Cash & Liquidity Management

Globalising corporate liquidity structures to maximise potential funds

Published: May 2013

The shifting focus of global commerce and a changing and variable regulatory environment are driving businesses to look much closer at their liquidity and risk management processes. While many multinational organisations are currently flush with cash, they are concerned with optimising future sources of liquidity. This is forcing companies to focus on improving their approaches to be able to make use of internal funds, while optimising and controlling the deployment of excess cash. Given these dynamics, the distributed regional and currency specific liquidity structures are no longer in favour.

Best-in-class companies are achieving optimisation through the centralisation and globalisation of their liquidity management and account structures. But this cannot be achieved in isolation. In adopting this new liquidity strategy, businesses need to ensure that the approach to liquidity management is integrated with the accounts payable (AP) and receivable (AR) processes.

Historically, companies operating globally would manage their liquidity on either a regional or single currency basis (or both). The adoption of the segregated model was more a reflection of the tendency for treasury organisations to be decentralised and the lack of tools available to support a more centralised approach. This reflected not only the technological limitations of the day, but also the stage of evolution of corporate treasury in general, which after the financial crisis in 2008, assumed a more strategic role.

“Managing through the crisis made both the CFO and the treasurer strategically more important to company interests, especially from a risk management perspective,” says Tom Schickler, Global Head of Liquidity for HSBC’s Global Payments and Cash Management business. “And as the treasury function became more important, centralising treasury suddenly became a strategic imperative.” The desire for centralisation coincided with improvements in the banking solutions available to support their requirements.

Funding constraints in the risk and regulatory environment

Emerging from the financial crisis in 2008, heightened concerns from a risk management perspective have accelerated the trend towards globalisation of liquidity management. Companies are seeking means by which to manage their counterparty and sovereign exposure, while ensuring that they have multiple sources of liquidity (not only relying on internal sources of funds). As a consequence, companies are looking beyond visibility and control to securing access to liquidity on a real-time basis in order to be able to respond to market events.

Recent developments across Europe (eg. Cyprus) have reinforced the importance of being able to gain access to liquidity on a timely basis, and furthermore to set up a foundation of liquidity management that reflects the companies risk management orientation. In addition to counterparty and sovereign risk, liquidity risk has also manifested itself in the past decade as money markets have not remained liquid during certain flashpoints. The situation has been acerbated by the constrained availability of cash from banks. The gridlock in the money markets that hit Europe in 2008 and 2009 and then again in 2011 and 2012, certainly raised concerns amongst companies, leading many to focus on accessing their own cash across all of their centres.

But handling the risk dimension is only part of the game. The evolving banking regulatory regime poses an additional funding consideration for corporates. As the increased capital requirements of Basel III come to fruition, it will place constraints on bank balance-sheet capacity. This will increase the cost of bank borrowing for companies over the long term. On an absolute basis, with interest rates currently running low, the cost of borrowing may be perceived to be low. However, it may prove to be relatively more expensive than heading in an alternative direction such as the debt and equity capital markets, raising funds through private equity or other non-traditional lenders – a move taken by increasing numbers of corporates.

In response, treasurers have learnt to prioritise the need to create or at least supplement the mechanisms they use to self-fund. But if they do this, it means putting in place a sound liquidity management structure; augmentation usually means shifting from the historical regional or single currency-based approach to a global approach, which implies certain control issues.

Control, visibility and access

“In the past decade or so there has been an emphasis on visibility and control,” notes Schickler. “It’s one thing to have visibility but the more important issue that companies are wrestling with – and some, but not many, are actually attacking – is the element of access to cash when it is needed.” A global treasurer may have a multi-bank report stating the existence of money in multiple countries, but if a crisis hits just knowing there is money out there does not help. The need, states Schickler, is to get hold of that money immediately and be able to do something constructive with it. “It is no longer just about visibility and control; it is also now about timely and efficient access.”

This realisation puts a premium on globalising liquidity management, especially consolidation of accounts in unregulated and less-regulated markets and preferred domiciles, but doing so in a way that minimises cash fragmentation. “Corporations need to consolidate liquidity positions as part of their goal, but they should avoid creating inefficiencies in their accounts payable (AP) and receivable (AR) processes as a consequence of that,” warns Schickler. By shifting these functions to one country without considering precisely the value, location and timing of payments in another, funding may not now be readily available. “Corporates need an automated structure that has the ability to fund those payments on a just-in-time basis, so they reap the benefits of having consolidated their liquidity position while still being able to meet their daily payment obligations.”

It is clear that where consolidation has not been managed effectively, it can put pressure on the treasury and finance functions which will need to counteract the negative effects by increasing to pinpoint accuracy their cash forecasting results. “But if you integrate your liquidity management approach with your AP and AR processes on a seamless and automated basis, you can get the best of both worlds; you don’t then have that operational requirement and process or that forecasting need.”

Bank differentiation

Banks differentiate themselves not by the availability of their liquidity management technology but more on their ability to apply that technology to develop a solution that is bespoke for a particular client based on its own liquidity management priorities and that aligns with its AP and AR processes. With a combination of local cash management capability that is fully integrated with a global liquidity platform, “HSBC is uniquely positioned to connect our clients’ liquidity across developed and developing markets,” says Schickler.

Market liberalisation

Market liberalisation programmes in certain countries – and the opportunity to leverage the benefits afforded by unlocking trapped cash and improving working capital efficiency – should be a catalyst for companies to review their existing local account and liquidity management structure, urges Schickler. Getting the foundation right, to take advantage of the anticipated liberalisation, will allow a company to integrate cash into their global structure as soon as the new regulatory regimes finalise their changes.

Recent developments in China, for example, have seen the State Administration of Foreign Exchange (SAFE) and the Chinese central bank, the Peoples’ Bank of China (PBoC), approve pilot schemes to enable cross-border sweeping of both foreign currency and renminbi (RMB). The pilot currently involves five international banks, including HSBC, and 13 large corporates, all of which have worked closely with the regulators in the design and implementation of the scheme. As the pilot progresses into broader commercial availability, a greater number of companies will be able to reduce their trapped cash in the country, notes Schickler.

He believes that schemes such as this are, or should be, creating a priority for companies to put the right foundation in place from a domestic cash management and liquidity management perspective, “in order to take advantage of the future capability to integrate local liquidity with the rest of their global liquidity.”

Taking the long view

Globalisation is not something that companies can flick a switch and get done; it is an evolutionary process. Depending on where each company is in the evolution of its own treasury management processes there will be an ongoing need for consultation and revisiting existing structures. Liquidity management will never be a “fire and forget” process; it demands continuous attention. “Remember that Basel III is still in the early stages of implementation. Each jurisdiction will interpret it and impose regulations based on its own particular interests and priorities,” warns Schickler. As a consequence, there will be a continuous need to respond to those developments by prioritising and making use of different tools.

As the regulatory environment continues to evolve in the banking and in the corporate space, it will impact on the dynamics of areas such as the money markets and other investment options. These changes will conspire to require companies to have a foundation, from a treasury and liquidity management perspective, which gives them the flexibility to respond in a timely manner.

Regulations and economic drivers are rarely fully-aligned across markets and so monitoring, understanding, interpreting and responding to them is an ongoing challenge. It requires a partnership between bank and client enabling full and frank dialogue, says Schickler. The capacity for HSBC to leverage its extensive local presence and expertise is its stock in trade when it comes to making sense of these events and translating them into practicable solutions for corporate clients.

Case study

Brendan McGraw

Group Treasurer at CLSA

CLSA is one of the leading and longest-running independent brokerages in Asia and one of the world’s largest agency brokers. It operates three main business activities – equity broking, asset management and investment banking.

Headquartered in Hong Kong and represented in 21 locations across Asia Pacific, Europe and the US, CLSA is a research-driven business with a global reach.

Formerly owned by Crédit Agricole CIB, 19.9% of CLSA shares were acquired by CITIC Securities International Company Limited, a wholly-owned subsidiary of CITIC Securities Company Limited (‘CITICS’) in July 2012. The deal incorporated an agreement for the acquisition of the remaining 80.1% of CLSA through a put option. This is expected to receive regulatory approval and be completed by the end of June 2013. The deal, in total, represents a valuation of $1.25 billion. CLSA has established stand-alone brokerages in Japan and the US as part of the transaction from Crédit Agricole to CITICS

CLSA has enhanced its cash management solutions through diligent treasury management, the application of sound technologies and through the support of a banking partner that has made a concerted effort to work with the company.

“What we really liked about HSBC was their preparedness to adapt their cash management models to fit in with what CLSA did rather than the other way round.”

CLSA naturally went to market to find the most suitable partner and the quickest response came from the bank with the best solution. But the partnership it chose is not just about a set of clever IT solutions. “Technology has a role to play, but a lot of banks have similar technologies, or they can adapt them to fit,” explains CLSA’s Group Treasurer, Brendan McGraw. “What we really liked about HSBC was their preparedness to adapt their cash management models to fit in with what CLSA did rather than the other way round.”

By partnering with HSBC to build out the right structure for operational efficiency, CLSA has established the path of its progress, assuring itself of access to a global operational network. A key part of the relationship is the alliance of this network with the in-depth local knowledge that the bank brings; HSBC obviously has a strong presence in Asia and, in the words of McGraw, “having boots on the ground has really helped us”.

Over the past few years CLSA has worked with HSBC on a number of projects, all driven by a general need for greater efficiency. Not least of these is the deployment of the bank’s Integrated Payables Solution. This has enabled the centralisation and streamlining of CLSA’s accounts payable management processes. Using an HSBC-supplied adaptor to interface between the bank’s internet banking platform, HSBCnet, and CLSA’s SAP general ledger system, most payments processes can now be executed through the firm’s Hong Kong headquarters.

Prior to HSBC’s involvement, CLSA’s management of cash was similarly left to the individual entities. This resulted sometimes in an imbalance between debit and credit positions across their businesses, with some entities operating with short positions and requiring funding, whilst others ran positive cash positions. McGraw presided over the implementation of a regional pooling structure for CLSA spread across nine Asian markets and based on HSBC’s Global Liquidity Solutions (‘GLS’) platform. This, he reports, has enabled CLSA to “cut its borrowing quite substantially.”

The regional structure features two multi-currency notional pools – one for entities inside of Hong Kong and one for those outside, this split being driven by a quest for tax efficiency. The pools are used to consolidate and offset mismatching positions across the firm’s business entities and obviate the need for individual entities long on cash to concern themselves with the demands of investing that cash. Also put in place is HSBC’s Interest Enhancement facility. This is a global cross-border virtual pooling solution that pays, as the name suggests, an enhanced interest rate on CLSA’s total operational balances. On the FX side, McGraw reports that bank and CLSA are working together on building a more efficient currency trading system.

“They’ve helped us to enhance our processes by bringing more robust cash management solutions.”

The pre-implementation work for each project to date featured intensive “brainstorming” sessions between client and bank, each time creating a detailed requirements definition. HSBC then returned with a practical proposition, a dedicated project team and a fully-formed project management approach. The latter, although within the confines of the standard HSBC approach, notably allowed the flexibility to meet CLSA’s individual needs – each time working backwards from the planned objective and deadline to incorporate all the essential milestones and timelines.

The rigour of each planning stage ensured that HSBC’s solutions were able to integrate comfortably with CLSA’s existing processes and technologies. “If anything, they’ve helped us to enhance our processes by bringing more robust cash management solutions,” comments McGraw.

The pooling structure still requires some work before bringing all parties on board and the conversation between CLSA and HSBC is thus ongoing. The rise of the US and Japanese brokerages will likely see the growth of each entity’s own cash production and funding needs which will make them natural targets to join the cash pool. “We’ve done a very good job on this, but there are a few more steps to go,” adds McGraw. The partnership, it seems, is assured for some time to come.

Portrait of Tom Shickler

Tom Shickler

Global Head of Liquidity

Tom Schickler is based in Singapore and is responsible for the strategy and development of Liquidity and Investment products for HSBC’s Global Payments and Cash Management business. He has extensive product, sales and operational management experience in Asia Pacific, Europe and the US, having spent 20 years working in the banking industry. All of his roles have focused on wholesale banking, and have involved working with Financial Institution and Corporate clients.

Schickler is also a Board Member of the National Payment Corporation of India, for whom he is the Chairman of the Risk and Audit Committees.

HSBC Global Payments and Cash Management

HSBC Global Payments and Cash Management provides cash management services to customers globally, including Fortune 500 multinational companies, top-tier local corporates, middle market companies, SMEs, financial institutions and government bodies.

HSBC Holdings plc

HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from around 6,600 offices in 81 countries and territories in Europe, the Asia Pacific region, North and Latin America, and the Middle East and North Africa. The HSBC Group is one of the world’s largest banking and financial services organisations.

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