Other issues to address included:
Centralisation of GM&T group liquidity in London led to a greater focus on investment function, given the size of portfolio that had to be managed.
Treasury and commodity trading exposures were not fully aggregated.
Small choice of products approved while credit ratings of several banks continued to fall.
GM&T undertook several steps to resolve the issues described above and to ensure a robust and market leading short-term investment strategy. The first step was to ensure accurate forecasting and reporting of cash balances and allow access to all available cash through the use of a multicurrency cash pool across the whole group of GM&T entities, to be invested via GM&T Global Treasury based in London. Accurate forecasting meant deposit tenures could be mapped to cash flow requirements, to maximise yield curve duration pick-ups.
The second step was to ensure all the 20 or more relationship banks used for the retained cash flow (RCF) funding were set up in the credit reporting system for time deposits, with credit limits linked to lines already in place for commodity trading. The treasury volume and tenure limits were also set according to credit ratings, credit default swap (CDS) prices and current market exposures. The credit reporting system is linked to the treasury management system (TMS) to ensure the treasury usage of lines feeds back to the trading business to record overall company exposure.
The third step was to ensure ease of trading, consistent audit trail and price transparency by trading through 360T. Straight through processing (STP) was developed between the trading platform and the TMS to the SWIFT payment bureau to improve accuracy and efficiency. Constant contact was maintained with each bank as well to ensure relationship building and understanding of requirements, which also helped to improve yields.
“The fourth step,” Kawski explains, “was to introduce money market funds as an addition to the investment portfolio, providing diversity of holdings, with limits based on percentage of net asset value (NAV).”
The fifth step (and still ongoing) is to add secured deposits (via tri-party reverse repos) to add a layer of protection and potential yield pickup. Also re-use the repo collateral to cover exchange margin requirements to ensure a higher return than cash deposited on the commodity exchange accounts.
Throughout the process the investment policy has been updated and tightened with security and liquidity of funds a priority, whilst maximising return. Due to the tight controls and close working with the GM&T credit department, KPIs have been set for treasury front office based on yield against market benchmarks, without putting the company funds at risk. Cash optimisation KPIs have also been set for the treasury cash management team to ensure there is no ‘trapped cash’ causing credit risk and loss of return.
By using in-house credit and treasury team expertise, GM&T has diversified its investment portfolio, added security and yield to its cash deposits and in difficult market conditions. GM&T has provided STP and top-class exposure reporting across its TMS and risk reporting software. This has given GM&T the ability to safely maximise returns on cash investments which have increased from £12 billion in 2012 to £22 billion in 1Q13 alone.