With accelerating business growth leading to larger cash balances in Europe, Google was finding the associated investment processes increasingly challenging. Relationships were maintained with a number of banks in order to diversify exposures and counterparties were predominantly selected on the basis of credit ratings.
“The daily process of investing included confirming the current ratings of a range of counterparty banks, tracking our outstanding investments to avoid overexposure to a single institution, contacting multiple banks for rate quotes, and settling and reconciling trading activity,” says Ronni Horrillo, Assistant Treasurer. “Furthermore, the process of maintaining multiple investment relationships required us to manage various set-up documents and confirmation formats.”
Not only did these processes place a significant strain on Google’s streamlined treasury team, but it was also felt that the lack of a consolidated process could have a negative impact on the economic return of the portfolio. A solution was therefore required that could enhance returns and reduce the burden on treasury staff, while also reducing investment and liquidity risk and simplifying existing procedures.
Prior to the financial crisis, Google discussed these requirements with J.P. Morgan and began designing a comprehensive investment solution. First of all, the criteria on which banks were selected were re-examined and bank concentration limits were set out. In addition, investment maturity lengths were synchronised with Google’s liquidity and cash flow requirements.
As the next stage in the project, J.P. Morgan and Google worked together to develop a rules-based investment programme called Cash Trade Execution (CTE). “Google, through CTE, transfers excess operating cash into a J.P. Morgan investment account, which is swept into time deposits with a broad range of pre-screened bank counterparties,” explains Horrillo. “Furthermore, CTE tracks and limits the concentration of cash with the counterparties, based on the rules we established at the inception of the service.” Meanwhile, J.P. Morgan undertakes independent monitoring to ensure the suitability of all counterparties, all of which are highly rated by Moody’s and Standard & Poor’s.
“The bank’s continuous monitoring of our counterparties ensured that we maintained a high-quality portfolio – enabling us to avoid many of the pitfalls suffered by others in the midst of the crisis.”
CTE has enabled Google to enforce its risk management policy regarding the selection of counterparties and the required level of diversification. It has also freed up treasury staff from administrative tasks while providing daily web-based reporting on Google’s positions. The implementation of the solution was smooth, with limited impact on staff and no disruption to the company’s investment performance.
However, it was not until the financial crisis intensified in late 2008 that the benefits of the platform could really be appreciated. “At that time, our board mandated that we could invest only with banks that were domiciled in jurisdictions with deposit guarantee programmes in place,” recalls Horrillo. “In partnership with J.P. Morgan, we were able to quickly and easily reconfigure our investment portfolio to satisfy the board’s new investment mandate. The bank’s continuous monitoring of our counterparties ensured that we maintained a high-quality portfolio – enabling us to avoid many of the pitfalls suffered by others in the midst of the crisis. At a time when every major institution was tested in ways none had ever been before, Google’s Board was pleased with our ability to quickly move excess cash into sovereign-guaranteed programmes, maintaining yield while minimising credit risk.”
