are using this, an increase of 11% between 2009 and 2013.
Treasurers are also more diligently monitoring and assessing various financial risks. According to the benchmarking tool, most corporates assess both interest rate risk (79%) and liquidity/funding risk (80%). Settlement risk is also receiving increased attention from corporate treasury, with larger companies more likely to monitor settlement risk (50%) versus only 16% of small companies.
Real-time treasury management is also playing a role. There is an increasing emphasis on daily visibility of cash flows and short-term investments; 80% of corporates reported that they had daily cash visibility over 75% of their total balances. When it comes to visibility over short-term investments, 85% of corporates said they had visibility over 75% of such investments. At the same time, corporates are increasing the frequency of cash forecasting updates, with 33% of larger companies updating forecasts daily – a 19% increase over the years 2009-13. This has been helped by the wider adoption of more sophisticated treasury technology.
More corporate treasurers are concentrating cash into a central pool on a daily basis. Seventy-six per cent of corporates said they reported daily concentration, although it is a trend adopted mainly by large companies (83% versus 47% of small companies).
Finally, the use of technology to automate processes and increase efficiencies is continuing, with 77% of companies reporting full or complete automation of pooling processes and nearly 30% of companies reporting greater than 95% automation of receivables matching, up 9% between 2009 and 2013.
Six Key Themes
These liquidity trends are taking place in a changing world in which multinationals’ operating environments are changing as are their needs and expectations. Six key themes are informing the strategies of banks such as Citi and their corporate clients. These are: globalisation, digitisation, urbanisation, regulation, reputation, and rates. Apart from rates, which are cyclical, the remaining trends are secular and irreversible, said Rajesh Mehta, the bank’s EMEA head treasury and trade solutions.
An interesting aspect of globalisation is the urbanisation trend, which Mehta believes will force companies and banks to focus on cities, rather than countries. “Success will not be about how many countries you operate in, but in how many cities you have operations,” he said.
Technology is increasingly important to corporate treasuries, particularly as staff numbers decline. Companies need operational efficiency in liquidity management as they grow into new countries and develop treasury and services centres, said Cindy Gerhard, global head of product management, liquidity management services. “Staff numbers are declining in treasury departments, with even large multinational companies having only five treasury staff. As a result, many companies depend on their banks to help them.”
Help can come in the form of advisory services, based on treasury diagnostics and benchmarking that helps a company to understand its liquidity needs, how they are being met and how efficient and effective they are compared with their industry peers.
Innovation in treasury diagnostics, cash analytics and forecasting, and liquidity management is helping to break down the traditional barriers to moving cash seamlessly around the globe, said Gerhard. Treasury departments require transactional banking services that can assess their company’s performance, identify inefficiencies and also benchmark performance against peers.
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