By breaking down silos and bringing specialist departments together, banks are far better placed to come up with holistic end-to-end solutions for their corporate clients – and their respective needs. We speak to Jim Fuell, Managing Director, Head of Global Liquidity, EMEA, J.P. Morgan Asset Management and Yera Hagopian, Liquidity Solutions Executive, EMEA, J.P. Morgan Treasury Services, about how this approach can help address the liquidity challenges that corporates face today.
Managing Director, Head of Global Liquidity for Europe, Middle East and Africa
Jim Fuell, Managing Director, is the Head of Global Liquidity for Europe, Middle East and Africa (EMEA) overseeing sales and marketing for the liquidity business. An employee since 2006, he previously worked to develop the corporate business as part of the Global Liquidity team in London and has also worked for Deutsche Bank, Bank of Tokyo-Mitsubishi and Citibank. He holds an MBA in Finance and International Business from New York University, Stern School of Business, and a BS in Business Administration, Marketing & Finance from Marquette University.
Liquidity Solutions Executive for Europe, Middle East and Africa
Yera Hagopian is the Liquidity Solutions Executive for Europe, the Middle East and Africa within Treasury Services at J.P. Morgan. After her graduation from Oxford University, Yera joined the management development programme at Barclays Bank before moving on to roles in sales, relationship, product and treasury management in the UK and US. Yera has accumulated over 20 years of cash management experience, incorporating an 11-year tenure at HSBC where she was responsible for liquidity services in Europe. She holds a BA Hons in Modern Languages (French and Italian) from Brasenose College in Oxford.
How would you describe the liquidity management environment for corporates? How are you helping them in this respect?
JF: We’re in an environment right now where global interest rates are at historically low levels. In the Eurozone, the situation is particularly exacerbated as we are experiencing an unprecedented environment with negative yields being offered, so never has it been more important for corporate investors to ensure that they understand where their cash is – and how best to use it.
As widely publicised, corporates have been carrying higher levels of cash and the cost of liquidity is becoming increasingly expensive. Not only are yields extremely poor but in some instances banks are effectively charging corporates to take their money. In evaluating the current yield outlook, corporate treasurers may begin using more of their surplus liquidity to pay down debt as suitable investment opportunities may appear scarcer than ever.
From an investment management perspective, we are working closely with corporate treasurers who are asking how they can improve the return on their surplus cash. The various means to achieving higher yield clearly need to be carefully assessed (eg higher volatility, greater credit risk, maturity extension etc), but some organisations are realising that there is far greater potential to increase yield than they may have previously assumed. Assisting clients in achieving visibility over their cash – wherever it is – can be the critical first step for any company determining whether or not they are in a position to seek higher yields. This is often where we are able to collaborate with our treasury services colleagues as their technology platforms often assist our corporate clients with transparency over their underlying liquidity and the functionality to move that money to an environment where it can be used most effectively. Following this, clients can then benefit from the advice of J.P. Morgan Asset Management’s Global Liquidity business where managing short-term investments is our core competency.
We are able to collaborate with our treasury services colleagues as their technology platforms often assist our corporate clients with transparency over their underlying liquidity and the functionality to move that money to an environment where it can be used most effectively.
What have been the principal changes across the liquidity landscape in the past year?
YH: I think we are seeing an exacerbation of existing trends. The deeper and more sustained period of low interest rates has been accompanied by a number of economic tremors ranging from sovereign downgrades to threats of Eurozone member exits. There’s a huge focus on risk, counterparty risk in particular, but also liquidity risk and above all accessibility of cash. Finally, we need to consider concerns around the availability of good quality investments in this economic environment. While these are not necessarily new challenges, we have reached new heights of anxiety and unprecedented pressures on yield. The last year has definitely been very challenging.
On the other side of the balance sheet, there are some regulatory influences, as well as general risk aversion in the market, that are leading to difficulty and uncertainty around funding. Therefore the importance of self-funding is increasing and the ability to manage internal liquidity is absolutely paramount. Clients are revisiting account and supply chain structures that they may have put in place several years back to ensure that they are efficient; that they are operating as they intended, that timing and funding is being optimised – basically ensuring that the cash flows are being used as effectively as they possibly can be. The key here is that companies are looking for sustainable approaches to address their liquidity management challenges rather than a series of knee-jerk reactions.
Alongside this internal focus, as a bank, we have seen a growing number of requests for guidance and more deep rooted analysis on what the market issues may be. Corporates are reviewing their investment guidelines to reassess the markets, instruments and counterparties they utilise. They want to know how quickly they can access their cash as they are now aware that even a delay of hours may be critical. They want to evaluate if the yield pick-up of longer-dated investments adequately compensates for reduced liquidity (almost certainly not). They also want to find out what challenges the regulatory changes could create for a market or a particular instrument in the future.
Finally, where technology is concerned, corporates are not often equipped with a large IT budget (many of them still work from a myriad of spread sheets) and consistency, which is a pre-requisite for cash management, is sorely tested in this environment. So any solution that can address both the liquidity and visibility issues in a timely and consistent manner has got to be valuable to them.
How problematic is trapped cash for corporates? As part of this drive to optimise operational cash, how can innovation in liquidity management help unlock this cash?
JF: In an ideal world, a corporation treasurer manages to sweep all cash back to its primary domicile but, in reality, regulations or specific country restrictions will often hinder that. In addition, issues such as thin capitalisation requirements or joint venture obligations may require the corporate to maintain cash in certain regions. As a result, businesses are left with cash in a variety of jurisdictions where a local solution is needed. In these instances, corporate investors must weigh up the investment alternatives which are locally available versus what’s typically required (and accepted) by their investment policies. Sometimes, corporate investment policies are put in place with a global view but they still need to be modified accordingly as certain nuances arise – this flexibility can be crucial when dealing with trapped cash. We spend a fair amount of time working with corporate treasurers to review and offer input in relation to their global investment policies.
YH: Regulatory concerns are obviously just one of the reasons why cash can be trapped in a jurisdiction – there are many practical reasons also. For example, a corporate may have to maintain balances on an account in a specific country because they need that to support their day-to-day operational business in that area. They might have an operating entity that isn’t particularly strong from a credit perspective and the subsidiary therefore needs to be fully funded. That cash is effectively still trapped and the corporate needs to think about how they are going to manage that on a day-to-day basis.
That’s why the cash flows usually need to be analysed at a very granular level. It’s not just a question of figuring out what can be moved from a regulatory perspective, the analysis needs to consider what is required from an organisational and operational perspective too. You really need to be aware of which account certain balances are in, why the money is there and what the impact would be of removing that balance. It is also worth considering whether balances that are trapped could generate value in other ways. For example, could the value generated by those balances be used to pay for other banking services?
Visibility is only the first step in optimising cash, wherever it is. What’s also crucial is this deeper analysis and understanding of cash flows – not just on a snapshot basis – but also through regular dialogue with the local operations. That is, corporates must gain an understanding of the underlying business, not just the numbers. Considering the many opportunities there are to optimise company cash, there are numerous ways in which the surplus balance could be serving the company. Depending on the particular business situation, it could be a local investment strategy, an earnings credit arrangement, or an interest optimisation structure that serves that balance best. This is something that can be decided when the cash flows and business model are better understood.
Visibility is only the first step in optimising cash, wherever it is. What’s also crucial is this deeper analysis and understanding of cash flows – not just on a snapshot basis – but also through regular dialogue with the local operations.
Can corporates really achieve same-day value on balances being swept through multiple jurisdictions? If so, how?
YH: The broad geographic reach of many businesses does present challenges to the globally consistent cash management objectives of many corporates. The more dispersed the business, the more currencies, regulatory regimes, time zones and last but not least, the greater the number of banks likely to be involved in the solution. Working with a global provider who has presence in the key markets goes some way to mitigating these challenges, especially the value dating challenges presented by time zone differences. However, it is difficult to avoid solutions that include local bank providers altogether, especially in some developing markets. Ideally in these cases, cash flows through the local bank would be incorporated in the global solution in an automated manner, through a multi-bank sweep.
At J.P. Morgan, we have bilateral agreements in place with a large number of banks globally to enable multi-bank payments to be initiated. Multi-bank sweeping leverages these bilateral agreements by issuing MT101 drawdown messages to automatically concentrate funds from a client’s global relationship banks into a single position with an overlay bank, thus enabling more efficient use of the consolidated global position. J.P. Morgan can also concentrate funds in countries where SWIFT is not the standard method of bank- to-bank communication.
JF: I think the same-day value concept ties into the increasing demand for same-day visibility. Corporates, all too often, are not able to project cash flow balances as a result of a lack of complete visibility over their subsidiaries. From an investment perspective, a product which affords the best return is not typically the investment that also allows the greatest level of liquidity. Therefore, with greater visibility and clarity around one’s investment horizon comes the opportunity to optimise investment returns because the cash can be put to work more effectively.
What have been the most important developments at J.P. Morgan regarding liquidity management in the past year?
YH: We are developing a range of solutions that evolve traditional product concepts and adapt them for today’s requirements. These include:
An expansion of the US earnings credit rate concept to provide value for global balances and for services other than traditional cash management products.
The creation of a deposit account that provides clients with both immediate access to liquidity and term extension.
Automated investment options that are driven by the client’s parameters for diversification and risk.
All of these capabilities are designed to provide clients with greater flexibility in a changing market, while offering added efficiency and value for short-term cash globally.
Through our J.P. Morgan ACCESS Liquidity Solutions portal, which is integral to all our offerings, we are also able to offer real-time cash position reporting and inter-company administration, specifically designed to enable the corporate treasurer to gain visibility and control over all cash flows and investments. Most importantly, these capabilities are all developed globally to ensure that we can provide a consistent client experience, wherever their operations.
JF: From an investment management perspective, we have continued to work with clients to identify jurisdictions where they have trapped cash or where they see a lack of suitable investment options. Where markets permit, we will evaluate the potential to develop further currency offerings like the RMB fund offering we’ve had much success with in China. Beyond this, however, the current environment has resulted in an increased level of dialogue with corporate treasurers who have chosen to seek the advice of a discretionary asset manager to provide guidance in navigating today’s more challenging short-term investment markets.
While our core money market fund offerings continue to provide investors with liquidity, diversification and the focus on capital preservation which they require, we have also seen a certain amount of interest in fund offerings such as our Managed Reserves Fund.
These investors are looking for potentially higher returns than those typically achieved by AAA rated liquidity funds and are prepared to incur a higher level of risk in order to achieve this. We have also seen a marked increase in investors who are interested in working with us to manage their liquidity in a bespoke fashion and have continued to invest in our separately managed account platform to support this activity.